This is something I hope to publish as an article if next week TOPS is not considered a penny stock under SA standards. I believe it's an interesting weekend story, especially to those interesting in the shipping sector.
On June 23, 2011 TOP Ships (TOPS) announced its long awaited (and second in three years) reverse split at a final ratio of 1-for-10. The split, the press release states, “will reduce the number of outstanding shares of the Company’s common stock from approximately 46.7 million shares to approximately 4.7 million shares”. From next week TOPS will again presumably trade, at least for a while, above NASDAQ's $1 minimum stock price for listing purposes.
Hang on a minute. According to the TOPS Form 20-F for FY 2010, as of December 31, 2010, just 34,200,673 shares of common stock were outstanding. More recently, a Schedule 13D/A filed on May 5, 2011, states that “[a]ccording to the Issuer’s transfer agent, there were 34,200,673 Common Shares issued and outstanding as of April 13, 2011”. The F-1 filed subsequently has not been declared effective and no secondary has closed. Where did the 13.5 million new shares come from in two months, a more than 35% increase in shares outstanding?
Let us hazard a guess. As I've already pointed out elsewhere, TOPS entered during 2010 and 2011 into three separate “bridge” loans, Laurasia 1 as amended, Laurasia 2, and Santa Lucia (as per the names of the Lenders, both Marshall Islands entities). The amount of each loan is $2,000,000, or $6,000.000 in total, and under their terms each loan can be repaid, at the option of the Lender, in TOPS shares at $0.40 or 15,000,000 shares (at execution date TOPS share was at $0.88, 0.95 and $0.76 respectively). The nominal interest rates range from 6% to 8%. (Not disclosed in the 20-F are the “arrangement” fees ranging from an additional 10%-12% - and one loan is partly used to pay back such fees - any money staying in the company are then again siphoned out in other ways.) In comparison, TOPS total "normal" debt at March 31, 2011 was $326 million.
The loans can be accelerated, among other events, if TOPS other debt is “capable of being declared repayable prior to its stated maturity”. Since TOPS has been acknowledging that it is in continual breach of its normal banking debt throughout 2010 and 2011, these loans could have been accelerated/converted any time since their inception.
So there you have an explanation: part of these bridge loans may have been converted into TOPS shares. The final issue is to identify the brave lenders who took such risk and showed confidence by taking a more than 30% stake. Unfortunately, the only thing that can be said for certain about these obscure vehicles is that the nominal President of Laurasia is an associate at the Athens law firm used by TOPS' CEO Pistiolis himself, G. C. Economou and Associates – no, not that one. But, by the way, indeed George Economou of DRYS also has a 12% stake in TOPS.
Occam would likely conclude that these are sham transactions which are in fact related and they are efforts to retain stakes in TOPS, for nothing. Let's see if a 13D or 13G filing confirms anything.
A small moral
After the heady days of the shipping boom and outsized returns ended in 2008, a number of shipping companies have become irrelevant, in market cap terms, trading far below stock-exchange listing standards even after a series of reverse splits or reorganizations. The retail investor which is now the main target of these failed issues is also more or less generally aware of bad corporate governance practices in such names but hopes for a leveraged “shot to nothing” if the shipping cycle turns.
This little story about a company that once had a market cap pushing above $600 million and has been drained dry shows that corporate governance does matter. (Bear in mind that there are many ways to "tunnel" funds out of the company – TOPS used to pay some $2.5 million annually for office space in Athens – and also paid some $5 million for "renovation" works at the same office ... to the CEO's father - who can actually believe that?). Note that banks side with management: they will not call in their loans as long as the collateral is underwater and there is a chance of selling a good story to the hopeful equity investor. And in fact TOPS does go around saying they want to sell new equity "when market conditions improve."
There are many such companies in the shipping sector - avoid.
As a footnote, I simply can't understand how the number of shares outstanding at December 31, 2010 and April 13, 2011 are both 34,200,673, as per the filings, but the average common shares outstanding, basic AND diluted for Q1 2011, on which earnings are calculated, are both stated as 31,639,444. If any reader has an idea, please let me know.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.