DryShips: Dilution Just Before Reverse Split?

| About: DryShips Inc. (DRYS)

Summary

In the past, after the company announced the reverse split, the share count increased dramatically.

Since inception the company issued close to 1 billion new shares.

As of May 02, 2017, the company had 65,564,307 shares issued and outstanding.

Following a reverse split of 1 for 7 on May 11, 2017, the share count will likely be reduced from 65,564,307 to 9.4 million shares.

But I expect the share count on May 11, 2017 would be more than 9.4 million shares.

Source: Seeking Alpha

Investment Thesis

DryShips (NASDAQ:DRYS) have not provided an update on the share count since May 02, 2017. This does not mean that the company did not issue new shares since May 02, 2017. Based on previous transactions (reverse splits) this suggests that the company is likely to issue new shares after they announce the reverse split. Therefore it is not worth it to take a risk.

Previous Transactions (dilution just before reverse split)

  • On January 19, 2017 (RS 1 for 8), the company announced that the reverse stock split will take effect and the company's common stock will begin trading on a split-adjusted basis on the Nasdaq Capital Market as of the opening of trading on January 23, 2017. The company further states that the reverse stock split will reduce the number of issued common shares from 69,357,841 shares to approximately 8.7 million shares. I could not find the share count for January 23, 2017, and there were no press release between January 23, 2017 and January 30, 2017. On January 31, 2017, the company announced that they have 36,253,870 shares outstanding. From January 19, 2017 to January 31, 2017, the share count increased by about 317%.
  • On April 06, 2017 (RS 1 for 4), the company announced that the reverse stock split should take effect. As well as this, as of April 11, 2017 the company's common stock will begin trading on a split-adjusted basis on the Nasdaq Capital Market. I was not able to find the share count for April 06, 2017. On March 15, 2017, the company issued an outstanding 143,572,689 shares of common stock. On April 11, 2017 the company said that the 1-for-4 reverse split shall decrease from 177,354,378 to approximately 44,338,594. After the reverse split, the share count was 47,010,986 instead of 44,338,594. From March 15, 2017 to April 11, 2017, 2017, the share count increased by about 24%.
  • On May 02, 2017 (RS 1 for 7), when the reverse stock split becomes effective, every seven shares of the company's issued common stock will be automatically combined into one issued share of common stock. This will reduce the number of issued common shares from 65,564,307 shares to approximately 9.4 million shares. I expect a 9.4 million share count on May 11, 2017 may not be correct. I expect the share count could be at least 50% more than what they mentioned on their press release.

No Fractional Shares

One of the SA readers asked the question of what will happen to their 6 shares after the 1-for-7 reverse split. The company clearly said in their press release that "no fractional shares will be issued". The company further said as follows:

No fractional shares will be issued in connection with the reverse split of the issued common stock. Shareholders who would otherwise hold a fractional share of the Company's common stock will receive a cash payment in lieu thereof at a price equal to that fraction to which the shareholder would otherwise be entitled multiplied by the closing price of the Company's common stock on the Nasdaq Capital Market on May 10, 2017.

Conclusion

Based on the previous transactions, it is certain that the company will issue shares after they announce the reverse split. The share count mentioned on their pressure release i.e. "this will reduce the number of issued common shares from 65,564,307 shares to approximately 9.4 million shares" could mislead the investors. Please keep in mind that there is still $159.2 million worth of shares to be sold to Kalani and $2 billion shelf offering is still pending. My rough estimate is that the company may potentially issue close to 1 billion new shares to raise the remaining capital. Do not be fooled by the share price spike because share dilution could happen whenever there are share spikes.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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