TOPS

Business Context and Reporting Period

Company: TOP SHIPS INC.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2019
Business Overview: An international owner and operator of modern, fuel-efficient eco tanker vessels transporting crude oil, petroleum products, and bulk liquid chemicals. As of June 30, 2019, the fleet consisted of 12 vessels (including two chartered-in and two 50% owned joint ventures).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Revenues increased 51% to $29.8 million, driven by fleet expansion from 7 vessels in 2018 to 12 vessels in 2019 and the inclusion of voyage charter revenue.
• Operating Profitability: The company moved from an operating loss of $3.5 million to an operating income of $5.3 million. This improvement was primarily due to higher revenues and a significant reduction in management fees to related parties ($3.1 million decrease) and general/administrative expenses ($3.7 million decrease).
• Interest Costs: Interest and finance costs surged 136% to $7.9 million due to new sale and leaseback financing agreements for four new vessels and the utilization of the Family Trading Credit Facility.
• Accounting Changes: Adoption of ASC 842 (Leases) resulted in the reclassification of bareboat charter hire expenses into "Operating lease expenses" ($3.9 million) and the recognition of Right-of-Use assets and lease liabilities.
• Net Loss Dilution: While the GAAP net loss narrowed to $0.6 million, the net loss attributable to common shareholders widened to $15.2 million due to the issuance of Series E Perpetual Convertible Preferred Stock, which incurred significant deemed dividends ($9.3 million beneficial conversion feature and $4.2 million redemption value equivalents).

Guidance, Outlook, Risks, and Unusual Items

• Recent Developments:
  • Settled the Family Trading Credit Facility ($24.7 million principal) by issuing 27,129 Series E Preferred Shares.
  • Delivered four new vessels (M/T Eco California, M/T Eco Marina Del Ray, M/T Eco Bel Air, M/T Eco Beverly Hills) in the first half of 2019.
  • Entered into sale and leaseback agreements for three vessels (M/T Stenaweco Excellence, Energy, and Evolution) with Oriental Fleet International, accounting for them as financing transactions.
  • Effected a 1-for-20 reverse stock split on August 22, 2019.
• Liquidity Outlook: The company reported a working capital deficit of $40.1 million. Management expects to finance this deficit through operational cash flow, debt/equity issuances, or funds from the controlling shareholder. If financing is unavailable, vessel sales may be considered.
• Risks and Contingencies:
  • SEC Investigation: The company is cooperating with an ongoing SEC investigation regarding offerings made between February and August 2017. No provision for losses has been established.
  • Legal Proceedings: A securities class action lawsuit was dismissed with prejudice in August 2019, though plaintiffs filed a notice of appeal.
  • Market Risks: Exposure to fluctuations in charter rates, vessel values, and interest rates (LIBOR).

Investor Verification Checklist

• Debt Structure: Verify the terms and covenants of the new sale and leaseback facilities (Cargill, BoComm, CMBFL, Oriental Fleet) and the impact on future cash flows.
• Series E Preferred Stock: Review the dilution impact and dividend obligations associated with the Series E shares issued to settle related-party debt.
• SEC Investigation Status: Monitor updates regarding the SEC investigation into 2017 offerings and potential financial or reputational impact.
• Liquidity Position: Assess the sufficiency of the $2.7 million unrestricted cash balance against the $40.1 million working capital deficit and upcoming debt maturities.
• Related Party Transactions: Confirm the ongoing nature and terms of management agreements with Central Mare and Central Shipping Inc. (CSI).