Business Context and Reporting Period
Company: Euroseas Ltd.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Six months ended June 30, 2017 (Interim Unaudited)
Filing Date: October 11, 2017
Business Overview: Euroseas Ltd. is engaged in the ocean transportation of drybulk commodities and containers through the ownership and operation of a fleet of vessels. The company is managed by Eurobulk Ltd. and Eurobulk (Far East) Ltd., entities controlled by the Pittas family.
Key Financial Metrics
| Metric | Six Months Ended June 30, 2017 | Six Months Ended June 30, 2016 |
|---|---|---|
| Voyage Revenues | $19.28 million | $14.54 million |
| Net Revenue | $18.30 million | $13.89 million |
| Operating Loss | $(1.57) million | $(6.76) million |
| Net Loss | $(3.23) million | $(22.03) million |
| Net Loss Attributable to Common Shareholders | $(4.11) million | $(22.88) million |
| Loss Per Share (Basic & Diluted) | $(0.37) | $(2.82) |
| Net Cash Used in Operating Activities | $(0.06) million | $0.03 million (Provided) |
| Net Cash Used in Investing Activities | $(6.38) million | $(18.88) million |
| Net Cash Provided by Financing Activities | $10.78 million | $12.54 million |
| Total Assets (as of June 30, 2017) | $152.19 million | $143.69 million (Dec 31, 2016) |
| Total Liabilities (as of June 30, 2017) | $67.53 million | $55.78 million (Dec 31, 2016) |
| Long-Term Debt (as of June 30, 2017) | $62.92 million | $50.36 million (Dec 31, 2016) |
| Working Capital Deficit (as of June 30, 2017) | $(3.42) million | $(0.73) million (Dec 31, 2016) |
Operational Highlights
- Fleet Size: Average of 13.25 vessels in H1 2017 vs. 11.49 in H1 2016.
- Utilization Rate: 97.0% in H1 2017 vs. 98.8% in H1 2016.
- Average TCE Rate: $7,654 per day per vessel in H1 2017 vs. $6,701 in H1 2016.
- Vessel Operating Expenses: $4,304 per day per vessel in H1 2017 vs. $4,445 in H1 2016.
Material Changes vs. Prior Period
- Revenue Growth: Voyage revenues increased 32.5% to $19.28 million, driven by a larger fleet (14.7% increase in ownership days) and higher average charter rates.
- Significant Improvement in Net Loss: Net loss decreased significantly from $22.03 million to $3.23 million. The prior year loss was heavily impacted by a $14.0 million impairment of the investment in the joint venture Euromar LLC and a $1.45 million loss on the termination of a newbuilding contract, neither of which occurred in H1 2017.
- Operating Expenses: Drydocking expenses dropped from $1.17 million to $0.12 million as the company utilized an in-water survey instead of a drydock. Vessel operating expenses increased in total due to fleet size but decreased on a per-vessel basis.
- Debt Levels: Long-term debt increased to $62.92 million due to new financing for vessel acquisitions (M/V Tasos, M/V EM Astoria, M/V Alexandros P) and a newbuilding, partially offset by repayments.
- Asset Sales: The company recorded a $0.52 million gain on the sale of the container carrier M/V "RT Dagr" in January 2017.
Outlook, Risks, and Contingencies
Liquidity and Capital Resources
The company reported a working capital deficit of $3.42 million as of June 30, 2017. Management believes it has adequate funding to continue as a going concern for the next twelve months through cash on hand, operating cash flows, new mortgage debt, refinancing, and equity offerings (including an at-the-market offering). A commitment exists to draw up to $4.00 million from COLBY Trading Ltd. (affiliated with the CEO) if necessary.
Capital Commitments
As of June 30, 2017, the company had $20.25 million remaining to be paid for a Kamsarmax newbuilding (Hull number YZJ 1153), with delivery expected in Q2 2018.
Legal and Contingencies
- Vessel Arrest: M/V Ninos was arrested in Karachi due to a fuel oil supplier's lien claim following the bankruptcy of a time-charterer. A bank guarantee of $0.53 million was provided, restricting an equal amount of cash. The company has accrued $0.15 million for potential costs but believes it will be successful in its claim.
- Debt Covenants: The company was in compliance with all loan covenants as of June 30, 2017.
Subsequent Events (Post-June 30, 2017)
- Acquisitions: In September and October 2017, the company agreed to purchase four container vessels (M/V EM Athens, EM Oinousses, EM Corfu, Akinada Bridge) from Euromar for approximately $25 million.
- Euromar Acquisition: In September 2017, the company acquired the remaining 85.714% interest in Euromar LLC, making it a wholly-owned subsidiary. The $4.0 million undistributed escrow funds from the prior investment were released to Euroseas.
- Derivatives: Entered into a new five-year interest rate swap for $5 million in August 2017.
Key Facts for Investor Verification
- Going Concern Status: Verify the company's ability to fund the $20.25 million remaining commitment for the newbuilding and cover the $3.42 million working capital deficit without dilutive equity issuance or asset sales.
- Debt Structure: Review the terms of the new loan for M/V EM Astoria, which includes a profit participation liability ($487,900) where the lender receives 35% of the vessel's appreciation and 35% of cash flow after debt service.
- Related Party Transactions: Confirm the extent of reliance on Pittas family-controlled entities for management (Eurobulk), chartering (Eurochart), and potential liquidity support (COLBY Trading Ltd.).
- Legal Exposure: Monitor the resolution of the maritime lien dispute regarding M/V Ninos and the potential release of the $0.53 million restricted cash.
- Euromar Integration: Assess the financial impact of acquiring the remaining stake in Euromar and the integration of its three feeder containerships into the fleet.