TOP Ships Inc. — FY2016 Form 20-F
Reporting period: Fiscal year ended December 31, 2016; filed March 14, 2017. This is an annual report, not a standalone fourth-quarter filing. Financial statements are prepared under U.S. GAAP and amounts below are U.S. dollars unless noted.
Business context
TOP Ships owns and operates medium-range product/chemical tankers. At year-end, its operating fleet comprised six vessels: four owned and two chartered in under sale-and-leaseback arrangements. All six were employed on time charters. A 40% interest in a seventh vessel was acquired after year-end and the vessel was delivered in February 2017.
Financial and operating metrics
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $28.433 million | $13.075 million |
| Operating income (loss) | $4.848 million | ($7.416 million) |
| Net income (loss) | $1.052 million | ($8.507 million) |
| Net income (loss) attributable to common shareholders | ($0.351 million) | ($8.507 million) |
| Basic and diluted EPS | ($0.09) | ($4.21) |
| Adjusted EBITDA, non-GAAP | $16.186 million | $3.058 million |
| Average daily TCE | $15,396 | $15,961 |
| Fleet utilization | 99.28% | 98.91% |
| Cash provided by (used in) operating activities | $6.704 million | ($1.387 million) |
| Cash used in investing activities | $77.071 million | $0.850 million |
| Cash provided by financing activities | $67.826 million | $4.905 million |
Revenue grew 117.5%, principally because the fleet expanded and more vessels operated for a full year. Operating margin was approximately 17.1% and net margin approximately 3.7%; however, a $1.403 million deemed dividend related to Series B preferred shares meant the loss attributable to common shareholders was $0.351 million. Adjusted EBITDA is a non-GAAP measure and should not be treated as operating cash flow.
Operating expenses increased with fleet growth: vessel operating expenses rose to $9.913 million from $4.789 million, bareboat hire and related amortization totaled $7.876 million, and interest and finance costs increased to $3.093 million from $0.719 million. The company recorded no vessel impairment in 2016, compared with a $3.081 million charge in 2015. A $3.137 million non-cash operating gain resulted mainly from writing off aged liabilities tied to previously sold vessels.
Financial position and liquidity
- Total assets were $143.317 million and stockholders’ equity was $45.521 million at year-end.
- Reported total debt was $84.539 million after deferred financing fees; gross debt before those fees was approximately $86.1 million. Debt increased substantially to finance vessel deliveries.
- Current assets were $4.541 million and current liabilities $20.033 million, a $15.492 million working-capital deficit.
- Cash and cash equivalents were $0.127 million; restricted cash was approximately $5.467 million. Thus, reported cash of about $5.6 million included funds that were not freely available.
- The company reported compliance with its debt and sale-and-leaseback covenants at December 31, 2016. Its $82.0 million of senior secured bank debt was secured by vessel mortgages and related collateral.
The audited cash-flow statement reports $6.704 million provided by operations; one passage in the management discussion describes the amount as cash “used,” which conflicts with the statement and appears to be a textual error. The filing states that available cash and expected vessel revenue alone were insufficient to cover the next 12 months’ obligations, and describes continued access to related-party credit and additional capital as part of its funding plan.
Changes, outlook, risks and unusual items
- Fleet growth and charter cover: Four vessel deliveries during 2015–2016 drove revenue growth. Year-end charter receipts under non-cancellable time charters were estimated at $99.3 million through 2021, before off-hire, maintenance and commissions. Average TCE nevertheless declined 3.5% year over year.
- Management outlook: Management expected 2017 operating cash flow to increase because all six vessels were expected to be employed for a full year, versus partial-year employment for three vessels in 2016. This is an expectation, not a quantified earnings forecast.
- Funding actions after year-end: The company sold $7.5 million of Series C convertible preferred shares, issued a $3.5 million face-value note for $3.3 million, and entered a common-stock purchase agreement of up to approximately $3.1 million. It also amended and extended its related-party Family Trading facility to December 31, 2018; the amended facility bears 10% interest and permits repayment in shares under specified pricing terms. These transactions carry repayment, financing and dilution risks.
- Related-party exposure: Family Trading and the Fleet Manager are affiliated with the CEO’s family. The company relies on its related-party Fleet Manager for vessel operations and had $4.1 million outstanding under the Family Trading facility at year-end. A related-party affiliated trust was reported to have significant voting influence.
- Preferred shares and warrants: Series B and Series C preferred shares and warrants have conversion or exercise terms linked in part to market prices. These securities can create substantial dilution. After year-end, 854,756 common shares were issued on Series B conversions; the filing also describes further equity-line sales and warrant exercises.
- Principal business risks: Tanker-market and vessel-value volatility, dependence on three charterers, counterparty default or charter renegotiation, debt service and covenant compliance, access to capital, environmental and safety regulation, and potential dilution. The company also disclosed that its share price was volatile and Nasdaq listing compliance remained a risk.
- Other disclosures: No dividends were paid in 2014–2016. Management concluded disclosure controls and internal control over financial reporting were effective as of year-end; the auditor issued an unqualified opinion on the financial statements but did not attest to internal-control effectiveness. No material litigation or uncured material payment default was reported.
Most important facts for investors to verify
- Reconcile the $6.704 million operating-cash-flow figure with the conflicting “cash used” wording in management’s discussion.
- Confirm unrestricted versus restricted cash, current debt maturities, and the company’s ability to fund its working-capital deficit and debt service.
- Review the Family Trading facility’s amended terms, related-party nature, remaining availability and potential share-settlement dilution.
- Model dilution and conversion terms for Series B and Series C preferred shares, the equity line and outstanding warrants using current share prices and applicable floors.
- Check charterer concentration, charter performance and renewal exposure, including whether forecast full-year fleet employment and charter receipts materialize.
- Monitor vessel values, lender collateral and covenants, and the sensitivity of results to charter rates, interest rates and operating costs.