Diana Containerships Inc. (DCIX) is a microcap shipping stock and, because it is a foreign issuer, under SEC rules its disclosure requirements are much looser than a US-based SEC filer. Whether assessing DCIX as a long or short investment or trade, extreme caution should be taken. I have written prior articles that have provided insight into the private placement of warrants with Kalani Investments. They should be read as a primer to this article and more importantly as a cautionary tale for investing or trading in this equity.
DCIX announced an open market stock buyback program in the amount of $6 million after the market close on January 9th. DCIX's Equity Market Value at the close on January 9th, prior to the announcement, was approximately $11.95 million based on 14.94 million shares outstanding as of January 9th. The $6 million repurchase therefore represents a significant buyback. DCIX jumped approximately 50% in after-market trading. DCIX is a very volatile stock that has a history of violent short covering rallies. The timing of the stock buyback announcement is a surprise since the Kalani Warrants (discussed below) do not expire until March 24th. Any spike in the price and trading volume of DCIX will likely result in additional exercise of warrants by Kalani resulting in additional stock issuance.
Recent Price Action
DCIX announced 3Q 2018 earnings on November 23rd, 2018. DCIX declined approximately 19.6% from the date of the Q3 earnings announcement to January 9th, 2019, and was pushed to a 52-week low on December 24th of $.57 due to year-end tax selling. On December 24th, the stock had plummeted almost 45% from its pre Q3 2018 earnings release price level. The plummet in stock price reduced the pace of exercise of Kalani Warrants and resulted in the issuance of only 480k shares based on the shares outstanding disclosed as of November 21st, 2018, and January 9th, 2018. This reduced pace of issuance resulted in 3.3% dilution as of January 9th, 2018.
DCIX entered into a private placement of warrants with Kalani, an unaffiliated third party with an unsavory reputation for entering rapacious "financing" deals with troubled shipping companies, during March 2017. The Statement of Designations and Preferences for the Series B-2 Preferred should be independently reviewed, but the most pertinent language is summarized in the Q2 2108 financial statement footnotes:
At the option of Kalani, the preferred stock may be alternatively converted into common shares at a per share price equal to the higher of (I) 92.25% of the lowest daily volume weighted average price on any trading day during the 5 consecutive trading day period ending on and including the conversion date and (II) $0.50. Kalani may elect to convert the preferred stock into shares of common stock at the conversion price or alternate conversion price then in effect, at any time. The Series B preferred warrants are exercisable into Series B convertible preferred shares at any time at the option of the holder thereof at an exercise price of $1,000 per Series B convertible preferred share.
The warrants expire March 24th, 2019, (assuming that DCIX does not extend the expiration date) and at least 105,000 of the warrants likely remained outstanding as of November 21st. The warrant expiration date is defined on page 3 of the Preliminary Prospectus filed March 24th, 2017.
The Series B-2 Preferred Warrants are exercisable immediately and will expire two years after the date of issuance of such warrants, or March 24, 2019.
I have reviewed DCIX's recent press releases and SEC filings and I have not noted any disclosure of the warrant expiration date being altered or renegotiated with Kalani. As noted in the citation above, each warrant has an exercise price of $1,000, so a significant amount of common stock could still be issued between now and March 24th, 2019, through the exercise of the Kalani Warrants. The only limitation on issuance is the ceiling on ownership by Kalani of 4.99% on any particular day (to avoid the need to disclose ownership above 5% as required by the SEC). The effect of this limitation is discussed at length in prior articles.
Although the plunge in DCIX's stock price dampened warrant exercise by Kalani between November 21st and January 9th, 2019, there is a nontrivial probability that any spike in price or volume resulting from the announcement of a stock buyback by DCIX may result in the exercise of additional Kalani Warrants and the dilutive issuance of additional DCIX stock.
Balance Sheet and Asset Quality
In my review of the 3Q 2018 earnings release, I wrote the following assessment of DCIX's balance sheet.
DCIX has completed the cleanup of its balance sheet as proceeds from the sale of the Hamburg were used to repay all outstanding debt during July 2018. What is left on the asset side is four vessels that are pretty long in the tooth. They will be 18, 14, 13, and 12 years old as of January 2019. Three of the vessels have entered or are near the time period when they will undergo Special Surveys and Dry Dockings every 2 1/2 years (beginning in year 15) which will make them less economic to keep on the water. They will also need additional CapEx to come into compliance with the Water Ballast Protocols.
In short, the liability side of the balance sheet is in good shape, but the quality of assets is low. DCIX will likely have to use a significant portion of the funds that will be raised through the exercise of Kalani Warrants through March 24, 2019, to pay for upcoming SS/DDs and Ballast Water equipment. The alternative would be to use the Kalani Warrant proceeds plus proceeds from the sales of the older vessels to purchase younger vessels and renew the fleet. The viability of this alternative will be better assessed at the end of Q4 when proceeds from the exercise of Kalani Warrants are known.
Why Was the Buyback Announced Now?
The above analysis was predicated on the continued steady exercise of Kalani Warrants from the 3Q 2018 earnings release date through the March 24th, 2019, expiration date of the Kalani Warrants. The 45% plunge in the DCIX stock price from November 26th to December 24th derailed the exercise of Kalani Warrants during that period and reduced the cash proceeds from the issuance of common stock through the exercise of Kalani Warrants. Cash at September 30, 2018, was approximately $5.5 million. A generous estimate of proceeds from the issuance of approximately 480k shares through the exercise of Kalani Warrants since the 3Q earnings release (discussed above) is $400k (remember that the shares are issued at a discount from market price equal to 92.5% of the VWAP). As discussed in my last article, I forecasted that DCIX would have positive cash flow.
The analysis was predicated on the continued steady exercise of Kalani Warrants from the 3Q 2018 earnings release date through the March 24th, 2019, expiration date of the Kalani Warrants. The 45% plunge in the DCIX stock price from November 26th to December 24th derailed the exercise of Kalani Warrants.
Let's assume that free cash flow during Q4 was $500k. Combined with the estimated proceeds from stock issuance of $400k, DCIX may have had as much as $6.5 million of cash on the balance sheet at 4Q 2018. Here is the current fleet employment.
|Vessel||Gross Rate (USD Per Day)||Com*||Charterers||Delivery Date to Charterers**||Redelivery Date to Owners***||Notes|
|2 Panamax Container Vessels|
|PAMINA||11,950||5.00%||Hyundai Merchant Marine Co., Ltd.||23/Aug/2018||23/Apr/2019||-||23/Aug/2019|
|2 Post - Panamax Container Vessels|
|PUCON||18,000||3.75%||Orient Overseas Container Line Ltd.||21/Jun/2018||21/Feb/2019||-||21/Jun/2019|
|ROTTERDAM||18,200||3.75%||Wan Hai Lines (Singapore) Pte Ltd.||12/Jul/2018||15/Apr/2019||-||15/Jul/2019|
|* Total commission paid to third parties.|
|** In case of newly acquired vessel with time charter attached, this date refers to the expected/actual date of delivery of the vessel to the Company.|
|*** Range of redelivery dates, with the actual date of redelivery being at the Charterers’ option, but subject to the terms, conditions, and exceptions of the particular charterparty.|
|For those vessels employed in the spot market and where rates are quoted the Company has calculated the estimated rates under current specific contracted voyages. The Company gives no guarantee that these rates are correct or that the rates are sustainable beyond the duration of the current voyage. The quoted rates are not indications of future earnings and the Company gives no assurance or guarantee of future rates after the current voyage.|
This is a link to HarperPetersen's graph and table on containership TCs. The containership index graph for the last 12 months is UGLY. The comparison of DCIX's TCs with current estimates provided by HarperPetersen is quite positive with 6500 TEU current rates at January 4, 2019, at $9,750 versus the $18,000 per day TCs for DCIX's 6500s. The problem is that all of DCIX's TCs expire during 2019. Its revenue and free cash flow will decline precipitously if it rolls expiring TCs into new contracts at rates significantly below the $18k level. Signing new TCs for the 6500s at or below $15k (remember, current rates are $9,750) would be enough for DCIX to become cash-flow negative.
The timing of DCIX's buyback announcement appears a bit suspect. DCIX is unlikely to generate sufficient cash flow from operations during 2019 to complete a repurchase of $6 million of common stock by the December 31st, 2019, expiration date of the buyback program if containership rates do not recover from current levels. The first and best use of any cash generated by DCIX during 2019 should be the investment in the rejuvenation of its fleet (setting aside the question of whether DCIX is too small to be a viable publicly-traded company) rather than the repurchase of common stock. Based on DCIX's contract exposure and current rates, DCIX is in danger of not having the cash necessary to execute the stock buyback program.
A more cynical view of the stock buyback program announcement is that it is designed to jumpstart the exercise of Kalani Warrants by pushing the stock price and trading volume upwards. As observed above, DCIX has experienced a number of vicious short covering rallies since the Kalani Warrants were issued on March 24th, 2017. DCIX needs equity capital to fund the rejuvenation and expansion of its fleet and the issuance of additional equity through the exercise of Kalani Warrants is the only visible path to that goal.
Whether assessing DCIX as a long or short investment or trade, I recommend extreme caution! Best of luck to anyone trading the stock.
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.