Euroseas Ltd. and Subsidiaries
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
(*) Adjusted to reflect the 1-for-8 reverse stock split effected at the close of trading on December 18, 2019.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
1.
|
Basis of Presentation and General Information
|
Euroseas Ltd. was formed on May 5, 2005 under the laws of the Republic of the Marshall Islands to consolidate the beneficial owners of the ship-owning companies in existence
at that time. Euroseas Ltd, through its wholly owned vessel owning subsidiaries (collectively the "Company" or “Euroseas”) is engaged in the ocean transportation of containers through ownership and operation of containerships. Euroseas’ common
shares trade on the Nasdaq Capital Market under the ticker symbol “ESEA”.
The operations of the vessels are managed by Eurobulk Ltd. (“Eurobulk” or “Management Company” or “Manager”), a corporation controlled by members of the Pittas family.
Eurobulk has an office in Greece located at 4 Messogiou & Evropis Street, Maroussi, Greece. The Manager provides the Company with a wide range of shipping services such as technical support and maintenance, insurance consulting, chartering,
financial and accounting services and executive management services, in consideration for fixed and variable fees (see Note 5).
The Pittas family is the controlling shareholder of Friends Investment Company Inc., Containers Shareholders Trinity Ltd., Eurobulk Marine Holdings Inc. and Diamantis
Shareholders Ltd. which, in turn, collectively own 62% of the Company’s shares as of June 30, 2020.
The accompanying unaudited condensed consolidated financial statements include the accounts of Euroseas Ltd., and its wholly owned vessel owning subsidiaries and should be read
in conjunction with the audited consolidated financial statements for the year ended December 31, 2019 as filed with the U.S. Securities and Exchange Commission ("SEC") on Form 20-F on April 30, 2020.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of
America (US GAAP) for interim financial information. Accordingly, they do not include all the information and notes required by US GAAP for complete financial statements and, in the opinion of management, reflect all adjustments, which include only
normal recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Operating results for the six month period ended June 30, 2020 are not
necessarily indicative of the results that might be expected for the fiscal year ending December 31, 2020.
As of June 30, 2020, the Company had a working capital deficit of $9.8 million. For the six-month period ended June 30, 2020, the Company reported a net income of $3.2 million
and a net income attributable to common shareholders of $2.9 million and generated net cash from operating activities of $4.0 million. The Company’s cash balance amounted to $1.3 million and cash in restricted and retention accounts amounted to
$2.6 million as of June 30, 2020. The Company intends to fund its working capital requirements and capital commitments via cash on hand and cash flows from operations, via the conversion of the related party loans to equity, as well as via the cash
proceeds expected to be generated through the sale of certain of the Company’s older vessels for scrap, in addition to the vessels already sold (refer Note 11). In the event that these are not sufficient, the Company may also use funds from debt
refinancing and equity offerings, if required, among other options. The Company believes it will have adequate funding through the sources described above and, accordingly, it believes it has the ability to continue as a going concern and finance
its obligations as they come due over the next twelve months following the date of the issuance of these financial statements. Consequently, the interim condensed consolidated financial statements have been prepared on a going concern basis which
contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
2.
|
Significant Accounting Policies
|
A summary of the Company's significant accounting policies is identified in Note 2 of the Company’s consolidated financial statements, included in the Annual Report on Form 20-F
for the fiscal year ended December 31, 2019 (the “2019 Annual Report”). There have been no changes to the Company’s significant accounting policies.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
The amounts in the accompanying unaudited condensed consolidated balance sheets are as follows:
|
|
Costs
|
|
|
Accumulated Depreciation
|
|
|
Net Book
Value
|
|
Balance, January 1, 2020
|
|
|
132,863,067
|
|
|
|
(16,632,734
|
)
|
|
|
116,230,333
|
|
Depreciation for the period
|
|
|
-
|
|
|
|
(3,386,726
|
)
|
|
|
(3,386,726
|
)
|
Capitalized expenses
|
|
|
92,477
|
|
|
|
-
|
|
|
|
92,477
|
|
Vessels held for sale
|
|
|
(10,752,242
|
)
|
|
|
3,689,943
|
|
|
|
(7,062,299
|
)
|
Balance, June 30, 2020
|
|
|
122,203,302
|
|
|
|
(16,329,517
|
)
|
|
|
105,873,785
|
|
In January 2020, M/V "EM Oinousses", a 2,506 teu 2000-built container carrier, experienced an engine room fire while sailing off Mozambique
carrying empty containers. The fire was extinguished without any injuries to the crew. On July 6, 2020, the Company signed a Memorandum of agreement to sell the vessel for scrap for net proceeds of $3.7 million following an agreement with the
H&M underwriters to sell the vessel for scrap as is without effecting permanent repairs (see note 6). M/V EM Oinousses was written down to its fair market value less costs to sell amounting to $3.7 million, resulting in a non-cash loss of $0.1
million compared to its net book value of $3.8 million and is presented within "Vessels held for sale” in the unaudited condensed consolidated balance sheet. This amount is presented in the "Loss on write-down of vessel held for sale" line in the
"Operating Expenses" section of the unaudited condensed consolidated statements of operations.
In February 2020, the Company entered into an agreement to sell for scrap the M/V "Manolis P”, a 1,452 teu 1995-built container carrier, in line with the Company’s strategy to
dispose older vessels. The vessel reached her destination port on April 7, 2020, but the sale was not completed due to complications during its delivery to the buyers related to COVID-19 restrictions and port lockdowns in the territory of arrival
(Alang, India). A dispute with the buyers is in arbitration. The advance received from the buyers amounting to $1,133,817 was transferred from the Company’s bank account to an escrow account following this dispute. On June 19, 2020, the Company
signed a Memorandum of agreement to sell the vessel for scrap for net proceeds of $2.0 million to new buyers. As of June 30, 2020, the vessel is presented within "Vessels held for sale” in the unaudited condensed consolidated balance sheet with a
value of $1.9 million, representing its net book value of $1.7 million plus expenses already incurred in relation to the sale of the vessel amounting to $0.1 million. The Company received a deposit for the sale of $0.5 million, which is presented
as "Liability associated with vessel held for sale" in the in the unaudited condensed consolidated balance sheet.
On June 30, 2020 the Company decided to sell for scrap M/V "Kuo Hsiung" a 1,169 teu 1993-built container carrier, in line with the Company’s strategy to dispose older vessels.
As of June 30, 2020, the vessel is presented within "Vessels held for sale” in the unaudited condensed consolidated balance sheet with a value of $1.6 million. On July 13, 2020, the Company signed a Memorandum of agreement to sell the vessel for
scrap for net proceeds of $1.9 million.
As of June 30, 2020 all vessels are used as collateral under the Company’s loan agreements (see Note 7).
4.
|
Fair Value of Below Market Time Charters Acquired
|
Details of the Company’s fair value of below market acquired time charters are discussed in Note 6 of the Company’s consolidated financial statements for the year ended December
31, 2019, included in the 2019 Annual Report.
For the six-month period ended June 30, 2020, the amortization of fair value of the below market acquired time charters was $1,160,839 and is included under“Time charter
revenue” in the unaudited condensed consolidated statement of operations.
The unamortized balance of this intangible liability as of June 30, 2020 of $553,531 is expected to be amortized within 2020.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
5.
|
Related Party Transactions
|
Details of the Company’s transactions with related parties did not change in the six-month period ended June 30, 2020 and are discussed in Note 7 of the Company’s consolidated
financial statements for the year ended December 31, 2019, included in the 2019 Annual Report.
The Company’s vessel owning companies are parties to management agreements with the Management Company which is controlled by members of the Pittas family, whereby the
Management Company provides technical and commercial vessel management for a fixed daily fee of Euro 685 for both the six months ended June 30, 2019 and 2020 under the Company’s Master Management Agreement (“MMA”) with Eurobulk. Vessel management
fees paid to the Management Company amounted to $1,547,139 and $2,642,368 in the six-month periods ended June 30, 2019 and 2020, respectively. The MMA was further renewed on January 1, 2018
for an additional five-year term until January 1, 2023 with the 5% volume discount permanently incorporated in the daily management fee. The daily management fee remained unchanged at Euro 685 for the year 2020 and may be adjusted annually for
inflation in the Eurozone. These fees are recorded under "Related party management fees" in the unaudited condensed consolidated statements of operations.
In addition to the vessel management services, the Management Company provides the Company with the services of its executives, services associated with the Company being a
public company and other services to the Company’s subsidiaries. For the six months ended June 30, 2019 and 2020, compensation paid to the Management Company for such additional services to the Company was $625,000 and $1,000,000, respectively.
This amount is included in “General and administrative expenses” in the unaudited condensed consolidated statements of operations.
Amounts due to or from related company represent net disbursements and collections made on behalf of the vessel-owning companies by the Management Company during the normal
course of operations for which a right of offset exists. As of December 31, 2019 and June 30, 2020, the amount due to related company was $795,562 and $1,531,239, respectively.
The Company uses brokers for various services, as is industry practice. Eurochart S.A., an affiliated company controlled by certain members of the Pittas family, provides
vessel sale and purchase services, and chartering services to the Company whereby the Company pays commission of 1% of the vessel sales price and 1.25% of charter revenues. Commissions to Eurochart S.A. for chartering services were $214,621 and
$378,330 for the six-month periods ended June 30, 2019 and 2020, respectively.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
5.
|
Related Party Transactions - continued
|
Certain members of the Pittas family, together with another unrelated ship management company, have formed a joint venture with the insurance broker Sentinel Maritime Services
Inc. (“Sentinel”). Technomar Crew Management Services Corp (“Technomar”), is a company owned by certain members of the Pittas family, together with two other unrelated ship management companies, which provides crewing services. Sentinel is paid a
commission on insurance premiums not exceeding 5%; Technomar is paid a fee of about $50 per crew member per month. Total fees charged by Sentinel and Technomar were $21,258 and $64,995 in the first six months of
2019, respectively. In the first six months of 2020, total fees charged by Sentinel and Technomar were $57,820 and $113,640, respectively. These amounts are recorded in “Vessel operating expenses” under “Operating expenses” in the accompanying
unaudited condensed consolidated statements of operations.
On September 30, 2019, the Company reached an agreement with a related party, Colby Trading Ltd., a company controlled by the Pittas family and affiliated with the Company’s
Chief Executive Officer, to draw a $2.5 million loan to finance the special survey and Water Ballast Treatment system installation on the M/V “Akinada Bridge”. The first repayment instalment was paid on May 15, 2020 and the remaining three
instalments, which were payable on a quarterly basis, were rescheduled to be paid at the maturity of the loan in November 2020. On November 1, 2019, the Company entered into a second
agreement with Colby Trading Ltd., to draw another $2.5 million loan to finance working capital needs. There are no principal repayments until December 31, 2020, when the loan matures. The interest rate applied on both agreements is 8% per annum
and amounted $199,452 for the six-month period ended June 30, 2020. Interest on the loans is payable quarterly. Under certain circumstances, the Company can pay principal in equity, and the loans are convertible in common stock of the Company at
the option of the lender at certain times.
6.
|
Other operating income
|
In January 2020, M/V EM Oinousses experienced an engine room fire while sailing off Mozambique carrying empty containers. The fire was extinguished without any injuries to the
crew. The vessel completed an evaluation for the type of repairs required and was idle during the evaluations. The Company agreed with the H&M underwriters an “unrepaired damage” claim of $2.7 million. Under this agreement the vessel will be
sold to scrap as is without effecting any permanent repairs. As of June 30, 2020, the underwriters have already paid $1.0 million for the “unrepaired damage”. The H&M underwriters and the vessel’s last Charterers / cargo owners will cover any
“General Average” costs and salvage proceeds. As a result of the above the Company as of June 30, 2020, recognized a receivable of $2.0 million, including a general average claim of $0.3 million, and an “Other operating income” of $2.7 million.
These amounts are included under “Other receivables” in the unaudited condensed consolidated balance sheet and under “Other operating income” in the accompanying unaudited condensed consolidated statement of operations, respectively.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
Long-term debt represents bank loans of the Company. Outstanding long-term debt as of December 31, 2019 and June 30, 2020 is as follows:
Borrower
|
|
December 31,
2019
|
|
|
June 30,
2020
|
|
Alterwall Business Inc. / Allendale Investments S.A. / Manolis Shipping Ltd. / Joanna Maritime Ltd. / Jonathan John Shipping Ltd. / Athens Shipping Ltd. / Oinousses Navigation Ltd. / Corfu
Navigation Ltd. / Bridge Shipping Ltd. / Noumea Shipping Ltd. / Gregos Shipping Ltd.
|
|
|
37,650,000
|
|
|
|
36,375,000
|
|
Diamantis Shipowners Ltd.
|
|
|
3,507,220
|
|
|
|
3,186,300
|
|
Kea Shipowners Ltd. / Spetses Shipowners Ltd. / Hydra Shipowners Ltd.
|
|
|
12,050,000
|
|
|
|
11,150,000
|
|
Antwerp Shipping Ltd. / Busan Shipping Ltd. / Keelung Shipping Ltd. / Oakland Shipping Ltd.
|
|
|
32,000,000
|
|
|
|
29,200,000
|
|
|
|
|
85,207,220
|
|
|
|
79,911,300
|
|
Less: Current portion
|
|
|
(12,541,840
|
)
|
|
|
(13,451,153
|
)
|
Long-term portion
|
|
|
72,665,380
|
|
|
|
66,460,147
|
|
Deferred charges, current portion
|
|
|
246,520
|
|
|
|
246,567
|
|
Deferred charges, long-term portion
|
|
|
477,595
|
|
|
|
354,761
|
|
Long-term bank loans, current portion net of deferred charges
|
|
|
12,295,320
|
|
|
|
13,204,586
|
|
Long-term bank loans, long-term portion net of deferred charges
|
|
|
72,187,785
|
|
|
|
66,105,386
|
|
|
|
|
|
|
|
|
|
|
Loan from related party, current
|
|
|
|
|
|
|
|
|
Euroseas Ltd.
|
|
|
5,000,000
|
|
|
|
4,375,000
|
|
The future annual loan repayments are as follows:
To June 30:
|
|
|
|
2021
|
|
|
13,451,153
|
|
2022
|
|
|
24,441,844
|
|
2023
|
|
|
21,518,303
|
|
2024
|
|
|
20,500,000
|
|
Total
|
|
|
79,911,300
|
|
Details of the loans are discussed in Note 8 of our consolidated financial statements for the year ended December 31, 2019 included in the 2019 Annual Report.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated financial statements
(All amounts expressed in U.S. Dollars)
7.
|
Long-Term Bank Loans - continued
|
The Company’s bank loans are secured with one or more of the following:
|
•
|
first priority mortgage over the respective vessels on a joint and several basis.
|
|
•
|
first assignment of earnings and insurance.
|
|
•
|
a corporate guarantee of Euroseas Ltd.
|
|
•
|
a pledge of all the issued shares of each borrower.
|
The loan agreements contain covenants such as minimum requirements regarding the security cover ratio (the ratio of fair value of vessel to outstanding loan less cash in
retention accounts ranging from 110% to 140%), restrictions as to changes in management and ownership of the ship-owning companies, distribution of profits or assets (i.e. not permitting dividend payment or other distributions in cases that an
event of default has occurred), additional indebtedness and mortgage of vessels without the lender’s prior consent, sale of vessels, maximum fleet-wide leverage, sale of capital stock of the Company’s subsidiaries, ability to make investments and
other capital expenditures, entering in mergers or acquisitions, minimum cash balance requirements and minimum cash retention accounts (restricted cash). The loan agreements also require the Company to make deposits in retention accounts with
certain banks that can only be used to pay the current loan installments. Minimum cash balance requirements are in addition to cash held in retention accounts. These cash deposits amounted to $4,410,376 and $2,032,468 as of both December 31, 2019
and June 30, 2020, and are included in "Restricted cash" under "Current assets" and "Long-term assets" in the unaudited condensed consolidated balance sheets. As of June 30, 2020, the Company satisfied all its debt covenants.
Interest expense, including loan fee amortization for the six-month periods ended June 30, 2019 and 2020 amounted to $1,461,978 and $2,389,021, respectively. For the six-month
period ended June 30, 2020, LIBOR for the Company’s loans was on average approximately 1.5% per year, while the average interest rate margin over LIBOR on our debt was approximately 3.6% per year for a total average interest rate of approximately
5.1% per year. For the six-month period ended June 30, 2019, LIBOR for the Company’s loans was on average approximately 2.6% per year, while the average interest rate margin over LIBOR on our debt was approximately 4.2% per year for a total average
interest rate of approximately 6.8% per year.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated financial statements
(All amounts expressed in U.S. Dollars)
8.
|
Commitments and Contingencies
|
|
(a)
|
As of June 30, 2020 a subsidiary of the Company, Alterwall Business Inc., owner of M/V “Ninos”, is involved in a dispute with a fuel oil supplier who claimed a maritime lien against the
vessel after the company which had time-chartered the vessel from the Company went bankrupt in October 2009 and failed to pay certain invoices. The vessel was arrested in Karachi in November 2009 and released after a bank guarantee for an
amount of $0.53 million was provided on behalf of the Company, for which the bank has restricted an equal amount of the Company's cash which is presented within Restricted Cash under “Long-term assets” in the unaudited condensed
consolidated balance sheets. The legal proceedings are ongoing. Although the Company believes it will be successful in its claim, it made a provision of $0.15 million in prior years for any costs that may be incurred.
|
|
(b)
|
On November 7, 2019, Euroseas Ltd. and Synergy Holdings Limited, as part of the agreement for the acquisition of the vessels M/V “Synergy Busan”, M/V “Synergy Keelung”, M/V “Synergy Oakland”
and M/V “Synergy Antwerp” (refer Notes 1 and 4 of the 2019 Annual Report), agreed that Euroseas will issue certain shares of its common stock to Synergy Holdings Limited under the following terms:
|
If the 12-month New ConTex index for a 4,250 TEU vessel (as published on https://www.vhbs.de/index or any successor website maintained by the Hamburg and
Bremen Shipbrokers’ Association) (the “Index Value”) is higher on November 16, 2020 at 4:00 p.m. New York time than the Index Value on November 15, 2019 at 4:00 p.m. New York time, then, on November 16, 2020, Euroseas shall issue to Synergy
Holdings Limited, $500,000 divided by the 20-day volume weighted average price of the Company’s common shares calculated on November 16, 2020 at 4:00 p.m. New York time.
The Company based on its assessment of future rates as of June 30, 2020, concluded that it is not probable that it will have to pay the specific contingent
consideration.
There are no other material legal proceedings to which the Company is a party or to which any of its properties are subject, other than routine litigation
incidental to the Company's business. In the opinion of the management, the disposition of these lawsuits should not have a material impact on the consolidated results of operations, financial position and cash flows.
As of June 30, 2020, future gross minimum revenues under non-cancellable time charter agreements total $20.8 million, $20.2 million of which is due in the
twelve-month period ending June 30, 2021 and $0.7 million is due in the twelve-month period ending June 30, 2021. In arriving at the future gross minimum revenues, the Company has deducted an estimated one off-hire day per quarter. Such off-hire
estimate may not be reflective of the actual off-hire in the future. In addition, the actual revenues could be affected by early delivery of the vessel by the charterers or any exercise of the charterers’ options to extend the terms of the
charters, which however cannot be estimated and hence not reflected above.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated financial statements
(All amounts expressed in U.S. Dollars)
A summary of the status of the Company’s unvested shares as of January 1, 2020, and changes during the six-month period ended June 30, 2020, are presented below:
Unvested Shares
|
|
Shares
|
|
|
Weighted-Average Grant-Date
Fair Value
|
|
Unvested on January 1, 2020
|
|
|
23,284
|
|
|
|
6.77
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited
|
|
|
-
|
|
|
|
-
|
|
Unvested on June 30, 2020
|
|
|
23,284
|
|
|
|
6.77
|
|
As of June 30, 2020, there was $80,215 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted. That cost is expected to be
recognized over a weighted-average period of 0.53 years. The share-based compensation recognized relating to the unvested shares was $49,565 and $60,808 for the six-month periods ended June 30, 2019 and 2020, respectively, and is included within
“General and administrative expenses” in the unaudited condensed consolidated statements of operations.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
10.
|
(Loss) / Earnings Per Share
|
Basic and diluted (loss)/earnings per common share is computed as follows:
|
|
For the six months
ended June 30,
|
|
|
|
2019
|
|
|
2020
|
|
Net (loss) / income
|
|
|
(765,615
|
)
|
|
|
3,247,415
|
|
Dividend Series B Preferred shares
|
|
|
(949,152
|
)
|
|
|
(339,069
|
)
|
Preferred deemed dividend
|
|
|
(504,577
|
)
|
|
|
-
|
|
Net (loss) / income attributable to common shareholders
|
|
|
(2,219,344
|
)
|
|
|
2,908,346
|
|
Weighted average common shares – outstanding
|
|
|
1,542,508
|
|
|
|
5,576,960
|
|
Basic and diluted (loss) / earnings per share
|
|
|
(1.44
|
)
|
|
|
0.52
|
|
The Company excluded the effect of 23,284 unvested incentive award shares as of June 30, 2020 and 21,948 shares as of June 30, 2019, as well as the effect of Series B preferred
shares, as they were anti-dilutive. The number of dilutive securities was nil shares in the six-month periods ended June 30, 2019 and 2020.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
11.
|
Financial Instruments
|
The principal financial assets of the Company consist of cash and cash equivalents, restricted cash, trade accounts receivable and other receivables. The principal financial
liabilities of the Company consist of long-term bank loans, related party loan, derivatives, trade accounts payable, accrued expenses and amount due to related company.
Interest rate risk
The Company enters into interest rate swap contracts as economic hedges to manage some of its exposure to variability in its floating rate long-term bank loans. Under the terms
of the interest rate swaps the Company and the bank agreed to exchange, at specified intervals the difference between a paying fixed rate and receiving floating rate interest amount calculated by reference to the agreed principal amounts and
maturities. Interest rate swaps allow the Company to convert long-term borrowings issued at floating rates into equivalent fixed rates. Even though, historically, the interest rate swaps were entered into for
economic hedging purposes, they did not qualify for accounting purposes as fair value hedges, under the guidance relating to Derivatives and Hedging, as the Company did not have written contemporaneous
documentation identifying the risk being hedged and, both on a prospective and retrospective basis, performing an effectiveness test to support that the hedging relationship is highly effective. Consequently, the Company recognized the change in
fair value of these derivatives in “Loss on derivatives, net” in the unaudited condensed consolidated statements of operations. As of June 30, 2020, the Company had one open swap contract for a notional amount of $30.0 million.
Concentration of credit risk
Financial instruments, which potentially subject the Company to significant concentration of credit risk consist primarily of cash and trade accounts receivable. The Company
places its temporary cash investments, consisting mostly of deposits, with high credit qualified financial institutions. The Company performs periodic evaluation of the relative credit standing of these financial institutions that are considered in
the Company’s investment strategy. The Company limits its credit risk with trade accounts receivable by performing ongoing credit evaluations of its customers’ financial condition and generally does not require collateral for its trade accounts
receivable.
Fair value of financial instruments
The estimated fair values of the Company's financial instruments such as cash and cash equivalents, restricted cash and amount due to related company approximate their
individual carrying amounts as of December 31, 2019 and June 30, 2020, due to their short-term maturity. Cash and cash equivalents and restricted cash are considered Level 1 items as they represent liquid assets with short-term maturities. The fair value of the Company’s long-term borrowings approximates $80.3 million as of June 30, 2020 or approximately $0.4 million more than its carrying value of $79.9 million (excluding the unamortized deferred
charges). The fair value of the Company’s long-term borrowings is estimated based on current interest rates offered to the Company for similar loans. LIBOR rates are observable at commonly quoted intervals for the full terms of the loans and hence
fair value of the long-term bank loans are considered Level 2 items in accordance with the fair value hierarchy due to their variable interest rate, being the LIBOR. The fair value of the Company’s related party loans is estimated based on current
interest rates offered to the Company for similar loans and approximates their individual carrying amounts due to their short-term maturity. The fair value of the Company’s interest rate swaps is the estimated amount the Company would pay to
terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the Company and its counter parties.
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
11.
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Financial Instruments - continued
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Fair value of financial instruments - continued
The Company follows guidance relating to “Fair value measurements”, which establishes a framework for measuring fair value under generally accepted accounting principles, and
expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the
information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following six categories:
Level 1: Quoted market prices in active markets for identical assets or liabilities;
Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data;
Level 3: Unobservable inputs that are not corroborated by market data.
The fair value of the Company’s interest rate swap agreements is determined using a discounted cash flow approach based on market-based LIBOR swap rates. LIBOR swap rates are
observable at commonly quoted intervals for the full terms of the swaps and therefore are considered Level 2 items. The fair values of the interest rate swap determined through Level 2 of the fair value hierarchy as defined in guidance relating to
“Fair value measurements” are derived principally from or corroborated by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparables, interest
rates, yield curves and other items that allow value to be determined.
Derivative not designated as hedging instrument
|
Location of loss recognized
|
Six Months Ended June 30, 2019
|
Six Months Ended June 30, 2020
|
Interest rate swap contract– Unrealized gain / (loss)
|
Loss on derivatives, net
|
41,435
|
(468,146)
|
Interest rate swap contract - Realized loss
|
Loss on derivatives, net
|
(44,320)
|
-
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Total loss on derivatives
|
|
(2,885)
|
(468,146)
|
Asset Measured at Fair Value on a Non-recurring Basis
As of June 30, 2020 the vessel M/V “EM Oinousses” with a carrying amount of $3.77 million, was classified as vessel held for sale and written down to its fair value of $3.87
million, less estimated costs to sell of $0.22 million, resulting in a loss of $0.12 million, which was included in the unaudited condensed consolidated statement of operations under “Loss on write-down of vessel held for sale”. The fair value of
M/V “EM Oinousses” was determined by reference to its negotiated and thereafter agreed sale price and is considered Level 2.
Nonrecurring Fair Value Measurements at Reporting Date
|
June 30, 2020
|
|
Fair Value
|
Level 1
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Level 2
|
Level 3
|
Loss 2020
|
Vessel held for sale
|
$3,873,406
|
-
|
$3,873,406
|
-
|
$121,165
|
Euroseas Ltd. and Subsidiaries
Notes to Unaudited Condensed Consolidated Financial Statements
(All amounts expressed in U.S. Dollars)
The following events occurred after June 30, 2020:
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(a)
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During the second quarter of 2020 and within July 2020, the Company agreed with certain of its lenders to defer a portion of its 2020 loan repayments to be repaid together with the
respective balloon instalments. A total of $4.7 million was rescheduled to December 2021 or within 2022. Furthermore, the Company agreed with the holders of its Series B Preferred Shares to have the option of paying the quarterly dividends
in-kind, for the period from April 1, 2020 to January 29, 2021, by issuing additional Series B Preferred Shares and increasing the dividend rate to 9% (from 8%) if paid in-kind. The respective agreements are in the process of customary
documentation.
|
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(b)
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In July 2020, the Company delivered three of its vessels sold for scrap, the M/V “Manolis P” on July 2, 2020, the M/V “EM Oinousses” on July 17, 2020 and the M/V “Kuo Hsiung” on July 30,
2020, to their new owners. All three vessels were sold for net proceeds of $7.6 million. All three vessels were on first priority mortgages for the revolving facility signed with Eurobank Ergasias S.A. on November 21, 2018 (see our annual
report on Form 20-F for the year ended December 31, 2019, Note 8 to the consolidated financial statements). The net proceeds from the sale of the vessels repaid a total of $7.0 million of the above loan.
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(c)
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The Company is still assessing the impact of the outbreak of the Coronavirus pandemic on its financial condition and operations and on the container industry in general. In response to the
outbreak, many countries, ports and organizations, including those where the Company conducts a large part of its operations, have implemented measures to combat the outbreak, such as quarantines and travel restrictions. Such measures have
and will likely continue to cause severe trade disruptions. The extent to which COVID-19 will impact the Company’s results of operations and financial condition will depend on future developments, which are highly uncertain and cannot be
predicted, including new information which may emerge concerning the severity of the virus and the actions to contain or treat its impact, among others. Accordingly, an estimate of the impact cannot be made at this time.
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(d)
|
On August 3, 2020, the Company issued and sold 200,000 shares of the Company’s common stock through its at-the-market offering for net proceeds of approximately $0.7 million.
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