Shares of small, Greece-based tanker operator Top Ships cratered on Wednesday after a long-advertised financing transaction turned out to be highly dilutive to existing shareholders.
It has been almost two years since my last article on the company was published and time has not been kind to equityholders with the shares down approximately 96% as the company continues to relentlessly dilute shareholders in order to grow its modern tanker fleet, currently consisting of twelve product and two crude tankers. From a company perspective, the proven pattern of dilution and reverse stock splits has been quite successful as it enabled Top Ships to double its fleet over the past 30 months including the recent return to the crude tanker market.
Photo: New Suezmax tanker "Eco Beverly Hills" - Source: ShipSpotting.com
After the most recent reverse stock split, share count was reduced to approximately 1.6 million but Wednesday's offering not only effectively doubled the number of outstanding shares, it also contained an ugly price-protection mechanism built into the attached Class A warrants in form of a so-called "cashless exercise" feature which will almost certainly result in the issuance of an additional 1.1 million shares (emphasis added by author):
The warrants will be immediately exercisable at a price of $8.19 per common share and will expire on December 31, 2019. There is not expected to be any trading market established for the warrants. The warrants also provide that if during the period of time between the date that is the earlier of ((i)) 30 days from the closing date and ((ii)) the trading day on which a total of more than 4.74 million common shares have traded since the closing date of this offering and if the volume weighted-average price of the common shares immediately prior to the exercise date is lower than the then-applicable exercise price per share, each warrant may be exercised, at the option of the holder, on a cashless basis for 0.7 of a common share.
In fact, the transaction appears pretty similar to the recent capital raise of drybulk carrier Seanergy Maritime (SHIP) which also included a cashless warrant exercise provision, ultimately resulting in the share count to increase more than sevenfold and the share price to crater 85%.
While the Top Ships transaction is smaller in size and resulting dilution substantially lower than in case of Seaenergy Maritime, the cashless exercise feature actually decreases the stated offering price of $6.30 by more than 40% to approximately $3.71:
Source: Company's SEC-Filings, Author's own work
As a result, investors in the offering will not suffer any losses until the share price drops below $3.71. Even worse, the price protection mechanism actually incentivizes them to hedge existing gains by selling their just purchased position and shorting an additional amount equal to the number of their upcoming cashless exercise shares.
Unfortunately, the recent offering is not the only thing to worry about for Top Ships' equityholders as the company's controlling shareholder, Evangelos Pistiolis, still owns a large amount of the company's toxic, 15% Series E Convertible Preferred Stock which can be converted into common shares at "80% of the lowest daily VWAP of the Company’s common shares over the twenty consecutive trading days expiring on the trading day immediately prior to the date of delivery of a conversion notice" as stated in the offering prospectus (page 48).
Based on Wednesday's closing price of $4.33 and adjusted for some recent cash redemptions by the company (at a redemption premium of 15%), the controlling shareholder would receive approximately 6.75 million common shares in exchange for his Series E Preferred Shares, resulting in a 61% stake in Top Ships.
That said, don't expect a conversion anytime soon as the above discussed terms handsomely protect Mr. Pistiolis from anticipated future share price deterioration thus enabling him to continue growing the company's fleet by further utilizing the same old scheme of dilution and reverse stock splits.
While at some point going forward, Pistiolis might decide to act in a similar manner as his obvious role model George Economou, I could easily envision Top Ships's shares to have lost another 96% by that time.
Stay away from Top Ships as I fully expect the shares to move down to the $3.71 level discussed above and potentially much lower over the coming days and weeks.
By all likelihood, Evangelos Pistiolis will continue the proven pattern of dilution and reverse splits to his personal benefit for the time being.
Unlike outside shareholders, he remains entirely protected from further share price decreases and at all time has the chance to convert his Series E Preferred Convertible Stock into a majority stake of the company's common shares at an at least 20% discount to the then prevailing market price.
Even a short sale looks attractive at this point, but shares are hard to borrow and the company's stock has occasionally been subject to short-lived but nevertheless violent momentum rallies in the past so I strongly suggest keeping your position size in check.
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.