EuroDry Ltd. — FY2019 Form 20-F
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter filing. EuroDry owns and operates drybulk vessels; historical comparisons before its May 2018 spin-off include carve-out results. Financial statements use U.S. GAAP.
Financial and operating performance
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net revenue | $27.24 million | $24.52 million |
| Operating income | $3.01 million | $3.99 million |
| Net income | $16,497 | $1.12 million |
| Net income (loss) attributable to common shareholders | $(1.92) million | $0.55 million |
| Basic and diluted EPS attributable to common shareholders | $(0.85) | $0.25 |
| Cash provided by operating activities | $15.11 million | $3.97 million |
| Cash used in investing activities | $(1.11) million | $(29.05) million |
| Cash provided by (used in) financing activities | $(12.63) million | $27.93 million |
Net revenue grew about 11%, reflecting a larger average fleet (7.0 vessels versus 5.74), partly offset by a 10.3% decline in average daily TCE to $11,190. Fleet utilization was 99.4%, compared with 99.7%. Operating margin was about 11%; net income was near break-even before preferred dividends and deemed dividends. The common-share loss reflects $1.75 million of Series B preferred dividends and a $0.19 million preferred deemed dividend.
Vessel operating expenses were $10.78 million; dry-docking expenses were $1.66 million; depreciation was $6.46 million; and interest and other financing costs were $3.51 million. Operating income declined from $3.99 million to $3.01 million as operating costs rose with fleet size and TCE rates eased. Derivative gains were $0.50 million, including realized gains from freight and bunker hedges, partly offset by unrealized interest-rate-swap losses.
Financial position and liquidity
At December 31, 2019, total assets were $117.69 million, total liabilities $61.16 million, and shareholders’ equity $41.81 million. Bank debt was $56.89 million, including $6.92 million current; loans carried floating rates of LIBOR plus 2.70%–3.25%. Scheduled principal repayments were approximately $20.30 million over 2020–2021. The company reported compliance with all debt covenants and no credit-facility default.
Cash and cash equivalents were $5.40 million; restricted cash was $3.73 million. Current assets of $9.58 million compared with current liabilities of $11.17 million, a working-capital deficit of approximately $1.6 million. Operating cash flow rose sharply, in part because amounts due from related companies fell by $7.51 million; this was a significant working-capital driver, not solely an increase in underlying operating earnings.
Financing cash outflow included $4.30 million to redeem preferred shares, $1.31 million of preferred dividends paid, and $11.49 million of debt repayments; the company drew $4.50 million of new debt. No vessels were acquired in 2019. Investing outflows mainly included vessel improvements, including ballast-water treatment systems.
Material changes, outlook and risks
- Preferred shares: EuroDry redeemed $4.3 million face value in June 2019. Remaining Series B preferred shares had approximately $15.39 million face value at year-end. Their cash dividend rate was reduced to 9.25% through January 2021 and is scheduled to rise to 14% thereafter. Preferred claims rank ahead of common shares.
- Charter exposure: At March 31, 2020, all but one vessel was employed on time charters or in a pool, with one vessel in drydock. Six vessels’ time charters were scheduled to expire during 2020. At year-end 2019, minimum contracted revenue was $5.3 million for 2020, excluding certain pool and index-linked revenue.
- Management outlook: Management said COVID-19 effects were uncertain and could not be estimated, and anticipated revenue could decline versus 2019 as market charter rates weakened. As of March 31, 2020, only about 32% of remaining-2020 vessel-capacity days were covered by time charters. The filing provides no numerical earnings or revenue guidance.
- Liquidity and going concern: Despite the working-capital deficit and preferred cash-dividend burden, management stated it believed available cash, operating cash flow, refinancing or equity financing, vessel sales, and a potential affiliated-company funding commitment would be adequate for obligations over the next twelve months. This is management’s assessment, not assurance of funding availability.
- Asset values and debt covenants: Management identified four vessels with impairment indicators but recorded no impairment after undiscounted cash-flow testing. It estimated that three vessels’ aggregate carrying value of $63.09 million exceeded estimated charter-free market value of about $49.20 million at December 31, 2019. Vessel-value declines could affect collateral coverage and covenant compliance.
- Other risks and contingencies: Drybulk rates are volatile and cyclical; customer concentration is material, with the top five charterers accounting for about 81% of 2019 revenue. The company relies on affiliated managers and has related-party arrangements. It reported no material legal proceedings and no off-balance-sheet arrangements. Two vessels did not yet comply with updated ballast-water guidelines; compliance costs may be substantial. COVID-19, trade disruptions, fuel and crew costs, environmental rules, and floating-rate debt are additional risks.
- Audit and controls: Deloitte issued an unqualified opinion on the financial statements. Management concluded disclosure controls and internal control over financial reporting were effective at year-end; no auditor attestation on internal controls was included because the company qualified as an emerging growth company.
Important facts for investors to verify
- Confirm the 2020 charter expirations, actual vessel employment and realized rates, especially for index-linked and pool vessels.
- Track unrestricted versus restricted cash, scheduled debt amortization, covenant headroom, and availability and terms of any affiliated funding commitment or refinancing.
- Verify the preferred-share balance, cash dividend payments, and the scheduled increase in its dividend rate to 14% after January 2021.
- Review vessel valuations, impairment assumptions, and collateral requirements against changes in charter rates and asset values.
- Assess the realized impact of COVID-19, ballast-water and other environmental compliance costs, and customer concentration on cash generation.