Box Ships (OTCPK:TEUFF) announced on March 4, 2016, a creative transaction to increase liquidity of their Series C Preferred Shares (OTCPK:TEUCF). See SEC Filing Here. A third-party investment firm (Magna Equities) will invest up to $350,000 in the preferred shares. The firm can then convert the shares into common shares by dividing the total cost of the Series C purchases by the lessor of 1) 60% of the 10-day trading average; or 2) $0.36.
While no conversions have occurred yet, a $350,000 investment at the current March 8, 2016, common share price of $0.18 could translate into 3.2 million shares or roughly 8% of the company. However, the agreement also limits the firm's ownership in common stock to 4.99% so not all the potential 3.2 million shares at current levels could be converted, leaving some preferred shares outstanding.
Series C Liquidity; Options for Direct Investment
Why would anyone do such a complicated transaction? It appears Box Ships is attempting to increase the liquidity of the Series C shares by creating demand through this transaction. At the current preferred share price of $6.21, Magna Equities could purchase up to 56,000 shares. With an average daily volume of 1000 (which is high), it would take at least two months to reach the Series C share purchase cap. If anything, it will allow preferred shareholders to sell their shares, create a market, and possibly increase share prices.
On the other side, the firm gets to invest in a preferred dividend currently paying over a 40% yield (although its not clear how much longer that will occur) with the option to convert the investment into common shares at a discount (40% unless Box Ships trades at $0.60 or higher).
Debt Reduction At Reduced Prices
The transaction also allows Box Ships to retire some of the Series C debt/obligation without paying par value ($25.00) or any cash for roughly 6% of its preferred shares (~56,000 of the 916,333 shares outstanding, at the current prices). If the investment firm converts the preferred shares to common shares, Box Ships will issue new common shares and assume ownership of the Series C shares, effectively canceling them. At the current preferred share price of $6.21 and assuming the investment firm purchases preferred shares to the $350,000 cap, this could represent a reduction of roughly $1.4 million from the $22.9 million par value on the preferred shares.
Insider Ownership of Preferred Shares
The CEO of Box Ships owns roughly 22% of the Series C preferred shares. The agreement appears to state the CEO will not sell his shares in this transaction, otherwise this would raise quite a few red flags for conflicts of interest.
Exit Opportunities; Decreased Likelihood of Bankruptcy
The transaction offers an opportunity for preferred shareholders to sell their stakes in an investment that had almost no liquidity for the past couple of months. For those looking for an exit, the potential buying power of more than 50,000 preferred shares should provide a buyer on the other side of the transaction. Further, even with the seriously discounted ~40% conversion rate for common shares, this transaction signals commitment by a third-party investment company that the company will not cease operations or go into receivership in the near future. Box Ships has to exist and be trading its shares for the investment firm to reap the benefits common share discount conversion.
To be clear, this transaction is nothing like a straight forward investment demonstrating confidence by a third-party firm. It is an optional and heavily hedged investment, with less risk to the buyer. The Series C shareholders could potentially benefit and the common shareholders, while possibly diluted more, have a signal the company will not immediately cease operations.
Disclosure: I am/we are long TEUCF SERIES C PREFERRED SHARES.