Business Context and Reporting Period
Company: TOP SHIPS INC.
Filing Type: Form 20-F (Annual Report)
Period Ended: December 31, 2012
Business Overview: Top Ships Inc. is an international provider of seaborne transportation services for petroleum products, crude oil, and drybulk commodities. As of December 31, 2012, the fleet consisted of seven owned vessels (six Handymax tankers and one Supramax drybulk vessel) with a total capacity of 351,200 dwt. All vessels were employed on long-term bareboat charters, insulating the company from direct voyage expenses and bunker price volatility.
Key Financial Metrics (Year Ended Dec 31, 2012)
| Metric | 2012 Value (USD) | 2011 Value (USD) |
|---|---|---|
| Revenues | $31.4 million | $79.7 million |
| Net Loss | $(64.0) million | $(189.1) million |
| Operating Loss | $(52.8) million | $(171.1) million |
| Impairment on Vessels | $61.5 million | $114.7 million |
| Total Debt | $172.6 million | $193.7 million |
| Stockholders' Equity | $13.1 million | $76.7 million |
| Cash and Cash Equivalents | $0.0 million (All restricted) | $0.0 million (All restricted) |
| Net Cash from Operating Activities | $15.1 million | $15.8 million |
Note: The company reclassified its drybulk operations from discontinued to continuing operations for all periods presented in 2012 after deciding not to sell the M/V Evian.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased by 60.6% (from $79.7M to $31.4M) primarily due to the sale of five vessels in 2011 (M/V Amalfi, M/V Astrale, M/V Cyclades, M/T Ioannis P, M/V Pepito) and the termination of the M/T Delos charter. The remaining fleet was deployed on bareboat charters at rates significantly lower than previous time charters for some assets.
- Loss Reduction: Net loss improved significantly from $(189.1) million in 2011 to $(64.0) million in 2012. This improvement was driven by a reduction in impairment charges (from $114.7M to $61.5M) and the absence of a $62.5 million loss on vessel sales recorded in 2011.
- Impairment Charges: The company recognized $61.5 million in impairment charges in 2012. This included a $17.0 million write-down of the M/T UACC Sila (classified as held for sale) and a $46.6 million write-down of five other tankers due to deteriorating charter rates and vessel values.
- Equity Erosion: Stockholders' equity declined by 83% to $13.1 million due to the net loss for the year.
Guidance, Outlook, Risks, and Contingencies
Going Concern and Liquidity
The filing raises substantial doubt about the company's ability to continue as a going concern. As of December 31, 2012, the company was in breach of multiple loan covenants (asset cover ratio, adjusted net worth, EBITDA, and minimum liquidity) with all lenders. Due to cross-default provisions, all debt ($172.6 million) and financial instruments ($5.8 million) were reclassified as current liabilities. The company reported a working capital deficit of approximately $166.9 million assuming debt acceleration.
Management Commentary and Outlook
- Debt Status: While in technical default, the company stated that loan installments and interest payments were current as of the filing date. Management is in discussions with lenders to obtain waivers and amendments.
- Liquidity Plan: Management anticipates that operating cash flow in 2013 will not be sufficient to cover scheduled debt repayments. Planned actions to improve liquidity include expense reduction, negotiating debt deferrals, potential equity/debt offerings, and asset sales.
- Asset Sales: The M/T UACC Sila was sold in April 2013 for $26 million, with proceeds used to fully repay its associated debt.
Key Risks
- Covenant Breaches: Failure to secure waivers could lead to debt acceleration, foreclosure on vessels, and forced auctions.
- Customer Concentration: In 2012, 89% of revenue was derived from three charterers (Daelim H&L Co. Ltd., United Arab Chemical Carriers, Ltd., and Perseveranza Di Navigatione S.p.a.).
- Market Conditions: Continued downturns in charter rates and vessel values could trigger further impairments.
- Charter Disputes: In April 2013, a charterer unilaterally reduced the daily rate for the M/T Miss Marilena from $14,400 to $10,000, violating the charter agreement. The company is pursuing recovery of the difference.
Investor Verification Checklist
- Covenant Waivers: Verify the status of negotiations with lenders (HSH, DVB, Alpha Bank) regarding the 2012 covenant breaches and whether waivers have been secured to prevent debt acceleration.
- Liquidity Runway: Assess the sufficiency of the $1.1 million in unrestricted cash against upcoming debt service obligations and the feasibility of raising additional capital in the current market.
- Charter Dispute Resolution: Monitor the outcome of the dispute regarding the M/T Miss Marilena rate reduction and the potential impact on 2013 revenue.
- Asset Valuation: Review the fair value assumptions used for the $61.5 million impairment charge and the potential for further write-downs if market rates decline.
- Related Party Transactions: Review the terms of the management agreements with Central Mare Inc. (controlled by the CEO's family) and the recent fee reductions to ensure they are at arm's length.