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, 2009
Business Overview: The Company provides international seaborne transportation services for petroleum products, crude oil, and drybulk commodities. As of the filing date, the fleet under management consists of 13 owned vessels (eight tankers and five drybulk vessels). The Company operates in two segments: Tanker Fleet and Drybulk Fleet.

Key Financial Metrics

Segment Performance (Six Months Ended June 30, 2009):

• Tanker Fleet: Revenues of $25.0 million; Operating Loss of $23.3 million.
• Drybulk Fleet: Revenues of $29.5 million; Operating Income of $10.3 million.

Material Changes vs. Prior Period

• Revenue Decline: Consolidated revenues decreased by 60.9% ($90.9 million) compared to the prior year. The Tanker segment saw a 76.1% drop due to fleet reduction and lower Time Charter Equivalent (TCE) rates. The Drybulk segment declined 12.5%.
• Operating Loss: The Company shifted from an operating income of $4.6 million in 2008 to an operating loss of $9.1 million in 2009. This was driven by a $15.4 million non-recurring lease termination expense and a $7.8 million increase in amortization of deferred gains due to lease terminations.
• Expense Reductions: Despite the loss, total expenses decreased by 53.3%. Voyage expenses dropped 89.1% as no tankers operated in the spot market in 2009. Charter hire expenses fell 68.1% following the termination of leased vessels.
• Financial Instruments: The Company recorded a gain of $0.3 million on financial instruments in 2009, compared to a loss of $11.6 million in 2008, primarily due to changes in interest rate swap valuations.

Guidance, Outlook, Risks, and Contingencies

Liquidity and Going Concern: The Company faces a severe liquidity crisis. As of June 30, 2009, unrestricted cash was $0. The Company reported a working capital deficit of $433.8 million. Due to breaches of loan covenants (minimum liquidity, adjusted net worth, and asset values), all debt of $404.7 million has been classified as current due to cross-default provisions. Management has received waivers from some lenders (RBS, DVB) but is negotiating with others (HSH, ALPHA, EMPORIKI). The Company plans to fund the shortfall through an equity offering in the second half of 2009 and expects positive operating cash flow once lease terminations are complete.

Outlook: Management expects cash flow from operations to be positive for the coming twelve months, with gross revenue from fixed employment estimated at approximately $418.0 million. Interest costs are expected to increase in the second half of 2009 due to new loans drawn for newbuildings.

Risks and Contingencies:

• Covenant Breaches: Violation of covenants constitutes an event of default, potentially allowing lenders to accelerate debt, demand additional collateral, or force vessel sales.
• Charter Dispute: The bareboat charterer of M/V Papillon declared an intention to pay a reduced rate ($18/day vs. $24/day). The Company has commenced arbitration to recover the difference, which could impact future receipts by $6.4 million.
• Market Conditions: Results are heavily dependent on global freight rates and the ability to secure new charters.

Investor Verification Checklist

• Debt Status: Verify the final status of loan covenant waivers with HSH, ALPHA, and EMPORIKI banks to determine if debt acceleration is imminent.
• Equity Financing: Confirm the timing and success of the planned equity offering or at-the-market sales intended to cover the $421.3 million cash shortfall.
• Arbitration Outcome: Monitor the resolution of the dispute with the M/V Papillon charterer regarding reduced charter hire rates.
• Cash Flow: Validate the projection of positive operating cash flow in the second half of 2009 against actual vessel employment rates.
• Restricted Cash: Determine if lenders will allow the use of the $22.8 million in restricted cash for loan repayments or operations.