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, 2016 (incorporated by reference into this September 2016 filing).
Business Overview: An international owner and operator of modern, fuel-efficient medium range (MR) tanker vessels transporting crude oil, petroleum products, and bulk liquid chemicals. As of June 30, 2016, the fleet consisted of six vessels (two chartered-in, four owned), with a seventh vessel (M/T Nord Valiant) delivered in August 2016.
Key Financial Metrics
| Metric ($ in thousands) | Six Months Ended June 30, 2016 | Six Months Ended June 30, 2015 |
|---|---|---|
| Voyage Revenues | 11,627 | 4,697 |
| Operating Loss | (149) | (5,377) |
| Net Income | 290 | (5,361) |
| Net Cash from Operating Activities | 1,938 | (1,307) |
| Total Debt (Outstanding) | 71,200 | N/A |
| Cash and Cash Equivalents | 554 | 2,668 |
| Restricted Cash | 4,240 | 1,750 |
| Working Capital Deficit | (18,863) | N/A |
Note: Total debt of $71.2 million excludes unamortized financing fees. Cash balance of $554k is unrestricted; total cash including restricted amounts is $4.8 million.
Material Changes vs. Prior Period
- Revenue Surge: Voyage revenues increased 147.5% to $11.6 million, driven by the full employment of the M/T Stenaweco Evolution and the addition of the M/T Eco Revolution, M/T Eco Fleet, and M/T Stenaweco Excellence.
- Profitability Turnaround: The company moved from a net loss of $5.4 million in 2015 to a net income of $0.3 million in 2016. This was primarily due to the absence of a $3.1 million vessel impairment charge recorded in 2015 and a $1.2 million gain on financial instruments (warrants) in 2016.
- Expense Growth: Operating expenses increased significantly due to fleet expansion. Vessel depreciation rose 923% to $1.2 million, and other vessel operating expenses increased 139% to $4.4 million as new vessels entered service.
- Balance Sheet Expansion: Total assets grew from $74.0 million to $121.7 million, largely due to the capitalization of new vessels ($65.1 million transferred from advances). Total liabilities increased to $83.1 million, reflecting new debt facilities.
Outlook, Risks, and Unusual Items
Recent Developments and Guidance
- Fleet Expansion: Delivered M/T Nord Valiant on August 10, 2016, and commenced a time charter with DS Norden A/S.
- Financing: Amended the ABN Amro facility to increase the borrowing limit to $64.4 million, adding a $20 million tranche secured by the M/T Nord Valiant. Drew down $3.3 million under the Family Trading facility in August 2016.
- Liquidity Strategy: Management expects operating cash flow to increase for the remainder of 2016 due to full fleet employment. The working capital deficit is expected to be funded through debt drawdowns, cash from operations, and potential support from major shareholders.
- Nasdaq Listing: Transferred listing from Nasdaq Global Select Market to Nasdaq Capital Market in July 2016 to regain compliance with minimum market value requirements.
Risks and Contingencies
- Going Concern: The filing notes a working capital deficit of $18.9 million and capital commitments of $23.1 million for the next 12 months. Financial statements are prepared on a going concern basis contingent on securing funding.
- Market Risks: Exposure to fluctuations in charter rates, vessel values, and oil demand. Reliance on major charterers (e.g., BP Shipping, Stena Weco) and creditworthiness of counterparties.
- Debt Covenants: The NORD/LB facility includes covenants regarding asset cover ratios, debt-to-fleet value, and minimum free liquidity. Default events include the CEO ceasing to hold office or the company delisting from Nasdaq.
- Related Party Transactions: Significant reliance on related parties for management services (Central Mare, CSM) and financing (Family Trading).
Investor Verification Checklist
- Liquidity Sufficiency: Verify the company's ability to meet the $23.1 million in capital commitments and service the $71.2 million debt load given the $18.9 million working capital deficit.
- Charter Contract Stability: Confirm the duration and terms of time charters for the new vessels (M/T Nord Valiant, M/T Stenaweco Excellence) to ensure revenue sustainability.
- Debt Covenant Compliance: Monitor compliance with the NORD/LB facility covenants, specifically the asset cover ratio and free liquidity requirements.
- Related Party Dependence: Assess the terms and sustainability of financing and management agreements with Family Trading and Central Mare.
- Derivative Valuation: Review the volatility assumptions used in the Level 3 fair value measurement of warrant liabilities, which significantly impacted net income.