UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549



FORM 20-F/A

(Amendment No. 1)



(Mark One)

| |  ̈ | REGISTRATION STATEMENT PURSUANT TO SECTION 12(b)
    OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
| | - | --------------------------------------------------------------------------------------------------



OR



| | x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
    ACT OF 1934
| | - | ----------------------------------------------------------------------------------------



For the fiscal year ended December 31, 2012



OR



| |  ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
| | - | --------------------------------------------------------------------------------------------



OR



| |  ̈ | SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
| | - | -----------------------------------------------------------------------------------------------



Date of event requiring this shell report .........



For the transition period from _____________
to ____________



Commission file
number 000-51672



|FREESEAS
    INC.                                         
|----------------------------------------------------------
|(Exact name of the Registrant as specified in its charter)



|Republic
    of the Marshall Islands                                                       
|-------------------------------------------------------------------------------------------
|(Jurisdiction of incorporation or organization)                                            
|                                                                                           
|10 Eleftheriou
    Venizelou Street, (Panepistimiou Ave.), 10671 Athens, Greece            
|(Address of principal executive offices)                                                   
|                                                                                           
|Alexandros Mylonas, Chief Financial
    Officer                                            
|FreeSeas Inc.                                                                              
|10 Eleftheriou Venizelou Street                                                            
|10671 Athens, Greece                                                                       
|011-30-210-452-8770                                                                        
|(Name, Telephone, E-mail and/or Facsimile number
    and Address of Company Contact Person)



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



|Title of Each Class                                                        |  | Name of each exchangeon which registered
|-------------------------------------------------------------------------- |  | ----------------------------------------
|Common Stock, par value $0.001 per share                                   |  | The NASDAQ Capital Market               
|Preferred Share Purchase Rights
        (attached to
        Common Stock) |  | The NASDAQ Capital Market               



Securities registered or to be registered pursuant to Section
12(g) of the Act.



|None            
|----------------
|(Title of Class)



Securities for which there is a reporting obligation pursuant
to Section 15(d) of the Act:



|None            
|----------------
|(Title of Class)



Indicate the number of outstanding shares
of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report. 1,362,830common shares, par value $0.001 per share, as of December 31, 2012.



Indicate by check mark if the registrant
is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  ̈ Yes
x No



If this report is an annual or transition
report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934. x Yes  ̈ No



Note - Checking the box above will not
relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.



Indicate by check mark whether the registrant
(1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. x Yes  ̈No



Indicate by check mark whether the registrant
has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted
and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such
shorter period that the registrant was required to submit and post such files). x
Yes  ̈ No



Indicate by check mark whether the registrant
is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and
large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):



 ̈ Large Accelerated
filer   ̈ Accelerated filer  x
Non-accelerated filer



Indicate by check mark which basis of
accounting the registrant has used to prepare the financial statements included in this filing:



|U.S. GAAP x |  | International Financial reporting Standards as issued by the International
    Accounting Standards Board  ̈ |  | Other  ̈
|----------- |  | ----------------------------------------------------------------------------------------------------------- |  | -------



If “Other” has been checked
in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
 ̈ Item 17  ̈ Item 18



If this is an annual report, indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  ̈ Yes
x No











Table of Contents



|          |                                                                                  |  | Page
|--------- | -------------------------------------------------------------------------------- |  | ----
|PART I    |                                                                                  |  |     
|ITEM 1.   | IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS                            |  | 6   
|ITEM 2.   | OFFER STATISTICS AND EXPECTED TIMETABLE                                          |  | 6   
|ITEM 3.   | KEY INFORMATION                                                                  |  | 6   
|ITEM 4.   | INFORMATION ON THE COMPANY                                                       |  | 28  
|ITEM 4A.  | UNRESOLVED STAFF COMMENTS                                                        |  | 39  
|ITEM 5.   | OPERATING AND FINANCIAL REVIEW AND PROSPECTS OVERVIEW                            |  | 39  
|ITEM 6.   | DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES                                       |  | 61  
|ITEM 7.   | MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS                                |  | 65  
|ITEM 8.   | FINANCIAL INFORMATION                                                            |  | 68  
|ITEM 9.   | THE OFFER AND LISTING                                                            |  | 68  
|ITEM 10.  | ADDITIONAL INFORMATION                                                           |  | 69  
|ITEM 11.  | QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK                        |  | 79  
|ITEM 12.  | DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES                           |  | 81  
|          |                                                                                  |  |     
|PART II   |                                                                                  |  |     
|ITEM 13.  | DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES                                  |  | 82  
|ITEM 14.  | MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND
    USE OF PROCEEDS |  | 82  
|ITEM 15.  | CONTROLS AND PROCEDURES                                                          |  | 82  
|ITEM 16.  | [RESERVED]                                                                       |  | 83  
|ITEM 16A. | AUDIT COMMITTEE FINANCIAL EXPERT                                                 |  | 83  
|ITEM 16B. | CODE OF ETHICS                                                                   |  | 83  
|ITEM 16C. | PRINCIPAL ACCOUNTANT FEES AND SERVICES                                           |  | 83  
|ITEM 16D. | EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES                       |  | 84  
|ITEM 16E. | PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS           |  | 84  
|ITEM 16F. | CHANGES IN REGISTRANT’S CERTIFYING ACCOUNTANT                                    |  | 84  
|ITEM 16G. | CORPORATE GOVERNANCE                                                             |  | 84  
|ITEM 16H. | MINE SAFETY DISCLOSURE                                                           |  | 85  
|          |                                                                                  |  |     
|PART III  |                                                                                  |  |     
|ITEM 17.  | FINANCIAL STATEMENTS                                                             |  | 86  
|ITEM 18.  | FINANCIAL STATEMENTS                                                             |  | 86  
|ITEM 19.  | EXHIBITS                                                                         |  | 86  



2







EXPLANATORY
NOTE



FreeSeas
Inc. (“FreeSeas” or the “Company”) is filing this Amendment No. 1 on Form 20-F/A (the “Amended Filing”)
to the Company’s Annual Report on Form 20-F for the year ended December 31, 2012 (the “Original Filing”) filed
with the Securities and Exchange Commission (“SEC”) on April 19, 2013.  In connection with a comment letter
received from the SEC, the Company determined that certain disclosures in the Original Filing would need to be revised.



For
the convenience of the reader, this Amended Filing sets forth the Original Filing as modified and superseded where necessary to
reflect the restatement. The following items have been amended as a result of, and to reflect, the restatement:



| | ● | Item 16F – Change in Registrant’s Certifying Accountant, to clarify the timing of the change of accountants in January 2013 and                     
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                     
| | ● | Item 19 – Exhibits, to include a letter from Ernst & Young (Hellas) Certified Auditors Accountants S.A. and an updated letter from Sherb & Co., LLP.



In
accordance with applicable SEC rules, this Amended Filing includes certifications from our Chief Executive Officer and Chief Financial
Officer dated as of the date of this filing.



Except
for the items noted above, no other information included in the Original Filing is being amended by this Amended Filing. The Amended
Filing continues to speak as of the date of the Original Filing and, except as set forth in the sections indicated above, we have
not updated the Original Filing to reflect events occurring subsequently to the date of the Original Filing. Accordingly, this
Amended Filing should be read in conjunction with our filings made with the SEC subsequent to the filing of the Original Filing.





3







INTRODUCTION



FreeSeas
Inc. is a Republic of the Marshall Islands company that is referred to in this annual report on Form 20-F, together with its subsidiaries,
as “FreeSeas Inc.,” “FreeSeas,” “the Company,” “we,” “us,” or “our.”



We
use the term “deadweight tons,” or “dwt,” in describing the capacity of our drybulk carriers. Dwt, expressed
in metric tons, each of which is equivalent to 1,000 kilograms, refers to the maximum weight of cargo and supplies that a vessel
can carry. Drybulk carriers are generally categorized as Handysize, Handymax, Panamax and Capesize. The carrying capacity of a
Handysize drybulk carrier typically ranges from 10,000 to 39,999 dwt and that of a Handymax drybulk carrier typically ranges from
40,000 to 59,999 dwt. By comparison, the carrying capacity of a Panamax drybulk carrier typically ranges from 60,000 to 79,999
dwt and the carrying capacity of a Capesize drybulk carrier typically is 80,000 dwt and above.



Unless otherwise indicated:



| | · | All
                                                                                                               references to “$”
                                                                                                               and “dollars”
                                                                                                               in this annual
                                                                                                               report are to U.S.
                                                                                                               dollars;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Financial
                                                                                                               information presented
                                                                                                               in this annual
                                                                                                               report is derived
                                                                                                               from financial
                                                                                                               statements for
                                                                                                               the fiscal year
                                                                                                               ended December
                                                                                                               31, 2012 appearing
                                                                                                               elsewhere in this
                                                                                                               annual report;
                                                                                                               and
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | All
                                                                                                               references to dollar
                                                                                                               amounts in this
                                                                                                               annual report are
                                                                                                               expressed in thousands
                                                                                                               of U.S. dollars.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



All
share-related and per share information in this annual report have been adjusted to give effect to the one share for five share
reverse stock split that was effective on October 1, 2010 and the one share for ten share reverse stock split that was effective
on February 14, 2013.



This
report should be read in conjunction with our audited consolidated financial statements and the accompanying notes thereto, which
are included in Item 18 to this annual report.



CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS



This
annual report contains certain forward-looking statements. These forward-looking statements include information about possible
or assumed future results of our operations and our performance. Our forward-looking statements include, but are not limited to,
statements regarding us or our management’s expectations, hopes, beliefs, intentions or strategies regarding the future
and other statements other than statements of historical fact. In addition, any statements that refer to projections, forecasts
or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking statements.
The words “anticipates,” “forecasts,” “believe,” “continue,” “could,”
“estimate,” “expect,” “intends,” “may,” “might,” “plan,”
“possible,” “potential,” “predicts,” “project,” “should,” “would”
and similar expressions may identify forward-looking statements, but the absence of these words does not mean that a statement
is not forward-looking. Forward-looking statements in this annual report may include, for example, statements about:



| | · | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



4







| | · | 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 (“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;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | acts
                                                                                                               of terrorism and
                                                                                                               other hostilities;
                                                                                                               and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | other
                                                                                                               factors discussed
                                                                                                               in the section
                                                                                                               titled “Risk
                                                                                                               Factors”
                                                                                                               in this annual
                                                                                                               report.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
forward-looking statements contained in this annual report are based on our current expectations and beliefs concerning future
developments and their potential effects on us. There can be no assurance that future developments affecting us will be those
that we have anticipated. These forward-looking statements involve a number of risks, uncertainties (some of which are beyond
our control) or other assumptions that may cause actual results or performance to be materially different from those expressed
or implied by these forward-looking statements. These risks and uncertainties include, but are not limited to, those factors described
under the heading “Risk Factors.” Should one or more of these risks or uncertainties materialize, or should any of
our assumptions prove incorrect, actual results may vary in material respects from those projected in these forward-looking statements. We
undertake no obligation to publicly update or revise any forward-looking statements contained in this annual report, or the documents
to which we refer you in this annual 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.



5







PART I



Item 1. Identity of Directors, Senior Management and Advisers



Not required.



Item 2. Offer Statistics and Expected Timetable



Not required.



Item 3. Key Information



|A. | Selected Financial Data
|-- | -----------------------



The selected
consolidated financial information set forth below has been derived from our audited consolidated financial statements for
the years ended December 31, 2012, 2011, 2010, 2009 and 2008. The information is only a summary and should be read in
conjunction with our audited consolidated financial statements for the years ended December 31, 2012, 2011 and 2010 and
notes thereto contained elsewhere herein. The financial results should not be construed as indicative of financial results
for subsequent periods. See “Item 4. Information on the Company” and “Item 5. Operating and
Financial Review and Prospects.”



|                                          |  | Year Ended December 31, |        
|----------------------------------------- |  | ----------------------- | -------
|                                          |  | 2012                    |        
|Statement of Operations Data:             |  |                         |        
|Operating revenues                        |  | $                       | 14,260 
|Income/ (loss) from operations            |  |                         | (28,036
|Other expense                             |  |                         | (2,852 
|Net income/ (loss)                        |  |                         | (30,888
|                                          |  |                         |        
|Earnings Per Share Data:                  |  |                         |        
|Net income /(loss) per share:             |  |                         |        
|Basic earnings/ (loss) per share          |  | $                       | (36.90 
|Diluted earnings/ (loss) per share        |  | $                       | (36.90 
|Weighted average number of shares:        |  |                         |        
|                                          |  |                         |        
|Basic weighted average number of shares   |  |                         | 837,173
|Diluted weighted average number of shares |  |                         | 837,173
|Dividends per share                       |  | $                       | —      



|                                          |  | Year Ended December 31, |        
|----------------------------------------- |  | ----------------------- | -------
|                                          |  | 2012                    |        
|Selected Balance Sheet Data:              |  |                         |        
|Total cash                                |  | $                       | 29     
|Vessels, net                              |  |                         | 75,690 
|Total assets                              |  |                         | 114,359
|Long-term debt, including current portion |  |                         | 89,169 
|Total shareholders’ equity                |  |                         | 7,803  



|B. | Capitalization and Indebtedness
|-- | -------------------------------



Not required.



|C. | Reasons for the Offer and Use of Proceeds
|-- | -----------------------------------------



Not required.



6







|D. | Risk Factors
|-- | ------------



The common shares
of our company are considered speculative. Investing in our common shares involves a high degree of risk and uncertainty. You
should carefully consider the following risks and uncertainties in addition to other information in this annual report in evaluating
our company and our business before purchasing our common shares. Our business, operating or financial condition could be harmed
due to any of the following risks.



Risk Factors Relating to FreeSeas



At December 31, 2012, FreeSeas’
current liabilities exceeded its current assets, which could impair its ability to successfully operate its business and could
have material adverse effects on its revenues, cash flows and profitability and its ability to comply with its debt covenants
and pay its debt service and other obligations.



As
a result of the historically low charter rates for drybulk vessels which have been affecting the Company for over three
years, and the resulting material adverse impact on the Company’s results from operations,the accompanying
consolidated financial statements have been prepared on a going concern basis. The Company as  of
December 31, 2012 has cash and cash equivalents of $29 and based on its cash flow projections for 2013, the Company will not
be able to make scheduled debt repayments as of December 31, 2012, 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  $30,888, $88,196 and $21,821 during the years ended December 31, 2012, 2011 and 2010, respectively. As of
December 31, 2012 and 2011, the Company had working capital deficits of $70,973 and $47,186, 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 addition, the Company
has undertaken negotiations with each of its lenders to restructure its debt repayments. On May 31, 2012, the Company and Credit
Suisse AG, or Credit Suisse entered into a Sixth Supplemental Agreement to its Facility Agreement with Credit Suisse, which provided
for, among other things, a deferral of principal payments until March 31, 2014. On September 7, 2012, the Company entered into
an amended and restated facility with Deutsche Bank Nederland N.V. or Deutsche Bank, which provides for, among other things, a
reduction in and deferral of the balloon payment due on facility B from November 2012 to December 2015, a reduction in the amount
of principal repayment and amendments to the financial covenants.



In
February, March, April, November and December 2012 and January 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. The Company is seeking and will continue to seek similar restructured loan terms from FBB. Also
the Company did not pay the monthly repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued
interest duein October, November and December 2012 and January, February and March 2013. As
well in February, March and April 2013, the Company did not pay the interest due of $124 and the interest
rate swaps due of $80, respectively, with the Credit Suisse facility. The Company is in discussions with both banks to reach a
mutually beneficial agreement.If the Company is not able to reach agreement with FBB as to restructured loan terms, 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 agreements. The Company’s failure to satisfy its covenants under its debt agreements, 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.



The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other commitments if current market charter
hire rates remain at current low levels, including completion of the negotiations for the restructuring of its loan with FBB,
offerings of common stock through structured financing agreements, disposition of certain vessels in its current fleet and additional
reductions in operating and other costs.



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 cross default provisions in the Company’s
loan agreements, actual breaches existing under its credit facility with FBB could result in defaults under all of the Company’s
affected debt and the acceleration of such debt by its lender. Accordingly, as of December 31, 2012, the Company was required
to reclassify its long term debt and derivative financial instrument liability (interest rate swaps) as current liabilities on
its consolidated balance sheet since the Company had not received waivers in respect of the breaches discussed above at such time.



7







We received a report from our independent
registered public accounting firm with an explanatory paragraph for the year ended December 31, 2012 with respect to our ability
to continue as a going concern.  The existence of such a report may adversely affect our stock price and our ability
to raise capital.  There is no assurance that we will not receive a similar report for our year ended December 31, 2013.



In
their report dated April 19, 2013, our independent registered public accounting firm expressed substantial doubt about our ability
to continue as a going concern as we have incurred recurring operating losses, have a working capital deficiency, have failed
to meet scheduled payment obligations under our loan facilities and have not complied with certain covenants included in our loan
agreements with banks.We have also failed to make required payments to Deutsche Bank as agreed to in our September 7,
2012 amended and restated facility agreement and received notices of default from FBB. Furthermore, if we were forced to liquidate
our assets, the amount realized could be substantially lower than the carrying value of these assets. Our
ability to continue as a going concern is subject to our ability to obtain necessary funding from outside sources, including obtaining
additional funding from the sale of our securities, obtaining loans from various financial institutions or lenders where possible
and restructuring outstanding debt obligations that are currently in default. Our continued net operating losses increase the
difficulty in meeting such goals and there can be no assurances that such methods will prove successful.



We have been in breach of certain
loan covenants contained in our loan agreements. Although we have entered into amendments to two of our loan facilities, if we
are not successful in obtaining a waiver and amendment from our other lender with respect to covenants breached, our lenders may
declare an event of default and accelerate our outstanding indebtedness under the relevant agreement, which would impair our ability
to continue to conduct our business, which raises substantial doubt about our ability to continue as a going concern.



Our loan agreements
require that we comply with certain financial and other covenants. As a result of the drop in our drybulk asset values we were
not in compliance with the FBB facility covenants relating to vessel values as of December 31, 2012. In addition, we were
in breach of interest cover ratios, leverage and minimum liquidity covenants with the FBB facility not previously waived. A violation
of these covenants constitutes an event of default under our credit facility, which would, unless waived by our lender, provide
our lender with the right to require us to post additional collateral, increase our interest payments and/or pay down our indebtedness
to a level where we are in compliance with our loan covenants. Furthermore, our lender may accelerate our indebtedness and foreclose
their liens on our vessels, in which case our vessels may be auctioned or otherwise transferred which would impair our ability
to continue to conduct our business. As a result of these breaches, our total indebtedness is presented within current liabilities
in the December 31, 2012 consolidated balance sheet.



Pursuant to letter
agreements dated September 6, 2011 and September 19, 2011 with Credit Suisse, which resolved a default by us under the
Credit Suisse facility agreement, FreeSeas agreed to execute a sale contract in respect of either of the M/V Free Jupiter or
the M/V Free Lady no later than October 10, 2011. On November 8, 2011, FreeSeas sold the M/V Free
Lady for a sale price of $21.9 million. Pursuant to the Fifth Supplemental Agreement dated November 7, 2011 with
Credit Suisse, FreeSeas agreed to enter into a period time charter of at least 12 months for all its mortgaged vessels no later
than December 31, 2011, which charter would cover the vessel’s debt service plus $1.0 million. If the foregoing time
charter was not entered into by the required date, FreeSeas agreed that it would sell either the M/V Free Jupiter or
both the M/V Free Goddess and the M/V Free Hero by January 31, 2012. FreeSeas did not conclude
any time charter agreement or any agreement for the sale of the above-mentioned vessels. On May 31, 2012, FreeSeas and Credit
Suisse entered into a Sixth Supplemental Agreement to its Facility Agreement with Credit Suisse, which provided for, among other
things, a deferral of principal payments until March 31, 2014. On September 7, 2012, FreeSeas entered into an amended and restated
facility with Deutsche Bank, which provide for, among other things, a reduction in and deferral of the balloon payment due on
facility B form November 2012 to December 2015, a reduction in the amount of principal repayment and amendments to the financial
covenants.



In February, March,
April, November and December 2012 and January 2013, FreeSeas received notifications from FBB that FreeSeas 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. FreeSeas is seeking and will continue to seek similar restructured loan terms from FBB. Also the Company did
not pay the monthly repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest due
in October, November and December 2012 and January, February and March 2013. As well in
February and March and in April 2013, the Company did not pay the interest due of $124 and the interest rate swaps due of $80,
respectively, with the Credit Suisse facility. The Company is in discussions with both banks to reach a mutually beneficial agreement.



If FreeSeas is not
able to reach agreement with FBB as to restructured loan terms, or if FreeSeas is unable to comply with its restructured loan
terms, as the case is with Deutsche Bank and Credit Suisse, this could lead to the acceleration of the outstanding debt under
its debt agreements. FreeSeas’ failure to satisfy its covenants under its debt agreements, and any consequent acceleration
and cross acceleration of its outstanding indebtedness would have a material adverse effect on FreeSeas’ business operations,
financial condition and liquidity.



8







Our loan agreements contain covenants
that may limit our liquidity and corporate activities.



If the drybulk market
remains depressed or further declines, we may require further waivers and/or covenant amendments to our loan agreements relating
to our compliance with certain covenants for certain periods of time. The waivers and/or covenant amendments may impose additional
operating and financial restrictions on us and modify the terms of our existing loan agreements. Any such waivers or amendments,
if needed, could contain such additional restrictions and might not be granted at all.



Our loan agreements
require that we maintain certain financial and other covenants. The low drybulk charter rates and drybulk vessel values have previously
affected, and may in the future affect, our ability to comply with these covenants. A violation of these covenants constitutes
an event of default under our credit facilities and would provide our lenders with various remedies, including the right to require
us to post additional collateral, enhance our equity and liquidity, withhold payment of dividends, increase our interest payments,
pay down our indebtedness to a level where we are in compliance with our loan covenants, sell vessels in our fleet, or reclassify
our indebtedness as current liabilities. Our lenders could also accelerate our indebtedness and foreclose their liens on our vessels.
The exercise of any of these remedies could materially adversely impair our ability to continue to conduct our business. Moreover,
our lenders may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate
the amortization schedule for our indebtedness and increase the interest rates they charge us on our outstanding indebtedness.



As a result of our
loan covenants, our lenders have imposed operating and financial restrictions on us. These restrictions may limit our ability
to:



| | · | incur additional
                                                                                                               indebtedness;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | create liens
                                                                                                               on our assets;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------



| | · | sell capital
                                                                                                               stock of our subsidiaries;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | make investments;
| | - | -----------------



| | · | engage in mergers
                                                                                                               or acquisitions;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------



| | · | pay dividends;
| | - | --------------



| | · | make capital
                                                                                                               expenditures;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                          



| | · | change the
                                                                                                               management of our
                                                                                                               vessels or terminate
                                                                                                               or materially amend
                                                                                                               our management
                                                                                                               agreements; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | sell our vessels.
| | - | -----------------



The amended and restated
credit agreement dated September 7, 2012 with Deutsche Bank does not allow us to pay dividends without their prior written
approval, such approval not to be unreasonably withheld. In addition, the Sixth Supplemental agreement dated May 31, 2012 with
Credit Suisse does allow us to pay dividends after March 31, 2014 provided: i) that at the time of such payment no default has
occurred or would occur as a result of such payment; ii) at the time of such payment the market value of the aggregate fair market
value of the financed vessels is not 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; iii) between May 31, 2012and the date
of such payment of dividend or distribution, a part of the loan
which is not less than $11,300hasbeen prepaid and a part
of the commitment which is not less than $11,300has been permanently reduced; and iv) the amount of such dividends in respect of a financial year does not exceed 50% of
the consolidated net profit of the Company for that financial year. If we need covenant waivers, our lenders may impose additional
restrictions and may require the payment of additional fees, require prepayment of a portion of our indebtedness to them, accelerate
the amortization schedule for our indebtedness, and increase the interest rates they charge us on our outstanding indebtedness.
We may be required to use a significant portion of the net proceeds from any future capital raising to repay a portion of our
outstanding indebtedness. We agreed with Credit Suisse and Deutsche Bank to raise no less than $25.0 million by March 31, 2014,
one third of which amount will be used to repay our existing debt. This provision does not apply to the proceeds from sales of
our common stock under equity line facilities. These potential restrictions and requirements may limit our ability to pay dividends
to you, finance our future operations, make acquisitions or pursue business opportunities.



9







Once the payment reductions and
holidays agreed to by two of our three lenders expire, we will again be obligated to make significant payments to service our
debt.



As a result of amendments
to our loan facilities agreed to this year with Credit Suisse, and Deutsche Bank, we have substantially reduced our current debt
repayment obligations. These amendments provide for deferred principal repayments until June 30, 2014, for the Credit Suisse facility,
and reduced payments until May 31, 2013 and then a deferral of further payments until June 30, 2014 for Deutsche Bank. Following
these deferral periods, however, our payment obligations increase significantly and we will have balloon payments due in December
2015 under the Credit Suisse facility and the Deutsche Bank facilities. These required payments will limit funds otherwise available
for working capital, capital expenditures and other purposes. Our inability to service our debt could lead to acceleration of
our debt and foreclosures of our fleet. We may not be able to generate cash flow in amounts that are sufficient for these purposes.



We depend
upon a few significant customers for a large part of our revenues. The loss of one or more of these customers could adversely
affect our financial performance.



We
have historically derived a significant part of our revenue from a small number of charterers. During 2012, we derived approximately
42% of our gross revenue from three charterers, and during 2011, we derived approximately 53% of our gross revenues from three
charterers. If we do remain dependent, in large part, on a small number of charterers, if one or more of our charterers is unable
to perform under one or more charters with us, if we are not able to find appropriate replacement charterers, or if a charterer
exercises certain rights to terminate its charter, we could suffer a loss of revenues that could materially adversely affect our
business, financial condition and results of operations.



The international
drybulk shipping industry is highly competitive, and we may not be able to compete successfully for charters with new entrants
or established companies with greater resources.



We
employ our vessels in a highly competitive market that is capital intensive and highly fragmented. Competition arises primarily
from other vessel owners, some of which have substantially greater resources than we do. Competition for the transportation of
drybulk cargo by sea is intense and depends on price, customer relationships, operating expertise, professional reputation and
size, age, location and condition of the vessel. Due in part to the highly fragmented market, additional competitors with greater
resources could enter the drybulk shipping industry and operate larger fleets through consolidations or acquisitions and may be
able to offer lower charter rates than we are able to offer, which could have a material adverse effect on our fleet utilization
and, accordingly, our profitability.



We currently
rely on our Manager to manage and charter our fleet.



We
currently have no employees and contract all of our financial, accounting, including our financial reporting and internal controls,
and other back-office services, and the management of our fleet, including crewing, maintenance and repair, through Free Bulkers,
S.A., our Manager. We rely on our Manager to provide the technical management of our fleet and to attract charterers and charter
brokers. The loss of its services or failure to perform its obligations could reduce our revenues and net income and adversely
affect our operations and business if we are not able to contract with other companies to provide these services or take over
these aspects of our business directly. FreeSeas has no control over our Manager. Our Manager is not liable to us for any losses
or damages, if any, that may result from its management of our fleet unless the same shall have resulted from willful misconduct
or gross negligence of our Manager or any person to whom performance of the management services has been delegated by our Manager.
Pursuant to its agreement with us, our Manager’s liability for such acts, except in certain limited circumstances, may not
exceed ten times the annual management fee payable by the applicable subsidiary to our Manager. Although we may have rights against
our Manager, if our Manager defaults on its obligations to us, we may have no recourse against our Manager. Further, we will need
approval from our lenders if we intend to replace our Manager as our fleet manager.



We and
one of our executive officers have affiliations with our Manager that could create conflicts of interest detrimental to us.



Our
Chairman, Chief Executive Officer and President, Ion G. Varouxakis, is also the controlling shareholder and officer of our Manager.
These dual responsibilities of our officer and the relationships between the two companies could create conflicts of interest
between our Manager and us. Each of our operating subsidiaries has a nonexclusive management agreement with our Manager. Although
our Manager currently serves as manager for vessels owned by us, our Manager is not restricted from entering into management agreements
with other competing shipping companies. Our Manager could also allocate charter and/or vessel purchase and sale opportunities
to others. There can be no assurance that our Manager would resolve any conflicts of interest in a manner beneficial to us.



10







Management
and service fees are payable to our Manager, regardless of our profitability, which could have a material adverse effect on our
business, financial condition and results of operations.



The
management and service fees due from us to our Manager are payable whether or not our vessels are employed, and regardless of
our profitability. We have no ability to require our Manager to reduce the management fees and service fees if our profitability
decreases, which could have a material adverse effect on our business, financial condition and results of operations.



Our Manager
is a privately held company, and there is little or no publicly available information about it.



The
ability of our Manager to continue providing services for our benefit will depend in part on its own financial strength. Circumstances
beyond our control could impair our Manager’s financial strength. Because our Manager is privately held, it is unlikely
that information about its financial strength would become public or available to us prior to any default by our Manager under
the management agreement. As a result, an investor in us might have little advance warning of problems that affect our Manager,
even though those problems could have a material adverse effect on us.



As part
of its services to us, our Manager must continue to upgrade its operational, accounting and financial systems, and add more staff.
If our Manager cannot upgrade these systems or recruit suitable additional employees, its services to us and, therefore, our performance
may suffer.



Our
current operating, internal control, accounting and financial systems are provided by our Manager and may not be adequate if our
Manager’s efforts to improve those systems may be ineffective. If our Manager cannot continue to upgrade its operational
and financial systems effectively or recruit suitable employees, its services to us and, therefore, our performance may suffer
and our ability to expand our business further will be restricted.



We and
our Manager may be unable to attract and retain key executive officers with experience in the shipping industry, which may reduce
the effectiveness of our management and lower our results of operations.



Our
success depends to a significant extent upon the abilities and efforts of our and our Manager’s executive officers. The
loss of any of these individuals could adversely affect our business prospects and financial condition. Our success will depend
on retaining these key members of our and our Manager’s management team. Difficulty in retaining our executive officers,
and difficulty in our Manager retaining its executive officers, could adversely affect our results of operations and ability to
pay dividends. We do not maintain “key man” life insurance on any of our officers.



We intend
to continue to charter most of our vessels in the spot market, and as a result, we will be exposed to the cyclicality and volatility
of the spot charter market.



Since
we intend to continue to charter our vessels in the spot market, we will be exposed to the cyclicality and volatility of the spot
charter market, and we may not have long term, fixed time charter rates to mitigate the adverse effects of downturns in the spot
market. Handysize and Handymax vessels, which we currently operate, have been less volatile compared to larger vessels such as
Panamax and Capesize vessels but this may discontinue in the future. We cannot assure you that we will be able to successfully
charter our vessels in the future at rates sufficient to allow us to meet our obligations. The supply of and demand for shipping
capacity strongly influences freight rates. Because the factors affecting the supply and demand for vessels are outside of our
control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.



Factors
that influence demand for drybulk vessel capacity include:



| | • |  | demand for and production of drybulk products;
| | - |  | ----------------------------------------------



| | • |  | global and regional economic and political
    conditions including developments in international trade, fluctuations in industrial and agricultural production and armed
    conflicts;
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the distance drybulk cargo is to be moved
    by sea;
| | - |  | -----------------------------------------------------



| | • |  | environmental and other regulatory developments;
    and
| | - |  | --------------------------------------------------------



| | • |  | changes in seaborne and other transportation
    patterns.
| | - |  | ----------------------------------------------------------



| | • |  | The factors that influence the supply of
    drybulk vessel capacity include:
| | - |  | -----------------------------------------------------------------------------



11







| | • |  | the number of newbuilding deliveries;
| | - |  | -------------------------------------



| | • |  | port and canal congestion;
| | - |  | --------------------------



| | • |  | the scrapping rate of older vessels;
| | - |  | ------------------------------------



| | • |  | vessel casualties; and
| | - |  | ----------------------



| | • |  | the number of vessels that are out of service,
    i.e., laid-up, drydocked, awaiting repairs or otherwise not available for hire.
| | - |  | ----------------------------------------------------------------------------------------------------------------------------------



In
addition to the prevailing and anticipated freight rates, factors that affect the rate of newbuilding, scrapping and laying-up
include newbuilding prices, secondhand vessel values in relation to scrap prices, costs of bunkers and other operating costs,
costs associated with classification society surveys, normal maintenance and insurance coverage, the efficiency and age profile
of the existing fleet in the market and government and industry regulation of maritime transportation practices, particularly
environmental protection laws and regulations. These factors influencing the supply of and demand for shipping capacity are outside
of our control, and we may not be able to correctly assess the nature, timing and degree of changes in industry conditions.



We
anticipate that the future demand for our drybulk carriers will be dependent upon economic growth in the world’s economies,
including China, Japan and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier
fleet and the sources and supply of drybulk cargo to be transported by sea. The capacity of the global drybulk carrier fleet seems
likely to increase, and we can provide no assurance as to the timing or extent of future economic growth. Adverse economic, political,
social or other developments could have a material adverse effect on our business, results of operations, cash flows and financial
condition. Should the drybulk market strengthen significantly in the future, we may enter into medium to long term employment
contracts for some or all of our vessels.



With
the exemption of the M/V Free Goddess, M/V Free Impala and the M/V Free Maverick, we currently employ our
vessels in the spot market, all with charters scheduled to expire within one to two months, by which time we will have to negotiate
new employment for these vessels. If the rates in the charter market fall significantly throughout 2013, it will affect the charter
revenue we will receive from our vessels, which would have an adverse effect on our revenues, cash flows and profitability, as
well as our ability to comply with our debt covenants.



When our charters in the spot market
end, we may not be able to replace them promptly, and any replacement charters could be at lower charter rates, which may materially,
adversely affect our earnings and results of operations.



We will generally
attempt to recharter our vessels at favorable rates with reputable charterers. All of our vessels currently operate in the spot
market. If the drybulk shipping market is in a period of depression when our vessels’ charters expire, it is likely that
we may be forced to re-charter them at reduced rates, if such charters are available at all. In the event charter rates fall below
our costs to operate a vessel or for any other strategic or operational matter, we may determine not to recharter a vessel until
such time as the charter rates increase or such strategic or operational matter ceases to exist. We cannot assure you that we
will be able to obtain new charters at comparable or higher rates or with comparable charterers, that we will be able to obtain
new charters at all or that we may decide not to charter a vessel at all. The charterers under our charters have no obligation
to renew or extend the charters. We will generally attempt to recharter our vessels at favorable rates with reputable charterers
as our charters expire. Failure to obtain replacement charters at rates comparable to our existing charters and our decision not
to charter vessels will reduce or eliminate our revenue and will adversely affect our ability to service our debt. Further, we
may have to incur lay-up expenses or reposition our vessels without cargo or compensation to deliver them to future charterers
or to move vessels to areas where we believe that future employment may be more likely or advantageous. Laying up expenses and
reactivating expenses would increase our vessel operating expenses. Repositioning our vessels would increase our vessel operating
costs. If any of the foregoing events were to occur, our revenues, net income and earnings may be materially adversely affected.



Further
declines in charter rates and other market deterioration could cause us to incur impairment charges.



We
evaluate the recoverable amounts of our vessels to determine if events have occurred that would require an impairment of their
carrying amounts. The recoverable amount of vessels is reviewed based on events and changes in circumstances that would indicate
that the carrying amount of the assets might not be recovered. The review for potential impairment indicators and future undiscounted
net operating cash flows related to the vessels is complex and requires us to make various estimates including future charter
rates and earnings from the vessels which have been historically volatile.



12







When
our estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying value, the
carrying value is written down, by recording a charge to operations, to the vessel’s fair market value if the fair market
value is lower than the vessel’s carrying value. The carrying values of our vessels may not represent their fair market
value because the market prices of secondhand vessels tend to fluctuate with changes in charter rates and the cost of newbuildings.
Any impairment charges incurred as a result of declines in charter rates could have a material adverse effect on our business,
results of operations, cash flows and financial condition.



Our charterers
may terminate or default on their charters, which could adversely affect our results of operations and cash flow.



The
ability of each of our charterers to perform its obligations under a charter will depend on a number of factors that are beyond
our control. These factors may include general economic conditions, the condition of the drybulk shipping industry, the charter
rates received for specific types of vessels, hedging arrangements, the ability of charterers to obtain letters of credit from
its customers, cash reserves, cash flow considerations and various operating expenses. Many of these factors impact the financial
viability of our charterers. Charterers may not pay or may attempt to renegotiate charter rates. Should a charterer fail to honor
its obligations under its agreement with us, it may be difficult for us to secure substitute employment for the affected vessel,
and any new charter arrangements we secure in the spot market or on a time charter may be at lower rates.



We
lose a charterer or the benefits of a charter if a charterer fails to make charter payments because of its financial inability,
disagreements with us or otherwise, terminates the charter because we fail to deliver the vessel within the time specified in
the charter, the vessel is lost or damaged beyond repair, there are serious deficiencies in the vessel or prolonged periods of
off-hire, default under the charter or the vessel has been subject to seizure for more than a specified number of days.



The M/V Free Jupiterwas on time charter with Korea Line Corp, or KLC, a South Korean company, from June 8, 2007 until she was re-delivered
to us on February 22, 2011. KLC made several unilateral deductions from hire payments during the three-year course of the
time charter, and no hire was received from KLC from February 8, 2011 until the actual redelivery of the vessel on February 22,
2011. The Company commenced arbitration proceedings against KLC, and has taken action to obtain security, including the arrest
of KLC assets. As a result, the Company obtained third-party security in the amount of $1.68 million (which includes provision
for interest and legal costs) in the form of a letter of undertaking from KLC’s P&I club covering KLC’s unilateral
deductions from the hire. The Company also obtained cash security held in escrow in the amount of $182 from the execution of a
lien on sub-hires. KLC has counterclaimed by way of set-off, alleging that KLC is entitled to retain the amount of hire that was
deducted because of the Company’s alleged breach of charterparty. The Company denies these allegations and continues to
assert its claim to recover the full amount deducted by KLC. On January 25, 2011, KLC announced that it had filed a
petition for the rehabilitation proceeding for court receivership in the Seoul Central District Court, and the court approved
and confirmed a rehabilitation plan. Upon the issuance of the final award of the arbitration tribunal, and for any amount in excess
of the third-party security and cash security, the Company may participate in the approved rehabilitation plan. On January 17,
2012, the Company obtained an interim award under which it was awarded the part of the claim that KLC had admitted was undisputed,
$832, plus interest, legal costs, and the cost of the tribunal. Following the interim award, the Company received approximately
$335. The majority of the balance of $511 that has been awarded is unsecured. The Company is considering its options if KLC
does not pay the balance, including the possibility of pursuing this in the Korean rehabilitation proceedings, where the hearing
of the Company’s claim has been stayed pending the outcome of the London arbitration. The Company believes that, if the
Korean claim succeeds, the Company should make a recovery in accordance with the rehabilitation plan, which has been approved
by the Korean court. The Company intends to seek a further award (if this matter does not settle) for the disputed balance, which
is adequately secured. Despite above actions, the Company wrote-off the remaining outstanding balance $1,173 of the KLC time charter
which is included in "Provision and write-offs of insurance claims and bad debts" of the accompanying consolidated financial
statements for the year ended December 31, 2012.



If
our charterers fail to meet their obligations to us, we would experience material adverse effects on our revenues, cash flows
and profitability and our ability to comply with our debt covenants and pay our debt service and other obligations. The actual
or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the additional
debt financing that we will require to acquire additional vessels or may significantly increase our costs of obtaining such financing.
Our inability to obtain additional financing at all, or at a higher than anticipated cost, may materially impair our ability to
implement our business strategy.



Charter
rates are subject to seasonal fluctuations, which may adversely affect our operating results.



Our
fleet consists of Handysize and Handymax drybulk carriers that operate in markets that have historically exhibited seasonal variations
in demand and, as a result, in charter rates. This seasonality may result in quarter-to-quarter volatility in our operating results.
The energy markets primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration
require more electricity and towards the end of the calendar year in anticipation of the forthcoming winter period. Grain shipments
are driven by the harvest within a climate zone. Because three of the five largest grain producers (the United States, Canada
and the European Union) are located in the northern hemisphere and the other two (Argentina and Australia) are located in the
southern hemisphere, harvests occur throughout the year and grains require drybulk shipping accordingly. As a result of these
and other factors, the drybulk shipping industry is typically stronger in the fall and winter months. Therefore, we expect our
revenues from our drybulk carriers to be typically weaker during the fiscal quarters ending June 30 and September 30
and, conversely, we expect our revenues from our drybulk carriers to be typically stronger in fiscal quarters ending December 31
and March 31. Seasonality in the drybulk industry could materially affect our operating results.



13







The aging
of our fleet may result in increased operating costs in the future, which could adversely affect our ability to operate our vessels
profitably.



The
majority of our vessels were acquired second-hand, and we estimate their useful lives to be 28 years from their date of delivery
from the yard, depending on various market factors and management’s ability to comply with government and industry regulatory
requirements. As of December 31, 2012, the average age of the vessels in our current fleet was 15 years. Part of our business
strategy includes the continued acquisition of second hand vessels when we find attractive opportunities.



In
general, expenditures necessary for maintaining a vessel in good operating condition increase as a vessel ages. Second hand vessels
may also develop unexpected mechanical and operational problems despite adherence to regular survey schedules and proper maintenance.
Cargo insurance rates also tend to increase with a vessel’s age, and older vessels tend to be less fuel-efficient than newer
vessels. While the difference in fuel consumption is factored into the freight rates that our older vessels earn, if the cost
of bunker fuels were to increase significantly, it could disproportionately affect our vessels and significantly lower our profits.
In addition, changes in governmental regulations, safety or other equipment standards may require:



| | • |  | expenditures for alterations to existing
    equipment;
| | - |  | -------------------------------------------------------



| | • |  | the addition of new equipment; or
| | - |  | ---------------------------------



| | • |  | restrictions on the type of cargo a vessel
    may transport.
| | - |  | -------------------------------------------------------------



We
cannot give assurances that future market conditions will justify such expenditures or enable us to operate our vessels profitably
during the remainder of their economic lives.



Although
we inspect the secondhand vessels that we acquire prior to purchase, this inspection does not provide us with the same knowledge
about a vessel’s condition and the cost of any required (or anticipated) repairs that we would have had if this vessel had
been built for and operated exclusively by us. Generally, we do not receive the benefit of warranties on secondhand vessels.



Unless
we set aside reserves or are able to borrow funds for vessel replacement, at the end of a vessel’s useful life our revenue
will decline, which would adversely affect our business, results of operations and financial condition.



Unless
we maintain reserves or are able to borrow or raise funds for vessel replacement, we may be unable to replace the vessels in our
fleet upon the expiration of their useful lives, which we expect to be 28 years from their date of delivery from the yard. Our
cash flows and income are dependent on the revenues earned by the chartering of our vessels to customers. If we are unable to
replace the vessels in our fleet upon the expiration of their useful lives, our business, results of operations, financial condition
and ability to pay dividends will be materially and adversely affected. Any reserves set aside for vessel replacement may not
be available for dividends.



If any
of our vessels fail to maintain their class certification and/or fail any annual survey, intermediate survey, dry-docking or special
survey, that vessel would be unable to carry cargo, thereby reducing our revenues and profitability and violating certain loan
covenants of our third-party indebtedness.



The
hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry.
The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations
of the country of registry of the vessel and the Safety of Life at Sea Convention, or SOLAS.



A
vessel must undergo annual surveys, intermediate surveys, dry-dockings and special surveys. In lieu of a special survey, a vessel’s
machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.
Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel
is also required to be dry-docked every two to three years for inspection of the underwater parts of such vessel.



If
any vessel does not maintain its class and/or fails any annual survey, intermediate survey, dry-docking or special survey, the
vessel will be unable to carry cargo between ports and will be unemployable and uninsurable, thereby reducing our revenues and
profitability. That could also cause us to be in violation of certain covenants in our loan agreements. In addition, the cost
of maintaining our vessels’ classifications may be substantial at times and could result in reduced revenues.



14







Our vessels
may suffer damage and we may face unexpected dry-docking costs, which could affect our cash flow and financial condition.



If
our vessels suffer damage, they may need to be repaired at a dry-docking facility, resulting in vessel downtime and vessel off-hire.
The costs of dry-dock repairs are unpredictable and can be substantial. We may have to pay dry-docking costs that our insurance
does not cover. The inactivity of these vessels while they are being repaired and repositioned, as well as the actual cost of
these repairs, would decrease our earnings. In addition, space at dry-docking facilities is sometimes limited and not all dry-docking
facilities are conveniently located. We may be unable to find space at a suitable dry-docking facility or we may be forced to
move to a dry-docking facility that is not conveniently located to our vessels’ positions. The loss of earnings while our
vessels are forced to wait for space or to relocate to dry-docking facilities that are farther away from the routes on which our
vessels trade would also decrease our earnings.



Our growth
depends on the growth in demand for and the shipping of drybulk cargoes.



Our
growth strategy focuses on the drybulk shipping sector. Accordingly, our growth depends on growth in world and regional demand
for and the shipping of drybulk cargoes, which could be negatively affected by a number of factors, such as declines in prices
for drybulk cargoes or general political and economic conditions.



Reduced
demand for and the shipping of drybulk cargoes would have a material adverse effect on our future growth and could harm our business,
results of operations and financial condition. In particular, Asian Pacific economies and India have been the main driving force
behind the past increase in seaborne drybulk trade and the demand for drybulk carriers. The negative change in economic conditions
in any Asian Pacific country, but particularly in China or Japan, as well as India, may have a material adverse effect on our
business, financial condition and results of operations, as well as our future prospects, by further reducing demand and resultant
charter rates.



If we fail
to manage our growth properly, we may not be able to successfully expand our market share.



We
will continue exploring expansion opportunities as our financial resources permit. Our growth will depend on:



| | • |  | locating and acquiring suitable vessels;
| | - |  | ----------------------------------------



| | • |  | placing newbuilding orders and taking delivery
    of vessels;
| | - |  | --------------------------------------------------------------



| | • |  | identifying and consummating acquisitions
    or joint ventures;
| | - |  | ----------------------------------------------------------------



| | • |  | integrating any acquired vessel successfully
    with our existing operations;
| | - |  | ------------------------------------------------------------------------------



| | • |  | enhancing our customer base;
| | - |  | ----------------------------



| | • |  | managing our expansion; and
| | - |  | ---------------------------



| | • |  | obtaining the required financing.
| | - |  | ---------------------------------



If
our financial resources permit, we could face risks in connection with growth by acquisition, such as undisclosed liabilities
and obligations and difficulty experienced in obtaining additional qualified personnel, managing relationships with customers
and suppliers, and integrating newly acquired operations into existing infrastructures.



We
cannot give any assurance that we will be successful in executing our growth plans or that we will not incur significant expenses
and losses in connection with the execution of those growth plans.



Our
ability to successfully implement our business plan depends on our ability to obtain additional financing, which may affect the
value of your investment in us.



We
plan to continue to explore expansion opportunities. We will require substantial additional financing to fund any acquisitions
of additional vessels and to implement our business plan. We cannot be certain that sufficient financing will be available on
terms that are acceptable to us or at all. If we cannot raise the financing we need in a timely manner and on acceptable terms,
we may not be able to acquire the vessels necessary to implement our business plans and consequently you may lose some or all
of your investment in us.



15







While
we expect that a significant portion of the financing resources needed to acquire vessels, if any, will be through long-term debt
financing, we may raise additional funds through additional equity offerings. New equity investors may dilute the percentage of
the ownership interest of our existing shareholders. Sales or the possibility of sales of substantial amounts of shares of our
common stock in the public markets could adversely affect the market price of our common stock.



If we acquire
additional drybulk carriers and those vessels are not delivered on time or are delivered with significant defects, our earnings
and financial condition could suffer.



We
expect to acquire additional vessels in the future. A delay in the delivery of any of these vessels to us or the failure of the
contract counterparty to deliver a vessel at all could cause us to breach our obligations under a related time charter and could
adversely affect our earnings, our financial condition and the amount of dividends, if any, that we pay in the future. The delivery
of these vessels could be delayed or certain events may arise which could result in us not taking delivery of a vessel, such as
a total loss of a vessel, a constructive loss of a vessel, or substantial damage to a vessel prior to delivery. In addition, the
delivery of any of these vessels with substantial defects could have similar consequences.



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 and our ability to implement our fleet renewal program.



The market values
of our vessels will fluctuate depending on general economic and market conditions affecting the shipping industry and prevailing
charter hire rates, competition from other shipping companies and other modes of transportation, the types, sizes and ages of
our vessels, applicable governmental regulations and the cost of newbuildings.



If a determination
is made that a vessel’s future useful life is limited or its future earnings capacity is reduced, it could result in an
impairment of its carrying amount on our financial statements that would result in a charge against our earnings and the reduction
of our shareholders’ equity. If for any reason we sell our vessels at a time when prices have fallen, the sale price may
be less than the vessels’ carrying amount on our financial statements, and we would incur a loss and a reduction in earnings.
During the year ended December 31, 2012, we incurred an impairment loss of $12,480 due to expected sales of certain vessels.



We have incurred secured
debt under loan agreements for all of our vessels. The market value of our vessels is based, in part, on charter rates and the
stability of charter rates over a period of time. As a result of global economic conditions, volatility in charter rates, generally
declining charter rates, and other factors, we have recently experienced a decrease in the market value of our vessels. Due to
the decline of the market value of our fleet, we were not in compliance with certain covenants of our existing loan agreements
that relate to maintenance of asset values and, as a result, we may not be able to refinance our debt or obtain additional financing.
There can be no assurances that charter rates will stabilize or increase, that the market value of our vessels will stabilize
or increase or that we will regain compliance with the financial covenants in our loan agreements or that our lenders will agree
to waivers or forbearances.



On November 8,
2011, we sold the M/V Free Lady for a sale price of $21.9 million. If we fail to sell our other vessels currently
held for sale (the M/V Free Hero, the M/V Free Jupiter , the M/V Free Impala , and
the M/V Free Neptune ), or fail to sell them at prices acceptable to us, it could have a material adverse effect
on our competitiveness and business operations.



Maritime claimants could arrest
our vessels, which could interrupt our cash flow.



Crew members, suppliers
of goods and services to a vessel, shippers of cargo and other parties may be entitled to a maritime lien against a vessel for
unsatisfied debts, claims or damages. In many jurisdictions, a maritime lien holder, such as our lenders, may enforce its lien
by arresting a vessel through foreclosure proceedings. The arresting or attachment of one or more of our vessels could interrupt
our cash flow and require us to pay large sums of funds to have the arrest lifted.



In addition, in some
jurisdictions, such as South Africa, under the “sister ship” theory of liability, a claimant may arrest both the vessel
which is subject to the claimant’s maritime lien and any “associated” vessel, which is any vessel owned or controlled
by the same owner or managed by the same manager. Claimants could try to assert “sister ship” liability against one
of our vessels for claims relating to another of our vessels or a vessel managed by our Manager.



On November 5, 2012,
the M/V Free Maverick was arrested in Morocco in relation to claims against the M/V Free Maverick and “sister
ships”. As a result, the M/V Free Maverick is idle pending a resolution with the creditors.



16







Economic conditions and regulatory
pressures impacting banks in Greece may cause disruptions to one of our lenders, which may cause an increase in the cost of our
borrowings from that lender.



One of our lenders
is FBB, located in Greece. As a result of the recent financial crisis in Greece, Greek banks have been under significant pressure
from the applicable banking regulators to increase capital, increase earnings or merge with other banks. There can be no assurances
that our banking relationship with FBB would continue if FBB were to merge with another bank or that FBB might not attempt to
invoke provisions in our loan agreement that permits it to pass along increases in its cost of regulations. In either event, our
financial condition and results of operations could be materially adversely affected.



The smuggling
of drugs or other contraband onto our vessels may lead to governmental claims against us.



We
expect that our vessels will call in ports in South America and other areas where smugglers are known to attempt to hide drugs
and other contraband on vessels, with or without the knowledge of crew members. To the extent our vessels are found with contraband,
whether inside or attached to the hull of our vessel and whether with or without the knowledge of any of our crew, we may face
governmental or other regulatory claims which could have an adverse effect on our business, results of operations, cash flows
and financial condition.



Rising
fuel prices may adversely affect our profits.



Upon
redelivery of vessels at the end of a period time or trip time charter, we may be obligated to repurchase bunkers on board at
prevailing market prices, which could be materially higher than fuel prices at the inception of the charter period. In addition,
although we rarely deploy our vessels on voyage charters, fuel is a significant, if not the largest, expense that we would incur
with respect to vessels operating on voyage charter. As a result, an increase in the price of fuel may adversely affect our profitability.
The price and supply of fuel is volatile and fluctuates based on events outside our control, including geopolitical developments,
supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and unrest in oil producing countries
and regions, regional production patterns and environmental concerns and regulations.



We are
subject to regulation and liability under environmental laws and the failure to comply with these regulations may subject us to
increased liability, may adversely affect our insurance coverage and may result in a denial of access to, or detention in, certain
ports. This could require significant expenditures and reduce our cash flows and net income.



Our
business and the operation of our vessels are materially affected by government regulation in the form of international conventions
and national, state and local laws and regulations in force in the jurisdictions in which the vessels operate, as well as in the
country or countries of their registration, including those governing the management and disposal of hazardous substances and
wastes, the cleanup of oil spills and other contamination, air emissions, and water discharges and ballast water management. We
are also required by various governmental and quasi-governmental agencies to obtain certain permits, licenses and certificates
with respect to our operations. Because such conventions, laws, regulations and permit requirements are often revised, or the
required additional measures for compliance are still under development, we cannot predict the ultimate cost of complying with
such conventions, laws, regulations or permit requirements, or the impact thereof on the resale prices or useful lives of our
vessels. Additional conventions, laws and regulations may be adopted which could limit our ability to do business or increase
the cost of our doing business and which may materially adversely affect our business, financial condition and results of operations.



Environmental
requirements can also affect the resale prices or useful lives of our vessels or require reductions in cargo capacity, ship modifications
or operational changes or restrictions. Failure to comply with these requirements could lead to decreased availability of or more
costly insurance coverage for environmental matters or result in the denial of access to certain jurisdictional waters or ports,
or detention in certain ports. Under local, national and foreign laws, as well as international treaties and conventions, we could
incur material liabilities, including cleanup obligations and claims for natural resource, personal injury and property damages
in the event that there is a release of petroleum or other hazardous materials from our vessels or otherwise in connection with
our operations. The 2010 explosion of the Deepwater Horizon and the subsequent release of oil into the Gulf of Mexico or similar
events may result in further regulation of the shipping industry, including modifications to statutory liability schemes.



The
operation of our vessels is affected by the requirements set forth in the International Safety Management, or ISM Code. The failure
of a shipowner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease available
insurance coverage for the affected vessels, and/or may result in a denial of access to, or detention in, certain ports.



The
European Union is currently considering proposals to further regulate vessel operations. Individual countries in the European
Union may also have additional environmental and safety requirements. It is difficult to predict what legislation or regulation,
if any, may be adopted by the European Union or any other country or authority.



17







The
International Maritime Organization or other regulatory bodies may adopt additional regulations in the future that could adversely
affect the useful lives of our vessels as well as our ability to generate income from them or resell them at attractive prices.



The
United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and
clean-up of the environment from oil spills. Under OPA, vessel owners, operators and bareboat charterers are “responsible
parties” and are jointly, severally and strictly liable (unless the spill results solely from the act or omission of a third
party, an act of God or an act of war) for all containment and clean-up costs and other damages arising from discharges or threatened
discharges of oil from their vessels, including bunkers (fuel).



Violations
of, or liabilities under, environmental or other applicable laws and regulations can result in substantial penalties, fines and
other sanctions, including, in certain instances, seizure or detention of our vessels. Events of this nature could have a material
adverse effect on our business, financial condition and results of operations.



Technological
innovation related to existing or new vessels could reduce the competitiveness of our older vessels and therefore the value of
such vessels in the chartering and secondhand resale markets.



The
charter hire rates and the value and operational life of a vessel are determined by a number of factors, including the vessel’s
efficiency, operational flexibility and physical life. Efficiency includes speed, fuel economy and the ability to load and discharge
cargo quickly. Flexibility includes the ability to enter harbors, utilize related docking facilities and pass through canals and
straits. The length of a vessel’s physical life is related to its original design and construction, its maintenance and
the impact of the stress of operations. If new drybulk carriers are built that are more efficient or more flexible or have longer
physical lives than our older vessels, competition from these more technologically advanced vessels could adversely affect the
competitiveness of our older vessels, and, in turn, the amount of charter hire payments we receive for our older vessels once
their initial charters expire, and the resale value of our older vessels could significantly decrease.



Our vessels
are exposed to inherent operational risks that may not be adequately covered by our insurance.



The
operation of any vessel includes risks such as mechanical failure, collision, fire, contact with floating objects, cargo or property
loss or damage and business interruption due to political circumstances in foreign countries, piracy, terrorist attacks, armed
hostilities and labor strikes. With a drybulk carrier, the cargo itself and its interaction with the ship can be a risk factor.
By their nature, drybulk cargoes are often heavy, dense, easily shifted, and react badly to water exposure. In addition, drybulk
carriers are often subjected to battering treatment during unloading operations with grabs, jackhammers (to pry encrusted cargoes
out of the hold), and small bulldozers. This treatment may cause damage to the vessel. Vessels damaged due to treatment during
unloading procedures may be more susceptible to breach to the sea. Hull breaches in drybulk carriers may lead to the flooding
of the vessels’ holds. If a drybulk carrier suffers flooding in its forward holds, the bulk cargo may become so dense and
waterlogged that its pressure may buckle the vessel’s bulkheads leading to the loss of a vessel. If we are unable to adequately
maintain our vessels we may be unable to prevent these events. Any of these circumstances or events could negatively impact our
business, financial condition and results of operations.



Further,
such occurrences could result in death or injury to persons, loss of property or environmental damage, delays in the delivery
of cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties or restrictions on conducting
business, higher insurance rates and damage to our reputation and customer relationships generally. In the past, political conflicts
have also resulted in attacks on vessels, mining of waterways and other efforts to disrupt international shipping, particularly
in the Arabian Gulf region. Acts of terrorism and piracy have also affected vessels trading in regions such as the South China
Sea and the Gulf of Aden and Indian Ocean off the coast of Somalia and Kenya. If these attacks and other disruptions result in
areas where our vessels are deployed being characterized by insurers as “war risk” zones or Joint War Committee “war,
strikes, terrorism and related perils” listed areas, as the Gulf of Aden currently is, premiums payable for such coverage
could increase significantly and such insurance coverage may be more difficult or impossible to obtain. In addition, there is
always the possibility of a marine disaster, including oil spills and other environmental damage. Although our vessels carry a
relatively small amount of the oil used for fuel (“bunkers”), a spill of oil from one of our vessels or losses as
a result of fire or explosion could be catastrophic under certain circumstances.



We
may not be adequately insured against all risks, and our insurers may not pay particular claims. With respect to war risks insurance,
which we usually obtain for certain of our vessels making port calls in designated war zone areas, such insurance may not be obtained
prior to one of our vessels entering into an actual war zone, which could result in that vessel not being insured. Even if our
insurance coverage is adequate to cover our losses, we may not be able to timely obtain a replacement vessel in the event of a
loss. Under the terms of our credit facilities, we will be subject to restrictions on the use of any proceeds we may receive from
claims under our insurance policies. Furthermore, in the future, we may not be able to maintain or obtain adequate insurance coverage
at reasonable rates for our fleet. We may also be subject to calls, or premiums, in amounts based not only on our own claim records
but also the claim records of all other members of the protection and indemnity associations through which we receive indemnity
insurance coverage for tort liability. Our insurance policies also contain deductibles, limitations and exclusions which, although
we believe are standard in the shipping industry, may nevertheless increase our costs in the event of a claim or decrease any
recovery in the event of a loss. If the damages from a catastrophic oil spill or other marine disaster exceeded our insurance
coverage, the payment of those damages could have a material adverse effect on our business and could possibly result in our insolvency.



18







In
addition, we may not carry loss of hire insurance. Loss of hire insurance covers the loss of revenue during extended vessel off-hire
periods, such as those that occur during an unscheduled drydocking due to damage to the vessel from accidents. Accordingly, any
loss of a vessel or any extended period of vessel off-hire, due to an accident or otherwise, could have a material adverse effect
on our business, financial condition and results of operations.



We may
be subject to increased premium payments because we obtain some of our insurance through protection and indemnity associations.



We
may be subject to increased premium payments, or calls, in amounts based not only on our and our Manager’s claim records
but also the claim records of other members of the protection and indemnity associations through which we receive insurance coverage
for tort liability, including pollution-related liability. Our protection and indemnity associations may not have enough resources
to cover claims made against them. Our payment of these calls could result in significant expense to us, which could have a material
adverse effect on our business, results of operations, cash flows and financial condition.



Our operations
expose us to global political risks, such as wars and political instability that may interfere with the operation of our vessels
causing a decrease in revenues from such vessels.



We
are an international company and primarily conduct our operations outside the United States. Changing economic, political and
governmental conditions in the countries where we are engaged in business or where our vessels are registered will affect us.
In the past, political conflicts, particularly in the Middle East, resulted in attacks on vessels, mining of waterways and other
efforts to disrupt shipping in the area. For example, recent political and governmental instability in Egypt, Syria and Libya
may affect vessels trading in such regions. In addition, future political and governmental instability, revolutions and wars in
regions where our vessels trade could affect our trade patterns and adversely affect our operations by causing delays in shipping
on certain routes or making shipping impossible on such routes, thereby causing a decrease in revenues.



During
a period of war or emergency, a government could requisition for title or seize our vessels. Requisition for title occurs when
a government takes control of a vessel and becomes the owner. A government could also requisition our vessels for hire, when a
government takes control of a vessel and effectively becomes the charterer at dictated charter rates. Government requisition of
one or more of our vessels could reduce our revenues and net income.



Because
our seafaring employees are covered by collective bargaining agreements, failure of industry groups to renew those agreements
may disrupt our operations and adversely affect our earnings.



All
of the seafarers employed on the vessels in our fleet are covered by collective bargaining agreements that set basic standards.
We cannot assure you that these agreements will prevent labor interruptions. Any labor interruptions could disrupt our operations
and harm our financial performance.



Crew
costs are a significant expense for us under our charters. Recently, the limited supply of and increased demand for well-qualified
crew, due to the increase in the size of the global shipping fleet, has created upward pressure on crewing costs, which we generally
bear under our period time and spot charters. Increases in crew costs may adversely affect our profitability.



Increases
in interest rates would reduce funds available to purchase vessels and service debt.



We
have purchased, and may purchase in the future, vessels with loans that provide for periodic interest payments based on indices
that fluctuate with changes in market interest rates. If interest rates increase significantly, it would increase our costs of
financing our acquisition of vessels, which could decrease the number of additional vessels that we could acquire and adversely
affect our financial condition and results of operations and may adversely affect our ability to service debt.



The derivative
contracts we have entered into to hedge our exposure to fluctuations in interest rates could result in higher than market interest
rates and charges against our income.



We
have entered into two interest rate swaps for purposes of managing our exposure to fluctuations in interest rates applicable to
indebtedness under two of our credit facilities with Credit Suisse, which provide for a floating interest rate based on LIBOR.
Our hedging strategies, however, may not be effective and we may incur substantial losses if interest rates move materially differently
from the fixed rates agreed to in our derivative contracts. Since our existing interest rate swaps do not, and future derivative
contracts may not, qualify for treatment as hedges for accounting purposes, we recognize fluctuations in the fair value of such
contracts in our income statement. In addition, our financial condition could be materially adversely affected to the extent we
do not hedge our exposure to interest rate fluctuations under our financing arrangements. Any hedging activities we engage in
may not effectively manage our interest rate exposure or have the desired impact on our financial conditions or results of operations.



19







From
time to time in the future, we may take positions in derivative instruments including freight forward agreements, or FFAs. FFAs
and other derivative instruments may be used to hedge a vessel owner’s exposure to the charter market by providing for the
sale of a contracted charter rate along a specified route and period of time. Upon 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 FFAs is required to pay the buyer an amount equal to the difference between the contracted rate and the settlement rate,
multiplied by the number of days in the specified period. Conversely, if the contracted rate is greater than the settlement rate,
the buyer is required to pay the seller the settlement sum. If we take positions in FFAs or other derivative instruments and do
not correctly anticipate charter rate movements over the specified route and time period, we could suffer losses in the settling
or termination of the FFA. This could adversely affect our results of operation and cash flow. As of the date of this annual report,
we had no FFAs outstanding.



Because
we generate all of our revenues in U.S. dollars but will incur a portion of our expenses in other currencies, exchange rate fluctuations
could have an adverse impact on our results of operations.



We
generate all of our revenues in U.S. dollars, but we expect that portions of our future expenses will be incurred in currencies
other than the U.S. dollar. This difference could lead to fluctuations in our net income due to changes in the value of the dollar
relative to the other currencies, in particular the Euro. Expenses incurred in foreign currencies against which the dollar falls
in value can increase, decreasing net income. For the years ended December 31, 2012 and 2011, the fluctuation in the value
of the dollar against foreign currencies did not have a material impact on us.



We may
have to pay tax on United States source income, which would reduce our earnings.



Under
the laws of the countries of our and our subsidiaries incorporation and/or vessels’ registration, 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” in our consolidated statement of operations. Pursuant to the Internal Revenue Code of the United States,
or the Code, U.S. source income from the international operations of ships is generally exempt from U.S. tax if the company operating
the ships meets both of the following requirements, (1) more than 50% of the value of our stock is owned, directly or indirectly,
by “qualified shareholders,” which includes persons (i) who are “residents” of our country of organization
or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States,
and (ii) who comply with certain documentation requirements, which we refer to as the “Qualified Shareholder Ownership
Test,” or (2) our stock is primarily and regularly traded on one or more established securities markets in our country
of organization, in another country that grants an “equivalent exemption” to United States corporations, or in the
United States, which we refer to as the “Publicly-Traded Test;” and we are not considered “closely held,”
which we refer to as the “Closely-Held Test;”



To complete the exemption
process, our shipowning subsidiaries must file a U.S. tax return, state the basis of their exemption and obtain and retain documentation
attesting to the basis of their exemptions. Our subsidiaries will complete the filing process for 2012 on or prior to the applicable
tax filing deadline.



All of our ship-operating
subsidiaries currently satisfy the Publicly-Traded Test based on the trading volume and the widely-held ownership of our common
stock, but no assurance can be given that this will remain so in the future, since continued compliance with this rule is subject
to factors outside our control. Based on our U.S. source Shipping Income for 2010, 2011 and 2012, we would be subject to U.S.
federal income tax of approximately $34, $93 and $25, respectively, in the absence of an exemption under Section 883.



U.S. tax
authorities could treat us as a “passive foreign investment company,” which could have adverse U.S. federal income
tax consequences to U.S. holders.



A
foreign corporation will be treated as a “passive foreign investment company,” or PFIC, for U.S. federal income tax
purposes if either (1) at least 75% of its gross income for any taxable year consists of certain types of “passive
income” or (2) at least 50% of the average value of the corporation’s assets produce or are held for the production
of those types of “passive income.” For purposes of these tests, “passive income” includes dividends,
interest, and gains from the sale or exchange of investment property and rents and royalties other than rents and royalties which
are received from unrelated parties in connection with the active conduct of a trade or business. For purposes of these tests,
income derived from the performance of services does not constitute “passive income.” U.S. shareholders of a PFIC
are subject to a disadvantageous U.S. federal income tax regime with respect to the income derived by the PFIC, the distributions
they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of their shares in the PFIC.



20







Based
on our currently anticipated operations, we do not believe that we will be a PFIC with respect to any taxable year. In this regard,
we intend to treat the gross income we derive or are deemed to derive from our time chartering activities as services income,
rather than rental income. Accordingly, we believe that our time chartering activities does not constitute “passive income,”
and the assets that we own and operate in connection with the production of that income do not constitute passive assets.



There
is, however, no direct legal authority under the PFIC rules addressing our proposed method of operation, and a federal court decision
has characterized income received from vessel time charters as rental rather than services income for U.S. tax purposes. Accordingly,
no assurance can be given that the U.S. Internal Revenue Service, or IRS, or a court of law will accept our position, and there
is a risk that the IRS or a court of law could determine that we are a PFIC. Moreover, no assurance can be given that we would
not constitute a PFIC for any future taxable year if there were to be changes in the nature and extent of our operations.



If
the IRS were to find that we are or have been a PFIC for any taxable year, our U.S. shareholders will face adverse U.S. tax consequences.
Under the PFIC rules, unless those shareholders make an election available under the Code (which election could itself have adverse
consequences for such shareholders), such shareholders would be liable to pay United States federal income tax at the then prevailing
income tax rates on ordinary income plus interest upon excess distributions and upon any gain from the disposition of our common
stock, as if the excess distribution or gain had been recognized ratably over the shareholder’s holding period of our common
stock.



Risk Factors
Relating to the Drybulk Shipping Industry



The international
drybulk shipping industry is cyclical and volatile and charter rates have decreased significantly and may further decrease in
the future, which may adversely affect our earnings, vessel values and results of operations.



The
drybulk shipping industry is cyclical with volatility in charter hire rates and profitability. The degree of charter hire rate
volatility among different types of drybulk vessels has varied widely. Since the middle of the third quarter of 2008, charter
hire rates for drybulk vessels have decreased substantially, they may remain volatile for the foreseeable future and could continue
to decline further. Additionally, charter rates have been particularly volatile during 2012 and have substantially decreased.
As a result, our charter rates could further decline significantly, resulting in a loss and a reduction in earnings.



We
anticipate that the future demand for our drybulk vessels will be dependent upon existing conditions in the world’s economies,
seasonal and regional changes in demand, changes in the number of drybulk vessels being ordered and constructed, particularly
if there is an oversupply of vessels, changes in the capacity of the global drybulk fleet and the sources and supply of drybulk
cargo to be transported by sea. Adverse economic, political, social or other developments could have a further material adverse
effect on drybulk shipping in general and on our business and operating results in particular.



Our
ability to re-charter our drybulk vessels upon the expiration or termination of their current time charters, the charter rates
payable under any renewal or replacement charters will depend upon, among other things, the current state of the drybulk shipping
market. If the drybulk shipping market is in a period of depression when our vessels’ charters expire, it is likely that
we may be forced to re-charter them at reduced rates, including rates whereby we incur a loss, which may reduce our earnings or
make our earnings volatile.



In
addition, because the market value of our vessels may fluctuate significantly, we may incur losses when we sell vessels, which
may adversely affect our earnings. If we sell vessels at a time when vessel prices have fallen and before we have recorded an
impairment adjustment to our financial statements, the sale may be at less than the vessel’s carrying amount on our financial
statements, resulting in a loss and a reduction in earnings.



The drybulk
carrier charter market remains significantly below its high in the middle of 2008 and the average rates achieved in the four prior
years, which has and may continue to adversely affect our revenues, earnings and profitability and our ability to comply with
our loan covenants and repay our indebtedness.



The
drybulk shipping industry is cyclical with attendant volatility in charter hire rates and profitability. The degree of charter
hire rate volatility among different types of dry bulk vessels has varied widely; however, the continued downturn in the drybulk
charter market has severely affected the entire dry bulk shipping industry and charter hire rates for drybulk vessels have declined
significantly from historically high levels. The Baltic Dry Index (the “BDI”), which is published daily by the Baltic
Exchange Limited, a London-based membership organization that provides daily shipping market information to the global investing
community, is a daily average of charter rates in selected shipping routes measured on a time charter and voyage basis covering
Handysize, Supramax, Panamax and Capesize drybulk carriers. The BDI has long been viewed as the main benchmark to monitor the
movements of the dry bulk vessel charter market and the performance of the entire drybulk shipping market. The BDI declined 94%
in 2008 from a peak of 11,793 in May 2008 to a low of 663 in December 2008 and remained volatile during 2009, ranging from a low
of 772 in January 2009 to a high of 4,661 in November 2009. The BDI continued its volatility in 2010, 2011 and 2012, reaching
a high of 4,209 in May 2010, and a low of 1,700 in July 2010, in 2011, ranging from a low of approximately 1,043 in February 2011
and a high of approximately 2,173 in October 2011 and in 2012, reaching a high of approximately 1,738 in January 2012 and a low
of approximately 647 in February 2012.



21







As
of April 4, 2013, the BDI had risen to 866. The decline and volatility in charter rates has been due to various factors, including
the lack of trade financing for purchases of commodities carried by sea, which had resulted in a significant decline in cargo
shipments. The decline and volatility in charter rates in the drybulk market also affects the value of our drybulk vessels, which
follows the trends of drybulk charter rates, and earnings on our charters, and similarly, affects our cash flows, our ability
to repay our indebtedness and compliance with the covenants contained in our loan agreements.



Economic
recession and disruptions in world financial markets and the resulting governmental action in the United States and in other parts
of the world could have a further material adverse impact on our results of operations, financial condition and cash flows.



We
face risks resulting from changes in economic environments, changes in interest rates and instability in the banking, energy,
commodities and securities markets around the world, among other factors. Major market disruptions, the adverse changes in market
conditions and the regulatory climate in the United States and worldwide may adversely affect our business, impair our ability
to borrow amounts under our existing credit facility or any credit facilities we enter into. In addition, the economic environment
in Greece, which is where our operations are based, may have adverse impacts on us. We cannot predict how long the current market
conditions will last. However, these economic and governmental factors, together with the concurrent decline in charter rates,
could have a significant effect on our results of operations and could affect the price of our common stock.



An economic
slowdown in the Asia Pacific region could exacerbate the effect of recent slowdowns in the economies of the European Union and
may have a material adverse effect on our business, financial condition and results of operations.



We
anticipate a significant number of the port calls made by our vessels will continue to involve the loading or discharging of drybulk
commodities in ports in the Asia Pacific region. As a result, any negative changes in economic conditions in any Asia Pacific
country, particularly in China, may exacerbate the effect of recent slowdowns in the economies of the European Union and may have
a material adverse effect on our business, financial condition and results of operations, as well as our future prospects. Before
the global economic financial crisis that began in 2008, China had one of the world’s fastest growing economies in terms
of gross domestic product (“GDP”) which had a significant impact on shipping demand. The growth rate of China’s
GDP decreased to approximately 7.8% for the year ended December 31, 2012, as compared to 9.3% and 10.4% for the years ended December 31,
2011 and 2010, respectively, and continues to remain below pre-2008 levels. It is possible that China and other countries in the
Asia Pacific region will continue to experience slowed or even negative economic growth in the near future. Moreover, the current
economic slowdown in the economies of the European Union and other Asian countries may further adversely affect economic growth
in China and elsewhere. Our business, financial condition and results of operations, as well as our future prospects, will likely
be materially and adversely affected by a further economic downturn in any of these countries.



Changes
in the economic and political environment in China and policies adopted by the government to regulate its economy may have a material
adverse effect on our business, financial condition and results of operations.



The
Chinese economy differs from the economies of most countries belonging to the Organization for Economic Cooperation and Development,
or OECD, in such respects as structure, government involvement, level of development, growth rate, capital reinvestment, allocation
of resources, rate of inflation and balance of payments position. Since 1978, increasing emphasis has been placed on the utilization
of market forces in the development of the Chinese economy. There is an increasing level of freedom and autonomy in areas such
as allocation of resources, production, pricing and management and a gradual shift in emphasis to a “market economy”
and enterprise reform. Although limited price reforms were undertaken, with the result that prices for certain commodities are
principally determined by market forces, many of the reforms are experimental and may be subject to change or abolition. We cannot
assure you that the Chinese government will continue to pursue a policy of economic reform. The level of imports to and exports
from China could be adversely affected by changes to these economic reforms, as well as by changes in political, economic and
social conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import
restrictions, all of which could, adversely affect our business, financial condition and operating results.



Risks involved
with operating ocean-going vessels could affect our business and reputation, which may reduce our revenues.



The
operation of an ocean-going vessel has inherent risks. These risks include the possibility of:



| | • |  | crew strikes and/or boycotts;
| | - |  | -----------------------------



| | • |  | marine disaster;
| | - |  | ----------------



22







| | • |  | piracy;
| | - |  | -------



| | • |  | environmental accidents;
| | - |  | ------------------------



| | • |  | cargo and property losses or damage; and
| | - |  | ----------------------------------------



| | • |  | business interruptions caused by mechanical
    failure, human error, war, terrorism, political action in various countries, labor strikes or adverse weather conditions.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The
involvement of any of our vessels in an environmental disaster may harm our reputation as a safe and reliable vessel operator.
Any of these circumstances or events could increase our costs or lower our revenues.



On October 11, 2012,
we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release
by her hijackers. The M/V Free Goddess had been hijacked by Somali pirates on February 7, 2012 while transiting the
Indian Ocean eastbound. The vessel was on a time charter trip at the time she was hijacked. Under the charterparty agreement,
the BIMCO Piracy clause was applied, which provided among other things, for the charterers to have the vessel covered with kidnap
and ransom insurance and loss of hire insurance. The vessel was also covered by the war risk underwriters, who confirmed cover.
We commenced arbitration proceedings with the charterer due to the charterer not fulfilling its obligations under the charterparty
agreement. The proceedings were concluded and the award was in our favor. Thereafter, we reached a settlement with the charterer
pursuant to which the charterer agreed to pay $800. Currently, the vessel is being surveyed pending commencement of temporary
repairs.



An oversupply
of drybulk vessel capacity may lead to reductions in charter rates and profitability.



As
of December 31, 2012, newbuilding orders had been placed for an aggregate of approximately 18% of the total DWT of the then-existing
global drybulk fleet, with deliveries expected mainly during the succeeding 36 months, although available data with regard to
cancellations of existing newbuilding orders or delays of new build deliveries are not always accurate. As of December 31,
2011, newbuilding orders had been placed for an aggregate of approximately 32% of the total DWT of the then-existing global drybulk
fleet, with deliveries expected mainly during the succeeding 36 months, although available data with regard to cancellations of
existing new build orders or delays of new build deliveries are not always accurate. An over-supply of drybulk carrier capacity
may result in a reduction of charter hire rates. Because the factors affecting the supply and demand for vessels are outside of
our control and are unpredictable, the nature, timing, direction and degree of changes in industry conditions are also unpredictable.



Factors
that influence demand for vessel capacity include:



| | • |  | supply and demand for energy resources,
    commodities, semi-finished and finished consumer and industrial products;
| | - |  | ---------------------------------------------------------------------------------------------------------------------



| | • |  | changes in the exploration or production
    of energy resources, commodities, semi-finished and finished consumer and industrial products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the location of regional and global exploration,
    production and manufacturing facilities;
| | - |  | ---------------------------------------------------------------------------------------------



| | • |  | the location of consuming regions for energy
    resources, commodities, semi-finished and finished consumer and industrial products;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------



| | • |  | the globalization of production and manufacturing;
    global and regional economic and political conditions, including armed conflicts, terrorist activities, embargoes and strikes;
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | developments in international trade;
| | - |  | ------------------------------------



| | • |  | changes in seaborne and other transportation
    patterns, including the distance cargo is transported by sea;
| | - |  | --------------------------------------------------------------------------------------------------------------



| | • |  | environmental and other regulatory developments;
| | - |  | ------------------------------------------------



| | • |  | currency exchange rates; and weather.
| | - |  | -------------------------------------



The
factors that influence the supply of vessel capacity include:



| | • |  | the number of newbuilding deliveries;
| | - |  | -------------------------------------



23







| | • |  | port and canal congestion;
| | - |  | --------------------------



| | • |  | the scrapping rate of older vessels;
| | - |  | ------------------------------------



| | • |  | vessel casualties; and
| | - |  | ----------------------



| | • |  | the number of vessels that are out of service.
| | - |  | ----------------------------------------------



We
anticipate that the future demand for our drybulk carriers will be dependent upon continued economic growth in the world’s
economies, including China and India, seasonal and regional changes in demand, changes in the capacity of the global drybulk carrier
fleet and the sources and supply of drybulk cargoes to be transported by sea. The capacity of the global drybulk carrier fleet
seems likely to increase and economic growth may not continue. Adverse economic, political, social or other developments could
have a material adverse effect on our business and operating results.



Increased
inspection procedures and tighter import and export controls could increase costs and disrupt our business.



International
shipping is subject to various security and customs inspection and related procedures in countries of origin and destination.
Inspection procedures can result in the seizure of the contents of our vessels, delays in the loading, offloading or delivery
and the levying of customs duties, fines or other penalties against us.



Since the
terrorist attacks of September 11, 2001, there has been a variety of limitations intended to enhance vessel security.



Regulations
by the U.S. Coast Guard and rules pursuant to the International Convention for the Safety of Life at Sea have imposed increased
compliance costs on vessel owners and charterers. These costs include certification costs imposed by relevant agencies and bonding
costs under U.S. Customs and Border Protection, as well as potential delays in transit due to increased security procedures regulating
the entry into harbors or the discharge of cargo. For a further description of the various requirements, please see “Item
4. Information on the Company -Environmental and Other Regulation-Vessel Security Regulations.”



It
is possible that changes to inspection procedures could impose additional financial and legal obligations on us. Furthermore,
changes to inspection procedures could also impose additional costs and obligations on our customers and may, in certain cases,
render the shipment of certain types of cargo uneconomical or impractical. Any such changes or developments may have a material
adverse effect on our business, results of operations, cash flows, financial condition and ability to pay dividends.



Risks Related to Our Common Stock



Our executive officers, directors
and principal stockholders own a large percentage of our voting common stock and could limit our stockholders’ influence
on corporate decisions or could delay or prevent a change in corporate control.



As of April 2, 2013,
our directors, executive officers and certain holders of more than 5% of our outstanding common stock, together with their affiliates
and related persons, beneficially own, in the aggregate, approximately 22.3% of our outstanding common stock. As a result, these
stockholders, if acting together, have the ability to determine the outcome of all matters submitted to our stockholders for approval,
including the election and removal of directors and any merger, consolidation or sale of all or substantially all of our assets
and other extraordinary transactions. The interests of this group of stockholders may not always coincide with our corporate interests
or the interest of other stockholders, and they may act in a manner with which you may not agree or that may not be in the best
interests of other stockholders. This concentration of ownership may have the effect of:



| | · | delaying, deferring
                                                                                                               or preventing a
                                                                                                               change in control
                                                                                                               of our company;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | entrenching
                                                                                                               our management
                                                                                                               and/or board;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | impeding a
                                                                                                               merger, consolidation,
                                                                                                               takeover or other
                                                                                                               business combination
                                                                                                               involving our company;
                                                                                                               or
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | discouraging
                                                                                                               a potential acquirer
                                                                                                               from making a tender
                                                                                                               offer or otherwise
                                                                                                               attempting to obtain
                                                                                                               control of our
                                                                                                               company.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24







The market price of our common stock
has been and may in the future be subject to significant fluctuations.



The market price of
our common stock has been and may in the future be subject to significant fluctuations as a result of many factors, some of which
are beyond our control. Among the factors that have in the past and could in the future affect our stock price are:



| | · | quarterly variations
                                                                                                               in our results
                                                                                                               of operations;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | our lenders’
                                                                                                               willingness to
                                                                                                               extend our loan
                                                                                                               covenant waivers,
                                                                                                               if necessary;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | changes in
                                                                                                               market valuations
                                                                                                               of similar companies
                                                                                                               and stock market
                                                                                                               price and volume
                                                                                                               fluctuations generally;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | changes in
                                                                                                               earnings estimates
                                                                                                               or publication
                                                                                                               of research reports
                                                                                                               by analysts;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | speculation
                                                                                                               in the press or
                                                                                                               investment community
                                                                                                               about our business
                                                                                                               or the shipping
                                                                                                               industry generally;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | strategic actions
                                                                                                               by us or our competitors
                                                                                                               such as acquisitions
                                                                                                               or restructurings;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the thin trading
                                                                                                               market for our
                                                                                                               common stock, which
                                                                                                               makes it somewhat
                                                                                                               illiquid;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the current
                                                                                                               ineligibility of
                                                                                                               our common stock
                                                                                                               to be the subject
                                                                                                               of margin loans
                                                                                                               because of its
                                                                                                               low current market
                                                                                                               price;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | regulatory
                                                                                                               developments;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | additions or
                                                                                                               departures of key
                                                                                                               personnel;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | general market
                                                                                                               conditions; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | domestic and
                                                                                                               international economic,
                                                                                                               market and currency
                                                                                                               factors unrelated
                                                                                                               to our performance.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The stock markets
in general, and the markets for drybulk shipping and shipping stocks in particular, have experienced extreme volatility that has
sometimes been unrelated to the operating performance of individual companies. These broad market fluctuations may adversely affect
the trading price of our common stock.



As long as our stock price remains
below $5.00 per share, our shareholders will face restrictions in using our shares as collateral for margin accounts.



The closing price
of our common stock on the NASDAQ Capital Market on April 3, 2013 was $1.19 per share. If the market price of our shares of common
stock remains below $5.00 per share, under Federal Reserve regulations and account maintenance rules of many brokerages, our shareholders
will face restrictions in using such shares as collateral for borrowing in margin accounts. These restrictions on the use of our
common stock as collateral may lead to sales of such shares creating downward pressure on and increased volatility in, the market
price of our shares of common stock. In addition, many institutional investors will not invest in stocks whose prices are below
$5.00 per share.



If our common stock is delisted
from The NASDAQ Stock Market, we would be subject to the risks relating to penny stocks.



If
our common stock were to be delisted from trading on The NASDAQ Stock Market and the trading price of the common stock were below
$5.00 per share on the date the common stock were delisted, trading in our common stock would also be subject to the requirements
of certain rules promulgated under the Securities Exchange Act of 1934, as amended. These rules require additional disclosure
by broker-dealers in connection with any trades involving a stock defined as a "penny stock" and impose various sales
practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors,
generally institutions. These additional requirements may discourage broker-dealers from effecting transactions in securities
that are classified as penny stocks, which could severely limit the market price and liquidity of such securities and the ability
of purchasers to sell such securities in the secondary market. A penny stock is defined generally as any non-exchange listed equity
security that has a market price of less than $5.00 per share, subject to certain exceptions.



25







As a foreign private issuer whose
shares are listed on the NASDAQ Capital Market, we may follow certain home country corporate governance practices instead of certain
NASDAQ requirements and are not required to obtain shareholder approval for the sale of shares.



As a foreign private
issuer whose shares are listed on the NASDAQ Capital Market, we are permitted to follow certain home country corporate governance
practices instead of certain requirements of the NASDAQ Marketplace Rules. For example, we may follow home country practice with
regard to, among other things, the composition of the board of directors, compensation of officers, director nomination process
and quorum at shareholders’ meetings. In addition, we may follow home country practice instead of the NASDAQ requirement
to obtain shareholder approval for certain dilutive events, such as for the establishment or amendment of certain equity-based
compensation plans, a stock issuance that will result in a change of control of the company, certain transactions other than a
public offering involving issuances of a 20% or more interest in the company and certain acquisitions of the stock or assets of
another company. In particular, we are not required to obtain shareholder approval for our sale of shares pursuant to the Investment
Agreement, which may result in the issuance of shares totaling more than 20% of our outstanding shares. Accordingly, our shareholders
may not be afforded the same protections as provided under NASDAQ’s corporate governance rules.



Future sales or issuances of our
stock could cause the market price of our common stock to decline.



Issuance of a substantial
number of shares of our common stock in public or private offerings, equity lines, or shares issued as an additional compensation
to executive officers, members of the Board or to the Manager, , or in payment of obligations due, or the perception that these
issuances could occur, may depress the market price for our common stock. These issuances could also impair our ability to raise
additional capital through the sale of our equity securities in the future. We may issue additional shares of our common stock
in the future and our shareholders may elect to sell large numbers of shares held by them from time to time. Also, we may need
to raise additional capital to achieve our business plans.



Because the Republic of the Marshall
Islands, where we are incorporated, does not have a well-developed body of corporate law, shareholders may have fewer rights and
protections than under typical United States law, such as Delaware, and shareholders may have difficulty in protecting their interest
with regard to actions taken by our Board of Directors.



Our corporate affairs
are governed by amended and restated articles of incorporation and by-laws and by the Marshall Islands Business Corporations Act,
or BCA. The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However,
there have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities
of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Shareholder rights
may differ as well. For example, under Marshall Islands law, a copy of the notice of any meeting of the shareholders must be given
not less than 15 days before the meeting, whereas in Delaware such notice must be given not less than 10 days before the meeting.
Therefore, if immediate shareholder action is required, a meeting may not be able to be convened as quickly as it can be convened
under Delaware law. Also, under Marshall Islands law, any action required to be taken by a meeting of shareholders may only be
taken without a meeting if consent is in writing and is signed by all of the shareholders entitled to vote, whereas under Delaware
law action may be taken by consent if approved by the number of shareholders that would be required to approve such action at
a meeting. Therefore, under Marshall Islands law, it may be more difficult for a company to take certain actions without a meeting
even if a majority of the shareholders approve of such action. While the BCA does specifically incorporate the non-statutory law,
or judicial case law, of the State of Delaware and other states with substantially similar legislative provisions, public shareholders
may have more difficulty in protecting their interests in the face of actions by the management, directors or controlling shareholders
than would shareholders of a corporation incorporated in a U.S. jurisdiction.



It may not be possible for investors
to enforce U.S. judgments against us.



We, and all our subsidiaries,
are or will be incorporated in jurisdictions outside the U.S. and substantially all of our assets and those of our subsidiaries
and will be located outside the U.S. In addition, most of our directors and officers are or will be non-residents of the U.S.,
and all or a substantial portion of the assets of these non-residents are or will be located outside the U.S. As a result, it
may be difficult or impossible for U.S. investors to serve process within the U.S. upon us, our subsidiaries, or our directors
and officers, or to enforce a judgment against us for civil liabilities in U.S. courts. In addition, you should not assume that
courts in the countries in which we or our subsidiaries are incorporated or where our or the assets of our subsidiaries are located
would enforce judgments of U.S. courts obtained in actions against us or our subsidiaries based upon the civil liability provisions
of applicable U.S. federal and state securities laws or would enforce, in original actions, liabilities against us or our subsidiaries
based on those laws.



We can
issue shares of preferred stock without shareholder approval, which could adversely affect the rights of common shareholders.



Our
articles of incorporation permit us to establish the rights, privileges, preferences and restrictions, including voting rights,
of future series of our preferred stock and to issue such stock without approval from our stockholders. The rights of holders
of our common stock may suffer as a result of the rights granted to holders of preferred stock that we may issue in the future.
In addition, we could issue preferred stock to prevent a change in control of our company, depriving common shareholders of an
opportunity to sell their stock at a price in excess of the prevailing market price.



26







Our stockholder rights plan
may discourage a takeover.



In
January 2009, our Board of Directors authorized shares of Series A Participating Preferred Stock in connection with its adoption
of a stockholder rights plan, under which we issued rights to purchase Series A Preferred Stock to holders of our common
stock. Upon certain triggering events, each Right entitles the registered holder to purchase from us one one-thousandth of a share
of Preferred Stock at an exercise price of $90.00, subject to adjustment. Our stockholder rights plan may generally discourage
a merger or tender offer involving our securities that is not approved by our Board of Directors by increasing the cost of effecting
any such transaction and, accordingly, could have an adverse impact on stockholders who might want to vote in favor of such merger
or participate in such tender offer. Our stockholder rights plan expires in January 2019.



Provisions in our organizational
documents, our management agreement and under Marshall Islands corporate law could make it difficult for our shareholders to replace
or remove our current Board of Directors or have the effect of discouraging, delaying or preventing a merger or acquisition, which
could adversely affect the market price of our common stock.



Several provisions
of our amended and restated articles of incorporation and by-laws, and certain provisions of the Marshall Islands corporate law,
could make it difficult for our shareholders to change the composition of our Board of Directors in any one year, preventing them
from changing the composition of management. In addition, these provisions may discourage, delay or prevent a merger or acquisition
that shareholders may consider favorable. These provisions include:



| | · | authorizing
                                                                                                               our Board of Directors
                                                                                                               to issue “blank
                                                                                                               check” preferred
                                                                                                               stock without shareholder
                                                                                                               approval;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | providing for
                                                                                                               a classified Board
                                                                                                               of Directors with
                                                                                                               staggered, three
                                                                                                               year terms;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | prohibiting
                                                                                                               cumulative voting
                                                                                                               in the election
                                                                                                               of directors;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | authorizing
                                                                                                               the removal of
                                                                                                               directors only
                                                                                                               for cause and only
                                                                                                               upon the affirmative
                                                                                                               vote of the holders
                                                                                                               of a two-thirds
                                                                                                               majority of the
                                                                                                               outstanding shares
                                                                                                               of our common shares,
                                                                                                               voting as a single
                                                                                                               class, entitled
                                                                                                               to vote for the
                                                                                                               directors;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | limiting the
                                                                                                               persons who may
                                                                                                               call special meetings
                                                                                                               of shareholders;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | establishing
                                                                                                               advance notice
                                                                                                               requirements for
                                                                                                               election to our
                                                                                                               Board of Directors
                                                                                                               or proposing matters
                                                                                                               that can be acted
                                                                                                               on by shareholders
                                                                                                               at shareholder
                                                                                                               meetings; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | limiting our
                                                                                                               ability to enter
                                                                                                               into business combination
                                                                                                               transactions with
                                                                                                               certain shareholders.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Pursuant to the terms
of our management agreement, our Manager is entitled to a termination fee if such agreement is terminated upon a “change
of control,” which term includes, but is not limited to, the election of a director not recommended by the then-current
Board of Directors, any person or entity or group of affiliated persons or entities that becomes a beneficial owner of 15% or
more of our voting securities, a merger of FreeSeas where less than a majority of the shares of the resulting entity are held
by the FreeSeas shareholders or the sale of all or substantially all of FreeSeas’ assets. The termination fee as of December 31,
2012 would have been approximately $89 million. In addition, we have implemented a shareholder rights plan pursuant to which the
holders of our common stock receive one right to purchase one one-thousandth of a share of our Series A Participating Preferred
Stock at an exercise price of $90.00 per share, subject to adjustment. The rights become exercisable upon the occurrence of certain
change in control events. These provisions and our shareholder rights plan could substantially impede the ability of public shareholders
to benefit from a change in control and, as a result, may adversely affect the market price of our common shares and your ability
to realize any potential change of control premium.



27







Item 4. Information on the Company



Our Organization and Corporate
Structure



We
were incorporated on April 23, 2004 under the name “Adventure Holdings S.A.” pursuant to the laws of the Republic
of the Marshall Islands to serve as the parent holding company of our ship-owning entities. On April 27, 2005, we changed
our name to “FreeSeas Inc.”



We
became a public reporting company on December 15, 2005, when we completed a merger with Trinity Partners Acquisition Company
Inc., or Trinity, a blank check company formed to serve as a vehicle to complete a business combination with an operating business,
in which we were the surviving corporation. At the time of the merger we owned three drybulk carriers. We currently own seven
vessels, each of which is owned through a separate wholly owned subsidiary.



Our
common stock currently trades on the NASDAQ Capital Market under the trading symbol “FREE”.



Our
principal executive offices are located at 10, Eleftheriou Venizelou Street (Panepistimiou Ave.), 10671, Athens, Greece and our
telephone number is 011-30-210-452-8770.



Capital Expenditures
and Divestitures



During
the last three fiscal years, our capital expenditures and divestitures related to our efforts to renew and expand our fleet were
as follows:



| | · | On
                                                                                                             July 30, 2010,
                                                                                                             we entered into an
                                                                                                             agreement to sell
                                                                                                             the M/V Free
                                                                                                             Destiny for
                                                                                                             a price of $3,213.
                                                                                                             The vessel was delivered
                                                                                                             to the buyers on
                                                                                                             August 27, 2010
                                                                                                             and we recognized
                                                                                                             a gain of $807.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               August 17,
                                                                                                               2010, two of the
                                                                                                               Company’s
                                                                                                               wholly owned subsidiaries
                                                                                                               entered into shipbuilding
                                                                                                               contracts with
                                                                                                               a Chinese yard
                                                                                                               for the construction
                                                                                                               of two drybulk
                                                                                                               vessels of approximately
                                                                                                               33,600 dwt each
                                                                                                               for an aggregate
                                                                                                               purchase price
                                                                                                               of $49,880 including
                                                                                                               extra costs of
                                                                                                               approximately $1,080
                                                                                                               in total. On December 31,
                                                                                                               2011, the Company
                                                                                                               impaired the advances
                                                                                                               and the capitalized
                                                                                                               expenses relating
                                                                                                               to the shipbuilding
                                                                                                               contracts due to
                                                                                                               lack of financing
                                                                                                               after the cancelation
                                                                                                               of ABN AMRO financing
                                                                                                               commitment and
                                                                                                               delayed scheduled
                                                                                                               payment to the
                                                                                                               yard resulting
                                                                                                               in a default situation
                                                                                                               as per the construction
                                                                                                               contract.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               May 13, 2011,
                                                                                                               the Company sold
                                                                                                               the M/V Free
                                                                                                               Envoy, a 1984
                                                                                                               built 26,318 dwt
                                                                                                               Handysize dry bulk
                                                                                                               vessel for a sale
                                                                                                               price of $4.2 million
                                                                                                               and recognized
                                                                                                               a gain of $1,561
                                                                                                               as a result of
                                                                                                               the sale. From
                                                                                                               the net proceeds
                                                                                                               of the sale, the
                                                                                                               Company paid on
                                                                                                               May 13, 2011
                                                                                                               an amount of $3.7
                                                                                                               million constituting
                                                                                                               prepayment towards
                                                                                                               the Deutsche Bank
                                                                                                               loan facility B.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               November 8,
                                                                                                               2011, the Company
                                                                                                               sold the M/V Free
                                                                                                               Lady, a 2003-built,
                                                                                                               50,246 dwt Handymax
                                                                                                               dry bulk vessel,
                                                                                                               for a sale price
                                                                                                               of $21.9 million.
                                                                                                               From the net proceeds
                                                                                                               of the sale, the
                                                                                                               Company paid on
                                                                                                               November 8,
                                                                                                               2011 the amount
                                                                                                               of $19.8 million
                                                                                                               constituting prepayment
                                                                                                               towards the Credit
                                                                                                               Suisse loan facility.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Our Fleet



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 six 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 April 2, 2013, the aggregate dwt of our
operational fleet is approximately 197,200 dwt and the average age of our fleet is 15.5 years.



Our investment and
operational focus is in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity. Handysize
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.



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.



28







All of our vessels
are currently being chartered in the spot market. The following table details the vessels in our fleet as of April 10, 2013:



|Vessel Name       |  | Type      |  | Built |  | Dwt    |  | Employment                                                                
|----------------- |  | --------- |  | ----- |  | ------ |  | --------------------------------------------------------------------------
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Jupiter  |  | Handymax  |  | 2002  |  | 47,777 |  | About 20-25 day time charter trip at $4,700 per
    day through May 2013  
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Knight   |  | Handysize |  | 1998  |  | 24,111 |  | About 70-80 day time charter trip at $4,500
    per day through April 2013
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Maverick |  | Handysize |  | 1998  |  | 23,994 |  | Idle pending resolution in connection with dispute with
    creditors     
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Impala   |  | Handysize |  | 1997  |  | 24,111 |  | Laid-up                                                                   
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Neptune  |  | Handysize |  | 1996  |  | 30,838 |  | About 65 day time charter trip at $6,500
    per day through April 2013   
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Hero     |  | Handysize |  | 1995  |  | 24,318 |  | About 20-25 day time charter trip at $5,400
    per day through April 2013
|                  |  |           |  |       |  |        |  |                                                                           
|M/V Free Goddess  |  | Handysize |  | 1995  |  | 22,051 |  | Being surveyed pending commencement of repairs
    after pirate seizure   



On October 11,
2012, we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s
release by her hijackers. The M/V Free Goddess had been hijacked by Somali pirates on February 7, 2012 while transiting
the Indian Ocean eastbound. The vessel was on a time charter trip at the time she was hijacked. Under the charterparty agreement,
the BIMCO Piracy clause was applied, which provided among other things, for the charterers to have the vessel covered with kidnap
and ransom insurance and loss of hire insurance. The vessel was also covered by the war risk underwriters, who confirmed cover.
We commenced arbitration proceedings with the charterer due to the charterer not fulfilling its obligations under the charterparty
agreement. The proceedings were concluded and the award was in our favor. Thereafter, we reached a settlement with the charterer
pursuant to which the charterer agreed to pay $800. Since then, the vessel is being surveyed pending commencement of temporary
repairs at the port of refuge.



Competitive Strengths



We
believe that we possess a number of strengths that provide us with a competitive advantage in the drybulk shipping industry, including:



| | • |  | Positive macro environment.The
    broader shipping sector is currently at a cyclical low and poised for a significant upswing in a positive macroeconomic environment.
    Several key market indicators support increased seaborne dry trade, including growing Chinese and Japanese iron ore and coal
    imports as well as strengthening Indian demand for thermal coal imports. Industrial production in emerging and developing
    economies constitutes a major driving force and is expected to generate enhanced demand for dry bulk commodities in the near
    term. The rising world population and economic recovery in the importing regions are also expected to contribute to the overall
    growth of the seaborne dry bulk trade.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | Solid Handysize fundamentals.We
    are strategically well positioned to take advantage of the growing Handysize fleet shortage. Approximately 34% of the worldwide
    Handysize fleet is over 20 years old, and nearing the end of its useful life, making it considerably older than any other
    fleet type. In addition, Handysize fleet growth is expected to be less than half the growth of any other vessel type. Operationally,
    Handysize vessels are more versatile than other drybulk vessels. Their shallow draft allows for access to smaller ports unserviceable
    by larger Panamax and Capesize vessels, and they are equipped with on-board cranes, enabling entry into ports with inadequate
    loading and discharging facilities.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | Experienced management team.We
    have benefited from the expertise of our executive officers, including that of Ion G. Varouxakis, our Chairman, President
    and Chief Executive Officer, and that of our Manager’s personnel, which consists of seasoned shipping professionals
    with long-standing experience in the industry. We believe that our management team has a proven track record of strong performance
    throughout a challenging economic climate, as we have actively and decisively renewed our fleet while reducing operating costs
    without sacrificing quality or safety in the process.
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



29







Business Strategy



Our
primary objectives are to profitably grow our business and maximize value to our shareholders by pursuing the following strategies:



| | • |  | Optimize our fleet. Our
    fleet of drybulk carriers consists of Handysize and Handymax vessels. Given the relatively low number of Handysize drybulk
    vessels on order, and a relatively great number of Handysize drybulk vessels at an age of 20 years or older, we believe
    there will be continued demand for such vessels. Handysize vessels are typically shallow-drafted and equipped with onboard
    cranes. This makes them more versatile and able to access a wider range of loading and discharging ports than larger ships
    that are unable to service many ports due to their size or the lack of local port infrastructure. Many countries in the Asia
    Pacific region, including China, as well as countries in Africa and South America, have shallow ports. We believe that our
    vessels, and any Handysize that we may acquire, should enable us to transport a wider variety of cargoes and to pursue a greater
    number of chartering opportunities than if we owned larger drybulk vessels. Handysize vessels have also historically achieved
    greater charter rate stability than larger drybulk vessels.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • |  | Build upon strategic relationships.We
    intend to continue to build upon our extensive experience and relationships with ship brokers, financial institutions, industrial
    partners and commodity traders. We use these relationships to identify chartering and acquisition opportunities and gain access
    to sources of additional financing, industry contacts and market intelligence. Our current specialization in a single asset
    class allows us to not only monitor markets with a single measure, but also makes us a partner of choice for businesses that
    have a need or requirement for a Handysize specialist.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Vessel Employment



We
have employed and continue to employ our vessels in the spot charter market, under trip time charters and period time charters.
We have laid up the M/V Free Impalaand two of the remaining vessels, the M/V Free Goddessand the M/V Free Maverick,
currently do not earn income.



A
trip time charter is a short-term time charter for a voyage between load port(s) and discharge port(s) under which the charterer
pays fixed daily hire rate on a semi-monthly basis for use of the vessel. A period time charter is charter for a vessel for a
fixed period of time at a set daily rate. Under trip time charters and time charters, the charterer pays voyage expenses. Under
all three types of charters, the vessel owners pay for vessel operating expenses, which include crew costs, provisions, deck and
engine stores, lubricating oil, insurance, maintenance and repairs. The vessel owners are also responsible for each vessel’s
dry-docking and intermediate and special survey costs. Lastly, vessels can be chartered under “bareboat” contracts
whereby the charterer is responsible for the vessel’s maintenance and operations, as well as all voyage expenses.



Vessels
operating on period time charter provide more predictable cash flows, but can yield lower profit margins than vessels operating
in the spot market during periods characterized by favorable market conditions. Vessels operating in the spot market generate
revenues that are less predictable but may enable us to increase profit margins during periods of increasing drybulk charter rates.
However, we would then be exposed to the risk of declining drybulk charter rates, which may be higher or lower than the rates
at which we chartered our vessels. We are constantly evaluating opportunities for period time charters, but only expect to enter
into additional period time charters if we can obtain contract terms that satisfy our criteria.



Although
we have not previously done so, we may from time to time utilize forward freight agreements that enable us to enter into contractual
obligations to sell the spot charter forward and thereby reduce our exposure to a potential deterioration of the charter market.



Customers



During
2012, we derived approximately 42% of our gross revenues from three charterers, and during 2011, we derived approximately 53%
of our gross revenues from three charterers. We believe that our customer base is composed of established charterers.



30











Management
of Operations and Fleet



Pursuant
to our amended and restated services agreement with our Manager, our operations are executed and supervised by our Manager, based
on the strategy devised by the board of directors and subject to the approval of our board of directors as described below. We
pay a monthly fee of $136.275 (on the basis that the dollar/Euro exchange rate is 1.35 or lower; if on the last business day of
each month the dollar/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 dollar/Euro exchange rate) as compensation
for services (described below) related to accounting, financial reporting, implementation of Sarbanes-Oxley internal control over
financial reporting procedures and general administrative and management services. Our Manager is also entitled to a termination
fee if the agreement is terminated upon a “change of control” as defined in the services agreement. The termination
fee as of December 31, 2012 would have been $89,020.



Our
Manager provides us with the following services:



| | • | General Administration. Our
                                                                    Manager provides us with general administrative, office and
                                                                    support services necessary for our operations and our fleet,
                                                                    including technical and clerical personnel, communication,
                                                                    accounting, and data processing services.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Financial Accounting Services.
                                                                    Our Manager maintains our books, records and accounts and
                                                                    provides all services as are necessary for the preparation
                                                                    and maintenance of the our accounting records in accordance
                                                                    with U.S. GAAP, preparing and filing financial statements
                                                                    with the SEC and NASDAQ in accordance with applicable financial
                                                                    reporting requirements, and developing, implementing, monitoring
                                                                    and assessing our internal controls;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | Sale and Purchase of Vessels.
                                                                    Our Manager advises our board of directors when opportunities
                                                                    arise to purchase, including through newbuildings, or to sell
                                                                    any vessels. All decisions to purchase or sell vessels require
                                                                    the approval of our board of directors. Any purchases or sales
                                                                    of vessels approved by our board of directors are arranged
                                                                    and completed by our Manager. This involves the appointment
                                                                    of superintendents to inspect and take delivery of vessels
                                                                    and to monitor compliance with the terms and conditions of
                                                                    the purchase contracts.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We
also contract the technical and commercial management of our vessels to our Manager. Our Manager has a separate management contract
with each of our ship-owning subsidiaries and provides a wide range of services on a fixed fee per vessel basis, as described
below. These services include vessel operations, maintenance, regulatory compliance, crewing, supervising dry-docking and repairs,
arranging insurance for vessels, vessel supplying, advising on the purchase and sale of vessels, and performing certain accounting
and other administrative services, including financial reporting and internal controls requirements. Pursuant to our amended management
agreement with our Manager, we pay our Manager a monthly technical management fee of $18.975 (on the basis that the dollar/Euro
exchange rate is 1.30 or lower; if on the first business day of each month the dollar/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 dollars will be the equivalent
in Euro based on 1.30 dollar/Euro exchange rate) plus a fee of $0.4 per day for superintendant attendance and other direct expenses.



We
also pay our Manager a fee equal to 1.25% of the gross freight or hire from the employment of FreeSeas’ vessels and a 1%
commission on the gross purchase price of any new vessel acquired or the gross sale price of any vessel sold by FreeSeas with
the assistance of our Manager. Additionally, we pay our Manager a monthly fee of $136.275 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.



Our
Manager currently manages all of our vessels and we anticipate that our Manager will manage any additional vessels we may acquire
in the future.



We
believe that we pay our Manager industry-standard fees for these services.



Crewing and
Employees



We
currently have no employees, our Manager is responsible for employing all of the executive officers and staff to execute and supervise
the operations. In addition, our Manager is responsible for recruiting, either directly or through a crewing agent, the senior
officers and all other crew members for our vessels.



Long-Term
Debt



We
and our subsidiaries are parties to various loan facilities secured by our vessels. Please see “Item 5. Operating and Financial
Review and Prospects – Long-Term Debt” for a description of these facilities, our current non-compliance with our
obligations and covenants under the facility agreements, and the status of our efforts to restructure the terms of these agreements.



31







All
the Company’s credit facilities bear interest at LIBOR plus a margin, ranging from 1% 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 year ended December 31, 2012 and 2011 was 2.7% and 2.9%, respectively. Interest expense incurred under the above
loan agreements amounted to $2,415, 3,173 (net of capitalized interest $282) and $3,932 for the years ended December 31,
2012, 2011 and 2010, respectively, and is included in “Interest and Finance Costs” in the consolidated statements
of operations.



Charter Hire
Rates



Charter
hire rates fluctuate by varying degrees among drybulk carrier size categories. The volume and pattern of trade in a small number
of commodities (major bulks) affect demand for larger vessels. Therefore, charter rates and vessel values of larger vessels often
show greater volatility. Conversely, trade in a greater number of commodities (minor bulks) drives demand for smaller drybulk
carriers. Accordingly, charter rates and vessel values for those vessels are subject to less volatility.



Charter
hire rates paid for drybulk carriers are primarily a function of the underlying balance between vessel supply and demand, although
at times other factors may play a role. Furthermore, the pattern seen in charter rates is broadly mirrored across the different
charter types and the different drybulk carrier categories. However, because demand for larger drybulk vessels is affected by
the volume and pattern of trade in a relatively small number of commodities, charter hire rates (and vessel values) of larger
ships tend to be more volatile than those for smaller vessels.



In
the time charter market, rates vary depending on the length of the charter period and vessel specific factors such as age, speed
and fuel consumption.



In
the voyage charter market, rates are influenced by cargo size, commodity, port dues and canal transit fees, as well as commencement
and termination regions. In general, a larger cargo size is quoted at a lower rate per ton than a smaller cargo size. Routes with
costly ports or canals generally command higher rates than routes with low port dues and no canals to transit. Voyages with a
load port within a region that includes ports where vessels usually discharge cargo or a discharge port within a region with ports
where vessels load cargo also are generally quoted at lower rates, because such voyages generally increase vessel utilization
by reducing the unloaded portion (or ballast leg) that is included in the calculation of the return charter to a loading area.



Within
the drybulk shipping industry, the charter hire rate references most likely to be monitored are the freight rate indices issued
by the Baltic Exchange. These references are based on actual charter hire rates under charters entered into by market participants
as well as daily assessments provided to the Baltic Exchange by a panel of major shipbrokers.



Property



In
June 2011, we relocated our principal offices to Athens, Greece and we reimbursed the Manager in an amount equal to $144 (equivalent
of Euro 100) for the expenses incurred in relation to this relocation and early termination cost for previous lease agreement.
In addition, we entered into an agreement with our Manager pursuant to which we agreed to pay our Manager 65% of the rents due
from our Manager to the lessor of our rented office space, commencing in June 2011, and 65% of the apportioned common expenses
and maintenance expenses.



Competition



We
operate in markets that are highly competitive and based primarily on supply and demand. Ownership of drybulk carriers is highly
fragmented and is divided among approximately 1,200 drybulk carrier owners. We compete for charters on the basis of price, vessel
location, size, age and condition of the vessel, as well as on our reputation. There are many drybulk shipping companies which
are publicly traded on the U.S. stock markets, such as DryShips Inc., Diana Shipping Inc., Eagle Bulk Shipping Inc., Euroseas
Ltd., Excel Maritime Carriers Ltd. and Baltic Trading Limited, which are significantly larger than we are and have substantially
more capital, more and larger vessels, personnel, revenue and profits and which are in competition with us. There is no assurance
that we can successfully compete with such companies for charters or other business.



Our
Manager arranges our charters (whether spot charters, period time charters, bareboat charters or pools) through the use of brokers,
who negotiate the terms of the charters based on market conditions. We compete with other owners of drybulk carriers in the, Handysize
and Handymax sectors. Charters for our vessels are negotiated by our Manager utilizing a worldwide network of shipbrokers. These
shipbrokers advise our Manager on a continuous basis of the availability of cargo for any particular vessel. There may be several
shipbrokers involved in any one charter. The negotiation for a charter typically begins prior to the completion of the previous
charter in order to avoid any idle time. The terms of the charter are based on industry standards.



32







Seasonality



Coal,
iron ore and grains, which are the major bulks of the drybulk shipping industry, are somewhat seasonal in nature. The energy markets
primarily affect the demand for coal, with increases during hot summer periods when air conditioning and refrigeration require
more electricity and towards the end of the calendar year in anticipation of the forthcoming winter period. The demand for iron
ore tends to decline in the summer months because many of the major steel users, such as automobile makers, reduce their level
of production significantly during the summer holidays. Grains are completely seasonal as they are driven by the harvest within
a climate zone. Because three of the five largest grain producers (the United States of America, Canada and the European Union)
are located in the northern hemisphere and the other two (Argentina and Australia) are located in the southern hemisphere, harvests
occur throughout the year and grains required drybulk shipping accordingly.



Environmental
and Other Regulations



Government
regulation and laws significantly affects the ownership and operation of our vessels. The vessels are subject to international
conventions and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate
or are registered, including those governing the management and disposal of hazardous substances and wastes, the cleanup of oil
spills and other contamination, air emissions, and water discharges and ballast water management.



A
variety of governmental and private entities subject our vessels to both scheduled and unscheduled inspections. These entities
include the local port authorities (United States Coast Guard, harbor master or equivalent), classification societies, flag state
administration (country of registry) and charterers. Certain of these entities require us to obtain permits, licenses, financial
assurances and certificates for the operation of our vessels. Failure to maintain necessary permits or approvals could require
us to incur substantial costs or result in the temporary suspension of operation of one or more of our vessels.



We
believe that the heightened level of environmental and quality concerns among insurance underwriters, regulators and charterers
is leading to greater inspection and safety requirements on all vessels and may accelerate the scrapping of older vessels throughout
the industry. Increasing environmental concerns have created a demand for vessels that conform to the stricter environmental standards.
We are required to maintain operating standards for all of our vessels that will emphasize operational safety, quality maintenance,
continuous training of its officers and crews and compliance with U.S. and international regulations. We believe that the operation
of our vessels is in substantial compliance with applicable environmental laws and regulations; however, because such laws and
regulations are frequently changed and may impose increasingly stricter requirements, such future requirements may limit our ability
to do business, increase our operating costs, force the early retirement of our vessels, and/or affect their resale value, all
of which could have a material adverse effect on our financial condition and results of operations.



International
Maritime Organization



The
International Maritime Organization, or IMO, the United Nations agency for maritime safety and the prevention of pollution by
ships, has adopted the International Convention for the Prevention of Marine Pollution, 1973, as modified by the related Protocol
of 1978, or the MARPOL Convention, which has been updated through various amendments. The MARPOL Convention establishes environmental
standards relating to oil leakage or spilling, garbage management, sewage, air emissions, handling and disposal of noxious liquids
and handling of harmful substances in packaged forms. The IMO adopted regulations that set forth pollution prevention requirements
applicable to drybulk carriers. These regulations have been adopted by over 150 nations, including many of the jurisdictions in
which our vessels operate.



In
September 1997, the IMO adopted Annex VI to the International Convention for the Prevention of Pollution from Ships to address
air pollution from vessels. Annex VI, which came into effect on May 19, 2005, set limits on sulfur oxide ("SOx")
and NOx emissions from vessels and prohibited deliberate emissions of ozone depleting substances, such as chlorofluorocarbons.
Annex VI also included a global cap on the sulfur content of fuel oil and allowed for special areas to be established with
more stringent controls on sulfur emissions. Annex VI has been ratified by some, but not all IMO member states, including
the Marshall Islands. Pursuant to a Marine Notice issued by the Marshall Islands Maritime Administrator as revised in March 2005,
vessels flagged by the Marshall Islands that are subject to Annex VI must, if built before the effective date, obtain an
International Air Pollution Prevention Certificate evidencing compliance with Annex VI by the first dry docking after May 19,
2005, but no later than May 19, 2008. All vessels subject to Annex VI and built after May 19, 2005 must also have
this Certificate. We have obtained International Air Pollution Prevention certificates for all of our vessels. Amendments to Annex VI
regarding particulate matter, NOx and SOx emission standards entered into force in July 2010. The amendments provide for a progressive
reduction in SOx emissions from ships, with the global sulfur cap reduced initially to 3.50% (from the current 4.50%), effective
from 1 January 2012; then progressively to 0.50%, effective from 1 January 2020, subject to a feasibility review to
be completed no later than 2018. The Annex VI amendments also establish tiers of stringent NOx emissions standards for new
marine engines, depending on their dates of installation. The United States ratified the amendments, and all vessels subject to
Annex VI must comply with the amended requirements when entering U.S. ports or operating in U.S. waters. Additionally, more
stringent emission standards apply in coastal areas designated by MEPC as Emission Control Areas (ECAs). The North American ECA,
which includes the area extending 200 nautical miles from the Atlantic/Gulf and Pacific Coasts of the United States and Canada,
the Hawaiian Islands, and the French territories of St. Pierre and Miquelon, has been enforceable since August 1, 2012.
Fuel used by vessels operating in the ECA cannot exceed a 1.0% sulfur content, dropping to a 0.1% sulfur content in 2015. NOx
after-treatment requirements will apply in 2016. The U.S. Caribbean ECA, which includes the waters of Puerto Rico and the Virgin
Islands, will become enforceable on January 1, 2014. We may incur costs to install control equipment on our engines in order
to comply with the new requirements. Other ECAs may be designated, and the jurisdictions in which our vessels operate may adopt
more stringent emission standards independent of IMO.



33







The
operation of our vessels is also affected by the requirements set forth in the IMO’s Management Code for the Safe Operation
of Ships and Pollution Prevention, or the ISM Code. The ISM Code requires shipowners and bareboat charterers to develop and maintain
an extensive “Safety Management System” that includes the adoption of a safety and environmental protection policy
setting forth instructions and procedures for safe operation and describing procedures for dealing with emergencies. The failure
of a shipowner or management company to comply with the ISM Code may subject such party to increased liability, may decrease available
insurance coverage for the affected vessels, and may result in a denial of access to, or detention in, certain ports. Currently,
each of our vessels is ISM Code-certified. However, there can be no assurance that such certification will be maintained indefinitely.



Additional
or new conventions, laws and regulations may also be adopted that could adversely affect our ability to operate our vessels.



The U.S. Oil
Pollution Act of 1990



The
United States Oil Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and
clean up of the environment from oil spills. OPA affects all owners and operators whose vessels trade in the United States, its
territories and possessions or whose vessels operate in waters of the United States, which includes the United States’ territorial
sea and its 200 nautical mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental Response,
Compensation and Liability Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land
or at sea. Both OPA and CERCLA affect our operations.



Under
OPA, vessel owners, operators, charterers and management companies are “responsible parties” and are jointly, severally
and strictly liable (unless the spill results solely from the act or omission of a third party, an act of God or an act of war)
for all containment and removal costs and other damages arising from discharges or threatened discharges of oil from their vessels,
including bunkers (fuel). Effective July 31, 2009, the U.S. Coast Guard adjusted the limits of OPA liability for drybulk
vessels to the greater of $1,000 per gross ton or $854,400 and established a procedure for adjusting the limits for inflation
every three years. CERCLA contains a liability scheme that is similar to that under the OPA, and liability under CERCLA is limited
to the greater of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo and the greater of $300
per gross ton or $0.5 million for any other vessel. These limits of liability do not apply if an incident was directly caused
by violation of applicable U.S. federal safety, construction or operating regulations or by a responsible party’s gross
negligence or willful misconduct, or if the responsible party fails or refuses to report the incident or to cooperate and assist
in connection with oil removal activities. In response to the 2010 oil spill in the Gulf of Mexico resulting from the explosion
of the Deepwater Horizon drilling rig, bills have been introduced in the U.S. Congress to increase the limits of OPA
liability for all vessels.



OPA
requires owners and operators of vessels to establish and maintain with the United States Coast Guard evidence of financial responsibility
sufficient to meet their potential liabilities under OPA. Under the regulations, vessel owners and operators may evidence their
financial responsibility by showing proof of insurance, surety bond, self-insurance, or guaranty. Upon satisfactory demonstration
of financial responsibility, a Certificate of Financial Responsibility, or COFR, is issued by the United States Coast Guard. This
certificate must be carried aboard the vessel to comply with these financial responsibility regulations. We have complied with
these financial responsibility regulations by obtaining and carrying COFRs for each of our vessels that operate in U.S. waters,
currently the M/V Free Hero, the M/V Free Jupiter and the M/V Free Maverick. We may incur
additional costs to obtain COFRs for additional vessels, if required, and to comply with increased limits of liability in the
future.



OPA
specifically permits individual states to impose their own liability regimes with regard to oil pollution incidents occurring
within their boundaries, and some states have enacted legislation providing for unlimited liability for oil spills. In some cases,
states, which have enacted such legislation, have not yet issued implementing regulations defining vessels owners’ responsibilities
under these laws. We currently comply, and intend to continue to comply in the future, with all applicable state regulations in
the ports where our vessels call. We currently maintain pollution liability coverage as part of our protection and indemnity insurance
for each of our vessels in the amount of $1 billion per incident. If the damages from a catastrophic pollution liability incident
exceed our insurance coverage, the payment of those damages may materially decrease our net income.



34







The United
States Clean Water Act



The
United States Clean Water Act, or CWA, prohibits the discharge of oil or hazardous substances in navigable waters and imposes
strict liability in the form of penalties for any unauthorized discharges. The CWA also imposes substantial liability for the
costs of removal, remediation and damages and complements the remedies available under the OPA and CERCLA.Under U.S. Environmental Protection Agency, or EPA, regulations we are required to obtain
a CWA permit regulating and authorizing any discharges of ballast water or other wastewaters incidental to our normal vessel operations
if we operate within the three-mile territorial waters or inland waters of the United States. The permit, which EPA has designated
as the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP, incorporated the then-current
U.S. Coast Guard requirements for ballast water management, as well as supplemental ballast water requirements and limits for
26 other specific discharges. Regulated vessels cannot operate in U.S. waters unless they are covered by the VGP. To do so, vessel
owners must submit a Notice of Intent, or NOI, at least 30 days before the vessel operates in U.S. waters. To comply with
the VGP vessel owners and operators may have to install equipment on their vessels to treat ballast water before it is discharged
or implement port facility disposal arrangements or procedures at potentially substantial cost. The VGP also requires states to
certify the permit, and certain states have imposed more stringent discharge standards as a condition of their certification.
Many of the VGP requirements have already been addressed in our vessels' current ISM Code SMS Plan. We have submitted NOIs for
all of our vessels that operate in U.S. waters. As part of a settlement of a lawsuit challenging the VGP, EPA has proposed a new
VGP with numerical restrictions on organisms in ballast water discharges. EPA expects to issue the new VGP by March 15, 2013,
and it will become effective on December 19, 2013.



Other Environmental
Initiatives



The
EU has also adopted legislation that: requires member states to impose criminal sanctions for certain pollution events, such as
the unauthorized discharge of tank washings. The European Parliament recently endorsed a European Commission proposal to criminalize
certain pollution discharges from ships. If the proposal becomes formal EU law, it will affect the operation of vessels and the
liability of owners for oil and other pollutional discharges. It is difficult to predict what legislation, if any, may be promulgated
by the European Union or any other country or authority.



The
Paris Memorandum of Understanding on Port State Control (Paris MoU) to which 27 nations are party adopted the "New Inspection
Regime" (NIR) to replace the existing Port State Control system, effective January 1, 2011. The NIR is a significant
departure from the previous system, as it is a risk based targeting mechanism that will reward quality vessels with a smaller
inspection burden and subject high-risk ships to more in-depth and frequent inspections. The inspection record of a vessel, its
age and type, the Voluntary IMO Member State Audit Scheme, and the performance of the flag State and recognized organizations
are used to develop the risk profile of a vessel.



The
U.S. National Invasive Species Act, or NISA, was enacted in 1996 in response to growing reports of harmful organisms being released
into U.S. ports through ballast water taken on by ships in foreign ports. Under NISA, the USCG adopted regulations in July 2004
imposing mandatory ballast water management practices for all vessels equipped with ballast water tanks entering U.S. waters.
These requirements can be met by performing mid-ocean ballast exchange, by retaining ballast water on board the ship, or by using
environmentally sound alternative ballast water management methods approved by the USCG. (However, mid-ocean ballast exchange
is mandatory for ships heading to the Great Lakes or Hudson Bay, or vessels engaged in the foreign export of Alaskan North Slope
crude oil.) Mid-ocean ballast exchange is the primary method for compliance with the USCG regulations, since holding ballast water
can prevent ships from performing cargo operations upon arrival in the United States, and alternative methods are still under
development. Vessels that are unable to conduct mid-ocean ballast exchange due to voyage or safety concerns may discharge minimum
amounts of ballast water (in areas other than the Great Lakes and the Hudson River), provided that they comply with record keeping
requirements and document the reasons they could not follow the required ballast water management requirements. On March 23,
2012 the USCG adopted ballast water discharge standards that set maximum acceptable discharge limits for living organisms and
established standards for ballast water management systems. The regulations became effective on June 21, 2012 and will be
phased in between January 1, 2014 and January 1, 2016 for existing vessels, depending on the size of their ballast water
tanks and their next drydocking date. Although the USCG ballast water management requirements are consistent with the requirements
in EPA's proposed VGP, the USCG intends to review the practicability of implementing even more stringent ballast water discharge
standards and publish the results of that review no later than January 1, 2016. In the past absence of federal standards,
states enacted legislation or regulations to address invasive species through ballast water and hull cleaning management and permitting
requirements. Michigan's ballast water management legislation was upheld by the Sixth Circuit Court of Appeals and California
enacted legislation extending its ballast water management program to regulate the management of "hull fouling" organisms
attached to vessels and adopted regulations limiting the number of organisms in ballast water discharges. Other states may proceed
with the enactment of requirements similar to those of California and Michigan or the adoption of requirements that are more stringent
than the EPA and USCG requirements. We could incur additional costs to comply with the new VGP and additional USCG or state ballast
water management requirements.



35







At
the international level, the IMO adopted the International Convention for the Control and Management of Ships' Ballast Water and
Sediments, or the BWM Convention, in February 2004. The Convention's implementing regulations call for a phased introduction of
mandatory ballast water exchange requirements, to be replaced in time with mandatory concentration limits. The BWM Convention
will not enter into force until 12 months after it has been adopted by 30 states, the combined merchant fleets of which represent
not less than 35% of the gross tonnage of the world's merchant shipping. The Convention has not yet entered into force because
a sufficient number of states have failed to adopt it. However, in March 2010, MEPC passed a resolution urging the ratification
of the Convention and calling upon those countries that have already ratified it to encourage the installation of ballast water
management systems.



If
the mid-ocean ballast exchange is made mandatory throughout the United States or at the international level, or if water treatment
requirements or options are instituted, the cost of compliance could increase for ocean carriers. Although we do not believe that
the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it is difficult to predict the overall
impact of such a requirement on our business.



Greenhouse
Gas Regulation



The
2005 Kyoto Protocol to the United Nations Framework Convention on Climate Change required adopting countries to implement national
programs to reduce emissions of certain greenhouse gases, but emissions from international shipping are not subject to the soon
to expire Kyoto Protocol. International negotiations regarding a successor to the Kyoto Protocol are on-going. The IMO's MEPC
adopted two new sets of mandatory requirements to address greenhouse gas emissions from vessels at its July 2011 meeting. The
EEDI establishes a minimum energy efficiency level per capacity mile and will be applicable to new vessels. The Ship Energy Efficiency
Management Plan will be applicable to currently operating vessels of 400 metric tons and above. These requirements entered into
force in January 2013 and could cause us to incur additional compliance costs. The IMO is also considering the development of
market based mechanisms to reduce greenhouse gas emissions from vessels, as well as sustainable development goals for marine transportation,
but it is impossible to predict the likelihood that such measures might be adopted or their potential impacts on our operations
at this time. The EU is considering measures including an expansion of the existing EU emissions trading scheme to greenhouse
gas emissions from marine vessels, The U.S. EPA Administrator issued a finding that greenhouse gases threaten the public health
and safety and has adopted regulations relating to the control of greenhouse gas emissions from certain mobile and stationary
sources. Although the EPA findings and regulations do not extend to vessels and vessel engines, the EPA is separately considering
a petition from the California Attorney General and environmental groups to regulate greenhouse gas emissions from ocean-going
vessels under the CAA. Any passage of climate control legislation or other regulatory initiatives by the IMO, the EU or individual
countries in which we operate or any international treaty adopted to succeed the Kyoto Protocol could require us to make significant
financial expenditures or otherwise limit our operations that we cannot predict with certainty at this time.



Vessel Security
Regulation



Since
the terrorist attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security.
On November 25, 2002, the Maritime Transportation Security Act of 2002, or MTSA, came into effect. To implement certain portions
of the MTSA, in July 2003, the United States Coast Guard issued regulations requiring the implementation of certain security
requirements aboard vessels operating in waters subject to the jurisdiction of the United States of America. Similarly, in December 2002,
amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new chapter went
into effect in July 2004, and imposes various detailed security obligations on vessels and port authorities, most of which
are contained in the newly created ISPS Code.



Among
the various requirements are:



| | • | on-board installation of automatic
                                                                    information systems, to enhance vessel-to-vessel and vessel-to-shore
                                                                    communications;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | on-board installation of ship
                                                                    security alert systems;
| | - | -------------------------------------------------------------------------------------------------------------------------



| | • | the development of vessel
                                                                    security plans; and
| | - | -----------------------------------------------------------------------------------------------------------------



| | • | compliance with flag state
                                                                    security certification requirements.
| | - | -----------------------------------------------------------------------------------------------------------------------------------



The
United States Coast Guard regulations, intended to align with international maritime security standards, exempt non-U.S. vessels
from MTSA vessel security measures provided such vessels have on board, by July 1, 2004, a valid International Ship Security
Certificate that attests to the vessel’s compliance with SOLAS security requirements and the ISPS Code. Our vessels are
in compliance with the various security measures addressed by the MTSA, SOLAS and the ISPS Code. We do not believe these additional
requirements will have a material financial impact on our operations.



36







Inspection
by Classification Societies



The
hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry.
The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations
of the country of registry of the vessel and SOLAS.



A
vessel must undergo annual surveys, intermediate surveys, dry-dockings and special surveys. In lieu of a special survey, a vessel’s
machinery may be on a continuous survey cycle, under which the machinery would be surveyed periodically over a five-year period.
Our vessels are on special survey cycles for hull inspection and continuous survey cycles for machinery inspection. Every vessel
is also required to be dry-docked every two to three years for inspection of the underwater parts of such vessel. If any vessel
does not maintain its class and/or fails any annual survey, intermediate survey, dry-docking or special survey, the vessel will
be unable to carry cargo between ports and will be unemployable and uninsurable. That could cause us to be in violation of certain
covenants in our loan agreements.



At
an owner’s application, the surveys required for class renewal may be split according to an agreed schedule to extend over
the entire period of class. This process is referred to as continuous class renewal.



All
areas subject to survey as defined by the classification society are required to be surveyed at least once per class period, unless
shorter intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed
five years.



Most
insurance underwriters make it a condition for insurance coverage and lending that a vessel be certified as “in class”
by a classification society which is a member of the International Association of Classification Societies. Our vessels are certified
as being “in class” by their respective classification societies all of which are members of the International Association
of Classification Societies.



The
table below lists the next dry-docking and special surveys scheduled for our each vessel in our fleet, to the extent such dates
are known as of the date of this annual report:



|                  |  |  |  |                     |  |  |  |                     
|----------------- |  |  |  | ------------------- |  |  |  | --------------------
|                  |  |  |  | Next Intermediate   |  |  |  | Next Special Survey 
|Vessel            |  |  |  | Dry-docking         |  |  |  | Dry-docking         
|M/V Free Goddess  |  |  |  | Third quarter 2013  |  |  |  | Third quarter 2015  
|M/V Free Hero     |  |  |  | Third quarter 2013  |  |  |  | Third quarter 2015  
|M/V Free Impala   |  |  |  | Fourth quarter 2015 |  |  |  | Fourth quarter 2012*
|M/V Free Jupiter  |  |  |  | Third quarter 2015  |  |  |  | Second quarter 2017 
|M/V Free Knight   |  |  |  | Second quarter 2016 |  |  |  | Second quarter 2013 
|M/V Free Maverick |  |  |  | First quarter 2016  |  |  |  | First quarter 2013* 
|M/V Free Neptune  |  |  |  | Fourth quarter 2014 |  |  |  | Third quarter 2016  










* The M/V Free
Impalaand the M/V Free Maverickhave not yet passed their special survey drydocking and no assurances can be made
that the drydockings will be completed.



ISM
and ISPS certifications have been awarded to all of our vessels and to the Manager by either the vessel’s flag country or
a member of the International Association of Classification Societies.



Risk of Loss and Liability Insurance



General



The operation of
any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss or damage and
business interruption due to political circumstances in foreign countries, hostilities and labor strikes. In addition, there is
always an inherent possibility of marine disaster, including oil spills and other environmental mishaps, and the liabilities arising
from owning and operating vessels in international trade. OPA, which imposes virtually unlimited liability upon owners, operators
and bareboat charterers of any vessel trading in the exclusive economic zone of the United States of America for certain oil pollution
accidents in the United States of America, has made liability insurance more expensive for ship owners and operators trading in
the United States of America market. While we believe that our present insurance coverage is adequate, not all risks can be insured,
and there can be no guarantee that any specific claim will be paid, or that we will always be able to obtain adequate insurance
coverage at reasonable rates.



37







Hull and Machinery Insurance



We have obtained
marine hull and machinery and war risk insurance, which include the risk of actual or constructive total loss, for all of our
vessels. The vessels are each covered up to at least their fair market values or such higher amounts as may be required to meet
the requirements of any outstanding indebtedness on a particular vessel, with deductibles in amounts of approximately $250.



Protection and Indemnity Insurance



Protection and indemnity
insurance is provided by mutual protection and indemnity associations, or P&I associations, which covers our third-party liabilities
in connection with our shipping activities. This includes third-party liability and other related expenses of injury or death
of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels, damage
to other third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs, including
wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and indemnity
mutual associations, or “clubs.”



Our current protection
and indemnity insurance coverage for pollution is $1 billion per vessel per incident. The 14 P&I associations that comprise
the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a pooling agreement
to reinsure each association’s liabilities. Each P&I association has capped its exposure to this pooling agreement at
$5.4 billion. As a member of a P&I association, which is a member of the International Group, we are subject to calls
payable to the associations based on its claim records as well as the claim records of all other members of the individual associations
and members of the pool of P&I associations comprising the International Group.



Loss of Hire Insurance



With the exception
of kidnap and ransom insurance and its loss of hire extension (described below), we have not obtained loss of hire insurance for
any of our vessels. Loss of hire insurance generally provides coverage against loss of charter hire that result from the loss
of use of a vessel. We will review annually whether obtaining and/or maintaining this insurance is cost effective. Our ability
to obtain loss of hire insurance is subject to market conditions and general availability.



Kidnap and Ransom



We have kidnap and
ransom insurance on a case by case basis, generally when one of our vessels is transitioning in an area where acts of piracy are
known to take place. Kidnap and ransom insurance generally provides coverage of ransom paid, including interest if ransom money
are through financing products and including delivery expense of ransom, fees of negotiators and crisis management personnel and
the cost of reinstatement of replacement crew. The loss of hire extension covers the insured for any hire lost during seizure
for a certain number of days that have been agreed on at the inception of the coverage, typically either 90, 120 or 180 days.



Procedures in the Event of an Insured
Event



Marine casualties
are an inherent risk in the shipping industry. If one of our vessels undergoes a marine casualty, we intend to take prompt action
in consultation with the appropriate insurers, as described above, to ascertain the extent of any damage to our vessel, its cargo,
the crew, the vessel’s ability to complete its charter and any environmental impact and the appropriate steps to try to
mitigate the impact of the casualty on our financial condition and results of operations.



Legal Proceedings



Except
as disclosed below, we are not and have not been involved in any legal proceedings that have, or have had, a significant effect
on our business, financial position, results of operations or liquidity, nor are we aware of any proceedings that are pending
or threatened that may have significant effect on our business, financial position, results of operations or liquidity. From time
to time, we may be subject to legal proceedings and claims in the ordinary course of business, principally personal injury and
property casualty claims. We expect that these claims would be covered by insurance, subject to customary deductibles. Those claims,
even if lacking in merit, could result in the expenditure of significant financial and managerial resources.



38







M/V Free Maverick



On November 5, 2012,
the M/V Free Maverick was arrested in Morocco in relation to claims against the M/V Free Maverick and “sister
ships”. Since then, the M/V Free Maverick is idle pending resolution in connection with creditors. The owners’
legal counsels were involved and instructed to dispute the arrest orders that had been issued based on invoices for other vessels
under the Manager’s management on the basis that were owned by different entities. The appeal was heard in December 2012.
The ruling issued in February 2013 was against us and the arrest orders were deemed to be standing. The Company has reached an
agreement with the largest creditor and the arrest was subsequently lifted for this specific amount. The Company is also in discussions
with the remaining creditors to settle the outstanding balance.



Exchange Controls



Under
Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange controls
or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of our common stock.



Item 4A.  	Unresolved Staff Comments



None.



Item 5.	  Operating and Financial Review and
Prospects



The following management’s
discussion and analysis should be read in conjunction with our historical consolidated financial statements and accompanying notes
included elsewhere in this report. This discussion contains forward-looking statements that reflect our current views with respect
to future events and financial performance. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, such as those set forth in the section entitled “Risk Factors” and elsewhere
in this report.



The historical consolidated
financial results of FreeSeas described below are presented, unless otherwise stated, in thousands of United States dollars.



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 six 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 April 2, 2013, the aggregate dwt of our
operational fleet is approximately 197,200 dwt and the average age of our fleet is 15.5 years.



Our investment and
operational focus is in the Handysize sector, which is generally defined as less than 40,000 dwt of carrying capacity. Handysize
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.



We have contracted
the management of our fleet to Free Bulkers S.A., referred to as our Manager, 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



| | · | Effective
                                                                                                               January 1, 2013,
                                                                                                               Sherb & Co.,
                                                                                                               LLP, or Sherb,
                                                                                                               combined its practice
                                                                                                               with RBSM LLP (“RBSM”),
                                                                                                               and going forward,
                                                                                                               RBSM will be the
                                                                                                               Company’s
                                                                                                               new independent
                                                                                                               registered public
                                                                                                               accounting firm.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                                                                                               of January 9, 2013,
                                                                                                               the Company has
                                                                                                               sold the remaining
                                                                                                               142,362 shares
                                                                                                               of its common stock
                                                                                                               to Dutchess, under
                                                                                                               the Dutchess Agreement
                                                                                                               for aggregate proceeds
                                                                                                               of $106.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



39







| | · | On
                                                                                                                              January
                                                                                                                              15,
                                                                                                                              2013,
                                                                                                                              the
                                                                                                                              Company
                                                                                                                              issued
                                                                                                                              137,500
                                                                                                                              shares
                                                                                                                              of
                                                                                                                              its
                                                                                                                              common
                                                                                                                              stock
                                                                                                                              (the
                                                                                                                              “Settlement
                                                                                                                              Shares”)
                                                                                                                              to
                                                                                                                              Hanover
                                                                                                                              Holdings
                                                                                                                              I,
                                                                                                                              LLC
                                                                                                                              (“Hanover”)
                                                                                                                              in
                                                                                                                              connection
                                                                                                                              with
                                                                                                                              a
                                                                                                                              stipulation
                                                                                                                              of
                                                                                                                              settlement
                                                                                                                              (the
                                                                                                                              “Settlement
                                                                                                                              Agreement”)
                                                                                                                              of
                                                                                                                              an
                                                                                                                              outstanding
                                                                                                                              litigation
                                                                                                                              claim.
                                                                                                                              The
                                                                                                                              Settlement
                                                                                                                              Agreement
                                                                                                                              provides
                                                                                                                              that
                                                                                                                              the
                                                                                                                              Settlement
                                                                                                                              Shares
                                                                                                                              will
                                                                                                                              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
                                                                                                                              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
                                                                                                                              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
                                                                                                                              Settlement
                                                                                                                              Agreement
                                                                                                                              further
                                                                                                                              provides
                                                                                                                              that
                                                                                                                              if,
                                                                                                                              at
                                                                                                                              any
                                                                                                                              time
                                                                                                                              and
                                                                                                                              from
                                                                                                                              time
                                                                                                                              to
                                                                                                                              time
                                                                                                                              during
                                                                                                                              the
                                                                                                                              True-Up
                                                                                                                              Period,
                                                                                                                              Hanover
                                                                                                                              reasonably
                                                                                                                              believes
                                                                                                                              that
                                                                                                                              the
                                                                                                                              total
                                                                                                                              number
                                                                                                                              of
                                                                                                                              Settlement
                                                                                                                              Shares
                                                                                                                              previously
                                                                                                                              issued
                                                                                                                              to
                                                                                                                              Hanover
                                                                                                                              shall
                                                                                                                              be
                                                                                                                              less
                                                                                                                              than
                                                                                                                              the
                                                                                                                              total
                                                                                                                              number
                                                                                                                              of
                                                                                                                              VWAP
                                                                                                                              Shares
                                                                                                                              to
                                                                                                                              be
                                                                                                                              issued
                                                                                                                              to
                                                                                                                              Hanover
                                                                                                                              or
                                                                                                                              its
                                                                                                                              designee
                                                                                                                              in
                                                                                                                              connection
                                                                                                                              with
                                                                                                                              the
                                                                                                                              Settlement
                                                                                                                              Agreement,
                                                                                                                              Hanover
                                                                                                                              may,
                                                                                                                              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
                                                                                                                              and
                                                                                                                              the
                                                                                                                              Company
                                                                                                                              will
                                                                                                                              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
                                                                                                                              Settlement
                                                                                                                              Agreement).
                                                                                                                              On
                                                                                                                              January
                                                                                                                              18
                                                                                                                              and29,
                                                                                                                              2013
                                                                                                                              the
                                                                                                                              Company
                                                                                                                              delivered
                                                                                                                              additional
                                                                                                                              40,000
                                                                                                                              and
                                                                                                                              8,284
                                                                                                                              shares,
                                                                                                                              respectively,
                                                                                                                              to
                                                                                                                              Hanover.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              January 18, 2013,
                                                                                                              the Company’s’
                                                                                                              Board of Directors
                                                                                                              approved the issuance
                                                                                                              of an additional
                                                                                                              641,639 shares of
                                                                                                              the Company’s
                                                                                                              common stock to
                                                                                                              the Manager in payment
                                                                                                              of $809 in unpaid
                                                                                                              fees due to the
                                                                                                              Manager for November
                                                                                                              and December 2012
                                                                                                              and January 2013
                                                                                                              under the management
                                                                                                              and services agreements
                                                                                                              with the Company.
                                                                                                              The number of shares
                                                                                                              to be issued to
                                                                                                              the Manager was
                                                                                                              based on the closing
                                                                                                              prices of the Company's
                                                                                                              common stock on
                                                                                                              the first day of
                                                                                                              each month, which
                                                                                                              are the dates the
                                                                                                              management and services
                                                                                                              fees were due and
                                                                                                              payable. The Board
                                                                                                              also approved the
                                                                                                              issuance of an aggregate
                                                                                                              of 53,020 shares
                                                                                                              of the Company’s
                                                                                                              common stock to
                                                                                                              its non-executive
                                                                                                              directors in payment
                                                                                                              of $48 in unpaid
                                                                                                              Board fees for the
                                                                                                              fourth quarter of
                                                                                                              2012. The aggregate
                                                                                                              number of shares
                                                                                                              to be issued to
                                                                                                              the directors was
                                                                                                              based on the closing
                                                                                                              price of the Company’s
                                                                                                              common stock on
                                                                                                              the last day of
                                                                                                              the fourth quarter
                                                                                                              of 2012, which is
                                                                                                              the date that the
                                                                                                              Board fees were
                                                                                                              due and payable.
                                                                                                              All of the foregoing
                                                                                                              shares will be restricted
                                                                                                              shares under applicable
                                                                                                              U.S. securities
                                                                                                              laws.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                             January 24, 2013,
                                                                                                             the Company entered
                                                                                                             into an Investment
                                                                                                             Agreement with Granite,
                                                                                                             pursuant to which,
                                                                                                             for a 36-month period,
                                                                                                             the Company has the
                                                                                                             right to sell up
                                                                                                             to 395,791 shares
                                                                                                             of its common stock,
                                                                                                             which equals approximately
                                                                                                             24% of its 1,682,693
                                                                                                             shares outstanding
                                                                                                             as of January 24,
                                                                                                             2013. The Investment
                                                                                                             Agreement entitles
                                                                                                             the Company to sell
                                                                                                             and obligates Granite
                                                                                                             to purchase, from
                                                                                                             time to time over
                                                                                                             a period of 36 months
                                                                                                             (the “Open
                                                                                                             Period”), 395,791
                                                                                                             shares of the Company’s
                                                                                                             common stock, subject
                                                                                                             to conditions the
                                                                                                             Company must satisfy
                                                                                                             as set forth in the
                                                                                                             Investment Agreement.
                                                                                                             For each share of
                                                                                                             common stock purchased
                                                                                                             under the Investment
                                                                                                             Agreement, Granite
                                                                                                             will pay 98% of the
                                                                                                             lowest daily volume
                                                                                                             weighted average
                                                                                                             price during the
                                                                                                             pricing period, which
                                                                                                             is the five consecutive
                                                                                                             trading days commencing
                                                                                                             on the day the Company
                                                                                                             delivers a put notice
                                                                                                             to Granite. Each
                                                                                                             such put may 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, shall
                                                                                                             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.
                                                                                                             If the Company was
                                                                                                             to sell all 395,791
                                                                                                             shares at a purchase
                                                                                                             price determined
                                                                                                             as described above,
                                                                                                             based on a put notice
                                                                                                             date of January 23,
                                                                                                             2013, the Company
                                                                                                             would receive an
                                                                                                             aggregate of approximately
                                                                                                             $767 in proceeds
                                                                                                             from the sale of
                                                                                                             those shares.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                                January 24, 2013,
                                                                                                                the Company received
                                                                                                                notice from FBB,
                                                                                                                according to which
                                                                                                                failure to (i) pay
                                                                                                                the $4,188 repayment
                                                                                                                installment due
                                                                                                                in December 2012,
                                                                                                                (ii) pay
                                                                                                                accrued interest
                                                                                                                and (iii) failure
                                                                                                                to pay default
                                                                                                                interest constitute
                                                                                                                an event of default.
                                                                                                                The Company is
                                                                                                                in discussions
                                                                                                                to permanently
                                                                                                                amend the amortization
                                                                                                                schedule and reach
                                                                                                                an agreement on
                                                                                                                the unpaid principal
                                                                                                                and interest
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                                February 13, 2013,
                                                                                                                we issued 185,000
                                                                                                                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
                                                                                                                will 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 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 Second
                                                                                                                Settlement Agreement
                                                                                                                shall 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
                                                                                                                provides that
                                                                                                                if, at any time
                                                                                                                and from time
                                                                                                                to time during
                                                                                                                the Second True-Up
                                                                                                                Period, Hanover
                                                                                                                reasonably believes
                                                                                                                that the total
                                                                                                                number of Second
                                                                                                                Settlement Shares
                                                                                                                previously issued
                                                                                                                to Hanover shall
                                                                                                                be 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 may, 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
                                                                                                                will 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
                                                                                                                “Second
                                                                                                                Settlement Shares”
                                                                                                                for purposes of
                                                                                                                the Second Settlement
                                                                                                                Agreement). On
                                                                                                                February 19, 2013,
                                                                                                                the Company issued
                                                                                                                and delivered
                                                                                                                to Hanover 90,000
                                                                                                                additional Second
                                                                                                                Settlement Shares,
                                                                                                                on February 25,
                                                                                                                2013, the Company
                                                                                                                issued and delivered
                                                                                                                to Hanover another
                                                                                                                90,000 additional
                                                                                                                Second Settlement
                                                                                                                Shares, on February
                                                                                                                26, 2013 the Company
                                                                                                                issued and delivered
                                                                                                                to Hanover another
                                                                                                                90,000 additional
                                                                                                                Second Settlement
                                                                                                                Shares, on February
                                                                                                                27, 2013, the
                                                                                                                Company issued
                                                                                                                and delivered
                                                                                                                to Hanover another
                                                                                                                100,000 additional
                                                                                                                Second Settlement
                                                                                                                Shares, on February
                                                                                                                28, 2013, the
                                                                                                                Company issued
                                                                                                                and delivered
                                                                                                                to Hanover another
                                                                                                                100,000 additional
                                                                                                                Second Settlement
                                                                                                                Shares and on
                                                                                                                March 4, 2013,
                                                                                                                the Company issued
                                                                                                                and delivered
                                                                                                                to Hanover another
                                                                                                                100,000 additional
                                                                                                                Second Settlement
                                                                                                                Shares. At the
                                                                                                                end of the Second
                                                                                                                True-Up Period,
                                                                                                                the Company issued
                                                                                                                and delivered
                                                                                                                31,755 additional
                                                                                                                Second Settlement
                                                                                                                Shares to Hanover
                                                                                                                on March 6, 2013.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



40







| | · | On
                                                                                                              January 22, 2013,
                                                                                                              the Company’s
                                                                                                              Board of Directors
                                                                                                              authorized a reverse
                                                                                                              stock split at a
                                                                                                              ratio of 1 for 10,
                                                                                                              which was effective
                                                                                                              at 8:00 am on February
                                                                                                              14, 2013, New York
                                                                                                              time. The reverse
                                                                                                              stock split consolidates
                                                                                                              10 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 has
                                                                                                              been reduced from
                                                                                                              18,759,778 to 1,875,978
                                                                                                              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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              January 31, 2013,
                                                                                                              the Company entered
                                                                                                              into a convertible
                                                                                                              promissory note
                                                                                                              of $153.5 with Asher
                                                                                                              Enterprises, Inc.
                                                                                                              at the rate of eight
                                                                                                              percent per annum
                                                                                                              and with maturity
                                                                                                              date November 1,
                                                                                                              2013. 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              February 13, 2013,
                                                                                                              the Company received
                                                                                                              notification from
                                                                                                              NASDAQ that effective
                                                                                                              February 19, 2013,
                                                                                                              the Company’s
                                                                                                              common stock would
                                                                                                              be transferred from
                                                                                                              the NASDAQ Global
                                                                                                              Market to the NASDAQ
                                                                                                              Capital Market.
                                                                                                              Thus, on February
                                                                                                              14, 2013, the Company
                                                                                                              received notification
                                                                                                              from NASDAQ that
                                                                                                              the appeals hearing,
                                                                                                              scheduled for February
                                                                                                              21, 2013, was cancelled.
                                                                                                              In accordance with
                                                                                                              Marketplace Rule
                                                                                                              5810(c)(3)(A), the
                                                                                                              Company has until
                                                                                                              June 17, 2013,
                                                                                                              which is 180 calendar
                                                                                                              days from the date
                                                                                                              the initial compliance
                                                                                                              period ended, to
                                                                                                              regain compliance
                                                                                                              with the minimum
                                                                                                              bid price rule.
                                                                                                              To regain compliance,
                                                                                                              the closing bid
                                                                                                              price of the Company’s
                                                                                                              common stock must
                                                                                                              be at or above $1.00
                                                                                                              per share for a
                                                                                                              minimum of 10 consecutive
                                                                                                              business days. NASDAQ
                                                                                                              may, in its discretion,
                                                                                                              require the Company
                                                                                                              to maintain a bid
                                                                                                              price of at least
                                                                                                              $1.00 per share
                                                                                                              for a period in
                                                                                                              excess of 10 consecutive
                                                                                                              business days, but
                                                                                                              generally no more
                                                                                                              than 20 consecutive
                                                                                                              business days, before
                                                                                                              determining that
                                                                                                              the Company has
                                                                                                              demonstrated an
                                                                                                              ability to maintain
                                                                                                              long-term compliance.
                                                                                                              If the Company does
                                                                                                              not regain compliance
                                                                                                              by June 17,
                                                                                                              2013, NASDAQ will
                                                                                                              provide written
                                                                                                              notification to
                                                                                                              the Company that
                                                                                                              the Company’s
                                                                                                              common stock may
                                                                                                              be delisted. At
                                                                                                              that time, the Company
                                                                                                              may then appeal
                                                                                                              the delisting determination
                                                                                                              to a hearings panel.
                                                                                                              There can be no
                                                                                                              assurances that
                                                                                                              the Company will
                                                                                                              be able to regain
                                                                                                              compliance with
                                                                                                              the NASDAQ minimum
                                                                                                              bid price rule and
                                                                                                              thereby maintain
                                                                                                              the listing of its
                                                                                                              common stock.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               February 28, 2013,
                                                                                                               pursuant to the
                                                                                                               approval of the
                                                                                                               Company’s
                                                                                                               Board of Directors
                                                                                                               at its January
                                                                                                               18, 2013 meeting,
                                                                                                               the Company issued
                                                                                                               641,639 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
                                                                                                               41,909 shares of
                                                                                                               its common stock
                                                                                                               to its non-executive
                                                                                                               directors in payment
                                                                                                               of $48 in unpaid
                                                                                                               Board fees for
                                                                                                               the fourth quarter
                                                                                                               of 2012.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                                                                                               January, February
                                                                                                               and March 2013,
                                                                                                               the Company did
                                                                                                               not pay the monthly
                                                                                                               repayments of $20
                                                                                                               for each of Facility
                                                                                                               A and Facility
                                                                                                               B with Deutsche
                                                                                                               Bank, totaling
                                                                                                               $120 along with
                                                                                                               accrued interest
                                                                                                               due. The Company
                                                                                                               is in discussions
                                                                                                               with Deutsche Bank
                                                                                                               to reach a mutually
                                                                                                               beneficial agreement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                                                                                               February and March
                                                                                                               and in April 2013,
                                                                                                               the Company did
                                                                                                               not pay the interest
                                                                                                               due of $124 and
                                                                                                               the interest rate
                                                                                                               swaps due of $80,
                                                                                                               respectively, with
                                                                                                               the Credit Suisse
                                                                                                               facility. The Company
                                                                                                               is in discussions
                                                                                                               with the bank to
                                                                                                               arrange a settlement
                                                                                                               of these.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



41







| | · | On
                                                                                                              March 20, 2013,
                                                                                                              the Company issued
                                                                                                              and delivered to
                                                                                                              Hanover 350,000
                                                                                                              shares (the “Settlement
                                                                                                              Shares”) of
                                                                                                              the Company’s
                                                                                                              common stock, $0.001
                                                                                                              par value. Giving
                                                                                                              effect to such issuance,
                                                                                                              the Settlement Shares
                                                                                                              represent approximately
                                                                                                              9.77% of the total
                                                                                                              number of shares
                                                                                                              of Common Stock
                                                                                                              presently outstanding.
                                                                                                              The Settlement Agreement
                                                                                                              provides that the
                                                                                                              Settlement Shares
                                                                                                              will be subject
                                                                                                              to adjustment on
                                                                                                              the trading day
                                                                                                              immediately following
                                                                                                              the Calculation
                                                                                                              Period (as defined
                                                                                                              below) to reflect
                                                                                                              the intention of
                                                                                                              the parties that
                                                                                                              the total number
                                                                                                              of shares of Common
                                                                                                              Stock to be issued
                                                                                                              to Hanover pursuant
                                                                                                              to the 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 subsequent
                                                                                                              to the Court’s
                                                                                                              entry of the Order.
                                                                                                              Specifically, the
                                                                                                              total number of
                                                                                                              shares of Common
                                                                                                              Stock to be issued
                                                                                                              to Hanover pursuant
                                                                                                              to the Settlement
                                                                                                              Agreement shall
                                                                                                              be equal to the
                                                                                                              quotient obtained
                                                                                                              by dividing (i)
                                                                                                              $1,264,656.12 by
                                                                                                              (ii) 70% of the
                                                                                                              VWAP of the Common
                                                                                                              Stock over the 35-consecutive
                                                                                                              trading day period
                                                                                                              immediately following
                                                                                                              the date of issuance
                                                                                                              of the initial Settlement
                                                                                                              Shares (or such
                                                                                                              shorter trading-day
                                                                                                              period as may be
                                                                                                              determined by Hanover
                                                                                                              in its sole discretion
                                                                                                              by delivery of written
                                                                                                              notice to the Company)
                                                                                                              (the “Calculation
                                                                                                              Period”),
                                                                                                              rounded up to the
                                                                                                              nearest whole share
                                                                                                              (the “VWAP
                                                                                                              Shares”).
                                                                                                              As a result, the
                                                                                                              Company ultimately
                                                                                                              may be required
                                                                                                              to issue to Hanover
                                                                                                              substantially more
                                                                                                              shares of Common
                                                                                                              Stock than the number
                                                                                                              of Settlement Shares
                                                                                                              initially issued
                                                                                                              (subject to the
                                                                                                              limitations described
                                                                                                              below). The Settlement
                                                                                                              Agreement further
                                                                                                              provides that if,
                                                                                                              at any time and
                                                                                                              from time to time
                                                                                                              during the Calculation
                                                                                                              Period, Hanover
                                                                                                              reasonably believes
                                                                                                              that the total number
                                                                                                              of Settlement Shares
                                                                                                              previously issued
                                                                                                              to Hanover shall
                                                                                                              be less than the
                                                                                                              total number of
                                                                                                              VWAP Shares to be
                                                                                                              issued to Hanover
                                                                                                              or its designee
                                                                                                              in connection with
                                                                                                              the Settlement Agreement,
                                                                                                              Hanover may, in
                                                                                                              its sole discretion,
                                                                                                              deliver one or more
                                                                                                              written notices
                                                                                                              to the Company,
                                                                                                              at any time and
                                                                                                              from time to time
                                                                                                              during the Calculation
                                                                                                              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
                                                                                                              will 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
                                                                                                              Settlement Agreement).
                                                                                                              At the end of the
                                                                                                              Calculation Period,
                                                                                                              (i) if the number
                                                                                                              of VWAP Shares exceeds
                                                                                                              the number of Settlement
                                                                                                              Shares issued, then
                                                                                                              the Company will
                                                                                                              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 is 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. Hanover
                                                                                                              may sell the shares
                                                                                                              of Common Stock
                                                                                                              issued to it or
                                                                                                              its designee in
                                                                                                              connection with
                                                                                                              the Settlement Agreement
                                                                                                              at any time without
                                                                                                              restriction, even
                                                                                                              during the Calculation
                                                                                                              Period. On March
                                                                                                              21, 2013, the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover 390,000
                                                                                                              additional Settlement
                                                                                                              Shares, on March
                                                                                                              22, 2013, the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover another
                                                                                                              420,000 additional
                                                                                                              Settlement Shares
                                                                                                              and on March 26,
                                                                                                              2013 the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover another
                                                                                                              300,000 additional
                                                                                                              Settlement Shares.
                                                                                                              At the end of the
                                                                                                              True-Up Period,
                                                                                                              the Company issued
                                                                                                              and delivered 12,894
                                                                                                              additional Settlement
                                                                                                              Shares to Hanover
                                                                                                              on March 26, 2013.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                                                                                              of April 2, 2013,
                                                                                                              the Company has
                                                                                                              sold all the 395,791
                                                                                                              shares of its common
                                                                                                              stock to Granite
                                                                                                              under the Investment
                                                                                                              Agreement for aggregate
                                                                                                              proceeds of $458.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              April 4, 2013, the
                                                                                                              Company received
                                                                                                              notification from
                                                                                                              NASDAQ that it has
                                                                                                              regained compliance
                                                                                                              with the NASDAQ
                                                                                                              Listing Rule 5450(a)(1)
                                                                                                              (the "Minimum
                                                                                                              Bid Price Rule")
                                                                                                              requirement for
                                                                                                              continued listing
                                                                                                              on NASDAQ, as the
                                                                                                              bid price of the
                                                                                                              Company’s
                                                                                                              common stock closed
                                                                                                              at or above $1.00
                                                                                                              per share for a
                                                                                                              minimum of 10 consecutive
                                                                                                              business days.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              April 8, 2013, the
                                                                                                              Company entered
                                                                                                              into a convertible
                                                                                                              promissory note
                                                                                                              of $103.5 with Asher
                                                                                                              Enterprises, Inc.
                                                                                                              at the rate of eight
                                                                                                              percent per annum
                                                                                                              and with maturity
                                                                                                              date nine months
                                                                                                              after issuance.
                                                                                                              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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Employment and Charter Rates



All of our vessels
are currently being chartered in the spot market. The following table details the vessels in our fleet as of April 10, 2013:



|Vessel Name       | Type      | Built | Dwt    | Employment                                                                
|----------------- | --------- | ----- | ------ | --------------------------------------------------------------------------
|                  |           |       |        |                                                                           
|M/V Free Jupiter  | Handymax  | 2002  | 47,777 | About 20-25 day time charter trip at $4,700 per
    day through May 2013  
|                  |           |       |        |                                                                           
|M/V Free Knight   | Handysize | 1998  | 24,111 | About 70-80 day time charter trip at $4,500
    per day through April 2013
|                  |           |       |        |                                                                           
|M/V Free Maverick | Handysize | 1998  | 23,994 | Idle pending resolution in connection with dispute with
    creditors     
|                  |           |       |        |                                                                           
|M/V Free Impala   | Handysize | 1997  | 24,111 | Laid-up                                                                   
|                  |           |       |        |                                                                           
|M/V Free Neptune  | Handysize | 1996  | 30,838 | About 65 day time charter trip at $6,500
    per day through April 2013   
|                  |           |       |        |                                                                           
|M/V Free Hero     | Handysize | 1995  | 24,318 | About 20-25 day time charter trip at $5,400
    per day through April 2013
|                  |           |       |        |                                                                           
|M/V Free Goddess  | Handysize | 1995  | 22,051 | Being surveyed pending commencement of repairs
    after pirate seizure   



42







On October 11, 2012,
we announced that all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release
by her hijackers. The M/V Free Goddess had been hijacked by Somali pirates on February 7, 2012 while transiting the
Indian Ocean eastbound. The vessel was on a time charter trip at the time she was hijacked. Under the charterparty agreement,
the BIMCO Piracy clause was applied, which provided among other things, for the charterers to have the vessel covered with kidnap
and ransom insurance and loss of hire insurance. The vessel was also covered by the war risk underwriters, who confirmed cover.
We commenced arbitration proceedings with the charterer due to the charterer not fulfilling its obligations under the charterparty
agreement. The proceedings were concluded and the award was in our favor. Thereafter, we reached a settlement with the charterer
pursuant to which the charterer agreed to pay $800. Since then, the vessel is being surveyed
pending commencement of temporary repairs at the port of refuge.



Acquisition of Vessels



From time to time,
as opportunities arise and depending on the availability of financing, we intend to acquire additional secondhand drybulk carriers.
When a vessel is acquired free of charter, we enter into a new charter contract. The shipping industry uses income days (also
referred to as “voyage” or “operating” days) to measure the number of days in a period during which vessels
actually generate revenues.



Consistent with shipping
industry practice, we treat the acquisition of a vessel (whether acquired with or without a charter) as the acquisition of an
asset rather than a business. When we acquire a vessel, we conduct, also consistent with shipping industry practice, an inspection
of the physical condition of the vessel, unless practical considerations do not allow such an inspection. We also examine the
vessel’s classification society records. We do not obtain any historical operating data for the vessel from the seller.
We do not consider that information material to our decision on acquiring the vessel.



Prior to the delivery
of a purchased vessel, the seller typically removes from the vessel all records and log books, including past financial records
and accounts related to the vessel. Upon the change in ownership, the technical management agreement between the seller’s
technical manager and the seller is automatically terminated and the vessel’s trading certificates are revoked by its flag
state, in the event the buyer determines to change the vessel’s flag state.



When a vessel has
been under a voyage charter, the seller delivers the vessel free of charter to the buyer. When a vessel is under time charter
and the buyer wishes to assume that charter, the buyer cannot acquire the vessel without the charterer’s consent and an
agreement between the buyer and the charterer for the buyer to assume the charter. The purchase of a vessel does not in itself
transfer the charter because the charter is a separate service agreement between the former vessel owner and the charterer.



When we acquire a
vessel and want to assume or renegotiate a related time charter, we must take the following steps:



| | · | Obtain
                                                                                                               the charterer’s
                                                                                                               consent to us as
                                                                                                               the new owner;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Obtain
                                                                                                               the charterer’s
                                                                                                               consent to a new
                                                                                                               technical manager;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Obtain
                                                                                                               the charterer’s
                                                                                                               consent to a new
                                                                                                               flag for the vessel,
                                                                                                               if applicable;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Arrange
                                                                                                               for a new crew
                                                                                                               for the vessel;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Replace
                                                                                                               all hired equipment
                                                                                                               on board the vessel,
                                                                                                               such as gas cylinders
                                                                                                               and communication
                                                                                                               equipment;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Negotiate
                                                                                                               and enter into
                                                                                                               new insurance contracts
                                                                                                               for the vessel
                                                                                                               through our own
                                                                                                               insurance brokers;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



43







| | · | Register
                                                                                                               the vessel under
                                                                                                               a flag state and
                                                                                                               perform the related
                                                                                                               inspections in
                                                                                                               order to obtain
                                                                                                               new trading certificates
                                                                                                               from the flag state,
                                                                                                               if we change the
                                                                                                               flag state;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Implement
                                                                                                               a new planned maintenance
                                                                                                               program for the
                                                                                                               vessel; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Ensure
                                                                                                               that the new technical
                                                                                                               manager obtains
                                                                                                               new certificates
                                                                                                               of compliance with
                                                                                                               the safety and
                                                                                                               vessel security
                                                                                                               regulations of
                                                                                                               the flag state.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Business Components and Activities



Our business comprises
the following primary components:



| | · | Employment
                                                                                                           and operation of our
                                                                                                           drybulk carriers; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Management
                                                                                                           of the financial, general
                                                                                                           and administrative
                                                                                                           elements involved in
                                                                                                           the ownership and operation
                                                                                                           of our drybulk vessels.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



The employment and
operation of our vessels involve the following activities:



| | · | Vessel
                                                                                                               maintenance and
                                                                                                               repair;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Planning
                                                                                                               and undergoing
                                                                                                               dry-docking, special
                                                                                                               surveys and other
                                                                                                               major repairs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Organizing
                                                                                                               and undergoing
                                                                                                               regular classification
                                                                                                               society surveys;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Crew
                                                                                                               selection and training;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               spares and stores
                                                                                                               supply;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               bunkering;
| | - | --------------------------------------------------------------------------------------------------------------------------------



| | · | Contingency
                                                                                                               response planning;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | Onboard
                                                                                                               safety procedures
                                                                                                               auditing;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Accounting;
| | - | -----------



| | · | Vessel
                                                                                                               insurance arrangements;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               chartering;
| | - | ---------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               hire management;
                                                                                                               and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               performance monitoring.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------



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,” 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 December 31, 2012
and (ii) what we believe the charter free market value of each of our vessels was as of December 31, 2012, the aggregate
carrying value of three of the vessels in our fleet as of December 31, 2012 exceeded their aggregate charter-free market
value by approximately $55.8 million, as noted in the table below. 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 December 31, 2012,
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 December 31, 2012. However, as of December 31,
2012 and as of the date of this report, we were not and are not holding any of these vessels for sale.



44







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. We also refer you to the risk factor in “Item 3. Key Information—D.
Risk Factors—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 |      |  | Carrying
    Value as of
    12/31/2012 
(in million USD) |  
|------------------- |  | --- | ------- |  |  | ---------- | ---- |  | --------------------------------------------------------- | -
|Free Hero*          |  |     | 24,318  |  |  |            | 1995 |  |                                                           | $
|Free Jupiter*       |  |     | 47,777  |  |  |            | 2002 |  |                                                           | $
|Free Goddess        |  |     | 22,051  |  |  |            | 1995 |  |                                                           | $
|Free Impala*        |  |     | 24,111  |  |  |            | 1997 |  |                                                           | $
|Free Knight         |  |     | 24,111  |  |  |            | 1998 |  |                                                           | $
|Free Maverick       |  |     | 23,994  |  |  |            | 1998 |  |                                                           | $
|Free Neptune*       |  |     | 30,838  |  |  |            | 1996 |  |                                                           | $
|Total               |  |     | 197,200 |  |  |            |      |  |                                                           | $



| | * | Vessels classified as held for sale.
| | - | ------------------------------------



| | ** | Indicates drybulk carriers for which we believe, as of December 31,
                                                         2012, the basic charter-free market value is lower than the vessel’s
                                                         carrying value. We believe that the aggregate carrying value of these
                                                         vessels exceeds their aggregate basic charter-free market value by approximately
                                                         $55.8 million.
| | -- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Critical Accounting Policies



The discussion and
analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have
been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires us to make estimates and judgments
that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the date of our financial
statements. Actual results may differ from these estimates under different assumptions and conditions. Critical accounting policies
are those that reflect significant judgments of uncertainties and potentially result in materially different results under different
assumptions and conditions. We have described below what we believe are our most critical accounting policies, because they generally
involve a comparatively higher degree of judgment in their application. For a description of all our significant accounting policies,
see Note 2 to our consolidated financial statements.



45







Impairment of Long-lived
Assets: The Company follows the guidance under ASC 360, “Property, Plant and Equipment,” which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets. The standard requires that, long-lived assets and
certain identifiable intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash
flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company
should evaluate the asset for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset which
is determined based on management estimates and assumptions and by making use of available market data. The fair values are determined
through Level 2 inputs of the fair value hierarchy as defined in ASC 820 “Fair value measurements and disclosures”
and are derived principally from or by corroborated or observable market data. Inputs, considered by management in determining
the fair value, include independent broker’s valuations, FFA indices, average charter hire rates and other market observable
data that allow value to be determined. The Company evaluates the carrying amounts and periods over which long-lived assets are
depreciated to determine if events have occurred which would require modification to their carrying values or useful lives. In
evaluating useful lives and carrying values of long-lived assets, management reviews certain indicators of potential impairment,
such as future undiscounted net operating cash flows, vessel sales and purchases, business plans and overall market conditions.
In performing the recoverability tests the Company determines future undiscounted net operating cash flows for each vessel and
compares it to the vessel’s carrying value. The future undiscounted net operating cash flows are determined by considering
the Company’s alternative courses of action, estimated vessel’s utilization, its scrap value, the charter revenues
from existing time charters for the fixed fleet days and an estimated daily time charter equivalent for the unfixed days over
the remaining estimated useful life of the vessel, net of vessel operating expenses adjusted for inflation, and cost of scheduled
major maintenance. When the Company’s estimate of future undiscounted net operating cash flows for any vessel is lower than
the vessel’s carrying value, the carrying value is written down, by recording a charge to operations, to the vessel’s
fair market value.



As of December 31,
2012, 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 significant factors and assumptions the Company used in each future
undiscounted net operating cash flow analysis included, among others, operating revenues, commissions, off-hire days, dry-docking
costs, operating expenses and management fee estimates. Revenue assumptions were based on contracted time charter rates up to
the end of life of the current contract of each vessel as well as Forward Freight Agreements (FFAs) and market historical average
time charter rates for the remaining life of the vessel after the completion of the current contracts. In addition, the Company
used an annual operating expenses escalation factor and an estimate of off hire days. All estimates used and assumptions made
were in accordance with the Company’s internal budgets and historical experience of the shipping industry. The Company’s
assessment concluded that for vessels that are intended to be held and used no impairment existed as of December 31, 2012,
as the future undiscounted net operating cash flows per vessel exceeded the carrying value of each vessel. For the vessels for
which alternative courses of action (including their sale) are under consideration, an impairment charge of $12,480 was recognized
in 2012 and reflected in the accompanying consolidated statement of operations.



Vessels’
Depreciation: The cost of the Company’s vessels is depreciated on a straight-line basis over the vessels’ remaining
economic useful lives from the acquisition date, after considering the estimated residual value (vessel’s residual value
is equal to the product of its lightweight tonnage and estimated scrap rate). Effective April 1, 2009, and following management’s
reassessment of the useful lives of the Company’s assets, the fleet useful life was increased from 27 to 28 years since
the date of initial delivery from the shipyard. Management’s estimate was based on the current vessels’ operating
condition, as well as the conditions prevailing in the market for the same type of vessels.



Accounting for
Special Survey and Dry-docking Costs: The Company follows 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.
If special survey or dry-docking is performed prior to the scheduled date, the remaining un-amortized balances are immediately
written-off. In the accompanying financial statements, costs deferred are presented on a consistent basis and are limited to actual
costs incurred at the yard, paints, class renewal expenses, and parts used in the dry docking or special survey. Indirect costs
and/or costs related to ordinary maintenance, carried out while at dry dock, are expensed when incurred as they do not provide
any future economic benefit. Unamortized dry-docking and special survey costs of vessels that are sold are written off at the
time of the respective vessels’ sale and are included in the calculation of the resulting gain or loss from such sale.



46







Accounting for
Revenue and Expenses: Revenue is recorded when services are rendered, the Company has a signed charter agreement or other
evidence of an arrangement, the price is fixed or determinable, and collection is reasonably assured. A voyage charter involves
the carriage of a specific amount and type of cargo from specific load port(s) to specific discharge port(s), subject to various
cargo handling terms, in return for payment of an agreed upon freight rate per ton of cargo. A time charter involves placing a
vessel at the charterers’ disposal for a period of time during which the charterer uses the vessel in return for the payment
of a specified daily hire rate. Short period charters for less than three months are referred to as spot charters. Time charters
extending three months to a year are generally referred to as medium term charters. All other time charters are considered long
term. Voyage revenues for the transportation of cargo are recognized ratably over the estimated relative transit time of each
voyage. A voyage is deemed to commence when a vessel is available for loading of its next fixed cargo and is deemed to end upon
the completion of the discharge of the current cargo. Revenues from time chartering of vessels are accounted for as operating
leases and are thus recognized on a straight line basis as the average revenue over the rental periods of such charter agreements,
as service is provided, Voyage expenses, primarily consisting of port, canal and bunker expenses that are unique to a particular
charter, are paid for by the charterer under time charter arrangements or by the Company under voyage charter arrangements, except
for commissions, which are always paid for by the Company, regardless of charter type. All voyage and vessel operating expenses
are expensed as incurred, except for commissions. Commissions are deferred over the related voyage charter period to the extent
revenue has been deferred since commissions are earned as the Company’s revenues are earned. Probable losses on voyages
in progress are provided for in full at the time such losses can be estimated.



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. 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 offhire due
                                                                                      to major repairs, dry-dockings or special
                                                                                      or intermediate surveys. 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.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



47







| | • | Adjusted
                                                                                      EBITDA represents net earnings before taxes,
                                                                                      depreciation and amortization, amortization
                                                                                      of deferred revenue , (gain)/loss on derivative
                                                                                      instruments, stock-based compensation expense,
                                                                                      vessel impairment loss, write-off of advances
                                                                                      for vessels under construction, interest
                                                                                      and finance cost net, provision and write-offs
                                                                                      of insurance claims and bad debts and (gain)/loss
                                                                                      on sale of vessel. 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Revenues



Our revenues were
driven primarily by the number of vessels we operate, the number of operating days during which our vessels generate revenues,
and the amount of daily charter hire that our vessels earn under charters. These, in turn, are affected by a number of factors,
including the following:



| | · | The
                                                                                                               nature and duration
                                                                                                               of our charters;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                               amount of time
                                                                                                               that we spent repositioning
                                                                                                               its vessels;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                               amount of time
                                                                                                               that our vessels
                                                                                                               spent in dry-dock
                                                                                                               undergoing repairs;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Maintenance
                                                                                                               and upgrade work;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                               age, condition
                                                                                                               and specifications
                                                                                                               of our vessels;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | The
                                                                                                               levels of supply
                                                                                                               and demand in the
                                                                                                               drybulk carrier
                                                                                                               transportation
                                                                                                               market; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Other
                                                                                                               factors affecting
                                                                                                               charter rates for
                                                                                                               drybulk carriers
                                                                                                               under voyage charters.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



A voyage charter is
generally a contract to carry a specific cargo from a load port to a discharge port for an agreed-upon total amount. Under voyage
charters, voyage expenses such as port, canal and fuel costs are paid by the vessel owner. A trip time charter is a short-term
time charter for a voyage between load port(s) and discharge port(s) under which the charterer pays fixed daily hire rate on a
semi-monthly basis for use of the vessel. A period time charter is charter for a vessel for a fixed period of time at a set daily
rate. Under trip time charters and time charters, the charterer pays voyage expenses. Under all three types of charters, the vessel
owners pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs. The vessel owners are also responsible for each vessel’s dry-docking and intermediate and special
survey costs.



Vessels operating
on period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the
spot charter market for single trips during periods characterized by favorable market conditions.



Vessels operating
in the spot charter market generate revenues that are less predictable, but can yield increased profit margins during periods
of improvements in drybulk rates. Spot charters also expose vessel owners to the risk of declining drybulk rates and rising fuel
costs. Our vessels were chartered in the spot market during the year ended December 31, 2012.



A standard maritime
industry performance measure is the TCE. TCE rates are defined as our time charter revenues less voyage expenses during a period
divided by the number of our operating days during the period, which is consistent with industry standards. Voyage expenses include
port charges, bunker (fuel oil and diesel oil) expenses, canal charges and commissions. Our average TCE rate for financial year
2010, 2011 and 2012 was $15,742, $9,408 and $4,515 respectively.



Vessel Operating Expenses



Vessel operating expenses
include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of spares
and consumable stores, tonnage taxes and other miscellaneous expenses. Vessel operating expenses generally represent costs of
a fixed nature.



48







Principal Factors Affecting Our Business



The principal factors
that affected our financial position, results of operations and cash flows include the following:



| | · | Number
                                                                                                               of vessels owned
                                                                                                               and operated;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Charter
                                                                                                               market rates and
                                                                                                               periods of charter
                                                                                                               hire;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Vessel
                                                                                                               operating expenses
                                                                                                               and direct voyage
                                                                                                               costs, which are
                                                                                                               incurred in both
                                                                                                               U.S. dollars and
                                                                                                               other currencies,
                                                                                                               primarily Euros;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Management
                                                                                                               fees and service
                                                                                                               fees;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Depreciation
                                                                                                               and amortization
                                                                                                               expenses, which
                                                                                                               are a function
                                                                                                               of vessel cost,
                                                                                                               any significant
                                                                                                               post-acquisition
                                                                                                               improvements, estimated
                                                                                                               useful lives, estimated
                                                                                                               residual scrap
                                                                                                               values, and fluctuations
                                                                                                               in the carrying
                                                                                                               value of our vessels,
                                                                                                               as well as, drydocking
                                                                                                               and special survey
                                                                                                               costs;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Financing
                                                                                                               costs related to
                                                                                                               indebtedness associated
                                                                                                               with the vessels;
                                                                                                               and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Fluctuations
                                                                                                               in foreign exchange
                                                                                                               rates.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 audited consolidated financial statements for the year ended December 31, 2012, 2011 and 2010
included elsewhere in this report. The historical data included below is not necessarily indicative of our future performance.



|                                        |  | For the year ended December 31, |       
|--------------------------------------- |  | ------------------------------- | ------
|                                        |  | 2012                            |       
|                                        |  |                                 |       
|Adjusted EBITDA (1)                     |  | $                               | (6,055
|                                        |  |                                 |       
|Fleet Data:                             |  |                                 |       
|                                        |  |                                 |       
|Average number of vessels (2)           |  |                                 | 7.02  
|                                        |  |                                 |       
|Ownership days (3)                      |  |                                 | 2,562 
|                                        |  |                                 |       
|Available days (4)                      |  |                                 | 2,529 
|                                        |  |                                 |       
|Operating days (5)                      |  |                                 | 2,337 
|                                        |  |                                 |       
|Fleet utilization (6)                   |  |                                 | 92.4  
|                                        |  |                                 |       
|Average Daily Results:                  |  |                                 |       
|                                        |  |                                 |       
|Average TCE rate (7)                    |  | $                               | 4,515 
|                                        |  |                                 |       
|Vessel operating expenses (8)           |  |                                 | 4,242 
|                                        |  |                                 |       
|Management fees (9)                     |  |                                 | 726   
|                                        |  |                                 |       
|General and administrative expenses(10) |  |                                 | 1,494 
|                                        |  |                                 |       
|Total vessel operating expenses (11)    |  | $                               | 4,968 



49







| | (1) | Adjusted
                                                                                                              EBITDA represents
                                                                                                              net earnings before
                                                                                                              taxes, depreciation
                                                                                                              and amortization,
                                                                                                              amortization of
                                                                                                              deferred revenue,
                                                                                                              (gain)/loss on derivative
                                                                                                              instruments, stock-based
                                                                                                              compensation expense
                                                                                                              and stock-based
                                                                                                              compensation recognized
                                                                                                              for the issuance
                                                                                                              of shares to the
                                                                                                              Manager in payment
                                                                                                              of unpaid management,
                                                                                                              services and boars
                                                                                                              fees , vessel impairment
                                                                                                              loss, write-off
                                                                                                              of advances for
                                                                                                              vessels under construction,
                                                                                                              interest and finance
                                                                                                              cost net, provision
                                                                                                              and write-offs of
                                                                                                              insurance claims
                                                                                                              and bad debts and
                                                                                                              (gain)/loss on sale
                                                                                                              of vessel. 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.
| | --- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|                                                           |  | For the year ended December 31, |        
|---------------------------------------------------------- |  | ------------------------------- | -------
|                                                           |  | 2012                            |        
|Net loss                                                   |  | $                               | (30,888
|Depreciation and amortization                              |  |                                 | 6,717  
|Amortization of deferred revenue                           |  |                                 | —      
|Stock-based compensation expense                           |  |                                 | 1,159  
|Vessel impairment loss                                     |  |                                 | 12,480 
|Impairment of advances for vessels under construction      |  |                                 | —      
|Loss on derivative instruments                             |  |                                 | 85     
|Interest and finance cost, net of interest income          |  |                                 | 2,717  
|(Gain) on sale of vessel                                   |  |                                 | —      
|Provision and write-offs of insurance claims and bad debts |  |                                 | 1,675  
|Adjusted EBITDA                                            |  | $                               | (6,055 



| | (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.
                                                                                                              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. The shipping
                                                                                                              industry uses available
                                                                                                              days to measure
                                                                                                              the number of ownership
                                                                                                              days in a period
                                                                                                              during which vessels
                                                                                                              should be 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:
| | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



50







|                                   |  | For the year ended December 31, |       
|---------------------------------- |  | ------------------------------- | ------
|                                   |  | 2012                            |       
|                                   |  |                                 |       
|Operating revenues                 |  | $                               | 14,260
|                                   |  |                                 |       
|Voyage expenses and commissions    |  | $                               | (3,709
|                                   |  |                                 |       
|Net operating revenues             |  | $                               | 10,551
|                                   |  |                                 |       
|Operating days                     |  |                                 | 2,337 
|                                   |  |                                 |       
|Time charter equivalent daily rate |  | $                               | 4,515 



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



|                               |  | For the year ended December 31, |       
|------------------------------ |  | ------------------------------- | ------
|                               |  | 2012                            |       
|                               |  |                                 |       
|Vessel operating expenses      |  | $                               | 10,868
|                               |  |                                 |       
|Ownership days                 |  |                                 | 2,562 
|                               |  |                                 |       
|Daily vessel operating expense |  | $                               | 4,242 



| | (9) | Daily
                                                                                                              management fees
                                                                                                              are calculated by
                                                                                                              dividing total management
                                                                                                              fees paid (excluding
                                                                                                              stock-based compensation
                                                                                                              expense recognized
                                                                                                              for the issuance
                                                                                                              of shares to the
                                                                                                              Manager in payment
                                                                                                              of unpaid management
                                                                                                              fees) 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
                                                                                                               expense and stock-based
                                                                                                               compensation expense
                                                                                                               recognized for
                                                                                                               the issuance of
                                                                                                               shares to the Manager
                                                                                                               in payment of unpaid
                                                                                                               services and Board
                                                                                                               fees) 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



Year Ended December 31, 2012
as Compared to Year Ended December 31, 2011



REVENUES —Operating
revenues for the year ended December 31, 2012 were $14,260 compared to $29,538 for the year ended December 31, 2011. The decrease
of $15,278 is mainly attributable to the lower average daily TCE rate of $4,515 in the year ended December 31, 2012 compared to
an average daily TCE rate of $9,408 in the year ended December 31, 2011 on the back of the very weak spot charter rates and to
a lesser degree to the decrease of the average number of vessels in our fleet to 7.02 vessels for the year ended December 31,
2012 compared to 8.21 vessels for the year ended December 31, 2011 and to a lower fleet utilization of 93% for the year ended
December 31, 2012 compared to 96.8% for the year ended December 31, 2011.



VOYAGE
EXPENSES AND COMMISSIONS — Voyage expenses, which include bunkers,
cargo expenses, port expenses, port agency fees, tugs, extra insurance and various expenses, were $2,835 for the year ended December
31, 2012, as compared to $807 for the year ended December 31, 2011. The variance in voyage expenses reflects mainly the increased
replenishment of bunkers to the owners’ account and the increased idle time of the vessels during 2012.



51







For the year ended
December 31, 2012, commissions charged amounted to $874, as compared to $1,777 for the year ended December 31, 2011. The decrease
in commissions is mainly due to the large decrease of operating revenues for the year ended December 31, 2012 compared to the
year ended December 31, 2011. 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 crew cost, provisions, deck and engine stores, lubricating oil,
insurance, maintenance and repairs, totaled $10,868 in the year ended December 31, 2012, as compared to $14,563 in the year ended
December 31, 2011. The decrease of $3,695, which is translated to daily operating expenses of $4,242 for the year ended December
31, 2012 versus $4,858 for the year ended December 31, 2011 is primarily due to the intensification of the cost cutting initiatives
initiated in the fourth quarter of 2010 and continued throughout 2012 and the ownership of 7.02 vessels versus 8.21 during the
prior year.



DEPRECIATION AND
AMORTIZATION — For the year ended December 31, 2012, depreciation expense totaled $5,729 as compared to $8,664
for the year ended December 31, 2011. The decrease of $2,935 in depreciation expense resulted mainly from the ownership of
7.02 vessels for the year ended December 31, 2012 compared to 8.21 vessels for the year ended December 31, 2011. For the year
ended December 31, 2012, amortization of dry-dockings and special survey costs totaled $988, a slight increase of $73 over
the $915 expenses reported in the year ended December 31, 2011. The main reason for the slight increase is the amortization,
commenced in August 2012, of the M/V Free Jupiter scheduled dry-docking and special survey costs.



MANAGEMENT FEES— Management fees for the year ended December 31, 2,012 totaled $2,404, as compared to $1,900 in the year ended
December 31, 2011. The $504 increase in management fees mainly resulted from the recognition of $543 as stock-based compensation
expense for the issuance of: i) 201,037 shares of the Company's common stock to the Manager in payment of $916 in unpaid management
fees due to the Manager for the first and third quarter of 2012 and ii) 149,561 shares on February 28, 2013 of its common stock
to the Manager in payment of $266 in unpaid management fees due to the Manager for November and December 2012 under the management
agreement with the Company.



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 $4,443 (including $616
stock-based compensation expense) for the year ended December 31, 2012, as compared to $4,734 (including $122 stock-based
compensation expense) for the year ended December 31, 2011. The decrease of $291 due to the cost cutting policy applied throughout
2012, was counterbalanced by the amount of $494 recognized as stock-based compensation expense for the issuance of: i) 237,326
shares of the Company's common stock to the Manager in payment of $818 in unpaid services fees due to the Manager for the first
and third quarter of 2012, in payment of $155 in unpaid Board fees for the last three quarters of 2011 and in payment of $152
in unpaid Board fees for the first, second and third quarter of 2012 and ii) 195,219 shares on February 28, 2013 of its common
stock to the Manager in payment of $272 in unpaid services fees due to the Manager for November and December 2012 and in payment
of $48 in unpaid Board fees for the fourth quarter of 2012, under the services agreement with the Company.



PROVISION
AND WRITE-OFFS OF INSURANCE CLAIMS AND BAD DEBTS — For the year ended December 31, 2012, the amount of $1,675 reflected
the write-off of various long outstanding accounts receivable. The amount of $1,173 relates to the remaining outstanding balance
of the KLC time charter, which the Company wrote-off. Despite the write-off, the Company is considering its options if KLC does
not pay the balance, including the possibility of pursuing this in the Korean rehabilitation proceedings, where the hearing of
the Company’s claim has been stayed pending the outcome of the London arbitration. The Company believes that, if the Korean
claim succeeds, the Company should make a recovery in accordance with the rehabilitation plan, which has been approved by the
Korean court. The Company intends to seek a further award (if this matter does not settle) for the disputed balance, which is
adequately secured. For the year ended December 31, 2011, the provision totaled $133, which reflected the write-off of various
long outstanding accounts receivable.



GAIN/LOSS ON SALE
OF VESSEL — During the year ended December 31, 2012, there were no vessel disposals. For the year ended December 31,
2011, the Company recognized a gain of $1,561 on the sale of the M/V Free Envoy.



VESSEL IMPAIRMENT
LOSS — The Company according to the provisions of ASC 360, has classified the M/V Free Hero, the M/V Free
Jupiter, the M/V Free Impala and the M/V Free Neptune as “held for sale” for the year ended December 31,
2012 at their estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale”
were met at the balance sheet date. As of December 31, 2012, the Company compared the carrying values of vessels classified as
held for sale with their estimated market values less costs to sell and recognized an impairment loss of $12,480 in the consolidated
statements of operations, of which $2,880 relates to the M/V Free Hero, $3,360 to the M/V Free Jupiter, $3,360 to
the M/V Free Impala and $2,880 to the M/V Free Neptune.



52







The Company according
to the provisions of ASC 360, has classified the M/V Free Hero, the M/V Free Jupiter, the M/V Free Impala
and the M/V Free Neptune as “held for sale” in the consolidated balance sheet for the year ended December 31,
2011 at their estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale”
were met at the balance sheet date. On February 28, 2011, after obtaining the respective lenders consent (FBB), the Company’s
Board of Directors, approved a plan of sale of the vessels M/V Free Impala and M/V Free Neptune within the context
of its plans to fund its working capital requirements. On July 15, 2011, the Company’s Board of Directors approved
a plan of sale of the vessels M/V Free Jupiter and M/V Free Lady (which was sold on November 8, 2011) as a
result of the fourth supplemental agreement the Company entered into with Credit Suisse. Drydocking costs consists of the unamortized
dry docking and special survey costs of the M/V Free Neptune which were included in “Vessels held for sale”
following the vessel’s classification as held for sale in February 2011 as well as $373 relating to the cost of the drydocking
and special survey performed on this vessel in November 2011. As of December 31, 2011, the Company compared the carrying
values of vessels classified as held for sale with their estimated market values less costs to sell and recognized an impairment
loss of $23,483 in the consolidated statements of operations.



IMPAIRMENT OF ADVANCES
FOR VESSELS UNDER CONSTRUCTION — As of December 31, 2011, the Company has impaired the advances and the capitalized
expenses relating to the vessels under construction after the cancelation of ABN AMRO financing commitment on December 30,
2011. There were no advances and capitalized expenses relating to the vessels under construction, since their cancelation in 2011,
to be impaired for the year ended December 31, 2012.



FINANCING COSTS— Financing costs amounted to $2,717 for the year ended December 31, 2012 and $4,003 for the year ended December 31,
2011. The decrease of the interest and financing costs incurred for the year ended December 31, 2012 as compared to the same
period in 2011 was attributed to:



| | · | the
                                                                                                               write-off of the
                                                                                                               commitment fees
                                                                                                               that ABN AMRO Bank
                                                                                                               had charged the
                                                                                                               Company for pre-delivery
                                                                                                               and post delivery
                                                                                                               debt financing
                                                                                                               for the purchase
                                                                                                               of the two newbuilding
                                                                                                               Handysize vessels
                                                                                                               which were canceled
                                                                                                               (the bank agreed
                                                                                                               to return them
                                                                                                               to the Company,
                                                                                                               pursuant to a settlement
                                                                                                               agreement entered
                                                                                                               into on April 13,
                                                                                                               2012);
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                               lower weighted
                                                                                                               average interest
                                                                                                               rate as a result
                                                                                                               of the amended
                                                                                                               and restated facilities
                                                                                                               the Company entered
                                                                                                               with Credit Suisse
                                                                                                               and Deutsche Bank,
                                                                                                               on May 31, 2012
                                                                                                               and September 7,
                                                                                                               2012, respectively;
                                                                                                               and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                               write-off of the
                                                                                                               unamortized deferred
                                                                                                               financing fees
                                                                                                               of $191 related
                                                                                                               to the prior Credit
                                                                                                               Suisse and Deutsche
                                                                                                               Bank loan facilities
                                                                                                               consequently;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



alleviated by the quarterly amortization
of the amendment and restructuring fees incurred, due to the amendment of Credit Suisse and Deutsche Bank loan facilities in May
and September 2012, respectively.



GAIN/(LOSS) ON
INTEREST RATE SWAPS — The Company is a party to two interest rate swap agreements that do not qualify for hedge accounting
and as such, the changes in their fair values are recognized in the statement of operations. The Company makes quarterly payments
to the counterparty based on decreasing notional amounts, standing at $4,340 and $2,323, respectively as of December 31,
2012 at fixed rates of 5.07% and 5.55% respectively, and the counterparty makes quarterly floating-rate payments at LIBOR to the
Company based on the same decreasing notional amounts. The swaps mature in September 2015 and July 2015, respectively.



The change in the
fair value of the Company’s two interest rate swaps for the year ended December 31, 2012, 2011 and 2010 resulted in
unrealized gains of $314, $361 and $129, respectively. The settlements on the interest rate swaps for the year ended December 31,
2012, 2011 and 2010 resulted in realized losses of $399, $539 and $594, respectively. The total of the change in fair value and
settlements for the year ended December 31, 2012, 2011 and 2010 aggregate to losses of $85, $178 and $465, respectively,
which is separately reflected in “Loss on derivative instruments” in the consolidated statements of operations.



NET LOSS —
Net loss for the year ended December 31, 2012 was $30,888 as compared to net loss of $88,196 for the year ended December 31,
2011. The decrease of the net loss for the year ended December 31, 2012 resulted primarily from



| | · | the
                                                                                                               higher amount of
                                                                                                               impairment loss
                                                                                                               the Company recognized
                                                                                                               in the consolidated
                                                                                                               statements of operations
                                                                                                               in the year ended
                                                                                                               December 31, 2011,
                                                                                                               compared to an
                                                                                                               impairment loss
                                                                                                               of $12,480 the
                                                                                                               Company recognized
                                                                                                               in the year ended
                                                                                                               December 31, 2012
                                                                                                               and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                               write off of $11,717
                                                                                                               regarding the advances
                                                                                                               of vessels under
                                                                                                               construction the
                                                                                                               Company recognized
                                                                                                               in the year ended
                                                                                                               December 31, 2011.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



53







Year Ended December 31, 2011
as Compared to Year Ended December 31, 2010



REVENUES —
Operating revenues for the year ended December 31, 2011 were $29,538 compared to $57,650 for the year ended December 31,
2010. The decrease of $28,112 is mainly attributable to the lower average daily TCE rate of $9,408 in the year ended December 31,
2011 compared to an average daily TCE rate of $15,742 in the year ended December 31, 2010 on the back of weak spot charter
market rates and to a lesser degree to the decrease of the average number of vessels in our fleet to 8.21 vessels for the year
ended December 31, 2011 compared to 9.65 vessels for the year ended December 31, 2010.



VOYAGE EXPENSES
AND COMMISSIONS — Voyage expenses, which include bunkers, cargo expenses, port expenses, port agency fees, tugs, extra
insurance and various expenses, were $807 for the year ended December 31, 2011, as compared to $1,887 for the year ended
December 31, 2010. The variance in voyage expenses reflects mainly the bunkers delivery – redelivery transactions which
expired during 2011 and the reduced average number of vessels to 8.21 in the year ended December 31, 2011 from 9.65 in the
year ended December 31, 2010.



For the year ended
December 31, 2011, commissions charged amounted to $1,777, as compared to $3,357 for the year ended December 31, 2010.
The decrease in commissions is mainly due to the decrease of operating revenues for the year ended December 31, 2011 compared
to the year ended December 31, 2010. 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 crew cost, provisions, deck and engine stores, lubricating oil, insurance,
maintenance and repairs, totaled $14,563 in the year ended December 31, 2011, as compared to $18,607 in the year ended December 31,
2010. The decrease of $4,044, which is translated to daily operating expenses of $4,858 for the year ended December 31, 2011
versus $5,282 for the year ended December 31, 2010 is primarily due to the intensification of the cost cutting initiatives
initiated in the fourth quarter of 2010 and continued throughout 2011 and the ownership of 8.21 vessels versus 9.65 during the
prior year.



DEPRECIATION
AND AMORTIZATION— For the year ended December 31, 2011, depreciation expense totaled $8,664 as compared to $15,365
for the year ended December 31, 2010. The decrease of $6,701 in depreciation expense resulted from the classification of
the M/V Free Hero , the M/V Free Jupiter , the M/V Free Lady (which was sold on November 8, 2011), the
M/V Free Impala and the M/V Free Neptune , as “held for sale” in our consolidated balance sheet for
the year ended December 31, 2011, the sale of M/V Free Destiny on August 27, 2010, the sale of M/V Free Envoyon May 13, 2011 and the sale of M/V Free Lady on November 8, 2011. For the year ended December 31, 2011,
amortization of dry-dockings and special survey costs totaled $915, a decrease of $973 over the $1,888 expenses reported in the
year ended December 31, 2010. The main reason for the decrease is the write-off of certain dry-docking costs due to the classification
of the M/V Free Hero , the M/V Free Jupiter , the M/V Free Lady , the M/V Free Impala and the M/V
Free Neptune as “held for sale,” for the year ended December 31, 2011.



MANAGEMENT FEES— Management fees for the year ended December 31, 2011 totaled $1,900, as compared to $1,978 in the year ended
December 31, 2010. The $78 decrease in management fees mainly resulted from the reduced average number of vessels under the
technical management of the Manager to 8.21 in the year ended December 31, 2011 from 9.65 in the year ended December 31,
2010 counterbalanced by the increase of the monthly management fee per vessel to $19.0 from $16.5, effective June 1, 2011.



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 $4,734 (including $122
stock-based compensation expense) for the year ended December 31, 2011, as compared to $4,494 (including $559 stock-based
compensation expense) for the year ended December 31, 2010. The difference was primarily due to $662 expenses related to
the Company’s abandoned capital raising efforts.



PROVISION AND WRITE-OFFS
OF INSURANCE CLAIMS AND BAD DEBTS — For the year ended December 31, 2011, the amount of $133 refers to write-offs
of various long outstanding accounts receivable, which is significantly below the $1,250 of provisions and write-offs reported
in the previous year that was mainly affected by the $986 claim of the M/V Free Jupiter.



GAIN/LOSS ON SALE
OF VESSEL — For the year ended December 31, 2011, the Company recognized a gain of $1,561 on the sale of the M/V
Free Envoy. For the year ended December 31, 2010, the Company recognized a gain of $807 on the sale of the M/V Free
Destiny.



VESSEL IMPAIRMENT
LOSS — For the year ended December 31, 2011, the Company according to the provisions of ASC 360, has classified
the M/V Free Hero, the M/V Free Jupiter, the M/V Free Impala and the M/V Free Neptune as “held
for sale” at their estimated market values less costs to sell, as all criteria required for the classification as “Held
for Sale” were met at the balance sheet date. On November 8, 2011, the Company sold the M/V Free Lady for a
sale price of $21,900. Due to the planned sale of the vessel, the Company for the purposes of preparing its interim financial
statements performed an impairment exercise and recognized an impairment loss of $36,415.



54







As of December 31,
2011, the Company compared the carrying values of the vessels classified as held for sale with their estimated market values less
costs to sell and recognized an impairment loss of $33,583 in the consolidated statements of operations.



For the year ended
December 31, 2010, the M/V Free Hero, the M/V Free Impala and the M/V Free Neptune, according to the
provisions of ASC 360, were classified as asset “held for sale”. The Company has individually assessed for recoverability
the carrying values of each of the above vessels, including unamortized deferred dry docking costs of $631. In performing its
assessment, the Company compared the carrying values of these vessels with their estimated fair values at December 31, 2010.
As a result of this assessment the Company has recognized an impairment loss of $26,631 of which $17,253 relates to the M/V Free
Impala and $9,378 to the M/V Free Hero . No impairment loss was recognized for the M/V Free Neptune as its fair
value exceeded its carrying value.



IMPAIRMENT OF ADVANCES
FOR VESSELS UNDER CONSTRUCTION — As of December 31, 2011, the Company has impaired the advances and the capitalized
expenses relating to the vessels under construction after the cancelation of ABN AMRO financing commitment on December 30,
2011.



FINANCING COSTS— Financing costs amounted to $4,003 in the year ended December 31, 2011 and $4,375 for the year ended December 31,
2010. The decrease of the interest and financing costs incurred in the year ended December 31, 2011 as compared to 2010 was
mainly attributed to a lower debt balance, lower weighted average interest rate and increased capitalized interest as compared
to 2010 counterbalanced by increased financing fees due to the amendment of certain agreements in 2010.



GAIN/(LOSS) ON
INTEREST RATE SWAPS — Under the terms of the two swap agreements, we make quarterly payments to the counterparty based
on decreasing notional amounts, standing at $5,993 and $3,208 as of December 31, 2011 at fixed rates of 5.07% and 5.55% respectively,
and the counterparty makes quarterly floating-rate payments of 3-month LIBOR to us based on the same decreasing notional amounts.
The swaps mature in September 2015 and July 2015, respectively.



The change in fair
value on the Company’s two interest rate swaps for the year ended December 31, 2011 and 2010 resulted in unrealized
gains of $361 and $129, respectively. The settlements on the interest rate swaps for the year ended December 31, 2011 and
2010 resulted in realized losses of $539 and $594, respectively. The total change in fair value and settlements for the year ended
December 31, 2011 and 2010 aggregate to losses of $178 and $465, respectively, which is separately reflected in “Loss
on derivative instruments” in our consolidated statements of operations.



The change is attributable
to the interest rate differential between floating and fixed interest rates in the year ended December 31, 2011 compared
to the same period in 2010.



NET LOSS —
Net loss for the year ended December 31, 2011 was $88,196, as compared to net loss of $21,821 for the year ended December 31,
2010. The increase of the net loss for the year ended December 31, 2011 resulted primarily from the impairment of vessels
and vessels under construction and the weaker freight market during the year ended December 31, 2011 as compared to 2010.



Liquidity and Capital Resources



We have historically
financed our capital requirements from sales of equity securities, operating cash flows and long-term borrowings. As of December 31,
2012, our long-term borrowings totaled $89,169. We have primarily used our funds for capital expenditures to maintain our fleet,
comply with international shipping standards and environmental laws and regulations, and fund working capital requirements.



As a result of the
historically low charter rates for drybulk vessels which have been affecting the Company for over two years, and the resulting
material adverse impact on the Company’s results from operations, the Company has undertaken negotiations with each of its
lenders to restructure the Company’s debt repayments. On May 31, 2012, the Company and Credit Suisse entered into a Sixth
Supplemental Agreement to its Facility Agreement with Credit Suisse, which provided for, among other things, a deferral of principal
payments until March 31, 2014. On September 7, 2012, the Company entered into an amended and restated facility with Deutsche Bank,
which provides for, among other things, a reduction in and deferral of the balloon payment due on facility B from November 2012
to December 2015, a reduction in the amount of principal repayment and amendments to the financial covenants.



In February, March,
April, November and December 2012 and January 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. The Company is seeking and will continue to seek similar restructured loan terms from FBB. Also the Company
did not pay the monthly repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest
duein October, November and December 2012 and January, February and March 2013. As well in
February, March and April 2013, the Company did not pay the interest due of $124 and the interest rate swaps due of $80, respectively,
with the Credit Suisse facility. The Company is in discussions with both banks to reach a mutually beneficial agreement.



55







If the Company is
not able to reach agreement with FBB as to restructured loan terms, 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 agreements. The Company’s failure
to satisfy its covenants under its debt agreements, 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.



All of the above raises
doubt regarding the Company’s ability to continue as a going concern. The Company is currently
exploring several alternatives aiming to manage its working capital requirements and other commitments if current market charter
hire rates remain at current low levels, including completion of the negotiations for the restructuring of its loan with FBB,
offerings of common stock through equity line financings, disposition of certain vessels in its current fleet and additional reductions
in operating and other costs.



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 cross default provisions in the Company’s
loan agreements, actual breaches existing under its credit facility with FBB could result in defaults under all of the Company’s
affected debt and the acceleration of such debt by its lender. Accordingly, as of December 31, 2012, the Company was required
to reclassify its long term debt and derivative financial instrument liability (interest rate swaps) as current liabilities on
its consolidated balance sheet since the Company had not received waivers in respect of the breaches discussed above at such time.



Cash Flows



Year Ended December 31, 2012
as Compared to Year Ended December 31, 2011



OPERATING ACTIVITIES— Net cash from operating activities decreased by $6,495 to $(2,025) for the year ended December 31, 2012, as compared
to net cash from operating activities of $4,470 for the year ended December 31, 2011. The decrease resulted from the weak
freight market in the year ended December 31, 2012 compared to the same period in 2011 and the reduced average number of
vessels to 7.02 in the year ended December 31, 2012 from 8.21 in the year ended December 31, 2011.



INVESTING ACTIVITIES— Net cash provided by (used in) investing activities during the year ended December 31, 2012 was $nil, as compared
to $18,422 provided by investing activities for the year ended December 31, 2011. The variation reflected the cancelation
of the two Handysize newbuildings and the fact that no vessel disposals incurred during the year ended December 31, 2012.



FINANCING ACTIVITIES— The cash from financing activities for the year ended December 31, 2012 was $1,723, as compared to $(26,255)
used in for the year ended December 31, 2011. The increase in cash was mainly due to:



| | · | the
                                                                                                               decrease of $1,125
                                                                                                               in restricted cash;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                               payment of the
                                                                                                               unpaid management
                                                                                                               and services fees
                                                                                                               of $2,271 due to
                                                                                                               the Manager in
                                                                                                               2012 through the
                                                                                                               issuance of common
                                                                                                               shares to the Manager;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          

| | · | 
| | - | 

the equity raising of $629 through
the equity line from YA Global and Dutchess; and



| | · | the
                                                                                                               raise of $250 from
                                                                                                               the sale of a promissory
                                                                                                               note, in August
                                                                                                               2012, pursuant
                                                                                                               to the Note Purchase
                                                                                                               Agreement dated
                                                                                                               May 11, 2012 between
                                                                                                               the Company and
                                                                                                               YA Global.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Year Ended December 31, 2011
as Compared to Year Ended December 31, 2010



OPERATING ACTIVITIES— Net cash from operating activities decreased by $16,332 to $4,470 for the year ended December 31, 2011, as compared
to $20,802 of net cash from operating activities for the year ended December 31, 2010. The decrease resulted from the weak
freight market in the year ended December 31, 2011 compared to 2010 and the reduced average number of vessels to 8.21 in
the year ended December 31, 2011 from 9.65 in the year ended December 31, 2010.



INVESTING ACTIVITIES— Net cash from investing activities during the year ended December 31, 2011 was $18,422, as compared to $2,819
used in investing activities for the year ended December 31, 2010. This increase mainly reflected the net proceeds of $24,474,
the Company received from the sale of M/V Free Envoy and M/V Free Lady during the year ended December 31, 2011
as compared to net proceeds of $2,846, the Company received from the sale of M/V Free Destiny during the year ended December 31,
2010.



56







FINANCING ACTIVITIES— The cash used in financing activities for the year ended December 31, 2011 was $26,255, as compared to $20,630
used in for the year ended December 31, 2010. The increase in cash used in financing activities was mainly due to the prepayment
of $19,800 made on November 8, 2011 towards the Credit Suisse loan facility as a result of the sale of M/V Free Lady
, counterbalanced by the deferral of scheduled payments due in 2011 relating to Deutsche Bank and FBB facilities amounting to
$750 and $838, respectively, the inability to pay scheduled loan repayments due in 2011 relating to Deutsche Bank facility amounting
to $750, the decrease in restricted cash of $5,255 during the year ended December 31, 2011, attributed to the release of
the pledged deposit to ABN AMRO Bank in respect of the guarantee provided for the second installments of Hull 1 and Hull 2, which
the Company advanced to the shipyard in March and May 2011, respectively, and the release of $375 deposit held in Credit Suisse
as minimum cash requirement, as a result of the sale of M/V Free Lady , compared to the increase in restricted cash of
$3,130 during 2010.



Long-Term Debt



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 year ended December 31, 2012 and 2011 was 2.7% and 2.9%, respectively. Interest expense incurred under
the above loan agreements amounted to $2,415, $ 3,173 (net of capitalized interest $282) and $3,932 or the years ended December 31,
2012, 2011 and 2010, respectively, and is included in “Interest and Finance Costs” in the accompanying consolidated
statements of operations.



Deutsche Bank Facility



On September 2,
2011, the Company instructed the Deutsche Bank in accordance with relevant provision of the facility agreement to postpone the
repayment installment of $750 due on September 18, 2011, which will be paid on the termination date in December 2015.



In October 2011, the
Company following negotiations with Deutsche Bank deferred the payment of an additional fee equal to $360, due on November 1,
2011, to January 2012 (Note 15).



In December 2011,
the Company did not pay the $750 repayment installment along with accrued interest with Deutsche Bank and held discussions to
permanently amend the amortization schedule including refinancing of the balloon due in November 2012.



On February 15,
2012, the Company received notice from Deutsche Bank, or Deutsche Bank, according to which Company's failure to (i) repay
the installment due in December 2011, (ii) pay regular interest on the loan, (iii) pay default interest on the loan,
(iv) pay the success fee due in November 2011, (v) set new financial covenants and (vi) comply with the loan to
value covenant, are considered events of default. Deutsche Bank requested that the Company fulfill its obligations by March 15,
2012. The Company has not paid the aforementioned amounts or the $750 repayment installment along with accrued interest due in
March 2012. On April 26, 2012, the Company was advised by Deutsche Bank that it would approve the request to permanently
amend the amortization schedule including refinancing of the balloon due in November 2012.



On September 7, 2012,
the Company and certain of its subsidiaries entered into an amended and restated facility agreement with Deutsche Bank. As amended
and restated, the facility agreement:



| | · | Defers
                                                                                                               and reduces the
                                                                                                               balloon payment
                                                                                                               of $16,009 due
                                                                                                               on Facility B from
                                                                                                               November 2012 to
                                                                                                               December 2015;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provides
                                                                                                               for monthly repayments
                                                                                                               of $20 for each
                                                                                                               of Facility A and
                                                                                                               Facility B commencing
                                                                                                               September 30, 2012
                                                                                                               through April 30,
                                                                                                               2013 and a monthly
                                                                                                               repayment of $11.5
                                                                                                               for each of Facility
                                                                                                               A and Facility
                                                                                                               B on May 31, 2013;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Suspends
                                                                                                               principal repayments
                                                                                                               from June 1, 2013
                                                                                                               through June 30,
                                                                                                               2014 on each of
                                                                                                               Facility A and
                                                                                                               Facility B;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provides
                                                                                                               for quarterly repayments
                                                                                                               of $337 for Facility
                                                                                                               A commencing June
                                                                                                               30, 2014, which
                                                                                                               quarterly repayments
                                                                                                               have been reduced
                                                                                                               from $750;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Provides
                                                                                                               for quarterly repayments
                                                                                                               of $337 for Facility
                                                                                                               B commencing June
                                                                                                               30, 2014;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



57







| | · | Bears
                                                                                                               interest at the
                                                                                                               rate of LIBOR plus
                                                                                                               1% through March
                                                                                                               31, 2014 and LIBOR
                                                                                                               plus 3.25% from
                                                                                                               April 1, 2014 through
                                                                                                               maturity, which
                                                                                                               were reduced from
                                                                                                               LIBOR plus 2.25%
                                                                                                               for Facility A
                                                                                                               and LIBOR plus
                                                                                                               4.25% for Facility
                                                                                                               B;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Establishes
                                                                                                               certain financial
                                                                                                               covenants, including
                                                                                                               an interest coverage
                                                                                                               ratio that must
                                                                                                               be complied with
                                                                                                               starting January
                                                                                                               1, 2013, a consolidated
                                                                                                               leverage ratio
                                                                                                               that must be complied
                                                                                                               with starting January
                                                                                                               1, 2014, and a
                                                                                                               minimum liquidity
                                                                                                               ratio that must
                                                                                                               be complied with
                                                                                                               starting July 1,
                                                                                                               2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Removes
                                                                                                               permanently the
                                                                                                               loan to value ratio;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Requires
                                                                                                               the amount of any
                                                                                                               “Excess Cash,”
                                                                                                               as determined in
                                                                                                               accordance with
                                                                                                               the amended and
                                                                                                               restated 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; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | Removes
                                                                                                               the success fee
                                                                                                               originally due
                                                                                                               under the previous
                                                                                                               agreement and provides
                                                                                                               for an amendment
                                                                                                               and restructuring
                                                                                                               fee of $1,480 payable
                                                                                                               on the earlier
                                                                                                               of March 31, 2014,
                                                                                                               the date of a voluntary
                                                                                                               prepayment, or
                                                                                                               the date the loan
                                                                                                               facility becomes
                                                                                                               due or is repaid
                                                                                                               in full.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In October, November
and December 2012 and in January, February and March 2013, the Company did not pay the monthly repayments of $20 for each of Facility
A and Facility B with Deutsche Bank, totaling $240 along with accrued interest due. The Company is in discussions with Deutsche
Bank to reach a mutually beneficial agreement.



Credit Suisse Facility



On July 15, 2011,
the Company entered into a Fourth Supplemental Agreement with Credit Suisse, which amended its existing credit facility to, among
other things, defer its payments totaling $2,000, originally due in July 2011 until September 2011. The Fourth Supplemental Agreement,
as originally entered into, contemplated that the Company would complete a proposed debt financing with an unrelated party, and
that if the debt financing did not occur by September 5, 2011, the Company would sell one or two of the four vessels collateralizing
the credit facility. This debt financing did not occur. Therefore, the Company initiated the sale of the M/V Free Jupiter and
the M/V Free Lady. On October 3, 2011, the Company entered an agreement to sell the M/V Free Lady. The net proceeds of this
sale amounting to $19,800 were applied to pay down the amount outstanding on this facility.



In light of the successful
sale of the M/V Free Lady, the Company entered into a Fifth Supplemental Agreement dated November 7, 2011 with Credit
Suisse, which amended the Fourth Supplemental Agreement to, among other things, reduce the next five loan repayment installments
starting from the third quarter of 2011. Pursuant to this agreement, the Company agreed to enter into a period time charter of
at least twelve months for all mortgaged vessels not later than December 31, 2011, which charter would cover the vessels’
debt service plus $1.0 million. If the foregoing time charters were not entered into by the date required, the Company agreed
that will sell, not later than January 31, 2012, either the M/V Free Jupiter or both the M/V Free Goddess and
the M/V Free Hero . In addition, under the Fifth Supplemental Agreement, the margin on this facility increased to 3.25%
during the period until either the period employment or the sale procedure has been completed, after which time the margin will
be reduced to 2.75%. According to the terms of the agreement, failure to comply with the above would constitute an event of default.
The Company did not conclude any time charter agreement and any agreement for the sale of the above mentioned vessels.



On February 2,
2012, the Company agreed by letter with Credit Suisse to defer its payments totaling $700 originally due on January 31, 2012
until the next repayment date April 30, 2012, which was further deferred to May 31, 2012 as per letter dated April 25,
2012. The interest payment of $348 originally due on February 8, 2012, has been agreed to be paid in two installments as
follows: $147 paid on February 8, 2012 and $201 to be paid on April 30, 2012, which was further deferred to May 31,
2012 as per letter dated April 25, 2012. In addition the interest payment of $348 originally due on May 10, 2012, has
been agreed to be paid in two installments as follows: $147 to be paid on May 10, 2012 and $201 on May 31, 2012.



On February 15
2012, the Company received a proposal from Credit Suisse containing restructuring head terms for the full payment holiday of the
principal and partial interest payment holiday until March 31, 2014, conditioned on approval from the Company’s other
lenders. The Company has been advised that the proposal has been approved by Deutsche Bank. The Company is continuing discussions
with FBB.



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



| | · | Defer
                                                                                                               further principal
                                                                                                               repayments until
                                                                                                               March 31, 2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



58







| | · | 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31,
2012, the outstanding balance under the Facility Agreement totaled $36,450. An amendment and restructuring fee equal to 5% of
the current outstanding indebtedness, $1,823, will be due and payable on the earlier of March 31, 2014, the date of a voluntary
prepayment, or the date the loan facility becomes due or is repaid in full. The Company is also no longer required to sell additional
vessels, as it had been under the terms of the Facility Agreement as previously in effect.



In February, March
and April 2013, the Company did not pay the interest due of $124 and the interest rate swaps due of $80, respectively, with the
Credit Suisse facility. The Company is in discussions with the bank to arrange a settlement of these.



FBB Facility



On January 27,
2012, the Company entered into a First Supplemental Agreement with FBB, which amends its existing credit facility to defer the
repayment installment of $837.5 and the interest payment of $197 both due on December 16, 2011 until the next repayment date
on March 16, 2012. In addition, FBB granted a waiver to the security value covenant and the financial covenants, whose testing
was waived until March 16, 2012. On March 23, 2012, the Company received a notice from FBB according to which failure
to (i) pay the $1,675 repayment installment due in March 2012, (ii) pay accrued interest and (iii) pay default
interest constitute an event of default. On April 12, 2012, the Company received notice from FBB according to which along
with the previously mentioned events, failure to make periodic monthly installments into the retention account since September
2011 and violation of the loan to value covenant constituted events of default, and that if all of the above events are not remedied
on or before April 20, 2012, FBB will take whatever action is available to it. The Company has not either paid the installment
of $837.5 which was due on June 18, 2012 or the accrued interest. On July 11, August 22, November 28, December 19, 2012 and
on January 24, 2013, the Company received notices from FBB, according to which failure to (i) pay the $4,188 repayment installment
due in December 2012, (ii) pay accrued interest and (iii) failure to pay default interest constitute an event of default.
The Company is in discussions to permanently amend the amortization schedule and reach an agreement on the unpaid principal and
interest.



ABN AMRO Bank Facility



On September 10,
2010, the Company signed an offer letter with ABN AMRO Bank securing, subject to customary legal documentation and payment of
an arrangement fee, commitments for pre-delivery and post-delivery debt financing up to an amount of $32,400 for the purchase
of two newbuilding Handysize vessels. The facility, which would be available for drawdown until December 31, 2012, is repayable
in 20 quarterly installments plus a balloon payment, commencing three months after the delivery of the vessels. The vessels will
be used as collateral for the facility. According to the agreed terms, the facility would bear interest at LIBOR plus margin and
would include customary financial covenants.



By letter dated December 30,
2011, the Company received notice from ABN AMRO Bank that the Bank’s commitment for pre-delivery and post delivery debt
financing up to the amount of $32,400 for the purchase of the two newbuilding Handysize vessels has been canceled due to the Company’s
failure to pay commitment fees as prescribed in the offer letter, that were considered as events of default, and the occurrence
of various material adverse changes as considered by ABN AMRO Bank.



Pursuant to a settlement
agreement entered into on April 13, 2012, ABN AMRO Bank returned to the Company all commitment fees paid to date less expenses
and all further obligations of the parties were terminated.



59













Loan Covenants



As of December 31,
2012, the Company was in breach of certain of its financial covenants for its loan agreement with FBB, including the loan-to-value
ratio, interest cover ratio, minimum liquidity requirements and leverage ratio. 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 $89,169
as current at December 31, 2012.



Deutsche Bank amended and restated
facility agreement



| | · | 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;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             

| | · | 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;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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;
| | --- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | (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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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
                                                                                                                             expenseshall
                                                                                                                             not
                                                                                                                             be
                                                                                                                             less
                                                                                                                             than
                                                                                                                             3;
                                                                                                                             and
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



60







| | · | 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.



Off-Balance
Sheet Arrangements



As
of December 31, 2012, we did not have any off-balance sheet arrangements as defined in Item 303(a)(4)(ii) of Regulation S-K
promulgated by the SEC.



Summary of
Contractual Obligations



The
following table summarizes our contractual obligations and their maturity dates as of December 31, 2012:



|                               |  | Payments
    Due by Period  |        
|------------------------------ |  | --------------------------- | -------
|(Dollars in 
    thousands)    |  | Total                       |        
|                               |  | (U.S. dollars in thousands) |        
|                               |  |                             |        
|Debt                           |  | $                           | 89,169 
|                               |  |                             |        
|Interest on variable-rate debt |  |                             | 1,501  
|                               |  |                             |        
|Services fees to the Manager   |  |                             | 9,403  
|                               |  |                             |        
|Management fees to the Manager |  |                             | 9,696  
|                               |  |                             |        
|Total obligations              |  | $                           | 109,769



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



| | Item 6. | Directors,
                                                                                                                               Senior
                                                                                                                               Management
                                                                                                                               and
                                                                                                                               Employees
| | ------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Directors and Senior Management
|-- | -------------------------------



The
following sets forth the names of the members of our board of directors and our senior management. Generally, each member of the
board of directors serves for a three-year term. Additionally, the directors are divided among three classes, so the term of office
of a certain number of directors expires each year. Consequently, the number of directors who stand for re-election each year
may vary. Our executive officers are appointed by, and serve at the pleasure of, the board of directors. The primary business
address of each of our executive officers and directors is 10, Eleftheriou Venizelou Street (Panepistimiou Ave.), 106 71, Athens,
Greece.



|                          |  |     |  |                                                                               |  | Term   
|------------------------- |  | --- |  | ----------------------------------------------------------------------------- |  | -------
|Name                      |  | Age |  | Position                                                                      |  | Expires
|Ion G. Varouxakis         |  | 42  |  | Chairman of the Board of Directors, Chief Executive
    Officer and President |  | 2014   
|Alexandros Mylonas        |  | 39  |  | Chief Financial Officer and Treasurer                                         |  | —      
|Focko H. Nauta            |  | 55  |  | Director                                                                      |  | 2013   
|Dimitrios Panagiotopoulos |  | 52  |  | Director                                                                      |  | 2014   
|Keith Bloomfield          |  | 42  |  | Director                                                                      |  | 2013   
|Xenophon Galinas          |  | 56  |  | Director                                                                      |  | 2015   
|Maria Badekas             |  | 41  |  | Secretary                                                                     |  | —      



61







Ion
G. Varouxakisis one of our founders and is the Chairman of our Board of Directors. He also serves as our President and
Chief Executive Officer. In 2003, Mr. Varouxakis founded Free Bulkers, the beginning of a single-vessel, self-financed entrepreneurial
venture that led to FreeSeas’ founding and NASDAQ listing in 2005. Prior to founding Free Bulkers, Mr. Varouxakis held
since 1997 management positions in private shipping companies operating in the drybulk sector. Mr. Varouxakis holds a candidature
degree in law from the Catholic University of Saint Louis in Brussels and a Bachelor of Science degree in economics from the London
School of Economics and Political Science. Mr. Varouxakis is a member of the Hellenic Committee of the Korean Register of
Shipping, a member of the Hellenic and Black Sea Committee of Bureau Veritas and an officer of the reserves of the Hellenic Army.



Alexandros
Mylonas is our Chief Financial Officer and joined us in October 2009. In addition, he has served as our Treasurer since
December 2010. Prior to joining FreeSeas, Mr. Mylonas was the Banking Executive of Cardiff Marine Inc., a ship management
company managing a fleet of tankers and drybulk carriers including the fleet of DryShips Inc. a company listed on the NASDAQ Global
Select Market. From 2005 to 2008, Mr. Mylonas was an Account Manager with the Global Shipping Group of Fortis Bank, an international
shipping bank. From 2002 to 2005, Mr. Mylonas was an Investment Associate with NBG Venture Capital, a private equity firm
investing in Southeast Europe. Mr. Mylonas holds an MBA in Finance and Supply Chain Management from Michigan State University
and a Bachelor of Business Administration from University of Macedonia in Thessaloniki.



Focko
H. Nauta joined our Board of Directors in 2005. Since September 2000, he has also been a director of FinShip SA, a ship
financing company. From 1997 through 1999, Mr. Nauta served as a managing director of Van Ommeren Shipbroking, a London-based
ship brokering company. Prior to 1997, he was a general manager of a Fortis Bank branch. Mr. Nauta holds a degree in law
from Leiden University in the Netherlands.



Dimitrios
Panagiotopoulosjoined our Board of Directors in 2007. He is the head of shipping and corporate banking of Proton Bank,
a Greek private bank, where he has served since April 2004. From January 1997 to March 2004, he served as deputy head of the Greek
shipping desk of BNP Paribas and before that for four years as senior officer of the shipping department of Credit Lyonnais Greece.
From 1990 to 1993, he worked as chief accountant in Ionia Management, a Greek shipping company. He holds a degree in economics
from Athens University and a master’s of science in shipping, trade and finance from City University of London. He was an
officer of the Greek Special Forces and today is a captain of the reserves of Hellenic Army.



Keith
Bloomfield joined our Board of Directors in 2010. He has over 13 years of experience in mergers and acquisitions, corporate
law, and wealth management. He is currently the President and Chief Executive Officer of Forbes Family Trust, a private wealth
management firm which he founded in September 2009. From October 2006 to September 2009, he was a Senior Managing Director and
Corporate Counsel at Third Avenue Management, a global asset management firm with approximately $16 billion in assets under management.
At Third Avenue, he was responsible for mergers and acquisitions, corporate transactions and business development. Prior to joining
Third Avenue, he was a corporate attorney with Simpson Thacher & Bartlett LLP. Mr. Bloomfield earned an LL.M. (Master
of Law) in Taxation from New York University School of Law and a J.D. with honors from Hofstra University School of Law, and graduated
summa cum laude with a B.A. in History from Tulane University.



Xenophon
Galinas joined our Board of Directors in 2012. From July 2011 to July 2012, Mr. Galinas served as a managing director
of Rodman & Renshaw LLC, an investment banking firm. Prior to joining Rodman & Renshaw, Mr. Galinas was a Managing Director
and Head of Shipping at the investment banking firm of Morgan Joseph TriArtisan LLC, from September 2009 to June 2011. From February
2007 to August 2009, he served as a non-Executive Chairman of Manhattan Group Partners LLC, a New York-based merchant banking
firm focused exclusively on shipping and transportation. From November 1986 to December 1998, he served as President of Olympic
Tower Associates, Executive Vice President of Central American Steamship, Inc., and was a member of the Board of Directors of
Williston S.A., all of which were management and business operating arms of the Alexander S. Onassis Public Benefit Foundation.
Mr. Galinas served for 12 years as head of the Onassis Group’s business activities in the U.S. Mr. Galinas received a M.S.
in Marine Engineering from the University of Michigan at Ann Arbor, and an MBA in finance from New York University.



Maria
Badekas holds a Master of Law from University of Cambridge (UK) and a Bachelor in English and European Laws from Essex
University (UK). From 2001 to 2003 she was a political expert to the European Commission, DG Development. From 2003 to 2005, she
was a special advisor to the Mayor of Athens and participated in the preparation of the Athens 2004 Olympic Games (international
affairs and public relations). Between 2005 and 2006, she was a special advisor to the Minister of the Hellenic Ministry of Foreign
Affairs, and from 2006 to 2009, she was a special advisor to the General Secretary for European Affairs of the Hellenic Ministry
of Foreign Affairs.



62







|B. | Compensation
|-- | ------------



The total gross cash
compensation paid for 2011 and for the year ended December 31, 2012 to our directors was $52 and $nil, respectively. We have
agreed to pay each of our non-executive directors a fee of $40 per year, except that if the U.S. Dollar/Euro exchange rate exceeds
1.35 on the last business day of each quarter, then the amount of the directors’ fees payable for that quarter will be increased
so that the amount payable in U.S. Dollars will be the equivalent in Euros based on a 1.35 U.S. Dollar/Euro exchange rate. Our
directors were not paid any cash directors’ fees for the last three quarters of 2011 and for 2012.



On April 23, 2012,
the Company’s Board of Directors approved the issuance of 166,069 shares of the Company's common stock to the Manager in
payment of the $926 in unpaid fees due to the Manager for the first quarter of 2012 under the management and services agreements
with the Company. The number of shares issued to the Manager was based on the closing prices of the Company's common stock on
the first day of each month during the quarter, which are the dates the management and services fees were due and payable. The
Board also approved the issuance of an aggregate of 19,964 shares of the Company's common stock to the non-executive members of
its Board of Directors in payment of $31 per person in unpaid Board fees for the last three quarters of 2011. The aggregate number
of shares issued to the directors was based on the closing prices of the Company's common stock on the last day of each of the
last three quarters of 2011, which are the dates that the Board fees were due and payable.



On October 3, 2012,
the Company’s Board of Directors approved the issuance of 219,650 shares of the Company's common stock to the Manager in
payment of the $807 in unpaid fees due to the Manager for the third quarter of 2012 under the management and services agreements
with the Company. The number of shares issued to the Manager was based on the closing prices of the Company’s common stock
on the first day of each month during the quarter, which are the dates the management and services fees were due and payable.
The Board also approved the issuance of an aggregate of 32,679 shares of the Company’s common stock to the non-executive
members of its Board of Directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. The
aggregate number of shares issued to the directors was based on the closing prices of the Company's common stock on the last day
of each of the three quarters of 2012, which are the dates that the Board fees were due and payable.



On January 18, 2013,
the Company’s’ Board of Directors approved the issuance of an additional 641,639 shares of the Company’s common
stock to the Manager in payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 under
the management and services agreements with the Company. The number of shares to be issued to the Manager was based on the closing
prices of the Company's common stock on the first day of each month, which are the dates the management and services fees were
due and payable. The Board also approved the issuance of an aggregate of 53,020 shares of the Company’s common stock to
its non-executive directors in payment of $48 in unpaid Board fees for the fourth quarter of 2012. The aggregate number of shares
to be issued to the directors was based on the closing price of the Company’s common stock on the last day of the fourth
quarter of 2012, which is the date that the Board fees were due and payable.







Our
Manager receives a monthly management fee from us to provide overall executive and commercial management of our affairs. See “Principal
Shareholders” and “Certain Relationships and Related Transactions.”



There
are no agreements between us and any director that provide for benefits upon termination or retirement.



Other
than through stock options, pursuant to our Amended and Restated 2005 Stock Incentive Plan and as determined by our Board of Directors,
our executive officers do not receive any compensation, including any cash compensation, from us.



|C. | Board Practices
|-- | ---------------



The
term of our Class A directors expires in 2015, the term of our Class B directors expires in 2013 and the term of our
Class C directors expires in 2014. There are no agreements between us and any director that provide for benefits upon termination
or retirement.



Board Committees



Our
board of directors has an audit committee, a compensation committee, a nominating committee and a corporate governance committee.
Our board of directors has adopted a charter for each of these committees.



Audit Committee



Our
audit committee consists of Messrs. Nauta, Panagiotopoulos and Galinas, each of whom is an independent director. Mr. Nauta
has been designated the “Audit Committee Financial Expert” under the SEC rules and the current listing standards of
the NASDAQ Marketplace Rules.



63







The
audit committee has powers and performs the functions customarily performed by such a committee (including those required of such
a committee under the NASDAQ Marketplace Rules and the SEC). The audit committee is responsible for selecting and meeting with
our independent registered public accounting firm regarding, among other matters, audits and the adequacy of our accounting and
control systems.



Compensation
Committee



Our
compensation committee consists of Messrs. Bloomfield and Panagiotopoulos, each of whom is an independent director. The compensation
committee reviews and approves the compensation of our executive officers.



Nominating
Committee



Our
nominating committee consists of Messrs. Bloomfield and Galinas, each of whom is an independent director. The nominating
committee is responsible for overseeing the selection of persons to be nominated to serve on our board of directors.



Corporate
Governance Committee



Our
corporate governance committee consists of Messrs.  Bloomfield and Nauta, each of whom is an independent director. The corporate
governance committee ensures that we have and follow appropriate governance standards.



Director Independence



Our
securities are listed on the NASDAQ Stock Market and we are exempt from certain NASDAQ listing requirements including the requirement
that our board be composed of a majority of independent directors. The Board of Directors has evaluated whether each of Messrs.
Nauta, Panagiotopoulos, Bloomfield and Galinas is an “independent director” within the meaning of the listing requirements
of NASDAQ. The NASDAQ independence definition includes a series of objective tests, such as that the director is not our employee
and has not engaged in various types of business dealings with us. In addition, as further required by the NASDAQ requirements,
the Board of Directors made a subjective determination as to each of Messrs. Nauta, Panagiotopoulos, Bloomfield and Galinas that
no relationships exist which, in the opinion of the Board of Directors, would interfere with the exercise of his independent judgment
in carrying out the responsibilities of a director. In making this determination, the Board of Directors reviewed and discussed
information provided by each of Messrs. Nauta, Panagiotopoulos, Bloomfield and Galinas with regard to his business and personal
activities as they may relate to us and our management. After reviewing the information presented to it, our Board of Directors
has determined that each of Messrs. Nauta, Panagiotopoulos, Bloomfield and Galinas is “independent” within the meaning
of such rules. Our independent directors will meet in executive session as often as necessary to fulfill their duties, but no
less frequently than annually.



Code of Conduct
and Ethics



We
have adopted a code of conduct and ethics applicable to our directors, officers and employees in accordance with applicable federal
securities laws and the NASDAQ Marketplace Rules.



|D. | Employees
|-- | ---------



We
currently have no employees. Our Manager is responsible for employing all of the executive officers and staff to execute and supervise
our operations based on the strategy devised by the Board of Directors and subject to the approval of our Board of Directors and
for recruiting, and employing, either directly or through a crewing agent, the senior officers and all other crew members for
our vessels.



Amended and
Restated 2005 Stock Incentive Plan



Our
Amended and Restated 2005 Stock Incentive Plan was implemented for the purpose of furthering our long-term stability, continuing
growth and financial success by retaining and attracting key employees, officers and directors through the use of stock incentives.
Our shareholders approved the plan on December 19, 2006. Awards may be granted under the plan in the form of incentive stock
options, nonqualified stock options, stock appreciation rights, dividend equivalent rights, restricted stock, unrestricted stock,
restricted stock units and performance shares. Pursuant to the plan, we have reserved 300,000 shares of our common stock for awards,
of which 204,000 remain available for grant as of the date of this annual report.



In December 2007,
the Company’s Board of Directors granted 900 options to directors and 2,500 options to executive officers of which 2,800
would vest in one year, 300 would vest in two years and 300 in three years from the grant, all at an exercise price of $412.50
per share. Effective December 18, 2009, certain of the Company’s officers and directors have forfeited 2,200 of the
stock options granted to them, leaving 1,200 stock options unexercised, which expired on December 24, 2012.



64







On December 31,
2009, the Company’s Board of Directors awarded 25,500 restricted shares to its non-executive directors, executive officers
and certain of Manager’s employees. Of the unvested restricted shares amounted to 13,400 as of December 31, 2010, 1,000
and 400 restricted shares with an original vesting date on December 31, 2012 have been forfeited in June 2011 and October
2011, respectively. Of the remaining unvested restricted shares amounted to 12,000 as of December 30, 2012, 7,000 restricted shares
vested on December 31 2012 and 5,000 restricted shares will vest on December 31, 2013.



| | Item 7. | Major
                                                                                                                               Shareholders
                                                                                                                               and
                                                                                                                               Related
                                                                                                                               Party
                                                                                                                               Transactions
| | ------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Major Shareholders
|-- | ------------------



The
following table sets out certain information regarding the beneficial ownership of our common stock as of April 2, 2013 by
each of our officers and directors, all of our officers and directors as a group, and each person or group of affiliated persons
who is currently known to us to be the beneficial owner of 5% or more of the shares of our common stock.



Unless
otherwise indicated, we believe that all persons named in the table have sole voting and investment power with respect to all
shares of beneficially owned by them. As beneficial owners of shares of common stock, the persons named in the table do not have
different voting rights than any other holder of common stock.



|Name                                                              |  | Number of Shares
    of Common Stock Beneficially Owned |           |  | Shares of Common
    Stock Beneficially Owned (1) | 
|----------------------------------------------------------------- |  | ------------------------------------------------------- | --------- |  | ------------------------------------------------- | 
|Ion G. Varouxakis (2)                                             |  |                                                         | 1,081,652 |  |                                                   | 
|                                                                  |  |                                                         |           |  |                                                   | 
|All directors and executive officers as a group (six
    persons) |  |                                                         | 1,139,297 |  |                                                   | 



|(1) | For purposes of computing the percentage of outstanding
    shares of common stock held by each person named above, any shares that the named person has the right to acquire within 60 days
    under warrants or options are deemed to be outstanding for that person, but are not deemed to be outstanding when computing
    the percentage ownership of any other person. Based on 5,100,763 shares of common stock outstanding as of April 2, 2013.
|--- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(2) | Reflects 50,294 shares owned by The Mida’s Touch S.A.,
    a Marshall Islands corporation wholly owned by Mr. Varouxakis, 4,000 shares held directly by Mr. Ion Varouxakis
    and 1,027,358 shares owned by Free Bulkers S.A. Does not include 800 shares owned of record by V Estates S.A., which is controlled
    by his father, or 612 shares owned of record by his mother, as to which shares he disclaims beneficial ownership.                  



|B. | Related Party Transactions
|-- | --------------------------



Manager









All
vessels (except M/V Free Fighter, M/V Free Destiny, M/V Free Envoy and M/V Free
Lady, which were sold in April 2007, August 2010, May 2011 and November 2011, respectively) receive management services
from the Manager, pursuant to ship management agreements between each of the ship-owning companies and the Manager.



In June 2011, each
of the ship-owning subsidiaries entered into an amended and restated management agreement and the Company entered into a services
agreement with the Manager pursuant to which the monthly technical management fee increased from $16.5 to $18.975 and the monthly
services fee increased from $118.5 to $136.275, effective June 1, 2011. In addition, in connection with the relocation of
the Company’s offices in June 2011, the Company entered into an agreement with the Manager pursuant to which the Company
agreed to pay the Manager 65% of the rental due for the office space, commencing June 2011, and 65% of the apportioned common
expenses and maintenance expenses.



In addition, based
on the amended services agreement the Company reimbursed the Manager with the lump sum of $144 (equivalent of Euro 100) for the
expenses incurred in relation to the relocation of the Manager’s offices and early termination cost for previous lease agreement.
This compensation is included in “General and Administrative Expenses” in the accompanying consolidated statement
of operations.



65







Each of the Company’s
ship-owning subsidiaries pays, as per its management agreement with the Manager, 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 $0.4 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. During the year ended December 31, 2012, there were no vessel disposals. During
the year ended December 31, 2011, the Company paid the Manager $261 relating to the sale of the M/V Free Envoy and M/V
Free Lady (Note 5). In addition, the Company has incurred commission expenses relating to its commercial agreement with
the Manager amounting to $174, $371 and $728 for the years ended December 31, 2012, 2011 and 2010 respectively, included
in “Commissions” in the accompanying consolidated statements of operations.



The Company also pays,
as per its services agreement with the Manager, a monthly fee of $136.275, (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 December 31, 2012 would be approximately $89,020. In connection with
the shares to be issued to the Manager in payment of unpaid management and services fees, described below, the Manager has waived
its right to terminate the services agreement and receive such termination fee.



On April 23, 2012,
the Company’s Board of Directors approved the issuance of 166,069 shares of the Company's common stock to the Manager in
payment of the $926 in unpaid fees due to the Manager for the first quarter of 2012 under the management and services agreements
with the Company. The number of shares issued to the Manager was based on the closing prices of the Company's common stock on
the first day of each month during the quarter, which are the dates the management and services fees were due and payable. The
Board also approved the issuance of an aggregate of 19,964 shares of the Company's common stock to the non-executive members of
its Board of Directors in payment of $31 per person in unpaid Board fees for the last three quarters of 2011. The aggregate number
of shares issued to the directors was based on the closing prices of the Company's common stock on the last day of each of the
last three quarters of 2011, which are the dates that the Board fees were due and payable. On August 10, 2012, pursuant to the
above approval of the Company’s Board of Directors, the Company issued 166,069 shares of its common stock to the Manager
in payment of the $926 in unpaid fees due to the Manager for the first quarter of 2012 and 19,964 shares of its common stock to
its non-executive directors in payment of $155 in unpaid Board fees for the last three quarters of 2011. All of the foregoing
shares will be restricted shares under applicable U.S. securities laws.



On October 3, 2012,
the Company’s Board of Directors approved the issuance of 219,650 shares of the Company's common stock to the Manager in
payment of the $807 in unpaid fees due to the Manager for the third quarter of 2012 under the management and services agreements
with the Company. The number of shares issued to the Manager was based on the closing prices of the Company’s common stock
on the first day of each month during the quarter, which are the dates the management and services fees were due and payable.
The Board also approved the issuance of an aggregate of 32,679 shares of the Company’s common stock to the non-executive
members of its Board of Directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. The
aggregate number of shares issued to the directors was based on the closing prices of the Company's common stock on the last day
of each of the three quarters of 2012, which are the dates that the Board fees were due and payable. On October 11, 2012, pursuant
to the above approval of the Company’s Board of Directors, the Company issued 219,650 shares of its common stock to the
Manager in payment of the $807 in unpaid fees due to the Manager for the third quarter of 2012 and 32,679 shares of its common
stock to its non-executive directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012.
All of the foregoing shares will be restricted shares under applicable U.S. securities laws.



On January 18, 2013,
the Company’s’ Board of Directors approved the issuance of an additional 641,639 shares of the Company’s common
stock to the Manager in payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 under
the management and services agreements with the Company. The number of shares issued to the Manager was based on the closing prices
of the Company's common stock on the first day of each month, which are the dates the management and services fees were due and
payable. The Board also approved the issuance of an aggregate of 53,020 shares of the Company’s common stock to its non-executive
directors in payment of $48 in unpaid Board fees for the fourth quarter of 2012. The aggregate number of shares issued to the
directors was based on the closing price of the Company’s common stock on the last day of the fourth quarter of 2012, which
is the date that the Board fees were due and payable. On February 28, 2013, pursuant to the above approval of the Company’s
Board of Directors, the Company issued 641,639 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 41,909 shares of its common stock to its non-executive directors
in payment of $48 in unpaid Board fees for the fourth quarter of 2012. All of the foregoing shares will be restricted shares under
applicable U.S. securities laws.



66







Fees and expenses
charged by the Manager are included in the consolidated financial statements in “Management and other fees to a related
party,” “General and administrative expenses,” “Operating expenses,” “Gain on sale of vessel”,
“Vessel impairment loss”, “Advances for vessels under construction” and “Write-off of advances for
vessels under construction”. The total amounts charged for the year ended December 31, 2012, 2011 and 2010 amounted
to $4,560 ($2,404 of management fees, $1,985 of services fees, $134 of superintendent fees and $37 for other expenses), $4,451
($1,900 of management fees, $1,609 of services fees, $146 of superintendent fees, $144 for compensation of relocation expenses,
$179 for other expenses and $473 for management fees and supervision expenses for vessels under construction), and $3,826 ($1,978
of management fees, $1,439 of services fees, $178 of superintendent fees, $117 for other expenses and $114 for management fees
and supervision expenses for vessels under construction), respectively.



The “Management
and other fees to a related party” and the “General and administrative expenses” for the year ended December
31, 2012 include the net amount of $1,037 recognized as stock-based compensation expense (the amount of $1,442 recognized as stock-based
compensation expense netted by the amount of $405 recognized as gain) for the issuance of the aggregate 385,719 shares of the
Company's common stock to the Manager and the issuance of the aggregate 52,643 shares of the Company’s common stock to the
non-executive members of its Board of Directors. As well, the above mentioned stock-based compensation expense includes the compensation
recognized for the approved issuance (on January 18, 2013) of 355,890 additional common shares to the Manager in payment of $538
in unpaid fees due to the Manager for November and December 2012 and in payment of $48 in unpaid Board fees for the fourth quarter
of 2012.



On December 31,
2009, the Company’s Board of Directors awarded 25,500 restricted shares to its non-executive directors, executive officers
and certain of Manager’s employees. Of the remaining 12,000 unvested restricted shares, 7,000 vested on December 31,
2012 and 5,000 will vest on December 31, 2013 pursuant to the Company’s equity incentive plan. The cost of these shares
is amortized over their vesting period and is included in “General and administrative expenses” in the consolidated
statements of operations.



The balance due from
the Manager as of December 31, 2012 and December 31, 2011 was $346 and $563 respectively. The amount paid to the Manager
for office space during the year ended December 31, 2012, 2011 and 2010 was $143, $178 and $204, respectively and is included
in “General and administrative expenses” in the consolidated statements of operations.



First Business Bank (FBB)



The Company received
from FBB, in which the Company’s Chairman, Chief Executive Officer and President owns a minority interest, a loan of $27,750
in December 2009, to refinance its then existing loan balance of $21,750 with FBB and to receive additional liquidity of up to
$6,000 with a first priority mortgage over the M/V Free Impala and the M/V Free Neptune. The outstanding balance
of the loan as of December 31, 2012 was $23,237. Interest charged under the loan facility for the year ended December 31,
2012, 2011 and 2010 amounts to $1,115, $812 and $893, respectively, and is included in “Interest and finance costs”
in the consolidated statements of operations.



On
December 23, 2011 the Company agreed by letter with FBB to defer the repayment installment of $837.5 and the interest payment
of $197 both due on December 16, 2011 until the next repayment date March 16, 2012. In addition, the bank granted a
waiver to the security value covenant and the financial covenants and their testing has been waived until March 16,
2012. On March 23, 2012, the Company received a notice from FBB according to which failure to (i) pay the $1,675 repayment
installment due in March 2012 (ii) pay accrued interest and (iii) failure to pay default interest constitute an event
of default. On April 12, 2012, the Company received notice from FBB according to which along with the previously mentioned
events, failure to make periodic monthly installments into the retention account since September 2011 and violation of loan to
value covenant constitute events of default and notifies the Company that if remedy of all of the above is not made up to April 20,
2012, FBB will take whatever action is open to them. The Company has not either paid the installment of $837.5 which was due on
June 18, 2012 or the accrued interest. On July 11, August 22, November 28, December 19, 2012, and January 24, 2013 the Company
received notices from FBB, according to which failure to (i) pay the $4,188 repayment installment due in December 2012, (ii) pay
accrued interest and (iii) failure to pay default interest constitute an event of default. The Company is in discussions
to permanently amend the amortization schedule and reach an agreement on the unpaid principal and interest.



Other Related Parties



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 years ended December 31,
2012, 2011 and 2010, such ship-brokering firm charged the Company commissions of $43, $56 and $175, respectively, which are included
in “Commissions” in the consolidated statements of operations. The balance due to the ship-brokering firm as of December 31,
2012 and December 31, 2011 was $94 and $84, respectively.



67







|C. | Interest of Experts and Counsel
|-- | -------------------------------



Not required.



| | Item 8. | Financial
                                                                                                                                    Information
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Consolidated Statements and Other Financial Information.
|-- | --------------------------------------------------------



Please see “Item 18.
Financial Statements” for a list of the financial statements filed as part of this annual report.



|B. | Significant Changes
|-- | -------------------



Except as described
in this annual report, since the date of the annual financial statements included in this annual report, no significant changes
have occurred to our financial condition.



| | Item 9. | The
                                                                                                                                    Offer
                                                                                                                                    and
                                                                                                                                    Listing
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Offer and Listing Details
|-- | -------------------------



The closing high and
low sales prices of our common stock as reported by the NASDAQ Stock Market, for the years, quarters and months indicated, are
as follows (adjusted to give effect of our one share for five share reverse stock split that was effective on October 1, 2010
and our one share for ten share reverse split that was effective on February 14, 2013):



|                     |  | Common Stock |       
|-------------------- |  | ------------ | ------
|For the Years Ended: |  | High         |       
|December 31, 2008    |  | $            | 398.50
|December 31, 2009    |  |              | 174.50
|December 31, 2010    |  |              | 79.50 
|December 31, 2011    |  |              | 38.90 
|December 31, 2012    |  |              | 18.50 



|                        |  | Common Stock |      
|----------------------- |  | ------------ | -----
|For the Quarters Ended: |  | High         |      
|March 31, 2011          |  | $            | 38.90
|June 30, 2011           |  |              | 28.00
|September 30, 2011      |  |              | 22.70
|December 31, 2011       |  |              | 11.30
|March 31, 2012          |  |              | 9.30 
|June 30, 2012           |  |              | 18.50
|September 30, 2012      |  |              | 6.60 
|December 31, 2012       |  |              | 2.40 



|                      |  | Common Stock |     
|--------------------- |  | ------------ | ----
|For the Months Ended: |  | High         |     
|October 31, 2012      |  | $            | 2.40
|November 30, 2012     |  |              | 2.40
|December 31, 2012     |  |              | 1.70
|January 31, 2013      |  |              | 5.80
|February 28, 2013     |  |              | 3.22
|March 31, 2013        |  |              | 2.15



|B. | Plan of Distribution
|-- | --------------------



Not applicable.



|C. | Markets
|-- | -------



Our common stock began
trading on the NASDAQ Capital Market on February 26, 2013 under the trading symbol “FREE.” Prior to that time, our
common stock traded on the NASDAQ Global Market between November 8, 2007 and February 25, 2013 under the trading symbol “FREE.”
Prior to that time, our common stock was traded on the NASDAQ Capital Market under the symbol “FREE.”



68







|D. | Selling Shareholders
|-- | --------------------



Not required.



|E. | Dilution
|-- | --------



Not required.



|F. | Expenses of the Issue
|-- | ---------------------



Not required.



| | Item 10. | Additional
                                                                                                                                     Information
| | -------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------



|A. | Share Capital
|-- | -------------



Not required.



|B. | Memorandum and Articles of Association
|-- | --------------------------------------



The
information required herein was provided in the Registration Statement on Form F-1 (File No. 333-145203), the report
on Form 6-K dated October 22, 2009, both previously filed by us with the Securities and Exchange Commission and incorporated
herein by reference, and filed herewith as Exhibit 1.5.



One
million shares of our preferred stock have been designated Series A Participating Preferred Stock in connection with our
adoption of a shareholder rights plan as described below.



Shareholder Rights Plan



General



Each
share of our common stock includes a right that entitles the holder to purchase from us a unit consisting of one-thousandth of
a share of our Series A participating preferred stock at a purchase price of $90.00 per unit, subject to specified adjustments.
The rights are issued pursuant to a rights agreement between us and American Stock Transfer & Trust Company, LLC, as
rights agent. Until a right is exercised, the holder of a right will have no rights to vote or receive dividends or any other
shareholder rights.



The
rights may have anti-takeover effects. The rights will cause substantial dilution to any person or group that attempts to acquire
us without the approval of our board of directors. As a result, the overall effect of the rights may be to render more difficult
or discourage any attempt to acquire us. Because our board of directors can approve a redemption of the rights or a permitted
offer, the rights should not interfere with a merger or other business combination approved by our board of directors.



We
have summarized the material terms and conditions of the rights agreement and the rights below. For a complete description of
the rights, we encourage you to read the rights agreement, which we have filed as an exhibit to this annual report.



Detachment
of the Rights



The
rights are attached to all certificates representing our outstanding common stock and will attach to all common stock certificates
we issue prior to the rights distribution date that we describe below. The rights are not exercisable until after the rights distribution
date and will expire at the close of business on the tenth anniversary date of the adoption of the rights plan, unless we redeem
or exchange them earlier as described below. The rights will separate from the common stock and a rights distribution date will
occur, subject to specified exceptions, on the earlier of the following two dates:



| | • | 10 days
                                                                                                                           following
                                                                                                                           a public
                                                                                                                           announcement
                                                                                                                           that
                                                                                                                           a person
                                                                                                                           or
                                                                                                                           group
                                                                                                                           of
                                                                                                                           affiliated
                                                                                                                           or
                                                                                                                           associated
                                                                                                                           persons
                                                                                                                           or
                                                                                                                           an
                                                                                                                           “acquiring
                                                                                                                           person”
                                                                                                                           has
                                                                                                                           acquired
                                                                                                                           or
                                                                                                                           obtained
                                                                                                                           the
                                                                                                                           right
                                                                                                                           to
                                                                                                                           acquire
                                                                                                                           beneficial
                                                                                                                           ownership
                                                                                                                           of
                                                                                                                           15%
                                                                                                                           or
                                                                                                                           more
                                                                                                                           of
                                                                                                                           our
                                                                                                                           outstanding
                                                                                                                           common
                                                                                                                           stock;
                                                                                                                           or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



69







| | • | 10
                                                                                                                           business
                                                                                                                           days
                                                                                                                           following
                                                                                                                           the
                                                                                                                           start
                                                                                                                           of
                                                                                                                           a tender
                                                                                                                           or
                                                                                                                           exchange
                                                                                                                           offer
                                                                                                                           that
                                                                                                                           would
                                                                                                                           result,
                                                                                                                           if
                                                                                                                           closed,
                                                                                                                           in
                                                                                                                           a person
                                                                                                                           becoming
                                                                                                                           an
                                                                                                                           “acquiring
                                                                                                                           person.”
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Existing
shareholders and their affiliates are excluded from the definition of “acquiring person” for purposes of the rights,
and therefore their ownership or future share acquisitions cannot trigger the rights. Specified “inadvertent” owners
that would otherwise become an acquiring person, including those who would have this designation as a result of repurchases of
common stock by us, will not become acquiring persons as a result of those transactions.



Our
board of directors may defer the rights distribution date in some circumstances, and some inadvertent acquisitions will not result
in a person becoming an acquiring person if the person promptly divests itself of a sufficient number of shares of common stock.



Until
the rights distribution date:



| | • | our
                                                                                                                           common
                                                                                                                           stock
                                                                                                                           certificates
                                                                                                                           will
                                                                                                                           evidence
                                                                                                                           the
                                                                                                                           rights,
                                                                                                                           and
                                                                                                                           the
                                                                                                                           rights
                                                                                                                           will
                                                                                                                           be
                                                                                                                           transferable
                                                                                                                           only
                                                                                                                           with
                                                                                                                           those
                                                                                                                           certificates;
                                                                                                                           and
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | any
                                                                                                                           new
                                                                                                                           shares
                                                                                                                           of
                                                                                                                           common
                                                                                                                           stock
                                                                                                                           will
                                                                                                                           be
                                                                                                                           issued
                                                                                                                           with
                                                                                                                           rights
                                                                                                                           and
                                                                                                                           new
                                                                                                                           certificates
                                                                                                                           will
                                                                                                                           contain
                                                                                                                           a notation
                                                                                                                           incorporating
                                                                                                                           the
                                                                                                                           rights
                                                                                                                           agreement
                                                                                                                           by
                                                                                                                           reference.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As
soon as practicable after the rights distribution date, the rights agent will mail certificates representing the rights to holders
of record of common stock at the close of business on that date. After the rights distribution date, only separate rights certificates
will represent the rights.



We
will not issue rights with any shares of common stock we issue after the rights distribution date, except as our board of directors
may otherwise determine.



Flip-In Event



A
“flip-in event” will occur under the rights agreement when a person becomes an acquiring person. If a flip-in event
occurs and we do not redeem the rights as described under the heading “—Redemption of Rights” below, each right,
other than any right that has become void, as described below, will become exercisable at the time it is no longer redeemable
for the number of shares of common stock, or, in some cases, cash, property or other of our securities, having a current market
price equal to two times the exercise price of such right.



If
a flip-in event occurs, all rights that then are, or in some circumstances that were, beneficially owned by or transferred to
an acquiring person or specified related parties will become void in the circumstances the rights agreement specifies.



Flip-Over
Event



A
“flip-over event” will occur under the rights agreement when, at any time after a person has become an acquiring person:



| | • | we
                                                                                                                           are
                                                                                                                           acquired
                                                                                                                           in
                                                                                                                           a merger
                                                                                                                           or
                                                                                                                           other
                                                                                                                           business
                                                                                                                           combination
                                                                                                                           transaction;
                                                                                                                           or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | 50%
                                                                                                                           or
                                                                                                                           more
                                                                                                                           of
                                                                                                                           our
                                                                                                                           assets,
                                                                                                                           cash
                                                                                                                           flows
                                                                                                                           or
                                                                                                                           earning
                                                                                                                           power
                                                                                                                           is
                                                                                                                           sold
                                                                                                                           or
                                                                                                                           transferred.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If
a flip-over event occurs, each holder of a right, other than any right that has become void as we describe under the heading “—Flip-In
Event” above, will have the right to receive the number of shares of common stock of the acquiring company having a current
market price equal to two times the exercise price of such right.



Antidilution



The
number of outstanding rights associated with our common stock is subject to adjustment for any stock split, stock dividend or
subdivision, combination or reclassification of our common stock occurring prior to the rights distribution date. With some exceptions,
the rights agreement does not require us to adjust the exercise price of the rights until cumulative adjustments amount to at
least 1% of the exercise price. It also does not require us to issue fractional shares of our preferred stock that are not integral
multiples of one one-hundredth of a share, and, instead we may make a cash adjustment based on the market price of the common
stock on the last trading date prior to the date of exercise. The rights agreement reserves us the right to require, prior to
the occurrence of any flip-in event or flip-over event that, on any exercise of rights, that a number of rights must be exercised
so that we will issue only whole shares of stock.



70







Redemption
of Rights



At
any time until 10 days after the date on which the occurrence of a flip-in event is first publicly announced, we may redeem
the rights in whole, but not in part, at a redemption price of $0.01 per right. The redemption price is subject to adjustment
for any stock split, stock dividend or similar transaction occurring before the date of redemption. At our option, we may pay
that redemption price in cash, shares of common stock or any other consideration our board of directors may select. The rights
are not exercisable after a flip-in event until they are no longer redeemable. If our board of directors timely orders the redemption
of the rights, the rights will terminate on the effectiveness of that action.



Exchange of
Rights



We
may, at our option, exchange the rights (other than rights owned by an acquiring person or an affiliate or an associate of an
acquiring person, which have become void), in whole or in part. The exchange must be at an exchange ratio of one share of common
stock per right, subject to specified adjustments at any time after the occurrence of a flip-in event and prior to:



| | • | any
                                                                                                                           person
                                                                                                                           other
                                                                                                                           than
                                                                                                                           our
                                                                                                                           existing
                                                                                                                           shareholders
                                                                                                                           becoming
                                                                                                                           the
                                                                                                                           beneficial
                                                                                                                           owner
                                                                                                                           of
                                                                                                                           common
                                                                                                                           stock
                                                                                                                           with
                                                                                                                           voting
                                                                                                                           power
                                                                                                                           equal
                                                                                                                           to
                                                                                                                           50%
                                                                                                                           or
                                                                                                                           more
                                                                                                                           of
                                                                                                                           the
                                                                                                                           total
                                                                                                                           voting
                                                                                                                           power
                                                                                                                           of
                                                                                                                           all
                                                                                                                           shares
                                                                                                                           of
                                                                                                                           common
                                                                                                                           stock
                                                                                                                           entitled
                                                                                                                           to
                                                                                                                           vote
                                                                                                                           in
                                                                                                                           the
                                                                                                                           election
                                                                                                                           of
                                                                                                                           directors;
                                                                                                                           or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | the
                                                                                                                           occurrence
                                                                                                                           of
                                                                                                                           a flip-over
                                                                                                                           event.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Amendment
of Terms of Rights



While
the rights are outstanding, we may amend the provisions of the rights agreement only as follows:



| | • | to
                                                                                                                           cure
                                                                                                                           any
                                                                                                                           ambiguity,
                                                                                                                           omission,
                                                                                                                           defect
                                                                                                                           or
                                                                                                                           inconsistency;
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | to
                                                                                                                           make
                                                                                                                           changes
                                                                                                                           that
                                                                                                                           do
                                                                                                                           not
                                                                                                                           adversely
                                                                                                                           affect
                                                                                                                           the
                                                                                                                           interests
                                                                                                                           of
                                                                                                                           holders
                                                                                                                           of
                                                                                                                           rights,
                                                                                                                           excluding
                                                                                                                           the
                                                                                                                           interests
                                                                                                                           of
                                                                                                                           any
                                                                                                                           acquiring
                                                                                                                           person;
                                                                                                                           or
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | to
                                                                                                                           shorten
                                                                                                                           or
                                                                                                                           lengthen
                                                                                                                           any
                                                                                                                           time
                                                                                                                           period
                                                                                                                           under
                                                                                                                           the
                                                                                                                           rights
                                                                                                                           agreement,
                                                                                                                           except
                                                                                                                           that
                                                                                                                           we
                                                                                                                           cannot
                                                                                                                           change
                                                                                                                           the
                                                                                                                           time
                                                                                                                           period
                                                                                                                           when
                                                                                                                           rights
                                                                                                                           may
                                                                                                                           be
                                                                                                                           redeemed
                                                                                                                           or
                                                                                                                           lengthen
                                                                                                                           any
                                                                                                                           time
                                                                                                                           period,
                                                                                                                           unless
                                                                                                                           such
                                                                                                                           lengthening
                                                                                                                           protects,
                                                                                                                           enhances
                                                                                                                           or
                                                                                                                           clarifies
                                                                                                                           the
                                                                                                                           benefits
                                                                                                                           of
                                                                                                                           holders
                                                                                                                           of
                                                                                                                           rights
                                                                                                                           other
                                                                                                                           than
                                                                                                                           an
                                                                                                                           acquiring
                                                                                                                           person.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



At
any time when no rights are outstanding, we may amend any of the provisions of the rights agreement, other than decreasing the
redemption price.



|C. | Material Contracts
|-- | ------------------



The following is a
summary of the agreements considered material to the Company and should be read together with the full text of such agreements.



| | · | On
                                                                                                             May 31, 2012, the
                                                                                                             Company entered into
                                                                                                             a Sixth Supplemental
                                                                                                             Agreement with Credit
                                                                                                             Suisse, which amends
                                                                                                             and restates the
                                                                                                             Facility Agreement
                                                                                                             dated December 24,2007,
                                                                                                             as amended, between
                                                                                                             the Company and Credit
                                                                                                             Suisse. See "Management’s
                                                                                                             Discussion and Analysis
                                                                                                             of Financial Condition
                                                                                                             and Results of Operations
                                                                                                             — Long Term
                                                                                                             Debt".
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                             September 7, 2012,
                                                                                                             the Company and certain
                                                                                                             of its subsidiaries
                                                                                                             entered into an amended
                                                                                                             and restated facility
                                                                                                             agreement with Deutsche
                                                                                                             Bank. See "Management’s
                                                                                                             Discussion and Analysis
                                                                                                             of Financial Condition
                                                                                                             and Results of Operations
                                                                                                             — Long Term
                                                                                                             Debt".
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



|D. | Exchange Controls.
|-- | ------------------



Under Marshall Islands
law, there are currently no restrictions on the export or import of capital, including foreign exchange controls or restrictions
that affect the remittance of dividends, interest or other payments to non-resident holders of our shares.



71







|E. | Taxation.
|-- | ---------



The
following is a discussion of the material Marshall Islands and United States federal income tax consequences relevant to a U.S.
Holder, as defined below, of our common stock. This discussion does not purport to deal with the tax consequences of owning common
stock to all categories of investors, some of which, such as dealers in securities, investors whose functional currency is not
the United States dollar, and investors that own, actually or under applicable constructive ownership rules, 10% or more of the
voting power of our stock, may be subject to special rules. This discussion deals only with U.S. Holders that hold the common
stock as a capital asset. You are encouraged to consult your own tax advisors concerning the overall tax consequences arising
in your own particular situation under United States federal, state, local or foreign law of the ownership of common stock.
The discussion is not intended, and should not be construed, as legal or professional tax advice and does not exhaust all possible
tax considerations.



Marshall Islands Tax Consequences



We are incorporated
in the Marshall Islands. Under current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall
Islands withholding tax will be imposed upon payments of dividends by us to our stockholders provided such stockholders are not
residents of the Marshall Islands. Holders of our common stock who are not residents of, domiciled in, or carrying on any commercial
activity in the Marshall Islands will not be subject to Marshall Islands tax on the sale or other disposition of our common stock.



United States Federal Income Tax Consequences



The following are
the material United States federal income tax consequences to us of our activities and to U.S. Holders and Non-U.S. Holders, each
as defined below, of the ownership and disposition of our common stock. The following discussion of United States federal income
tax matters is based on the United States Internal Revenue Code of 1986, as amended, or the Code, judicial decisions, administrative
pronouncements, and existing and proposed regulations issued by the United States Department of the Treasury, all of which are
subject to change, possibly with retroactive effect. This discussion below is based, in part, upon Treasury Regulations promulgated
under Section 883 of the Code, and in part, on the description of our business as described in “About Our Company”
above and assumes that we conduct our business as described in that section.



TO ENSURE COMPLIANCE
WITH TREASURY DEPARTMENT CIRCULAR 230, HOLDERS OF OUR COMMON STOCK ARE HEREBY NOTIFIED THAT: (A) ANY DISCUSSION OF FEDERAL
TAX ISSUES IN THIS ANNUAL REPORT IS NOT INTENDED OR WRITTEN TO BE RELIED UPON, AND CANNOT BE RELIED UPON, BY HOLDERS FOR THE PURPOSE
OF AVOIDING PENALTIES THAT MAY BE IMPOSED ON HOLDERS UNDER THE INTERNAL REVENUE CODE; (B) SUCH DISCUSSION IS BEING USED IN
CONNECTION WITH THE PROMOTION OR MARKETING (WITHIN THE MEANING OF CIRCULAR 230) BY THE ISSUERS OF THE TRANSACTIONS OR MATTERS
ADDRESSED HEREIN; AND (C) HOLDERS SHOULD SEEK ADVICE BASED ON THEIR PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.



Taxation of Operating Income: In General



Unless exempt from
United States federal income taxation under the rules discussed below, a foreign corporation is subject to United States federal
income taxation in respect of any income that is derived from the use of vessels, from the hiring or leasing of vessels for use
on a time, voyage or bareboat charter basis, from the participation in a shipping pool, partnership, strategic alliance, joint
operating agreement, code sharing arrangements or other joint venture it directly or indirectly owns or participates in that generates
such income, or from the performance of services directly related to those uses, which we refer to as “shipping income,”
to the extent that the shipping income is derived from sources within the United States. For these purposes, 50% of shipping income
that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States, exclusive
of certain U.S. territories and possessions, constitutes income from sources within the United States, which we refer to as “U.S.-Source
Gross Transportation Income” or “USSGTI.”



Shipping income attributable
to transportation that both begins and ends in the United States is considered to be 100% from sources within the United States.
U.S. law prohibits us from engaging in transportation that produces income considered to be 100% from sources within the United
States.



Shipping income attributable
to transportation exclusively between non-U.S. ports will be considered to be 100% derived from sources outside the United States.
Shipping income derived from sources outside the United States will not be subject to any United States federal income tax.



In the absence of
exemption from tax under Section 883, our USSGTI would be subject to a 4% tax imposed without allowance for deductions as
described below.



| | · | we
                                                                                                               are organized in
                                                                                                               a foreign country
                                                                                                               (our “country
                                                                                                               of organization”)
                                                                                                               that grants an
                                                                                                               “equivalent
                                                                                                               exemption”
                                                                                                               to corporations
                                                                                                               organized in the
                                                                                                               United States;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



72







| | · | we
                                                                                                               satisfy one of
                                                                                                               the following ownership
                                                                                                               tests (discussed
                                                                                                               in more detail
                                                                                                               below): (1) more
                                                                                                               than 50% of the
                                                                                                               value of our stock
                                                                                                               is owned, directly
                                                                                                               or indirectly,
                                                                                                               by “qualified
                                                                                                               shareholders,”
                                                                                                               which includes
                                                                                                               persons (i) who
                                                                                                               are “residents”
                                                                                                               of our country
                                                                                                               of organization
                                                                                                               or of another foreign
                                                                                                               country that grants
                                                                                                               an “equivalent
                                                                                                               exemption”
                                                                                                               to corporations
                                                                                                               organized in the
                                                                                                               United States,
                                                                                                               and (ii) who
                                                                                                               comply with certain
                                                                                                               documentation requirements,
                                                                                                               which we refer
                                                                                                               to as the “Qualified
                                                                                                               Shareholder Ownership
                                                                                                               Test,” or
                                                                                                               (2) our stock
                                                                                                               is primarily and
                                                                                                               regularly traded
                                                                                                               on one or more
                                                                                                               established securities
                                                                                                               markets in our
                                                                                                               country of organization,
                                                                                                               in another country
                                                                                                               that grants an
                                                                                                               “equivalent
                                                                                                               exemption”
                                                                                                               to United States
                                                                                                               corporations, or
                                                                                                               in the United States,
                                                                                                               which we refer
                                                                                                               to as the “Publicly-Traded
                                                                                                               Test;” and
                                                                                                               we are not considered
                                                                                                               “closely
                                                                                                               held,” which
                                                                                                               we refer to as
                                                                                                               the “Closely-Held
                                                                                                               Test;” and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | we
                                                                                                               meet certain substantiation,
                                                                                                               reporting and other
                                                                                                               requirements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Exemption of Operating Income from
United States Federal Income Taxation



Under Section 883
of the Code, we will be exempt from United States federal income taxation on our U.S.-source shipping income if:



The Republic of the
Marshall Islands, the jurisdiction where we and our shipowning subsidiaries are incorporated, grants “equivalent exemptions”
to United States corporations. Therefore, we should meet the first requirement for the Section 883 exemption. Additionally,
we intend to comply with the substantiation, reporting and other requirements that are applicable under Section 883 of the
Code. As a result, qualification for the Section 883 exemption will turn primarily on our ability to satisfy the second requirement
enumerated above.



Since the 2007 tax
year, we have claimed the benefits of the Section 883 tax exemption for our ship-owning subsidiaries on the basis of the
Publicly-Traded Test. For 2012 and subsequent tax years, we anticipate that we will need to satisfy the Publicly-Traded Test in
order to qualify for benefits under Section 883. While we expect to satisfy the Publicly-Traded Test for such years, there
can be no assurance in this regard. Our ability to satisfy the Publicly-Traded Test is discussed below.



The regulations provide,
in pertinent part, that the stock of a foreign corporation will be considered to be “primarily traded” on an established
securities market in a country if the number of shares of each class of stock that are traded during the tax year on all established
securities markets in that country exceeds the number of shares in each such class that are traded during that year on established
securities markets in any other single country. Our common stock, our sole class of our issued and outstanding stock, is “primarily
traded” on the NASDAQ Capital Market.



Under the regulations,
our stock will be considered to be “regularly traded” if one or more classes of our stock representing 50% or more
of our outstanding shares, by total combined voting power of all classes of stock entitled to vote and by total combined value
of all classes of stock, are listed on one or more established securities markets, which we refer to as the “listing threshold.”
Our common stock, our sole class of issued and outstanding stock, is listed on the NASDAQ Capital Market, and accordingly, we
will satisfy this listing requirement.



The regulations further
require that with respect to each class of stock relied upon to meet the listing requirement: (i) such class of the stock
is traded on the market, other than in minimal quantities, on at least 60 days during the tax year or 1/6 of the days in
a short tax year; and (ii) the aggregate number of shares of such class of stock traded on such market is at least 10% of
the average number of shares of such class of stock outstanding during such year or as appropriately adjusted in the case of a
short tax year. We believe we will satisfy the trading frequency and trading volume tests. Even if this were not the case, the
regulations provide that the trading frequency and trading volume tests will be deemed satisfied by a class of stock if, as we
expect to be the case with our common stock, such class of stock is traded on an established market in the United States, and
such class of stock is regularly quoted by dealers making a market in such stock. While we anticipate that we will satisfy the
trading frequency and trading volume tests, satisfaction of these requirements is outside of our control and hence, no assurances
can be provided that we will satisfy the Publicly-Traded Test each year.



In addition, even
if the “primarily traded” and “regularly traded” portions of the Publicly-Traded Test described above
are satisfied, the Closely-Held Test provides, in pertinent part, that a class of stock will not be considered to be “regularly
traded” on an established securities market for any tax year in which 50% or more of the vote and value of the outstanding
shares of such class of stock are owned, actually or constructively under specified stock attribution rules, on more than half
the days during the tax year by persons who each own directly or indirectly 5% or more of the vote and value of such class of
stock, who we refer to as “5% Shareholders.” For purposes of being able to determine our 5% Shareholders under the
Closely-Held Test, the regulations permit us to rely on Schedule 13G and Schedule 13D filings with the Securities and Exchange
Commission. The regulations further provide that an investment company that is registered under the Investment Company Act of
1940, as amended, will not be treated as a 5% Shareholder for purposes of the Closely-Held Test.



73







In the event the Closely-Held
Test is triggered, the regulations provide that the Closely-Held Test will nevertheless not apply if we can establish that among
the closely-held group of 5% Shareholders, sufficient shares are owned by our 5% Shareholders that are considered to be “qualified
shareholders,” to preclude non-qualified 5% Shareholders in the closely-held group from owning 50% or more of the value
of such class of stock for more than half of the days during the tax year, which we refer to as the exception to the Closely-Held
Test. Establishing such qualification and ownership by our direct and indirect 5% Shareholders will depend on their meeting the
requirements of one of the qualified shareholder tests set out under the regulations applicable to 5% Shareholders and compliance
with certain ownership certification procedures by each intermediary or other person in the chain of ownership between us and
such qualified 5% Shareholders. Further, the regulations require, and we must certify, that no person in the chain of qualified
ownership of shares relied on by us to qualify for exemption holds those shares in bearer form.



The ability to avoid
application of the Closely-Held Test will be outside our control, and, as a result, there can be no assurance regarding whether
we will satisfy the Publicly Traded Test for any year. For this and other reasons, there can be no assurance that we or any of
our subsidiaries will qualify for the benefits of Section 883 of the Code for any year.



Taxation in Absence of Exemption



To the extent the
benefits of Section 883 are unavailable, our USSGTI, to the extent not considered to be “effectively connected”
with the conduct of a U.S. trade or business, as described below, would be subject to a 4% tax imposed by Section 887 of
the Code on a gross basis, without the benefit of deductions, otherwise referred to as the “4% Tax.” Since under the
sourcing rules described above, no more than 50% of our shipping income would be treated as being derived from U.S. sources, the
maximum effective rate of U.S. federal income tax on our shipping income would never exceed 2% under the 4% gross basis tax regime.



To the extent the
benefits of the Section 883 exemption are unavailable, and our USSGTI is considered to be “effectively connected”
with the conduct of a U.S. trade or business, as described below, any such “effectively connected” U.S.-source shipping
income, net of applicable deductions, would be subject to the U.S. federal corporate income tax currently imposed at rates of
up to 35%. In addition, we may be subject to the 30% “branch profits” taxes on earnings effectively connected with
the conduct of such trade or business, as determined after allowance for certain adjustments, and on certain interest paid or
deemed paid attributable to the conduct of its U.S. trade or business.



Our U.S.-source shipping
income would be considered “effectively connected” with the conduct of a U.S. trade or business only if:



| | · | We
                                                                                                               have, or are considered
                                                                                                               to have, a fixed
                                                                                                               place of business
                                                                                                               in the United States
                                                                                                               involved in the
                                                                                                               earning of shipping
                                                                                                               income; and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | substantially
                                                                                                               all of our U.S.-source
                                                                                                               shipping income
                                                                                                               is attributable
                                                                                                               to regularly scheduled
                                                                                                               transportation,
                                                                                                               such as the operation
                                                                                                               of a vessel that
                                                                                                               follows a published
                                                                                                               schedule with repeated
                                                                                                               sailings at regular
                                                                                                               intervals between
                                                                                                               the same points
                                                                                                               for voyages that
                                                                                                               begin or end in
                                                                                                               the United States.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



We do not intend to
have, or permit circumstances that would result in having any vessel operating to the United States on a regularly scheduled basis.
Based on the foregoing and on the expected mode of our shipping operations and other activities, we believe that none of our U.S.-source
shipping income will be “effectively connected” with the conduct of a U.S. trade or business.



United States Taxation of Gain on Sale
of Vessels



If we qualify for
the Section 883 exemption, then gain from the sale of any vessel may be exempt from tax under Section 883. Even if such
gain is not exempt from tax under Section 883, we will not be subject to United States federal income taxation with respect
to gain realized on a sale of a vessel, assuming that we are not, and have never been, engaged in a U.S. trade or business. Under
certain circumstances, if we are so engaged, gain on the sale of vessels could be subject to U.S. federal income tax.



United States Federal Income Taxation
of U.S. Holders



As used herein, the
term “U.S. Holder” means a beneficial owner of common stock that is a United States citizen or resident, United States
corporation or other United States entity taxable as a corporation, an estate the income of which is subject to United States
federal income taxation regardless of its source, or a trust if a court within the United States is able to exercise primary jurisdiction
over the administration of the trust and one or more United States persons have the authority to control all substantial decisions
of the trust.



74







If a partnership holds
our common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities
of the partnership. If you are a partner in a partnership holding our common stock, you are encouraged to consult your tax advisor.



Distributions. Subject
to the discussion of passive foreign investment companies (or “PFICs”) below, any distributions made by us with respect
to our common stock will generally be taxable as dividend income to the extent of our current or accumulated earnings and profits,
as determined under United States federal income tax principles. Distributions in excess of our earnings and profits will be treated
first as a nontaxable return of capital to the extent of the U.S. Holder’s tax basis in his or her common stock on a dollar-for-dollar
basis and thereafter as capital gain. Because we are not a United States corporation, U.S. Holders that are corporations will
not be entitled to claim a dividends received deduction with respect to any distributions they receive from us. Dividends paid
with respect to our common stock will generally be treated as passive category income or, in the case of certain types of U.S.
Holders, general category income for purposes of computing allowable foreign tax credits for United States foreign tax credit
purposes.



For tax years beginning
before January 1, 2013, dividends paid on our common stock to a U.S. Holder who is an individual, trust or estate, which
we refer to as a “U.S. Individual Holder,” will generally be treated as “qualified dividend income” that
is taxable to such a U.S. Individual Holder at preferential tax rates provided that (1) we are not a passive foreign investment
company for the tax year during which the dividend is paid or the immediately preceding tax year (which we do not believe we are,
have been or will be), (2) our common stock is readily tradable on an established securities market in the United States
(such as the NASDAQ Capital Market), and (3) the U.S. Individual Holder has owned the common stock for more than 60 days
in the 121-day period beginning 60 days before the date on which the common stock becomes ex-dividend. There is no assurance
that any dividends paid on our common stock will be eligible for these preferential rates in the hands of a U.S. Individual Holder.
Any distributions treated as dividends paid by us that are not eligible for these preferential rates will be taxed as ordinary
income to a U.S. Individual Holder.



Special rules may
apply to any “extraordinary dividend” generally, a dividend in an amount which is equal to or exceeds ten percent
of a stockholder’s adjusted basis (or fair market value in certain circumstances) in a share of our stock paid by us. If
we pay an “extraordinary dividend” on our stock that is treated as “qualified dividend income,” then any
loss derived by a U.S. Individual Holder from the sale or exchange of such stock will be treated as long-term capital loss to
the extent of such dividend.



Sale, Exchange
or Other Disposition of Common Stock. Assuming we do not constitute a passive foreign investment company for any tax
year, a U.S. Holder generally will recognize taxable gain or loss upon a sale, exchange or other disposition of our common stock
in an amount equal to the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition
and the U.S. Holder’s tax basis in such stock. Such gain or loss will be treated as long-term capital gain or loss if the
U.S. Holder’s holding period is greater than one year at the time of the sale, exchange or other disposition. Such capital
gain or loss will generally be treated as U.S.-source income or loss, as applicable, for U.S. foreign tax credit purposes. A U.S.
Holder’s ability to deduct capital losses is subject to certain limitations.



Passive Foreign
Investment Company Status and Significant Tax Consequences. Special United States federal income tax rules apply to a
U.S. Holder that holds stock in a foreign corporation classified as a passive foreign investment company for United States federal
income tax purposes. In general, we will be treated as a passive foreign investment company with respect to a U.S. Holder if,
for any tax year in which such holder held our common stock, either:



| | · | at
                                                                                                               least 75% of our
                                                                                                               gross income for
                                                                                                               such tax year consists
                                                                                                               of passive income
                                                                                                               (e.g., dividends,
                                                                                                               interest, capital
                                                                                                               gains and rents
                                                                                                               derived other than
                                                                                                               in the active conduct
                                                                                                               of a rental business);
                                                                                                               or
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | at
                                                                                                               least 50% of the
                                                                                                               average value of
                                                                                                               the assets held
                                                                                                               by the corporation
                                                                                                               during such tax
                                                                                                               year produce, or
                                                                                                               are held for the
                                                                                                               production of,
                                                                                                               passive income.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



For purposes of determining
whether we are a passive foreign investment company, we will be treated as earning and owning our proportionate share of the income
and assets, respectively, of any of our subsidiary corporations in which we own at least 25% of the value of the subsidiary’s
stock. Income earned, or deemed earned, by us in connection with the performance of services would not constitute passive income.
By contrast, rental income would generally constitute “passive income” unless we were treated under specific rules
as deriving our rental income in the active conduct of a U.S. trade or business. We may own, directly or indirectly, interests
in other entities that are passive foreign investment companies, or subsidiary PFICs. If we are a passive foreign investment company,
each U.S. Holder will be treated as owning its pro rata share by value of the stock of any such subsidiary PFICs.



75







Based on our current
operations and future projections, we do not believe that we are, nor do we expect to become, a passive foreign investment company
with respect to any tax year. Although we are not relying upon an opinion of counsel on this issue, our belief is based principally
on the position that, for purposes of determining whether we are a passive foreign investment company, the gross income we derive
or are deemed to derive from the time chartering and voyage chartering activities of our wholly owned subsidiaries should constitute
services income, rather than rental income. Correspondingly, such income should not constitute passive income, and the assets
that we or our wholly-owned subsidiaries own and operate in connection with the production of such income, in particular, the
vessels, should not constitute passive assets for purposes of determining whether we are a passive foreign investment company.
Internal Revenue Service pronouncements concerning the characterization of income derived from time charters and voyage charters
as services income for other tax purposes support this position. However, a recent case reviewing the deductibility of commissions
by a foreign sales corporation decided that time charter income constituted rental income under the law. While the IRS asserted
in such case that the time charter income should be considered services income, in the absence of any legal authority specifically
relating to the statutory provisions governing PFICs and time charter income, the IRS or a court could disagree with our position.
In addition, although we intend to conduct our affairs in a manner to avoid being classified as a PFIC with respect to any tax
year, we cannot assure you that the nature of our operations will not change in the future.



If we are determined
to be a PFIC for any tax year (or portion thereof) that is included in the holding period of a U.S. Holder of our common stock,
and the U.S. Holder did not make a timely qualified electing fund (“QEF”) election for our first tax year as a PFIC
in which the U.S. Holder held (or was deemed to hold) common stock, as described below, such holder generally will be subject
to special rules with respect to:



| | · | any
                                                                                                               gain recognized
                                                                                                               by the U.S. Holder
                                                                                                               on the sale or
                                                                                                               other disposition
                                                                                                               of its common stock;
                                                                                                               and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | any
                                                                                                               “excess distribution”
                                                                                                               made to the U.S.
                                                                                                               Holder (generally,
                                                                                                               any distributions
                                                                                                               to such U.S. Holder
                                                                                                               during a tax year
                                                                                                               of the U.S. Holder
                                                                                                               that are greater
                                                                                                               than 125% of the
                                                                                                               average annual
                                                                                                               distributions received
                                                                                                               by such U.S. Holder
                                                                                                               in respect of the
                                                                                                               common stock during
                                                                                                               the three preceding
                                                                                                               tax years of such
                                                                                                               U.S. Holder or,
                                                                                                               if shorter, such
                                                                                                               U.S. Holder’s
                                                                                                               holding period
                                                                                                               for the common
                                                                                                               stock).
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Under these rules,



| | · | the
                                                                                                               U.S. Holder’s
                                                                                                               gain or excess
                                                                                                               distribution will
                                                                                                               be allocated ratably
                                                                                                               over the U.S. Holder’s
                                                                                                               holding period
                                                                                                               for the common
                                                                                                               stock;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the
                                                                                                               amount allocated
                                                                                                               to the U.S. Holder’s
                                                                                                               current tax year
                                                                                                               and any tax years
                                                                                                               in the U.S. Holder’s
                                                                                                               holding period
                                                                                                               before the first
                                                                                                               day of our first
                                                                                                               tax year in which
                                                                                                               we are a PFIC,
                                                                                                               will be taxable
                                                                                                               as ordinary income;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the
                                                                                                               amount allocated
                                                                                                               to other tax years
                                                                                                               (or portions thereof)
                                                                                                               of the U.S. Holder
                                                                                                               and included in
                                                                                                               its holding period
                                                                                                               will be taxed at
                                                                                                               the highest tax
                                                                                                               rate in effect
                                                                                                               for that year and
                                                                                                               applicable to the
                                                                                                               U.S. Holder; and
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | the
                                                                                                               interest charge
                                                                                                               generally applicable
                                                                                                               to underpayments
                                                                                                               of tax will be
                                                                                                               imposed in respect
                                                                                                               of the tax attributable
                                                                                                               to each such other
                                                                                                               tax year of the
                                                                                                               U.S. Holder.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In general, if we
are determined to be a PFIC, a U.S. Holder will avoid the PFIC tax consequences described above in respect to our common stock
by making a timely QEF election to include in income its pro rata share of our net capital gains (as long-term capital gain) and
other earnings and profits (as ordinary income), on a current basis, in each case whether or not distributed, in the tax year
of the U.S. Holder in which or with which our tax year ends. A U.S. Holder may make a separate election to defer the payment of
taxes on undistributed income inclusions under the QEF rules, but if deferred, any such taxes will be subject to an interest charge.



Although a determination
as to our PFIC status will be made annually, an initial determination that our company is a PFIC will generally apply for subsequent
years to a U.S. Holder who held our common stock while we were a PFIC, whether or not we meet the test for PFIC status in those
subsequent years. A U.S. Holder who makes the QEF election discussed above for our first tax year as a PFIC in which the U.S.
Holder owns (or is deemed to own) our common stock, however, will not be subject to the PFIC tax and interest charge rules discussed
above in respect to such shares. In addition, such U.S. Holder will not be subject to the QEF inclusion regime with respect to
such shares for any tax year of ours that ends within or with a tax year of the U.S. Holder and in which we are not a PFIC. On
the other hand, if the QEF election is not effective for each of our tax years in which we are a PFIC, and the U.S. Holder owns
(or is deemed to hold) our common stock, the PFIC rules discussed below will continue to apply to such shares unless the holder
makes a purging election, as described below, and pays the tax and interest charge with respect to the gain inherent in such shares
attributable to the pre-QEF election period.



If a U.S. Holder has
made a QEF election with respect to our common stock, and the special tax and interest charge rules do not apply to such shares
(because of a timely QEF election for our first tax year as a PFIC in which the U.S. Holder owns (or is deemed to own) such shares
or a purge of the PFIC taint pursuant to a purging election, as described below), any gain recognized on the sale of our common
stock generally will be taxable as capital gain, and no interest charge will be imposed. As discussed above, U.S. Holders of a
QEF are currently taxed on their pro rata shares of its earnings and profits, whether or not distributed. In such case, a subsequent
distribution of such earnings and profits that were previously included in income generally should not be taxable as a dividend
to such U.S. Holders. The tax basis of a U.S. Holder’s shares in a QEF will be increased by amounts that are included in
income, and decreased by amounts distributed but not taxed as dividends, under the above rules. Similar basis adjustments apply
to property if by reason of holding such property the U.S. Holder is treated under the applicable attribution rules as owning
shares in a QEF.



76







The QEF election is
made on a shareholder-by-shareholder basis and, once made, can be revoked only with the consent of the IRS. A U.S. Holder generally
makes a QEF election by attaching a completed IRS Form 8621 (Return by a Shareholder of a Passive Foreign investment Company or
Qualified Electing Fund), including the information provided in a PFIC annual information statement, to a timely filed U.S. federal
income tax return for the tax year to which the election relates. Retroactive QEF elections generally may be made only by filing
a protective statement with such return and if certain other conditions are met or with the consent of the IRS. U.S. Holders should
consult with their tax advisors regarding the availability and tax consequences of a retroactive QEF election under their particular
circumstances. In order to comply with the requirements of a QEF election, a U.S. Holder must receive a PFIC annual information
statement from us. If we determine we are a PFIC for any tax year, we will endeavor to provide to a U.S. Holder such information
as the IRS may require, including a PFIC annual information statement, in order to enable the U.S. Holder to make and maintain
a QEF election. However, there is no assurance that we will have timely knowledge of our status as a PFIC in the future or of
the required information to be provided.



If a U.S. Holder,
at the close of its tax year, owns shares in a PFIC that are treated as “marketable stock”, the U.S. Holder may make
a mark-to-market election with respect to such shares for such tax year. If the U.S. Holder makes a valid mark-to-market election
for the first tax year of the U.S. Holder in which the U.S. Holder owns (or is deemed to hold) common stock in us and for which
we are determined to be a PFIC, such holder generally will not be subject to the PFIC rules described above in respect to its
common stock. Instead, in general, the U.S. Holder will include as ordinary income each year the excess, if any, of the fair market
value of its common stock at the end of its tax year over the adjusted basis in its common stock. The U.S. Holder also will be
allowed to take an ordinary loss in respect of the excess, if any, of the adjusted basis of its common stock over the fair market
value of its common stock at the end of its tax year (but only to the extent of the net amount of previously included income as
a result of the mark-to-market election). The U.S. Holder’s basis in its common stock will be adjusted to reflect any such
income or loss amounts, and any further gain recognized on a sale or other taxable disposition of the common stock will be treated
as ordinary income. The mark-to-market election is available only if our common stock is treated as marketable stock. If our common
stock is listed on the NASDAQ Capital Market and is regularly traded on such market in accordance with applicable Treasury Regulations,
our common stock will be treated as “marketable stock” for this purpose. U.S. Holders are advised to consult with
their tax advisors regarding the availability and tax consequences of a mark-to-market election in respect to our common stock
under their particular circumstances.



If we are a PFIC and,
at any time, have a foreign subsidiary that is classified as a PFIC, U.S. Holders generally would be deemed to own a portion of
the shares of such lower-tier PFIC, and generally could incur liability for the deferred tax and interest charge described above
if we receive a distribution from, or dispose of all or part of our interest in, the lower-tier PFIC or the U.S. Holders otherwise
were deemed to have disposed of an interest in the lower-tier PFIC. We will endeavor to cause any lower-tier PFIC to provide to
a U.S. Holder the information that may be required to make or maintain a QEF election with respect to the lower- tier PFIC. However,
there is no assurance that we will have timely knowledge of the status of any such lower-tier PFIC. In addition, we may not hold
a controlling interest in any such lower-tier PFIC and thus there can be no assurance we will be able to cause the lower-tier
PFIC to provide the required information. U.S. Holders are advised to consult with their tax advisors regarding the tax issues
raised by lower-tier PFICs.



A U.S. Holder that
owns (or is deemed to own) shares in a PFIC during any tax year of the U.S. Holder, may have to file an IRS Form 8621 (whether
or not a QEF or mark-to-market election is made) and such other information as may be required by the U.S. Treasury Department.



The rules dealing
with PFICs and with the QEF and mark-to-market elections are very complex and are affected by various factors in addition to those
described above. Accordingly, U.S. Holders are advised to consult with their tax advisors concerning the application of the PFIC
rules (and the QEF and mark-to-market elections) to our common stock under their particular circumstances.



United States Federal Income Taxation
of “Non-U.S. Holders”



A beneficial owner
of common stock that is not a U.S. Holder is referred to herein as a “Non-U.S. Holder.”



Dividends on Common
Stock. Non-U.S. Holders generally will not be subject to United States federal income tax or withholding tax on dividends
received from us with respect to our common stock, unless that income is effectively connected with the Non-U.S. Holder’s
conduct of a trade or business in the United States. If the Non-U.S. Holder is entitled to the benefits of a United States income
tax treaty with respect to those dividends, that income is taxable only if it is attributable to a permanent establishment maintained
by the Non-U.S. Holder in the United States.



77







Sale, Exchange
or Other Disposition of Common Stock. Non-U.S. Holders generally will not be subject to United States federal income
tax or withholding tax on any gain realized upon the sale, exchange or other disposition of our common stock, unless:



| | · | the
                                                                                                               gain is effectively
                                                                                                               connected with
                                                                                                               the Non-U.S. Holder’s
                                                                                                               conduct of a trade
                                                                                                               or business in
                                                                                                               the United States.
                                                                                                               If the Non-U.S.
                                                                                                               Holder is entitled
                                                                                                               to the benefits
                                                                                                               of an income tax
                                                                                                               treaty with respect
                                                                                                               to that gain, that
                                                                                                               gain is taxable
                                                                                                               only if it is attributable
                                                                                                               to a permanent
                                                                                                               establishment maintained
                                                                                                               by the Non-U.S.
                                                                                                               Holder in the United
                                                                                                               States; or
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | the
                                                                                                               Non-U.S. Holder
                                                                                                               is an individual
                                                                                                               who is present
                                                                                                               in the United States
                                                                                                               for 183 days
                                                                                                               or more during
                                                                                                               the tax year of
                                                                                                               disposition and
                                                                                                               other conditions
                                                                                                               are met.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



If the Non-U.S. Holder
is engaged in a United States trade or business for United States federal income tax purposes, the income from the common stock,
including dividends and the gain from the sale, exchange or other disposition of the stock that is effectively connected with
the conduct of that trade or business will generally be subject to regular United States federal income tax in the same manner
as discussed in the previous section relating to the taxation of U.S. Holders. In addition, if you are a corporate Non-U.S. Holder,
your earnings and profits that are attributable to the effectively connected income, which are subject to certain adjustments,
may be subject to an additional branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable income
tax treaty.



Backup Withholding and Information
Reporting



In general, dividend
payments, or other taxable distributions, made within the United States to you will be subject to information reporting requirements.
Such payments will also be subject to backup withholding tax if you are a non-corporate U.S. Holder and you:





| | · | fail
                                                                                                               to provide an accurate
                                                                                                               taxpayer identification
                                                                                                               number;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | are
                                                                                                               notified by the
                                                                                                               Internal Revenue
                                                                                                               Service that you
                                                                                                               have failed to
                                                                                                               report all interest
                                                                                                               or dividends required
                                                                                                               to be shown on
                                                                                                               your federal income
                                                                                                               tax returns; or
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| |  | 
| |  | 

| | · | in
                                                                                                               certain circumstances,
                                                                                                               fail to comply
                                                                                                               with applicable
                                                                                                               certification requirements.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Non-U.S. Holders may
be required to establish their exemption from information reporting and backup withholding by certifying their status on Internal
Revenue Service Form W-8BEN, W-8ECI or W-8IMY, as applicable.



If you sell your stock
to or through a United States office or broker, the payment of the proceeds is subject to both United States backup withholding
and information reporting unless you certify that you are a non-U.S. person, under penalties of perjury, or you otherwise establish
an exemption. If you sell your stock through a non-United States office of a non-United States broker and the sales proceeds are
paid to you outside the United States, then information reporting and backup withholding generally will not apply to that payment.
However, United States information reporting requirements, but not backup withholding, will apply to a payment of sales proceeds,
even if that payment is made to you outside the United States, if you sell your stock through a non-United States office of a
broker that is a United States person or has some other contacts with the United States.



Backup withholding
tax is not an additional tax. Rather, you generally may obtain a refund of any amounts withheld under backup withholding rules
that exceed your income tax liability by filing a refund claim with the Internal Revenue Service.



We encourage each
stockholder to consult with his, her or its own tax advisor as to particular tax consequences to it of holding and disposing of
our shares, including the applicability of any state, local or foreign tax laws and any proposed changes in applicable law.



|F. | Dividends and paying agents
|-- | ---------------------------



Not applicable.



|G. | Statement by experts
|-- | --------------------



Not applicable.



78













|H. | Documents on display
|-- | --------------------



This annual report
and the exhibits thereto and any other document we file pursuant to the Exchange Act may be inspected without charge and copied
at prescribed rates at the following Securities and Exchange Commission public reference rooms: 100 F Street, N.E., Room 1580,
Washington, D.C. 20549. You may obtain information on the operation of the Securities and Exchange Commission’s public reference
room in Washington, D.C. by calling the Securities and Exchange Commission at 1-800-SEC-0330 or by visiting the Securities and
Exchange Commission’s website at http://www.sec.gov, and may obtain copies of our filings from the public reference
room by calling 1-800-SEC-0330. The Exchange Act file number for our Securities and Exchange Commission filings is 000-49760.



The Securities and
Exchange Commission maintains a website at www.sec.govthat contains reports, proxy and information statements, and other
information regarding registrants that make electronic filings with the Securities and Exchange Commission using its EDGAR (Electronic
Data Gathering, Analysis, and Retrieval) system. Certain of our material documents or filings can also be viewed on SEDAR (the
System for Electronic Document Analysis and Retrieval of the Canadian securities regulatory authorities) at www.sedar.com.



We will also provide
without charge to each person, including any beneficial owner, upon written or oral request of that person, a copy of any and
all of the information that has been incorporated by reference in this annual report. Please direct such requests to Alexandros
Mylonas, Chief Financial Officer, FreeSeas Inc., 10, Eleftheriou Venizelou Street (Panepistimiou Ave.) 106 71, Athens, Greece, telephone
number +30-210-4528770 or facsimile number +30-210-4291010.



|I. | Subsidiary
    Information
|-- | --------------------------



Not applicable.



|Item 11. | Quantitative and Qualitative Disclosure
    About Market Risk
|-------- | -------------------------------------------------------------



Interest Rate Fluctuation



The
international drybulk industry is a capital-intensive industry, requiring significant amounts of investment. Much of this investment
is provided in the form of long-term debt. Our debt usually contains interest rates that fluctuate with LIBOR. Increasing interest
rates could adversely impact future earnings. To mitigate this risk, we have entered into two interest rate swap contracts.



Our
interest expense is affected by changes in the general level of interest rates. As an indication of the extent of our sensitivity
to interest rate changes, an increase of 100 basis points would have increased our net loss and use of our cash flows in the 2012
fiscal year by approximately $639 based upon our debt level during the period in 2012 during which we had debt outstanding.



The
following table sets forth for a period of five years the sensitivity of the loans on each of the vessels owned by us during fiscal
2012 in U.S. dollars to a 100-basis-point increase in LIBOR.



|(In thousands of U.S. Dollars)             
|-------------------------------------------
|Vessel Name                                
|Free Hero / Free Goddess
    / Free Jupiter
|Free Impala / Free Neptune                 
|Free Knight                                
|Free Maverick                              



Please
see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Long Term Debt”
for a full description of each of these loans.



Interest Rate
Risk



We
are exposed to interest rate risk 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, we use interest rate swaps to manage net exposure
to interest rate fluctuations related to its borrowings and to lower its overall borrowing costs. We have two interest rate swaps
outstanding with a total notional amount of $6,663 as of December 31, 2012. These interest rate swap agreements do not qualify
for hedge accounting, and changes in their fair values are reflected in our earnings.



79







Our
derivative financial instruments are valued using pricing models that are used to value similar instruments by market participants.
Where possible, we verify the values produced by our 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.
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.



Foreign Exchange
Rate Risk



We
generate all of our revenues in U.S. dollars, but incur a portion of our expenses in currencies other than U.S. dollars. For accounting
purposes, expenses incurred in Euros are converted into U.S. dollars at the exchange rate prevailing on the date of each transaction.
At December 31, 2012, 2011 and 2010, approximately 29%, 32% and 55%, respectively, of our outstanding accounts payable was
denominated in currencies other than the U.S. dollar (mainly in the Euro). As an indication of the extent of our sensitivity to
foreign exchange rate changes, an increase of an additional 10% in the value of other currencies against the dollar would have
decreased our net income and cash flows in 2012 by approximately $374 based upon the accounts payable we had denominated in currencies
other than the U.S. dollar as of December 31, 2012.



Credit Risk



Financial
instruments, which potentially subject us to significant concentrations of credit risk, consist principally of cash and cash equivalents,
trade accounts receivable, insurance claims and derivative contracts (interest rate swaps). We place our cash and cash equivalents,
consisting mostly of deposits, with high credit qualified financial institutions.



We
monitor the credit risk regarding charterer’s turnover in order to review its reliance on individual charterers. We do not
obtain rights to collateral to reduce its credit risk. We are exposed to credit risk in the event of non-performance by counter
parties to derivative instruments; however, we limit our exposure by diversifying among counter parties with high credit ratings.
In addition, the counterparty to the derivative financial instrument is a major financial institution in order to manage exposure
to non-performance counterparties.



Charter Market
Risk



Our
revenues, earnings and profitability are affected by the prevailing charter market rates. During 2012, the BDI remained volatile.
In 2012, the BDI reached a high of 1,738 in January 2012 and a low of 647 in February 2012. Furthermore, charter rates have been
particularly volatile during the first three months of 2013. On, March 25, 2013, the BDI was 935, increasing from a low of 698
on January 2, 2013. Such chartering market volatility is expected to adversely impact our financial performance for the relevant
quarter including its net income and cash flow.



The M/V Free Jupiterwas on time charter with Korea Line Corp, or KLC, a South Korean company, from June 8, 2007 until she was re-delivered
to us on February 22, 2011. KLC made several unilateral deductions from hire payments during the three-year course of the
time charter, and no hire was received from KLC from February 8, 2011 until the actual redelivery of the vessel on February 22,
2011. The Company commenced arbitration proceedings against KLC, and has taken action to obtain security, including the arrest
of KLC assets. As a result, the Company obtained third-party security in the amount of $1.68 million (which includes provision
for interest and legal costs) in the form of a letter of undertaking from KLC’s P&I club covering KLC’s unilateral
deductions from the hire. The Company also obtained cash security held in escrow in the amount of $182 from the execution of a
lien on sub-hires. KLC has counterclaimed by way of set-off, alleging that KLC is entitled to retain the amount of hire that was
deducted because of the Company’s alleged breach of charterparty. The Company denies these allegations and continues to
assert its claim to recover the full amount deducted by KLC. On January 25, 2011, KLC announced that it had filed a
petition for the rehabilitation proceeding for court receivership in the Seoul Central District Court, and the court approved
and confirmed a rehabilitation plan. Upon the issuance of the final award of the arbitration tribunal, and for any amount in excess
of the third-party security and cash security, the Company may participate in the approved rehabilitation plan. On January 17,
2012, the Company obtained an interim award under which it was awarded the part of the claim that KLC had admitted was undisputed,
$832, plus interest, legal costs, and the cost of the tribunal. Following the interim award, the Company received approximately
$335. The majority of the balance of $511 that has been awarded is unsecured. The Company is considering its options if KLC
does not pay the balance, including the possibility of pursuing this in the Korean rehabilitation proceedings, where the hearing
of the Company’s claim has been stayed pending the outcome of the London arbitration. The Company believes that, if the
Korean claim succeeds, the Company should make a recovery in accordance with the rehabilitation plan, which has been approved
by the Korean court. The Company intends to seek a further award (if this matter does not settle) for the disputed balance, which
is adequately secured. Despite above actions, the Company wrote-off the remaining outstanding balance $1,173 of the KLC time charter,
which is included in "Provision and write-offs of insurance claims and bad debts" in the consolidated statements of
operations for the year ended December 31, 2012.





80







|Item 12. | Description of Securities Other than Equity Securities
|-------- | ------------------------------------------------------



Not applicable.



81







|PART II
|-------



|Item 13. | Defaults, Dividend Arrearages and Delinquencies
|-------- | -----------------------------------------------



Please see “Item
5. Operating and Financial Review and Prospects - Recent Developments” and “- Long-Term Debt” for a full description
of loan defaults.



|Item 14. | Material Modifications to the Rights of Security Holders and Use of Proceeds
|-------- | ----------------------------------------------------------------------------



Except as described
elsewhere in this document, there have been no changes to the instruments defining the rights of the holders of any class of registered
securities, and the rights of holders of the registered securities have not been altered by the issuance or modification of any
other class of securities in 2012 (see “Item 10. Additional Information — B. Memorandum and Articles of Incorporation”)
for a description of this plan). There are no restrictions on working capital and no removal or substitution of assets securing
any class of our registered securities.



|Item 15. | Controls and Procedures.
|-------- | ------------------------



Disclosure Controls and Procedures



Under
the supervision and with the participation of our management, including our chief executive officer and chief financial officer,
we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined
in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as
of December 31, 2012. Disclosure controls and procedures are defined under SEC rules as controls and other procedures that
are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the
Exchange Act is recorded, processed, summarized and reported within required time periods. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that
it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal
executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions
regarding required disclosure. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures,
including the possibility of human error and the circumvention of overriding of the controls and procedures. Accordingly, even
effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.



Based
on our evaluation, our chief executive officer and our chief financial officer have concluded that our disclosure controls and
procedures were effective as of December 31, 2012.



Management’s Annual Report on Internal Control over
Financial Reporting



Our management is
responsible for establishing and maintaining adequate internal control over financial reporting as required under applicable United
States securities regulatory requirements. Internal control over financial reporting is defined in Rule 13a-15(f) or 15d-15(f)
promulgated under the Exchange Act as a process designed by, or under the supervision of, the company’s chief executive
and chief financial officers and effected by the company’s board of directors, management and other personnel, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:



| | • | pertain
                                                                    to the maintenance of records that in reasonable detail accurately
                                                                    and fairly reflect the transactions and dispositions of the
                                                                    assets of the company;
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | provide
                                                                    reasonable assurance that transactions are recorded as necessary
                                                                    to permit preparation of financial statements in accordance
                                                                    with generally accepted accounting principles, and that receipts
                                                                    and expenditures of the company are being made only in accordance
                                                                    with authorizations of management and directors of the company;
                                                                    and
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | provide
                                                                    reasonable assurance regarding prevention or timely detection
                                                                    of unauthorized acquisition, use of disposition of the company’s
                                                                    assets that could have a material effect on the financial
                                                                    statements.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Because of its inherent
limitations, internal control over financial reporting may not prevent or detect all misstatements. A system of internal controls
can provide only reasonable, not absolute, assurance that the objectives of the control system are met, no matter how well the
system is conceived or operated. Projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures
may deteriorate.



82







Our management assessed
the effectiveness of our internal control over financial reporting as of December 31, 2012. In making this assessment, our management
used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control
Integrated Framework. Based on that evaluation under this framework, our management concluded that as of December 31, 2012, our
internal control over financial reporting was effective.



Attestation Report of the Registered
Public Accounting Firm



This annual report
does not include an attestation report by our independent registered public accounting firm regarding internal control over financial
reporting. As we are neither a large accelerated filer nor an accelerated filer, our management's report was not subject to attestation
by our registered public accounting firm pursuant to rules of the Securities and Exchange Commission that permit us to provide
only management's report in this annual report.



Changes to Internal Controls and Procedures for Financial
Reporting



There were no changes
in our internal control over financial reporting that occurred during the quarter ended December 31, 2012 that have materially
affected, or are reasonably likely to materially affect, our internal control over financial reporting.



|Item 16. | [Reserved]
|-------- | ----------



|Item 16A. | Audit Committee Financial Expert.
|--------- | ---------------------------------



Our board has determined
that Mr. Mr. Focko Nauta, an independent director, qualifies as an “audit committee financial expert” as defined
by rules of the Securities and Exchange Commission. For a brief listing of Mr. Nauta’s relevant experience, see Item 6.A.
“Directors, Senior Management and Employees - Directors and Senior Management.”



|Item 16B. | Code of Ethics.
|--------- | ---------------



We have adopted a
code of ethics that applies to our chief executive officer and all senior financial officers of our company, including the chief
financial officer, chief accounting officer or controller, or persons performing similar functions. Our code of ethics has been
filed as an exhibit to this annual report and is available on the Corporate Governance section of our website at www.freeseas.gr. We
will also provide a paper copy of our Code of Business Conduct and Ethics free of charge upon written request of a shareholder.
Shareholders may direct their requests to the attention of Alexandros Mylonas, Chief Financial Officer.



|Item 16C. | Principal Accountant Fees and Services.
|--------- | ---------------------------------------



Independent Public Accountants Fees



The aggregate
fees billed for the last two fiscal years for professional services rendered by our auditor are as follows:



|                   |  | 2012 |     |  | 2011 |  
|------------------ |  | ---- | --- |  | ---- | -
|Audit fees (1)     |  | $    | 193 |  |      | $
|Audit-related fees |  |      | —   |  |      |  
|Tax fees           |  |      | —   |  |      |  
|Other fees         |  |      | —   |  |      |  
|Total              |  | $    | 193 |  |      | $



|(1) | Audit fees represent fees for professional services
    related to the audit of our financial statements for the years ended December 31, 2012 and 2011, as well as fees for
    services related to the Company’s additional filings relating to possible capital raises.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Audit Committee Pre-Approved Policies and Procedures



Our
audit committee pre-approves all audit, audit-related and non-audit services not prohibited by law to be performed by our independent
auditors and associated fees prior to the engagement of the independent auditor with respect to such services.



83







|Item 16D. | Exemptions from the Listing Standards for Audit Committees.
|--------- | -----------------------------------------------------------



Not applicable.



|Item 16E. | Purchases of Equity Securities by the Issuer and Affiliated Purchasers.
|--------- | -----------------------------------------------------------------------



There were no purchases
of our common shares made by us or on our behalf or by any affiliated purchaser during the fiscal year ended December 31, 2012.



|Item 16F. | Change in Registrant’s Certifying Accountant.
|--------- | ---------------------------------------------



Ernst & Young (Hellas)
Certified Auditors Accountants S.A. (“E&Y”) was previously the principal accountants for the Company. On
September 11, 2012, our Audit Committee approved the retention of Sherb as our independent registered public accounting firm for
the fiscal year ending December 31, 2012, and dismissed E&Y.



During the two fiscal
years ended December 31, 2011, and the subsequent interim period through September 11, 2012, there were no: (1) disagreements with
E&Y on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which
disagreements if not resolved to their satisfaction would have caused them to make reference in connection with their opinion to
the subject matter of the disagreement, or (2) reportable events. The audit reports of E&Y on the consolidated financial statements
of the Company and subsidiaries as of and for the years ended December 31, 2011 and 2010, did not contain any adverse opinion or
disclaimer of opinion, nor were they qualified or modified as to uncertainty, audit scope, or accounting principles, except as
follows:



E&Y 's report on
the consolidated financial statements of the Company and subsidiaries as of and for the years ended December 31, 2011 and 2010,
contained a separate paragraph stating that” The accompanying financial statements have been prepared assuming that the Company
will continue as a going concern. As more fully described in Note 3 to the consolidated financial statements, the Company has incurred
recurring operating losses and has a working capital deficiency. In addition, the Company has failed to meet scheduled payment
obligations under its loan facilities and has not complied with certain covenants included in its loan agreements with banks. These
conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in
regard to these matters also are described in Note 3. The 2011 consolidated financial statements do not include any adjustments
to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of
liabilities that may result from the outcome of this uncertainty.”



During the two years
ended December 31, 2011 and any subsequent interim period prior to engaging Sherb, neither we nor or anyone on our behalf consulted
Sherb regarding (i) either: the application of accounting principles to a specified transaction, either completed or proposed;
or the type of audit opinion that might be rendered on our financial statements, and neither a written report nor oral advice was
provided to us that Sherb concluded was an important factor considered by us in reaching a decision as to the accounting, auditing
or financial reporting issue; or (ii) any matter that was either the subject of a disagreement or a reportable event.



Effective
January 1, 2013, Sherb combined its practice with RBSM. Effective January 30, 2013, the Company’s audit committee approved
the new engagement with RBSM and the transition engagement letter was executed; as a result, at that time, Sherb was dismissed
and RBSM was engaged as the Company’s new independent registered public accounting firm.



|Item 16G. | Corporate Governance.
|--------- | ---------------------



As
a foreign private issuer, we can elect to be exempt from many of the corporate governance requirements of The NASDAQ Stock Market
other than the requirements regarding the disclosure of a going concern audit opinion, notification of material non-compliance
with NASDAQ corporate governance practices, the establishment and composition of an audit committee that complies with SEC Rule 10A-3
and a formal audit committee charter. The practices followed by us in lieu of NASDAQ’s corporate governance rules are described
below:



| | • | Our board is composed of a
                                                                    majority of independent directors, consistent with NASDAQ
                                                                    corporate governance requirements; we are not required under
                                                                    Marshall Islands law, however, to maintain a majority independent
                                                                    directors and we cannot guarantee that we will always in the
                                                                    future maintain a board with a majority of independent members.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | In lieu of obtaining shareholder
                                                                    approval prior to the issuance of designated securities, we
                                                                    comply with provisions of Marshall Islands law, requiring
                                                                    that the board of directors approves share issuances.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | • | In lieu of holding regular
                                                                    meetings at which only independent directors are present,
                                                                    our entire board of directors, a majority of whom are independent,
                                                                    hold regular meetings as is consistent with Marshall Islands
                                                                    law.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



84







| | • | As a foreign private issuer,
                                                                    we are not required to solicit proxies or provide proxy statements
                                                                    to NASDAQ pursuant to NASDAQ corporate governance rules or
                                                                    Marshall Islands law. Consistent with Marshall Islands law
                                                                    and as provided in our bylaws, we will notify our shareholders
                                                                    of meetings between 15 and 60 days before the meeting.
                                                                    This notification will contain, among other things, information
                                                                    regarding business to be transacted at the meeting. In addition,
                                                                    our bylaws provide that shareholders must give us between
                                                                    150 and 180 days advance notice to properly introduce
                                                                    any business at a meeting of shareholders.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



Other
than as noted above, we are in compliance with all other applicable NASDAQ corporate governance standards. Additionally, we believe
that our established practices in the area of corporate governance are in line with the spirit of the NASDAQ standards and provide
adequate protection to our stockholders.



|Item 16H. | Mine Safety Disclosure.
|--------- | -----------------------



Not applicable.



85







|PART III
|--------



|Item 17. | Financial Statements.
|-------- | ---------------------



Not applicable.



|Item 18. | Financial Statements
|-------- | --------------------



See Financial Statements attached hereto
as pages F-1 to F-35.



|Item 19. | Exhibits
|-------- | --------



|ITEM 19. | EXHIBITS
|-------- | --------



|ExhibitNo.: |  | Exhibit
        Description                                                                                                                                                      |  | Where
        Filed                                                                                                                                                           
|----------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.1         |  | Amended and Restated Articles of Incorporation
    of FreeSeas Inc. (formerly known as Adventure Holdings S.A.)                                                                  |  | Exhibit 3.1 to Registrant’s
    Registration Statement on Form F-1 (File No. 333-124825) filed on May 11, 2005 and incorporated herein
    by reference                       
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.2         |  | Amended and Restated By-Laws of FreeSeas
    Inc. (formerly known as Adventure Holdings S.A.)                                                                                    |  | Exhibit 3.2 to Registrant’s
    Registration Statement on Form F-1 (File No. 333-124825) filed on May 11, 2005 and incorporated herein
    by reference                       
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.3         |  | First Amendment to the Amended and Restated
    Bylaws of FreeSeas Inc.                                                                                                          |  | Exhibit 3.3 to Amendment No. 1
    to Registrant’s Registration Statement on Form F-1 (File No. 333-124825) filed on October 15, 2007 and
    incorporated herein by reference
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.4         |  | First Amendment to the Amended and Restated
    Articles of Incorporation of FreeSeas Inc.                                                                                       |  | Exhibit 99.3 to Registrant’s
    Form 6-K filed on October 22, 2009 and incorporated herein by reference                                                                      
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.5         |  | Amendment to the Amended and Restated Articles
    of Incorporation of FreeSeas Inc.                                                                                             |  | Exhibit 1.5 to Registrant’s Annual
    Report on Form 20-5 for the year ended December 31, 2010 and incorporated herein by reference                                          
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|1.6         |  | Certificate of Amendment
    to the Amended and Restated Articles of Incorporation, as filed with the Registrar of Corporations of the Marshall Islands
    on February 12, 2013 |  | Exhibit 3.01 to Registrant’s Form
    6-K filed on February 14, 2013 and incorporated herein by reference                                                                     
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|2.1         |  | Specimen Common Stock Certificate                                                                                                                                                |  | Exhibit 4.1 to Amendment No. 1
    to Registrant’s Registration Statement on Form F-1 (File No. 333-124825) filed on July 22, 2005
    and incorporated herein by reference   
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|2.2         |  | Shareholder Rights Agreement entered into
    effective as of January 14, 2009 by and between FreeSeas Inc. and American Stock Transfer & Trust Company, LLC                     |  | Exhibit 2.9 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference                                          
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|4.1         |  | Amended and Restated 2005 Stock Incentive
    Plan                                                                                                                               |  | Annex A to Registrant’s Form 6-K
    filed on December 1, 2006 and incorporated herein by reference                                                                           
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|4.2         |  | Facility Agreement dated December 24,
    2007 between FreeSeas Inc. and Credit Suisse                                                                                           |  | Exhibit 4.39 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference                                         
|            |  |                                                                                                                                                                                  |  |                                                                                                                                                                               
|4.3         |  | First Preferred Mortgage on the M/V Free
    Hero in favor of Credit Suisse                                                                                                      |  | Exhibit 4.40 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference                                         



86







|4.4  |  | Addendum No. 1 dated July 18,
    2011 to First Preferred Mortgage on the M/V Free Hero in favor of Credit Suisse AG                                                       |  | Exhibit 4.4 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference 
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.5  |  | First Preferred Mortgage on the M/V Free
    Goddess in favor of Credit Suisse                                                                                             |  | Exhibit 4.41 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference          
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.6  |  | Addendum No. 1 dated July 18, 2011 to First
    Preferred Mortgage on the M/V Free Goddess in favor of Credit Suisse AG                                                    |  | Exhibit 4.6 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference 
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.7  |  | First Preferred Mortgage on the M/V Free
    Jupiter in favor of Credit Suisse                                                                                             |  | Exhibit 4.42 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2007 and incorporated herein by reference          
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.8  |  | Addendum No. 1 dated July 18, 2011 to First
    Preferred Mortgage on the M/V Free Jupiter in favor of Credit Suisse AG                                                    |  | Exhibit 4.8 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference 
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.9  |  | Supplemental Agreement dated June 26,
    2008 to the Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                   |  | Exhibit 4.56 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference          
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.10 |  | Supplemental Agreement dated March 23,
    2009 to the Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                  |  | Exhibit 4.57 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference          
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.11 |  | Amended and Restated Services Agreement
    dated October 1, 2008 between FreeSeas Inc. and Free Bulkers S.A.                                                              |  | Exhibit 4.61 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2008 and incorporated herein by reference          
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.12 |  | Supplemental Agreement dated June 8, 2011
    between FreeSeas, Inc. and Free Bulkers S.A.                                                                                 |  | Exhibit 4.12 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.13 |  | Amendment and Restatement Agreement dated
    September 1, 2009 among Adventure Two, Adventure Three, Adventure Seven, Adventure Eleven, FreeSeas Inc. and New HBU II N.V. |  | Exhibit 99.5 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                            
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.14 |  | Facility Agreement dated September 1,
    2009 among Adventure Two, Adventure Three, Adventure Seven, Adventure Eleven, FreeSeas Inc. and New HBU II N.V.                  |  | Exhibit 99.6 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                            
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.15 |  | Deed of Release of Whole dated September 15,
    2009 by New HBU II N.V. in favour of Adventure Two, Adventure Three, Adventure Seven and Adventure Eleven                 |  | Exhibit 99.7 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                            
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.16 |  | Deed of Assignment dated September 15,
    2009 between Adventure Three and New HBU II N.V.                                                                                |  | Exhibit 99.9 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                            
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.17 |  | Deed of Assignment dated September 15,
    2009 between Adventure Seven and New HBU II N.V.                                                                                |  | Exhibit 99.10 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                           
|     |  |                                                                                                                                                                            |  |                                                                                                                                                
|4.18 |  | Deed of Assignment dated September 15,
    2009 between Adventure Eleven and New HBU II N.V.                                                                               |  | Exhibit 99.11 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                           



87







|4.19 |  | Addendum No. 1 dated September 17,
    2009 to the Amended and Restated Services Agreement dated October 1, 2008 by and between FreeSeas Inc. and Free Bulkers
    S.A.                                                                                                                                      |  | Exhibit 99.12 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                           
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.20 |  | Form of Standard Ship Management Agreement
    by and between Free Bulkers S.A. and each of Adventure Five S.A. through Adventure Twelve S.A.                                                                                                                                                                |  | Exhibit 99.13 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                           
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.21 |  | Form of Addendum No. 2 to BIMCO Management
    Agreement by and between Free Bulkers S.A. and each of Adventure Two S.A. and Adventure Three S.A and Form of Addendum No. 1
    to BIMCO Management Agreement by and between Free Bulkers S.A. and each of Adventure Five S.A. through Adventure Twelve S.A. |  | Exhibit 99.14 to Registrant’s
    6-K filed on October 22, 2009 and incorporated herein by reference                                           
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.22 |  | Loan Agreement dated December 15,
    2009 among Adventure Nine, Adventure Twelve and First Business Bank                                                                                                                                                                                                    |  | Exhibit 4.60 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.23 |  | First Priority Mortgage on the M/V Free
    Impala in favor of First Business Bank                                                                                                                                                                                                                           |  | Exhibit 4.61 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.24 |  | First Preferred Mortgage on the M/V Free
    Neptune in favor of First Business Bank                                                                                                                                                                                                                         |  | Exhibit 4.62 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.25 |  | Deed of Covenants dated December 16,
    2009 between Adventure Nine and First Business Bank                                                                                                                                                                                                                 |  | Exhibit 4.63 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.26 |  | Amendment and Restatement Agreement dated
    December 1, 2009 among Adventure Two, Adventure Three, Adventure Seven, Adventure Eleven, FreeSeas Inc. and New HBU II
    N.V.                                                                                                                                |  | Exhibit 4.64 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.27 |  | Restated Facility Agreement dated December 1,
    2009 among Adventure Two, Adventure Three, Adventure Seven, Adventure Eleven, FreeSeas Inc. and New HBU II N.V.                                                                                                                                            |  | Exhibit 4.65 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.28 |  | Third Supplemental Agreement dated November 27,
    2009 to the Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                                                                                                                                           |  | Exhibit 4.66 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.29 |  | First Preferred Liberian Ship Mortgage
    on the M/V Free Goddess in favor of Credit Suisse AG                                                                                                                                                                                                              |  | Exhibit 4.67 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.30 |  | First Preferred Liberian Ship Mortgage
    on the M/V Free Hero in favor of Credit Suisse AG                                                                                                                                                                                                                 |  | Exhibit 4.68 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.31 |  | First Preferred Liberian Ship Mortgage
    on the M/V Free Jupiter in favor of Credit Suisse AG                                                                                                                                                                                                              |  | Exhibit 4.69 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2009 and incorporated herein by reference          
|     |  |                                                                                                                                                                                                                                                                                                              |  |                                                                                                                                                
|4.32 |  | Addendum No. 2 dated July 18, 2011 to First
    Preferred Mortgage on the M/V Free Lady in favor of Credit Suisse AG                                                                                                                                                                                         |  | Exhibit 4.32 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference



88







|4.33 |  | Fourth Supplemental Agreement
    dated July 15, 2011 to the Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                                         |  | Filed as Exhibit 99.3 to Registrant’s
    6-K filed December 12, 2011 and incorporated herein by reference                                                         
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.34 |  | Fifth Supplemental Agreement dated November
    7, 2011 to the Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                                       |  | Filed as Exhibit 99.4 to Registrant’s
    6-K filed December 12, 2011 and incorporated herein by reference                                                         
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.35 |  | Credit Suisse Letter dated August 4, 2011
    regarding Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                                              |  | Exhibit 4.35 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference                    
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.36 |  | Credit Suisse Letter dated September 6,
    2011 regarding Facility Agreement dated December 24, 2007 between FreeSeas Inc. and Credit Suisse                                                           |  | Exhibit 4.36 to Registrant’s
    amended Annual Report on Form 20-F/A for the year ended December 31, 2011 and incorporated herein by reference                    
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.37 |  | First Supplemental Agreement dated January
    27, 2012 among FBB – First Business Bank S.A., Adventure Nine S.A., Adventure Twelve S.A., FreeSeas Inc. and Free Bulkers
    S.A.                       |  | Filed as Exhibit 4.30 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2011 filed on May 7, 2012 and incorporated herein by reference
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.38 |  | Letter Agreement dated February 2, 2012
    with Credit Suisse                                                                                                                                          |  | Filed as Exhibit 4.31 to Registrant’s
    Annual Report on Form 20-F for the year ended December 31, 2011 filed on May 7, 2012 and incorporated herein by reference
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.39 |  | Standby Equity Distribution Agreement dated
    May 11, 2012 between FreeSeas and YA Global Masters SPV Ltd.                                                                                            |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed May 15, 2012 and incorporated herein by reference                                                              
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.40 |  | Note Purchase Agreement dated May 11, 2012
    between FreeSeas Inc. and YA Global Masters SPV Ltd.                                                                                                     |  | Exhibit 99.3 to Registrant’s Form
    6-K, as filed May 15, 2012 and incorporated herein by reference                                                              
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.41 |  | Sixth Supplemental Agreement
    dated May 31, 2012 among FreeSeas Inc., Adventure Five S.A., Adventure Six S.A., Adventure Eight S.A., Adventure Ten
    S.A., Free Bulkers S.A., and Credit Suisse AG |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.42 |  | Facility Agreement (as amended
    and restated) between FreeSeas Inc. and Credit Suisse AG                                                                                                             |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.43 |  | Addendum No. 3 to First
    Preferred Mortgage dated May 31, 2012 between Adventure Five S.A. and Credit Suisse AG                                                                                      |  | Exhibit 99.3 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.44 |  | Addendum No. 3 to First
    Preferred Mortgage dated May 31, 2012 between Adventure Six S.A. and Credit Suisse AG                                                                                       |  | Exhibit 99.4 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.45 |  | Addendum No. 3 to First
    Preferred Mortgage dated May 31, 2012 between Adventure Eight S.A. and Credit Suisse AG                                                                                     |  | Exhibit 99.5 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.46 |  | Deed of Release dated May 31,
    2012 by Credit Suisse AG in favor of Adventure Ten S.A.                                                                                                               |  | Exhibit 99.6 to Registrant’s Form
    6-K, as filed June 12, 2012 and incorporated herein by reference                                                             
|     |  |                                                                                                                                                                                                         |  |                                                                                                                                                                    
|4.47 |  | Amendment to Standby Equity
    Distribution Agreement dated June 28, 2012 between FreeSeas Inc. and YA Global Master SPV, Ltd.                                                                         |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed June 29, 2012 and incorporated herein by reference                                                             



89







|4.48 |  | Amendment and
    Restatement Agreement dated September 7, 2012 by and among FreeSeas Inc., certain of the Company's subsidiaries and Deutsche
    Bank Nederland N.V.               |  | Exhibit 99.1 to Registrant’s
    Form 6-K, as filed September 19, 2012 and incorporated herein by reference                                                                  
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.49 |  | Investment Agreement dated
    as of October 11, 2012 by and between FreeSeas Inc. and Dutchess Opportunity Fund, II, LP, a Delaware limited partnership.                            |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed October 12, 2012 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.50 |  | Registration Rights Agreement
    dated as of October 11, 2012, by and between FreeSeas Inc. and Dutchess Opportunity Fund, II, LP, a Delaware limited partnership.                  |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed October 12, 2012 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.51 |  | Stipulation of Settlement
    between the Company and Hanover Holdings I, LLC                                                                                                        |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed January 15, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.52 |  | Order Approving Fairness,
    Terms and Conditions of Exchange and Issuance Pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, dated
    January 14, 2013       |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed January 15, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.53 |  | Investment Agreement dated
    as of January 24, 2013 by and between FreeSeas Inc. and Granite State Capital, LLC                                                                    |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed January 24, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.54 |  | Registration Rights Agreement
    dated as of January 24, 2013 by and between FreeSeas Inc. and Granite State Capital, LLC                                                           |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed January 24, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.55 |  | Amendment to Stipulation
    of Settlement, dated January 31, 2013.                                                                                                                  |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed February 1, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.56 |  | Order dated January 31, 2013.                                                                                                                                                        |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed February 1, 2013 and incorporated herein by reference                                                                    
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.57 |  | Stipulation of Settlement
    between the Company and Hanover Holdings I, LLC                                                                                                        |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed February 13, 2013 and incorporated herein by reference                                                                   
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.58 |  | Order Approving Fairness,
    Terms and Conditions of Exchange and Issuance Pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, dated
    February 13, 2013      |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed February 13, 2013 and incorporated herein by reference                                                                   
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.59 |  | Stipulation of Settlement
    between the Company and Hanover Holdings I, LLC                                                                                                        |  | Exhibit 99.1 to Registrant’s Form
    6-K, as filed March 20, 2013 and incorporated herein by reference                                                                      
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.60 |  | Order Approving Fairness,
    Terms and Conditions of Exchange and Issuance Pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, dated
    March 19, 2013         |  | Exhibit 99.2 to Registrant’s Form
    6-K, as filed March 20, 2013 and incorporated herein by reference                                                                      
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|4.61 |  | Revised Order Approving Fairness,
    Terms and Conditions of Exchange and Issuance Pursuant to Section 3(a)(10) of the Securities Act of 1933, as amended, dated
    March 20, 2013 |  | Exhibit 99.3 to Registrant’s Form
    6-K, as filed March 20, 2013 and incorporated herein by reference                                                                      
|     |  |                                                                                                                                                                                      |  |                                                                                                                                                                              
|8.1  |  | Subsidiaries of the Registrant                                                                                                                                                       |  | Exhibit 21.1 to Amendment No. 1 to
    Registrant’s Registration Statement on Form F-1 (File No. 333-162630) filed on March 30, 2011 and
    incorporated herein by reference



90







|12.1    |  | Section 302 Certification
    of Chief Executive Officer                                                    |  | Filed herewith      
|------- |  | ----------------------------------------------------------------------------------------------------------- |  | --------------------
|        |  |                                                                                                             |  |                     
|12.2    |  | Section 302 Certification of Chief
    Financial Officer                                                    |  | Filed herewith      
|        |  |                                                                                                             |  |                     
|13.1    |  | Section 906 Certification of Chief
    Executive Officer                                                    |  | Filed herewith      
|        |  |                                                                                                             |  |                     
|13.2    |  | Section 906 Certification of Chief
    Financial Officer                                                    |  | Filed herewith      
|        |  |                                                                                                             |  |                     
|16.1    |  | Letter from Sherb
    & Co., LLPto the SEC, dated as of June 6, 2013.                                       |  | Filed herewith      
|        |  |                                                                                                             |  |                     
|16.2    |  | Letter from Ernst & Young (Hellas)
Certified Auditors Accountants S.A. to the SEC, dated as of June 6, 2013 |  | Filed herewith      
|        |  |                                                                                                             |  |                     
|101 INS |  | XBRL Instance Document*                                                                                     |  | Previously submitted
|        |  |                                                                                                             |  |                     
|101 SCH |  | XBRL Taxonomy Extension Schema Document*                                                                    |  | Previously submitted
|        |  |                                                                                                             |  |                     
|101 CAL |  | XBRL Taxonomy Calculation Linkbase Document*                                                                |  | Previously submitted
|        |  |                                                                                                             |  |                     
|101 LAB |  | XBRL Taxonomy Labels Linkbase Document*                                                                     |  | Previously submitted
|        |  |                                                                                                             |  |                     
|101 PRE |  | XBRL Taxonomy Presentation Linkbase Document*                                                               |  | Previously submitted
|        |  |                                                                                                             |  |                     
|101 DEF |  | XBRL Taxonomy Extension Definition Linkbase
    Document*                                                   |  | Previously submitted










| | * | Users of this data are advised pursuant
                                                         to Rule 406T of Regulation S-T that this interactive data file is
                                                         deemed not filed or part of a registration statement or prospectus for
                                                         purposes of sections 11 or 12 of the Securities Act of 1933, is deemed
                                                         not filed for purposes of section 18 of the Securities Exchange Act of
                                                         1934, and otherwise is not subject to liability under these sections.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



91







SIGNATURES



The Registrant hereby certifies that it meets all of the requirements
for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.



|                     | FREESEAS INC.
|-------------------- | -------------
|                     |              
|Dated:  June 7, 2013 | By:          
|                     |              
|                     |              



92







INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



|                                                                                                          | PageNumber 
|--------------------------------------------------------------------------------------------------------- | -----------
|                                                                                                          |            
|Report of Independent Registered Public Accounting Firm                                                   | F-2        
|                                                                                                          |            
|Consolidated Balance Sheets as of December 31, 2012 and 2011                                              | F-3        
|                                                                                                          |            
|Consolidated Statements of Operations for the Years Ended December 31,
    2012, 2011 and 2010            | F-4        
|                                                                                                          |            
|Consolidated Statements of Shareholders’ Equity for the Years Ended
    December  31, 2012, 2011 and 2010 | F-5        
|                                                                                                          |            
|Consolidated Statements of Cash Flows for the Years Ended December 31,
    2012, 2011 and 2010            | F-6        
|                                                                                                          |            
|Notes to Consolidated Financial Statements                                                                | F-7 to F-35



F-1







REPORT OF INDEPENDENT REGISTERED PUBLIC
ACCOUNTING FIRM





To the Board of Directors and Shareholders
of FreeSeas Inc.



We have audited the accompanying consolidated
balance sheets of FreeSeas Inc. (the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements
of operations, shareholders’ equity, and cash flows for each of the three years ended December 31, 2012. These consolidated
financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
these consolidated financial statements based on our audits.



We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We
were not engaged to perform an audit of the Company’s internal control over financial reporting. Our audits included consideration
of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances,
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.



In our opinion, the consolidated financial
statements referred to above present fairly, in all material respects, the consolidated financial position of FreeSeas Inc. at
December 31, 2012 and 2011, and the consolidated results of its operations and its cash flows for each of the three years ended
December 31, 2012, in conformity with U.S. generally accepted accounting principles.



The accompanying consolidated financial
statements have been prepared assuming that the Company will continue as a going concern. As more fully described in Note 3 to
the consolidated financial statements, the Company has incurred recurring operating losses and has a working capital deficiency.
In addition, the Company has failed to meet scheduled payment obligations under its loan facilities and has not complied with
certain covenants included in its loan agreements. It has also failed to make required payments to Deutsche Bank Nederland as
agreed to in its September 7, 2012 amended and restated facility agreement and received notices of default from First Business
Bank as describe in Note 10. Furthermore, the vast majority of the Company’s assets are considered to be highly illiquid
and if the Company were forced to liquidate, the amount realized by the Company could be substantially lower that the carrying
value of these assets. These conditions among others raise substantial doubt about the Company’s ability to continue as
a going concern. Management’s plans in regard to these matters also are described in Note 3. The 2012 consolidated
financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification
of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.





/s/ RBSM LLP



New York, NY

April 19, 2013



F-2







FREESEAS INC.

CONSOLIDATED BALANCE SHEETS

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



|                                                                                                                                                                    |  | Notes |       |  | December
    31, 2012 |   |          | December
    31, 2011 | 
|------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- | ----- |  | --------------------- | - | -------- | --------------------- | 
|ASSETS                                                                                                                                                              |  |       |       |  |                       |   |          |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|CURRENT ASSETS:                                                                                                                                                     |  |       |       |  |                       |   |          |                       | 
|Cash and cash equivalents                                                                                                                                           |  |       |       |  |                       | $ | 29       |                       | 
|Restricted cash                                                                                                                                                     |  |       |       |  |                       |   | —        |                       | 
|Trade receivables, net of provision of $1,313 and $1,336 for 2012 and 2011, respectively                                                                            |  |       |       |  |                       |   | 1,230    |                       | 
|Insurance claims                                                                                                                                                    |  |       | 11    |  |                       |   | 276      |                       | 
|Due from related party                                                                                                                                              |  |       | 4     |  |                       |   | 346      |                       | 
|Inventories                                                                                                                                                         |  |       |       |  |                       |   | 521      |                       | 
|Deferred charges — current portion                                                                                                                                  |  |       | 8     |  |                       |   | —        |                       | 
|Prepayments and other                                                                                                                                               |  |       |       |  |                       |   | 389      |                       | 
|Vessels held for sale                                                                                                                                               |  |       | 6     |  |                       |   | 32,792   |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total current assets                                                                                                                                                |  |       |       |  |                       | $ | 35,583   |                       | 
|Vessels, net                                                                                                                                                        |  |       | 5     |  |                       |   | 75,690   |                       | 
|Deferred charges, net of current                                                                                                                                    |  |       | 8     |  |                       |   | 3,086    |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total non-current assets                                                                                                                                            |  |       |       |  |                       | $ | 78,776   |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total assets                                                                                                                                                        |  |       |       |  |                       | $ | 114,359  |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|LIABILITIES AND SHAREHOLDERS’ EQUITY                                                                                                                                |  |       |       |  |                       |   |          |                       | 
|CURRENT LIABILITIES:                                                                                                                                                |  |       |       |  |                       |   |          |                       | 
|Accounts payable                                                                                                                                                    |  |       |       |  |                       | $ | 13,809   |                       | 
|Accrued liabilities                                                                                                                                                 |  |       |       |  |                       |   | 2,834    |                       | 
|Unearned revenue                                                                                                                                                    |  |       |       |  |                       |   | 204      |                       | 
|Due to related party                                                                                                                                                |  |       | 4     |  |                       |   | 94       |                       | 
|Derivative financial instruments                                                                                                                                    |  |       | 9     |  |                       |   | 446      |                       | 
|Bank loans                                                                                                                                                          |  |       | 10    |  |                       |   | 89,169   |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total current liabilities                                                                                                                                           |  |       |       |  |                       | $ | 106,556  |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total liabilities                                                                                                                                                   |  |       |       |  |                       | $ | 106,556  |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Commitments and Contingencies                                                                                                                                       |  |       | 11    |  |                       |   | —        |                       | 
|SHAREHOLDERS’ EQUITY:                                                                                                                                               |  |       |       |  |                       |   |          |                       | 
|Preferred stock, $0.001 par value; 5,000,000 shares authorized,
    none issued                                                                                     |  |       | 13,15 |  |                       |   | —        |                       | 
|Common stock, $0.001 par value; 250,000,000
    shares authorized, 1,362,830 and 647,562  shares issued and outstanding at December 31, 2012 and 2011, respectively |  |       | 13,15 |  |                       |   | 2        |                       | 
|Additional paid-in capital                                                                                                                                          |  |       |       |  |                       |   | 131,335  |                       | 
|Accumulated deficit                                                                                                                                                 |  |       |       |  |                       |   | (123,534 | )                     | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total shareholders’ equity                                                                                                                                          |  |       |       |  |                       | $ | 7,803    |                       | 
|                                                                                                                                                                    |  |       |       |  |                       |   |          |                       | 
|Total liabilities and shareholders’
    equity                                                                                                                      |  |       |       |  |                       | $ | 114,359  |                       | 



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



F-3







FREESEAS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

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



|                                                               |  | Year Ended
    December 31, |        
|-------------------------------------------------------------- |  | --------------------------- | -------
|                                                               |  | 2012                        |        
|OPERATING REVENUES                                             |  | $                           | 14,260 
|                                                               |  |                             |        
|OPERATING EXPENSES:                                            |  |                             |        
|Voyage expenses                                                |  |                             | (2,835 
|Commissions                                                    |  |                             | (874   
|Vessel operating expenses                                      |  |                             | (10,868
|Depreciation expense (Note 5)                                  |  |                             | (5,729 
|Amortization of deferred charges (Note 8)                      |  |                             | (988   
|Management and other fees to a related party (Note 4)          |  |                             | (2,404 
|General and administrative expenses                            |  |                             | (4,443 
|Provision and write-offs of insurance claims and bad debts     |  |                             | (1,675 
|Gains on sale of vessel (Note 5)                               |  |                             | —      
|Vessel impairment loss (Notes 5,6)                             |  |                             | (12,480
|Impairment of advances for vessels under construction (Note 7) |  |                             | —      
|                                                               |  |                             |        
|Loss from operations                                           |  |                             | (28,036
|                                                               |  |                             |        
|OTHER INCOME (EXPENSE):                                        |  |                             |        
|Interest and finance costs                                     |  |                             | (2,717 
|Loss on derivative instruments (Note 9)                        |  |                             | (85    
|Interest income                                                |  |                             | —      
|Other                                                          |  |                             | (50    
|                                                               |  |                             |        
|Other expense                                                  |  | $                           | (2,852 
|                                                               |  |                             |        
|Net loss                                                       |  | $                           | (30,888
|                                                               |  |                             |        
|Basic loss per share                                           |  | $                           | (36.90 
|Diluted loss per share                                         |  | $                           | (36.90 
|Basic weighted average number of shares                        |  |                             | 837,173
|Diluted weighted average number of shares                      |  |                             | 837,173



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



F-4







FREESEAS INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(All amounts in thousands of United States Dollars, except
for share data)



|                              |  | Common
    Shares (Notes 1 and 13) |           |   | Common
    Shares $ |   |   | Additional
    Paid-in Capital |  |   | Retained
    Earnings (Accumulated deficit) |  |  | Total |         
|----------------------------- |  | ---------------------------------- | --------- | - | ------------------- | - | - | ------------------------------ |  | - | ------------------------------------------- |  |  | ----- | --------
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|Balance December 31,
    2009 |  |                                    | 649,785   |   |                     | $ | 1 |                                |  | $ | 127,080                                     |  |  | $     | 17,371  
|Net loss                      |  |                                    | —         |   |                     |   | — |                                |  |   | —                                           |  |  |       | (21,821 
|Stock compensation expense    |  |                                    | —         |   |                     |   | — |                                |  |   | 559                                         |  |  |       | —       
|Restricted shares forfeited   |  |                                    | (1,000    | ) |                     |   | — |                                |  |   | —                                           |  |  |       | —       
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|Balance December 31, 2010     |  |                                    | 648,785   |   |                     |   | 1 |                                |  |   | 127,639                                     |  |  |       | (4,450  
|Net loss                      |  |                                    | —         |   |                     |   | — |                                |  |   | —                                           |  |  |       | (88,196 
|Stock compensation expense    |  |                                    | —         |   |                     |   | — |                                |  |   | 122                                         |  |  |       | —       
|Restricted shares forfeited   |  |                                    | (1,400    | ) |                     |   | — |                                |  |   | —                                           |  |  |       | —       
|Exercise of warrants          |  |                                    | 177       |   |                     |   | — |                                |  |   | 3                                           |  |  |       | —       
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|Balance December 31, 2011     |  |                                    | 647,562   |   |                     |   | 1 |                                |  |   | 127,764                                     |  |  |       | (92,646 
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|Net loss                      |  |                                    | —         |   |                     |   | — |                                |  |   | —                                           |  |  |       | (30,888 
|Stock compensation expense    |  |                                    | —         |   |                     |   | — |                                |  |   | 1,159                                       |  |  |       | —       
|Restricted shares forfeited   |  |                                    | —         |   |                     |   | — |                                |  |   | —                                           |  |  |       | —       
|Stock issued                  |  |                                    | 715,268   |   |                     |   | 1 |                                |  |   | 2,412                                       |  |  |       | —       
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|                              |  |                                    |           |   |                     |   |   |                                |  |   |                                             |  |  |       |         
|Balance December 31, 2012     |  |                                    | 1,362,830 |   |                     | $ | 2 |                                |  | $ | 131,335                                     |  |  | $     | (123,534



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



F-5











FREESEAS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

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



|                                                                                             |  | Year Ended            |        
|-------------------------------------------------------------------------------------------- |  | --------------------- | -------
|                                                                                             |  | December 31,
    2012 |        
|Cash Flows from Operating Activities:                                                        |  |                       |        
|Net loss                                                                                     |  | $                     | (30,888
|Adjustments to reconcile net loss to net cash (used in) provided by operating
    activities |  |                       |        
|Depreciation (Note 5)                                                                        |  |                       | 5,729  
|Amortization of deferred financing fees (Note 8)                                             |  |                       | 555    
|Amortization of deferred dry-docking and special survey costs (Note 8)                       |  |                       | 988    
|Provision and write-offs of insurance claims and bad debts                                   |  |                       | 1,675  
|Stock compensation cost (Notes 4,14)                                                         |  |                       | 1,159  
|Write off of deferred financing fees (Note 8)                                                |  |                       | 191    
|Change in fair value of derivatives (Note 9)                                                 |  |                       | (314   
|Amortization of deferred revenue                                                             |  |                       | —      
|Gain on sale of vessel (Note 5)                                                              |  |                       | —      
|Vessel impairment loss                                                                       |  |                       | 12,480 
|Write-off of advances for vessels under construction (Note 7)                                |  |                       | —      
|                                                                                             |  |                       |        
|Changes in operating assets and liabilities:                                                 |  |                       |        
|-Trade receivables                                                                           |  |                       | 419    
|-Insurance claims                                                                            |  |                       | 351    
|-Due from related party                                                                      |  |                       | 217    
|-Inventories                                                                                 |  |                       | 82     
|-Prepayments and other                                                                       |  |                       | 111    
|-Accounts payable                                                                            |  |                       | 5,849  
|-Accrued liabilities                                                                         |  |                       | 937    
|-Unearned revenue                                                                            |  |                       | (12    
|-Due to related party                                                                        |  |                       | 2,050  
|Dry-docking and special survey costs paid (Note 8)                                           |  |                       | —      
|(Increase) – decrease of deferred charges (Note 8)                                           |  |                       | (3,303 
|Dry-docking and special survey costs for vessels held for
    sale (Note 8)                  |  |                       | (301   
|                                                                                             |  |                       |        
|Net Cash (used in) provided by Operating Activities                                          |  |                       | (2,025 
|                                                                                             |  |                       |        
|Cash flows from Investing Activities:                                                        |  |                       |        
|Advances for vessels under construction (Note 7)                                             |  |                       | —      
|Proceeds from sale of vessel, net                                                            |  |                       | —      
|                                                                                             |  |                       |        
|Net Cash provided by (used in) Investing Activities                                          |  |                       | —      
|                                                                                             |  |                       |        
|Cash flows from Financing Activities:                                                        |  |                       |        
|Decrease – (increase) in restricted cash                                                     |  |                       | 1,125  
|Proceeds from note (Note 15)                                                                 |  |                       | 250    
|Payments of bank loans                                                                       |  |                       | (40    
|Proceeds from issuance of common stock                                                       |  |                       | 388    
|Exercise of warrants (Note 12)                                                               |  |                       | —      
|                                                                                             |  |                       |        
|Net Cash provided by (used in) Financing Activities                                          |  | $                     | 1,723  
|                                                                                             |  |                       |        
|Net decrease in cash and cash equivalents                                                    |  | $                     | (302   
|Cash and cash equivalents, beginning of year                                                 |  |                       | 331    
|                                                                                             |  |                       |        
|Cash and cash equivalents, end of year                                                       |  | $                     | 29     
|                                                                                             |  |                       |        
|Supplemental Cash Flow Information:                                                          |  |                       |        
|Cash paid for interest                                                                       |  | $                     | 1,089  
|Cash
    paid for taxes                                                                      |  | $                     | —      
|Non-Cash Operating Activities:                                                               |  |                       |        
|Shares issued to settle fees owed to the Manager                                             |  | $                     | 2,040  



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



F-6







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



|1. | Basis of Presentation and General Information
|-- | ---------------------------------------------



The accompanying 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).



All share-related and per share information
in the notes have been adjusted to give effect to the one share for five share reverse stock split that was effective on October 1,
2010 and the one share for ten share reverse stock split that was effective on February 14, 2013.



During the year ended December 31,
2012, the Company owned and operated six Handysize dry bulk carriers and one Handymax dry bulk carrier. As of December 31,
2012, 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 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Three S.A.    |  |         | 100 | % |     | Free Envoy    |      |  | Handysize |     |  |  | 26,318                                    |  |  |                     | 1984 |  |                  |  | 09/29/04 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Four S.A.     |  |         | 100 | % |     | Free Fighter  |      |  | Handysize |     |  |  | 38,905                                    |  |  |                     | 1982 |  |                  |  | 06/14/05 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Five S.A.     |  |         | 100 | % |     | Free Goddess  |      |  | Handysize |     |  |  | 22,051                                    |  |  |                     | 1995 |  |                  |  | 10/30/07 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Six S.A.      |  |         | 100 | % |     | Free Hero     |      |  | Handysize |     |  |  | 24,318                                    |  |  |                     | 1995 |  |                  |  | 07/03/07 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Seven S.A.    |  |         | 100 | % |     | Free Knight   |      |  | Handysize |     |  |  | 24,111                                    |  |  |                     | 1998 |  |                  |  | 03/19/08 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Eight S.A.    |  |         | 100 | % |     | Free Jupiter  |      |  | Handymax  |     |  |  | 47,777                                    |  |  |                     | 2002 |  |                  |  | 09/05/07 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Nine S.A.     |  |         | 100 | % |     | Free Impala   |      |  | Handysize |     |  |  | 24,111                                    |  |  |                     | 1997 |  |                  |  | 04/02/08 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Ten S.A.      |  |         | 100 | % |     | Free Lady     |      |  | Handymax  |     |  |  | 50,246                                    |  |  |                     | 2003 |  |                  |  | 07/07/08 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Eleven S.A.   |  |         | 100 | % |     | Free Maverick |      |  | Handysize |     |  |  | 23,994                                    |  |  |                     | 1998 |  |                  |  | 09/01/08 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Twelve S.A.   |  |         | 100 | % |     | Free Neptune  |      |  | Handysize |     |  |  | 30,838                                    |  |  |                     | 1996 |  |                  |  | 08/25/09 |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Fourteen S.A. |  |         | 100 | % |     | Hull 1        |      |  | Handysize |     |  |  | 33,600                                    |  |  |                     | 2012 |  |                  |  | N/A      |                             
|                        |  |         |     |   |     |               |      |  |           |     |  |  |                                           |  |  |                     |      |  |                  |  |          |                             
|Adventure Fifteen S.A.  |  |         | 100 | % |     | Hull 2        |      |  | Handysize |     |  |  | 33,600                                    |  |  |                     | 2012 |  |                  |  | N/A      |                             



|2. | Significant Accounting Policies
|-- | -------------------------------



a) Principles of Consolidation:
The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles
(or “U.S. GAAP”) and include in each of the three years in the period ended December 31, 2012 the accounts and
operating results of the Company and its wholly-owned subsidiaries referred to in Note 1 above. All inter-company balances and
transactions have been eliminated upon consolidation. FreeSeas as the holding company determines whether it has a controlling
financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity.
Under ASC 810 “Consolidation” a voting interest entity is an entity in which the total equity investment at risk is
sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb
losses, the right to receive residual returns and the right to make financial and operating decisions. The holding company consolidates
voting interest entities in which it owns all, or at least a majority (generally, greater than 50%) of the voting interest. Variable
interest entities (“VIE”) are entities as defined under ASC 810 that in general either do not have equity investors
with voting rights or that have equity investors that do not provide sufficient financial resources for the entity to support
its activities. The determination of whether a reporting entity is required to consolidate another entity is based on, among other
things, the other entity’s design and purpose and the reporting entity’s power, through voting or similar rights,
to direct the activities of the other entity that most significantly impact the other entity’s economic performance. A controlling
financial interest in a VIE is present when a company has the obligation to absorb losses or the right to receive benefits that
could potentially be significant to the VIE, or both. Only one reporting entity, known as the primary beneficiary, is expected
to be identified as having a controlling financial interest and thus is required to consolidate the VIE. The Company evaluates
all arrangements that may include a variable interest in an entity to determine if it may be the primary beneficiary, and would
be required to include assets, liabilities and operations of a VIE in its consolidated financial statements. As of December 31,
2012 and 2011, no such interest existed.



F-7







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



b) Use of Estimates: The preparation
of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ
from those estimates.



c) 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. For the year ended December 31,
2012, one charterer individually accounted for more than 10% of the Company’s voyage revenues, one charterer individually
accounted for more than 10% of the Company’s voyage revenues for the year ended December 31, 2011, and three charterers
individually accounted for more than 10% of the Company’s voyage revenues for the year ended December 31, 2010 as follows:





|Charterer |  | 2012 |                                                                        |   | 2011 |  |                                                                        | 2010 | 
|--------- |  | ---- | ---------------------------------------------------------------------- | - | ---- |  | ---------------------------------------------------------------------- | ---- | 
|A         |  |      | 22                                                                     | % |      |  | 33                                                                     | %    | 
|B         |  |      | Less than 10                                                           | % |      |  | Less than 10                                                           | %    | 
|C         |  |      | Less
                                                          than 10 | % |      |  | Less
                                                          than 10 | %    | 







d) Foreign Currency Translation:
The functional currency of the Company is the U.S. Dollar because the Company’s vessels operate in international shipping
markets, and therefore primarily transact business in U.S. Dollars. The Company’s accounting records are maintained in U.S.
Dollars. Transactions involving other currencies during the year are converted into U.S. Dollars using the exchange rates in effect
at the time of the transactions. At the balance sheet date, monetary assets and liabilities, which are denominated in other currencies,
are translated into U.S. Dollars at the year-end exchange rates. Resulting gains or losses are included in other income/loss in
the accompanying consolidated statements of operations.



e) Cash and Cash Equivalents: The
Company considers highly liquid investments such as time deposits and certificates of deposit with an original maturity of three
months or less to be cash equivalents.



f) Restricted Cash: Restricted
cash includes bank deposits that are required under the Company’s borrowing arrangements to be kept as part of the security
required under the respective loan agreements.



g) Trade Receivables, net: The
amount shown as Trade Receivables at each balance sheet date includes receivables from charterers for hire, freight and demurrage
billings, net of an allowance for doubtful debts. An estimate is made of the allowance for doubtful debts based on a review of
all outstanding amounts at year end, and an allowance is made for any accounts which management believes are not recoverable.



h) Insurance Claims: Insurance
claims comprise claims submitted and/or claims in the process of compilation for submission (claims pending) relating to hull
and machinery or protection and indemnity insurance coverage. They are recorded as incurred on the accrual basis and represent
the claimable expenses incurred, net of deductibles, the recovery of which is probable under the related insurance policies and
the Company can make an estimate of the amount to be reimbursed. Any non-recoverable amounts are included in accrued liabilities
and depending on their nature, are classified as operating expenses or voyage expenses in the statement of operations. The classification
of insurance claims (if any) into current and non-current assets is based on management’s expectations as to their collection
dates.



i) Inventories: Inventories, which
are comprised of bunkers and lubricants remaining on board of the vessels at year end, are valued at the lower of cost, as determined
on a first-in, first-out basis, or market.



F-8







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



j) Advances for vessels under construction:This account includes milestone payments relating to the shipbuilding contracts with the shipyard, and various pre-purchase
costs and expenses for which the recognition criteria are met.



k) Vessels’ Cost: Vessels
are stated at cost, which consists of the contract purchase price and any material expenses incurred upon acquisition (initial
repairs, improvements, delivery expenses and other expenditures to prepare the vessel for her initial voyage). Subsequent expenditures
for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning capacity
or improve the efficiency or safety of the vessels. Otherwise, these expenditures are charged to expense as incurred.



l) Vessels’ Depreciation:
The cost of the Company’s vessels is depreciated on a straight-line basis over the vessels’ remaining economic useful
lives from the acquisition date, after considering the estimated residual value (vessel’s residual value is equal to the
product of its lightweight tonnage and estimated scrap rate). Effective April 1, 2009, and following management’s reassessment
of the useful lives of the Company’s assets, the fleets useful life was increased from 27 to 28 years since the date
of initial delivery from the shipyard. Management’s estimate was based on the current vessels’ operating condition,
as well as the conditions prevailing in the market for the same type of vessels.



m) Vessels held for sale: It is
the Company’s policy to dispose of vessels when suitable opportunities arise and not necessarily to keep them until the
end of their useful life. The Company classifies assets and disposal groups of assets as being held for sale in accordance with
ASC 360, “Property, Plant and Equipment,” when the following criteria are met: (i) management possessing the
necessary authority has committed to a plan to sell the asset; (ii) the asset is immediately available for sale on an “as
is” basis; (iii) an active program to find the buyer and other actions required to execute the plan to sell the asset
have been initiated; (iv) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition
as a completed sale within one year; (v) the asset is being actively marketed for sale at a price that is reasonable in relation
to its current fair value and (vi) actions required to complete the plan indicate that it is unlikely that significant changes
to the plan will be made or that the plan will be withdrawn. Long-lived assets or disposal groups classified as held for sale
are measured at the lower of their carrying amount or fair value less cost to sell. These assets are not depreciated once they
meet the criteria to be held for sale and are classified in current assets on the consolidated balance sheet.



n) Impairment of Long-lived Assets:The Company follows the guidance under ASC 360, “Property, Plant and Equipment,” which addresses financial accounting
and reporting for the impairment or disposal of long-lived assets. The standard requires that, long-lived assets and certain identifiable
intangibles held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of the assets may not be recoverable. When the estimate of undiscounted cash flows, excluding interest
charges, expected to be generated by the use of the asset is less than its carrying amount, the Company should evaluate the asset
for an impairment loss. Measurement of the impairment loss is based on the fair value of the asset which is determined based on
management estimates and assumptions and by making use of available market data. The fair values are determined through Level
2 inputs of the fair value hierarchy as defined in ASC 820 “Fair value measurements and disclosures” and are derived
principally from or by corroborated or observable market data. Inputs, considered by management in determining the fair value,
include independent broker’s valuations, FFA indices, average charter hire rates and other market observable data that allow
value to be determined. The Company evaluates the carrying amounts and periods over which long-lived assets are depreciated to
determine if events have occurred which would require modification to their carrying values or useful lives. In evaluating useful
lives and carrying values of long-lived assets, management reviews certain indicators of potential impairment, such as future
undiscounted net operating cash flows, vessel sales and purchases, business plans and overall market conditions. In performing
the recoverability tests the Company determines future undiscounted net operating cash flows for each vessel and compares it to
the vessel’s carrying value. The future undiscounted net operating cash flows are determined by considering the Company’s
alternative courses of action, estimated vessel’s utilization, its scrap value, the charter revenues from existing time
charters for the fixed fleet days and an estimated daily time charter equivalent for the unfixed days over the remaining estimated
useful life of the vessel, net of vessel operating expenses adjusted for inflation, and cost of scheduled major maintenance. When
the Company’s estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying
value, the carrying value is written down, by recording a charge to operations, to the vessel’s fair market value.



As of December 31, 2012, 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 significant factors and assumptions the Company used in each future undiscounted net operating
cash flow analysis included, among others, operating revenues, commissions, off-hire days, dry-docking costs, operating expenses
and management fee estimates. Revenue assumptions were based on contracted time charter rates up to the end of life of the current
contract of each vessel as well as Forward Freight Agreements (FFAs) and market historical average time charter rates for the
remaining life of the vessel after the completion of the current contracts. In addition, the Company used an annual operating
expenses escalation factor and an estimate of off hire days. All estimates used and assumptions made were in accordance with the
Company’s internal budgets and historical experience of the shipping industry. The Company’s assessment concluded
that for vessels that are intended to be held and used no impairment existed as of December 31, 2012, as the future undiscounted
net operating cash flows per vessel exceeded the carrying value of each vessel. For the vessels for which alternative courses
of action (including their sale) are under consideration, an impairment charge of $12,480 was recognized in 2012 and reflected
in the accompanying consolidated statement of operations. (see Notes 5 and 6)



F-9







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



o) Accounting for Special Survey and
Dry-docking Costs: The Company follows 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. If special survey
or dry-docking is performed prior to the scheduled date, the remaining unamortized balances are immediately written-off. In the
accompanying financial statements, costs deferred are presented on a consistent basis and are limited to actual costs incurred
at the yard, paints, class renewal expenses, and parts used in the dry docking or special survey. Indirect costs and/or costs
related to ordinary maintenance, carried out while at dry dock, are expensed when incurred as they do not provide any future economic
benefit. Unamortized dry-docking and special survey costs of vessels that are sold are written off at the time of the respective
vessels’ sale and are included in the calculation of the resulting gain or loss from such sale.



p) Financing Costs: Fees incurred
for obtaining new loans are deferred and amortized over the loans’ respective repayment periods, using the effective interest
rate method. These charges are included in the balance sheet line item Deferred Charges. Any unamortized balance of costs relating
to loans repaid or refinanced is expensed in the period the repayment or refinancing is made, if the refinancing is deemed to
be a debt extinguishment under the provision of ASC 470-50 “Debt: Modifications and Extinguishments.”



q) Unearned Revenue: Unearned revenue
includes cash received prior to the balance sheet date and is related to revenue earned after such date. These amounts are recognized
as revenue over the voyage or charter period.



r) Interest Rate Swaps: The Company
uses interest rate swaps to manage net exposure to interest rate changes related to its borrowings. Such swap agreements, designated
as “economic hedges” are recorded at fair value with changes in the derivatives’ fair value recognized in earnings
unless specific hedge accounting criteria are met. During the years ended December 31, 2010, 2011 and 2012, there was no
derivative transaction meeting such hedge accounting criteria; therefore the change in their fair value is recognized in earnings.



s) Financial Instruments: The principal
financial assets of the Company consist of cash and cash equivalents and restricted cash, trade receivables (net of allowance),
insurance claims, prepayments and advances. The principal financial liabilities of the Company consist of accounts payable, accrued
liabilities, deferred revenue, long-term debt, and interest-rate swaps. The carrying amounts reflected in the accompanying consolidated
balance sheets of financial assets and liabilities, approximate their respective fair values.



t) Fair Value Measurements: The
Company follows the provisions of ASC 820, “Fair Value Measurements and Disclosures” which defines, and provides guidance
as to the measurement of, fair value. ASC 820 creates a hierarchy of measurement and indicates that, when possible, fair value
is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market
participants. The fair value hierarchy gives the highest priority (Level 1) to quoted prices in active markets and the lowest
priority (Level 3) to unobservable data, for example, the reporting entity’s own data. Under the standard, fair value measurements
are separately disclosed by level within the fair value hierarchy. ASC 820 applies when assets or liabilities in the financial
statements are to be measured at fair value, but does not require additional use of fair value beyond the requirements in other
accounting principles.



u) Fair value option: In February,
2007, the FASB issued ASC 825, “Financial Instruments,” which permits companies to report certain financial assets
and financial liabilities at fair value. ASC 825 was effective for the Company as of January 1, 2008 at which time the Company
could elect to apply the standard prospectively and measure certain financial instruments at fair value. The Company evaluated
the guidance contained in ASC 825 and elected not to report any existing financial assets or liabilities at fair value that are
not already reported at fair value, therefore the adoption of the statement had no impact on its financial position and results
of operations. The Company retains the ability to elect the fair value option for certain future assets and liabilities acquired
under this pronouncement.



F-10







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



v) Accounting for Revenue and Expenses:Revenue is recorded when services are rendered, the Company has a signed charter agreement or other evidence of an arrangement,
the price is fixed or determinable, and collection is reasonably assured. A voyage charter involves the carriage of a specific
amount and type of cargo from specific load port(s) to specific discharge port(s), subject to various cargo handling terms, in
return for payment of an agreed upon freight rate per ton of cargo. A time charter involves placing a vessel at the charterers’
disposal for a period of time during which the charterer uses the vessel in return for the payment of a specified daily hire rate.
Short period charters for less than three months are referred to as spot charters. Time charters extending three months to a year
are generally referred to as medium term charters. All other time charters are considered long term. Voyage revenues for the transportation
of cargo are recognized ratably over the estimated relative transit time of each voyage. A voyage is deemed to commence when a
vessel is available for loading of its next fixed cargo and is deemed to end upon the completion of the discharge of the current
cargo. Revenues from time chartering of vessels are accounted for as operating leases and are thus recognized on a straight line
basis as the average revenue over the rental periods of such charter agreements, as service is provided. Voyage expenses, primarily
consisting of port, canal and bunker expenses that are unique to a particular charter, are paid for by the charterer under time
charter arrangements or by the Company under voyage charter arrangements, except for commissions, which are always paid for by
the Company, regardless of charter type. All voyage and vessel operating expenses are expensed as incurred, except for commissions.
Commissions are deferred over the related voyage charter period to the extent revenue has been deferred since commissions are
earned as the Company’s revenues are earned. Probable losses on voyages in progress are provided for in full at the time
such losses can be estimated.



w) Profit Sharing Arrangements:
From time to time, the Company has entered into profit sharing arrangements with its charterers, whereby the Company may have
received additional income at an agreed percentage of net earnings earned by such charterer, where those earnings are over the
base rate of hire and settled periodically during the term of the charter agreement. Revenues generated from the profit sharing
arrangements are recorded in the period they are earned.



x) Repairs and Maintenance: All
repair and maintenance expenses, including major overhauling and underwater inspection expenses, are charged against income as
incurred and are included in vessel operating expenses in the accompanying consolidated statements of operations.



y) Stock-Based Compensation: Following
the provisions of ASC 718, “Compensation- Stock Compensation” the Company recognizes all share-based payments to employees,
including grants of employee stock options, in the consolidated statements of operations based on their fair values on the grant
date. Compensation cost on stock based awards with graded vesting is recognized on an accelerated basis as though each separately
vesting portion of the award was in substance, a separate award.



z) Earnings/(Losses) per Share:
Basic earnings/(losses) per share are computed by dividing net income (loss) by the weighted average number of common shares
outstanding during the periods presented. Diluted earnings per share reflect the potential dilution that would occur if securities
or other contracts to issue common stock were exercised. Dilution has been computed by the treasury stock method whereby all of
the Company’s dilutive securities (warrants, options and restricted shares) are assumed to be exercised and the proceeds
used to repurchase common shares at the weighted average market price of the Company’s common stock during the relevant
periods. The incremental shares (the difference between the number of shares assumed issued and the number of shares assumed purchased)
are included in the denominator of the diluted earnings/(losses) per share computation unless such inclusion would be anti-dilutive.



aa) Segment Reporting: The Company
reports financial information and evaluates its operations by total charter revenues. The Company does not have discrete financial
information to evaluate the operating results for each type of charter. Although revenue can be identified for these types of
charters, management does not identify expenses, profitability or other financial information for these charters. As a result,
management, including the chief operating decision makers, review operating results solely by revenue per day and operating results
of the fleet and thus the Company has determined that it operates under one reportable segment. Furthermore, when the Company
charters a vessel to a charterer, the charterer is free to trade the vessel worldwide and, as a result, the disclosure of geographic
information is impracticable.



bb) Subsequent Events: The Company
evaluates subsequent events or transactions up to the date in which the financial statements are issued according to the requirements
of ASC 855.



cc) Recent Accounting Pronouncements:



Fair Value



In May 2011,
the FASB issued new guidance for fair value measurements intended to achieve common fair value measurement and disclosure requirements
in U.S. GAAP and International Financial Reporting Standards. The amended guidance provides a consistent definition of fair value
to ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and International Financial
Reporting Standards. The amended guidance changes certain fair value measurement principles and enhances the disclosure requirements,
particularly for Level 3 fair value measurements. The amended guidance was effective for the Company beginning January 1,
2012. The adoption of the new guidance for fair value measurements had no effect on the Company’s consolidated financial
statements.



F-11







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Comprehensive Income



In June 2011, the FASB issued ASU
2011-05 Comprehensive Income (Topic 220): Presentation of Comprehensive Income. Under the amendments to Topic 220, Comprehensive
Income, in this Update, an entity has the option to present the total of comprehensive income, the components of net income, and
the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate
but consecutive statements. In both choices, an entity is required to present each component of net income along with total net
income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for
comprehensive income. This update eliminates the option to present the components of other comprehensive income as part of the
statement of changes in stockholders’ equity. The amendments in this update do not change the items that must be reported
in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. ASU is effective
for the fiscal years beginning after December 15, 2011. The Company follows the provisions of ASC 220, “Comprehensive
Income,” which requires separate presentation of certain transactions, which are recorded directly as components of stockholders’
equity. The provisions of ASU 2011-05 had no effect on the Company’s consolidated financial statements. In December 2011,
the FASB issued ASU 2011-11, “Balance Sheet (Topic 210): Disclosures about offsetting Assets and Liabilities”. The
objective of this update is to provide enhanced disclosures that will enable financial statements’ users to evaluate the
effect or potential effect of netting arrangements on an entity’s financial position. This includes the effect or potential
effect of rights of setoff associated with an entity’s recognized assets and recognized liabilities within the scope of
this ASU. The amendments require enhanced disclosures by requiring improved information about financial instruments and derivative
instruments that are either (1) offset in accordance with either Section 210-20-45 or Section 815-10-45 or (2) subject
to an enforceable master netting arrangement or similar agreement, irrespective of whether they are offset in accordance with
either Section 210-20-45 or Section 815-10-45. The amendments in this update are effective for annual reporting periods
beginning on or after January 1, 2013, and interim periods within those annual periods. An entity should provide the disclosures
required by those amendments retrospectively for all comparative periods presented. The provisions of ASU 2011-11 are not expected
to have a material impact on the Company’s consolidated financial statements.



In December 2011, FASB issued an Accounting
Standards Update for balance sheet, which contains new disclosure requirements regarding the nature of an entity's rights of offset
and related arrangements associated with its financial instruments and derivative instruments. Under U.S. GAAP, certain derivative
and repurchase agreement arrangements are granted exceptions from the general off-setting model. The new disclosure requirement
will provide financial statement users information regarding both gross and net exposures. This guidance is effective for annual
and interim financial statements beginning on or after January 1, 2013. Retrospective application is required. The Company does
not expect a material impact on the Company’s consolidated financial statements as a result of the adoption of this standard.



In July 2012, the FASB released an Accounting
Standards Update for Intangibles-Goodwill and Other, Testing Indefinite-Lived Intangible Assets for Impairment. The ASU gives
companies the option to perform a qualitative assessment before calculating the fair value of the indefinite-lived intangible
asset. Under the guidance, if this option is selected, a company is not required to calculate the fair value of the indefinite-lived
intangible unless the entity determines it is more likely than not that its fair value is less than its carrying amount. The provisions
are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012, but early
adoption is permitted. The Company’s adoption of this guidance did not have a material impact on the Company’s consolidated
financial statements.



In February 2013, the FASB issued new
accounting guidance that improves the reporting of reclassifications out of accumulated other comprehensive income. This new guidance
requires entities to report the effect of significant reclassifications out of accumulated other comprehensive income on the respective
line items in net income when applicable or to cross-reference the reclassifications with other disclosures that provide additional
detail about the reclassifications made when the reclassifications are not made to net income. The new standard is effective for
fiscal years, and interim periods within those fiscal years, beginning after December 15, 2012. The Company does not expect this
guidance to have a material impact on the Company’s 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 three years, and the resulting material adverse impact
on Company’ results from operations, the accompanying consolidated financial statements have been prepared on a going concern
basis. Based on the Company’s cash flow projections for 2013, cash on hand will not be sufficient to cover scheduled debt
repayments as of December 31, 2012 and operating expenses and capital expenditure requirements for at least twelve months
from the balance sheet date. The Company has incurred net losses of $30,888, $88,196 and $21,821 during the years ended December
31, 2012, 2011 and 2010, respectively. As of December 31, 2012 and 2011, the Company had working capital deficits of $70,973 and
$47,186, 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 the normal course of
business operations when they come due and to generate profitable operations in the future.



F-12







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



In addition, the Company has undertaken
negotiations with each of its lenders to restructure its debt repayments. On May 31, 2012, the Company and Credit Suisse entered
into a Sixth Supplemental Agreement to its Facility Agreement with Credit Suisse, which provided for, among other things, a deferral
of principal payments until March 31, 2014 (Note 10). On September 7, 2012, the Company entered into an amended and restated facility
with Deutsche Bank, which provides for, among other things, a reduction in and deferral of the balloon payment due on facility
B from November 2012 to December 2015, a reduction in the amount of principal repayment and amendments to the financial covenants
(Note 10).



In
February, March, April, November and December 2012, the Company received notifications from First Business Bank S.A. (FBB) that
the Company is in default under its loan agreement as a result of the breach of certain covenants and the failure to pay principal
and interest due under the loan agreement. Although the Company is seeking and will continue to seek waivers to certain covenants
from FBB, and continues negotiations to restructure its debt, it is uncertain that it will be able to succeed as this is currently
subject to the agreement of the bank. The Company is in discussions with the bank to permanently amend the amortization schedule
and resolve the foregoing defaults. Also the Company did not pay the monthly
repayments of $20 for each of Facility A and Facility B with Deutsche Bank along with accrued interest due in October, November
and December 2012. The Companyis in discussions with Deutsche
Bank to reach a mutually beneficial agreement.



The Company is currently exploring several
alternatives aiming to manage its working capital requirements and other commitments if current market charter hire rates remain
at current low levels, including completion of the negotiations for the restructuring of its loan with FBB, offerings of common
stock through a Standby Equity Distribution Agreement and an Equity Line Facility, (please see Note 17 “Subsequent events”
for recent developments), disposition of certain vessels in its current fleet and additional reductions in operating and other
costs.



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 cross default provisions in the Company’s loan agreements,
actual breaches existing under its credit facility with FBB could result in defaults under all of the Company’s affected
debt and the acceleration of such debt by its lender. Accordingly, as of December 31, 2012, the Company was required to reclassify
its long term debt and derivative financial instrument liability (interest rate swaps) as current liabilities on its consolidated
balance sheet since the Company had not received waivers in respect of the breaches discussed above at such time.



The consolidated financial statements
as of December 31, 2012, were prepared assuming that the Company would continue as a going concern. 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 current classification of debt and derivative financial instrument liability.



|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.



In June 2011, each of the ship-owning
subsidiaries entered into an amended and restated management agreement and the Company entered into a services agreement with
the Manager pursuant to which the monthly technical management fee increased from $16.5 to $18.975 and the monthly services fee
increased from $118.5 to $136.275, respectively, effective June 1, 2011. In addition, in connection with the relocation of
the Company’s offices in June 2011, the Company entered into an agreement with the Manager pursuant to which the Company
agreed to pay the Manager 65% of the rental due for the office space, commencing June 2011, and 65% of the apportioned common
expenses and maintenance expenses.



F-13







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



In addition, based on the amended services
agreement the Company reimbursed the Manager with the lump sum of $144 (equivalent of Euro 100) for the expenses incurred in relation
to the relocation of the Manager’s offices and early termination cost for previous lease agreement. This compensation is
included in “General and Administrative Expenses” in the accompanying consolidated statement of operations.



Each of the Company’s ship-owning
subsidiaries pays, as per its management agreement with the Manager, 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 $0.4 per day for superintendant 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. The Manager has subcontracted the
charter and post charter management of the Company’s vessels and pays the 1.25% of the gross freight or hire from the employment
of the vessels to Safbulk Pty Ltd (“Safbulk”), an entity affiliated with one of the Company’s shareholders.
Such sub-management agreement was terminated in March 2012 and the Manager has commenced the provision of the commercial management
of the Company’s fleet. 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. During the year ended December 31,
2012, there were no vessel disposals. During the year ended December 31, 2011, the Company paid the Manager $261 relating to the
sale of the M/V Free Envoy and M/V Free Lady (Note 5). In addition, the Company has incurred commission expenses
relating to its commercial agreement with the Manager amounting to $174, $371 and $728 for the years ended December 31, 2012,
2011 and 2010 respectively, included in “Commissions” in the accompanying consolidated statements of operations.



The Company also pays, as per its services
agreement with the Manager, a monthly fee of $136.275, (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 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 December 31, 2012 would be approximately $89,020. In
connection with the shares to be issued to the Manager in payment of unpaid management and services fees, described below, the
Manager has waived its right to terminate the services agreement and receive such termination fee.



On April 23, 2012, the Company’s
Board of Directors approved the issuance of 166,069 shares of the Company's common stock to the Manager in payment of the $926
in unpaid fees due to the Manager for the first quarter of 2012 under the management and services agreements with the Company.
The number of shares issued to the Manager was based on the closing prices of the Company's common stock on the first day of each
month during the quarter, which are the dates the management and services fees were due and payable. The Board also approved the
issuance of an aggregate of 19,964 shares of the Company's common stock to the non-executive members of its Board of Directors
in payment of $31 per person in unpaid Board fees for the last three quarters of 2011. The aggregate number of shares issued to
the directors was based on the closing prices of the Company's common stock on the last day of each of the last three quarters
of 2011, which are the dates that the Board fees were due and payable. All of the foregoing shares will be restricted shares under
applicable U.S. securities laws.



On October 3, 2012, the Company’s
Board of Directors approved the issuance of 219,650 shares of the Company's common stock to the Manager in payment of the $807
in unpaid fees due to the Manager for the third quarter of 2012 under the management and services agreements with the Company.
The number of shares issued to the Manager was based on the closing prices of the Company’s common stock on the first day
of each month during the quarter, which are the dates the management and services fees were due and payable. The Board also approved
the issuance of an aggregate of 32,679 shares of the Company’s common stock to the non-executive members of its Board of
Directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012. The aggregate number of shares
issued to the directors was based on the closing prices of the Company's common stock on the last day of each of the three quarters
of 2012, which are the dates that the Board fees were due and payable. All of the foregoing shares will be restricted shares under
applicable U.S. securities laws.



On January 18, 2013, the Company’s’
Board of Directors approved the issuance of an additional 641,639 shares of the Company’s common stock to the Manager in
payment of $809 in unpaid fees due to the Manager for November and December 2012 and January 2013 under the management and services
agreements with the Company. The number of shares to be issued to the Manager was based on the closing prices of the Company's
common stock on the first day of each month, which are the dates the management and services fees were due and payable. The Board
also approved the issuance of an aggregate of 53,020 shares of the Company’s common stock to its non-executive directors
in payment of $48 in unpaid Board fees for the fourth quarter of 2012. The aggregate number of shares to be issued to the directors
was based on the closing price of the Company’s common stock on the last day of the fourth quarter of 2012, which is the
date that the Board fees were due and payable. All of the foregoing shares will be restricted shares under applicable U.S. securities
laws (Note 17).



F-14







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Fees and expenses charged by the Manager
are included in the accompanying consolidated financial statements in “Management and other fees to a related party,”
“General and administrative expenses,” “Operating expenses,” “Gain on sale of vessel”, “Vessel
impairment loss”, “Advances for vessels under construction” and “Write-off of advances for vessels under
construction”. The total amounts charged for the year ended December 31, 2012, 2011 and 2010 amounted to $4,560 ($2,404
of management fees, $1,985 of services fees, $134 of superintendent fees and $37 for other expenses), $4,451 ($1,900 of management
fees, $1,609 of services fees, $146 of superintendent fees, $144 for compensation of relocation expenses, $179 for other expenses
and $473 for management fees and supervision expenses for vessels under construction), and $3,826 ($1,978 of management fees,
$1,439 of services fees, $178 of superintendent fees, $117 for other expenses and $114 for management fees and supervision expenses
for vessels under construction), respectively.



The “Management and other fees to
a related party” and the “General and administrative expenses” for the year ended December 31, 2012 include
the net amount of $1,037 recognized as stock-based compensation expense (the amount of $1,442 recognized as stock-based compensation
expense netted by the amount of $405 recognized as gain) for the issuance of the aggregate 385,719 shares of the Company's common
stock to the Manager and the issuance of the aggregate 52,643 shares of the Company’s common stock to the non-executive
members of its Board of Directors. As well, the above mentioned stock-based compensation expense includes the compensation recognized
for the approved issuance (on January 18, 2013) of 355,890 additional common shares to the Manager in payment of $538 in unpaid
fees due to the Manager for November and December 2012 and in payment of $48 in unpaid Board fees for the fourth quarter of 2012
(Note 17).



On December 31, 2009, the Company’s
Board of Directors awarded 25,500 restricted shares, as adjusted to reflect the reverse stock split effective February 14,
2013, to its non-executive directors, executive officers and certain of Manager’s employees. Of the remaining 12,000 unvested
restricted shares, 7,000 vested on December 31, 2012 and 5,000 will vest on December 31, 2013 pursuant to the Company’s
equity incentive plan (Note 14).The cost of these shares is amortized over their vesting period and is included in “General
and administrative expenses” in the accompanying consolidated statements of operations.



The balance due from the Manager as of
December 31, 2012 and 2011 was $346 and $563, respectively. The amount paid to the Manager for office space during the year
ended December 31, 2012, 2011 and 2010 was $143, $178 and $204, respectively and is included in “General and administrative
expenses” in the accompanying consolidated statements of operations.



First Business Bank (FBB)



The Company received from FBB, in which
the Company’s Chairman, Chief Executive Officer and President owns a minority interest, a loan of $27,750 (Note 10) in December
2009, to refinance its then existing loan balance of $21,750 with FBB and to receive additional liquidity of up to $6,000 with
a first priority mortgage over the M/V Free Impala and the M/V Free Neptune. The outstanding balance of the loan
as of December 31, 2012 was $23,237. Interest charged under the loan facility for the year ended December 31, 2012,
2011 and 2010 amounts to $1,115, $812 and $893, respectively, and is included in “Interest and finance costs” in the
accompanying consolidated statements of operations.



On
December 23, 2011 the Company agreed by letter with FBB to defer the repayment installment of $837.5 and the interest payment
of $197 both due on December 16, 2011 until the next repayment date March 16, 2012. In addition, the bank granted a
waiver to the security value covenant and the financial covenants and their testing has been waived until March 16,
2012. On March 23, 2012, the Company received a notice from FBB according to which failure to (i) pay the $1,675 repayment
installment due in March 2012 (ii) pay accrued interest and (iii) failure to pay default interest constitute an event
of default. On April 12, 2012, the Company received notice from FBB according to which along with the previously mentioned
events, failure to make periodic monthly installments into the retention account since September 2011 and violation of loan to
value covenant constitute events of default and notifies the Company that if remedy of all of the above is not made up to April 20,
2012, FBB will take whatever action is open to them. The Company has not either paid the installment of $837.5 which was due on
June 18, 2012 or the accrued interest. On July 11, August 22, November 28 and December 19, 2012, the Company received notices
from FBB, according to which failure to (i) pay the $4,188 repayment installment due in December 2012, (ii) pay accrued
interest and (iii) failure to pay default interest constitute an event of default. The Company is in discussions to permanently
amend the amortization schedule and reach an agreement on the unpaid principal and interest.



F-15







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Other Related Parties



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 years ended December 31, 2012, 2011 and
2010, such ship-brokering firm charged the Company commissions of $43, $56 and $175, respectively, which are included in “Commissions”
in the accompanying consolidated statements of operations. The balance due to the ship-brokering firm as of December 31,
2012 and 2011 was $94 and $84, respectively.



|5. | Vessels, net
|-- | ------------



|                         |  | Vessels Cost |         |   | Accumulated
    Depreciation |   |         | Net Book
    Value | 
|------------------------ |  | ------------ | ------- | - | ---------------------------- | - | ------- | ------------------ | 
|December 31, 2009        |  | $            | 309,816 |   |                              | $ | (39,115 | )                  | 
|Depreciation             |  |              | —       |   |                              |   | (15,365 | )                  | 
|Disposal                 |  |              | (7,600  | ) |                              |   | 5,561   |                    | 
|Vessel held for sale     |  |              | (27,981 | ) |                              |   | 5,472   |                    | 
|Vessel impairment charge |  |              | (22,921 | ) |                              |   | 5,824   |                    | 
|December 31, 2010        |  | $            | 251,314 |   |                              | $ | (37,623 | )                  | 
|                         |  |              |         |   |                              |   |         |                    | 
|Depreciation             |  |              | —       |   |                              |   | (8,664  | )                  | 
|Disposal                 |  |              | (9,461  | ) |                              |   | 7,279   |                    | 
|Vessels held for sale    |  |              | (76,302 | ) |                              |   | 1,214   |                    | 
|Vessel impairment charge |  |              | (62,414 | ) |                              |   | 16,076  |                    | 
|December 31, 2011        |  | $            | 103,137 |   |                              | $ | (21,718 | )                  | 
|Depreciation             |  |              | —       |   |                              |   | (5,729  | )                  | 
|December 31, 2012        |  | $            | 103,137 |   |                              | $ | (27,447 | )                  | 



Vessel disposed during the year ended
December 31, 2010.



On July 30, 2010, the Company agreed
to sell the M/V Free Destiny. The vessel was delivered to the buyers on August 27, 2010 and the Company recognized
a gain of $807 as a result of the sale. From the proceeds of the sale, the Company paid on November 1, 2010 an amount of
$2,700 constituting prepayment towards the Deutsche Bank (“Deutsche Bank,” formerly known as Hollandsche Bank Unie)
loan facility B (Note 10).



Vessels disposed during the year ended
December 31, 2011.



On May 13, 2011, the Company sold
the M/V Free Envoy for a sale price of $4,200 and recognized a gain of $1,561 as a result of the sale. From the net proceeds
of the sale, the Company paid on May 13, 2011 an amount of $3,700 constituting prepayment towards the Deutsche Bank Nederland
loan facility B. According to the loan terms, all future installments have been reduced to nil until the balloon payment due in
November 2012 (Note 10).



As a result of the fourth supplemental
agreement, the Company entered into with Credit Suisse on July 15, 2011(Note 10), the Company committed to a plan for sale
of the vessels M/V Free Jupiter and M/ V Free Lady.



Thus Company assessed for recoverability
the carrying value of M/V Free Jupiter and M/V Free Lady, including unamortized deferred dry docking costs of $177,
due to their expected sale. In performing its assessment, the Company compared the carrying value of the vessels with their estimated
fair value. As a result of this assessment, the Company has recognized an impairment loss of $46,515 in the consolidated statements
of operations of which $15,048 relates to the M/V Free Jupiter and $31,467 to the M/V Free Lady.



On November 8, 2011, the Company
sold the M/V Free Lady, for a sale price of $21,900. From the net proceeds of the sale, the Company paid on November 8,
2011 the amount of $19,800 constituting prepayment towards the Credit Suisse loan facility (Note 10).



F-16







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Vessels disposed during the year ended
December 31, 2012.



During the year ended December 31, 2012,
there were no vessel disposals.



The M/V Free Maverick is currently
idle pending resolution in connection with dispute with creditors.



|6. | Vessels held for sale
|-- | ---------------------



|                         |  | Net Book Value |        
|------------------------ |  | -------------- | -------
|December 31, 2009        |  | $              | —      
|Additions                |  |                | 22,509 
|Vessel impairment charge |  |                | (8,903 
|December 31, 2010        |  | $              | 13,606 
|Additions                |  |                | 75,088 
|Disposals                |  |                | (20,503
|Drydocking costs         |  |                | 564    
|Vessel impairment charge |  |                | (23,483
|December 31, 2011        |  | $              | 45,272 
|Vessel impairment charge |  |                | (12,480
|December 31, 2012        |  | $              | 32,792 



Vessel classified as assets held for
sale during the year ended December 31, 2010.



The Company according to the provisions
of ASC 360, has classified the M/V Free Hero as “held for sale” in the accompanying consolidated balance sheet
for the year ended December 31, 2010 at her estimated market value less costs to sell, as all criteria required for the classification
as “Held for Sale” were met at the balance sheet date. The vessel’s carrying value was adjusted to $13,606 at
the date of its classification as held for sale. Furthermore subsequent to December 31, 2010, at the direction of the Company’s
Board of Directors, and after obtaining the respective lenders consent (FBB), the Company initiated a plan of sale of the vessels
M/V Free Neptune and M/ V Free Impala within the context of its plans to fund its working capital requirements.



The Company has individually assessed
for recoverability the carrying values of each of the above vessels, including unamortized deferred dry docking costs of $631.
In performing its assessment, the Company compared the carrying values of these vessels with their estimated fair values at December 31,
2010. As a result of this assessment the Company has recognized an impairment loss of $26,631 in the accompanying 2010 consolidated
statement of operations, of which $17,253 relates to the M/V Free Impala and $9,378 to the M/V Free Hero. No impairment
loss was recognized for the M/V Free Neptune as its fair value exceeded its carrying value.



Vessels classified as assets held for
sale during the year ended December 31, 2011.



The Company according to the provisions
of ASC 360, has classified the M/V Free Hero, the M/V Free Jupiter, the M/V Free Impala and the M/V Free
Neptune as “held for sale” in the accompanying consolidated balance sheet for the year ended December 31,
2011 at their estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale”
were met at the balance sheet date. On February 28, 2011, after obtaining the respective lenders consent (FBB), the Company’s
Board of Directors, approved a plan of sale of the vessels M/V Free Impala and M/V Free Neptune within the context
of its plans to fund its working capital requirements as discussed in Note 3. On July 15, 2011, the Company’s Board
of Directors approved a plan of sale of the vessels M/V Free Jupiter and M/V Free Lady (which was sold on November 8,
2011) as a result of the fourth supplemental agreement the Company entered into with Credit Suisse (Note 10).



Drydocking costs consists of the unamortized
dry docking and special survey costs of the M/V Free Neptune which were included in “Vessels held for sale”
following the vessel’s classification as held for sale in February 2011 as well as $373 relating to the cost of the drydocking
and special survey performed on this vessel in November 2011.



As of December 31, 2011, the Company
compared the carrying values of vessels classified as held for sale with their estimated market values less costs to sell and
recognized an impairment loss of $23,483 in the accompanying consolidated statements of operations.



F-17







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Vessels classified as assets held for
sale during the year ended December 31, 2012.



The Company according to the provisions
of ASC 360, has classified the M/V Free Hero, the M/V Free Jupiter, the M/V Free Impala and the M/V Free
Neptune as “held for sale” in the accompanying consolidated balance sheet for the year ended December 31,
2012 at their estimated market values less costs to sell, as all criteria required for the classification as “Held for Sale”
were met at the balance sheet date.



As of December 31, 2012, the Company compared
the carrying values of vessels classified as held for sale with their estimated market values less costs to sell and recognized
an impairment loss of $12,480 in the accompanying consolidated statements of operations, of which $2,880 relates to the M/V Free
Hero, $3,360 to the M/V Free Jupiter, $3,360 to the M/V Free Impala and $2,880 to the M/V Free Neptune.
The Company is currently continuing its attempts to sell these vessels and will sell them, whenever the conditions are considered
satisfactory.



|7. | Advances for Vessels under Construction
|-- | ---------------------------------------



On August 17, 2010, two of the Company’s
wholly owned subsidiaries entered into shipbuilding contracts with a Chinese shipyard for the construction of two drybulk vessels
of approximately 33,600 dwt each for an aggregate purchase price of $49,880 including extra costs of approximately $1,080 in total.



As of December 31, 2011, the Company
impaired the advances and the capitalized expenses relating to the shipbuilding contracts due to lack of financing after the cancelation
of ABN AMRO financing commitment and delayed scheduled payment to the yard resulting in a default situation as per the construction
contract.



|8. | Deferred Charges
|-- | ----------------



|                      |  | Dry Docking
     Costs– Non Current |       |   | Special Survey
    Costs – Non Current |   |        | Financing
    Costs- Current |  |   | Total |  
|--------------------- |  | ----------------------------------- | ----- | - | -------------------------------------- | - | ------ | ---------------------------- |  | - | ----- | -
|December 31, 2009     |  | $                                   | 753   |   |                                        | $ | 1,425  |                              |  | $ | 817   |  
|Additions             |  |                                     | 1,610 |   |                                        |   | 937    |                              |  |   | —     |  
|Write-offs            |  |                                     | (298  | ) |                                        |   | (333   | )                            |  |   | —     |  
|Amortization          |  |                                     | (834  | ) |                                        |   | (1,054 | )                            |  |   | (211  | )
|December 31, 2010     |  | $                                   | 1,231 |   |                                        | $ | 975    |                              |  | $ | 606   |  
|Additions             |  |                                     | 172   |   |                                        |   | 20     |                              |  |   | —     |  
|Write-offs            |  |                                     | (126  | ) |                                        |   | (280   | )                            |  |   | (100  | )
|Vessels held for sale |  |                                     | (124  | ) |                                        |   | (67    | )                            |  |   | —     |  
|Amortization          |  |                                     | (622  | ) |                                        |   | (293   | )                            |  |   | (176  | )
|December 31, 2011     |  | $                                   | 531   |   |                                        | $ | 355    |                              |  | $ | 330   |  
|Additions             |  |                                     | —     |   |                                        |   | —      |                              |  |   | 3,303 |  
|Write-offs            |  |                                     | —     |   |                                        |   | —      |                              |  |   | (191  | )
|Vessels held for sale |  |                                     | 112   |   |                                        |   | 189    |                              |  |   | —     |  
|Amortization          |  |                                     | (628  | ) |                                        |   | (360   | )                            |  |   | (555  | )
|December 31, 2012     |  | $                                   | 15    |   |                                        | $ | 184    |                              |  | $ | 2,887 |  



Additions to financing costs in 2012 related
to the amendment and restructuring fees of $1,823 and $1,480, concerning the Credit Suisse and Deutsche Bank loan facilities,
respectively, both due and payable on the earlier of March 31, 2014, the date of a voluntary prepayment, or the date the loan
facilities become due or are repaid in full.



Additions to deferred dry-docking and
special survey costs in 2011 related to the dry docking and special survey of the M/V Free Maverick.



F-18







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



Unamortized deferred financing fees of
$191 related to the Credit Suisse and Deutsche Bank loan facilities, were written off due to the amended and restated facilities
the Company entered with Credit Suisse and Deutsche Bank Nederland, on May 31, 2012 and September 7, 2012, respectively (Note 10).



Unamortized dry docking and special survey
costs of $406 related to the M/V Free Envoy and M/V Free Lady were written off upon the vessels sale in 2011 as
well as $100 related to unamortized deferred financing fees of the Credit Suisse loan facility (Note 10) due to the prepayment
made in 2011.



Unamortized dry docking and special survey
costs of $191 related to the M/V Free Neptune were included in “Vessels held for sale” following the vessel’s
classification as held for sale in February 2011.



|9. | 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 uses interest rate swaps to manage net exposure to interest
rate fluctuations related to its borrowings.



The Company is a party of two interest
rate swap agreements which do not qualify for hedge accounting and as such, the changes in their fair values are recognized in
the statement of operations. The Company makes quarterly payments to the counterparty based on decreasing notional amounts, standing
at $4,340 and $2,323, respectively as of December 31, 2012 at fixed rates of 5.07% and 5.55% respectively, and the counterparty
makes quarterly floating-rate payments at LIBOR to the Company based on the same decreasing notional amounts. The swaps mature
in September 2015 and July 2015, respectively.



The change in the fair value of the Company’s
two interest rate swaps for the years ended December 31, 2012, 2011 and 2010 resulted in unrealized gains of $314, $361 and
$129, respectively. The settlements on the interest rate swaps for the years ended December 31, 2012, 2011 and 2010 resulted
in realized losses of $399, $539 and $594, respectively. The total of the change in fair value and settlements for the year ended
December 31, 2012, 2011 and 2010 aggregate to losses of $85, $178 and $465, respectively, which is separately reflected in
“Loss on derivative instruments” in the accompanying consolidated statements of operations.



As of December 31, 2012 the Company
was in breach of certain of its financial covenants relating to its loan agreement with FBB (Note 10). Thus the cross default
provisions of the swap agreements would be activated and as such and in accordance with the guidance related to classification
of obligations that are callable by the creditor, the Company has classified the entire long-term amount as current at December 31,
2012. In this respect the total fair value amounting to $446 is reflected in “Derivative financial instruments-current portion”
in the accompanying consolidated balance sheets.



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 income.



Fair Value of Derivative Instruments



|                                                  |  |                                                           |  | Asset Derivatives      |   |  | Liability Derivatives |  
|------------------------------------------------- |  | --------------------------------------------------------- |  | ---------------------- | - |  | --------------------- | -
|                                                  |  |                                                           |  | December 31,
     2012 |   |  | December 31,
    2011 |  
|Derivative                                        |  | Balance Sheet Location                                    |  | Fair Value             |   |  | Fair Value            |  
|                                                  |  |                                                           |  |                        |   |  |                       |  
|Derivatives not designated as hedging instruments |  |                                                           |  |                        |   |  |                       |  
|                                                  |  |                                                           |  |                        |   |  |                       |  
|Interest rate swaps                               |  | Derivative financial instruments - current portion        |  | $                      | — |  |                       | $
|                                                  |  |                                                           |  |                        |   |  |                       |  
|                                                  |  | Derivative financial instruments - net of current portion |  |                        | — |  |                       |  
|                                                  |  |                                                           |  |                        |   |  |                       |  
|                                                  |  | Total derivatives                                         |  | $                      | — |  |                       | $





F-19







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



The Effect of Derivative Instruments on the Statement of
Operations for the Years Ended December 31, 2012, 2011 and 2010



Derivatives Not Designated as Hedging Instruments



|                    |  |                                        |  | Amount |   
|------------------- |  | -------------------------------------- |  | ------ | --
|Derivative          |  | Loss Recognized on Derivative Location |  | 2012   |   
|Interest rate swaps |  | Loss on derivative instruments         |  | $      | 85
|                    |  |                                        |  |        |   
|Total               |  |                                        |  | $      | 85



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-20







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(All amounts in thousands of United States Dollars, except
for share 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:



|                             |  | December 31, |     |  | Quoted Prices  in Active
    Markets for Identical Assets |   |   | Significant Other Observable
    Inputs |  |   | Significant Unobservable
    Inputs | 
|---------------------------- |  | ------------ | --- |  | --------------------------------------------------------- | - | - | --------------------------------------- |  | - | ----------------------------------- | 
|Recurring measurements:      |  | 2012         |     |  | (Level 1)                                                 |   |   | (Level 2)                               |  |   | (Level 3)                           | 
|Interest rate swap contracts |  | $            | 446 |  |                                                           | $ | — |                                         |  | $ | 446                                 | 
|                             |  |              |     |  |                                                           |   |   |                                         |  |   |                                     | 
|Total                        |  | $            | 446 |  |                                                           | $ | — |                                         |  | $ | 446                                 | 



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



|                             |  | December 31, |        |  | Quoted Prices  in Active
    Markets for Identical Assets |   |   | Significant Other Observable
    Inputs |  |   | Significant Unobservable
    Inputs | 
|---------------------------- |  | ------------ | ------ |  | --------------------------------------------------------- | - | - | --------------------------------------- |  | - | ----------------------------------- | 
|Non -Recurring measurements: |  | 2011         |        |  | (Level 1)                                                 |   |   | (Level 2)                               |  |   | (Level 3)                           | 
|Vessels held for sale        |  | $            | 45,272 |  |                                                           | $ | — |                                         |  | $ | 45,272                              | 
|                             |  |              |        |  |                                                           |   |   |                                         |  |   |                                     | 
|Total                        |  | $            | 45,272 |  |                                                           | $ | — |                                         |  | $ | 45,272                              | 



|Non -Recurring measurements: |  | December 31, 2012 |        |  | (Level 1) |   |   | (Level 2) |  |   | (Level 3) | 
|---------------------------- |  | ----------------- | ------ |  | --------- | - | - | --------- |  | - | --------- | 
|Vessels held for sale        |  | $                 | 32,792 |  |           | $ | — |           |  | $ | 32,792    | 
|                             |  |                   |        |  |           |   |   |           |  |   |           | 
|Total                        |  | $                 | 32,792 |  |           | $ | — |           |  | $ | 32,792    | 



In accordance with the provisions of relevant
guidance, as of December 31, 2012, the Company compared the carrying values of the M/V Free Hero , the M/V Free
Jupiter , the M/V Free Impala and the M/V Free Neptune which were classified as held for sale in the accompanying
consolidated balance sheet for the year ended December 31, 2012 (Note 6), with their estimated fair market values less costs
to sell and recognized an impairment loss of $12,480 in the accompanying consolidated statements of operations.



In accordance with the provisions of relevant
guidance, as of December 31, 2011, the Company compared the carrying values of the M/V Free Hero , the M/V Free
Jupiter , the M/V Free Impala and the M/V Free Neptune which were classified as held for sale in the accompanying
consolidated balance sheet for the year ended December 31, 2011 (Note 6), with their estimated fair market values less costs
to sell and recognized an impairment loss of $23,483 in the accompanying consolidated statements of operations.



|10. | Long-Term Debt
|--- | --------------



Long-term debt as of December 31,
2012 and 2011 consists of the following bank loans:





|                                |  | (In thousands of U.S. Dollars) |       
|------------------------------- |  | ------------------------------ | ------
|                                |  | December 31, 2012              |       
|Lender                          |  | Current
    Portion            |       
|Deutsche Bank Nederland
    (a) |  | $                              | 14,741
|Deutsche Bank Nederland (b)     |  | $                              | 14,741
|Credit Suisse (c)               |  | $                              | 8,170 
|Credit Suisse (d)               |  | $                              | 8,170 
|Credit Suisse (e)               |  | $                              | 20,110
|First Business
    Bank (f)     |  | $                              | 23,237
|Total                           |  | $                              | 89,169









F-21







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



The remaining repayment terms of the loans
outstanding as of December 31, 2012 are as follows:



|Lender                  |  | Vessel                          |  | Remaining
    Repayment Terms                                                                                                                                                                                                                                            
|----------------------- |  | ------------------------------- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) Deutsche Bank       |  | M/V  Free Knight                |  | Five monthly repayments of $20 through April 30,
    2013 and a monthly repayment of $11.5 on May 31, 2013, thereafter six consecutivequarterly
    repayments of $337 commencing on June 30, 2014 followed by one balloon payment of $12,607.5 due on December 31, 2015.
|                        |  |                                 |  |                                                                                                                                                                                                                                                                          
|(b) Deutsche Bank       |  | M/V Free Maverick               |  | Five monthly repayments of $20 through April 30,
    2013 and a monthly repayment of $11.5 on May 31, 2013, thereafter six consecutivequarterly
    repayments of $337 commencing on June 30, 2014 followed by one balloon payment of $12,607.5 due on December 31, 2015.
|                        |  |                                 |  |                                                                                                                                                                                                                                                                          
|(c) Credit Suisse       |  | M/V Free Hero                   |  | Seven quarterly installments of $286 commencing
    on June 30, 2014 and a balloon payment of $6,168 payable together with the last installment due on December 31, 2015.                                                                                                
|(d) Credit Suisse       |  | M/V  Free Goddess               |  | Seven quarterly installments of
        $286 commencing on June 30, 2014 and a balloon payment of $6,168 payable together with the last installment due on December
        31, 2015.                                                                                    
|(e) Credit Suisse       |  | M/V Free Jupiter                |  | Seven quarterly installments of $350 commencing
    on June 30, 2014 and a balloon payment of $17,660 payable together with the last installment due on December 31, 2015.                                                                                               
|                        |  |                                 |  |                                                                                                                                                                                                                                                                          
|(f) First Business Bank |  | M/V Free ImpalaM/V Free Neptune |  | Fifteen quarterly installments of $837.5 and a
    balloon payment of $10,675, payable together with the last installment due on December 16, 2016.                                                                                                                      



The vessels indicated in the above table
are pledged as collateral for the respective loans.



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 year ended December 31, 2012 and 2011 was 2.7% and 2.9%, respectively. Interest expense incurred under the above loan
agreements amounted to $2,415, $ 3,173 (net of capitalized interest $282) and $3,932 or the years ended December 31, 2012,
2011 and 2010, respectively, and is included in “Interest and Finance Costs” in the accompanying consolidated statements
of operations.



Deutsche Bank Facility



On September 2, 2011, the Company
instructed the Deutsche Bank in accordance with relevant provision of the facility agreement to postpone the repayment installment
of $750 due on September 18, 2011, which will be paid on the termination date in December 2015.



In October 2011, the Company following
negotiations with Deutsche Bank deferred the payment of an additional fee equal to $360, due on November 1, 2011, to January
2012 (Note 15).



In December 2011, the Company did not
pay the $750 repayment installment along with accrued interest with Deutsche Bank and held discussions to permanently amend the
amortization schedule including refinancing of the balloon due in November 2012.



F-22







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



On February 15, 2012, the Company
received notice from Deutsche Bank Nederland, or Deutsche Bank, according to which Company's failure to (i) repay the installment
due in December 2011, (ii) pay regular interest on the loan, (iii) pay default interest on the loan, (iv) pay the
success fee due in November 2011, (v) set new financial covenants and (vi) comply with the loan to value covenant, are
considered events of default. Deutsche Bank requested that the Company fulfill its obligations by March 15, 2012. The Company
has not paid the aforementioned amounts or the $750 repayment installment along with accrued interest due in March 2012. On April 26,
2012, the Company was advised by Deutsche Bank that it would approve the request to permanently amend the amortization schedule
including refinancing of the balloon due in November 2012.



On September 7, 2012, the Company and
certain of its subsidiaries entered into an amended and restated facility agreement with Deutsche Bank. As amended and restated,
the facility agreement:



| | · | Defers
                                                                                                               and reduces the
                                                                                                               balloon payment
                                                                                                               of $16,009 due
                                                                                                               on Facility B from
                                                                                                               November 2012 to
                                                                                                               December 2015;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Provides
                                                                                                               for monthly repayments
                                                                                                               of $20 for each
                                                                                                               of Facility A and
                                                                                                               Facility B commencing
                                                                                                               September 30, 2012
                                                                                                               through April 30,
                                                                                                               2013 and a monthly
                                                                                                               repayment of $11.5
                                                                                                               for each of Facility
                                                                                                               A and Facility
                                                                                                               B on May 31, 2013;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Suspends
                                                                                                               principal repayments
                                                                                                               from June 1, 2013
                                                                                                               through June 30,
                                                                                                               2014 on each of
                                                                                                               Facility A and
                                                                                                               Facility B;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Provides
                                                                                                               for quarterly repayments
                                                                                                               of $337 for Facility
                                                                                                               A commencing June
                                                                                                               30, 2014, which
                                                                                                               quarterly repayments
                                                                                                               have been reduced
                                                                                                               from $750;
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Provides
                                                                                                               for quarterly repayments
                                                                                                               of $337 for Facility
                                                                                                               B commencing June
                                                                                                               30, 2014;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Bears
                                                                                                               interest at the
                                                                                                               rate of LIBOR plus
                                                                                                               1% through March
                                                                                                               31, 2014 and LIBOR
                                                                                                               plus 3.25% from
                                                                                                               April 1, 2014 through
                                                                                                               maturity, which
                                                                                                               were reduced from
                                                                                                               LIBOR plus 2.25%
                                                                                                               for Facility A
                                                                                                               and LIBOR plus
                                                                                                               4.25% for Facility
                                                                                                               B;
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Establishes
                                                                                                               certain financial
                                                                                                               covenants, including
                                                                                                               an interest coverage
                                                                                                               ratio that must
                                                                                                               be complied with
                                                                                                               starting January
                                                                                                               1, 2013, a consolidated
                                                                                                               leverage ratio
                                                                                                               that must be complied
                                                                                                               with starting January
                                                                                                               1, 2014, and a
                                                                                                               minimum liquidity
                                                                                                               ratio that must
                                                                                                               be complied with
                                                                                                               starting July 1,
                                                                                                               2014;
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Removes
                                                                                                               permanently the
                                                                                                               loan to value ratio;
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Requires
                                                                                                               the amount of any
                                                                                                               “Excess Cash,”
                                                                                                               as determined in
                                                                                                               accordance with
                                                                                                               the amended and
                                                                                                               restated 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; and
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | · | Removes
                                                                                                               the success fee
                                                                                                               originally due
                                                                                                               under the previous
                                                                                                               agreement and provides
                                                                                                               for an amendment
                                                                                                               and restructuring
                                                                                                               fee of $1,480 payable
                                                                                                               on the earlier
                                                                                                               of March 31, 2014,
                                                                                                               the date of a voluntary
                                                                                                               prepayment, or
                                                                                                               the date the loan
                                                                                                               facility becomes
                                                                                                               due or is repaid
                                                                                                               in full.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



In October, November and December 2012,
the Company did not pay the monthly repayments of $20 for each of Facility A and Facility B with Deutsche Bank, totaling $120
along with accrued interest due of $165. The Company is evaluating its options and is in discussion with Deutsche Bank to reach
a mutually beneficial agreement.



Credit Suisse Facility



On July 15, 2011, the Company entered
into a Fourth Supplemental Agreement with Credit Suisse which amended its existing credit facility to, among other things, defer
its payments totaling $2,000, originally due in July 2011 until September 2011. The Fourth Supplemental Agreement, as originally
entered into, contemplated that the Company would complete a proposed debt financing with an unrelated party, and that if the
debt financing did not occur by September 5, 2011, the Company would sell one or two of the four vessels collateralizing
the credit facility. This debt financing did not occur. Therefore, the Company initiated the sale of the M/V Free Jupiter and
the M/V Free Lady. On October 3, 2011, the Company entered an agreement to sell the M/V Free Lady. The net proceeds of this
sale amounting to $19,800 were applied to pay down the amount outstanding on this facility.



In light of the successful sale of the
M/V Free Lady, the Company entered into a Fifth Supplemental Agreement dated November 7, 2011 with Credit Suisse,
which amended the Fourth Supplemental Agreement to, among other things, reduce the next five loan repayment installments starting
from the third quarter of 2011. Pursuant to this agreement, the Company agreed to enter into a period time charter of at least
twelve months for all mortgaged vessels not later than December 31, 2011, which charter would cover the vessels’ debt
service plus $1.0 million. If the foregoing time charters were not entered into by the date required, the Company agreed that
will sell, not later than January 31, 2012, either the M/V Free Jupiter or both the M/V Free Goddess and the
M/V Free Hero . In addition, under the Fifth Supplemental Agreement, the margin on this facility increased to 3.25% during
the period until either the period employment or the sale procedure has been completed, after which time the margin will be reduced
to 2.75%. According to the terms of the agreement, failure to comply with the above would constitute an event of default. The
Company did not conclude any time charter agreement and any agreement for the sale of the above mentioned vessels.



F-23















FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



On February 2, 2012, the Company
agreed by letter with Credit Suisse to defer its payments totaling $700 originally due on January 31, 2012 until the next
repayment date April 30, 2012, which was further deferred to May 31, 2012 as per letter dated April 25, 2012. The
interest payment of $348 originally due on February 8, 2012, has been agreed to be paid in two installments as follows: $147
paid on February 8, 2012 and $201 to be paid on April 30, 2012, which was further deferred to May 31, 2012 as per
letter dated April 25, 2012. In addition the interest payment of $348 originally due on May 10, 2012, has been agreed
to be paid in two installments as follows: $147 to be paid on May 10, 2012 and $201 on May 31, 2012.



On February 15 2012, the Company
received a proposal from Credit Suisse containing restructuring head terms for the full payment holiday of the principal and partial
interest payment holiday until March 31, 2014, conditioned on approval from the Company’s other lenders. The Company
has been advised that the proposal has been approved by Deutsche Bank Nederland. The Company is continuing discussions with FBB.



On May 31, 2012, the Company entered into
a Sixth Supplemental Agreement with Credit Suisse, which amends and restates the Facility Agreement dated December 24, 2007, as
amended, between the Company and Credit Suisse. The Sixth Supplemental Agreement, among other things, modifies 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



As of December 31, 2012, the outstanding
balance under the Facility Agreement totaled $36,450. An amendment and restructuring fee equal to 5% of the current outstanding
indebtedness, $1,823, will be due and payable on the earlier of March 31, 2014, the date of a voluntary prepayment, or the date
the loan facility becomes due or is repaid in full. The Company is also no longer required to sell additional vessels, as it had
been under the terms of the Facility Agreement as previously in effect.



FBB Facility



On January 27, 2012, the Company
entered into a First Supplemental Agreement with FBB, which amends its existing credit facility to defer the repayment installment
of $837.5 and the interest payment of $197 both due on December 16, 2011 until the next repayment date on March 16,
2012. In addition, FBB granted a waiver to the security value covenant and the financial covenants, whose testing was waived until
March 16, 2012. On March 23, 2012, the Company received a notice from FBB according to which failure to (i) pay
the $1,675 repayment installment due in March 2012, (ii) pay accrued interest and (iii) pay default interest constitute
an event of default. On April 12, 2012, the Company received notice from FBB according to which along with the previously
mentioned events, failure to make periodic monthly installments into the retention account since September 2011 and violation
of the loan to value covenant constituted events of default, and that if all of the above events are not remedied on or before
April 20, 2012, FBB will take whatever action is available to it. The Company has not either paid the installment of $837.5
which was due on June 18, 2012 or the accrued interest. On July 11, August 22, November 28 and December 19, 2012, the Company
received notices from FBB, according to which failure to (i) pay the $4,188 repayment installment due in December 2012, (ii) pay
accrued interest and (iii) failure to pay default interest constitute an event of default. The Company is in discussions
to permanently amend the amortization schedule and reach an agreement on the unpaid principal and interest.



F-24







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



ABN AMRO Bank Facility



On September 10, 2010, the Company
signed an offer letter with ABN AMRO Bank securing, subject to customary legal documentation and payment of an arrangement fee,
commitments for pre-delivery and post-delivery debt financing up to an amount of $32,400 for the purchase of two newbuilding Handysize
vessels. The facility, which would be available for drawdown until December 31, 2012, is repayable in 20 quarterly installments
plus a balloon payment, commencing three months after the delivery of the vessels. The vessels will be used as collateral for
the facility. According to the agreed terms, the facility would bear interest at LIBOR plus margin and would include customary
financial covenants.



By letter dated December 30, 2011,
the Company received notice from ABN AMRO Bank that the Bank’s commitment for pre-delivery and post delivery debt financing
up to the amount of $32,400 for the purchase of the two newbuilding Handysize vessels has been canceled due to the Company’s
failure to pay commitment fees as prescribed in the offer letter, that were considered as events of default, and the occurrence
of various material adverse changes as considered by ABN AMRO Bank.



Pursuant to a settlement agreement entered
into on April 13, 2012, ABN AMRO Bank returned to the Company all commitment fees paid to date less expenses and all further
obligations of the parties were terminated.



Loan Covenants



As of December 31, 2012, the Company was
in breach of certain of its financial covenants for its loan agreement with FBB, including the loan-to-value ratio, interest cover
ratio, minimum liquidity requirements and leverage ratio. 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 $89,169 as current
at December 31, 2012.



Deutsche Bank amended and restated
facility agreement:



| | · | 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.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-25







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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





| | · | 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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



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 expenseshall 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.



“See Note 5 for current status of M/V Free Maverick”.



|11. | Commitments and Contingencies
|--- | -----------------------------



The following table summarizes our contractual obligations
and their maturity dates as of December 31, 2012:



|                               |  | Payments Due
    by Period  |        
|------------------------------ |  | --------------------------- | -------
|(Dollars
    in thousands)     |  | Total                       |        
|                               |  | (U.S. dollars in thousands) |        
|                               |  |                             |        
|Debt                           |  | $                           | 89,169 
|                               |  |                             |        
|Interest on variable-rate debt |  |                             | 1,501  
|                               |  |                             |        
|Services fees to the Manager   |  |                             | 9,403  
|                               |  |                             |        
|Management fees to the Manager |  |                             | 9,696  
|                               |  |                             |        
|Total
    obligations          |  | $                           | 109,769



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-26







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



The M/V Free
Jupiter was on time charter with Korea Line Corp, or KLC, a South Korean company, from June 8, 2007 until she was re-delivered
to us on February 22, 2011. KLC made several unilateral deductions from hire payments during the three-year course of the
time charter, and no hire was received from KLC from February 8, 2011 until the actual redelivery of the vessel on February 22,
2011. The Company commenced arbitration proceedings against KLC, and has taken action to obtain security, including the arrest
of KLC assets. As a result, the Company obtained third-party security in the amount of $1.68 million (which includes provision
for interest and legal costs) in the form of a letter of undertaking from KLC’s P&I club covering KLC’s unilateral
deductions from the hire. The Company also obtained cash security held in escrow in the amount of $182 from the execution of a
lien on sub-hires. KLC has counterclaimed by way of set-off, alleging that KLC is entitled to retain the amount of hire that was
deducted because of the Company’s alleged breach of charterparty. The Company denies these allegations and continues to
assert its claim to recover the full amount deducted by KLC. On January 25, 2011, KLC announced that it had filed a
petition for the rehabilitation proceeding for court receivership in the Seoul Central District Court, and the court approved
and confirmed a rehabilitation plan. Upon the issuance of the final award of the arbitration tribunal, and for any amount in excess
of the third-party security and cash security, the Company may participate in the approved rehabilitation plan. On January 17,
2012, the Company obtained an interim award under which it was awarded the part of the claim that KLC had admitted was undisputed,
$832, plus interest, legal costs, and the cost of the tribunal. Following the interim award, the Company received approximately
$335. The majority of the balance of $511 that has been awarded is unsecured. The Company is considering its options if KLC
does not pay the balance, including the possibility of pursuing this in the Korean rehabilitation proceedings, where the hearing
of the Company’s claim has been stayed pending the outcome of the London arbitration. The Company believes that, if the
Korean claim succeeds, the Company should make a recovery in accordance with the rehabilitation plan, which has been approved
by the Korean court. The Company intends to seek a further award (if this matter does not settle) for the disputed balance, which
is adequately secured. Despite above actions, the Company wrote-off the remaining outstanding balance $1,173 of the KLC time charter,
which is included in "Provision and write-offs of insurance claims and bad debts" in the accompanying consolidated statements
of operations for the year ended December 31, 2012.



On December 4, 2012, the M/V Free Jupiterenrooted from West Africa to Brazil in order to load her next cargo, she has suffered a malfunction on her main engine that
prevented her on completing the transit on her own power. The Owners engaged in a Lloyds open form agreement with a Brazilian
tug company and the vessel was towed to Brazil for repairs, which are claimable from hull and machinery underwriters.



In addition to the above claims, the aggregate
outstanding balance of the Company’s other claims as of December 31, 2012 stands at $276 related to Company’s
insurance claims for vessel incidents arising in the ordinary course of business.



On October 11, 2012, we announced that
all 21 crew members of the M/V Free Goddess are reported safe and well after the vessel’s release by her hijackers.
The M/V Free Goddess had been hijacked by Somali pirates on February 7, 2012 while transiting the Indian Ocean eastbound.
The vessel was on a time charter trip at the time she was hijacked. Under the charterparty agreement, the BIMCO Piracy clause
was applied, which provided among other things, for the charterers to have the vessel covered with kidnap and ransom insurance
and loss of hire insurance. The vessel was also covered by the war risk underwriters, who confirmed cover. We commenced arbitration
proceedings with the charterer due to the charterer not fulfilling its obligations under the charterparty agreement. The proceedings
were concluded and the award was in our favor. Thereafter, we reached a settlement with the charterer pursuant to which the charterer
agreed to pay $800.



On November 5, 2012, the M/V Free Maverickwas arrested in Morocco in relation to claims against the M/V Free Maverick and “sister ships”. Since then,
the M/V Free Maverick is idle pending resolution in connection with creditors. The owners’ legal counsels were involved
and instructed to dispute the arrest orders that had been issued based on invoices for other vessels under the Manager’s
management on the basis that were owned by different entities. The appeal was heard in December 2012. The ruling issued in February
2013 was against us and the arrest orders were deemed to be standing. The Company has reached an agreement with the largest creditor
and the arrest was subsequently lifted for this specific amount. The Company is also in discussions with the remaining creditors
to settle the outstanding balance.



|12. | Earnings/(Losses) per Share
|--- | ---------------------------



On June 9, 2011, the Company extended
the expiration date and reduced the exercise price for its 165,500 outstanding Class Z warrants. The expiration date of the
Class Z warrants was extended to August 12, 2011 from July 26, 2011 and the exercise price per share was reduced
to $1.80 per one-tenth (1/10) of a share of common stock, or $18 per whole share of common stock, from $25 per one-tenth
(1/10) of a share, or $250 per whole share. As of August 12, 2011, 886 Class Z warrants had been exercised and 177 shares
of Common Stock were issued; the remaining Class Z warrants expired unexercised. In addition, the 15,000 Class A warrants
held by the founding shareholders, which had an exercise price of $25.00 per 1/10 share or $250 per whole share, were not exercised
and expired on July 29, 2011.



F-27







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



On December 24, 2012, the 1,200 shares
of common stock that were reserved for issuance upon the exercise of outstanding options were not exercised and expired.



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 February 14, 2013. The computation of the dilutive common shares outstanding at December 31, 2012
and 2011 does not include the non vested restricted shares discussed in Note 14, as the Company reported losses for the years
ended December 31, 2012 and 2011.



The components of the denominator for
the calculation of basic earnings/(losses) per share and diluted earnings/(losses) per share for the years ended December 31,
2012, 2011 and 2010, respectively, adjusted to reflect the reverse stock split effective February 14, 2013 (Note 13), are
as follows:



|                                           |  | For the year
    ended December 31, 2012 |         |   | For the year
    ended December 31, 2011 |   |         | For the year
    ended December 31, 2010 | 
|------------------------------------------ |  | ---------------------------------------- | ------- | - | ---------------------------------------- | - | ------- | ---------------------------------------- | 
|Numerator                                  |  |                                          |         |   |                                          |   |         |                                          | 
|Net loss – basic and diluted               |  | $                                        | (30,888 | ) |                                          | $ | (88,196 | )                                        | 
|Basic earnings per share denominator:      |  |                                          |         |   |                                          |   |         |                                          | 
|Weighted average common shares outstanding |  |                                          | 837,173 |   |                                          |   | 648,507 |                                          | 
|Diluted earnings per share denominator:    |  |                                          |         |   |                                          |   |         |                                          | 
|Weighted average common shares outstanding |  |                                          | 837,173 |   |                                          |   | 648,507 |                                          | 
|Dilutive common shares:                    |  |                                          |         |   |                                          |   |         |                                          | 
|Options                                    |  |                                          | —       |   |                                          |   | —       |                                          | 
|Warrants                                   |  |                                          | —       |   |                                          |   | —       |                                          | 
|Restricted shares                          |  |                                          | —       |   |                                          |   | —       |                                          | 
|                                           |  |                                          |         |   |                                          |   |         |                                          | 
|Dilutive effect                            |  |                                          | —       |   |                                          |   | —       |                                          | 
|                                           |  |                                          |         |   |                                          |   |         |                                          | 
|Weighted average common shares – diluted   |  |                                          | 837,173 |   |                                          |   | 648,507 |                                          | 
|                                           |  |                                          |         |   |                                          |   |         |                                          | 
|Basic income/(loss) per common share       |  | $                                        | (36.90  | ) |                                          | $ | (136    | )                                        | 
|Diluted income/(loss) per common share     |  | $                                        | (36.90  | ) |                                          | $ | (136    | )                                        | 



|13. | Reverse stock split
|--- | -------------------



In the Annual General Meeting of Shareholders
held on September 30, 2010, the Company’s shareholders approved a reverse stock split of the Company’s issued
and outstanding common stock at a ratio of one share for every five shares outstanding, effective on October 1, 2010. The
reverse stock split consolidates 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 has been reduced from 32,437,480 to 6,487,852,
excluding outstanding and unexercised share options and warrants. The reverse stock split did not affect any shareholder’s
ownership percentage of the Company’s common shares or warrants, 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.



On January 22, 2013, the Company’s
Board of Directors authorized a reverse stock split at a ratio of 1 for 10, which was effective at 8:00 am on February 14, 2013,
New York time. The reverse stock split consolidates 10 shares of common stock into one share of common stock at a par value of
$0.001 per share. 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.



At December 31, 2012, and following
the reverse stock split discussed above, the Company had 5,000,000 shares of preferred stock authorized at $0.001 par value of
which none was issued, 250,000,000 shares of common stock authorized at $0.001 par value, of which 1,362,830 shares were issued
and outstanding, as well as the number of shares of restricted stock discussed in Note 14.



F-28









FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



All per share amounts included in these
audited consolidated financial statements and accompanying notes have been retroactively adjusted to the earliest period presented
for the effect of these reverse stock splits.



|14. | Stock Incentive Plan
|--- | --------------------



In April 2005, FreeSeas’ Board
of Directors approved the issuance of Class A warrants to the executive officers of FreeSeas. The terms of the warrants provided
that they expired on July 29, 2011 and are not callable. These warrants, the issuance of which was ratified, adopted and
approved by the Board of Directors on December 16, 2005, entitle the holders to purchase an aggregate of 4,000 shares of
the Company’s common stock at an exercise price of $250.00 per share. Such warrants were not exercised and expired by their
terms on July 29, 2011.



In December 2007, the Company’s
Board of Directors granted 900 options to directors and 2,500 options to executive officers, as adjusted to reflect the reverse
stock split effective February 14, 2013 (Note 13 and 17), of which 2,800 would vest in one year, 300 would vest in two years
and 300 in three years from the grant, all at an exercise price of $412.50 per share. Effective December 18, 2009, certain
of the Company’s officers and directors have forfeited 2,200 of the stock options granted to them, leaving 1,200 stock options
unexercised, which expired on December 24, 2012.



On December 31, 2009, the Company’s
Board of Directors awarded 25,500 restricted shares, as adjusted to reflect the reverse stock split effective February 14,
2013, to its non-executive directors, executive officers and certain of Manager’s employees. Of the unvested restricted
shares amounted to 13,400 as of December 31, 2010, 1,000 and 400 restricted shares with an original vesting date on December 31,
2012 have been forfeited in June 2011 and October 2011, respectively. Of the remaining unvested restricted shares amounted to
12,000 as of December 30, 2012, 7,000 restricted shares vested on December 31 2012 and 5,000 restricted shares will vest
on December 31, 2013.



For the year ended December 31, 2012,
the recognized stock based compensation expense in relation to the restricted shares granted is $122. The total unrecognized compensation
cost of the non vested restricted shares granted under the Plan is $58. The cost is expected to be recognized over a period of
twelve months, representing a weighted average remaining life of approximately 8 months.



Presented below is a table reflecting
the activity in the restricted shares, options, Class A warrants, Class W warrants and Class Z Warrants from January 1,
2010 through December 31, 2012:



|                            |  | RestrictedShares |        |   | Options |  |        | Class AWarrants |  |  | Class WWarrants |   |  | Class ZWarrants |         |   | Total |  |          | AverageExercisePrice |  |  | OptionsExercisable |   |  | Class AWarrantsExercisable |        |  | Class WWarrantsExercisable |  |        | Class ZWarrantsExercisable |  |  | Total   |   |  | AverageExercisePrice |        
|--------------------------- |  | ---------------- | ------ | - | ------- |  | ------ | --------------- |  |  | --------------- | - |  | --------------- | ------- | - | ----- |  | -------- | -------------------- |  |  | ------------------ | - |  | -------------------------- | ------ |  | -------------------------- |  | ------ | -------------------------- |  |  | ------- | - |  | -------------------- | -------
|                            |  |                  |        |   |         |  |        |                 |  |  |                 |   |  |                 |         |   |       |  |          |                      |  |  |                    |   |  |                            |        |  |                            |  |        |                            |  |  |         |   |  |                      |        
|01-Jan-10                   |  |                  | 18,400 |   |         |  | 1,200  |                 |  |  | 15,000          |   |  |                 | 78,626  |   |       |  | 165,500  |                      |  |  | 278,727            |   |  | $                          | 216.60 |  |                            |  | 900    |                            |  |  | 15,000  |   |  |                      | 78,626 
|Options vested              |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | 300    |                            |  |  | —       |   |  |                      | —      
|Options forfeited           |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Warrants expired            |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | (78,626 | ) |       |  | —        |                      |  |  | (78,626            | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | (78,626
|Warrants exercised          |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares issued    |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares vested    |  |                  | (4,000 | ) |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | (4,000             | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares forfeited |  |                  | (1,000 | ) |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | (1,000             | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|                            |  |                  |        |   |         |  |        |                 |  |  |                 |   |  |                 |         |   |       |  |          |                      |  |  |                    |   |  |                            |        |  |                            |  |        |                            |  |  |         |   |  |                      |        
|31-Dec-10                   |  |                  | 13,400 |   |         |  | 1,200  |                 |  |  | 15,000          |   |  |                 | 0       |   |       |  | 165,500  |                      |  |  | 195,100            |   |  | $                          | 255.20 |  |                            |  | 1,200  |                            |  |  | 15,000  |   |  |                      | 0      
|Options vested              |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Options forfeited           |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Options expired             |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Warrants exercised          |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | (886     | )                    |  |  | (886               | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Warrants expired            |  |                  | —      |   |         |  | —      |                 |  |  | (15,000         | ) |  |                 | —       |   |       |  | (164,614 | )                    |  |  | (179,614           | ) |  |                            |        |  |                            |  | —      |                            |  |  | (15,000 | ) |  |                      | —      
|Restricted shares vested    |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares forfeited |  |                  | (1,400 | ) |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | (1,400             | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|                            |  |                  |        |   |         |  |        |                 |  |  |                 |   |  |                 |         |   |       |  |          |                      |  |  |                    |   |  |                            |        |  |                            |  |        |                            |  |  |         |   |  |                      |        
|31-Dec-11                   |  |                  | 12,000 |   |         |  | 1,200  |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | 13,200             |   |  | $                          | 412.50 |  |                            |  | 1,200  |                            |  |  | —       |   |  |                      | —      
|Options vested              |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Options forfeited           |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Options expired             |  |                  | —      |   |         |  | (1,200 | )               |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | (1,200             | ) |  |                            |        |  |                            |  | (1,200 | )                          |  |  | —       |   |  |                      | —      
|Warrants exercised          |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Warrants expired            |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares vested    |  |                  | (7,000 | ) |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | (7,000             | ) |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|Restricted shares forfeited |  |                  | —      |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | —                  |   |  |                            |        |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      
|                            |  |                  |        |   |         |  |        |                 |  |  |                 |   |  |                 |         |   |       |  |          |                      |  |  |                    |   |  |                            |        |  |                            |  |        |                            |  |  |         |   |  |                      |        
|31-Dec-12                   |  |                  | 5,000  |   |         |  | —      |                 |  |  | —               |   |  |                 | —       |   |       |  | —        |                      |  |  | 5,000              |   |  | $                          | —      |  |                            |  | —      |                            |  |  | —       |   |  |                      | —      



F-29







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



|15. | Shareholders’ Equity
|--- | --------------------



On April 27, 2005, the Company filed
amended Articles of Incorporation in the Marshall Islands, whereby the name of the Company was changed from Adventure Holdings
S.A. to FreeSeas Inc.



The authorized number of shares was increased
to 45,000,000, of which 40,000,000 would be common stock with a par value of $.001 per share and 5,000,000 blank check preferred
stock with a par value of $.001 per share. On September 17, 2009, the Company’s shareholders approved at the Annual
Meeting of Shareholders an amendment to the Company’s Articles of Incorporation to increase the number of authorized shares
of common stock from 40,000,000 to 250,000,000 shares, par value $0.001 per share.



On July 28, 2009, the Company completed
the registered offering of 200,823 shares of common stock (as adjusted to reflect the effect of reverse stock split), which includes
26,194 shares (as adjusted to reflect the effect of reverse stock split) issued pursuant to the underwriter’s over-allotment
option. The offering resulted in net proceeds of $16,244, after deducting underwriting fees and offering expenses. Proceeds from
the offering were used primarily for the acquisition of the drybulk vessel M/V Free Neptune as discussed in Note 5 above,
for general working capital purposes, and an amount of $1,691 was applied against the outstanding balance with Deutsche Bank Nederland.
The shares were sold under the Company’s previously filed shelf registration statement, which was declared effective by
the Securities and Exchange Commission on May 14, 2008.



On December 9, 2011, the Company
received a deficiency letter from NASDAQ stating that, because the Company’s common stock has not maintained a minimum bid
price of $1.00 per a share for the last 30 consecutive business days, the Company was no longer in compliance with NASDAQ Listing
Rule Section 5450(a)(1). In order to regain compliance, the Company has until June 4, 2012 for the closing bid price
of its common stock to meet or exceed $1.00 for a minimum of 10 consecutive business days. On January 6, 2012, the Company
received a deficiency letter from NASDAQ stating that, because the Company has not maintained a minimum Market Value of Publicly
Held Shares (the “MVPHS”) of $5,000 for the last 30 consecutive business days, the Company is no longer in compliance
with NASDAQ Listing Rule Section 5450(b)(1)(C). In order to regain compliance, the Company had until July 2, 2012 for
the Company’s MVPHS to meet or exceed $5,000 for a minimum of 10 consecutive business days. By letter dated February 29,
2012, the Company received notice from NASDAQ that it has regained compliance with Listing Rules 5450(a)(1) and 5450(b)(1)(C),
since for the last 10 consecutive business days, from February 14, 2012 to February 28, 2012, the closing bid price
of the Company’s common stock has been at $1.00 per share or greater and the Company’s minimum market value of publicly
held shares has been $5,000 or greater, respectively.



The Company received letters dated June
21, 2012 and June 25, 2012 from NASDAQ stating that for the previous 30 consecutive business days, the bid price of the Company'
common stock closed below the minimum $1.00 per share and the market value of the Company' publicly held common stock, or MVPHS,
was below the minimum of $5,000. These are both requirements for continued listing on the NASDAQ Global Market pursuant to NASDAQ
Marketplace Rules 5450(a)(1), the Minimum Bid Price Rule, and 5450(b)(1), the MVPHS Rule, respectively. These letters have no
immediate effect on the listing of the Company's common stock. The Company has been provided a grace period of 180 calendar days
to regain compliance by maintaining a closing bid price of at least $1.00 per share (which grace period ends December 18, 2012)
and a closing MVPHS of $5,000 or more for a minimum of ten consecutive business days (which grace period ends December 24, 2012).
If at any time before those dates, the bid price of the Company' common stock closes at $1.00 per share or more and its MVPHS
closes at $5,000 or more for a minimum of 10 consecutive business days, NASDAQ will notify the Company that it has achieved compliance
with the Minimum Bid Price Rule and the MVPHS Rule. The Company was granted an initial six month period, or until December 24,
2012, to regain compliance with the minimum bid price rule, unless it was able to obtain an extension of the deadline to regain
compliance.



In December 2012, the Company applied
to NASDAQ to transfer the listing of the Company's common stock from The NASDAQ Global Market to The NASDAQ Capital Market. To
transfer to the NASDAQ Capital Market, the Company was required to meet all of the continued listing requirements of the NASDAQ
Capital Market, except for the minimum bid price. One of the continued listing requirements of the NASDAQ Capital Market is to
have a MVPHS of $1,000. Such a transfer would have granted the Company an additional six month period to regain compliance with
the minimum bid price.



On December 19, 2012, the Company received
notification from NASDAQ that on December 18, 2012, it failed to meet all continued listing criteria for the NASDAQ Capital Market,
as its MVPHS was $897. As a result, the notice indicated that the Company’s common stock would be delisted from NASDAQ.
The Company appealed that decision and the appeals hearing was scheduled for February 21, 2013 (for recent developments, please
see Note 17 below).



F-30







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



On May 11, 2012, the Company entered into
a Standby Equity Distribution Agreement, or SEDA, with YA Global Master SPV Ltd., or YA Global, a fund managed by Yorkville Advisors,
LLC, pursuant to which, for a 24-month period, the Company has the right to sell up to $3.2 million of shares of the Company’s
common stock. The SEDA entitles the Company to sell and obligates YA Global to purchase, from time to time over a period of 24
months, shares of the Company’s common stock for cash consideration up to an aggregate of $3.2 million, subject to conditions
the Company must satisfy as set forth in the SEDA. For each share of common stock purchased under the SEDA, YA Global will pay
96% of the lowest daily volume weighted average price during the pricing period, which is the five consecutive trading days after
the Company delivers an advance notice to YA Global. Each such advance may be for an amount not to exceed the greater of $200
or 100% of the average daily trading volume of the Company’s common stock for the 10 consecutive trading days prior to the
notice date. The Company registered the resale by YA Global of up to 183,972 shares of its common stock. As of December 31, 2012,
the Company had sold all the shares of its common stock under the SEDA for aggregate proceeds of $432. Pursuant to the terms of
the SEDA, the Company cannot deliver any further advance notices until such time as the Company files and has declared effective
a new registration statement covering the resale of additional shares of its common stock by YA Global.



On August 21, 2012, pursuant to the terms
of a Note Purchase Agreement dated May 11, 2012 between the Company and YA Global, the Company raised an aggregate of $250 from
the sale of a promissory note pursuant to the Note Purchase Agreement. The note was expected to be repaid in 10 equal weekly installments
and matures 90 days from the date of funding. Thereafter, the Company requested an extension of the repayment schedule which was
granted. As of December 31, 2012, the outstanding balance under the Note Purchase Agreement totaled $75.



On August 10, 2012, pursuant to the approval
of the Company’s Board of Directors at its April 2012 meeting, the Company issued 166,069 shares of its common stock to
the Manager in payment of the $926 in unpaid fees due to the Manager for the first quarter of 2012 and 19,964 shares of its common
stock to its non-executive directors in payment of $155 in unpaid Board fees for the last three quarters of 2011.



On September 11, 2012, the Company’s
Audit Committee approved the retention of Sherb & Co., LLP, or Sherb, as our independent registered public accounting firm
for the fiscal year ending December 31, 2012, and dismissed Ernst & Young (Hellas) Certified Auditors Accountants S.A. (“E&Y”).



On October 11, 2012, pursuant to the approval
of the Company’s Board of Directors at its October 2012 meeting, the Company issued 219,650 shares of its common stock to
the Manager in payment of the $807 in unpaid fees due to the Manager for the third quarter of 2012 and 32,679 shares of its common
stock to its non-executive directors in payment of $152 in unpaid Board fees for the first, second and third quarter of 2012.



On October 11, 2012, the Company entered
into an Investment Agreement, or Dutchess Agreement, with Dutchess Opportunity Fund, II, LP, or Dutchess, a fund managed by Dutchess
Capital Management, II, LLC, pursuant to which, for a 36-month period, the Company has the right to sell up to 235,296 shares
of our common stock. The Dutchess Agreement entitles the Company to sell and obligates Dutchess to purchase, from time to time
over a period of 36 months, up to 235,296 shares of its common stock, subject to conditions the Company must satisfy as set
forth in the Dutchess Agreement. For each share of common stock purchased under the Dutchess Agreement, Dutchess will pay 98%
of the lowest daily volume weighted average price during the pricing period, which is the five consecutive trading days commencing
on the day the Company delivers a put notice to Dutchess. Each such put may be for an amount not to exceed the greater of $200
or 200% of the average daily trading volume of the Company’s 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, subject
to a 9.99% blocker provision. The Company registered the resale by Dutchess of up to 235,296 shares of its common stock. As of
December 31, 2012, the Company had sold 92,933 shares of its common stock under the Dutchess Agreement for aggregate proceeds
of $91.



Common Stock Dividends



During the year ended December 31,
2012, 2011 and 2010, the Company did not declare or pay any dividends.



F-31







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



|16. | Taxes
|--- | -----



Under the laws of the Countries of the
Company and its subsidiaries incorporation and/or vessels’ registration, the Company is not subject to tax on international
shipping income; however, they are subject to registration and tonnage taxes, which have been included in Vessel operating expenses
in the accompanying consolidated statement of operations. Pursuant to the Internal Revenue Code of the United States (the “Code”),
U.S. source income from the international operations of ships is generally exempt from U.S. tax if the company operating the ships
meets both of the following requirements, (a) the Company is organized in a foreign country that grants an equivalent exemption
to corporations organized in the United States, and (b) either (i) more than 50% of the value of the Company’s
stock is owned, directly or indirectly, by individuals who are “residents” of the Company’s country of organization
or of another foreign country that grants an “equivalent exemption” to corporations organized in the United States
(the “50% Ownership Test”) or (ii) the Company’s stock is “primarily and regularly traded on an established
securities market” in its country of organization, in another country that grants an “equivalent exemption”
to United States corporations, or in the United States (the “Publicly-Traded Test”).



To complete the exemption process, the
Company’s shipowning subsidiaries must file a U.S. tax return, state the basis of their exemption and obtain and retain
documentation attesting to the basis of their exemptions. The Company’s subsidiaries completed the filing process for 2012
on or prior to the applicable tax filing deadline.



All the Company’s ship-operating
subsidiaries currently satisfy the Publicly-Traded Test based on the trading volume and the widely-held ownership of the Company’s
shares, but no assurance can be given that this will remain so in the future, since continued compliance with this rule is subject
to factors outside the Company’s control. Based on its U.S. source Shipping Income for 2010, 2011 and 2012, the Company
would be subject to U.S. federal income tax of approximately $34, $93 and $25, respectively, in the absence of an exemption under
Section 883.



|17. | Subsequent Events
|--- | -----------------



| | · | Effective
                                                                                                               January 1, 2013,
                                                                                                               Sherb combined
                                                                                                               its practice with
                                                                                                               RBSM LLP (“RBSM”),
                                                                                                               and going forward,
                                                                                                               RBSM will be the
                                                                                                               Company’s
                                                                                                               new independent
                                                                                                               registered public
                                                                                                               accounting firm.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                                                                                               of January 9, 2013,
                                                                                                               the Company has
                                                                                                               sold the remaining
                                                                                                               142,362 shares
                                                                                                               of its common stock
                                                                                                               to Dutchess, under
                                                                                                               the Dutchess Agreement
                                                                                                               for aggregate proceeds
                                                                                                               of $106.
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                                             January
                                                                                                                             15,
                                                                                                                             2013,
                                                                                                                             the
                                                                                                                             Company
                                                                                                                             issued
                                                                                                                             137,500
                                                                                                                             shares
                                                                                                                             of
                                                                                                                             its
                                                                                                                             common
                                                                                                                             stock
                                                                                                                             (the
                                                                                                                             “Settlement
                                                                                                                             Shares”)
                                                                                                                             to
                                                                                                                             Hanover
                                                                                                                             Holdings
                                                                                                                             I,
                                                                                                                             LLC
                                                                                                                             (“Hanover”)
                                                                                                                             in
                                                                                                                             connection
                                                                                                                             with
                                                                                                                             a
                                                                                                                             stipulation
                                                                                                                             of
                                                                                                                             settlement
                                                                                                                             (the
                                                                                                                             “Settlement
                                                                                                                             Agreement”)
                                                                                                                             of
                                                                                                                             an
                                                                                                                             outstanding
                                                                                                                             litigation
                                                                                                                             claim.
                                                                                                                             The
                                                                                                                             Settlement
                                                                                                                             Agreement
                                                                                                                             provides
                                                                                                                             that
                                                                                                                             the
                                                                                                                             Settlement
                                                                                                                             Shares
                                                                                                                             will
                                                                                                                             be
                                                                                                                             subject
                                                                                                                             to
                                                                                                                             adjustment
                                                                                                                             on
                                                                                                                             the
                                                                                                                             36
                                                                                                                             th
                                                                                                                             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
                                                                                                                             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
                                                                                                                             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
                                                                                                                             Settlement
                                                                                                                             Agreement
                                                                                                                             further
                                                                                                                             provides
                                                                                                                             that
                                                                                                                             if,
                                                                                                                             at
                                                                                                                             any
                                                                                                                             time
                                                                                                                             and
                                                                                                                             from
                                                                                                                             time
                                                                                                                             to
                                                                                                                             time
                                                                                                                             during
                                                                                                                             the
                                                                                                                             True-Up
                                                                                                                             Period,
                                                                                                                             Hanover
                                                                                                                             reasonably
                                                                                                                             believes
                                                                                                                             that
                                                                                                                             the
                                                                                                                             total
                                                                                                                             number
                                                                                                                             of
                                                                                                                             Settlement
                                                                                                                             Shares
                                                                                                                             previously
                                                                                                                             issued
                                                                                                                             to
                                                                                                                             Hanover
                                                                                                                             shall
                                                                                                                             be
                                                                                                                             less
                                                                                                                             than
                                                                                                                             the
                                                                                                                             total
                                                                                                                             number
                                                                                                                             of
                                                                                                                             VWAP
                                                                                                                             Shares
                                                                                                                             to
                                                                                                                             be
                                                                                                                             issued
                                                                                                                             to
                                                                                                                             Hanover
                                                                                                                             or
                                                                                                                             its
                                                                                                                             designee
                                                                                                                             in
                                                                                                                             connection
                                                                                                                             with
                                                                                                                             the
                                                                                                                             Settlement
                                                                                                                             Agreement,
                                                                                                                             Hanover
                                                                                                                             may,
                                                                                                                             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
                                                                                                                             and
                                                                                                                             the
                                                                                                                             Company
                                                                                                                             will
                                                                                                                             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
                                                                                                                             Settlement
                                                                                                                             Agreement).
                                                                                                                             On
                                                                                                                             January
                                                                                                                             18
                                                                                                                             and29,
                                                                                                                             2013
                                                                                                                             the
                                                                                                                             Company
                                                                                                                             delivered
                                                                                                                             additional
                                                                                                                             40,000
                                                                                                                             and
                                                                                                                             8,284
                                                                                                                             shares,
                                                                                                                             respectively,
                                                                                                                             to
                                                                                                                             Hanover.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-32







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



| | · | On
                                                                                                               January 18, 2013,
                                                                                                               the Company’s’
                                                                                                               Board of Directors
                                                                                                               approved the issuance
                                                                                                               of an additional
                                                                                                               641,639 shares
                                                                                                               of the Company’s
                                                                                                               common stock to
                                                                                                               the Manager in
                                                                                                               payment of $809
                                                                                                               in unpaid fees
                                                                                                               due to the Manager
                                                                                                               for November and
                                                                                                               December 2012 and
                                                                                                               January 2013 under
                                                                                                               the management
                                                                                                               and services agreements
                                                                                                               with the Company.
                                                                                                               The number of shares
                                                                                                               to be issued to
                                                                                                               the Manager was
                                                                                                               based on the closing
                                                                                                               prices of the Company's
                                                                                                               common stock on
                                                                                                               the first day of
                                                                                                               each month, which
                                                                                                               are the dates the
                                                                                                               management and
                                                                                                               services fees were
                                                                                                               due and payable.
                                                                                                               The Board also
                                                                                                               approved the issuance
                                                                                                               of an aggregate
                                                                                                               of 53,020 shares
                                                                                                               of the Company’s
                                                                                                               common stock to
                                                                                                               its non-executive
                                                                                                               directors in payment
                                                                                                               of $48 in unpaid
                                                                                                               Board fees for
                                                                                                               the fourth quarter
                                                                                                               of 2012. The aggregate
                                                                                                               number of shares
                                                                                                               to be issued to
                                                                                                               the directors was
                                                                                                               based on the closing
                                                                                                               price of the Company’s
                                                                                                               common stock on
                                                                                                               the last day of
                                                                                                               the fourth quarter
                                                                                                               of 2012, which
                                                                                                               is the date that
                                                                                                               the Board fees
                                                                                                               were due and payable.
                                                                                                               All of the foregoing
                                                                                                               shares will be
                                                                                                               restricted shares
                                                                                                               under applicable
                                                                                                               U.S. securities
                                                                                                               laws.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                             January 24, 2013,
                                                                                                             the Company entered
                                                                                                             into an Investment
                                                                                                             Agreement with Granite,
                                                                                                             pursuant to which,
                                                                                                             for a 36-month period,
                                                                                                             the Company has the
                                                                                                             right to sell up
                                                                                                             to 395,791 shares
                                                                                                             of its common stock,
                                                                                                             which equals approximately
                                                                                                             24% of its 1,682,693
                                                                                                             shares outstanding
                                                                                                             as of January 24,
                                                                                                             2013. The Investment
                                                                                                             Agreement entitles
                                                                                                             the Company to sell
                                                                                                             and obligates Granite
                                                                                                             to purchase, from
                                                                                                             time to time over
                                                                                                             a period of 36 months
                                                                                                             (the “Open
                                                                                                             Period”), 395,791
                                                                                                             shares of the Company’s
                                                                                                             common stock, subject
                                                                                                             to conditions the
                                                                                                             Company must satisfy
                                                                                                             as set forth in the
                                                                                                             Investment Agreement.
                                                                                                             For each share of
                                                                                                             common stock purchased
                                                                                                             under the Investment
                                                                                                             Agreement, Granite
                                                                                                             will pay 98% of the
                                                                                                             lowest daily volume
                                                                                                             weighted average
                                                                                                             price during the
                                                                                                             pricing period, which
                                                                                                             is the five consecutive
                                                                                                             trading days commencing
                                                                                                             on the day the Company
                                                                                                             delivers a put notice
                                                                                                             to Granite. Each
                                                                                                             such put may 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, shall
                                                                                                             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.
                                                                                                             If the Company was
                                                                                                             to sell all 395,791
                                                                                                             shares at a purchase
                                                                                                             price determined
                                                                                                             as described above,
                                                                                                             based on a put notice
                                                                                                             date of January 23,
                                                                                                             2013, the Company
                                                                                                             would receive an
                                                                                                             aggregate of approximately
                                                                                                             $767 in proceeds
                                                                                                             from the sale of
                                                                                                             those shares.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               January 24, 2013,
                                                                                                               the Company received
                                                                                                               notice from FBB,
                                                                                                               according to which
                                                                                                               failure to (i) pay
                                                                                                               the $4,188 repayment
                                                                                                               installment due
                                                                                                               in December 2012,
                                                                                                               (ii) pay accrued
                                                                                                               interest and (iii) failure
                                                                                                               to pay default
                                                                                                               interest constitute
                                                                                                               an event of default.
                                                                                                               The Company is
                                                                                                               in discussions
                                                                                                               to permanently
                                                                                                               amend the amortization
                                                                                                               schedule and reach
                                                                                                               an agreement on
                                                                                                               the unpaid principal
                                                                                                               and interest
| | - | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               February 13, 2013,
                                                                                                               we issued 185,000
                                                                                                               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
                                                                                                               will 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
                                                                                                               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 Second Settlement
                                                                                                               Agreement shall
                                                                                                               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
                                                                                                               provides that if,
                                                                                                               at any time and
                                                                                                               from time to time
                                                                                                               during the Second
                                                                                                               True-Up Period,
                                                                                                               Hanover reasonably
                                                                                                               believes that the
                                                                                                               total number of
                                                                                                               Second Settlement
                                                                                                               Shares previously
                                                                                                               issued to Hanover
                                                                                                               shall be 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 may, 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 will 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 “Second
                                                                                                               Settlement Shares”
                                                                                                               for purposes of
                                                                                                               the Second Settlement
                                                                                                               Agreement). On
                                                                                                               February 19, 2013,
                                                                                                               the Company issued
                                                                                                               and delivered to
                                                                                                               Hanover 90,000
                                                                                                               additional Second
                                                                                                               Settlement Shares,
                                                                                                               on February 25,
                                                                                                               2013, the Company
                                                                                                               issued and delivered
                                                                                                               to Hanover another
                                                                                                               90,000 additional
                                                                                                               Second Settlement
                                                                                                               Shares, on February
                                                                                                               26, 2013 the Company
                                                                                                               issued and delivered
                                                                                                               to Hanover another
                                                                                                               90,000 additional
                                                                                                               Second Settlement
                                                                                                               Shares, on February
                                                                                                               27, 2013, the Company
                                                                                                               issued and delivered
                                                                                                               to Hanover another
                                                                                                               100,000 additional
                                                                                                               Second Settlement
                                                                                                               Shares, on February
                                                                                                               28, 2013, the Company
                                                                                                               issued and delivered
                                                                                                               to Hanover another
                                                                                                               100,000 additional
                                                                                                               Second Settlement
                                                                                                               Shares and on March
                                                                                                               4, 2013, the Company
                                                                                                               issued and delivered
                                                                                                               to Hanover another
                                                                                                               100,000 additional
                                                                                                               Second Settlement
                                                                                                               Shares. At the
                                                                                                               end of the Second
                                                                                                               True-Up Period,
                                                                                                               the Company issued
                                                                                                               and delivered 31,755
                                                                                                               additional Second
                                                                                                               Settlement Shares
                                                                                                               to Hanover on March
                                                                                                               6, 2013.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-33







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



| | · | On
                                                                                                              January 22, 2013,
                                                                                                              the Company’s
                                                                                                              Board of Directors
                                                                                                              authorized a reverse
                                                                                                              stock split at a
                                                                                                              ratio of 1 for 10,
                                                                                                              which was effective
                                                                                                              at 8:00 am on February
                                                                                                              14, 2013, New York
                                                                                                              time. The reverse
                                                                                                              stock split consolidates
                                                                                                              10 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 has
                                                                                                              been reduced from
                                                                                                              18,759,778 to 1,875,978
                                                                                                              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.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              January 31, 2013,
                                                                                                              the Company entered
                                                                                                              into a convertible
                                                                                                              promissory note
                                                                                                              of $153.5 with Asher
                                                                                                              Enterprises, Inc.
                                                                                                              at the rate of eight
                                                                                                              percent per annum
                                                                                                              and with maturity
                                                                                                              date November 1,
                                                                                                              2013. 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.
| | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              February 13, 2013,
                                                                                                              the Company received
                                                                                                              notification from
                                                                                                              NASDAQ that effective
                                                                                                              February 19, 2013,
                                                                                                              the Company’s
                                                                                                              common stock would
                                                                                                              be transferred from
                                                                                                              the NASDAQ Global
                                                                                                              Market to the NASDAQ
                                                                                                              Capital Market.
                                                                                                              Thus, on February
                                                                                                              14, 2013, the Company
                                                                                                              received notification
                                                                                                              from NASDAQ that
                                                                                                              the appeals hearing,
                                                                                                              scheduled for February
                                                                                                              21, 2013, was cancelled.
                                                                                                              In accordance with
                                                                                                              Marketplace Rule
                                                                                                              5810(c)(3)(A), the
                                                                                                              Company has until
                                                                                                              June 17, 2013,
                                                                                                              which is 180 calendar
                                                                                                              days from the date
                                                                                                              the initial compliance
                                                                                                              period ended, to
                                                                                                              regain compliance
                                                                                                              with the minimum
                                                                                                              bid price rule.
                                                                                                              To regain compliance,
                                                                                                              the closing bid
                                                                                                              price of the Company’s
                                                                                                              common stock must
                                                                                                              be at or above $1.00
                                                                                                              per share for a
                                                                                                              minimum of 10 consecutive
                                                                                                              business days. NASDAQ
                                                                                                              may, in its discretion,
                                                                                                              require the Company
                                                                                                              to maintain a bid
                                                                                                              price of at least
                                                                                                              $1.00 per share
                                                                                                              for a period in
                                                                                                              excess of 10 consecutive
                                                                                                              business days, but
                                                                                                              generally no more
                                                                                                              than 20 consecutive
                                                                                                              business days, before
                                                                                                              determining that
                                                                                                              the Company has
                                                                                                              demonstrated an
                                                                                                              ability to maintain
                                                                                                              long-term compliance.
                                                                                                              If the Company does
                                                                                                              not regain compliance
                                                                                                              by June 17,
                                                                                                              2013, NASDAQ will
                                                                                                              provide written
                                                                                                              notification to
                                                                                                              the Company that
                                                                                                              the Company’s
                                                                                                              common stock may
                                                                                                              be delisted. At
                                                                                                              that time, the Company
                                                                                                              may then appeal
                                                                                                              the delisting determination
                                                                                                              to a hearings panel.
                                                                                                              There can be no
                                                                                                              assurances that
                                                                                                              the Company will
                                                                                                              be able to regain
                                                                                                              compliance with
                                                                                                              the NASDAQ minimum
                                                                                                              bid price rule and
                                                                                                              thereby maintain
                                                                                                              the listing of its
                                                                                                              common stock.
| | - | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | 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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                               February 28, 2013,
                                                                                                               pursuant to the
                                                                                                               approval of the
                                                                                                               Company’s
                                                                                                               Board of Directors
                                                                                                               at its January
                                                                                                               18, 2013 meeting,
                                                                                                               the Company issued
                                                                                                               641,639 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
                                                                                                               41,909 shares of
                                                                                                               its common stock
                                                                                                               to its non-executive
                                                                                                               directors in payment
                                                                                                               of $48 in unpaid
                                                                                                               Board fees for
                                                                                                               the fourth quarter
                                                                                                               of 2012.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                                                                                               January, February
                                                                                                               and March 2013,
                                                                                                               the Company did
                                                                                                               not pay the monthly
                                                                                                               repayments of $20
                                                                                                               for each of Facility
                                                                                                               A and Facility
                                                                                                               B with Deutsche
                                                                                                               Bank, totaling
                                                                                                               $120 along with
                                                                                                               accrued interest
                                                                                                               due. The Company
                                                                                                               is in discussions
                                                                                                               with Deutsche Bank
                                                                                                               to reach a mutually
                                                                                                               beneficial agreement.
| | - | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | In
                                                                                                               February and March
                                                                                                               and in April 2013,
                                                                                                               the Company did
                                                                                                               not pay the interest
                                                                                                               due of $124 and
                                                                                                               the interest rate
                                                                                                               swaps due of $80,
                                                                                                               respectively, with
                                                                                                               the Credit Suisse
                                                                                                               facility. The Company
                                                                                                               is in discussions
                                                                                                               with the bank to
                                                                                                               arrange a settlement
                                                                                                               of these.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-34







FREESEAS INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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



| | · | On
                                                                                                              March 20, 2013,
                                                                                                              the Company issued
                                                                                                              and delivered to
                                                                                                              Hanover 350,000
                                                                                                              shares (the “Settlement
                                                                                                              Shares”) of
                                                                                                              the Company’s
                                                                                                              common stock, $0.001
                                                                                                              par value. Giving
                                                                                                              effect to such issuance,
                                                                                                              the Settlement Shares
                                                                                                              represent approximately
                                                                                                              9.77% of the total
                                                                                                              number of shares
                                                                                                              of Common Stock
                                                                                                              presently outstanding.
                                                                                                              The Settlement Agreement
                                                                                                              provides that the
                                                                                                              Settlement Shares
                                                                                                              will be subject
                                                                                                              to adjustment on
                                                                                                              the trading day
                                                                                                              immediately following
                                                                                                              the Calculation
                                                                                                              Period (as defined
                                                                                                              below) to reflect
                                                                                                              the intention of
                                                                                                              the parties that
                                                                                                              the total number
                                                                                                              of shares of Common
                                                                                                              Stock to be issued
                                                                                                              to Hanover pursuant
                                                                                                              to the 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 subsequent
                                                                                                              to the Court’s
                                                                                                              entry of the Order.
                                                                                                              Specifically, the
                                                                                                              total number of
                                                                                                              shares of Common
                                                                                                              Stock to be issued
                                                                                                              to Hanover pursuant
                                                                                                              to the Settlement
                                                                                                              Agreement shall
                                                                                                              be equal to the
                                                                                                              quotient obtained
                                                                                                              by dividing (i)
                                                                                                              $1,264,656.12 by
                                                                                                              (ii) 70% of the
                                                                                                              VWAP of the Common
                                                                                                              Stock over the 35-consecutive
                                                                                                              trading day period
                                                                                                              immediately following
                                                                                                              the date of issuance
                                                                                                              of the initial Settlement
                                                                                                              Shares (or such
                                                                                                              shorter trading-day
                                                                                                              period as may be
                                                                                                              determined by Hanover
                                                                                                              in its sole discretion
                                                                                                              by delivery of written
                                                                                                              notice to the Company)
                                                                                                              (the “Calculation
                                                                                                              Period”),
                                                                                                              rounded up to the
                                                                                                              nearest whole share
                                                                                                              (the “VWAP
                                                                                                              Shares”).
                                                                                                              As a result, the
                                                                                                              Company ultimately
                                                                                                              may be required
                                                                                                              to issue to Hanover
                                                                                                              substantially more
                                                                                                              shares of Common
                                                                                                              Stock than the number
                                                                                                              of Settlement Shares
                                                                                                              initially issued
                                                                                                              (subject to the
                                                                                                              limitations described
                                                                                                              below). The Settlement
                                                                                                              Agreement further
                                                                                                              provides that if,
                                                                                                              at any time and
                                                                                                              from time to time
                                                                                                              during the Calculation
                                                                                                              Period, Hanover
                                                                                                              reasonably believes
                                                                                                              that the total number
                                                                                                              of Settlement Shares
                                                                                                              previously issued
                                                                                                              to Hanover shall
                                                                                                              be less than the
                                                                                                              total number of
                                                                                                              VWAP Shares to be
                                                                                                              issued to Hanover
                                                                                                              or its designee
                                                                                                              in connection with
                                                                                                              the Settlement Agreement,
                                                                                                              Hanover may, in
                                                                                                              its sole discretion,
                                                                                                              deliver one or more
                                                                                                              written notices
                                                                                                              to the Company,
                                                                                                              at any time and
                                                                                                              from time to time
                                                                                                              during the Calculation
                                                                                                              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
                                                                                                              will 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
                                                                                                              Settlement Agreement).
                                                                                                              At the end of the
                                                                                                              Calculation Period,
                                                                                                              (i) if the number
                                                                                                              of VWAP Shares exceeds
                                                                                                              the number of Settlement
                                                                                                              Shares issued, then
                                                                                                              the Company will
                                                                                                              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 is 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. Hanover
                                                                                                              may sell the shares
                                                                                                              of Common Stock
                                                                                                              issued to it or
                                                                                                              its designee in
                                                                                                              connection with
                                                                                                              the Settlement Agreement
                                                                                                              at any time without
                                                                                                              restriction, even
                                                                                                              during the Calculation
                                                                                                              Period. On March
                                                                                                              21, 2013, the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover 390,000
                                                                                                              additional Settlement
                                                                                                              Shares, on March
                                                                                                              22, 2013, the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover another
                                                                                                              420,000 additional
                                                                                                              Settlement Shares
                                                                                                              and on March 26,
                                                                                                              2013 the Company
                                                                                                              issued and delivered
                                                                                                              to Hanover another
                                                                                                              300,000 additional
                                                                                                              Settlement Shares.
                                                                                                              At the end of the
                                                                                                              True-Up Period,
                                                                                                              the Company issued
                                                                                                              and delivered 12,894
                                                                                                              additional Settlement
                                                                                                              Shares to Hanover
                                                                                                              on March 26, 2013.
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              April 8, 2013, the
                                                                                                              Company entered
                                                                                                              into a convertible
                                                                                                              promissory note
                                                                                                              of $103.5 with Asher
                                                                                                              Enterprises, Inc.
                                                                                                              at the rate of eight
                                                                                                              percent per annum
                                                                                                              and with maturity
                                                                                                              date nine months
                                                                                                              after issuance.
                                                                                                              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.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | As
                                                                                                              of April 2, 2013,
                                                                                                              the Company has
                                                                                                              sold all the 395,791
                                                                                                              shares of its common
                                                                                                              stock to Granite
                                                                                                              under the Investment
                                                                                                              Agreement for aggregate
                                                                                                              proceeds of $458.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| | · | On
                                                                                                              April 4, 2013, the
                                                                                                              Company received
                                                                                                              notification from
                                                                                                              NASDAQ that it has
                                                                                                              regained compliance
                                                                                                              with the NASDAQ
                                                                                                              Listing Rule 5450(a)(1)
                                                                                                              (the "Minimum
                                                                                                              Bid Price Rule")
                                                                                                              requirement for
                                                                                                              continued listing
                                                                                                              on NASDAQ, as the
                                                                                                              bid price of the
                                                                                                              Company’s
                                                                                                              common stock closed
                                                                                                              at or above $1.00
                                                                                                              per share for a
                                                                                                              minimum of 10 consecutive
                                                                                                              business days.
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



F-35