Business Context and Reporting Period
Company: TOP SHIPS INC.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2009
Business Overview: TOP SHIPS INC. is an international provider of seaborne transportation services, operating a fleet of tankers and drybulk vessels. As of December 31, 2009, the fleet consisted of 13 owned vessels (8 tankers and 5 drybulk vessels) with a total carrying capacity of approximately 0.7 million deadweight tons (dwt). The company operates primarily through long-term time charters and bareboat charters to mitigate market volatility.
Key Financial Metrics (Year Ended Dec 31, 2009)
| Metric | 2009 (USD in thousands) | 2008 (USD in thousands) |
|---|---|---|
| Revenues | $107,979 | $257,380 |
| Net Loss | $(50,196) | $25,639 |
| Operating Loss | $(34,211) | $61,723 |
| Net Cash Provided by Operating Activities | $6,576 | $11,847 |
| Total Assets | $675,149 | $698,375 |
| Total Liabilities | $427,953 | $406,324 |
| Stockholders' Equity | $247,196 | $292,051 |
| Total Indebtedness | $404,300 | $342,479 |
| Weighted Avg. Shares Outstanding | 28,230,585 | 25,445,031 |
| Loss Per Share (Basic & Diluted) | $(1.78) | $0.97 |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by 58.0% to $107.9 million, primarily due to a reduction in the average number of tanker vessels operated (from 13.9 in 2008 to 8.7 in 2009) following a lease unwinding strategy and the sale of seven owned vessels in 2008.
- Impairment Charge: The company recorded a non-cash impairment charge of $36.6 million in the fourth quarter of 2009 related to two older tanker vessels (M/T Dauntless and M/T Ioannis P) due to expected lower re-charter rates.
- Lease Termination Costs: The company incurred $15.4 million in lease termination expenses in 2009 to exit remaining sale-and-leaseback agreements, a cost not present in 2008.
- Segment Performance: The Tanker segment reported an operating loss of $56.2 million, while the Drybulk segment generated an operating income of $18.2 million.
- Debt Reclassification: Due to covenant breaches, the company reclassified all long-term debt and financial instruments as current liabilities, totaling approximately $351.2 million in debt and $9.9 million in financial instruments.
Outlook, Risks, and Contingencies
- Going Concern Uncertainty: The company's independent auditors have issued an opinion with an explanatory paragraph emphasizing a "going concern" uncertainty. The company is in breach of multiple loan covenants (EBITDA, minimum liquidity, adjusted net worth, and asset cover ratios). While the company expects lenders will not accelerate debt if payments are made as due, there is substantial doubt about its ability to continue as a going concern without waivers or refinancing.
- Liquidity Shortfall: The company projects a cash shortfall of approximately $10.4 million to $13.8 million for 2010, depending on the availability of restricted cash. It is actively discussing the deferral or refinancing of a $11.2 million bridge loan due in July 2010.
- Market Risks: The company faces significant exposure to cyclical fluctuations in charter rates and vessel values. The product tanker market experienced a significant drop in rates, leading to the impairment charge. The company relies heavily on a few major charterers (Glencore, Hanjin, Cosco) for over 50% of its revenue.
- Charter Disputes: In January 2010, a bareboat charterer unilaterally reduced the hire rate for two vessels (M/T Ionian Wave and M/T Tyrrhenian Wave) from $14,300 to $10,000 per day. The company intends to pursue recovery of the difference.
- PFIC Status: The company expects to be treated as a Passive Foreign Investment Company (PFIC) for the 2009 taxable year, which may have adverse tax consequences for U.S. shareholders.
Key Facts for Investor Verification
- Covenant Breaches: Verify the status of ongoing negotiations with lenders (RBS, HSH, DVB, Alpha Bank, Emporiki) regarding waivers for breached covenants and the potential for debt acceleration.
- Bridge Loan Refinancing: Confirm the outcome of discussions to defer or refinance the $11.2 million DVB bridge loan due July 30, 2010, which is critical to meeting 2010 liquidity requirements.
- Impairment Assumptions: Review the assumptions used for the $36.6 million impairment charge, specifically the projected future charter rates for the two affected tankers upon re-chartering.
- Charter Rate Dispute: Monitor the resolution of the unilateral rate reduction dispute with the bareboat charterer of M/T Ionian Wave and M/T Tyrrhenian Wave.
- Equity Dilution: Assess the potential dilution from the Standby Equity Distribution Agreement (SEDA) with YA Global, under which the company may sell up to $200 million of common stock.