Euroseas(ESEA) - 2023 Q2 - Quarterly Report

FORM 6-K Filing Information Report Details This 6-K report, filed in September 2023, includes management's discussion and analysis and unaudited consolidated financial statements for the six months ended June 30, 2023 - This report is a Form 6-K report filed by a foreign private issuer under the Securities Exchange Act of 1934, covering September 2023[2] - The report includes Management's Discussion and Analysis and unaudited interim condensed consolidated financial statements for the six months ended June 30, 2023[4] Incorporation by Reference This 6-K report is incorporated by reference into the company's F-3 registration statements filed with the SEC - This 6-K report is incorporated by reference into the company's F-3 registration statements (File Nos. 333-268708 and 333-269066) filed on December 7, 2022, and December 29, 2022[5] Signatures The report was formally signed by Dr. Anastasios Aslidis, the company's Chief Financial Officer and Treasurer, on September 29, 2023 - The report was signed by Dr. Anastasios Aslidis, Chief Financial Officer and Treasurer of the company, on September 29, 2023[9] MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Introduction This section discusses the company's financial condition and operating results for the six months ended June 30, 2023, and should be read with the unaudited interim condensed consolidated financial statements - This discussion and analysis covers the company's financial condition and results of operations for the six months ended June 30, 2023[11] - This discussion and analysis should be read in conjunction with the unaudited interim condensed consolidated financial statements and related notes included in this report[11] Selected Consolidated Financial Data For the six months ended June 30, 2023, time charter revenue and net income decreased, while total assets and shareholders' equity grew, with fleet expansion but lower average TCE rates and utilization, and higher daily operating costs Selected Consolidated Financial Data (Six Months Ended June 30) | Metric | 2022 | 2023 | | :----------------------------------- | :----------- | :----------- | | Consolidated Statements of Income Data | | | | Time charter revenues | $97,448,528 | $92,771,677 | | Operating income | $60,484,573 | $58,507,335 | | Net income | $60,686,136 | $57,632,915 | | Earnings per share - basic | $8.40 | $8.28 | | Cash Flow Data | | | | Net cash provided by operating activities | $64,037,665 | $59,799,808 | | Net cash used in investing activities | $(67,246,904) | $(68,181,882) | | Net cash (used in)/provided by financing activities | $(17,760,983) | $15,157,382 | | Other Fleet Data | | | | Number of vessels (average) | 16.23 | 17.52 | | Utilization (percentage) | 99.4% | 97.8% | | Average TCE rate (USD/day/vessel) | $33,843 | $29,714 | | Vessel operating expenses (USD/day/vessel) | $6,069 | $6,352 | Selected Consolidated Balance Sheet Data | Metric | December 31, 2022 | June 30, 2023 | | :------------------- | :--------------- | :--------------- | | Total current assets | $46,867,161 | $45,708,911 | | Vessels, net | $216,570,426 | $249,127,642 | | Advances for vessels under construction | $59,083,594 | $93,816,071 | | Total assets | $328,590,425 | $394,125,631 | | Current liabilities | $73,689,704 | $45,673,764 | | Total long-term liabilities | $86,745,524 | $131,268,183 | | Total liabilities | $160,435,228 | $176,941,947 | | Total shareholders' equity | $168,155,197 | $217,183,684 | Comparison of Six Months Ended June 30, 2023 compared to six months ended June 30, 2022 In H1 2023, time charter revenue decreased due to lower market rates despite increased fleet size and operating days; operating costs generally rose, but drydocking expenses fell; net income slightly declined due to market rates and higher operating costs, partially offset by vessel sale gains and derivative income - Time charter revenue decreased from $97.4 million in H1 2022 to $92.8 million in H1 2023, primarily due to lower average container vessel market charter rates, with average TCE rates falling from $33,843/day to $29,714/day, despite an increase in average number of vessels and operating days[21] - Vessel operating expenses increased from $17.8 million in H1 2022 to $20.1 million in H1 2023, with daily vessel operating expenses growing by 4.7% to $6,352, mainly due to increased crew costs and inflation[24] - Drydocking expenses decreased from $2.5 million in H1 2022 to $1.0 million in H1 2023, reflecting fewer drydockings completed in H1 2023[25] - In H1 2023, the company recognized a gain of $5.2 million from the sale of M/V "Akinada Bridge"[30] - Interest and other financing costs remained around $2.1 million after capitalized interest, but total interest costs increased due to higher debt and a rise in weighted average LIBOR/SOFR rates from 3.6% to 7.6%[31] - Net income decreased from $60.7 million in H1 2022 to $57.6 million in H1 2023[35] Liquidity and Capital Resources The company primarily funds operations and fleet expansion through equity, operating cash flow, long-term borrowings, and vessel sales; cash and cash equivalents increased to $38.2 million by June 30, 2023, with significant newbuilding commitments for 2024 funded by existing cash, operating cash flow, and new mortgage loans - As of June 30, 2023, the company's total cash and cash equivalents and restricted cash were $38.2 million, an increase of $6.8 million from $31.4 million as of December 31, 2022[39] - The company has agreements to build seven container vessels, expected for delivery in 2024; $168 million of these newbuilding payments are due within the 12 months ending June 30, 2024, with the remaining $61 million due by the end of 2024[41] - The company plans to meet working capital needs and capital commitments through cash on hand, cash flow from operations, and new mortgage financings for vessels under construction, potentially supplemented by new mortgage financings for seven unencumbered vessels, debt refinancing, continuous market offerings, other equity offerings, and vessel or newbuilding contract sales[41] Cash Flows In H1 2023, operating cash flow slightly decreased, investment cash outflow increased mainly for newbuildings, and financing cash flow shifted from outflow to inflow due to new loans, partially offset by increased dividend payments and share repurchases - As of June 30, 2023, the company had a slight working capital surplus of $0.03 million, with a cash balance of $31.8 million and restricted and retained account cash of $6.4 million[44] - Net cash provided by operating activities decreased from $64.0 million in H1 2022 to $59.8 million in H1 2023, primarily due to a slight decrease in net income[45][46] - Net cash used in investing activities increased from $67.2 million in H1 2022 to $68.2 million in H1 2023, mainly due to a $47.9 million increase in payments for vessels under construction, partially offset by reduced vessel acquisitions, capitalized expenditures, and net proceeds from vessel sales[47] - Cash flow from financing activities shifted from an outflow of $17.8 million in H1 2022 to an inflow of $15.2 million in H1 2023, primarily driven by $51.5 million in loan proceeds, but offset by increased debt principal payments, dividend payments, and share repurchases[48] Debt Financing As of June 30, 2023, the company had seven outstanding loans totaling $132.8 million, maturing between 2024 and 2030, with approximately $28.2 million due within the next 12 months; all loans are secured and include various financial covenants, which the company met as of June 30, 2023 - As of June 30, 2023, the company had seven outstanding loans totaling $132.8 million, maturing between 2024 and 2030[50] - Within the next 12 months, the company plans to repay approximately $28.2 million of these loans[50] - Loan agreements include various covenants such as minimum security coverage, restrictions on management and ownership changes, profit distribution, additional debt and vessel mortgages, vessel sales, maximum fleet leverage, minimum cash balance, and minimum cash retention accounts[98] - As of June 30, 2023, the company had met all debt covenants[98] Recent Developments This section directs readers to Note 14 of the financial statements for events occurring after June 30, 2023 - Please refer to Note 14 to the unaudited interim condensed consolidated financial statements for developments occurring after June 30, 2023[51] Unaudited Interim Condensed Consolidated Financial Statements Index to Unaudited Interim Condensed Consolidated Financial Statements This index lists the unaudited condensed consolidated balance sheets as of December 31, 2022, and June 30, 2023, and the condensed consolidated statements of comprehensive income, shareholders' equity, and cash flows for the six months ended June 30, 2022, and 2023, along with notes to the financial statements - The index includes the unaudited condensed consolidated balance sheets as of December 31, 2022, and June 30, 2023[53] - The index also includes the unaudited condensed consolidated statements of comprehensive income, shareholders' equity, and cash flows for the six months ended June 30, 2022, and 2023[53] - The notes to the financial statements are an integral part of these unaudited interim condensed consolidated financial statements[53] Unaudited Condensed Consolidated Balance Sheets As of June 30, 2023, the company's total assets increased to $394.1 million, driven by higher net vessel values and advances for vessels under construction, with corresponding growth in total liabilities and shareholders' equity Unaudited Condensed Consolidated Balance Sheets (Summary) | Metric | December 31, 2022 | June 30, 2023 | | :----------------------- | :--------------- | :--------------- | | Assets | | | | Cash and cash equivalents | $25,845,333 | $31,841,476 | | Vessels, net | $216,570,426 | $249,127,642 | | Advances for vessels under construction | $59,083,594 | $93,816,071 | | Total assets | $328,590,425 | $394,125,631 | | Liabilities and Shareholders' Equity | | | | Current liabilities | $73,689,704 | $45,673,764 | | Long-term bank loans, net | $51,812,086 | $103,971,969 | | Total liabilities | $160,435,228 | $176,941,947 | | Total shareholders' equity | $168,155,197 | $217,183,684 | Unaudited Condensed Consolidated Statements of Comprehensive Income For the six months ended June 30, 2023, both time charter revenue and net income decreased; despite a slight reduction in total operating expenses, operating income and net income remained lower than the prior year period Unaudited Condensed Consolidated Statements of Comprehensive Income (Summary) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | | :----------------------------------- | :---------------------- | :---------------------- | | Time charter revenues | $97,448,528 | $92,771,677 | | Net income | $93,853,147 | $89,632,206 | | Total operating expenses, net | $33,368,574 | $31,124,871 | | Operating income | $60,484,573 | $58,507,335 | | Net income | $60,686,136 | $57,632,915 | | Earnings per share, basic | $8.40 | $8.28 | | Earnings per share, diluted | $8.36 | $8.25 | Unaudited Condensed Consolidated Statements of Shareholders' Equity As of June 30, 2023, total shareholders' equity increased to $217.2 million, with net income of $57.6 million for the period partially offset by $2.2 million in share repurchases and $7.0 million in dividend payments Unaudited Condensed Consolidated Statements of Shareholders' Equity (Summary) | Metric | June 30, 2022 | June 30, 2023 | | :------------------- | :------------- | :------------- | | Total shareholders' equity | $133,980,635 | $217,183,684 | | Balance at January 1 | $76,856,896 | $168,155,197 | | Net income | $60,686,136 | $57,632,915 | | Share repurchases | $(346,836) | $(2,206,846) | | Dividends paid | $(3,647,063) | $(7,031,856) | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended June 30, 2023, net cash from operating activities was $59.8 million, net cash used in investing activities was $68.2 million primarily for newbuildings, and financing cash flow shifted from an outflow to an inflow of $15.2 million due to new loans Unaudited Condensed Consolidated Statements of Cash Flows (Summary) | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | | :----------------------- | :---------------------- | :---------------------- | | Net cash provided by operating activities | $64,037,665 | $59,799,808 | | Net cash used in investing activities | $(67,246,904) | $(68,181,882) | | Net cash (used in)/provided by financing activities | $(17,760,983) | $15,157,382 | | Net (decrease)/increase in cash, cash equivalents and restricted cash | $(20,970,222) | $6,775,308 | | Cash, cash equivalents and restricted cash at end of period | $10,528,007 | $38,213,814 | Notes to Unaudited Interim Condensed Consolidated Financial Statements Note 1. Basis of Presentation and General Information Euroseas Ltd., a Marshall Islands company, engages in ocean transportation through container ship ownership and operation, trading on Nasdaq Capital Market, managed by the Pittas family who controlled 57.9% of the company as of June 30, 2023; these interim financial statements are prepared under US GAAP and assume going concern - Euroseas Ltd., incorporated in the Republic of the Marshall Islands on May 5, 2005, engages in ocean transportation through the ownership and operation of container vessels, with its common stock trading on the Nasdaq Capital Market under the symbol "ESEA"[61] - The company's vessels are managed by Eurobulk Ltd., controlled by members of the Pittas family, who collectively owned 57.9% of the company's shares as of June 30, 2023[62][63] - As of June 30, 2023, the company had a slight working capital surplus of $0.03 million, net income of $57.6 million, and net cash provided by operating activities of $59.8 million, expecting sufficient funds to continue as a going concern[66][68] Note 2. Significant Accounting Policies The company's significant accounting policies remain consistent with those disclosed in the 2022 annual report, with no changes in the current period - A summary of the company's significant accounting policies was discussed in Note 2 to the 2022 annual report, with no changes in the current period[69] Note 3. Advances for Vessels under Construction As of June 30, 2023, advances for vessels under construction increased to $93.8 million, primarily for nine new container ships, two delivered in H1 2023 and seven expected in 2024, with a total contract price of approximately $270.2 million - As of June 30, 2023, advances for vessels under construction amounted to $93,816,071, primarily comprising progress payments to shipyards, capitalized interest, and legal and other costs related to construction[74] - The company has contracted for nine new container vessels, two of which (M/V "Gregos" and "Terataki") were delivered in April and July 2023, with the remaining seven expected in 2024[70][71][72][73] - The total consideration for these newbuilding contracts is approximately $270.2 million ($89.7 million + $103.8 million + $86.7 million)[71][72][73] Note 4. Vessels, net As of June 30, 2023, net vessel value increased to $249.1 million, mainly due to the delivery of newbuilding M/V "Gregos" and capitalized expenditures like ballast water treatment system installations; seven vessels remain unencumbered, and the company gained $5.2 million from the sale of M/V "Akinada Bridge" in January 2023 Changes in Vessels, net (Summary) | Metric | January 1, 2023 | June 30, 2023 | | :----------------------- | :------------- | :------------- | | Cost | $257,173,053 | $300,618,851 | | Accumulated depreciation | $(40,602,627) | $(51,491,209) | | Net book value | $216,570,426 | $249,127,642 | | Delivery of newbuilding "Gregos" | - | $42,754,607 | | Capitalized expenditures | - | $691,191 | - On April 6, 2023, the company took delivery of the newbuilding M/V "Gregos" at a total cost of $42,754,607[76] - As of June 30, 2023, seven of the company's vessels (M/V "Evridiki", "Joanna", "EM Hydra", "EM Spetses", "EM Diamantis P.", "EM Astoria", and "EM Kea") were unencumbered[77] - In January 2023, the company sold M/V "Akinada Bridge" for scrap, recognizing a gain of $5.2 million from the sale[79] Note 5. Fair Value of Below Market Time Charters Acquired The company recognized a liability for acquiring vessels with below-market time charters; as of June 30, 2023, the unamortized balance of this intangible liability was $27.3 million, expected to be fully amortized by July 2025, with $7.6 million amortized into time charter revenue in H1 2023 - The company recognized a liability for acquiring vessels (M/V "Marcos V", "Emmanuel P", and "Rena P") with below-market time charters[81] - As of June 30, 2023, the unamortized balance of this intangible liability was $27,296,214, expected to be fully amortized by the end of July 2025[82][83] - For the six months ended June 30, 2023, the amortization of the fair value of below-market time charters was $7,637,224, recognized as a reduction in time charter revenue[82] Note 6. Related Party Transactions The company engages in various transactions with Pittas family-controlled related parties; Eurobulk Ltd. provides vessel management services, with daily fees increased to €775, totaling $2.8 million in H1 2023; Eurochart S.A. provides S&P and chartering services, with chartering commissions of $1.16 million in H1 2023; Sentinel and Technomar also provide insurance and crewing services - The company has management agreements with Eurobulk Ltd., controlled by the Pittas family, for technical and commercial vessel management services, with daily fixed fees increased from €720 in 2022 to €775 in 2023[86] - In H1 2023, vessel management fees paid to Eurobulk Ltd. were $2,752,178, with additional service fees of $1,075,000[86][87] - Eurochart S.A., an affiliate of the Pittas family, provides sale and purchase and chartering services, charging 1% of the vessel sale price and 1.25% of chartering revenue; chartering service commissions were $1,159,646 in H1 2023[89] Note 7. Other operating expenses / (income) In H1 2023, the company recorded $1.4 million in other operating income, primarily from off-hire insurance proceeds for two vessels, compared to $0.35 million in other operating expenses in H1 2022 - In H1 2023, the company recorded other operating income of $1.4 million, related to off-hire insurance proceeds for two vessels[91] - In H1 2022, the company recorded other operating expenses of $0.35 million, related to charterer account settlements[91] Note 8. Long-Term Bank Loans As of June 30, 2023, total long-term bank loans increased to $132.8 million from year-end 2022; two loans were repaid, and new $26 million loans were secured for M/V "Gregos" and M/V "Terataki", with an additional $40 million refinancing loan signed in July 2023; interest expense remained stable after capitalization, but the weighted average interest rate significantly increased Long-Term Bank Loan Balances and Future Annual Repayment Schedule | Metric | December 31, 2022 | June 30, 2023 | | :----------------------- | :--------------- | :--------------- | | Total loans | $107,975,000 | $132,830,000 | | Less: current portion | $(55,765,000) | $(28,150,000) | | Long-term portion | $52,210,000 | $104,680,000 | | Future Annual Repayment Schedule | | | | As of June 30, 2024 | | $28,150,000 | | As of June 30, 2025 | | $34,750,000 | | As of June 30, 2026 | | $21,750,000 | | As of June 30, 2027 | | $7,600,000 | | 2028 and thereafter | | $40,580,000 | | Total | | $132,830,000 | - In H1 2023, the company repaid two loans totaling $14.15 million using own funds, releasing the related vessels from mortgage[94] - The company secured new loans of $26 million each for M/V "Gregos" and M/V "Terataki", at an interest rate of SOFR plus 2.15%[95][96] - On July 13, 2023, the company signed and drew down a $40 million term loan to refinance $28.38 million of existing debt and provide working capital[97] - In H1 2023, interest expense (net of $2.3 million capitalized interest) was $2.1 million, consistent with H1 2022, but the weighted average interest rate increased from 3.6% to 7.6%[99] Note 9. Commitments and Contingencies As of June 30, 2023, the company has future minimum aggregate revenues of $287.3 million under non-cancelable time charter agreements, mostly due in 2024 and 2025; additionally, there are eight container vessels under construction with total contract amounts of $320.4 million, with $229 million remaining to be paid, primarily in 2024 Future Minimum Time Charter Revenues | As of June 30 | Amount (USD) | | :----------- | :----------- | | 2024 | $165,100,000 | | 2025 | $90,400,000 | | 2026 | $31,800,000 | | Total | $287,300,000 | Unpaid Commitments for Vessels Under Construction | As of June 30 | Amount (USD) | | :----------- | :----------- | | 2024 | $168,000,000 | | As of December 31, 2024 | $61,000,000 | | Total | $229,000,000 | - The company plans to meet these commitments through bank financing and available cash[101] Note 10. Stock Incentive Plan As of June 30, 2023, unrecognized compensation cost for unvested shares was $772,483, expected to be recognized over 0.82 years; stock-based compensation expense of $680,294 was recognized in H1 2023, and unvested restricted shares accumulated $150,625 in dividends - As of June 30, 2023, unrecognized compensation cost related to unvested shares was $772,483, expected to be recognized over a weighted average period of 0.82 years[104] - In H1 2023, stock-based compensation expense of $680,294 was recognized and included in "General and administrative expenses"[104] - As of June 30, 2023, unvested restricted shares had accumulated dividends of $150,625, presented as "Accrued dividends"[105] Note 11. Earnings Per Share For the six months ended June 30, 2023, basic earnings per share were $8.28 and diluted earnings per share were $8.25, both lower than the corresponding period in 2022 Earnings Per Share Calculation | Metric | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | | :----------------------- | :---------------------- | :---------------------- | | Net income | $60,686,136 | $57,632,915 | | Basic earnings per share | $8.40 | $8.28 | | Diluted earnings per share | $8.36 | $8.25 | Note 12. Common shares and Additional paid-in capital The board approved and extended a $20 million share repurchase program, with approximately $8.2 million used to repurchase 400,710 shares to date; in H1 2023, 120,454 common shares were repurchased, and cash dividends of $0.50 per share, totaling $7.03 million, were declared - The company's Board of Directors approved and extended a share repurchase program for up to $20 million, with approximately $8.2 million used to repurchase 400,710 common shares to date[109] - In H1 2023, the company repurchased 120,454 common shares under the share repurchase program for a total consideration of approximately $2.2 million[111] - The company declared cash dividends of $0.50 per share in February and May 2023, totaling $7.03 million in H1 2023[112] Note 13. Financial Instruments The company uses interest rate swaps to manage interest rate risk on floating-rate long-term bank loans, but these do not qualify for hedge accounting, with fair value changes recognized in profit or loss; credit risk is managed by transacting with highly-rated institutions, and financial instrument fair values are measured using market data, primarily Level 2 - The company uses interest rate swap agreements as economic hedges to manage interest rate risk on a portion of its floating-rate long-term bank loans, but these swaps do not qualify for hedge accounting, with fair value changes recognized in "Derivative income, net"[114] - As of June 30, 2023, the company had one open swap agreement with a notional amount of $20 million[114] - The company limits credit risk by performing ongoing credit evaluations of its customers and transacting with highly-rated counterparties[116] Fair Value Measurement of Derivatives (As of June 30, 2023) | Asset | Balance Sheet Location | Total (USD) | (Level 1) (USD) | (Level 2) (USD) | (Level 3) (USD) | | :----------------------- | :------------- | :----- | :----- | :----- | :----- | | Interest rate swap agreements, current portion | Derivatives, current portion of assets | $444,068 | - | $444,068 | - | | Interest rate swap agreements, long-term portion | Derivatives, long-term portion of assets | $73,007 | - | $73,007 | - | Derivative Income, net | Derivatives Not Designated as Hedging Instruments | Six Months Ended June 30, 2022 | Six Months Ended June 30, 2023 | | :----------------------------------- | :---------------------- | :---------------------- | | Interest rate swap agreements – unrealized gain/(loss) | $2,410,656 | $(3,294,851) | | Interest rate swap agreements – realized (loss)/gain | $(100,752) | $4,038,484 | | Total derivative income | $2,309,904 | $743,633 | Subsequent Events Subsequent Events In July and August 2023, the company repurchased and canceled 41,921 common shares under its buyback program; on July 6, 2023, the second newbuilding, M/V "Terataki", was delivered and commenced a 36-to-40-month time charter; additionally, in July 2023, the company early terminated existing time charters for two vessels and signed new 20-to-24-month time charters with Orient Overseas Container Line Ltd. at $21,000 per vessel per day, which began in August 2023 - In July and August 2023, the company repurchased and canceled 41,921 common shares under its share repurchase program for a total consideration of approximately $0.94 million[123] - On July 6, 2023, the company took delivery of the second newbuilding, M/V "Terataki", which immediately commenced a time charter for 36 to 40 months[123] - In July 2023, the company agreed to early terminate existing time charters for M/V "Rena P" and M/V "Emmanuel P" and signed new time charters with Orient Overseas Container Line Ltd. for 20 to 24 months at $21,000 per vessel per day, which commenced in August 2023[123]