Business Context and Reporting Period
Company: EUROSEAS LTD.
Filing Type: Form 6-K (Report of Foreign Private Issuer)
Reporting Period: Year ended December 31, 2018
Submission Date: April 17, 2019
Euroseas Ltd. is a pure containership company following the May 2018 spin-off of its drybulk fleet into a separate publicly traded entity, EuroDry Ltd. (EDRY). The Company operates in the feeder containership sector. Results for the drybulk fleet are presented as discontinued operations. The financial statements are unaudited and prepared in accordance with U.S. GAAP.
Key Financial Metrics (Continuing Operations)
| Metric (in USD) | 2018 | 2017 | 2016 |
|---|---|---|---|
| Net Revenue | $34,424,737 | $23,759,119 | $20,545,336 |
| Operating Income | $2,335,960 | $(5,409,713) | $(12,668,590) |
| Net Loss (Continuing Ops) | $(663,396) | $(6,944,261) | $(34,079,770) |
| Net Loss Attributable to Common Shareholders | $(1,999,129) | $(8,753,072) | $(35,805,469) |
| Loss Per Share (Basic & Diluted) | $(0.18) | $(0.79) | $(4.38) |
| Operating Cash Flow | $(1,474,830) | $5,053,025 | $(5,088,067) |
| Total Assets | $66,954,563 | $162,329,561 | N/A |
| Total Liabilities | $44,376,584 | $80,021,604 | N/A |
| Shareholders' Equity | $3,820,618 | $46,694,198 | N/A |
| Long-Term Debt (incl. current) | $36,586,790 | $34,014,502 | N/A |
Fleet Performance (2018): Average of 11.49 vessels; Average Time Charter Equivalent (TCE) rate of $9,179 per day; Utilization rate of 92.7%.
Material Changes vs. Prior Period
- Revenue Growth: Net revenue increased 45% to $34.4 million, driven by a 23.8% increase in the average number of vessels (11.49 vs. 9.28) and a 25.6% increase in the average TCE rate ($9,179 vs. $7,309) due to improved market charter rates.
- Profitability Improvement: The Company returned to operating profitability ($2.3 million) in 2018 compared to an operating loss of $5.4 million in 2017. Net loss attributable to common shareholders narrowed significantly to $2.0 million from $8.8 million.
- Expense Increases: Vessel operating expenses rose to $20.0 million (from $15.0 million) due to fleet expansion and higher costs for lubricants. Dry-docking expenses increased to $2.8 million (from $0.6 million) as three vessels underwent special surveys. Interest costs doubled to $3.1 million due to higher LIBOR rates and increased debt levels.
- Balance Sheet Impact: Total assets decreased to $67.0 million from $162.3 million, primarily due to the spin-off of the drybulk fleet (discontinued operations) which removed approximately $95 million in assets. Shareholders' equity decreased to $3.8 million due to the spin-off allocation and accumulated losses.
- Cash Flow: Operating cash flow turned negative ($1.5 million outflow) compared to a $5.1 million inflow in 2017, largely due to a $3.5 million net working capital outflow (decrease in "Due to related company" balance) and higher interest payments.
Guidance, Outlook, Risks, and Unusual Items
- Liquidity and Going Concern: The Company reported a working capital surplus of $0.4 million and cash/cash equivalents of $7.0 million as of December 31, 2018. Management believes it has adequate funding to continue as a going concern for the next 12 months via cash on hand, operating cash flows, debt refinancing, and equity offerings (ATM program).
- Debt Obligations: Total bank debt stands at $37.5 million. Approximately $5.2 million is due in 2019. The Company refinanced existing facilities in November 2018 with a new $45 million revolving credit facility (drawn $30 million).
- Preferred Shares: Series B Preferred Shares paid dividends in-kind totaling $1.34 million in 2018. Starting January 29, 2019, dividends are payable in cash at a rate of 12% per annum, increasing to 14% thereafter.
- Related Party Transactions: Significant reliance on Eurobulk Ltd. (controlled by the Pittas family) for vessel management ($3.5 million in fees) and executive services. A $2.0 million loan commitment from COLBY Trading Ltd. (affiliated with the CEO) is available if needed.
- Customer Concentration: High concentration risk with top charterers. CMA CGM accounted for 51% of revenues in 2018, and New Golden Sea Shipping accounted for 33%.
- Legal Contingency: A dispute exists regarding a maritime lien on M/V "Ninos" from a 2009 bankruptcy; a provision of $0.15 million has been recorded.
Key Facts for Investor Verification
- Spin-off Accounting: Verify the separation of discontinued operations (EuroDry) to ensure historical comparisons reflect only the continuing containership business.
- Debt Maturity Wall: Confirm the Company's ability to refinance the $5.2 million debt due in 2019 and manage the $37.5 million total debt load amidst rising interest rates.
- Preferred Dividend Obligation: Assess the impact of the shift from in-kind to cash dividends (12% rate) on future liquidity starting in 2019.
- Customer Concentration: Evaluate the risk associated with CMA CGM representing over half of the Company's revenue.
- Working Capital Trends: Investigate the $3.5 million outflow in working capital related to the "Due to related company" balance and its sustainability.