Castor Maritime (NASDAQ:CTRM) is a shipping company listed on Nasdaq but which has one employee, Mr. Petros Panagiotidis, located in Cyprus. He is the CEO, CFO, and controlling shareholder of CTRM stock. Recently, some have called into question the one-sided benefits that he is reaping from capital raises.
According to a recent Seeking Alpha article, Panagiotidis benefits greatly from its massive capital raises. And that is what the company just announced on June 15. Castor Maritime issued a new prospectus that purports to raise $300 million through the issuance of more equity shares using an “at-the-market” (ATM) filing scheme. This means that it can issue the shares anytime. There does not appear to be any particular price associated with the issuance.
The problem is that this will substantially dilute shareholders. And CTRM stock has tanked as a result. As of June 10, according to the prospectus, it was at $3.35. But today, July 2, CTRM stock opened at $2.63. That represents a 72-cents-per-share decline, or 21.5% from right before the share issuance.
Moreover, it’s not clear yet whether or not the company was successful in raising the cash. The fact that the stock has fallen so much could mean that insiders are aware of the share dilution.
How Petros Benefits from Capital Raises
As of March 31, the company had $64.2 million in cash and restricted cash on its balance sheet. The company uses its capital raises and existing cash to purchase and operate tankers and other ships that earn daily fees. In Q1, the company produced $7 million in revenue and $2.6 million in EBITDA (earnings before interest, taxes, depreciation and amortization).
The problem is that the company has made it clear that they are going to continue to issue more shares to acquire more ships. This will continually add to the dilution that shareholders experience. Seeking Alpha‘s article shows that the book value per share of CTRM stock has fallen from $35.39 on Dec. 31, 2018, to $3.27 as of June 14, 2021.
Moreover, the article also points out that Petros makes a 1% commission on every purchase and 1% on every sale of the ship fleet. He also gets a 1.25% share of all charter revenue, a sort of royalty just for having the ships in the fleet and generating revenue. On top of that, he gets $250 per ship per day. How, exactly, that is different than the royalty fee boggles the mind (except in cases where a ship is dry-docked or not earning revenue).
The author claims that when all is said and done, Castor Maritime will have 50 ships and $400 million in revenue. This will bring in $5 million in royalty revenue and $4.56 million in $250 per day per ship fees to Petros ($250 x 50 x 365 = $4.56 million). The author argues this is money that should be given to shareholders as dividends.
Where This Leaves CTRM Stock
It’s not as though shareholders don’t know about the dilution and the disclosure of all the fees paid to Petros. These have been made abundantly clear in the company’s prospectus. Here is a typical risk that the company put in the prospectus:
“Purchasers of the common shares we sell, as well as our existing shareholders, will experience significant dilution if we sell shares at prices significantly below the price at which they invested. In addition, we may issue additional common shares … without shareholder approval, in a number of circumstances.”
Here is another one:
“We have issued a significant number of our common shares and we may do so in the future. Shares to be issued in future equity offerings could cause the market price of our common shares to decline, and could have an adverse effect on our earnings per share.”
My attitude about dilution and the benefits for Petros is clear. The SEC has clearly seen these rules and made no comment. The broker-dealer that raised the capital likely had to disclose this to the buyers. So it’s not worth complaining about.
Expect that CTRM’s book value per share will continually decline with further dilution. Unless the company starts to pay a dividend and book solid and predictable earnings per share, CTRM stock will fall from the capital raises and associated dilution.
On the date of publication, Mark R. Hake did not hold a position in any security mentioned in the article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
Mark Hake writes about personal finance on mrhake.medium.com and runs the Total Yield Value Guide which you can review here.