17 August 2008

PRGN: Financial Analysis (Initial) through June 2008

Paragon Shipping, Inc., (NASDAQ: PRGN ) is a dry bulk shipper officially registered in the Marshall Islands but with headquarters in Voula, Greece.  The company, which was formed in 2006, owns a fleet of 12 carriers of three different types for transporting dry goods in bulk.  Michael Bodouroglou, Paragon's CEO, is also the sole shareholder of Allseas Marine S.A., which manages Paragon's fleet.

In August and September 2007, Paragon sold almost 11 million Class A common shares in an initial public offering.  At $16 per share, less expenses of $1.04 per share, the company brought in $164.5 million.  These funds, along with $318 million in debt assumed in 2007, have been used to expand the company's fleet.

The twelfth vessel, the Friendly Seas, was added on 5 Aug 2008.  The purchase price was $79.25 million.

We have examined Paragon's results for the second quarter of 2008.  This report includes financial statements prepared in accordance with U.S. generally accepted accounting principles.  The report is submitted to the SEC on Form 6-K, Report of Foreign Private Issuer, and not the more familiar Form 10-Q quarterly report.  The financial statements are expressed in U.S. Dollars.

Paragon is too new to compute GCFR gauge scores, but we can examine, with some adjustments, many of the metrics that influence the gauges.  However, we will begin with a review of the Paragon's second quarter Income Statement.

Please note that the tabular format below, which we use for all analyses, can and often does differ in material respects from company-used formats. A common difference is the classification of income and expenses as Operating and Non-Operating. The standardization is simply for convenience and to facilitate cross-company comparisons.

($ 000)

June 2008
June 2007
Revenue (1)
Op expenses

CGS (2) (5,522)

Depreciation (7,849)

SG&A (3) (2,519)
Operating Income
Other income

Asset sales

Interest, etc.
Pretax income

Income tax

Net Income
24,611 5,491

Shares outstanding (4)

1. Net Revenue = Time-charter revenue - Commissions
2. Voyage expenses + Vessel operating expenses + Dry-docking expenses

3. Management fees + G&A expenses (including share-based compensation)
Weighted average number of Class A, common shares, diluted

Revenue in the June 2008 quarter was nearly triple that of the June 2007 period.  The average number of vessels in Paragon's fleet increased from 6 to 11.
The Gross Margin rose from 85.3 percent in the year-earlier quarter to 85.7 percent in the most recent quarter.  The Cost of Goods Sold was, therefore, 14.3 percent of Revenue in the June 2008 quarter.

Depreciation dropped from 25.1 percent of Revenue to 20.3 percent of Revenue.

Sales, General, and Administrative (SG&A) expenses, in which we include related-party management fees, were 6.5 percent of Revenue.  These expenses were 8.3 percent of Revenue in the June 2007 quarter.

Operating Income grew by 238 percent.

Other non-operating activities shifted from a loss of $1.2 million to a gain of $1.8 million.  This turnaround was primarily the result of a $4.1 million profit on an interest rate swap in the second quarter of 2008.  However, to illustrate the variability of these derivatives, we will note the Paragon reported on net loss of $1.1 million in the first six months of 2008.

Paragon paid no income taxes in either period.

Net Income surged by 348 percent.

Cash Management.

3 months
Current Ratio3.5
5.2 yrs
6.1 yrs
Finished Goods/Inventory
Days of Sales Outstanding (DSO)1.7 days
1.4 days
Working Capital/Market Capitalization  7.5%
Cash Conversion Cycle Time (CCCT)

As a result of the IPO and debt offerings, Paragon has a lot of Cash on its Balance Sheet.  A good chunk of these funds will probably be used to expand the fleet further.  The presently high ratio of Debt to Cash Flow from Operations might be a concern, but the recent rapid pace of Cash Flow growth (see below) suggests that the ratio will be much lower in another year or so.


Revenue growth (1)
Revenue/Assets (2)22.8%
CFO growth (1)151%
Net Income growth (1)257%
1. Growth rates are trailing two quarters compared to the same two quarters in the year earlier.
2. Annualized based first two quarters

Since Paragon doesn't yet have eight quarters under its belt, we can't compute year-over-year growth rates in our normal fashion.  The three growth rates shown above compare the first two quarters of 2008 to the first two quarters of 2007.  Revenue/Assets compares Revenue in the first two quarters to the average value for Total Assets during this period, and it has been multiplied by 2 to approximate an annual rate.


All Income Statement and Cash Flow values are trailing four quarters.

Free Cash Flow is negative because capital expenditures to acquire vessels has exceeded Cash Flow from Operations.  However, once the company gets past its start-up phase, we would expect the pace of fleet expansion to slow significantly.

Value. Paragon shares ran up after the IPO, surpassing $27 at one point, but the current share price is now below the $16 offering price.  The ratios below assume the $16.79 closing price on 30 June 2008.

Paragon's valuation ratios can be compared with other companies in the Shipping industry.

As Paragon matures, its growth pace will stabilize and its financial data will become more suitable for GCFR analysis.  Although we need more data, and we would also suggest that potential investors consider corporate governance, Paragon has a big fan at Zacks.com.

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