SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by the Registrant x
Filed by a Party other than the Registrant ¨
Check the appropriate box: |
|
|
x |
Preliminary Proxy Statement |
¨ |
Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
¨ |
Definitive Proxy Statement |
¨ |
Definitive Additional Materials |
¨ |
Soliciting Material Pursuant to Section 240.14a-12 |
LookSmart, Ltd. |
(Exact name of registrant as specified in its charter) |
N/A |
(Name of person(s) filing proxy statement, if other than the registrant) |
Payment of Filing Fee (check the appropriate
box):
| x | Fee computed on
table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
| (1) | Title of each class of securities to which transaction applies: Common Stock |
| (2) | Aggregate number of securities to which transaction applies:1,350,000 |
| (3) | Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated
and state how it was determined):$0.60 |
| (4) | Proposed maximum aggregate value of transaction:$810,000 |
| ¨ | Fee
paid previously with preliminary materials. |
| x | Check
box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and
identify the filing for which the offsetting fee was paid previously. Identify the previous
filing by registration statement number, or the Form or Schedule and the date of its
filing. |
| (1) | Amount Previously Paid: $94.12 |
| (2) | Form, Schedule or Registration Statement No.: Form S-4. Registration Statement File NO. 333-203598 |
| (3) | Filing Party: Pyxis Tankers, Inc. |
| (4) | Date Filed: April 23, 2015 |
The
information in this preliminary proxy statement/prospectus is not complete and may be changed. These securities may not be issued
or sold nor may proxies be solicited until the registration statement filed with the Securities and Exchange Commission is effective.
This preliminary proxy statement/prospectus is not an offer to sell these securities and it is not soliciting an offer to buy
these securities in any jurisdiction where the offer or sale is not permitted.
PRELIMINARY
— SUBJECT TO COMPLETION, DATED APRIL 23, 2015
LOOKSMART, LTD.
50 California Street, 16th Floor
San Francisco, California 94108
TO THE STOCKHOLDERS OF LOOKSMART, LTD.:
You are cordially
invited to attend a special meeting of the stockholders of LookSmart, Ltd., a Delaware corporation (referred to herein as “LookSmart,”
the “Company,” “we,” “us” or “our”), which will be
held on ____________, 2015 at 10:00 a.m., local time, at the offices of Sichenzia Ross Friedman Ference LLP, 61 Broadway, 32nd
Floor, New York, NY 10006.
Effective as of ___________,
2015, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) by and among Pyxis Tankers Inc.
(“Pyxis”), Pyxis’ wholly owned subsidiary, Maritime Technologies Corp. (“Merger Sub”),
LookSmart and LookSmart’s wholly owned subsidiary, LookSmart Group, Inc. (“Holdco”). If the transactions
contemplated by the Merger Agreement are completed:
| · | All
of the business, assets and liabilities of LookSmart will have been acquired by Holdco,
and holders of record of the Company’s common stock at the close of business on
_______, 2015 will receive a pro rata distribution of one share of Holdco’s common
stock for each share of LookSmart common stock held at the close of business on _______,
2015 (the “Spin-Off”); |
| · | LookSmart
will be merged with and into Merger Sub, with Merger Sub surviving the merger and being
a wholly owned subsidiary of Pyxis (the “Merger”); and |
| · | Each
share of LookSmart held by holders of record of the Company’s common stock at the
close of business on _______, 2015 will be cancelled and exchanged for the right to receive____
share(s) of Pyxis common stock. |
In addition, in connection
with the Merger, we are soliciting your consent to approve an amendment to our Amended Certificate of Incorporation to effect
a reverse stock split (the “Reverse Split”) of our issued and outstanding common stock by a ratio of not less
than one-for-two and not more than one-for-ten at any time prior to __________, 2015, with the exact ratio to be set at a whole
number within this range, as determined by our board of directors in its sole discretion.
The accompanying
document is a proxy statement of LookSmart and a prospectus of Pyxis, and provides you with information about LookSmart, Pyxis,
the proposed Spin-Off, Merger, the Reverse Split and the special meeting of LookSmart stockholders. You should read the entire
proxy statement/prospectus carefully.
In connection
with its evaluation of the Merger, the board of directors of LookSmart engaged Gruppo, Levey & Co. and Source Capital
Group, Inc. (collectively, “GLC”) to act as its financial advisors. GLC has rendered its opinion stating
that, as of April 23, 2015 and based upon and subject to the assumptions, limitations and qualifications set forth in
their opinion, the transactions and stock distributions to LookSmart’s stockholders contemplated by the Merger
Agreement were fair, from a financial point of view, to LookSmart’s stockholders. The written opinion of GLC is
attached as Annex B to this joint proxy statement/prospectus, and you should read it carefully.
For a discussion
of risk factors you should consider in evaluating the proposals set forth in this proxy statement/prospectus that you are being
asked to adopt, see “Risk Factors” beginning on page 24.
Whether or not you
plan to attend a special meeting, please take the time to vote by completing and mailing the enclosed proxy card in the enclosed
envelope. YOUR VOTE IS VERY IMPORTANT.
NEITHER THE UNITED
STATES SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE PYXIS COMMON
STOCK TO BE ISSUED IN THE MERGER OR DETERMINED IF THIS PROXY STATEMENT/PROSPECTUS IS ACCURATE OR ADEQUATE. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
Thank you for your participation. We look
forward to your continued support.
|
|
|
By Order of the Board of Directors, |
|
|
|
|
|
|
|
|
LookSmart, Ltd. |
|
|
|
|
|
Date: |
_____, 2015 |
|
By: |
/s/ Michael Onghai |
|
|
|
Name: |
Michael Onghai |
|
|
|
Title: |
Chief Executive Officer |
The accompanying
proxy statement/prospectus is dated , 2015 and was first mailed to LookSmart stockholders
on or about ______, 2015.
LOOKSMART, LTD.
50 California Street, 16th Floor
San Francisco, California 94108
NOTICE OF SPECIAL
MEETING —PROPOSED STOCK SPLIT, SPIN-OFF AND MERGER.
YOUR VOTE IS VERY
IMPORTANT. PLEASE VOTE YOUR SHARES PROMPTLY.
NOTICE IS HEREBY
GIVEN, that you are cordially invited to attend a special meeting (the “Special Meeting”) of stockholders of
LookSmart, to be held at 10:00 a.m., local time, on _____, __________ __, 2015, at the offices of counsel for LookSmart, Sichenzia
Ross Friedman Ference LLP, 61 Broadway, 32nd Floor, New York, NY 10006, in order to consider and vote upon:
(1) a
proposal to effect the Reverse Split of our issued and outstanding common stock by a ratio of not less than one-for-two and not
more than one-for-ten at any time prior to _____, 2015, with the exact ratio to be set at a whole number within this range,
as determined by our board of directors in its sole discretion — we refer to this proposal as the “reverse split
proposal”;
(2) a
proposal to adopt the Spin-Off of LookSmart’s business, assets and liabilities into Holdco — we refer to this proposal
as the “spin-off proposal”;
(3) a
proposal to adopt the Merger Agreement and to approve the transactions contemplated by such agreement — we refer to this
proposal as the “merger proposal”; and
(4) to
consider and vote upon a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation
and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, LookSmart is not authorized to consummate
the transactions contemplated by the reverse split proposal, spin-off proposal and merger proposal — we refer to this proposal
as the “adjournment proposal.”
These items of business
are described in the attached proxy statement/prospectus, which we encourage you to read in its entirety before voting. Only holders
of record of the Company’s common stock at the close of business on _______, 2015 are entitled to notice of the Special
Meeting and to vote and have their votes counted at the Special Meeting and any adjournments or postponements of the Special Meeting.
The affirmative vote of the holders of a majority of the outstanding shares of our common stock is required to approve the reverse
split proposal, the spin-off proposal and the merger proposal. Approval of the adjournment proposal whether or not a quorum is
present, requires the affirmative vote of a majority of the votes cast by the holders of shares of LookSmart’s common stock
entitled to vote.
After careful consideration,
the Company’s board of directors has determined that the reverse split proposal, spin-off proposal, merger proposal, and
adjournment proposal are fair to and in the best interests of the Company and its stockholders and unanimously recommends that
you vote or give instruction to vote:
| · | “FOR”
the reverse split proposal; |
| · | “FOR”
the spin-off proposal; |
| · | “FOR”
the merger proposal; and |
| · | “FOR”
the adjournment proposal, if presented. |
YOUR VOTE IS IMPORTANT
WHETHER OR NOT YOU EXPECT TO ATTEND THE SPECIAL
MEETING IN PERSON, WE ENCOURAGE YOU TO SUBMIT YOUR PROXY AS PROMPTLY AS POSSIBLE (1) BY TELEPHONE, (2) THROUGH THE INTERNET
OR (3) BY MARKING, SIGNING AND DATING THE ENCLOSED PROXY CARD AND RETURNING IT IN THE POSTAGE-PAID ENVELOPE PROVIDED. You
may revoke your proxy or change your vote at any time before the Special Meeting. If your shares are held in the name of a bank,
broker or other nominee, please follow the instructions on the voting instruction card furnished to you by such bank, broker or
other nominee, which is considered the stockholder of record, in order to vote. As a beneficial owner, you have the right to direct
your broker or other agent on how to vote the shares in your account. Your broker or other agent cannot vote on any of the proposals,
including the proposal to approve the reverse split proposal, spin-off proposal and merger proposal, without your instructions.
If you fail to return your proxy card, grant
your proxy electronically over the Internet, or by telephone, or vote by ballot in person at the Special Meeting, your shares
will not be counted for purposes of determining whether a quorum is present at the Special Meeting. If you are a stockholder of
record, voting in person by ballot at the Special Meeting will revoke any proxy that you previously submitted. If you hold your
shares through a bank, broker or other nominee, you must obtain from the record holder a valid “legal” proxy issued
in your name in order to vote in person at the Special Meeting.
We encourage you to read the accompanying
proxy statement carefully and in its entirety, as well as the documents we file from time to time with the Securities and Exchange
Commission, including our Annual Report on Form 10-K for the fiscal year ended December 31, 2014. If you have any questions concerning
the Reverse Split, the Spin-Off, the Merger, the Special Meeting or the accompanying proxy statement/prospectus, would like additional
copies of the accompanying proxy statement/prospectus or need help voting your shares of common stock, please contact Michael
Onghai at (415) 348-7000.
Thank you for your participation. We look
forward to your continued support.
|
|
|
By Order of the Board of Directors, |
|
|
|
|
|
|
|
|
LookSmart, Ltd. |
|
|
|
|
|
Date: |
________, 2015 |
|
By: |
/s/ Michael Onghai |
|
|
|
Name: |
Michael Onghai |
|
|
|
Title: |
Chief Executive Officer |
TABLE OF CONTENTS
ANNEXES
Annex A |
Merger Agreement |
|
|
Annex B |
Opinion of GLC, LookSmart, Ltd.’s Financial Advisor |
|
|
Annex C |
Form of Voting Agreement |
|
|
Annex D |
Articles of Incorporation and Bylaws of Pyxis Tankers Inc. |
QUESTIONS AND ANSWERS
ABOUT THE PROPOSALS
The following
are answers to some questions that you, as a stockholder of LookSmart, may have regarding the Reverse Split, the Spin-Off, the
Merger and the other matters being considered at LookSmart’s Special Meeting, which is referred to herein as the “Special
Meeting.” We urge you to read carefully the remainder of this proxy statement/prospectus because the information in
this section does not provide all the information that might be important to you with respect to the Reverse Split, the Spin-Off,
the Merger and the other matters being considered at the Special Meeting. Additional important information is also contained in
the annexes to and the documents incorporated by reference into this proxy statement/prospectus.
| Q: | Why am I receiving this proxy statement/prospectus? |
| A: | The board of directors of LookSmart
is soliciting your proxy to vote at the Special Meeting because you owned shares of LookSmart
common stock at the close of business on ________ __, 2015, the “Record Date”
for the Special Meeting, and are therefore entitled to vote at the Special Meeting. This
proxy statement, along with a proxy card or a voting instruction card, is being mailed
to stockholders on or about ______ __, 2015. LookSmart has made these materials available
to you on the Internet, and LookSmart has delivered printed proxy materials to you or
sent them to you by e-mail. This proxy statement summarizes the information that you
need to know in order to cast your vote at the Special Meeting. You do not need to attend
the Special Meeting in person to vote your shares of LookSmart common stock. |
| Q: | When and where will the Special
Meeting be held? |
| A: | The Special Meeting will be held at
10:00 a.m., local time, on ________, ________ __, 2015 at the offices of counsel for
LookSmart, Sichenzia Ross Friedman Ference LLP, 61 Broadway, 32nd Floor, New
York, NY 10006. |
| Q: | On what matters will I be
voting? |
| A: | LookSmart and Pyxis have agreed to a
business combination under the terms of an Agreement and Plan of Merger (the “Merger
Agreement”) dated as of April 23, 2015 by and among Pyxis Tankers Inc.
(“Pyxis”), Pyxis’ wholly owned subsidiary, Maritime Technologies
Corp. (“Merger Sub”), LookSmart and LookSmart’s wholly owned
subsidiary, LookSmart Group, Inc. (“Holdco”). A copy of the Merger
Agreement is attached to this proxy statement as Annex A, and LookSmart encourages
its stockholders to read it in its entirety. |
LookSmart’s stockholders are
being asked to consider and vote upon proposals relating to the Merger Agreement, and specifically to adopt and approve the reverse
split proposal, the spin-off proposal and the merger proposal, which, among other things, provide for: (a) the Reverse Split of
our issued outstanding stock by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to ______
__, 2015, with the exact ratio to be set at a whole number within this range as determined by our board of directors in its sole
discretion; (b) the Spin-Off of LookSmart’s business, assets and liabilities into Holdco; and (c) the Merger of LookSmart
with and into Merger Sub, with Merger Sub surviving the merger and becoming the wholly-owned subsidiary of Pyxis.
LookSmart’s stockholders may
also be asked to consider and vote upon a proposal to adjourn the meeting to a later date or dates to permit further solicitation
and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, LookSmart would not have been authorized
to consummate the Merger. LookSmart will hold the Special Meeting to consider and vote upon these proposals. This proxy statement/prospectus
contains important information about matters to be acted upon at the Special Meeting. Stockholders should read it carefully. The
vote of stockholders is important.
In order to complete the Merger,
LookSmart stockholders must vote to approve the reverse split proposal, the spin-off proposal, and the merger proposal and all
other conditions to the Merger must be satisfied or waived.
Stockholders are encouraged to
vote as soon as possible after carefully reviewing this proxy statement/prospectus. If LookSmart stockholders fail to adopt the
reverse split proposal, the spin-off proposal, or the merger proposal, the Merger cannot be completed.
| Q: | Why is LookSmart proposing
the Reverse Split, the Spin-Off and the Merger? |
| A: | Our board of directors is submitting
the reverse split proposal to our stockholders for approval with the intent of increasing
the market price of our common stock to enhance our ability to meet the continued listing
requirements of the Nasdaq Capital Market, to make our common stock
sufficiently attractive for Pyxis to consummate the Merger transaction and to ensure
that Pyxis will be able to meet the continued listing requirements of the Nasdaq Capital
Market or the NYSE MKT after consummation of the Merger transaction. |
Pyxis is an industrial shipping
company that owns and operates a fleet of tankers with an average current age of four years. Based on its due
diligence investigations of Pyxis and the industry in which it operates, including the financial and other information
provided by Pyxis in the course of their negotiations, LookSmart believes that a business combination with Pyxis as
contemplated by the Merger Agreement described below will provide LookSmart stockholders with an opportunity to participate
in a company with significant growth potential while simultaneously continuing to participate in LookSmart’s existing
business as stockholders of Holdco as a result of the Spin-Off. However, there is no assurance of the growth potential of
Pyxis or the ability of Holdco to operate its business in a manner substantially similar to the operation of LookSmart.
| Q: | What is the effect of the
Reverse Split on holders of LookSmart common stock? |
| A: | Depending on the ratio for the Reverse
Split determined by our board of directors, a minimum of two and a maximum of ten shares
of existing common stock will be combined into one new share of common stock. The
actual number of shares issued after giving effect to the Reverse Split, if implemented,
will depend on the reverse stock split ratio that is ultimately determined by our board
of directors. |
The Reverse Split will affect all
holders of our common stock uniformly and will not affect any stockholder’s percentage ownership interest in the Company,
except that as described below in “Fractional Shares,” record holders of common stock otherwise entitled to a fractional
share as a result of the Reverse Split will be rounded up to the next whole number. In addition, the Reverse Split
will not affect any stockholder’s proportionate voting power.
The Reverse Split may result in
some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot shares may be more
difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat higher than the
costs of transactions in “round lots” of even multiples of 100 shares.
| Q: | With regard to the Reverse
Split, what if I hold my shares in street name? |
| A: | Upon the implementation of the Reverse
Split, we intend to treat shares held by stockholders through a bank, broker, custodian
or other nominee in the same manner as registered stockholders whose shares are registered
in their names. Banks, brokers, custodians or other nominees will be instructed
to effect the Reverse Split for their beneficial holders holding our common stock in
street name. However, these banks, brokers, custodians or other nominees may
have different procedures than registered stockholders for processing the Reverse Split. Stockholders
who hold shares of our common stock with a bank, broker, custodian or other nominee and
who have any questions in this regard are encouraged to contact their banks, brokers,
custodians or other nominees. |
| Q: | With regard to the Reverse
Split, what if I am a “book entry” holder of common stock (i.e. a stockholder
that is registered on the transfer agent’s books and records but does not hold
stock certificates)? |
| A: | Certain of our registered holders of
common stock may hold some or all of their shares electronically in book-entry form with
the transfer agent. These stockholders do not have stock certificates evidencing
their ownership of the common stock. They are, however, provided with a statement
reflecting the number of shares registered in their accounts. |
Stockholders who hold shares electronically
in book-entry form with the transfer agent will not need to take action (the exchange will be automatic) to receive whole shares
of post-Reverse Split common stock, subject to adjustment for treatment of fractional shares. We do not currently intend to issue
fractional shares in connection with the Reverse Split. Therefore, we will not issue certificates representing fractional
shares. In lieu of issuing fractions of shares, we will round up to the next whole number.
| Q: | What consideration will LookSmart
stockholders receive if the Reverse Split, Spin-Off and Merger are completed? |
| A: | If the Spin-Off is completed, each LookSmart
stockholder will be entitled to receive a pro rata distribution of one share of Holdco
common stock for each share of LookSmart common stock they hold as of ______, 2015. If
the Merger is completed, each issued and outstanding share of LookSmart common stock
will be cancelled and, in lieu thereof, all of the issued and outstanding shares of (post-Reverse
Split) LookSmart common stock will be exchanged for the right to receive _______shares
of the common stock of Pyxis. Thus, after the completion of the Reverse Split, the Spin-Off
and the Merger, each LookSmart stockholder will have received one share of common stock
of Holdco and ____ share(s) of common stock of Pyxis in exchange for that stockholder’s
one share of LookSmart. In addition, LookSmart received $600,000 in cash upon the signing
of the Merger Agreement. |
LookSmart stockholders that own
shares of the Company’s common stock prior to the Make Whole Record Date (as hereinafter defined) may be entitled to additional
compensation pursuant to the Merger Agreement that stockholders that purchase shares after the Make Whole Record Date will not
be entitled to receive. Please read with care the consideration and other rights described in “The Merger – Merger
Consideration” beginning on page 79 and “The Merger — Make Whole Record Date” beginning on page 79 of
this proxy statement/prospectus.
| Q: | What is the Make Whole Record
Date? |
| A: | In the
event that subsequent to the Merger, Pyxis completes a financing which results in gross
proceeds to Pyxis of at least $5,000,000 (a “Future Pyxis Offering”)
at a valuation lower than the valuation ascribed to the shares of common stock received
by LookSmart stockholders pursuant to the Merger Agreement, Pyxis will be obligated to
make “whole” the LookSmart stockholders as of __________, 20151
(the “Make Whole Record Date”) by offering such LookSmart
stockholders the right to receive additional shares of Pyxis common stock to
compensate the LookSmart stockholders for the difference in value of their Pyxis common
stock. |
In addition,
should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of the Merger,
each holder of the Company’s common stock who has held such stock continuously from the date of the Make Whole Record Date
until the expiration of such 3 year period (the “Legacy LS Stockholders”) will have a 24-hour option beginning
at the end of the 3 year period to require Pyxis to purchase a pro rata amount of Pyxis common stock that would result in aggregate
gross proceeds to the Legacy LS Stockholders in an amount not to exceed $2,000,000; provided that
in no event shall a Legacy LS Stockholder receive an amount per share greater than the Consideration Value.
| Q: | What
happens if I buy my shares after the Make Whole Record Date? |
| A: | Purchasers
of LookSmart common stock after the Make Whole Record Date will not be entitled to be
made “whole” as a result of a Future Pyxis Offering, and will not receive
an option such as that granted to the Legacy LS Stockholders. |
| Q: | What happens
if I sell my shares after the Record Date, but before the Special Meeting? |
| A: | The Record Date is earlier than the date of the Special Meeting.
If you transfer your shares of the Company after the Record Date but before the Special
Meeting, you will retain your right to vote at the Special Meeting, but will transfer
ownership of the shares and will not hold an interest in the Company in respect of such
shares after the Reverse Split, the Spin-Off and the Merger are completed. |
| Q: | Are there risks associated
with the Reverse Split, the Spin-Off and the Merger that I should consider in deciding
how to vote? |
| A: | Yes. There are a number of risks related
to the Merger and other transactions contemplated by the Merger Agreement, such as the
Reverse Split and the Spin-Off, that are discussed in this proxy statement/prospectus.
Please read with particular care the detailed description of the risks described in “Risk
Factors” beginning on page 24 of this proxy statement/prospectus. |
| Q: | How does LookSmart’s
board of directors recommend that I vote? |
| A: | The LookSmart board of directors recommends
that LookSmart stockholders vote or give instruction to vote: |
| · | “FOR”
the merger proposal; |
| · | “FOR”
the spin-off proposal; |
| · | “FOR”
the reverse split proposal; and |
| · | “FOR”
the adjournment proposal, if presented. |
14
days after announcement
You should read “The Merger
— Recommendation of LookSmart’s Board of Directors and Reasons for the Merger” beginning on page 81 for
a discussion of the factors that our board of directors considered in deciding to recommend the approval of the reverse split
proposal, the spin-off proposal and the merger proposal.
| Q: | Do persons involved in the
Merger have interests that may conflict with those as a LookSmart stockholder generally? |
| A: | In considering the recommendation of
the LookSmart board of directors to approve the Merger Agreement, LookSmart stockholders
should be aware that certain LookSmart executive officers and directors may be deemed
to have interests in the Merger that are different from, or in addition to, those of
LookSmart stockholders generally. These interests, which may create actual or potential
conflicts of interest, are, to the extent material, described in the section entitled
“Interests of Directors and Executive Officers of LookSmart in the Merger”
beginning on page 83. |
| A: | After you have carefully read this proxy
statement prospectus and have decided how you wish to vote your shares of LookSmart common
stock, please vote your shares promptly. |
Stockholders of Record
If your
shares of LookSmart common stock are registered directly in your name with LookSmart’s transfer agent, VStock Transfer,
LLC, you are the stockholder of record of those shares and these proxy materials have been mailed or e-mailed to you by the Company.
You may vote your shares by Internet or by mail as further described below. Your vote authorizes Michael Onghai, Chief Executive
Officer of the Company, as your proxy, with the power to appoint his substitute, to represent and vote your shares as you directed.
| · | Vote
by Internet—http://www.___________________________ |
| · | Use
the Internet to transmit your voting instructions 24 hours a day, seven days a week until
11:59 p.m. (Eastern Time) on ______, ______ __, 2015. |
| · | Please
have your proxy card available and follow the instructions to obtain your records and
create an electronic ballot. |
| · | Complete,
date and sign your proxy card and return it in the postage-paid envelope provided. |
Beneficial Owners
If your
shares of Looksmart common stock are held in a stock brokerage account, by a bank, broker or other nominee, you are considered
the beneficial owner of shares held in street name and these proxy materials are being forwarded to you by your bank, broker or
nominee that is considered the holder of record of those shares. As the beneficial owner, you have the right to direct your bank,
broker, trustee or nominee on how to vote your shares via the Internet or by telephone if the bank, broker, trustee or nominee
offers these options or by signing and returning a proxy card. Your bank, broker, trustee or nominee will send you instructions
for voting your shares. Please note that you may not vote shares held in street name by returning a proxy card directly to LookSmart
or by voting in person at the Special Meeting unless you provide a “legal proxy,” which you must obtain from your
broker, bank or nominee. Further, brokers, banks and nominees who hold shares of LookSmart common stock on your behalf may not
give a proxy to LookSmart to vote those shares without specific instructions from you.
For a discussion
of the rules regarding the voting of shares held by beneficial owners, please see the question below entitled “If I am a
beneficial owner of shares of LookSmart common stock, what happens if I don’t provide voting instructions? What is discretionary
voting? What is a broker non-vote?”
| Q: | What vote is required to approve
each proposal? |
A: The
affirmative vote of the holders of a majority of the outstanding shares of our common stock is required to approve the reverse
split proposal, the spin-off proposal and the merger proposal. Approval of the adjournment proposal, whether or not a quorum is
present, requires the affirmative vote of a majority of the votes cast by the holders of shares of LookSmart’s common stock
entitled to vote.
| Q: | How many votes do I and others
have? |
A: You
are entitled to one vote for each share of LookSmart common stock that you held as of the record date. As of the close of business
on the Record Date, there were ________ outstanding shares of LookSmart common stock.
Q: How
will our directors and executive officers vote on the reverse split proposal, the spin-off proposal and the merger proposal?
A: As
of the Record Date, the directors and executive officers of LookSmart as a group owned and were entitled to vote ________ shares
of the common stock of the Company, representing approximately ____% of the outstanding shares of LookSmart common stock on that
date. LookSmart expects that its directors and executive officers will vote their shares in favor of the reverse split proposal,
the spin-off proposal and the merger proposal, but none of the Company’s directors or executive officers other than Michael
Onghai has entered into any agreement obligating any of them to do so.
In connection with
their entry into the Merger Agreement, LookSmart, Pyxis and Michael Onghai, entered into a voting agreement, which is referred
to herein as the “Voting Agreement.” The Voting Agreement generally requires that Mr. Onghai, in his capacity
as a stockholder of LookSmart, vote all of his shares of LookSmart common stock in favor of the reverse split proposal, the spin-off
proposal and the merger proposal, unless doing so would violate his fiduciary duties as an executive officer and member of the
board of directors of the Company. As of the Record Date, Mr. Onghai beneficially held ________ shares of LookSmart common stock,
representing approximately ____% of the outstanding shares of the Company’s common stock, of which ____________ shares are
either held of record by Mr. Onghai as of the Record Date or over which he possesses voting rights and are therefore in either
case subject to the Voting Agreement.
| Q: | What will happen if I fail
to vote or I abstain from voting? |
A: Your
failure to vote will have the same effect as a vote against the reverse split proposal, the spin-off proposal, the merger proposal
and the adjournment proposal. Your abstention from voting will have the same effect as a vote against the reverse split, the spin-off
proposal, the merger proposal and the adjournment proposal.
| Q: | How many shares must be present
to hold the Special Meeting? |
A: The
presence in person or by proxy of a majority of the outstanding shares of LookSmart common stock entitled to vote at the Special
Meeting is necessary to constitute a quorum at the Special Meeting. The inspector of election will determine whether a quorum
is present. If you are a beneficial owner (as defined above) of shares of the Company’s common stock and you do not instruct
your bank, broker or other nominee how to vote your shares on any of the proposals, your shares will not be counted as present
at the Special Meeting for purposes of determining whether a quorum exists. Votes of stockholders of record who are present at
the Special Meeting in person or by proxy will be counted as present at the Special Meeting for purposes of determining whether
a quorum exists, whether or not such holder abstains from voting on all of the proposals.
Q: If
I am a beneficial owner of shares of LookSmart common stock, what happens if I don’t provide voting instructions? What is
discretionary voting? What is a broker non-vote?
A: If
you are a beneficial owner and you do not provide voting instructions to your broker, bank or other holder of record holding shares
for you, your shares will not be voted with respect to any proposal for which your broker does not have discretionary authority
to vote. Even though LookSmart is listed on the Nasdaq Capital Market, the rules of the New York Stock Exchange determine whether
proposals presented at stockholder meetings are “discretionary” or “non-discretionary.” If a proposal
is determined to be discretionary, your broker, bank or other holder of record is permitted under New York Stock Exchange rules
to vote on the proposal without receiving voting instructions from you. If a proposal is determined to be non-discretionary, your
broker, bank or other holder of record is not permitted under New York Stock Exchange rules to vote on the proposal without receiving
voting instructions from you. A “broker non-vote” occurs when a bank, broker or other holder of record holding shares
for a beneficial owner does not vote on a non-discretionary proposal because the holder of record has not received voting instructions
from the beneficial owner.
Under the rules of
the New York Stock Exchange, each of the proposals to be presented at the Special Meeting is a non-discretionary proposal. Accordingly,
if you are a beneficial owner and you do not provide voting instructions to your broker, bank or other holder of record holding
shares for you, your shares will not be voted with respect to any of the proposals. A broker non-vote would have the same effect
as a vote against the merger proposal, spin-off proposal and the adjournment proposal.
| Q: | What will happen if I return
my proxy card without indicating how to vote? |
A: If
you sign and return your proxy card without indicating how to vote on any particular proposal, the LookSmart common stock represented
by your proxy will be voted in favor of each such proposal. Proxy cards that are returned without a signature will not be counted
as present at the Special Meeting and cannot be voted.
| Q: | Can I change my vote after
I have returned a proxy or voting instruction card? |
A: Yes.
You can change your vote at any time before your proxy is voted at the Special Meeting. You can do this in one of four ways:
| · | you
can grant a new, valid proxy bearing a later date; |
| · | you
can send a signed notice of revocation; |
| · | if
you are a holder of record, you can attend the Special Meeting and vote in person, which
will automatically cancel any proxy previously given, or you may revoke your proxy in
person, but your attendance alone will not revoke any proxy that you have previously
given; or |
| · | if
your shares of LookSmart common stock are held in an account with a broker, bank or other
nominee, you must follow the instructions on the voting instruction card you received
in order to change or revoke your instructions. |
If you choose either
of the first two methods, you must submit your notice of revocation or your new proxy to the Secretary of LookSmart, as specified
in this proxy statement, no later than the beginning of the Special Meeting. If your shares are held in street name by your broker,
bank or nominee, you should contact them to change your vote.
| Q: | Do I need identification to
attend the Special Meeting in person? |
A: Yes.
Please bring proper identification, together with proof that you are a record owner of shares of LookSmart common stock. If your
shares are held in street name, please bring acceptable proof of ownership, such as a letter from your broker or an account statement
stating or showing that you beneficially owned shares of LookSmart common stock on the record date. Acceptable proof of ownership
is either (a) a letter from your broker stating that you beneficially owned LookSmart stock on the record date or (b) an account
statement showing that you beneficially owned LookSmart stock on the record date.
| Q: | Are LookSmart stockholders
entitled to appraisal rights? |
A: No.
LookSmart stockholders do not have appraisal rights in connection with the Reverse Split, the Spin-Off or the Merger under the
General Corporation Law of the State of Delaware (the “DGCL”).
| Q: | What do I do if I receive
more than one set of voting materials? |
A: You
may receive more than one set of voting materials for the Special Meeting, including multiple copies of this proxy statement,
proxy cards and/or voting instruction forms. This can occur if you hold your shares of common stock in more than one brokerage
account, if you hold shares directly as a record holder and also in street name, or otherwise through a nominee, and in certain
other circumstances. If you receive more than one set of voting materials, each should be voted and/or returned separately in
order to ensure that all of your shares of common stock are voted.
| Q: | If I am a LookSmart stockholder,
should I send in my LookSmart stock certificates with my proxy card? |
| A: | No. Please DO NOT send your LookSmart
stock certificates with your proxy card. |
After the Spin-Off is completed, LookSmart’s
transfer agent, VStock Transfer, LLC, will send you a letter of transmittal and, when applicable, your shares of Holdco.
After the Merger is completed, if you
held certificates representing shares of LookSmart common stock prior to the Merger, Pyxis’ transfer agent, VStock
Transfer, LLC, will send you a letter of transmittal and instructions for exchanging your shares of LookSmart common stock for
shares of Pyxis’ common stock. Upon surrender of the certificates for cancellation along with the executed letter of
transmittal and other required documents described in the instructions, you will receive your shares of Pyxis’ common
stock.
| Q: | Do you expect the Spin-Off
and the Merger to be taxable to LookSmart stockholders? |
A: Yes.
The receipt of Holdco’s common stock as a result of the Spin-Off and the receipt of Pyxis’ common stock in
exchange for shares of LookSmart common stock in the Merger will be a fully taxable transaction. Please review carefully the
information under “Certain Federal Income Tax Consequences of the Reverse Split” beginning on page 76 for a
description of the material U.S. federal tax consequences of the Reverse Split, and “United States Federal Income Tax
Consequences of the Merger” beginning on page 84, for a description of the material U.S. federal
income tax consequences of the Spin-Off and the Merger. The tax consequences to you will depend on your own situation. Please
consult your tax advisors as to the specific tax consequences to you of the Merger, including the applicability and effect of
U.S. federal, state, local and foreign income and other tax laws in light of your particular circumstances.
| Q: | When do you expect the Reverse
Split, the Spin-Off and the Merger to be completed? |
A: We
are working to complete the Reverse Split, the Spin-Off and the Merger as quickly as possible, and we expect to complete all transactions in the second quarter of 2015. However, LookSmart cannot assure you when or if the Merger will occur. The Merger
is subject to stockholder approvals and other conditions, and it is possible that factors outside the control of both LookSmart
and Pyxis could result in the Merger being completed at a later time, or not at all. There may be a substantial amount of time
between the Special Meeting and the completion of the Merger.
| Q: | Whom should I call with questions
about the Special Meeting, the Reverse Split, the Spin-Off or the Merger? |
| A: | LookSmart stockholders should call Michael
Onghai at (415) 348-7000 with any questions. |
FORWARD-LOOKING
STATEMENTS
This proxy statement/prospectus, including
information incorporated by reference into this proxy statement/prospectus, includes forward-looking statements within the meaning
of Section 27A of the United States Securities Act of 1933, as amended (the “Securities Act”) and Section 21E
of the United States Exchange Act of 1934, as amended (the “Exchange Act”) regarding, among other things, LookSmart’s
plans, strategies and prospects, both business and financial. Although LookSmart believes that its plans, intentions and expectations
reflected in or suggested by these forward-looking statements are reasonable, LookSmart cannot assure you that we will achieve
or realize these plans, intentions or expectations. Forward-looking statements are inherently subject to risks, uncertainties
and assumptions including, without limitation, the factors described under “Risk Factors” from time to time
in LookSmart’s filings with the SEC. Many of the forward-looking statements contained in this presentation may be identified
by the use of forward-looking words such as “believe”, “expect”, “anticipate”, “should”,
“planned”, “will”, “may”, “intend”, “estimated”, “aim”,
“on track”, “target”, “opportunity”, “tentative”, “positioning”, “designed”,
“create”, “predict”, “project”, “seek”, “would”, “could”,
“continue”, “ongoing”, “upside”, “increases” and “potential”, among
others. Important factors that could cause actual results to differ materially from the forward-looking statements we make in
this presentation are set forth in other reports or documents that we file from time to time with the SEC, and include, but are
not limited to:
| • | the number and percentage of
our public stockholders voting against the reverse split proposal, spin-off proposal
and merger proposal; |
| • | the occurrence of any event,
change or other circumstances that could give rise to the termination of the Merger Agreement; |
| • | the ability to obtain and/or
maintain the listing of Pyxis’ common stock on NASDAQ or the NYSE MKT following
the Merger; |
| • | changes adversely affecting
the business in which Pyxis is engaged; |
| • | general economic conditions; |
| • | Pyxis’ business strategy
and plans, including future acquisitions of vessels; |
| • | the result of future financing
efforts; and |
| • | and the other factors summarized
under the section entitled “Risk Factors”. |
You are cautioned
not to place undue reliance on these forward-looking statements, which speak only as of the date of this proxy statement/prospectus.
All forward-looking statements included herein attributable to any of LookSmart, Pyxis or any person acting on either party’s
behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. Except
to the extent required by applicable laws and regulations, LookSmart and Pyxis undertake no obligations to update these forward-looking
statements to reflect events or circumstances after the date of this proxy statement/prospectus or to reflect the occurrence of
unanticipated events.
Before a stockholder
grants its proxy or instructs how its vote should be cast or vote on the merger proposal, spin-off proposal, or the adjournment
proposal, it should be aware that the occurrence of the events described in the “Risk Factors” section and
elsewhere in this proxy statement/prospectus may adversely affect LookSmart and Pyxis.
SUMMARY
This summary highlights
selected information from this proxy statement/prospectus and does not contain all of the information that is important to you.
To better understand the proposals to be submitted for a vote at the Special Meeting, including the Merger, you should read this
entire document carefully, including the Merger Agreement attached as Annex A to this proxy statement/prospectus. The Merger
Agreement is the legal document that governs the Merger and the other transactions that will be undertaken in connection with
the Merger. It is also described in detail in this proxy statement/prospectus in the section entitled “The Merger Agreement.”
The Parties
LookSmart, Ltd.
LookSmart was organized in 1996 and is incorporated
in the State of Delaware. LookSmart is a digital advertising solutions company that provides relevant solutions for search and
display advertising customers, organized along five lines of business: (i) Clickable, (ii) LookSmart AdCenter, (iii) Novatech.io,
(iv) ShopWiki and (v) web searches. In addition, LookSmart formed a partnership with Conversion Media Holdings, LLC, which supports
the Company’s lines of business through the creation of content sites directed at ecommerce verticals. The Company operates
each line of business, while being related to the others in terms of shared resources, as separate business lines with their own
core management, profits and losses, and the ability to operate independently as separate businesses. As a result, this separation
of business lines allows LookSmart to operate effectively as a holding company and as a capital allocator to each of the Company’s
separate businesses with the goal of finding mispriced assets in the public and private markets and subsequently utilizing those
assets to create scalable and sustainable businesses that may then be monetized for the ultimate benefit of LookSmart’s
stockholders.
After the Merger, LookSmart will cease to
exist.
LookSmart Group, Inc.
Holdco is a wholly-owned subsidiary of LookSmart
formed solely for the purpose of effectuating the Spin-Off described herein, and to carry on the historical business of LookSmart
following the Merger. Holdco was incorporated under the laws of Nevada on March 6, 2015.
Pyxis Tankers Inc.
Pyxis Tankers Inc. is a newly formed
international maritime transportation company with a focus on the tanker sector. At the consummation of the Merger,
Pyxis’ fleet will be comprised of six double hull tankers with an average current age of four years and that
are employed under a mix of short- and medium-term time charters and spot charters. Pyxis will acquire these six vessels
prior to the Merger from an affiliate of its founder and chief executive officer, Mr. Valentios (“Eddie”)
Valentis. Four of the vessels in the fleet will be medium-range, or MR, tankers, three of which have eco-efficient or
eco-modified designs and two will be short-range tanker sister ships. Each of the vessels in the fleet is capable of
transporting refined petroleum products, such as naphtha, gasoline, jet fuel, kerosene, diesel and fuel oil, as well as other
liquid bulk items, such as vegetable oils and organic chemicals.
Pyxis’ principal objective will be
to own and operate its fleet in a manner that will enable it to benefit from short- and long-term trends that Pyxis expects
in the tanker sector to maximize its revenues and to enhance returns to its shareholders. Pyxis intends to expand the fleet
through selective acquisitions of modern product tankers in a manner that is accretive to shareholder value. It expects to
employ its vessels primarily through time charters to creditworthy customers and on the spot market. Pyxis intends to
continually evaluate the markets in which it operates and, based upon its view of market conditions, adjust its mix of vessel
employment by counterparty and stagger its charter expirations. In addition, Pyxis may choose to opportunistically direct
asset sales when conditions are primed to generate attractive returns for its shareholders.
Following the
consummation of the Merger, Pyxis will consider taking advantage of LookSmart’s experience in customizable internet
applications. LookSmart intends to upgrade
without charge Pyxis’ web-site and internet capabilities in order to enhance functionality and information, including shareholder
interface. Pyxis also intends that Robert Ladd, LookSmart’s nominee to Pyxis’ Board, and a number of Pyxis’
executive officers will monitor technological developments in the shipping industry and when economically feasible, propose
technologies for adoption by Pyxis and/or consider possible opportunities for joint ventures or investments by Pyxis. In
order to enhance its shareholder relations and capital markets access, Pyxis also intends to establish a small representative
office in the New York area in the near future.
Merger Sub
Merger Sub is a wholly-owned
subsidiary of Pyxis formed solely for the purpose of effecting the Merger described herein. Merger Sub was incorporated under
the laws of Delaware on March 25, 2015.
The Reverse Split
Our board of directors
has adopted resolutions (i) declaring that filing an amendment to the Company’s Certificate of Incorporation to effect
the Reverse Split of our issued and outstanding common stock was advisable, and (ii) directing that a proposal to approve
the Reverse Split be submitted to the holders of our common stock for their approval. The Reverse Split of our issued and outstanding
common stock will be effected by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to _____, 2015, with the exact ratio to be set at a whole number within this range as determined by our board of directors in its sole
discretion.
Our board of
directors is submitting the reverse split proposal to our stockholders for approval with the intent of increasing the market
price of our common stock to enhance our ability to meet the continued listing requirements of the Nasdaq Capital Market, to
make our common stock sufficiently attractive for Pyxis to consummate the Merger transaction and to ensure that Pyxis will be
able to meet the initial listing requirements of the Nasdaq Capital Market or the NYSE MKT after consummation of the Merger
transaction. Please see the section entitled “The Reverse Split” for more information.
The Spin-Off
Prior to the execution
of the Merger Agreement and the effective time of the Merger (the “Effective Time”), and pursuant to an Assignment
and Assumption Agreement between the Company and Holdco (the “Spin-Off Agreement”), the Company will have transferred
all of its businesses, assets and liabilities to Holdco in anticipation of the Spin-Off of Holdco from LookSmart.
Pursuant to the terms of the Spin-Off Agreement,
Holdco will assume all liabilities of LookSmart, and the liabilities of LookSmart’s subsidiaries.
Upon completion of the Spin-Off, all of LookSmart’s
shares of the common stock of Holdco shall be cancelled and Holdco shall be 100% owned by the Company’s stockholders of
record as of ________, 2015.
The Merger
Under the terms of
the Merger Agreement, upon completion of the Merger, LookSmart will merge with and into Merger Sub. Merger Sub will be the surviving
corporation in the Merger and will continue to be a wholly owned subsidiary of Pyxis.
At the Effective
Time, each share of the Company’s common stock issued and outstanding prior to the Effective Time (post-Reverse Split) will
be exchanged for the right to receive___ shares of Pyxis’ common stock. After the completion of the proposed Merger, and
assuming no adjustments pursuant to the terms of the Merger Agreement, the public stockholders of the Company are expected to
own 5.66% of the total issued and outstanding common stock of Pyxis.
As a result of
the Merger, and subject to the terms and conditions of the Merger Agreement, Pyxis is expected to become a public company.
Pyxis intends to apply to have its common stock listed on the Nasdaq Capital Market or the NYSE MKT under the symbol
“PXS.”
Merger Consideration
Each share of LookSmart
held by holders of record of the Company’s common stock (post-Reverse Split) at the close of business on _______, 2015 will
be cancelled and exchanged for the right to receive ____ share(s) of Pyxis common stock. In addition, the Company received a cash
payment of $600,000 upon execution of the Merger Agreement, which will be used by LookSmart and Holdco for operational purposes.
The Make Whole Record Date
In the event
that subsequent to the Merger, Pyxis completes a financing which results in gross proceeds to Pyxis of at least $5,000,000 (a
“Future Pyxis Offering”) at a valuation lower than the valuation ascribed to the shares of common stock
received by LookSmart stockholders pursuant to the Merger Agreement (the “Consideration Value”), Pyxis
will be obligated to make “whole” the LookSmart stockholders as of April 28, 2015 (the
“Make Whole Record Date”) by offering such LookSmart stockholders the right to receive additional shares
of Pyxis common stock to compensate the LookSmart stockholders for the difference in value of their Pyxis common stock.
In addition,
should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of the
Merger, each holder of the Company’s common stock who has held such stock continuously from the date of the Make Whole
Record Date until the expiration of such 3 year period (the “Legacy LS Stockholders”) will have a 24-hour
option beginning at the end of the 3 year period to require Pyxis to purchase from such Legacy LS Stockholders, a pro
rata amount of Pyxis common stock that would result in aggregate gross proceeds to the Legacy LS Stockholders in an amount
not to exceed $2,000,000; provided that in no event shall a Legacy LS Stockholder receive an amount per share greater
than the Consideration Value.
STOCKHOLDERS PURCHASING
SHARES OF LOOKSMART’S COMMON STOCK AFTER THE MAKE WHOLE RECORD DATE WILL NOT BE ENTITLED TO THE FOREGOING COMPENSATION RELATED
TO A FUTURE PYXIS SECURITIES OFFERING.
The Special Meeting
The Special Meeting
will be held at 10:00 a.m., local time, on _____, __________ __, 2015, at the offices of Sichenzia Ross Friedman Ference LLP,
61 Broadway, 32nd Floor, New York, NY 10006, to consider and vote upon the reverse split proposal, the spin-off proposal, the
merger proposal and/or if necessary, the adjournment proposal to permit further solicitation and vote of proxies if, based upon
the tabulated vote at the time of the Special Meeting, LookSmart is not authorized to consummate the Reverse Split, Spin-Off and/or
the Merger.
Recommendation to Stockholders
After careful consideration,
the Company’s board of directors has determined that the merger proposal, the spin-off proposal, and the adjournment proposal
are fair to and in the best interests of the Company and its stockholders and unanimously recommends that you vote or give instruction
to vote “FOR” the reverse split proposal, “FOR” the spin-off proposal, “FOR”
the merger proposal and “FOR” the adjournment proposal, if presented.
Opinion of Financial
Advisor to the Board of Directors of LookSmart
LookSmart
engaged Gruppo, Levey & Co. and Source Capital Group, Inc. to render an opinion, as of April 23, 2015, as to the fairness
of the Merger, from a financial standpoint, to LookSmart’s stockholders. Together, Gruppo, Levey & Co. and Source
Capital Group, Inc. (collectively, “GLC”) are investment banks that work together regularly in the
evaluation of businesses and their securities in connection with acquisitions, corporate restructuring, private placements
and for other purposes. LookSmart’s board of directors decided to use the services of GLC because GLC has represented
to the Company that it has requisite experience in similar matters. GLC rendered its oral opinion to LookSmart’s board
of directors on March 31, 2015 (which was subsequently confirmed in writing by delivery of GLC’s written opinion) that the Merger was fair, from a financial point of view, to LookSmart
stockholders.
GLC’s opinion
was provided for the use and benefit of the LookSmart board of directors in connection with its consideration of the Merger and
only addressed the fairness, from a financial standpoint, of the Merger to LookSmart’s stockholders pursuant to the Merger
Agreement, in each case as of the date of the opinion, and did not address any other aspect or implication of the Merger. The
summary of GLC’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written
opinion, which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made,
qualifications and limitations on the review undertaken and other matters considered by GLC in preparing its opinion. However,
neither GLC’s written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement
are intended to be, and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act
or vote with respect to any matter relating to the proposed Merger.
The Company had previously
retained GLC to represent its Clickable business line in a private placement offering. That offering has been suspended pending
the successful closing of the Reverse Split, the Spin-Off and the Merger transactions.
Interests of LookSmart’s
Directors and Officers in the Merger
As of the Record
Date, the directors and executive officers of LookSmart as a group owned and were entitled to vote ________ shares of the common
stock of the Company, representing approximately ____% of the outstanding shares of LookSmart common stock on that date. LookSmart
expects that its directors and executive officers will vote their shares in favor of the reverse split proposal, the spin-off
proposal and the merger proposal, but none of the Company’s directors or executive officers other than Michael Onghai has
entered into any agreement obligating any of them to do so.
Besides the equity
ownership of LookSmart detailed above, the directors and executive officers of the Company do not have interests different than
the other stockholders of LookSmart.
The Voting Agreement
In connection with
their entry into the Merger Agreement, LookSmart, Pyxis and Michael Onghai, entered into a voting agreement, which is referred
to herein as the “Voting Agreement.” The Voting Agreement generally requires that Mr. Onghai, in his capacity
as a stockholder of LookSmart, vote all of his shares of LookSmart common stock in favor of the reverse split proposal, the spin-off
proposal and the merger proposal, unless doing so would violate his fiduciary duties as an executive officer and member of the
board of directors of the Company. As of the Record Date, the Mr. Ongahi beneficially held ________ shares of LookSmart common
stock, representing approximately ____% of the outstanding shares of the Company’s common stock, of which ____________ shares
are either held of record by the Mr. Onghai as of the Record Date or over which he possesses voting rights and are therefore in
either case subject to the Voting Agreement.
Treatment of Stock Options and Warrants
At the Effective
Time, there shall be no outstanding options or warrants to purchase capital stock of LookSmart.
Appraisal Rights
LookSmart stockholders
do not have appraisal rights in connection with the Reverse Split, the Spin-Off or the Merger under the DGCL.
Material Marshall Islands Tax Considerations
In the opinion of Seward & Kissel LLP,
under current Marshall Islands law, we will not be subject to Marshall Islands income tax as a result of the transactions described
in the Merger Agreement and our stockholders will not be subject to any Marshall Islands income withholding or capital gains by
reason of such transactions.
Material United States Federal Income
Tax Considerations
The following discussion sets forth the material
U.S. Federal income tax consequences to our stockholders of the following transactions described in the Merger Agreement: (i)
the distribution of stock in Holdco to the stockholders (following the transfer of all of the Company’s assets to Holdco),
and (ii) the exchange by the stockholders of their stock in the Company for stock in Pyxis . The following discussion also sets
forth the material federal tax consequences to the Company on the spin-off of Holdco to the stockholders to the extent that those
consequences may affect the stockholders.
This discussion is limited to stockholders
who are U.S. Holders (as defined below) of our common stock who hold such stock as a capital asset for Federal income tax purposes.
This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations
promulgated thereunder, judicial decisions, and the current administrative rules, practices and interpretations of law of the
U.S. Internal Revenue Service (“IRS”), all as in effect on the date of this document, and all of which are
subject to change, possibly with retroactive effect. This discussion does not address all aspects of Federal income taxation that
may be important to particular holders in light of their individual investment circumstances. Unless specifically stated otherwise,
this discussion does not apply to the following holders, even if they are U.S. Holders, all of whom may be subject to tax rules
that differ significantly from those summarized below: (i) holders who may be subject to special tax rules, including, without
limitation, partnerships (including any entity or arrangement treated as a partnership for Federal income tax purposes); (ii)
dealers in securities or foreign currency, foreign persons, insurance companies, tax-exempt organizations, banks, financial institutions,
and broker-dealers; and (iii) holders of warrants or other convertible securities entitling them to receive stock, holders who
acquired common stock pursuant to the exercise of compensatory stock options or otherwise as compensation, or holders who hold
common stock as part of a hedge, straddle, conversion, constructive sale or other integrated security transaction.
We have not sought, and will not seek, a ruling
from the IRS regarding the Federal income tax consequences of these transactions. This discussion is based on varying interpretations
that could result in U.S federal income tax consequences different from those described below. The following discussion does not
address the tax consequences of this offering or the related share issuance under foreign, state, or local tax laws, or the alternative
minimum tax provisions of the Code. Accordingly, each U.S. holder of common stock is urged to consult his, her or its (hereinafter,
“his”) tax advisor with respect to the particular tax consequences of these transactions.
For purposes of this discussion, a “U.S.
holder” is a holder who is for U.S. federal income tax purposes: (i) a citizen or resident of the U.S.; (ii) a corporation
or other entity taxable as a corporation that is organized in or under the laws of the U.S., any state thereof or the District
of Columbia; (iii) an estate, the income of which is subject to U.S. federal income taxation, regardless of its source; or (iv)
a trust, if a U.S. court is able to exercise primary supervision over the administration of the trust and one or more U.S. persons
have the authority to control all substantial decisions of the trust (or if the trust was in existence on August 20, 1996, and
validly elected to continue to be treated as a U.S. trust).
THIS SUMMARY IS ONLY A GENERAL DISCUSSION
AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE. THE U.S. FEDERAL INCOME TAX TREATMENT OF THESE
TRANSACTIONS IS COMPLEX. ACCORDINGLY, EACH STOCKHOLDER WHO IS A U.S. HOLDER IS STRONGLY URGED TO CONSULT HIS OWN TAX ADVISER WITH
RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES OF THE TRANSACTIONS WITH SPECIFIC
REFERENCE TO SUCH PERSON’S PARTICULAR FACTS AND CIRCUMSTANCES.
Distributions of Stock in Holdco
The distribution to our stockholders of interests
in Holdco will be a taxable event to each Stockholder. The value of the interests in the Holdco stock received by each stockholder
will be applied first to reduce the stockholder’s basis in his stock in LookSmart; any value of those interests in excess
of the stockholder’s basis in LookSmart stock will be a capital gain to the stockholder. Any capital gain will be long-term
capital gain, taxable at favorable capital gains rates, if the Stockholder has held his LookSmart stock for more than a year at
the time of the distribution; otherwise, any gain will be short-term capital gain taxable at ordinary income tax rates.
The foregoing discussion assumes that the
Company does not, at the time of the distribution, have current or accumulated earnings and profits (“earnings and profits”).
According to the books of the Company, the Company has no accumulated earnings and profits. If the Company has any current earnings
and profits, then (i) the distribution of the interests in Holdco will be treated as a dividend distribution to each stockholder
to the extent of the stockholder’s pro rata share of the Company’s current earnings and profits; and (ii) the value
of the distribution, if any, in excess of the stockholder’s pro rata share of current earnings and profits will be treated
in the manner described in the preceding paragraph.
If a stockholder’s basis in his LookSmart
stock is greater than the value of the interests in Holdco received by the stockholder, the stockholder will not recognize a capital
loss. However, as discussed in the next section (“Exchange of Company Shares for Pyxis Shares”), a stockholder
may recognize a capital loss on the exchange of his shares in LookSmart for stock in Pyxis.
The tax consequences of the distribution of
Holdco, and of the exchange of LookSmart stock for Pyxis stock (as described below), are complex and not free from doubt. We have
provided what we believe are the most likely consequences. Stockholders may wish to consult their own tax advisors on the tax
consequences of these transactions.
Exchange of Company Shares for Pyxis Shares
The exchange by a stockholder of shares in
LookSmart for shares of stock in Pyxis will be a taxable event to the stockholder. The stockholder will realize a capital gain
to the extent that the value of the Pyxis stock received by the stockholder exceeds the stockholder’s basis in his LookSmart
stock (a stockholder’s basis in LookSmart stock may be reduced by the value of the Holdco interests distributed to the stockholder,
as described in “Distributions of Stock in Holdco”, above). Any gain will be long-term capital gain if the
stockholder has held his LookSmart stock for more than one year; otherwise any gain will be short-term capital gain. If the stockholder’s
basis in his LookSmart stock (determined after applying any reduction in basis described in “Distributions of Stock
in Holdco”, above) exceeds the value of the Pyxis stock received by the stockholder, the stockholder will recognize a capital
loss to the extent of the excess.
Net Investment Income Tax
The net investment income tax (the Medicare
Tax on Unearned Income) – a tax of 3.8% on certain kinds of investment income – will apply to (i) any portion of the
distribution of the stock of Holdco that is treated as a dividend (see the discussion in the second paragraph of “Distributions
of Stock in Holdco”, above), and (ii) any capital gains recognized by a stockholder on the exchange of his LookSmart
stock for Pyxis stock (see the discussion of capital gains under “Exchange of Company Shares for Pyxis Shares”),
above.
The net investment income tax also appears
to apply to any capital gain recognized by the stockholders on the distribution of Holdco stock to them (see the first paragraph
of “Distributions of Stock in Holdco”, above) but the treatment of such capital gain under the net investment income
rules is not entirely clear. Stockholders should consult their own tax advisors with respect to the applicability of the net investment
income tax to such gains.
The net investment income tax applies to individual
taxpayers who file joint returns and report adjusted gross income in excess of $250,000 ($125,000 in the case of married taxpayers
filing separate returns), and to single taxpayers who report adjusted gross income in excess of $200,000. The net investment income
tax also applies to estates and trusts with adjusted gross income in excess of approximately $7500.
Company Tax Liability Due to the Spin-Off
The Company will recognize gain on (i) the
transfer of its subsidiaries and other assets to Holdco if Holdco assumes liabilities of the Company in excess of the Company’s
adjusted bases in the subsidiaries and other assets transferred to Holdco and (ii) the distribution of Holdco interests to the
stockholders if Holdco has a fair market value in excess of the Company’s adjusted basis in Holdco. According to the Company’s
books, the Company’s liabilities do not exceed its basis in the assets being transferred to Holdco. However, Holdco’s
value may exceeds the Company’s adjusted basis in Holdco. Any such gain would be added to the Company’s other income
in determining the Company’s taxable income (taking into account the Company’s deductible expenses, credits, and allowable
net operating loss carryforwards) and its tax liability, if any. The Company expects that any such gain would be offset by its
other expenses and by its allowable net operating loss carryforwards, so that the Company would owe no tax as a result of these
transactions, but there is no certainty that that would be the case.
If the Company did incur a tax as a result
of the Spin-Off (or for any other reason), it is expected that, following the Merger, the Company will not have sufficient assets
to pay any such tax. Under the Merger Agreement, Holdco and the Company’s subsidiaries transferred to Holdco will indemnify
Pyxis against liability for any such taxes. Accordingly, it is expected that Holdco (or the subsidiaries transferred to Holdco)
will pay any tax owed by the Company as a result of the Spin-Off.
Please see the discussion in the next section,
“Stockholders’ Transferee Liability for Company Taxes”.
Stockholders’ Transferee Liability
for Company Taxes
Any taxes owed or accrued by the Company as
of (and including) the date of distribution of the interests in Holdco (including any tax arising as a result of the distribution
of Holdco’s stock, as discussed in the previous section, “Company Tax Liability Due to the Spin-Off”),
will be the primary responsibility of the Company. However, as noted above, the Company is not expected to have any assets following
the Merger, and Holdco (and its subsidiaries) have agreed to indemnify Pyxis against any such liability. If for any reason the
Company does not pay any portion of such tax (or if Holdco or the subsidiaries transferred to Holdco fail to pay such tax under
their indemnification agreements), a stockholder who receives a distribution of interests in Holdco (or who receives any other
property from the Company) could be liable, under the theory of transferee liability, for the Company’s taxes. Such liability
would be limited to the value of the property that the stockholder receives in the distribution.
Transferee liability arises when a corporation
distributes all of its property to its stockholders and, as a result thereof, has insufficient funds with which to pay any taxes
that it owes (or expects to owe) at that time. The Company does not expect to have any tax liability as of the date of distribution
of Holdco or to incur any tax as a result of the distribution. However, if a liability arises and is not paid by the Company or
Holdco, the IRS could collect such tax from the stockholders.
Information Reporting and Backup Withholding
Payments of proceeds from the distribution
of Holdco to a stockholder, and the exchange of Company stock for Pyxis stock, may be subject to information reporting to the
IRS and, possibly, U.S. federal backup withholding. Backup withholding will not apply if the stockholder furnishes a correct taxpayer
identification number (certified on the IRS Form W-9) or otherwise establishes that he is exempt from backup withholding. Backup
withholding is not an additional tax. Amounts withheld as backup withholding may be credited against the stockholder’s U.S.
federal income tax liability. The stockholder may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the IRS and furnishing any required information. Since any backup withholding
required in connection with the distribution of Holdco stock would in effect be a cash obligation imposed on the Company (since
no withholdable cash is being distributed), the Company does not intend to distribute Holdco stock to any stockholder who has
not provided the Company with a Form W-9 or otherwise established an exemption from backup withholding.
Regulatory Approvals Required for the
Merger
The Merger and the
transactions contemplated by the Merger Agreement are not subject to any additional federal or state regulatory requirement or
approval, except for filings with the State of Delaware necessary to effectuate the transactions contemplated by the Merger Agreement.
Risk Factors
In evaluating the
proposals to be presented at the Special Meeting, a stockholder should carefully read this proxy statement/prospectus and especially
consider the factors discussed in the section entitled “Risk Factors.”
Conditions to Closing of the Merger
The Company’s,
Pyxis’ and the Merger Sub’s obligations to consummate the transactions contemplated by the Merger Agreement are conditioned
upon, among other things:
| · | the
Reverse Split having been duly approved, adopted and implemented by the Company’s
stockholders by the requisite vote under the laws of Delaware; |
| · | the
Spin-Off having been duly approved, adopted and implemented by the Company’s stockholders
by the requisite vote under the laws of Delaware; |
| · | the
Merger Agreement and the Merger having been duly approved and adopted by the Company’s
and Pyxis stockholders by the requisite vote under the laws of Delaware and Marshall
Islands, respectively; |
| · | no
government entity having enacted, issued, promulgated, enforced or entered any law, rule,
regulation, judgment, injunction, decree, executive order or award which is then in effect
and which has the effect of making the Merger or the transactions contemplated thereby
illegal or otherwise prohibiting consummation of the Merger; |
| · | the
Pyxis common stock being authorized for listing on the NASDAQ or the NYSE MKT, subject
to official notice of issuance; and |
| · | the
proxy statement/prospectus being declared effective and no stop order suspending the
effectiveness of the proxy statement/prospectus being issued and no proceeding initiated
by the SEC. |
Termination
The Merger Agreement may be terminated
at any time, but not later than the closing, as follows:
| • | by mutual written consent of
the Company and Pyxis, duly authorized, or by mutual action of their respective boards
of directors; |
| • | by either the Company or Pyxis if the transactions
contemplated by the Merger Agreement are not consummated on or before October 31, 2015, provided that the right to terminate
will not be available to any party whose failure to fulfill any material obligation
was the cause of or resulted in the failure of the transactions contemplated by the
Merger Agreement to be consummated by such date; |
| • | by either the Company or Pyxis
if any governmental authority shall have enacted, issued, promulgated, enforced or entered
any order, law, rule regulation, judgment, injunction, decree or ruling which has become
final and nonappealable, and which permanently restrains, enjoins or otherwise prohibits
the transactions contemplated by the Merger Agreement; |
| • | by either the Company or Pyxis
if the other party has breached any of its covenants, agreements or representations and
warranties (and has not cured its breach within 30 days of the giving of notice of such
breach); |
| • | by Pyxis if, at the Special
Meeting, the Reverse Split, the Spin-Off or the Merger shall fail to be approved by holders
of Company’s common stock, or if the Company fails to hold the Special Meeting
within 60 days of the date of the execution of the Merger Agreement, unless such failure
is as a result of the Company responding in good faith to comments received from the
SEC; or |
| • | by the Company if its board
of directors recommends to its stockholders an alternative transaction based on an unsolicited
superior proposal, or resolves to do so, or enters into any letter of intent or similar
binding document or any agreement accepting such a superior proposal. |
In the event
of proper termination by either the Company or Pyxis, the Merger Agreement will be of no further force or effect and the
Merger will be abandoned, except that if the Merger Agreement is terminated due to (i) the proposals herein not being
approved, or (ii) a breach by LookSmart of its covenants, agreements or representations and warranties (and has not cured its
breach within 30 days of the giving of notice of such breach), then the Company shall immediately repay Pyxis the $600,000
received upon execution of the Merger Agreement plus legal and accounting fees incurred by Pyxis (up to $450,000 in fees)
(collectively, the “Break-up Fees”), and if the Merger Agreement is terminated because the board of directors of
LookSmart withdraws its recommendation of the Merger or approves an alternative proposal or enters into a superior
proposal, then in addition to the Break-up Fees an additional fee of $450,000 shall also be paid to Pyxis.
Post-Merger Board of Directors of Pyxis
Following
the Merger, the five members of the board of directors of Pyxis are expected to be Valentios (“Eddie”) Valentis, Basil
G. Mavroleon, Aristides J. Pittas, Robin P. Das and LookSmart’s designee Robert Ladd. Pyxis’ board of directors will
be staggered, with at least three members of the board of directors of Pyxis being independent at any given time.
RISK FACTORS
You should carefully consider the following
risk factors, together with the other information contained in this proxy statement/prospectus, including the factors discussed
in Part I, Item 1A—Risk Factors in LookSmart’s annual report on Form 10-K for the year ended December 31,
2014. The risks described below relate to the Reverse Split, the Spin-Off and the Merger, and are in addition to, and should be
read in conjunction with, without limitation, the factors discussed in Part I, Item 1A—Risk Factors in LookSmart’s
annual report on Form 10-K for the year ended December 31, 2014. If any of the following risks and uncertainties develops
into actual events, these events could have a material adverse effect on both LookSmart’s and Pyxis’ businesses, financial
conditions or results of operations. In addition, past financial performance may not be a reliable indicator of future performance,
and historical trends should not be used to anticipate results or trends in future periods.
Risks Related to the Reverse Split,
the Spin-Off and the Merger
Completion of the Reverse Split, the
Spin-Off and the Merger is subject to a number of conditions and if these conditions are not satisfied or waived, such transactions
will not be completed.
LookSmart’s obligation and the obligation
of Pyxis to complete the Merger are subject to satisfaction or waiver of a number of conditions, including, among others:
| · | approval
and completion of the Reverse Split; |
| · | approval
and completion of the Spin-Off; |
| · | approval
of the Merger by LookSmart’s stockholders; |
| · | receipt
of opinions of counsel; |
| · | absence
of injunctions or certain legal impediments; |
| · | approval
for the listing on NASDAQ or NYSE MKT of the shares of Pyxis’ common stock to be
issued in the Merger; and |
| · | accuracy
of the representations and warranties with respect to each of the foregoing transactions,
subject to certain materiality thresholds. |
There can be no assurance that the conditions
to closing of the Merger Agreement will be satisfied or waived or that the Merger itself will be completed.
Because certain
compensation to be paid pursuant to the Merger Agreement is Pyxis shares, and those shares are subject to adjustments, you may
be required to decide whether or not to approve the transaction before knowing the actual amount of compensation you will receive
in the Merger.
The exchange ratio
of LookSmart shares to Pyxis shares as set forth in the Merger Agreement is subject to a number of adjustments as a result of
stock splits, reverse stock splits, recapitalizations, reclassifications, stock dividends, changes in stock issued due to payment
of fees in connection with the Merger, and certain other permitted issuances. As the approval of this transaction by the stockholders
of LookSmart is a condition to the Merger, the exact exchange ratio will likely not be determined until after you must decide
whether to approve this transaction. In addition, because of changes in the business, operations or prospects of Pyxis, market
assessments of the likelihood that the merger will be completed and general market and other economic conditions prevailing after
the stockholder meetings, the market value of the Pyxis common stock that LookSmart stockholders will actually receive in the
Merger may differ from the market value of the shares of Pyxis common stock that the LookSmart stockholders would have received
if the Merger had been consummated at the time the LookSmart stockholders made their decision whether to approve this transaction.
In addition, since the price of Pyxis common stock will continue to fluctuate after the exchange ratio has been determined, the
market value of the Pyxis common stock that holders of LookSmart common stock will receive as a result of the Merger may change
after the date that the exchange ratio is determined, but before those shares actually are issued. Accordingly, it may be difficult
to value the consideration to be received by LookSmart stockholders as a result of the Merger.
In addition, pursuant
to the Merger Agreement, only LookSmart stockholders as of the Make Whole Record Date are eligible to receive certain compensation
in the event that a Future Pyxis Offering is done at a lower valuation than the valuation ascribed to the shares of common stock
received by LS stockholders pursuant to the Merger Agreement, or in the event that Pyxis does not conduct a Future Pyxis
Offering. Any purchaser of LookSmart common stock after the Make Whole Record Date will not be entitled to said additional compensation.
See “The Merger – Make Whole Record Date” beginning on page 79.
NASDAQ or NYSE
MKT may not list or continue to list Pyxis’ shares on its exchange, which could prevent consummation of the Merger or could
limit investors’ ability to make transactions in Pyxis’ securities and subject Pyxis to additional trading restrictions.
Pyxis intends to
apply to have its common shares listed on either NASDAQ or NYSE MKT upon consummation of the Merger, and it is a closing condition
of the Merger that Pyxis’ shares have been approved to be listed on either NASDAQ or NYSE MKT. Pyxis will be required to
meet the initial listing requirements to be listed. Pyxis may not be able to meet those initial listing requirements. Even if
Pyxis’ securities are so listed, Pyxis may be unable to maintain the listing of its securities in the future. If Pyxis fails
to meet the initial listing requirements and NASDAQ or NYSE MKT does not list its securities on its exchange, neither LookSmart
nor Pyxis would be required to consummate the Merger. In the event that each of LookSmart and Pyxis elected to waive this condition,
Pyxis and its stockholders could face significant material adverse consequences, including:
| · | a limited availability
of market quotations for its securities; |
| · | a limited amount
of news coverage for the company; and |
| · | a decreased
ability to issue additional securities or obtain additional financing in the future. |
Failure to complete the Merger could
negatively impact LookSmart’s stock price, future business or operations.
If the Merger is not completed, LookSmart
and Pyxis may be subject to a number of material risks, including the following:
| · | LookSmart
may be required under certain circumstances to pay Pyxis a termination fee; |
| · | the
price of LookSmart’s common stock may decline to the extent that the relevant current
market price reflects a market assumption that the Merger will be completed; |
| · | LookSmart
may not have sufficient working capital to fund its operation on an ongoing basis; |
| · | LookSmart
may not have sufficient time to regain compliance under NASDAQ continued Listing Rule
5810(c)(3)(A) in order to avoid being delisted from the Nasdaq Capital Market; and |
| · | costs
related to the Merger, such as legal, accounting, certain financial advisory and financial
printing fees, must be paid even if the Merger is not completed. |
Further, if the Merger
is terminated and either company’s board of directors determines to seek another merger or business combination, there can
be no assurance that it will be able to find a partner on terms as attractive as those provided for in the Merger Agreement. In
addition, while the Merger Agreement is in effect and subject to very narrowly defined exceptions, LookSmart is prohibited from
soliciting, initiating or encouraging or entering into certain extraordinary transactions, such as a merger, sale of assets or
other business combination, other than with Pyxis.
The exercise
of LookSmart’s directors’ and officers’ discretion in agreeing to changes or waivers in the terms of Merger
may result in a conflict of interest when determining whether such changes to the terms of the Merger or waivers of conditions
are appropriate and in LookSmart’s stockholders’ best interest.
In the period leading
up to the closing of the Merger, events may occur that, pursuant to the Merger Agreement, would require LookSmart to agree to
amend the Merger Agreement, to consent to certain actions taken by Pyxis or to waive rights that LookSmart is entitled to under
the Merger Agreement. Such events could arise because of changes in the course of Pyxis’ business, a request by Pyxis to
undertake actions that would otherwise be prohibited by the terms of the Merger Agreement or the occurrence of other events that
would have a material adverse effect on Pyxis’ business. In any of such circumstances, it would be at LookSmart’s
discretion, acting through its board of directors, to grant its consent or waive those rights. The existence of the financial
and personal interests of the directors of LookSmart described in the preceding risk factors may result in a conflict of interest
on the part of one or more of the directors between what he or they may believe is best for LookSmart and its stockholders and
what he or they may believe is best for himself or themselves in determining whether or not to take the requested action.
As of the date of
this proxy statement/prospectus, LookSmart does not believe there will be any changes or waivers that LookSmart’s directors
and officers would be likely to make after stockholder approval of the merger proposal has been obtained. While certain changes
could be made without further stockholder approval, LookSmart will circulate a new or amended proxy statement/prospectus and resolicit
LookSmart’s stockholders if changes to the terms of the transaction that would have a material impact on its stockholders
are required prior to the vote on the merger proposal.
Pyxis may not
realize anticipated growth opportunities.
Pyxis expects that it will realize
growth opportunities and other financial and operating benefits as a result of the Merger. Pyxis cannot predict with
certainty if or when these growth opportunities and benefits will occur, or the extent to which they actually will be
achieved. For example, the benefits from the Merger may be offset by costs incurred in obtaining or attempting to
obtain regulatory approvals for the Merger, or as a result of being a public company. See “Risks Related to Pyxis
Industry” for a fuller discussion of the risks relating to Pyxis following the Merger.
The distribution
of stock in Holdco to our stockholders (following the transfer of our operating subsidiaries and other assets to Holdco) may generate
a taxable gain to a stockholder if the fair market value of the Holdco stock received by the stockholder exceeds the stockholder’s
basis in our company’s stock.
As the Company is not expected to have earnings
and profits, any such gain would in all likelihood be a capital gain. The exchange by a stockholder of shares in our company for
shares of stock in Pyxis may also be a taxable event to the stockholder if the fair market value of the Pyxis stock received by
the stockholder exceeds the stockholder’s basis in our company’s stock. A stockholder’s basis in our stock may
be increased or decreased as a result of the distribution of the Holdco stock.
The net investment income tax (the Medicare
Tax on Unearned Income) may apply to any gain recognized by the stockholder on the distribution of the Holdco stock or on the
exchange of our company’s stock for Pyxis stock. The Company may recognize a gain as a result of the transfer of its subsidiaries
and other assets to Holdco and the distribution of the Holdco stock to our stockholders. Due to its other expenses and loss carry-forwards,
the Company is not expected to incur a tax liability as a result of these transfers. However, following the Merger the Company
is not expected to have sufficient assets to pay any tax that might arise, and under the terms of the Merger Agreement Holdco
or the subsidiaries would be expected to pay any such tax. If a tax is due from the Company and is not paid by Holdco, a stockholder
could be responsible for a portion of any such tax up to the value of the Holdco stock received by him. See “Material
U.S. Federal Income Tax Considerations” for a fuller discussion of these and other tax considerations.
The Company and Pyxis will incur significant transaction-related
costs in connection with the Reverse Split, the Spin-Off and the Merger.
The Company and Pyxis expect to incur a number
of non-recurring costs associated with the Reverse Split, the Spin-Off and the Merger before, at, and after closing the Merger.
The Company and Pyxis will also incur transaction fees and costs related to formulating and implementing post Spin-Off and Merger
plans, including facilities and systems implementation costs and employment-related costs. The Company and Pyxis will continue
to assess the magnitude of these costs, and additional unanticipated costs may be incurred in the Merger and, Pyxis in particular
will assess these costs in relation to post-Merger activities.
Risks if the Adjournment Proposal is
Not Approved
If the adjournment
proposal is not approved, and an insufficient number of votes have been obtained to authorize the consummation of the Merger,
LookSmart’s board of directors will not have the ability to adjourn the Special Meeting to a later date in order to solicit
further votes, and, therefore, the Merger will not be approved.
Our board of directors
is seeking approval to adjourn the Special Meeting to a later date or dates if, at the Special Meeting, based upon the tabulated
votes, there are insufficient votes to approve the consummation of the Reverse Split, the Spin-Off and the Merger. If the adjournment
proposal is not approved, LookSmart’s board will not have the ability to adjourn the Special Meeting to a later date and,
therefore, will not have more time to solicit votes to approve the consummation of the Reverse Split, the Spin-Off and the Merger.
In such event, the Reverse Split, the Spin-Off and the Merger would not be completed.
Additional Risks Related to LookSmart and/or Holdco
The value of your
investment in Holdco following consummation of the Merger will be subject to the significant risks affecting Holdco and those
inherent in the digital advertising industry. You should carefully consider the risks and uncertainties described below and other
information included in this proxy statement/prospectus. If any of the events described below occur, the post-acquisition business
and financial results of Holdco could be adversely affected in a material way. This could cause the price of Holdco’s common
shares to decline, perhaps significantly, and you therefore may lose all or part of your investment in Holdco. The following risk
factors apply to the business and operations of LookSmart until the Spin-Off is completed and will also apply to the business
and operations of Holdco following the Spin-Off. Accordingly, for the purposes of this section, the words “we,” “us”
and “our” refer to LookSmart prior to the consummation of the Spin-Off and to Holdco after the consummation of the
Spin-Off.
Our financial results are highly concentrated
in the online search advertising business; if we are unable to grow online search advertising revenues and find alternative sources
of revenue, our financial results will suffer.
Search advertising accounted for substantially
all of our revenues for the years ended December 31, 2014 and 2013. Our success depends upon search advertising customers choosing
to use, and distribution network partners choosing to distribute, our search advertising networks products. Decisions by search
advertising customers and distribution network partners not to adopt our products at projected rates, or changes in market conditions,
may adversely affect the use or distribution of search advertisements. Because of our revenue concentration in the online search
advertising business, such shortfalls or changes could have a negative impact on our financial results. Also, many of our products
are offered to website publishers who use them to display or generate revenue from their online advertisements. If we are unable
to generate significant revenue from our online advertising business or related business models under development, or if market
conditions adversely affect the use or distribution of online advertisements generally, or for some of our larger customers specifically,
our results of operations, financial condition and/or liquidity will suffer.
Our largest category of customers have
historically been Intermediaries, the majority of whom purchase clicks to sell into the affiliate networks of large search engine
providers. In 2014, we experienced a continued decrease in revenues due to loss of Intermediary business.
We operate in a large online search advertising
ecosystem serving ads that target user queries on partner sites. We operate in the middle of this ecosystem, acquiring search
queries from a variety of sources and matching them with the keywords of our search advertising customers. Our largest category
of customers has historically been Intermediaries, the majority of which purchase clicks to sell into the affiliate networks of
large search engine providers. The Intermediary business model experienced a significant change in the fourth quarter of 2011.
Since then, we have seen our revenues from Intermediaries decreasing from prior levels, and have ceased doing business with a
number of our Intermediary customers. We do not expect significant future revenue growth in this area. If we are unable to identify
and exploit alternative sources of profitable revenue, our results of operations, financial condition and/or liquidity will suffer.
Our future success depends on sales
to, and the management of, international customers.
A portion of our revenue is derived from sales
to international customers who are headquartered internationally, however our business with them is primarily U.S. based and our
transactions are primarily in U.S. dollars.
Managing our growing group of customers outside
the U.S. presents various challenges, including, but not limited to:
| · | economic
and political conditions; |
| · | differences
in the enforcement of intellectual property and contract rights in varying jurisdictions; |
| · | our
ability to develop relationships with local accounts; |
| · | compliance
with United States and international laws and regulations; |
| · | fluctuations
in foreign currency exchange rates; and |
| · | our
ability to secure and retain qualified people for the operation of our business. |
To date, foreign exchange exposure from sales
has not been material to our operations. Our activities with customers outside the United States may be affected by changes in
trade protection laws, policies and measures, and other regulatory requirements affecting trade and investment, including the
Foreign Corrupt Practices Act and local laws prohibiting corrupt payments. In addition, the laws of some foreign countries may
not protect our intellectual property rights to the same extent as do the laws of the United States, which increases the risk
of unauthorized use of our technologies. Our business could be materially adversely affected if foreign markets do not continue
to develop, if we do not receive additional traffic suitable for our foreign accounts or if regulations governing our international
businesses change.
We rely primarily on our distribution
network partners to generate quality search queries and display advertisements that generate paid clicks; if we are unable to
maintain or expand the scope and quality of this network, our ability to generate revenue may be seriously harmed.
The success of our online search advertisement
products depends in large part on the size and quality of our distribution network of search queries. We may be unable to maintain
or add partners of satisfactory quality in our distribution network at reasonable revenue-sharing rates, if at all. If we lose
any significant portion of our distribution network, we would need to find alternative sources of quality click traffic to replace
the lost paid clicks. In the past, we have lost portions of our distribution network and chose to remove those with poor quality.
Although alternate sources of click traffic are currently available in the market, they may not be available at reasonable prices
or may be of unacceptable quality. There is significant competition among advertising networks to sign agreements with traffic
providers. We may be unable to negotiate and sign agreements with quality traffic providers on favorable terms, if at all. In
order to attract higher quality traffic, we may have to pay high traffic acquisition costs which may adversely affect our gross
margin and other financial results. If we are unable to attract higher quality traffic, or if we are otherwise unsuccessful in
maintaining and expanding our distribution network, then our ability to generate revenue may be seriously harmed.
LookSmart generated net losses in 2014
and 2013, has had losses in the past, and Holdco may have further losses in the future. Failure to maintain operating profitability
could harm our business and result in a decline in our stock price.
LookSmart had a net loss of $6.4 million in
2014 and $5.3 million in 2013. As of December 31, 2014, LookSmart’s accumulated deficit was approximately $259 million.
We may be unable to achieve profitability in the foreseeable future. Our ability to achieve and maintain profitability will depend
on our ability to generate additional revenue and contain our expenses. In order to generate additional revenue, we will need
to expand our network of distribution network partners, increase the amount our search advertising customers spend on our advertising
network, expand our advertiser base, experience an increase in paid clicks across our network and publisher products and develop
and implement successful new digital advertising revenue generating models. We may be unable to accomplish some or any of these
goals because of the risks identified in this report or for unforeseen reasons. Also, we may be unable to contain our costs due
to the need to make revenue sharing payments to our distribution network partners, to invest in product development and to market
our products. Historically, our operating expenses have increased in proportion to our revenue. Operating expenses may increase
in the foreseeable future to the extent that our revenue grows and as we increase headcount, particularly our sales and technology-related
headcount, incur general and administrative expenses associated with being a public company and expand our facilities. Additionally,
our acquisition-related costs may increase if we pursue additional acquisition opportunities. Although we expect to achieve operating
efficiencies and greater leverage of resources as we grow, because of the foregoing factors, and others outlined in this report,
we may be unable to achieve profitability in the future, which could result in a decline in our stock price.
If we experience decreases to our match
rate and/or revenue-per-click, or we are unable to rebuild our match rate, and/or revenue-per-click, our financial results may
suffer.
We have experienced, and may continue to experience
in the future, decreases in our average revenue-per-click (“RPC”) and average match rate, which is the rate
at which our paid listings are matched against search queries from distribution network partners. Future decreases in RPC or average
match rate may occur for a variety of reasons, including a change in customer mix, the erosion of our advertiser base, a reduction
in average advertiser spend, a reduction in the number of listings purchased by search advertising customers, a lower number of
bids on keywords, changes in the composition of our distribution network or for other reasons. If our RPC or average match rate
falls for any reason, or if we are unable to grow our RPC and average match rate, then we may be unable to achieve our financial
projections and our stock price would likely suffer.
Our growth depends on our ability to
retain and grow our search advertising customer base; if our search advertising customer base and average search advertising customer
spend falls, our financial results will suffer.
Our growth depends on our ability to build
a search advertising customer base that corresponds with the characteristics of our distribution network. Our distribution network,
which currently consists of a diversified set of distribution sources, may change as new distribution sources are added and old
distribution sources are removed. Search advertising customers may view these changes to the distribution network negatively,
and existing or potential search advertising customers may elect to purchase fewer or no advertisements for display on our distribution
network. If this occurs, it is likely that our average RPC and average match rate may decline and our stock price would likely
suffer.
We have launched a solution that is
dependent on our customers’ use of search advertising. Any decrease in the use of search advertising or our inability to
further penetrate mobile, social and display advertising channels would harm our business, growth prospects, operating results
and financial condition.
We expect that search advertising will become
a channel increasingly used by our customers in the foreseeable future. Should our customers lose confidence in the value or effectiveness
of search advertising, the demand for our solutions may decline, which would harm our growth prospects, operating results and
financial condition.
If we cannot increase the capacity of
our advertising technology platform to meet advertiser demand, our business will be harmed.
We must be able to continue to increase the
capacity of our technology platforms in order to support substantial increases in the number of advertisers, to support an increasing
variety of advertising formats and to maintain a stable service infrastructure and reliable service delivery for advertising campaigns.
If we are unable to efficiently and effectively increase the scale of our advertising platforms to support and manage a substantial
increase in the number of advertisers, while also maintaining a high level of performance, the quality of our services could decline
and our reputation and business could be seriously harmed. In addition, if we are not able to support emerging advertising formats
or services preferred by advertisers, we may be unable to obtain new advertising clients or may lose existing advertising customers,
and in either case our revenue could decline.
The market for digital advertising is
relatively new and dependent on growth in various digital advertising channels. If this market develops more slowly or differently
than we expect, our business, growth prospects and financial condition would be adversely affected.
The market for digital advertising products
such as ours is relatively new and these products may not achieve or sustain high levels of demand and market acceptance. While
search and display advertising has been used successfully for several years, marketing via new digital advertising channels such
as social media is not as well established. The future growth of our business could be constrained by the level of acceptance
and expansion of emerging digital advertising channels, as well as the continued use and growth of existing channels, such as
search and display advertising. Even if these channels become widely adopted, advertisers and agencies may not make significant
investments in solutions such as ours that help them manage their digital advertising spend across publisher platforms and advertising
channels. It is difficult to predict customer adoption rates, customer demand for our platform, the future growth rate and size
of the digital advertising market or the entry of competitive products. Any expansion of the market for digital advertising management
solutions depends on a number of factors, including the growth of the digital advertising market, the growth of social as an advertising
channel and the cost, performance and perceived value associated with digital advertising management solutions. If our digital
advertising products, including those in the social media space, do not achieve widespread adoption, or there is a reduction in
demand for digital advertising caused by weakening economic conditions, decreases in corporate spending or otherwise, it could
result in reduced usage, which could decrease revenues or otherwise adversely affect our business.
Our business depends on our ability
to maintain the quality of our advertiser and developer content.
We must be able to ensure that our customers’
ads are not placed in publisher content that is unlawful or inappropriate. Likewise, publishers rely upon us not to distribute
ads that are unlawful or inappropriate. If we are unable to ensure that the quality of our advertiser and publisher content does
not decline as the number of advertisers and publishers we work with continues to grow, then our reputation and business may suffer.
If we are unable to attract new advertising
customers and sell additional offerings to our existing customers, our revenue growth will be adversely affected.
To sustain or increase our revenue, we must
add new advertisers and encourage existing advertisers (both of which are often represented by advertising agencies or other Intermediaries),
to purchase additional offerings from us. As the digital advertising industry matures and as competitors introduce lower cost
or differentiated products or services that compete with or are perceived to compete with ours, our ability to sell our solution
to new and existing advertisers based on our offerings, pricing, technology platform and functionality could be impaired. Some
advertisers that are repeat users of our solution tend to increase their spending over time. Conversely, some advertisers that
are newer to our solution tend to spend less than, and may not return as frequently as, advertisers who have used our solution
for longer periods of time. If we fail to retain or cultivate the spending of our newer, lower-spending advertisers, it will be
difficult for us to sustain and grow our revenue from existing advertisers. Even with long-time advertisers, we may reach a point
of saturation at which we cannot continue to grow our revenue from those advertisers because of internal limits that advertisers
may place on the allocation of their advertising budgets to digital media, to particular campaigns, to a particular provider,
or for other reasons not known to us. If we are unable to attract new advertisers or obtain new business from existing advertisers,
our revenue growth and our business may be adversely affected.
If we do not introduce new and upgraded
products and services and successfully adapt to our rapidly changing industry, our financial condition may suffer.
The online search advertising industry continues
to evolve and we will need to continue developing new and upgraded products and services, and adapt to new business environments
and competition in order to maintain and grow revenue and reach our profitability goals. New search advertising technologies could
emerge that make our services comparatively less useful or new business methods could emerge that divert web traffic away from
our advertising network. In addition, competition from other web businesses may prevent us from attracting substantial traffic
to our services. We may inaccurately predict trends in the online search advertising market, which could lead us to make investments
in technologies and products that do not generate sufficient returns. We may face platform and resource constraints that prevent
us from developing upgraded products and services. We may fail to successfully identify new products or services, or fail to bring
new products or services to market in a timely and efficient manner. Rapid industry change makes it difficult for us to accurately
anticipate customer needs for our products, particularly over longer periods.
We may not be able to compete successfully
against current and future competitors because competition in our industry is intense, and our competitors may offer solutions
that are perceived by our customers to be more attractive than ours. These factors could result in declining revenue, or inability
to grow our business.
Competition for our advertiser customers’
advertising budgets is intense. We also expect competition to increase as the barriers to enter our market are low. Increased
competition may force us to charge less for our solution, or offer pricing models that are less attractive to us and decrease
our margins. Our principal competitors include companies that offer demand side and data management platforms that allow advertisers
to purchase inventory directly from advertising exchanges or other third parties and manage and analyze their own consumer data,
traditional advertising networks and advertising agencies themselves. We compete with large companies that provide paid placement
products, paid inclusion products, and other forms of search marketing as well as contextually-targeted advertising products and
other types of online advertisements. We compete for search advertising customers on the basis of the quality and composition
of our network, the price-per-click (“PPC”) charged to search advertising customers, the volume of clicks that
we can deliver to search advertising customers, tracking and reporting of campaign results, customer service, and other factors.
We also compete for distribution network partners and for ad placement on those partners’ sites on the basis of the relevance
of our ads and the PPC charged to search advertising customers. We also experience competition in offering our publisher products
to website publishers. Some of our competitors have larger distribution networks and proprietary traffic bases, longer operating
histories, greater brand recognition, higher RPC, better relevance and conversion rates, or better products and services than
we have.
We compete with companies, such as Google,
which are significantly larger than us and have more capital to invest in their advertising businesses. We also compete with in-house
solutions used by companies who choose to coordinate advertising across their own properties, such as Facebook, Twitter, Yahoo!
and Pandora. They, or other companies that offer competing advertising solutions, may establish or strengthen cooperative relationships
with their partners, brand advertisers, app developers or other parties, thereby limiting our ability to promote our services
and generate revenue. Competitors could also seek to gain market share from us by reducing the prices they charge to advertisers
or by introducing new technology tools for developers. Moreover, increased competition for online advertising space from developers
could result in an increase in the portion of advertiser revenue that we must pay to developers to acquire that advertising space.
Our business will suffer to the extent that
our Intermediary and advertiser customers purchase and sell advertising directly from each other or through other companies that
are able to become Intermediaries. For example, we are aware of companies that have substantial existing platforms for developers
who had previously not heavily used those platforms for advertising campaigns. These companies could compete with us to the extent
they expand into advertising. Other companies, such as large app developers with a substantial advertising business, may decide
to directly monetize some or all of their advertising space without utilizing our services. Other companies that offer analytics,
mediation, exchange or other third party services may also become Intermediaries between advertisers and publishers and thereby
compete with us. Any of these developments would make it more difficult for us to sell our services and could result in increased
pricing pressure, reduced profit margins, increased sales and marketing expenses or the loss of market share.
We have previously derived a portion
of our revenues from display advertising. A decrease in the use of display advertising, or our inability to further penetrate
display, search, and social advertising channels would harm our business, growth prospects, operating results and financial condition.
Historically, we have had customers use our
solution for display advertising. We expect that display advertising will continue to be a significant channel used by our customers.
Recently, the market for display advertising, excluding social, has been declining as overall display advertising growth has been
driven by mobile, social and video advertising. Should our customers lose confidence in the value or effectiveness of display
advertising, the demand for our display solution could decline. In addition, our failure to achieve market acceptance of our solution
for social advertising would harm our growth prospects, financial condition and results of operations.
We do not have long-term commitments
from our advertisers, and we may not be able to retain advertisers or attract new advertisers that provide us with revenue that
is comparable to the revenue generated by any advertisers we may lose.
Most of our advertisers do business with us
by placing insertion orders for particular advertising campaigns. If we perform well on a particular campaign, then the advertiser,
or most often, the advertising agency representing the advertiser, may place new insertion orders with us for additional advertising
campaigns. We rarely have any commitment from an advertiser beyond the campaign governed by a particular insertion order. As a
result, our success is dependent upon our ability to outperform our competitors and win repeat business from existing advertisers,
while continually expanding the number of advertisers for whom we provide services. In addition, it is relatively easy for advertisers
and the advertising agencies that represent them to seek an alternative provider for their advertising campaigns because there
are no significant switching costs. Agencies, with whom we do the majority of our business, often have relationships with many
different providers, each of whom may be running portions of the same advertising campaign. Because we generally do not have long-term
contracts, it may be difficult for us to accurately predict future revenue streams. We cannot provide assurance that our current
advertisers will continue to use our solution, or that we will be able to replace departing advertisers with new advertisers that
provide us with comparable revenue.
If we serve our advertisers’ advertisements
on undesirable websites, our reputation will suffer, which would harm our brand and reputation and negatively impact our business,
financial condition and results of operations.
Our business depends in part on providing
advertisers with a service that they trust. We take action in an effort to prevent advertisements from appearing on undesirable
websites. We may distribute advertising to inventory that is objectionable to advertisers, and we may lose the trust of our advertiser
customers, which would harm our brand and reputation and negatively impact our business, financial condition and results of operations.
If our access to quality advertising
inventory is diminished or if we fail to have access to new advertising inventory, our revenue could decline and our growth could
be impeded.
We must maintain a consistent supply of attractive
advertising inventory, meaning the digital space on which we place advertising impressions, including websites, proprietary social
networks, such as Facebook, and mobile applications. Our success depends on our ability to secure quality inventory on reasonable
terms across a broad range of advertising networks and exchanges, including real time advertising exchanges, such as Google’s
DoubleClick Ad Exchange or AppNexus; suppliers of video and mobile inventory; and social media platforms, such as the Facebook
Exchange, known as FBX.
The amount, quality and cost of inventory
available to us can change at any time. Our suppliers are generally not bound by long-term contracts. As a result, we cannot provide
any assurance that we will have access to a consistent supply of quality inventory. Moreover, the number of competing intermediaries
that purchase advertising inventory from real-time advertising exchanges continues to increase, which could put upward pressure
on inventory costs. If we are unable to compete favorably for advertising inventory available on real-time advertising exchanges,
or if real-time advertising exchanges decide not to make their advertising inventory available to us, we may not be able to place
advertisements at competitive rates or find alternative sources of inventory with comparable traffic patterns and consumer demographics
in a timely manner. Furthermore, the inventory that we can access through real-time advertising exchanges may be of low quality
or misrepresented to us, despite attempts by us and our suppliers to prevent fraud and conduct quality assurance checks.
Suppliers control the bidding process for
the inventory they supply, and their processes may not always work in our favor. For example, suppliers may place restrictions
on the use of their inventory, including restrictions that prohibit the placement of advertisements on behalf of certain advertisers.
Through the bidding process, we may not win the right to deliver advertising to the inventory that we select and may not be able
to replace inventory that is no longer made available to us.
If we are unable to maintain a consistent
supply of quality inventory for any reason, our business, advertiser retention and loyalty, financial condition and results of
operations would be harmed.
If our access to quality inventory in
social media is diminished or if we fail to acquire new advertising inventory in social media, our growth could be impeded and
our revenue could decline.
If we are unable to compete favorably for
advertising inventory on Facebook’s FBX, our social media offering may not be successful. Also, we cannot provide assurance
that Facebook will continue to make its advertising inventory available to us upon reasonable terms or at all, and we may not
be able to replace the FBX advertising inventory with inventory that meets our advertisers’ specific goals with respect
to social media. In addition, advertisers may prefer to work with companies that provide advertising on social media platforms
other than FBX or that have a longer history of integration with social media platforms. If we are unable to run advertising campaigns
on the FBX platform, integrate with social media platforms that may become available in the future or find alternative sources
of quality social media inventory, our business could be harmed.
If mobile connected devices, their operating
systems or content distribution channels, including those controlled by our competitors, develop in ways that prevent our advertising
campaigns from being delivered to their users, our ability to grow our business will be impaired.
Our success in the mobile channel depends
upon the ability of our technology platform to integrate with mobile inventory suppliers and provide advertising for most mobile
connected devices, as well as the major operating systems that run on them and the thousands of applications that are downloaded
onto them. The design of mobile devices and operating systems is controlled by third parties with whom we do not have any formal
relationships. These parties frequently introduce new devices, and from time to time they may introduce new operating systems
or modify existing ones. Network carriers may also impact the ability to access specified content on mobile devices. If our solution
were unable to work on these devices or operating systems, either because of technological constraints or because an operating
system or app developer, device maker or carrier wished to impair our ability to purchase inventory and provide advertisements,
our ability to generate revenue could be significantly harmed.
If we do not deliver quality traffic
that delivers value for advertisers, then our advertisers and our advertising partners may pay us less for their listing or discontinue
listing with us altogether.
For our services to be successful, we need
to deliver consumers to advertisers’ websites that are valuable to such advertiser. If we do not meet advertisers’
expectations by delivering quality traffic, then our advertising partners may pay us less per click or cease doing business with
us altogether, which may adversely affect our business and financial results. We compete with other web search services, online
publishers and high-traffic websites, as well as traditional media such as television, radio and print, for a share of our advertisers’
total advertising expenditures. Many potential advertisers and advertising agencies have only limited experience advertising on
the Internet and have not devoted a significant portion of their advertising expenditures to search advertising. Acceptance of
our advertising offerings among our advertisers and advertising partners will depend, to a large extent, on its perceived effectiveness
and the continued growth of commercial usage of the Internet. If we experience downward pricing pressure for our services in the
future, our financial results may suffer.
We depend on publishers for advertising
space to deliver our advertiser customers’ advertising campaigns, and any decline in the supply of advertising inventory
from these publishers could hurt our business.
We depend on publishers, both search and social
media, to provide us with space (advertising inventory) into which to distribute advertisements. There is no contractually bound
obligation to make advertising inventory available to us or our customers, or to provide us with a consistent supply of advertising
inventory. Furthermore, there are tools that exist that parties could use which could result in pressure to increase the prices
paid to publishers for that inventory or to otherwise block access to this inventory, without which we would be unable to facilitate
the distribution of ads on behalf of our advertiser customers.
Publishers can change the amount of inventory
they make available to us at any time. They may also change the price at which they offer inventory, or they may elect to make
advertising space available to our competitors who offer ads to them on more favorable economic terms. In addition, publishers
may place significant restrictions on use of their advertising inventory. These restrictions may prohibit ads from specific advertisers
or specific industries, or they could restrict the use of specified creative content or format. Publishers may also use a fee-based
or subscription-based business model to generate revenue from their content, in lieu of or to reduce their reliance on ads.
If publishers decide not to make advertising
inventory available to us for any of these reasons, decide to increase the price of inventory, or place significant restrictions
on our use of their advertising space, we may not be able to replace this with inventory from other publishers that satisfy our
requirements in a timely and cost-effective manner. If this happens, our revenue could decline or our cost of acquiring inventory
could increase.
We do not have long-term agreements
with our advertiser customers, and we may be unable to retain key customers, attract new customers or replace departing customers
with customers that can provide comparable revenue to us.
Our success requires us to maintain and expand
our current advertiser customer relationships and to develop new relationships. Our contracts with our advertiser customers generally
do not include long-term obligations requiring them to purchase our services and are cancelable upon short or no notice and without
penalty. As a result, we may have limited visibility as to our future advertising revenue streams. We cannot assure you that our
advertiser customers will continue to use our services or that we will be able to replace, in a timely or effective manner, departing
customers with new customers that generate comparable revenue. If a major advertising customer representing a significant portion
of our business decides to materially reduce its use of our platform or to cease using our platform altogether, our revenue could
be significantly reduced. Advertisers in general may shift their business to a competitor’s platform because of new or more
compelling offerings, strategic relationships, technological developments, pricing and other financial considerations, or a variety
of other reasons, which could cause an immediate and significant decline in our revenue and harm our business.
Our acquisition of businesses and technologies
may be costly and time-consuming; acquisitions may also dilute our existing stockholders.
From time to time we evaluate strategic corporate
development opportunities and when appropriate, may make acquisitions of or significant investments in complementary companies
or technologies to increase our technological capabilities expand our service offerings, or extend the operating scale of our
network businesses. The pursuit of acquisitions, whether or not completed, as well as the completion of any acquisitions and their
integration, may be expensive and may divert the attention of management from the day-to-day operations of the company. It may
be difficult to retain key management and technical personnel of the acquired company during the transition period following an
acquisition. Acquisitions or other strategic transactions may also result in dilution to our existing stockholders if we issue
additional equity securities or increase our debt to pay for such acquisitions. We may also be required to amortize significant
amounts of intangible assets, record impairment of goodwill in connection with future acquisitions, or divest non-performing assets
at below-market prices, all of which would adversely affect our operating results. Integration of acquired companies and technologies
into the company is likely to be expensive, time-consuming, and strain our managerial resources. We may not be successful in integrating
any acquired businesses or technologies and these transactions may not achieve anticipated business benefits.
If we fail to make the right investment
decisions in our offerings and technology platform, we may not attract and retain advertisers and advertising agencies and our
revenue and results of operations may decline.
We compete for advertisers, which are often
represented by advertising agencies, who want to purchase digital media for advertising campaigns. Our industry is subject to
rapid changes in standards, technologies, products and service offerings, as well as in advertiser demands and expectations. We
continuously need to make decisions regarding which offerings and technology to invest in to meet advertiser demand and evolving
industry standards and regulatory requirements. We may make wrong decisions regarding these investments. For example, we expect
advertisers to award us credit, or attribution, for impressions that generate specific consumer purchases or responses using certain
criteria such as last ad clicked or viewed. Our technology considers these attribution models and if new attribution models are
introduced by advertisers, we may need to make changes in our technology. If new or existing competitors offer more attractive
offerings, we may lose advertisers or advertisers may decrease their spending on our solution. New advertiser demands, superior
competitive offerings or new industry standards could render our existing solution unattractive, unmarketable or obsolete and
require us to make substantial unanticipated changes to our technology platform or business model. Our failure to adapt to a rapidly
changing market or to anticipate advertiser demand could harm our business and our financial performance.
Our acquisition of Syncapse and ShopWiki could have a negative
impact on our business, or on our stock price.
In September 2013, we purchased the assets
of Syncapse and in December 2014, we acquired ShopWiki. These acquisitions could disrupt our business in the following ways, any
of which could negatively affect our stock price or could harm our financial condition, results of operations or business prospects:
| · | our
customers and other third party business partners may seek to terminate or renegotiate
their relationships as a result of our acquisition of Syncapse, whether pursuant to the
terms of their existing agreements or otherwise; |
| · | the
attention of our management may be directed toward the integration of our businesses
and related matters and may be diverted from our current business operations, including
from other opportunities that might otherwise be beneficial to us; and |
| · | current
and prospective employees may experience uncertainty regarding their future roles with
our company, which might adversely affect our ability to retain, recruit and motivate
key personnel. |
We may be unable to realize the benefits
anticipated by the acquisition, including estimated cost savings and synergies, or it may take longer than we anticipate for us
to achieve those benefits.
Our realization of the benefits anticipated
as a result of the acquisition of the assets of Syncapse will depend in part on the integration and development of Syncapse’s
assets with ours. However, there can be no assurance that we will be able to operate a business using the Syncapse’s assets
profitably or integrate it successfully into our operations in a timely fashion, or at all. Following the acquisition, the size
of the combined company’s business is significantly larger than our business was prior to the acquisition. Our future success
as a combined company depends, in part, upon our ability to manage this expanded business, which will pose substantial challenges
for our management, including challenges related to the management and monitoring of new operations and associated increased costs
and complexity. The dedication of management resources to this integration could detract attention from our current day-to-day
business, and we cannot assure you that there will not be substantial costs associated with the transition process or other negative
consequences as a result of these integration efforts. These effects, including, but not limited to, incurring unexpected costs
or delays in connection with integration of the two businesses, or the failure of the business created using Syncapse’s
assets to perform as expected, could harm our results of operations.
If we fail to develop widespread brand
awareness cost-effectively, our business may suffer.
We believe that developing and maintaining
widespread awareness of our brand in a cost-effective manner is critical to achieving widespread acceptance of our products and
attracting new customers. We expect sales and marketing expenses to increase as a result of our marketing and brand promotion
activities. We may not generate customer awareness or increase revenues enough to offset the increased expenses we incur in building
our brand. If we fail to successfully promote and maintain our brand, or incur substantial marketing and sales expenses, which
are not offset by increased revenues, we may fail to attract or retain customers necessary to realize a sufficient return on our
brand-building efforts, or to achieve the widespread brand awareness that is essential for broad customer adoption of our solution.
Failure to adequately manage our growth
may seriously harm our business.
We have in the past experienced, and may again
in the future experience, significant growth in our business. If we do not effectively manage our growth, the quality of our services
may suffer, which could negatively affect our reputation and demand for our services. Our growth has placed, and is expected to
continue to place, a significant strain on our managerial, administrative, operational and financial resources and our infrastructure.
Our future success will depend, in part, upon the ability of our senior management to manage growth effectively. This will require
us to, among other things:
| · | implement
additional management information systems; |
| · | further
develop our operating, administrative, legal, financial and accounting systems and controls; |
| · | hire
additional personnel; |
| · | develop
additional levels of management within our company; |
| · | locate
additional office space; |
| · | maintain
close coordination among our engineering, operations, legal, finance, sales and marketing
and client service and support organizations; and |
| · | manage
our expanding international operations. |
Moreover, as our sales increase, we may be
required to concurrently deploy our services infrastructure at multiple additional locations or provide increased levels of customization.
As a result, we may lack the resources to deploy our services on a timely and cost-effective basis. Failure to accomplish any
of these requirements could impair our ability to deliver our mobile advertising platform in a timely fashion, fulfill existing
client commitments or attract and retain new clients.
Our success depends on our ability to
attract and retain key personnel; if we were unable to attract and retain key personnel in the future, our business could be materially
and adversely impacted.
Our success depends on our ability to identify,
attract, retain and motivate highly skilled development, technical, sales, and management personnel. We have a limited number
of key development, technical, sales and management personnel performing critical company functions, and the loss of the services
of any of our key employees, particularly any of our executive team members or key technical personnel, could adversely affect
our business. The combination of stock volatility of Company stock and the Company’s small market capitalization may not
allow us to offer competitive equity based compensation to attract and retain key personnel.
If we do not attract additional sales
and technology talent, we may not be able to sustain our growth or achieve our business objectives.
Our future success also depends on our ability
to continue to attract, retain and motivate highly skilled managers and employees, particularly employees with technical skills
that enable us to deliver effective mobile advertising solutions and sales, and client support representatives with experience
in mobile and other digital advertising and strong relationships with brand advertisers and app developers. Competition for these
employees in our industry is intense. As a result, we may be unable to attract or retain these management, technical, sales and
client support personnel that are critical to our success, resulting in harm to our key client relationships, loss of key information,
expertise or know-how and unanticipated recruitment and training costs. The loss of the services of our senior management or other
key employees could make it more difficult to successfully operate our business and pursue our business goals.
We face capacity constraints on our
software and infrastructure systems that may be costly and time-consuming to resolve.
We use proprietary and licensed software and
databases to receive and analyze advertisements, campaigns and budgets, match search queries to advertising, analyze webpage information
to match advertising to relevant content, integrate third-party ads, detect invalid clicks, serve ads in high volume, and track,
analyze and report on advertising responses and campaigns. Any of these software systems may contain undetected errors, defects
or bugs, or may fail to operate with other software applications. The following developments may strain our capacity and result
in technical difficulties with our service or the websites of our distribution network partners:
| · | customization
of our matching algorithms and ad serving technologies, |
| · | substantial
increases in the number of queries to our database, |
| · | substantial
increases in the number of searches in our advertising databases, or |
| · | the
addition of new products or new features or changes to our products. |
If we experience difficulties with our software
and infrastructure systems or if we fail to address these difficulties in a timely manner, we may lose the confidence of search
advertisers and distribution network partners, our revenue may decline and our business could suffer. In addition, as we expand
our service offerings and enter into new business areas, we may be required to significantly modify and expand our software and
infrastructure systems. If we fail to accomplish these tasks in a timely manner, our business will likely suffer.
Our inability to use software licensed
from third parties, or our use of open source software under license terms that interfere with our proprietary rights, could disrupt
our business.
Our technology platform incorporates software
licensed from third parties, including some software, known as open source software, which we use without charge. Although we
monitor our use of open source software, the terms of many open source licenses to which we are subject have not been interpreted
by U.S. or foreign courts, and there is a risk that such licenses could be construed in a manner that imposes unanticipated conditions
or restrictions on our ability to provide our platform to our clients. While we monitor our use of open source software and try
to ensure that none is used in a manner that would require us to disclose our source code or that would otherwise breach the terms
of an open source agreement, such use could inadvertently occur. In the future, we could be required to seek licenses from third
parties in order to continue offering our platform, which licenses may not be available on terms that are acceptable to us, or
at all. Alternatively, we may need to re-engineer our platform or discontinue use of portions of the functionality provided by
our platform. In addition, the terms of open source software licenses may require us to provide software that we develop using
such software to others on unfavorable license terms. We may be required to release our proprietary source code, pay damages for
breach of contract, discontinue sales in the event re-engineering cannot be accomplished on a timely basis or take other remedial
action that may divert resources away from our development efforts. Our inability to use third party software could result in
disruptions to our business, or delays in the development of future offerings or enhancements of existing offerings, which could
impair our business.
If we fail to maintain adequate security
and supporting infrastructure as we scale our systems, we may experience outages and disruptions of our services which could harm
our brand and reputation and negatively impact our revenue and results of operations.
As we grow our business, we expect to continue
to further invest in technology services, hardware and software, including data centers, network services, storage and database
technologies. Creating the appropriate support for our technology platform, including Big Data and our computational infrastructure,
is expensive and complex, and our execution could result in inefficiencies or operational failures and increased vulnerability
to cyber-attacks, which, in turn, could diminish the quality of our services and our performance for advertisers. The steps we
take to increase the reliability, integrity and security of our systems as they scale may be expensive and may not prevent system
failures or unintended vulnerabilities resulting from the increasing number of persons with access to our systems, complex interactions
within our technology platform and the increasing number of connections with third party partners and vendors’ technology.
Operational errors or failures or successful cyber-attacks could result in damage to our reputation and loss of current and new
advertisers and other business partners which could harm our business. In addition, we could be adversely impacted by outages
and disruptions in the online platforms of our key business partners, such as the real-time advertising exchanges, who we rely
upon for access to inventory.
Our data center facility in Phoenix, Arizona
is vulnerable to damage or service interruption resulting from human error, intentional bad acts, earthquakes, hurricanes, floods,
fires, war, terrorist attacks, power losses, hardware failures, systems failures, telecommunications failures and similar events.
Moreover, while we have a disaster recovery plan in place, we do not maintain a “hot failover” instance of our software
platform permitting us to immediately switch over in the event of damage or service interruption at our data center. The occurrence
of a natural disaster or an act of terrorism, any outages or vandalism or other misconduct, or a decision to close the facility
without adequate notice or other unanticipated problems could result in lengthy interruptions in our services.
Any changes in service levels at the facility
or any errors, defects, disruptions or other performance problems at or related to the facility that affect our services could
harm our reputation and may damage our customers’ businesses. Interruptions in our services might reduce our revenues, subject
us to potential liability, or result in reduced usage of our platform. In addition, some of our customer contracts require us
to issue credits for downtime in excess of certain levels and in some instances give our customers the ability to terminate their
subscriptions.
Our data and information systems and
network infrastructure may be subject to hacking or other cyber security threats. If our security measures are breached and an
unauthorized party obtains access to our customer data or our proprietary business information, our information systems may be
perceived as being unsecure, which could harm our business and reputation, and our proprietary business information could be misappropriated
which could have an adverse effect on our business and results of operations.
In our operations, we store and transmit our
proprietary information and information related to our customers. Our operations are dependent upon the connectivity and continuity
of our facilities and operations. Despite our security measures, our information systems and network infrastructure may be vulnerable
to cyber-attacks or could be breached due to an employee error or other disruption that could result in unauthorized disclosure
of sensitive information which has the potential to significantly interfere with our business operations. Breaches of our security
measures could expose us to a risk of loss or misuse of this information, litigation and potential liability. Since techniques
used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures in advance
of such an attack on our systems. In addition, if we select a vendor that uses cyber or “cloud” storage of information
as part of their service or product offerings, despite our attempts to validate the security of such services, our proprietary
information may be misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security
of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer
damage to our reputation or our business, or lose existing customers and lose our ability to obtain new customers. Additionally,
misappropriation of our proprietary business information could prove competitively harmful to our business.
Errors or failures in our software and
systems could adversely affect our operating results and growth prospects.
We depend upon the sustained and uninterrupted
performance of our technology platform to operate over 1,000 campaigns at any given time; manage our inventory supply; bid on
inventory for each campaign; serve or direct a third party to serve advertising; collect, process and interpret data to optimize
campaign performance in real time; and provide billing information to our financial systems. If our technology platform cannot
scale to meet demand, or if there are errors in our execution of any of these functions on our platform, then our business could
be harmed. Because our software is complex, undetected errors and failures may occur, especially when new versions or updates
are made. We do not have the capability to test new releases or updates to our code on a small subset of campaigns, which means
that bugs or errors in code could impact all campaigns on our platform. Despite testing by us, errors or bugs in our software
have in the past, and may in the future, not be found until the software is in our live operating environment. For example, we
may experience failures in our bidding system to recognize or respond to budget restrictions for campaigns, resulting in overspending
on media, and we may in the future have failures in our systems that cause us to buy more media than our advertisers are contractually
obligated to pay for, which could be costly and harm our operating results. Errors or failures in our software could also result
in negative publicity, damage to our brand and reputation, loss of or delay in market acceptance of our solution, increased costs
or loss of revenue, loss of competitive position or claims by advertisers for losses sustained by them. In such an event, we may
be required or choose to expend additional resources to help mitigate any problems resulting from errors in our software. We may
make errors in the measurement of our campaigns causing discrepancies with our advertisers’ measurements leading to a lack
in confidence with us or, on occasion, the need for advertiser “make-goods,” the standard credits given to advertisers
for campaigns that have not been delivered properly. Alleviating problems resulting from errors in our software could require
significant expenditures of capital and other resources and could cause interruptions, delays or the cessation of our business,
any of which would adversely impact our financial position, results of operations and growth prospects.
Software and components that we incorporate
into our advertising platform may contain errors or defects, which could harm our reputation and hurt our business.
We use a combination of custom and third party
software, including open source software, in building our advertising platforms. Although we test software before incorporating
it into our platforms, we cannot guarantee that all of the third party technology that we incorporate will not contain errors,
bugs or other defects. We continue to launch enhancements to our mobile advertising platform, and we cannot guarantee any such
enhancements will be free from these kinds of defects. If errors or other defects occur in technology that we utilize in our mobile
advertising platform, it could result in damage to our reputation and losses in revenue, and we could be required to spend significant
amounts of additional resources to fix any problems.
If we do not comply with the financial
covenants in our credit agreements, our financial condition could be adversely affected.
Our credit facilities contain provisions that
could limit our ability to, among other things, incur, create or assume additional debt, sell or otherwise dispose of our or any
of our subsidiaries’ assets, or consolidate or merge with or into, or acquire the obligations or stock of, or any other
interest in, another person. In addition, our credit facilities contain financial covenants that require us to maintain specified
levels of tangible net worth and liquid assets. Our ability to meet those financial covenants can be affected by events beyond
our control, and we may be unable to satisfy these covenants. If we fail to comply with these covenants, we may be required to
identify restricted cash equal to our outstanding capital lease balance, if any, plus our outstanding standby letter of credit
(“SBLC”) or, in the event of default, we may be required to pay the lenders cash in an amount equal to the
capital lease balance, if any is outstanding. Paying such cash balances could have a material adverse effect on the Company’s
financial condition.
Economic downturns and political and
market conditions beyond our control could adversely affect our business, financial condition and results of operations.
Our business depends on the overall demand
for advertising and on the economic health of our current and prospective advertisers. Economic downturns or instability in political
or market conditions may cause current or new advertisers to reduce their advertising budgets. Adverse economic conditions and
general uncertainty about economic recovery are likely to affect our business prospects. In particular, uncertainty regarding
the budget crisis in the United States may cause general business conditions in the United States and elsewhere to deteriorate
or become volatile, which could cause advertisers to delay, decrease or cancel purchases of our solution, This could expose us
to increased credit risk on advertiser orders, which, in turn, could negatively impact our business, financial condition and results
of operations. In addition, concerns over the sovereign debt situation in certain countries in the EU as well as continued geopolitical
turmoil in many parts of the world have, and may continue to, put pressure on global economic conditions, which could lead to
reduced spending on advertising.
Cyclical and seasonal fluctuations in
the economy, in internet usage and in traditional retail shopping may have an effect on our business.
Both cyclical and seasonal fluctuations in
internet usage and traditional retail seasonality may affect our business. Internet usage generally slows during the summer months,
and queries typically increase significantly in the fourth quarter of each year. These seasonal trends may cause fluctuations
in our quarterly results, including fluctuations in sequential revenue growth rates.
Seasonal fluctuations in advertising
activity could adversely affect our cash flows.
Our cash flows from operations could vary
from quarter to quarter due to the seasonal nature of our advertisers’ spending. For example, many advertisers devote the
largest portion of their budgets to the fourth quarter of the calendar year, to coincide with increased holiday purchasing. To
date, these seasonal effects have been masked by our rapid revenue growth. However, if and to the extent that seasonal fluctuations
become more pronounced, our operating cash flows could fluctuate materially from period to period as a result.
If we fail to prevent, detect and remove
invalid search queries and clicks, we could lose the confidence of our search advertisers, thereby causing our business to suffer.
Invalid clicks are an ongoing problem for
the Internet search advertising industry, and we are exposed to the risk of invalid clicks on customers’ text advertisements
coming from within our distribution network. Invalid clicks occur when a person or robotic software causes a click on a paid listing
to occur for some reason other than to view the underlying content. Invalid clicks are commonly referred to as “click fraud.”
We continue to invest significant time and resources in preventing, detecting and eliminating invalid traffic from our distribution
network. However, the perpetrators of click fraud have developed sophisticated methods to evade detection, and we are unlikely
to be able to completely detect and remove all invalid traffic from our search network.
Currently and in the past we have been subject
to advertiser complaints and litigation regarding invalid clicks, and we may be subject to search advertising customer complaints,
claims, litigation or inquiries in the future. We have from time to time credited invoices or refunded revenue to our customers
due to invalid traffic, and we expect to continue to do so in the future. If our systems to detect invalid traffic are insufficient,
or if we find new evidence of past invalid clicks, we may have to issue credits or refunds retroactively to our search advertisers,
and we may still have to pay revenue share to our distribution network partners. This could negatively affect our profitability
and hurt our brand. If traffic consisting of invalid clicks is not detected and removed from our advertising network, the affected
search advertising customers may experience a reduced return on their investment in our online advertising because the invalid
clicks will not lead to conversions for the search advertising customers. This could lead the search advertisers to become dissatisfied
with our products, which could lead to loss of search advertising customers and revenue and could materially and adversely affect
our financial results.
We compete with many companies, some
of whom are more established and better capitalized than us.
We compete with a variety of companies on
a worldwide basis both through the Internet and in traditional markets. Many of these companies are larger and better capitalized
than us. There are also few barriers to entry in our markets. Our competitors may develop services that are superior to, or have
greater market acceptance than our services. For example, many of our current and potential competitors have longer operating
histories, significantly greater financial, technical, marketing and other resources and larger customer bases than us. These
factors may allow our competitors to respond more quickly than we can to new or emerging technologies and changes in customer
requirements. Our competitors may engage in more extensive research and development efforts, undertake more far-reaching marketing
campaigns and adopt more aggressive pricing policies which may allow them to build larger client bases. In addition, current and
potential competitors are making, and are expected to continue to make, strategic acquisitions or establish cooperative, and,
in some cases, exclusive relationships with significant companies or competitors to expand their businesses or to offer more comprehensive
products and services.
System failures could significantly
disrupt our operations and cause us to lose advertiser customers or advertising inventory.
Our success depends on the continuing and
uninterrupted performance of our own internal systems, which we utilize to distribute and place ads, monitor the performance of
advertising campaigns and manage inventory of advertising space. Our revenue depends on the technological ability of our platforms
to deliver ads and measure them on a per click basis. Sustained or repeated system failures that interrupt our ability to provide
services to customers, including technological failures affecting our ability to deliver ads quickly and accurately and to process
users’ responses to ads, could significantly reduce the attractiveness of our services to advertisers and reduce our revenue.
Our systems are vulnerable to damage from a variety of sources, including telecommunications failures, power outages, malicious
human acts and natural disasters. In addition, any steps we take to increase the reliability and redundancy of our systems may
be expensive and may not ultimately be successful in preventing system failures.
Any failure in the performance of our
key production systems could materially and adversely affect our revenues.
Any system failure that interrupts our hosted
products or services, whether caused by computer viruses, software failure, power interruptions, intruders, hackers, or other
causes, could harm our financial results. For example, our system for tracking and invoicing clicks is dependent upon a proprietary
software platform. If we lose key personnel or experience a failure of software, this system may fail. In such event, we may be
unable to track paid clicks and invoice our customers, which would materially and adversely affect our financial results and business
reputation. Moreover, our services are governed by Service Level Agreements that, if not met, require the payment of credits to
our customers depending upon the level of service interruption.
The occurrence of a natural disaster or unanticipated
problems at our principal headquarters or at a third-party data center could cause interruptions or delays in our business. A
loss of data could render us unable to provide some services. Our California facilities exist on or near known earthquake fault
zones and a significant earthquake could cause an interruption in our services. An interruption in our ability to serve advertisements,
track paid clicks, bill and collect invoices, and provide customer support would materially and adversely affect our financial
results.
Our business and operations depend on
Internet service providers and third party technology providers, and any failure or system downtime experienced by these companies
could materially and adversely affect our revenues.
Our distribution network partners and search
advertising customers depend on Internet service providers, online service providers and other third parties for access to our
services. These service providers have experienced significant outages in the past and could experience outages, delays and other
operating difficulties in the future. The occurrence of any or all of these events could adversely affect our reputation, brand
and business, which could have a material adverse effect on our financial results.
We have agreements with third-party click
tracking and ad-serving technology providers. We do not presently maintain fully redundant click tracking, customer account, and
web serving systems at separate locations. Accordingly, our operations depend on the ability of our data center to protect the
systems in their data centers from system failures, earthquake, fire, power loss, water damage, telecommunications failure, hacking,
vandalism, and similar events. We cannot guarantee that our Internet access will be uninterrupted, error-free or secure. Although
we maintain property insurance and business interruption insurance, such insurance may not protect against some risks and we cannot
guarantee that our insurance will be adequate to compensate us for all losses that may occur as a result of a catastrophic system
failure. Also, if our third-party click tracking or ad-serving technology providers experience service interruptions, errors or
security breaches, our ability to track, realize, and record revenue would suffer.
We may face liability for claims related
to our products and services, and these claims may be costly to resolve.
Internet users, search advertisers, other
customers, and companies in the Internet, technology and media industries frequently enter into litigation based on allegations
related to defamation, negligence, personal injury, breach of contract, unfair advertising, unfair competition, invasion of privacy,
patent infringement or other claims. Lawsuits are filed against us from time to time. As we enter foreign markets, our potential
liability could increase. In addition, we are obligated in some cases to indemnify our customers or distribution network partners
in the event that they are subject to claims that our services infringe on the rights of others.
Litigating these claims could consume significant
amounts of time and money, divert management’s attention and resources, cause delays in integrating acquired technology
or releasing new products, or require us to enter into royalty or licensing agreements. Royalty or licensing agreements, if required,
may not be available on acceptable terms, if at all. Our insurance may not adequately cover claims of this type, if at all. If
a court were to determine that some aspect of our services infringed upon or violated the rights of others, we could be prevented
from offering some or all of our services, which would negatively impact our revenue and business. For any of the foregoing reasons,
litigation involving our listings business and technology could have a material adverse effect on our business, operating results
and financial condition.
Our failure to protect our intellectual
property rights could diminish the value of our services, weaken our competitive position and reduce our revenue.
We regard the protection of our intellectual
property, which includes trade secrets, patents, copyrights, trademarks, domain names and patent applications, as critical to
our success. We strive to protect our intellectual property rights by relying on federal, state and common law rights, as well
as contractual restrictions. We enter into confidentiality and invention assignment agreements with our employees and contractors,
and confidentiality agreements with third parties with whom we conduct business in order to limit access to, and disclosure and
use of, our intellectual property and proprietary information. However, these contractual arrangements and the other steps we
have taken to protect our intellectual property may not prevent the misappropriation of our proprietary information or deter independent
development of similar technologies by others.
We seek patent protection for certain of our
technologies and currently have three issued U.S. patents. We are also pursuing the registration of our domain names, trademarks
and service marks in the United States and in certain locations outside the United States. Effective trade secret, copyright,
trademark, domain name and patent protection is expensive to develop and maintain, both in terms of initial and ongoing registration
requirements and the costs of defending our rights. We may be required to protect our intellectual property in an increasing number
of jurisdictions, a process that is expensive and may not be successful or which we may not pursue in every location. We may,
over time, increase our investment in protecting our intellectual property through additional patent filings that could be expensive
and time-consuming.
We have licensed in the past, and expect to
license in the future, some of our proprietary rights, such as trademarks or copyrighted material, to third parties. These licensees
may take unauthorized actions that diminish the value of our proprietary rights or harm our reputation.
Monitoring unauthorized use of our intellectual
property is difficult and costly. Our efforts to protect our proprietary rights may not be adequate to prevent misappropriation
of our intellectual property. Further, we may not be able to detect unauthorized use of, or take appropriate steps to enforce,
our intellectual property rights. Our competitors may also independently develop similar technology. In addition, the laws of
many countries, such as China and India, do not protect our proprietary rights to as great an extent as do the laws of European
countries and the United States. Further, the laws in the United States and elsewhere change rapidly, and any future changes could
adversely affect us and our intellectual property rights. Our failure to meaningfully protect our intellectual property could
result in competitors offering services that incorporate our most technologically advanced features, which could seriously reduce
demand for our mobile advertising services. In addition, we may in the future need to initiate infringement claims or litigation.
Litigation, whether we are a plaintiff or a defendant, can be expensive, time-consuming and may divert the efforts of our technical
staff and managerial personnel, which could harm our business, whether or not such litigation results in a determination that
is unfavorable to us. In addition, litigation is inherently uncertain, and thus we may not be able to stop our competitors from
infringing upon our intellectual property rights.
We could be subject to infringement
claims that may be costly to defend, result in the payment of settlements or damages or cause us to change the way we conduct
our business.
Internet, technology and media companies,
as well as patent holding companies often possess a significant number of patents. Further, many of these companies and other
parties are actively developing online advertising, search, indexing, electronic commerce and other Web-related technologies,
as well as a variety of online business models and methods. We believe that these parties will continue to take steps to protect
these technologies, including, but not limited to, seeking patent protection. As a result, we may face claims of infringement
of patents and other intellectual property rights held by others. Also, as we expand our business, acquire and maintain our customer
base, and develop new technologies, products and services, we may become increasingly subject to intellectual property infringement
claims. In the event that there is a claim or determination that we infringe third-party proprietary rights such as patents, copyrights,
trademark rights, trade secret rights or other third party rights such as publicity and privacy rights, we could incur substantial
monetary liability, be required to enter into costly royalty or licensing agreements or be prevented from using the rights, which
could require us to change our business practices in the future and limit our ability to compete effectively. We may also incur
substantial expenses in defending against third-party infringement claims regardless of the merit of such claims. The occurrence
of any of these results could harm our brand and negatively impact our operating results. In addition, many of our agreements
with our customers, partners and affiliates require us to indemnify them for certain third-party intellectual property infringement
claims or determinations, which could increase our costs in defending such claims and our damages.
Litigation, regulation, legislation
or enforcement actions directed at or materially affecting us may adversely affect the commercial use of our products and services
and our financial results.
New lawsuits, laws, regulations and enforcement
actions applicable to the online industry may limit the delivery, appearance and content of our advertising or our publisher customers’
advertisers or otherwise adversely affect our business. If such laws are enacted, or if existing laws are interpreted to restrict
the types and placements of advertisements we or our publishers’ customers can carry, it could have a material and adverse
effect on our financial results. For example, in 2002, the Federal Trade Commission, in response to a petition from a private
organization, reviewed the way in which search engines disclose paid placement or paid inclusion practices to Internet consumers
and issued guidance on what disclosures are necessary to avoid misleading consumers about the possible effects of paid placement
or paid inclusion listings on the search results. In 2003, the United States Department of Justice issued statements indicating
its belief that displaying advertisements for online gambling might be construed as aiding and abetting an illegal activity under
federal law. In 2004, the United States Congress considered new laws regarding the sale of pharmaceutical products over the Internet
and the use of adware to distribute advertisements on the Internet. In 2007, the Federal Trade Commission proposed new regulations
relating to online behavioral targeting. Moreover, as we enter into foreign markets, we may become subject to additional regulation
and legislation. If any new law or government agency were to require changes in the labeling, delivery or content of our advertisements,
or if we are subject to legal proceedings regarding these issues, it may reduce the desirability of our services or the types
of advertisements that we can run, and our business could be materially and adversely harmed. In addition, many of our agreements
with our customers, partners and affiliates require us to indemnify them for certain claims related to online advertising laws,
regulations and enforcement actions, which could increase our costs in defending such claims and our damages.
In addition, legislation or regulations, including
compliance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), present ongoing compliance risks, and
a failure to comply with these new laws and regulations could materially harm our business. As we continue our Section 404 compliance
efforts we may identify significant deficiencies, or material weaknesses, in the design and operation of our internal control
over financial reporting. We may be unable to remediate any of these matters in a timely fashion, and/or our independent registered
public accounting firm may not agree with our remediation efforts. Such failures could impact our ability to record, process,
summarize and report financial information, and could impact market perception of the quality of our financial reporting, which
could adversely affect our business and our stock price.
On October 3, 2013, WeBoost Media S.R.L.,
a Societa responsabilita (“WeBoost”) filed a complaint against LookSmart with the Superior Court of California
for the County of San Francisco. The matter was subsequently removed and is currently pending before the United States District
Court, Northern District of California. WeBoost’s complaint asserts claims for breach of contract and extra-contractual
tort and punitive damages related to "click fraud". No specific monetary amounts are indicated in the complaint. LookSmart
believes the claims are meritless and continues to vigorously defend the matter. The Company is unable to presently determine
the risk of loss associated with this matter.
Furthermore, the Company is involved, from
time to time, in various other legal proceedings arising from the normal course of business activities. Although the results of
litigation and claims cannot be predicted with certainty, the Company does not expect resolution of these matters to have a material
adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise. However, an
unfavorable resolution of a matter could, depending on its amount and timing, materially affect its results of operations, cash
flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company
because of defense costs, diversion of management resources and other factors.
Activities of our advertiser customers
could damage our reputation or give rise to legal claims against us.
Our advertiser customers’ promotion
of their products and services may not comply with federal, state and local laws, including, but not limited to, laws and regulations
relating to mobile communications. Failure of our customers to comply with federal, state or local laws or our policies could
damage our reputation and expose us to liability under these laws. We may also be liable to third parties for content in the ads
we deliver if the artwork, text or other content involved violates copyrights, trademarks or other intellectual property rights
of third parties or if the content is defamatory, unfair and deceptive, or otherwise in violation of applicable laws. Although
we generally receive assurance from our advertisers that their ads are lawful and that they have the right to use any copyrights,
trademarks or other intellectual property included in an ad, and although we are normally indemnified by the advertisers, a third
party or regulatory authority may still file a claim against us. Any such claims could be costly and time-consuming to defend
and could also hurt our reputation. Further, if we are exposed to legal liability as a result of the activities of our advertiser
clients, we could be required to pay substantial fines or penalties, redesign our business methods, discontinue some of our services
or otherwise expend significant resources.
Our business practices with respect
to data could give rise to liabilities or reputational harm as a result of governmental regulation, legal requirements or industry
standards relating to consumer privacy and data protection.
In the course of providing our services, we
transmit and store information related to the ads we place. Federal, state and international laws and regulations can govern the
collection, use, retention, sharing and security of data that we collect across our advertising platform. We strive to comply
with all applicable laws, regulations, policies and legal obligations relating to privacy and data protection. However, it is
possible that these requirements may be interpreted and applied in a manner that is inconsistent from one jurisdiction to another
and may conflict with other rules or our practices. Any failure, or perceived failure, by us to comply with U.S. federal, state,
or international laws, including laws and regulations regulating privacy, data security, or consumer protection, could result
in proceedings or actions against us by governmental entities or others. We are aware of several ongoing lawsuits filed against
companies in our industry alleging various violations of privacy-related laws. Any such proceedings could hurt our reputation,
force us to spend significant amounts in defense of these proceedings, distract our management, increase our costs of doing business,
adversely affect the demand for our services and ultimately result in the imposition of monetary liability. We may also be contractually
liable to indemnify and hold harmless our clients from the costs or consequences of inadvertent or unauthorized disclosure of
data that we store or handle as part of providing our services.
The regulatory framework for privacy issues
worldwide is evolving, and various government and consumer agencies and public advocacy groups have called for new regulation
and changes in industry practices. For example, in early 2012, the State of California entered into an agreement with several
major mobile app platforms under which the platforms have agreed to require mobile apps to meet specified standards to ensure
consumer privacy. Subsequently, in January 2013, the State of California released a series of recommendations for privacy best
practices for the mobile industry. In January 2014, a California law also became effective amending the required disclosures for
online privacy policies. It is possible that new laws and regulations will be adopted in the United States and internationally,
or existing laws and regulations may be interpreted in new ways, that would affect our business.
As we expand our operations globally, compliance
with regulations that differ from country to country may also impose substantial burdens on our business. In particular, the European
Union has traditionally taken a broader view as to what is considered personal information and has imposed greater obligations
under data privacy regulations. In addition, individual EU member countries have had discretion with respect to their interpretation
and implementation of the regulations, which has resulted in variation of privacy standards from country to country. In January
2012, the European Commission announced significant proposed reforms to its existing data protection legal framework, including
changes in obligations of data controllers and processors, the rights of data subjects and data security and breach notification
requirements. The EU proposals, if implemented, may result in a greater compliance burden if we deliver ads to mobile device users
in Europe. Complying with any new regulatory requirements could force us to incur substantial costs or require us to change our
business practices in a manner that could compromise our ability to effectively pursue our growth strategy.
Privacy-related regulation of the Internet
could limit the ways we currently collect and use personal information, which could decrease our advertising revenues or increase
our costs.
Internet user privacy has become an issue
both in the United States and abroad. The United States Congress and Federal Trade Commission are considering new legislation
and regulations to regulate Internet privacy. The Federal Trade Commission and government agencies in some states and countries
have investigated some Internet companies, and lawsuits have been filed against some Internet companies, regarding their handling
or use of personal information. Any laws imposed to protect the privacy of Internet consumers may affect the way in which we collect
and use personal information. We could incur additional expenses if new laws or court judgments, in the United States or abroad,
regarding the use of personal information are introduced or if any agency chooses to investigate our privacy practices.
We, along with some of our distribution network
partners or search advertising customers, retain information about our consumers. If others were able to penetrate the network
security of these user databases and access or misappropriate this information, we and our distribution network partners or search
advertising customers could be subject to liability. These claims may result in litigation, our involvement in which, regardless
of the outcome, could require us to expend significant time and financial resources. In addition, many of our agreements with
our customers, partners and affiliates require us to indemnify them for certain claims related to privacy laws, regulations and
enforcement actions which could increase our costs in defending such claims and damages.
Legislation and regulation of online
businesses, including privacy and data protection regimes, could create unexpected costs, subject us to enforcement actions for
compliance failures, or cause us to change our technology platform or business model, which could have a material adverse effect
on our business.
Government regulation could increase the costs
of doing business online. U.S. and foreign governments have enacted or are considering legislation related to online advertising
and we expect to see an increase in legislation and regulation related to advertising online, the use of geo-location data to
inform advertising, the collection and use of anonymous Internet user data and unique device identifiers, such as IP address or
unique mobile device identifiers, and other data protection and privacy regulation. Recent revelations about bulk online data
collection by the National Security Agency, and news articles suggesting that the National Security Agency may gather data from
cookies placed by Internet advertisers to deliver interest based advertising, may further interest governments in legislation
regulating data collection by commercial entities, such as advertisers and publishers and technology companies that serve the
advertising industry. Such legislation could affect the costs of doing business online, and could reduce the demand for our solution
or otherwise harm our business, financial condition and results of operations. For example, a wide variety of provincial, state,
national and international laws and regulations apply to the collection, use, retention, protection, disclosure, transfer and
other processing of personal data. While we have not collected data that is traditionally considered personal data, such as name,
email address, address, phone numbers, social security numbers, credit card numbers, financial or health data, we may obtain information
that are or may be considered personal data in some jurisdictions or otherwise may be the subject of legislation or regulation.
Evolving and changing definitions of personal data, within the EU, the United States and elsewhere, could cause us in the future,
to change our business practices, or limit or inhibit our ability to operate or expand our business. Data protection and privacy-related
laws and regulations are evolving and could result in ever-increasing regulatory and public scrutiny and escalating levels of
enforcement and sanctions. While we take measures to protect the security of information that we collect, use and disclose in
the operation of our business, and to offer certain privacy protections with respect to such information, such measures may not
always be effective. In addition, while we take steps to avoid collecting personally identifiable information about consumers,
we may inadvertently receive this information from advertisers or advertising agencies or through the process of delivering advertising.
Our failure to comply with applicable laws and regulations, or to protect personal data, could result in enforcement action against
us, including fines, imprisonment of our officers and public censure, claims for damages by consumers and other affected individuals,
damage to our reputation and loss of goodwill, any of which could have a material adverse impact on our business, financial condition
and results of operations. Even the perception of privacy concerns, whether or not valid, could harm our reputation and inhibit
adoption of our solution by current and future advertisers and advertising agencies.
If the use of “third party cookies”
is rejected by Internet users, restricted or otherwise subject to unfavorable regulation, our performance could decline and we
could lose advertisers and revenue.
Advertisers and our partners use “cookies”
(small text files) to gather important data in the delivery of advertisements. These cookies are placed through an Internet browser
on an Internet user’s computer and correspond to a data set. These cookies are known as “third party” cookies
because of a lack of a direct relationship with the Internet user. These cookies collect anonymous information, such as when an
Internet user views an ad, clicks on an ad, or visits one of our advertiser customer’s websites. On mobile devices, there
may also be location based information about the user’s device. These cookies are used to help achieve our advertiser customer’s
campaign goals, to help ensure that the same Internet user does not unintentionally see the same advertisement too frequently,
to report aggregate information to advertisers regarding the performance of their advertising campaigns and to detect and prevent
fraudulent activity throughout our network of inventory. Data from cookies are also used to help decide whether to bid on, and
how much to bid on, an opportunity to place an advertisement in a certain location, at a given time, in front of a particular
Internet user. A lack of data associated with cookies may detract from the ability to make decisions about which inventory to
purchase for an advertiser’s campaign, and undermine the effectiveness of our solution.
Cookies may easily be deleted or blocked by
Internet users. All of the most commonly used Internet browsers (including Chrome, Firefox, Internet Explorer, and Safari) allow
Internet users to prevent cookies from being accepted by their browsers. Internet users can also delete cookies from their computers
at any time. Some Internet users also download “ad blocking” software that prevents cookies from being stored on a
user’s computer. If more Internet users adopt these settings or delete their cookies more frequently than they currently
do, our business could be harmed. In addition, the Safari browser blocks cookies by default, and other browsers may do so in the
future. Unless such default settings in browsers were altered by Internet users, we would be able to set fewer of our cookies
in browsers, which could adversely affect our business. In addition, companies such as Google have publicly disclosed their intention
to move away from cookies to another form of persistent unique identifier, or ID, to indicate Internet users in the bidding process
on advertising exchanges. If companies do not use shared IDs across the entire ecosystem, this could have a negative impact on
our ability to find the same anonymous user across different web properties, and reduce the effectiveness of our solution.
In addition, in the European Union, or EU,
Directive 2009/136/EC, commonly referred to as the “Cookie Directive,” directs EU member states to ensure that accessing
information on an Internet user’s computer, such as through a cookie, is allowed only if the Internet user has given his
or her consent. We may not be able to develop or implement additional tools that compensate for the lack of data associated with
cookies. Moreover, even if we are able to do so, such additional tools may be subject to further regulation, time consuming to
develop or costly to obtain, and less effective than our current use of cookies.
Potential “Do Not Track”
standards or government regulation could negatively impact our business by limiting access to the anonymous user data that informs
the advertising campaigns we facilitate, and as a result could degrade our performance for our customers.
As the use of cookies has received ongoing
media attention over the past three years, some government regulators and privacy advocates have suggested creating a “Do
Not Track” standard that would allow Internet users to express a preference, independent of cookie settings in their web
browser, not to have their website browsing recorded. All the major Internet browsers have implemented some version of a “Do
Not Track” setting. Microsoft’s Internet Explorer 10 includes a “Do Not Track” setting that is selected
“on” by default. However, there is no definition of “tracking,” no consensus regarding what message is
conveyed by a “Do Not Track” setting and no industry standards regarding how to respond to a “Do Not Track”
preference. It is possible that we could face competing policy standards, or standards that put our business model at a competitive
disadvantage to other companies that collect data from Internet users, standards that reduce the effectiveness of our solution,
or standards that require us to make costly changes to our solution. The Federal Trade Commission has stated that it will pursue
a legislative solution if the industry cannot agree upon a standard. The “Do-Not-Track Online Act of 2013” was introduced
in the United States Senate in February 2013. If a “Do Not Track” web browser setting is adopted by many Internet
users, and the standard either imposed by state or federal legislation, or agreed upon by standard setting groups, requires us
to recognize a “Do Not Track” signal and prohibits the use of non-personal data as currently done, then that could
hinder growth of advertising and content production on the web generally, and limit the quality and amount of data we are able
to store and use, which would cause us to change our business practices and adversely affect our business.
Our business involves the use, transmission
and storage of confidential information, and the failure to properly safeguard such information could result in significant reputational
harm and monetary damages.
We may at times collect, store and transmit
information of, or on behalf of, our clients that may include certain types of confidential information that may be considered
personal or sensitive, and that are subject to laws that apply to data breaches. We believe that we take reasonable steps to protect
the security, integrity and confidentiality of the information we collect and store, but there is no guarantee that inadvertent
or unauthorized disclosure will not occur or that third parties will not gain unauthorized access to this information despite
our efforts to protect this information. If such unauthorized disclosure or access does occur, we may be required to notify persons
whose information was disclosed or accessed. Most states have enacted data breach notification laws and, in addition to federal
laws that apply to certain types of information, such as financial information, federal legislation has been proposed that would
establish broader federal obligations with respect to data breaches. We may also be subject to claims of breach of contract for
such disclosure, investigation and penalties by regulatory authorities and potential claims by persons whose information was disclosed.
The unauthorized disclosure of information may result in the termination of one or more of our commercial relationships or a reduction
in client confidence and usage of our services. We may also be subject to litigation alleging the improper use, transmission or
storage of confidential information, which could damage our reputation among our current and potential clients, require significant
expenditures of capital and other resources and cause us to lose business and revenue.
Online commerce security risks, including
security breaches, identity theft, service disrupting attacks and viruses, could harm our reputation and the conduct of our business,
which could have a material adverse effect on our financial results.
A fundamental requirement for online commerce
and communications is the secure storage and transmission of confidential information over public networks. Although we have developed
and use systems and processes that are designed to protect customer information and prevent fraudulent credit card transactions
and other security breaches, our security measures may not prevent security breaches or identity theft that could harm our reputation
and business. Currently, a significant number of our customers provide credit card and other financial information and authorize
us to bill their credit card accounts directly for all transaction fees charged by us. We rely on encryption and authentication
technology to provide the security and authentication to effect secure transmission of confidential information, including customer
credit card numbers. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may
result in a compromise or breach of the technology used by us to protect transaction data. In addition, any party who is able
to illicitly obtain a user’s password could access the user’s transaction data. An increasing number of websites have
reported breaches of their security. Any compromise of our security could damage our reputation and expose us to a risk of litigation
and possible liability. The coverage limits of our insurance policies may not be adequate to reimburse us for losses caused by
security breaches.
Additionally, our servers are vulnerable to
computer viruses, physical or electronic break-ins, and similar disruptions, and we have experienced “denial-of-service”
type attacks on our system that have made all or portions of our websites unavailable for periods of time. We may need to expend
significant resources to protect against security breaches or to address problems caused by breaches. Disruptions in our services
and damage caused by viruses and other attacks could cause a loss of user confidence in our systems and services, which could
lead to reduced usage of our products and services and materially adversely affect our business and financial results.
Our data and information systems and
network infrastructure may be subject to hacking or other cyber security threats. If our security measures are breached and an
unauthorized party obtains access to our customer data or our proprietary business information, our information systems may be
perceived as being unsecure, which could harm our business and reputation, and our proprietary business information could be misappropriated
which could have an adverse effect on our business and results of operations.
In our operations, we store and transmit our
proprietary information and information related to our customers. Our operations are dependent upon the connectivity and continuity
of our facilities and operations. Despite our security measures, our information systems and network infrastructure may be vulnerable
to cyber-attacks or could be breached due to an employee error or other disruption that could result in unauthorized disclosure
of sensitive information which has the potential to significantly interfere with our business operations. Breaches of our security
measures could expose us to a risk of loss or misuse of this information, litigation and potential liability. Since techniques
used to obtain unauthorized access or to sabotage information systems change frequently and generally are not recognized until
launched against a target, we may be unable to anticipate these techniques or to implement adequate preventive measures in advance
of such an attack on our systems. In addition, if we select a vendor that uses cyber or “cloud” storage of information
as part of their service or product offerings, despite our attempts to validate the security of such services, our proprietary
information may be misappropriated by third parties. In the event of an actual or perceived breach of our security, or the security
of one of our vendors, the market perception of the effectiveness of our security measures could be harmed and we could suffer
damage to our reputation or our business, or lose existing customers and lose our ability to obtain new customers. Additionally,
misappropriation of our proprietary business information could prove competitively harmful to our business.
New tax treatment of companies engaged
in Internet commerce may adversely affect the commercial use of our search service and our financial results.
Tax authorities at the international, federal,
state and local levels are currently reviewing the appropriate tax treatment of companies engaged in Internet commerce. New or
revised state tax regulations may subject us or our search advertising customers to additional state sales, income and other taxes.
We cannot predict the effect of current attempts to impose sales, income or other taxes on commerce over the Internet. New or
revised taxes and, in particular, sales taxes, would likely increase the cost of doing business online and decrease the attractiveness
of advertising and selling goods and services over the Internet. Any of these events could have an adverse effect on our business
and results of operations.
Our quarterly revenues and operating
results may fluctuate for many reasons, which may make our future results difficult to predict and could cause our operating results
to fall below investors’ and analysts; expectations, negatively affecting our stock price.
Our revenues and operating results have fluctuated
in the past, and will likely fluctuate significantly from quarter to quarter as a result of a variety of factors, many of which
are beyond our control. Because our business is changing and evolving rapidly, our historical operating results may not be useful
in predicting our future operating results. Factors that may cause fluctuations in our operating results include, without limitation:
| · | changes
in the composition and size of our Advertiser Network customer base; |
| · | changes
in composition of our AdCenter customer base; |
| · | the
seasonal nature of our customers’ spending on digital advertising campaigns; |
| · | the
pricing of advertising inventory or of other third-party services; |
| · | changes
in our distribution network, particularly the gain or loss of key distribution network
partners, or changes in the implementation of search results on partner websites; |
| · | changes
in the intermediary business model which affect the entire online search advertising
ecosystem; |
| · | changes
in the number of search advertising customers who do business with us, or the amount
of spending per customer; |
| · | the
introduction of new technologies, product or service offerings by our competitors; |
| · | changes
in our customers’ advertising budget allocations, agency affiliations or marketing
strategies; |
| · | the
revenue-per-click we receive from search advertising customers, or other factors that
affect the demand for, and prevailing prices of, Internet advertising and marketing services; |
| · | changes
to our traffic acquisition costs related to our Advertiser Network, including changes
to the economic prospects of our advertisers generally, which could alter current or
prospective advertisers’ spending priorities and increase the time or costs required
to complete sales with advertisers; |
| · | changes
and uncertainty in the regulatory environment for us or our advertisers; |
| · | changes
in the availability of advertising inventory through real-time advertising exchanges,
or in the cost to reach end consumers through digital advertising; |
| · | changes
in our capital expenditures as we acquire the hardware, equipment and other assets required
to support our business; |
| · | costs
related to the acquisition of people, business or technologies; and |
| · | systems
downtime on our Advertiser Network, our website or the websites of our distribution network
partners. |
Due to the above factors, we believe that
period-to-period comparisons of our financial results are not necessarily meaningful, and you should not rely on past financial
results as an indicator of our future performance. If our financial results in any future period fall below the expectations of
securities analysts and investors, the market price of our securities would likely decline.
Our stock price is extremely volatile,
and such volatility may hinder investors’ ability to resell their shares for a profit or avoid a loss.
The stock market has experienced significant
price and volume fluctuations in recent years, and the stock prices of Internet companies have been extremely volatile. The low
trading volume of our common stock may adversely affect its liquidity and reduce the number of market makers and/or large investors
willing to trade in our common stock, making wider fluctuations in the quoted price of our common stock more likely to occur.
You should evaluate our business in light of the risks, uncertainties, expenses, delays and difficulties associated with managing
and growing a business in a relatively new industry, many of which are beyond our control.
Our stock price may fluctuate, and you may
not be able to sell your shares for a profit, as a result of a number of factors, including, without limitation:
| · | developments
concerning proprietary rights, including patents, by us or a competitor; |
| · | announcements
by us or our competitors of significant contracts, acquisitions, commercial relationships,
joint ventures or capital commitments; |
| · | introductions
of new services by us or our competitors; |
| · | enactment
of new government regulations affecting our industry; |
| · | changes
in the market valuations of Internet companies in general and comparable companies in
particular; |
| · | quarterly
fluctuations in our operating results and changes in our financial conditions; |
| · | the
termination or expiration of our distribution agreements; |
| · | our
potential failure to meet our forecasts or analyst expectations on a quarterly basis; |
| · | the
relatively thinly traded volume of our publicly traded shares, which means that small
changes in the volume of trades may have a disproportionate impact on our stock price; |
| · | the
loss of key personnel, or our inability to recruit experienced personnel to fill key
positions; |
| · | changes
in ratings or financial estimates by analysts or the inclusion/removal of our stock from
certain stock market indices used to drive investment choices; |
| · | announcements
of new distribution network partnerships, technological innovations, acquisitions or
products or services by us or our competitors; |
| · | the
short selling of our stock; |
| · | the
sales of substantial amounts of our common stock in the public market by our stockholders,
or the perception that such sales could occur; or |
| · | conditions
or trends in the Internet that suggest a decline in rates of growth of advertising-based
Internet companies. |
In the past, securities class action litigation
has often been instituted after periods of volatility in the market price of a Company’s securities. A securities class
action suit against us could result in substantial costs and the diversion of management’s attention and resources, regardless
of the merits or outcome of the case.
We may need additional capital in the
future to support our operations and, if such additional financing is not available to us, on reasonable terms or at all, our
liquidity and results of operations will be materially and adversely impacted.
Unanticipated developments in the short term,
such as the entry into agreements which require large cash payments or the acquisition of businesses with negative cash flows,
may necessitate additional financing. We may seek to raise additional capital through public or private debt or equity financings
in order to:
| · | fund
the additional operations and capital expenditures; |
| · | take
advantage of favorable business opportunities, including geographic expansion or acquisitions
of complementary businesses or technologies; |
| · | develop
and upgrade our technology infrastructure beyond current plans; |
| · | develop
new product and service offerings; |
| · | take
advantage of favorable conditions in capital markets; or |
| · | respond
to competitive pressures. |
The capital markets, and in particular the
public equity market for Internet companies, have historically been volatile. It is difficult to predict when, if at all, it will
be possible for Internet companies to raise capital through these markets. We cannot assure you that the additional financing
will be available on terms favorable to us, or at all. If we issue additional equity or convertible debt securities, our existing
stockholders may experience substantial dilution.
The report of our independent registered
public accounting firm expresses substantial doubt about the Company’s ability to continue as a going concern.
Our auditors, Albert Wong & Co. LLP, have
indicated in their report on the Company’s financial statements for the fiscal year ended December 31, 2014 that conditions
exist that raise substantial doubt about our ability to continue as a going concern due to our recurring losses from operations
and negative working capital. A “going concern” opinion could impair our ability to finance our operations through
the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend upon
the availability and terms of future funding, continued growth in product orders and shipments, improved operating margins and
our ability to profitably meet our after-sale service commitments with existing customers. If we are unable to achieve these goals,
our business would be jeopardized and the Company may not be able to continue. If we ceased operations, it is likely that all
of our investors would lose their investment.
We do not anticipate paying any cash
dividends on our common stock in the foreseeable future and our stock may not appreciate in value.
We have not declared or paid cash dividends
on our common stock to date. We currently intend to retain our future earnings, if any, to fund the development and growth of
our business. In addition, the terms of any existing or future debt agreements may preclude us from paying dividends. There is
no guarantee that shares of our common stock will appreciate in value or that the price at which our stockholders have purchased
their shares will be able to be maintained.
We will incur costs and demands upon
management as a result of complying with the laws and regulations affecting public companies in the United States.
As a public company listed in the United States
we incur significant legal, accounting and other expenses. In addition, changing laws, regulations and standards relating to corporate
governance and public disclosure, including regulations implemented by the SEC and stock exchanges, may increase legal and financial
compliance costs and make some activities more time consuming. These laws, regulations and standards are subject to varying interpretations
and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies.
We intend to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased
general and administrative expenses and a diversion of management’s time and attention from revenue-generating activities
to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations and standards, we fail to comply,
regulatory authorities may initiate legal proceedings against us and our business may be harmed.
Failure to comply with these rules might also
make it more difficult for us to obtain some types of insurance, including director and officer liability insurance, and we might
be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board
of directors, on committees of our board of directors or as members of senior management
If our estimates or judgments relating
to our critical accounting policies are based on assumptions that change or prove to be incorrect, our operating results could
fall below the expectations of investors and securities analysts, which could result in a decline in our stock price.
The preparation of financial statements in
conformity with generally accepted accounting principles, or GAAP, requires management to make estimates and assumptions that
affect the amounts reported in the consolidated financial statements and accompanying notes. We base our estimates on historical
experience and on various other assumptions that we believe to be reasonable under the circumstances (as described in the section
entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations”), the results
of which form the basis for making judgments about the carrying values of assets, liabilities, equity, revenue and expenses that
are not readily apparent from other sources. Our operating results could be adversely affected if our assumptions change or if
actual circumstances differ from those in our assumptions. If, as a result, our operating results fall below the expectations
of investors and securities analysts, our stock price could decline. Significant assumptions and estimates used in preparing our
consolidated financial statements include those related to revenue recognition, stock-based compensation, allowance for doubtful
accounts, accounting for internal use software and income taxes.
Concentration of ownership of our common
stock among our existing executive officers, directors and principal stockholders may prevent new investors from influencing significant
corporate decisions.
As of December 31, 2014, our executive officers,
directors and current beneficial owners of 5% or more of our common stock and their respective affiliates, in the aggregate, beneficially
owned approximately 68% of our outstanding common stock. These persons, acting together, are able to significantly influence all
matters requiring stockholder approval, including the election and removal of directors and any merger or other significant corporate
transactions. The interests of this group of stockholders may not coincide with our interests or the interests of other stockholders.
This concentration of ownership may have the effect of deterring, delaying or preventing a change of control of our company, could
deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of our company and might
ultimately affect the market price of our common stock.
We depend on key persons and
the loss of any key person could adversely affect our operations.
The future success of our business is dependent
on our management team, including Michael Onghai, our Chief Executive Officer, and our professional team and employees. If one
or more of our key personnel are unable or unwilling to continue in their present positions, we may not be able to easily
replace them, and we may incur additional expenses to recruit and train new personnel. The loss of our key personnel
could severely disrupt our business and its financial condition and results of operations could be materially and adversely affected.
Furthermore, since our industry is characterized by high demand and intense competition for talent, we may need to offer higher
compensation and other benefits in order to attract and retain key personnel in the future. We cannot assure investors
that we will be able to attract or retain the key personnel needed to achieve our business objectives. In addition,
we do not have in place “key person” life insurance policies on any of our employees. The loss of the services
of key members of our professional team or employees could negatively affect our financial performance.
Provisions of Delaware corporate law
and provisions of our charter and bylaws may discourage a takeover attempt.
Our charter and bylaws and provisions of Delaware
law may deter or prevent a takeover attempt, including an attempt that might result in a premium over the market price for our
common stock. Our board of directors has the authority to issue shares of preferred stock and to determine the price, rights,
preferences and restrictions, including voting rights, of those shares without any further vote or action by the stockholders.
The issuance of preferred stock, while providing desirable flexibility in connection with possible acquisitions and other corporate
purposes, could have the effect of making it more difficult for a third party to acquire a majority of our outstanding voting
stock. In addition, our charter and bylaws provide for a classified board of directors. These provisions, along with Section 203
of the DGCL, prohibiting certain business combinations with an interested stockholder, could discourage potential acquisition
proposals and could delay or prevent a change of control.
If we fail to maintain proper and effective
internal controls, our ability to produce accurate financial statements on a timely basis could be impaired.
We are subject to the reporting requirements
of the Securities Exchange Act of 1934, the Sarbanes-Oxley Act of 2002, the Dodd-Frank Wall Street Reform and Consumer Protection
Act of 2010 and the rules and regulations of the Nasdaq Stock Market. The Sarbanes-Oxley Act requires, among other things, that
we maintain effective disclosure controls and procedures and internal controls over financial reporting and perform system and
process evaluation and testing of our internal controls over financial reporting to allow management to report on the effectiveness
of our internal controls over financial reporting. This requires that we incur substantial professional fees and internal costs
related to our accounting and finance functions and that we expend significant management efforts.
We may in the future discover areas of our
internal financial and accounting controls and procedures that need improvement. Our internal control over financial reporting
will not prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control system’s objectives will be met. Because of the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will
not occur or that all control issues and instances of fraud will be detected.
If we are unable to maintain proper and effective
internal controls in the future, we may not be able to produce timely and accurate financial statements, and we may conclude that
our internal controls over financial reporting are not effective. If that were to happen, the market price of our stock could
decline and we could be subject to sanctions or investigations by the Nasdaq Stock Market or the NYSE MKT, the SEC or other regulatory
authorities.
If securities or industry analysts do
not publish research or reports about our business, or publish inaccurate or unfavorable research reports about our business,
our share price and trading volume could decline.
The trading market for our common stock will,
to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do
not have any control over these analysts. If one or more of the analysts who cover us should downgrade our shares or change their
opinion of our business prospects, our share price would likely decline. If one or more of these analysts ceases coverage of our
company or fails to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our
share
Risks Related to Pyxis’ Industry
The value of your
investment in Pyxis following consummation of the Merger will be subject to the significant risks affecting Pyxis and those inherent
in the product tanker industry. You should carefully consider the risks and uncertainties described below and other information
included in this proxy statement/prospectus. If any of the events described below occur, the post-acquisition business and financial
results could be adversely affected in a material way. This could cause the trading price of Pyxis’ common shares to decline,
perhaps significantly, and you therefore may lose all or part of your investment. The following risk factors apply to the business
and operations of Pyxis and will also apply to the business and operations of Pyxis following the Merger.
The unaudited
pro forma financial information included elsewhere in this proxy statement/prospectus may not be indicative of what the combined
company’s actual financial position or results of operations would have been.
The unaudited pro
forma financial information in this proxy statement/prospectus is presented for illustrative purposes only, has been prepared
based on a number of assumptions and is not necessarily indicative of what the combined company’s actual financial position
or results of operations would have been had the Merger been completed on the dates indicated. The unaudited pro forma condensed
consolidated and combined financial information does not reflect any cost savings, operating synergies or revenue.
Operating ocean-going
vessels is inherently risky.
The operation of
ocean-going vessels in international trade is affected by a number of risks, including mechanical failure, personal injury, vessel
and cargo and property loss or damage, business interruption due to political conditions, hostilities, labor strikes, adverse
weather conditions, stowaways, placement on Pyxis’ vessels of illegal drugs and other contraband by smugglers, war, terrorism,
piracy, human error, environmental accidents generally, collisions and other catastrophic natural and marine disasters. An accident
involving any of Pyxis’ vessels could result in any of the following: death or injury to persons, loss of property or environmental
damage, delays in the delivery of cargo, loss of revenues from or termination of charter contracts, governmental fines, penalties
or restrictions on conducting business or higher insurance rates.
In addition, the
operation of tankers has unique operational risks associated with the transportation of oil and chemicals. An oil or chemical
spill may cause significant environmental damage, and a catastrophic spill could exceed the insurance coverage available. Compared
to other types of vessels, tankers are exposed to a higher risk of damage and loss by fire, whether ignited by a terrorist attack,
collision or other cause due to the high flammability and high volume of the oil transported in tankers. In addition, to the extent
Pyxis’ vessels are found with contraband, whether inside or attached to the hull of Pyxis’ vessel and whether such
contraband was on the Pyxis vessels with or without the knowledge of any of Pyxis’ crew or land-based shore personnel, it
may face governmental or other regulatory claims which could have an adverse effect on Pyxis’ business, results of operations,
cash flows, financial condition and ability to pay dividends. Pyxis could also become subject to personal injury or property damage
claims relating to the release of or exposure to hazardous materials associated with Pyxis’ operations. Violations of or
liabilities under environmental requirements also can result in substantial penalties, fines and other sanctions, including in
certain instances, seizure or detention of Pyxis’ vessels. Any of these circumstances or events could negatively impact
Pyxis’ business, financial condition and results of operations. In addition, the loss of any of Pyxis’ vessels could
harm Pyxis’ reputation as a safe and reliable vessel owner and operator.
Pyxis operates its vessels worldwide
and as a result, its vessels are exposed to international risks that may reduce revenue or increase expenses.
The international shipping industry is an
inherently risky business involving global operations. Pyxis’ vessels are at risk of damage or loss because of events such
as marine disasters, bad weather, business interruptions caused by mechanical failures, grounding, fire, explosions, collisions,
human error, war, terrorism, piracy, cargo loss, latent defects, acts of God and other circumstances or events. In addition, changing
economic, regulatory and political conditions in some countries, including political and military conflicts, have from time to
time resulted in attacks on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These sorts of events
could interfere with shipping routes and result in market disruptions that may reduce Pyxis’ revenue or increase its expenses.
International shipping is also subject to
various security and customs inspection and related procedures in countries of origin and destination and transhipment points.
Inspection procedures can result in the seizure of the cargo and/or our vessels, delays in the loading, offloading or delivery
and the levying of customs duties, fines or other penalties against us. It is possible that changes to inspection procedures could
impose additional financial and legal obligations on Pyxis. Furthermore, changes to inspection procedures could also impose additional
costs and obligations on Pyxis’ customers and may, in certain cases, render the shipment of certain types of cargo uneconomical
or impractical. Any such changes or developments may have a material adverse effect on Pyxis’ business, results of operations,
cash flows, financial condition and available cash.
Charter hire
rates for tankers are cyclical and volatile.
The tanker market
is cyclical with volatility in charter hire rates and industry profitability. The degree of charter hire rate volatility among
different types of tankers has varied widely. After reaching historical highs in mid-2008, charter hire rates for tankers have
declined significantly. If the shipping industry and charter hire rates are depressed in the future when Pyxis’ charters
expire, Pyxis may be unable to recharter its vessels at rates as favorable to it as historical rates and its revenues, earnings
and available cash flow will likely be adversely affected. In addition, a decline in charter hire rates likely will cause the
value of Pyxis’ vessels to decline. Pyxis’ ability to re-charter its vessels upon the expiration or termination of
its current charters, the charter rates payable under any replacement charters and vessel values will depend upon, among other
things, economic conditions in the tanker market at that time and changes in the supply and demand for vessel capacity.
The factors that
influence the demand for tanker vessel capacity are outside of Pyxis’ control and unpredictable and include:
| · | demand
and supply for refined petroleum products and other bulk products such as vegetable and
edible oils; |
| · | regional
availability of refining capacity; |
| · | the
globalization of manufacturing; |
| · | global
and regional economic and political conditions and developments in international trade; |
| · | changes
in seaborne and other transportation patterns, including changes in the distances over
which tanker cargoes are transported; |
| · | competition
from other shipping companies and other modes of transportation that compete with tankers; |
| · | environmental
and other regulatory developments; |
| · | currency
exchange rates; and |
| · | weather
and natural disasters. |
The factors that
influence the supply of tanker vessel capacity are outside of Pyxis’ control and unpredictable and include:
| · | the
number of tanker newbuilding deliveries; |
| · | the
scrapping rate of older tankers; |
| · | the
price of steel and vessel equipment; |
| · | the
cost of newbuildings and the cost of retrofitting or modifying secondhand tankers as
a result of charterer requirements; |
| · | availability
and cost of capital; |
| · | cost
and supply of labor; |
| · | technological
advances in tankers design and capacity; |
| · | conversion
of tankers to other uses and the conversion of other vessels to tankers; |
| · | tankers
freight rates, which is itself effected by factors that may affect the rate of newbuilding,
scrapping and laying-up of tankers; |
| · | port
and canal congestion; |
| · | exchange
rate fluctuations; |
| · | changes
in environmental and other regulations that may limit the useful lives of tankers; and |
| · | the
number of tankers that are out of service. |
These factors influencing the supply of and
demand for tanker capacity and charter rates are outside of Pyxis’ control, and it may not be able to correctly assess the
nature, timing and degree of changes in industry conditions. Pyxis cannot assure you that it will be able to successfully charter
its tankers in the future at all or at rates sufficient to allow the Company to meet its contractual obligations, including repayment
of its indebtedness, or to pay dividends to its shareholders.
Tanker rates also fluctuate based on
seasonal variations in demand.
Tanker markets are typically stronger in the
winter months as a result of increased oil consumption in the northern hemisphere but weaker in the summer months as a result
of lower oil consumption in the northern hemisphere and refinery maintenance that is typically conducted in the summer months.
In addition, unpredictable weather patterns during the winter months in the northern hemisphere tend to disrupt vessel routing
and scheduling. The oil price volatility resulting from these factors has historically led to increased oil trading activities
in the winter months. As a result, revenues generated by our vessels have historically been weaker during the quarters ended June
30 and September 30, and stronger in the quarters ended March 31 and December 31.
An over-supply of tanker capacity may
lead to reductions in charter rates, vessel values, and profitability.
The market supply of tankers
is affected by a number of factors such as demand for energy resources, oil, petroleum and chemical products, as well as strong
overall global economic growth. If the capacity of new ships delivered exceeds the capacity of tankers being scrapped and lost,
tanker capacity will increase. For example, as of February 28, 2015, the order book for MR tankers represented just over 15% of
the existing fleet and the orderbook may increase further in the future. If the supply of tanker capacity increases and if the
demand for tanker capacity does not increase correspondingly, charter rates and vessel values could materially decline. A reduction
in charter rates and the value of Pyxis’ vessels may have a material adverse effect on its results of operations and available
cash.
If Pyxis’ vessels suffer damage
due to the inherent operational risks of the shipping industry, it may experience unexpected drydocking costs and delays or total
loss of its vessels, which may adversely affect its business and financial condition.
The operation of an ocean-going vessel carries
inherent risks. Pyxis’ vessels and their cargoes will be at risk of being damaged or lost because of events such as marine
disasters, bad weather, business interruptions caused by mechanical failures, grounding, fire, explosions, collisions, human error,
war, terrorism, piracy, cargo loss, latent defects, acts of God and other circumstances or events. Changing economic, regulatory
and political conditions in some countries, including political and military conflicts, have from time to time resulted in attacks
on vessels, mining of waterways, piracy, terrorism, labor strikes and boycotts. These hazards may result in death or injury to
persons, loss of revenues or property, environmental damage, higher insurance rates, damage to our customer relationships, market
disruptions, delay or rerouting. In addition, the operation of tankers has unique operational risks associated with the transportation
of oil and other liquid bulk products. An oil or chemical spill, for example, may cause significant environmental damage, and
the associated costs could exceed the insurance coverage available to us. Compared to other types of vessels, tankers are exposed
to a higher risk of damage and loss by fire, whether ignited by a terrorist attack, collision, or other cause, due to the high
flammability and high volume of the oil or chemicals transported in tankers.
If Pyxis’ vessels suffer damage, they
may need to be repaired at a drydocking facility. The costs of drydock repairs are unpredictable and may be substantial. Pyxis
may have to pay drydocking costs that its insurance does not cover in full. The loss of revenues while these vessels are being
repaired and repositioned, as well as the actual cost of these repairs, may adversely affect Pyxis’ business and financial
condition. In addition, space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently
located. Pyxis may be unable to find space at a suitable drydocking facility or its vessels may be forced to travel to a drydocking
facility that is not conveniently located to its vessels’ positions. The loss of earnings while these vessels are forced
to wait for space or to travel or be towed to more distant drydocking facilities may adversely affect Pyxis’ business and
financial condition. Further, the total loss of any of its vessels could harm its reputation as a safe and reliable vessel owner
and operator. If Pyxis is unable to adequately maintain or safeguard its vessels, it may be unable to prevent any such damage,
costs, or loss which could negatively impact its business, financial condition, results of operations and available cash.
Acts of piracy
on ocean-going vessels could adversely affect Pyxis’ business.
Acts of piracy have
historically affected ocean-going vessels trading in many regions of the world. Although the frequency of piracy on ocean-going
vessels decreased during 2014, piracy incidents continue to occur, particularly in the Gulf of Aden off the coast of Somalia and
the Gulf of Guinea. Tanker vessels are particularly vulnerable to attacks by pirates. If regions in which Pyxis’ vessels
are deployed are characterized as ‘‘war risk’’ zones by insurers, as the Gulf of Aden temporarily was
in May 2008, or Joint War Committee ‘‘war and strikes’’ listed areas, premiums payable for coverage could
increase significantly and such insurance coverage may be more difficult to obtain. In addition, crew costs, including due to
employing onboard security guards, could increase in such circumstances. Pyxis may not be adequately insured to cover losses from
these incidents, which could have a material adverse effect on the company. In addition, any detention hijacking as a result of
an act of piracy against Pyxis’ vessels, or an increase in cost, or unavailability, of insurance for Pyxis’ vessels,
could have a material adverse impact on its business, financial condition and results of operations.
Pyxis’
substantial operations outside the United States expose Pyxis to political, governmental and economic instability.
Pyxis’ operations
are primarily conducted outside the United States and may be adversely affected by changing or adverse political, governmental
and economic conditions in the countries where its vessels are flagged or registered and in the regions where Pyxis otherwise
engages in business. In particular, it may derive some portion of its revenues from its vessels transporting oil and refined petroleum
products from politically unstable regions.
In addition, terrorist
attacks such as the attacks that occurred against targets in the United States on September 11, 2001, Spain on March 11, 2004,
London on July 7, 2005, Mumbai on November 26, 2008 and continuing hostilities in Iraq and Afghanistan and elsewhere in the Middle
East and the world may lead to additional armed conflicts or to further acts of terrorism and civil disturbance. Pyxis’
operations may also be adversely affected by expropriation of vessels, taxes, regulation, tariffs, trade embargoes, economic sanctions,
or a disruption of or limit to trading activities or other adverse events or circumstances in or affecting the countries and regions
where Pyxis operates or where it may operate in the future. Crew costs, including due to employing onboard security guards, could
increase in such circumstances. It may not be adequately insured to cover losses from these incidents, which could have a material
adverse effect on Pyxis.
Pyxis’ operations
are also potentially vulnerable to economic instability inherent in political and government risk. In particular, the shipping
industry, like many others, is dependent on the economies of India and China. India’s gross domestic product growth has
exhibited noteworthy growth in the recent years. The Chinese government’s reputation and reform of its economy continue
to develop. Many of the reforms by the Chinese government are unprecedented or experimental and may be subject to revision, change
or abolition based upon the outcome of such experiments.
In addition, fluctuations
in exchange rates may affect charter rates and may adversely affect the profitability in U.S. dollars of the services Pyxis provides
in foreign markets where payment is made in other currencies. All of Pyxis’ consolidated revenue is received in U.S. dollars.
The amount and frequency of expenses paid in currency other than the U.S. dollar (such as vessel repairs, supplies and stores)
may fluctuate from period to period. Depreciation in the value of the U.S. dollar relative to other currencies increases the U.S.
dollar cost to Pyxis. The portion of the company’s business conducted in other currencies could increase in the future,
which could expand its exposure to losses arising from currency fluctuations. Even if Pyxis implements hedging strategies to mitigate
this risk, these strategies might not eliminate its exposure to foreign exchange rate fluctuations and would involve costs and
risks of their own, such as ongoing management time and expertise, external costs to implement the hedging activities and potential
accounting implications.
Pyxis is also headquartered
in Greece, which is in the midst of an economic crisis that includes, among other things, a high budget deficit compared to previous
years. It does not know what steps, if any, the Greek government may take to respond to this fiscal crisis. The government in
Greece may decide to impose taxes on shipping companies located in Greece, which currently benefit from an exemption from Greek
taxes.
Any of these factors
may interfere with the operation of Pyxis’ vessels and/or increase the cost and risk that insurance will be unavailable,
insufficient or more expensive for its vessels, which could harm its business, financial condition and results of operations.
The current
global economic and financial crisis may negatively affect Pyxis’ business.
In recent years,
businesses in the global economy generally have suffered from a general recession, faced limited or no credit or credit on less
favorable terms than previously obtained, lower demand for goods and services, reduced liquidity and declining capital markets.
These factors have led to lower demand for crude oil and refined petroleum products including fuel oil, which, along with diminished
trade credit available for the delivery of such cargoes have led to decreased demand for tankers, creating downward pressure on
charter rates and reduced tanker values. General market volatility has resulted from uncertainty about debt, the credit market
and fears that countries such as Greece, Portugal and Spain will default on their governments’ financial obligations. In
addition, major market disruptions and the current adverse changes in market conditions and regulatory climate in the United States
and worldwide may further negatively affect Pyxis’ business or impair its ability to borrow amounts under any future financial
arrangements. In particular, a significant number of the port calls Pyxis expects its vessels to make will likely involve the
loading or discharging of cargo in ports in Organization of Economic Cooperation and Development, or OECD, countries and the Asia
Pacific region. Pyxis cannot assure you that the Chinese, Indian or Japanese economies will not experience a significant contraction
or otherwise negatively change in the future. Moreover, a significant or protracted slowdown in the economies of the United States,
the European Union or various Asian countries may adversely affect the economic growth in China and elsewhere.
If the current global
economic and financial environment persists or worsens, Pyxis may be negatively affected in the following ways:
| · | Pyxis
may not be able to employ its vessels at charter rates as favorable to Pyxis as historical
rates or operate its vessels profitably; and |
| · | the
market value of Pyxis’ vessels could decrease, which may cause Pyxis to, among
other things, recognize losses if any of its vessels are sold or if their values are
impaired, violate covenants in its current credit facility and future financing agreements
that it may enter into from time to time and be unable to incur debt at all or on terms
that are acceptable to the company. |
The occurrence of
any of the foregoing could have a material adverse effect on Pyxis’ business, results of operations, cash flows, financial
condition and amount of dividends it may pay, if any.
If economic conditions throughout the
world do not improve, it could impede Pyxis’ operations.
Negative trends in the global economy that
emerged in 2008 continue to adversely affect global economic conditions. In addition, the world economy continues to face a number
of new challenges, including uncertainty related to the continuing discussions in the United States regarding the U.S. federal
debt ceiling, along with widespread skepticism about the implementation of any resulting agreements, continuing turmoil and hostilities
in the Middle East, North Africa and other geographic areas and continuing economic weakness in the European Union. There has
historically been a strong link between the development of the world economy and demand for energy, including oil and gas. An
extended period of deterioration in the outlook for the world economy could reduce the overall demand for oil and gas and for
Pyxis’ services. Such changes could adversely affect its results of operations and cash flows.
The economies of the European Union and other
parts of the world continue to experience relatively slow growth or remain in recession and exhibit weak economic trends. The
credit markets in Europe have experienced significant contraction, de-leveraging and reduced liquidity, and European authorities
continue to implement a broad variety of governmental action and/or new regulation of the financial markets. Global financial
markets and economic conditions have been, and continue to be, severely disrupted and volatile.
Pyxis faces risks affected by changes in economic
environments, changes in interest rates, and instability in the banking and securities markets around the world, among other factors.
Pyxis cannot predict how long the current market conditions will last. These continuing economic and governmental factors, together
with the concurrent decline in charter rates and vessel values, may have a material adverse effect on its results of operations
and may cause the price of its common stock to decline.
Changes in fuel, or bunkers, prices
may adversely affect profits.
Fuel, or bunkers, is a significant expense
in shipping operations for Pyxis’ vessels employed on the spot market and can have a significant impact on earnings. With
respect to Pyxis’ vessels employed on time charter, the charterer is generally responsible for the cost and supply of fuel,
however such cost may affect the charter rates Pyxis is able to negotiate for its vessels. Changes in the price of fuel may adversely
affect Pyxis’ profitability. The price and supply of fuel is unpredictable and fluctuates based on events outside its control,
including geopolitical developments, supply and demand for oil and gas, actions by OPEC and other oil and gas producers, war and
unrest in oil producing countries and regions, regional production patterns and environmental concerns. Further, fuel may become
much more expensive in the future, which may reduce the profitability and competitiveness of Pyxis’ business versus other
forms of transportation, such as truck or rail.
If Pyxis’ vessels call on ports
located in countries that are subject to restrictions imposed by the U.S. government, its reputation and the market for its common
stock could be adversely affected.
Although no vessels owned or operated by Pyxis
have called on ports located in countries subject to sanctions and embargoes imposed by the U.S. government and other authorities
or countries identified by the U.S. government or other authorities as state sponsors of terrorism, such as Cuba, Iran, Sudan,
and Syria, in the future, its vessels may call on ports in these countries from time to time on charterers’ instructions
in violation of contractual provisions that prohibit them from doing so. Sanctions and embargo laws and regulations vary in their
application, as they do not all apply to the same covered persons or proscribe the same activities, and such sanctions and embargo
laws and regulations may be amended or strengthened over time. In 2010, the United States enacted the Comprehensive Iran Sanctions
Accountability and Divestment Act ("CISADA"), which expanded the scope of the Iran Sanctions Act. Among other
things, CISADA expands the application of the prohibitions on companies, such as Pyxis, and introduces limits on the ability of
companies and persons to do business or trade with Iran when such activities relate to the investment, supply or export of refined
petroleum or petroleum products.
On November 24, 2013, the P5+1 (the United
States, United Kingdom, Germany, France, Russia and China) entered into an interim agreement with Iran entitled the Joint Plan
of Action ("JPOA"). Under the JPOA it was agreed that, in exchange for Iran taking certain voluntary measures
to ensure that its nuclear program is used only for peaceful purposes, the United States and European Union would voluntarily
suspend certain sanctions for a period of six months.
On January 20, 2014, the United States and
European Union indicated that they would begin implementing the temporary relief measures provided for under the JPOA. These measures
include, among other things, the suspension of certain sanctions on the Iranian petrochemicals, precious metals, and automotive
industries from January 20, 2014 until July 20, 2014. The JPOA has been extended twice, and is scheduled to expire on June 30,
2015.
In 2012, President Barack Obama signed Executive
Order 13608, which prohibits foreign persons from violating or attempting to violate, or causing a violation of any sanctions
in effect against Iran or facilitating any deceptive transactions for or on behalf of any person subject to U.S. sanctions. Any
persons found to be in violation of Executive Order 13608 will be deemed a foreign sanctions evader and will be banned from all
contact with the United States, including conducting business in U.S. dollars. Also in 2012, President Obama signed into law the
Iran Threat Reduction and Syria Human Rights Act of 2012 (the "Iran Threat Reduction Act"), which created new sanctions
and strengthened existing sanctions. Among other things, the Iran Threat Reduction Act intensifies existing sanctions regarding
the provision of goods, services, infrastructure or technology to Iran's petroleum or petrochemical sector. The Iran Threat Reduction
Act also includes a provision requiring the President of the United States to impose five or more sanctions from Section 6(a)
of the Iran Sanctions Act, as amended, on a person the President determines is a controlling beneficial owner of, or otherwise
owns, operates, or controls or insures a vessel that was used to transport crude oil from Iran to another country and (1) if the
person is a controlling beneficial owner of the vessel, the person had actual knowledge the vessel was so used or (2) if the person
otherwise owns, operates, or controls, or insures the vessel, the person knew or should have known the vessel was so used. Such
a person could be subject to a variety of sanctions, including exclusion from U.S. capital markets, exclusion from financial transactions
subject to U.S. jurisdiction, and exclusion of that person's vessels from U.S. ports for up to two years.
Although Pyxis believes that it has been in
compliance with all applicable sanctions and embargo laws and regulations, and intends to maintain such compliance, there can
be no assurance that it will be in compliance in the future, particularly as the scope of certain laws may be unclear and may
be subject to changing interpretations. In addition, the United States retains the authority to revoke the relief set forth in
the JPOA if Iran fails to meet its commitments under the JPOA. Any such violation could result in fines, penalties or other sanctions
that could severely impact Pyxis’ ability to access U.S. capital markets and conduct its business, and could result in some
investors deciding, or being required, to divest their interest, or not to invest, in Pyxis. Moreover, its charterers may violate
applicable sanctions and embargo laws and regulations as a result of actions that do not involve it or its vessels, and those
violations could in turn negatively affect its reputation. In addition, Pyxis’ reputation and the market for its securities
may be adversely affected if it engages in certain other activities, such as engaging in operations under an otherwise lawful
contract or transaction with a third party which separately and subsequently becomes involved in sanctionable conduct. Investor
perception of the value of Pyxis’ common stock may also be adversely affected by the consequences of war, the effects of
terrorism, civil unrest and governmental actions in these and surrounding countries.
Certain or future counterparties of Pyxis
may be affiliated with persons or entities that are the subject of sanctions imposed by the Obama administration, and European
Union and/or other international bodies as a result of the annexation of Crimea by Russia in March 2014. If Pyxis determines that
such sanctions require it to terminate existing contracts or if it is found to be in violation of such applicable sanctions, its
results of operations may be adversely affected or it may suffer reputational harm.
The smuggling of drugs or other contraband
onto Pyxis’ vessels may lead to governmental claims against it.
Pyxis expects that its vessels will call in
ports where smugglers may attempt to hide drugs and other contraband on vessels, with or without the knowledge of crew members.
To the extent Pyxis’ vessels are found with contraband, whether inside or attached to the hull of our vessel and whether
placed with or without the knowledge of any of its crew, Pyxis may face governmental or other regulatory claims which could have
an adverse effect on its business, results of operations, cash flows, financial condition and ability to pay dividends
Pyxis’
vessels could be arrested by maritime claimants, which could result in a significant loss of earnings and cash flow if it is not
able to post the required security to lift the arrest.
Generally under the
terms of Pyxis’ time charters for its vessels, a vessel would be placed off-hire (i.e., the charterer could cease to pay
charterhire) for any period during which it is “arrested” for a reason not arising from the fault of the charterer.
Under maritime law in many jurisdictions, and under the International Convention on Arrest of Ships, 1999, crew members, tort
claimants, claimants for breach of certain maritime contracts, vessel mortgagees, suppliers of goods and services to a vessel
and shippers and consignees of cargo and others entitled to a maritime lien against the vessel may enforce their lien by “arresting”
a vessel through court processes. In addition, claims may be brought by claimants in hostile jurisdictions or on fictitious grounds
or for claims against previous owners, if any, or in respect of previous cargoes. Any such claims could lead to the arrest of
the vessel, against which a ship owner would have to post security to have the arrest lifted and subsequently defend against such
claims.
In addition, in those
countries adopting the International Convention on Arrest of Ships, 1999, and in certain other jurisdictions, such as South Africa,
under the “sister ship” theory of liability, a claimant may arrest not only the vessel with respect to which the claimant’s
maritime lien has arisen, but also any “associated” vessel owned or controlled by the legal or beneficial owner of
that vessel. While in some of the jurisdictions which have adopted this doctrine, liability for damages is limited in scope and
would only extend to a company and its vessel owning subsidiaries, there can be no assurance that liability for damages caused
by a vessel managed by International Tanker Management Ltd. (“ITM”), Pyxis’ technical manager (but otherwise
with no connection at all to Pyxis), would not be asserted against Pyxis or one or more of its vessels. The arrest of one or more
vessels in its fleet could result in a material loss of cash flow for Pyxis and/or require the company to pay substantial sums
to have the arrest lifted.
Governments
could requisition Pyxis’ vessels during a period of war or emergency.
A government could
requisition for title or seize Pyxis’ vessels. Requisition for title occurs when a government takes control of a vessel
and becomes its owner. Also, a government could requisition Pyxis’ vessels for hire. Requisition for hire occurs when a
government takes control of a vessel and effectively becomes her charterer at dictated charter rates. Generally, requisitions
occur during a period of war or emergency. Government requisition of one or more of Pyxis’ vessels could negatively impact
its business, financial condition and results of operations.
Environmental,
safety and other increasingly strict governmental regulations expose Pyxis to liability and significant additional expenditures.
Pyxis’ operations
are affected by extensive and changing international, national and local environmental protection laws, regulations, treaties,
conventions and standards in force in international waters, the jurisdictional waters of the countries in which Pyxis’ vessels
operate, as well as the countries of its vessels’ registration. These requirements can affect the resale value or useful
lives of Pyxis’ vessels, require a reduction in cargo-capacity, vessel modifications or operational changes or restrictions,
or result in the denial of access to certain jurisdictional waters or ports, or detention in, certain ports. In addition, ship
owners incur significant costs in complying with the regulations summarized above and in meeting maintenance and inspection requirements
and in developing contingency arrangements for potential environmental damages such as spills. Government regulation of vessels,
particularly in the areas of safety and environmental requirements, can be expected to become stricter in the future and require
Pyxis to incur significant capital expenditure on its vessels to keep them in compliance, even to scrap or sell certain vessels
altogether and generally to increase its compliance costs.
Pyxis is subject to complex laws and
regulations, including environmental laws and regulations, which can adversely affect its business, results of operations, cash
flows and financial condition, and its available cash.
Pyxis’ operations are subject to numerous
laws and regulations in the form of international conventions and treaties, national, state and local laws and national and international
regulations in force in the jurisdictions in which its vessels operate or are registered, which can significantly affect the ownership
and operation of its vessels. These requirements include, but are not limited to, the U.S. Oil Pollution Act of 1990 ("OPA"),
requirements of the U.S Coast Guard and the U.S. Environmental Protection Agency ("EPA"), the U.S. Comprehensive
Environmental Response, Compensation and Liability Act of 1980 ("CERCLA"), the U.S. Clean Air Act, the U.S. Clean
Water Act, the International Maritime Organization ("IMO"), International Convention on Civil Liability for Oil
Pollution Damage of 1969 (as from time to time amended and generally referred to as "CLC"), the IMO International
Convention on Civil Liability for Bunker Oil Pollution Damages, the IMO International Convention for the Prevention of Pollution
from Ships of 1973 (as from time to time amended and generally referred to as "MARPOL"), including designation
of Emission Control Areas thereunder, the IMO International Convention for the Safety of Life at Sea of 1974 (as from time to
time amended and generally referred to as "SOLAS"), the IMO International Convention on Load Lines of 1966 (as
from time to time amended), the U.S. Maritime Transportation Security Act of 2002, the International Labour Organization ("ILO")
Maritime Labour Convention ("MLC") and European Union regulations. Compliance with such laws and regulations,
where applicable, may require installation of costly equipment or operational changes and may affect the resale value or useful
lives of Pyxis’ vessels. Pyxis may also incur additional costs in order to comply with other existing and future regulatory
obligations, including, but not limited to, costs relating to air emissions including greenhouse gases, the management of ballast
and bilge waters, maintenance and inspection, elimination of tin-based paint, development and implementation of emergency procedures
and insurance coverage or other financial assurance of our ability to address pollution incidents. The 2010 Deepwater Horizon oil
spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes or changes to existing laws that
may affect Pyxis’ operations or require it to incur additional expenses to comply with such new laws or regulations.
These costs could have a material adverse
effect on Pyxis’ business, results of operations, cash flows and financial condition and its available cash. A failure to
comply with applicable laws and regulations may result in administrative and civil penalties, criminal sanctions or the suspension
or termination of its operations. Environmental laws often impose strict liability for remediation of spills and releases of oil
and hazardous substances, which could subject Pyxis to liability without regard to whether itwas negligent or at fault. Under
OPA, for example, owners, operators and bareboat charterers are jointly and severally strictly liable for the discharge of oil
in U.S. waters, including the 200-nautical mile exclusive economic zone around the United States. An oil spill could also result
in significant liability, including fines, penalties, criminal liability and remediation costs for natural resource damages under
other international and U.S. federal, state and local laws, as well as third-party damages, and could harm Pyxis’ reputation
with current or potential charterers of its tankers. Pyxis is required to satisfy insurance and financial responsibility requirements
for potential oil (including marine fuel) spills and other pollution incidents. Although Pyxis has arranged insurance to cover
certain environmental risks, there can be no assurance that such insurance will be sufficient to cover all such risks or that
any claims will not have a material adverse effect on its business, results of operations, cash flows and financial condition
and available cash.
The failure
to maintain class certifications of authorized classification societies on one or more of Pyxis’ vessels would affect its
ability to employ such vessels.
The hull and machinery
of every commercial vessel must be certified as meeting its class requirements by a classification society authorized by the vessel’s
country of registry. The classification society certifies that the vessel is safe and seaworthy in accordance with the applicable
rules and regulations of the country of registry of the vessel and the Safety of Life at Sea Convention, or SOLAS. The operating
vessels in Pyxis’ fleet are classed by the major classification societies, Nippon Kaiji Kyokai (Class NK) and Det Norske
Veritas. ITM, Pyxis’ technical manager, and the vessels in its fleet have also been awarded ISM certifications from major
classification societies. In order for a vessel to maintain its classification, the vessel must undergo annual surveys, intermediate
surveys and special surveys. In lieu of a special survey, a vessel’s machinery may be on a continuous survey cycle under
which the machinery would be surveyed from time to time over a five year period. All of the vessels in Pyxis’ fleet on time
charters or operating on the spot market are on special survey cycles for both hull and machinery inspection. Every vessel may
also be required to be drydocked every two to three years for inspection of the underwater parts of the vessel. If a vessel fails
any survey or otherwise fails to maintain its class, the vessel will be unable to trade and will be unemployable, and may subject
Pyxis to claims from the charterer if it has chartered the vessel, which would negatively impact its revenues as well as its reputation.
If Pyxis fails to comply with international
safety regulations, it may be subject to increased liability, which may adversely affect its insurance coverage and may result
in a denial of access to, or detention in, certain ports.
The operation of Pyxis’ vessels is affected
by the requirements set forth in the IMO's International Management Code for the Safe Operation of Ships and Pollution Prevention
("ISM Code"), promulgated by the IMO under SOLAS. The ISM Code requires ship owners, ship managers and bareboat
charterers to develop and maintain an extensive "Safety Management System" that includes the adoption of safety and
environmental protection policies setting forth instructions and procedures for safe operation and describing procedures for dealing
with emergencies. If Pyxis fails to comply with the ISM Code, it may be subject to increased liability, invalidation of its existing
insurance, or reduction in available insurance coverage for its affected vessels. Such noncompliance may also result in a denial
of access to, or detention in, certain ports.
Pyxis could
be adversely affected by violations of the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws.
The U.S. Foreign
Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries from making
improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Pyxis’ policies mandate compliance
with these laws. In certain circumstances, third parties may request Pyxis’ employees and agents to make payments that may
not comply with the U.S. Foreign Corrupt Practices Act and other anti-bribery laws. Despite such compliance program, Pyxis cannot
assure you that its internal control policies and procedures always will protect Pyxis from reckless or negligent acts committed
by its employees or agents. Violations of these laws, or allegations of such violations, could have a negative impact on its business,
results of operations and reputation.
Pyxis is subject to funding calls by
its protection and indemnity associations, and its associations may not have enough resources to cover claims made against them.
Pyxis is indemnified for certain liabilities
incurred while operating its vessels through membership in protection and indemnity associations, which are mutual insurance associations
whose members contribute to cover losses sustained by other association members. Claims are paid through the aggregate premiums
(typically annually) of all members of the association, although members remain subject to calls for additional funds if the aggregate
premiums are insufficient to cover claims submitted to the association. Claims submitted to the association may include those
incurred by members of the association, as well as claims submitted to the association from other protection and indemnity associations
with which Pyxis’ association has entered into interassociation agreements. Pyxis cannot assure you that the associations
to which it belongs will remain viable.
Pyxis must
protect the safety and condition of the cargoes transported on its vessels and any failure to do so may subject the company to
claims for loss or damage.
Under
Pyxis’ time charters and on the spot market, Pyxis is responsible for the safekeeping of cargo entrusted to it and must
properly maintain and control equipment and other apparatus to ensure that cargo is not lost or damaged in transit. Claims
and any liability for loss or damage to cargo that is not covered by insurance could harm Pyxis’ reputation
and adversely affect its business, financial condition and results of operations. See also “Pyxis’ insurance may
be insufficient to cover losses that may result from its operations.”
Pyxis may face
labor interruptions.
A majority of the
crew members on the vessels in Pyxis’ fleet that are under time or spot charters are employed under collective bargaining
agreements. ITM, Pyxis’ technical manager, is a party to some of these collective bargaining agreements. These collective
bargaining agreements and any employment arrangements with crew members on the vessels in its fleet may not prevent labor interruptions
and are subject to renegotiation in the future. Any labor interruptions, including due to failure to successfully renegotiate
collective bargaining employment agreements with the crew members on the vessels in its fleet, could disrupt Pyxis’ operations
and could adversely affect its business, financial condition and results of operations.
Technological innovation could reduce
Pyxis’ charter hire income and the value of its vessels.
The charterhire rates and the value and operational
life of a vessel are determined by a number of factors including the vessel's efficiency, operational flexibility and physical
life. Efficiency includes speed, fuel economy and the ability to load and discharge cargo quickly. Flexibility includes the ability
to enter harbors, utilize related docking facilities and pass through canals and straits. The length of a vessel’s physical
life is related to its original design and construction, its maintenance and the impact of the stress of operations. If new tankers
are built that are more efficient or more flexible or have longer physical lives than Pyxis’ vessels, competition from these
more technologically advanced vessels could adversely affect the amount of charterhire payments Pyxis receives for its vessels
once their initial charters expire and the resale value of its vessels could significantly decrease. As a result, its available
cash could be adversely affected.
Risks Related
to Pyxis’ Business and Operations
Pyxis operates
in a highly competitive international market and if it is unable to operate its vessels profitably, it may be unsuccessful in
competing, which would negatively affect its financial condition.
The tanker industry
is highly fragmented with many charterers, owners and operators of vessels and the transportation of petroleum products is characterized
by intense competition. Competition arises primarily from other tanker owners, including major oil companies as well as independent
tanker companies, some of which have substantially greater resources than Pyxis does. Although Pyxis believes that no single
competitor has a dominant position in the markets in which it competes, the trend towards consolidation in the industry is creating
an increasing number of global enterprises capable of competing in multiple markets, which may result in greater competition to
the company. Its competitors may be better positioned to devote greater resources to the development, promotion and employment
of their businesses than it is. Competition for charters, including for the transportation of oil and refined petroleum products,
are intense and depends on price as well as on the location, size, age, condition and acceptability of the vessel and its operator
to the charterer. Competition may increase in some or all of Pyxis’ principal markets, including with the entry of new competitors.
Pyxis may not be able to compete successfully or effectively with its competitors and its competitive position may be eroded in
the future, which could have an adverse effect on its business, financial condition and results of operations.
Because Pyxis
intends to charter some of the vessels in its fleet on the spot market or in pools trading in the spot market, it expects to have
exposure to the cyclicality and volatility of the spot charter market.
The spot market is
highly competitive and volatile, and spot charter rates may fluctuate dramatically based on the factors listed in the preceding
risk factor. Significant fluctuations in spot charter rates may result in significant fluctuations in Pyxis’ ability to
continuously recharter its vessels upon the expiration or termination of their current spot charters and in the earnings of its
vessels operating on the spot market. Since Pyxis charters some of its vessels on the spot market, and may in the future also
admit its vessels in pools trading on the spot market, Pyxis has exposure to the cyclicality and volatility of the spot charter
market. By focusing the employment of some of the vessels in its fleet on the spot market, Pyxis will benefit if conditions in
this market strengthen. However, Pyxis will also be particularly vulnerable to declining spot charter rates. Future spot charters
may not be available at the rates currently prevailing in the spot market or that will allow Pyxis to operate its vessels profitably.
When spot charter rates decrease, its earnings will be adversely impacted if and to the extent it has vessels trading on the spot
market.
Pyxis may be
unable to secure medium- and long-term employment for its vessels at profitable rates.
One of Pyxis’
strategies is to explore and selectively enter into or renew medium- and long-term, fixed rate time and bareboat charters for
some of the vessels in its fleet in order to provide the company with a base of stable cash flows and to manage charter rate volatility.
However, the process for obtaining longer term charters is highly competitive and generally involves a more lengthy and intense
screening and vetting process and the submission of competitive bids, compared to shorter term charters. In addition to the quality,
age and suitability of the vessel, longer term charters tend to be awarded based upon a variety of other factors relating to the
vessel operator, including:
| · | the
operator’s environmental, health and safety record; |
| · | shipping
industry relationships, reputation for customer service, technical and operating expertise
and safety record; |
| · | shipping
experience and quality of ship operations, including cost-effectiveness; |
| · | quality,
experience and technical capability of crews; |
| · | the
ability to finance vessels at competitive rates and overall financial stability; |
| · | relationships
with shipyards and the ability to obtain suitable berths with on-time delivery of new
vessels according to customer’s specifications; |
| · | willingness
to accept operational risks pursuant to the charter, such as allowing termination of
the charter for force majeure events; and |
| · | competitiveness
of the bid in terms of overall price. |
Pyxis’
ability to obtain new customers will depend upon a number of factors many of which are beyond its control.
Pyxis’ ability
to obtain new customers will depend upon a number of factors many of which are beyond its control. These include its ability to:
| · | successfully
manage its liquidity and obtain the necessary financing to fund its anticipated growth; |
| · | attract,
hire, train and retain qualified personnel and technical managers to manage and operate
its fleet; |
| · | identify
and consummate desirable acquisitions, joint ventures or strategic alliances; and |
| · | identify
and capitalize on opportunities in new markets. |
It is likely that
Pyxis will face substantial competition for medium- and long-term employment from a number of experienced shipping companies,
many of which may have significantly greater financial resources than it does. Increased competition may cause greater price competition.
As a result of these factors, Pyxis may be unable to expand its relationships with existing customers or obtain new customers
for medium- and long-term charters on a profitable basis, if at all.
Pyxis may not
be able to successfully mix its charter durations profitably and to the extent its vessels are employed on medium-and long-term
charters, Pyxis will not be able to take advantage of favorable opportunities in the current spot market.
A related risk to
the one above arises from the fact that it may be difficult to properly balance charter and spot business and anticipate trends
in these sectors. If Pyxis is successful in employing vessels under medium- and long-term charters, those vessels will not be
available for trading on the spot market during an upturn in the tanker market cycle, when spot trading may be more profitable.
If the company cannot successfully employ its vessels in a profitable mix of medium- and long-term charters and on the spot market,
its results of operations and operating cash flow could be adversely affected. At the expiration of its charters, if a charter
terminates early for any reason or if Pyxis acquires vessels charter-free, it may want to charter or re-charter its vessels under
medium- and long-term charters. Should more vessels be available on the spot or short-term market at the time it is seeking to
fix new medium- to long-term charters, Pyxis may have difficulty entering into such charters at profitable rates and for any term
other than short-term and, as a result, its cash flow may be subject to instability. A more active short-term or spot market may
require the company to enter into charters on all its vessels based on fluctuating market rates, as opposed to long-term contracts
based on a fixed rate, which could result in a decrease in its cash flow in periods when the charter rates for tankers are depressed.
Counterparties,
including charterers or technical managers, could fail to meet their obligations to Pyxis.
Pyxis enters into
with third parties, among other things, memoranda of agreement, charter parties, ship management agreements and loan agreements
with respect to the purchase and operation of its fleet and its business. Such agreements subject the company to counterparty
risks. Although Pyxis may have rights against any counterparty if it defaults on its obligations, its shareholders will share
that recourse only indirectly to the extent that it recovers funds. In particular, Pyxis faces credit risk with its charterers.
It is possible that not all of Pyxis’ charterers will provide detailed financial information regarding their operations.
As a result, charterer risk is largely assessed on the basis of its charterers’ reputation in the market, and even on that
basis, there can be no assurance that they can or will fulfill their obligations under the contracts Pyxis enters into with them.
Charterers are sensitive to the commodity markets and may be impacted by market forces affecting commodities. In addition, in
depressed market conditions, there have been reports of charterers renegotiating their charters or defaulting on their obligations
under charters. Pyxis’ customers may fail to pay charter hire or attempt to renegotiate charter rates. Should a charterer
counterparty fail to honor its obligations under agreements with Pyxis, it may be difficult to secure substitute employment for
such vessel, and any new charter arrangements Pyxis secures on the spot market or on substitute charters may be at lower rates
depending on the then existing charter rate levels, compared to the rates being charged for Pyxis’ vessels under the charter
agreements in force with such third parties at the time. In addition, if the charterer of a vesselin Pyxis’ fleet that is
used as collateral under its new credit facility defaults on its charter obligations to Pyxis, such default may constitute an
event of default under its credit facility, which may allow the bank to exercise remedies under its credit facility. If Pyxis’
charterers fail to meet their obligations to Pyxis or attempt to renegotiate the charter agreements with Pyxis or if any other
counterparty fails to honor its obligations to Pyxis, it could sustain significant losses which could have a material adverse
effect on its business, financial condition, results of operations and cash flows, as well as its ability to pay dividends, if
any, in the future, and compliance with covenants in its credit facility. Further, if Pyxis needs to find a replacement for ITM,
its technical manager, Pyxis may need approval from its lenders.
Pyxis may fail
to successfully control its operating and voyage expenses.
Pyxis’ operating
results are dependent on its ability to successfully control its operating and voyage expenses. Under its ship management agreements
with International Tanker Management, its technical manager, it is required to pay for vessel operating expenses (which includes
crewing, repairs and maintenance, insurance, stores, lube oils and communication expenses), and, for spot charters, voyage expenses
(which include bunker expenses, port fees, cargo loading and unloading expenses, canal tolls, agency fees and conversions). These
expenses depend upon a variety of factors, many of which are beyond Pyxis’ or the technical manager’s control, including
unexpected increases in costs for crews, insurance or spare parts for its vessels, unexpected drydock repairs, mechanical failures
or human error (including revenue lost in off-hire days), arrest action against its vessels due to failure to pay debts, disputes
with creditors or claims by third parties, labor strikes, severe weather conditions, any quarantines of Pyxis’ vessels and
uncertainties in the world oil markets. Some of these costs, primarily relating to fuel, insurance and enhanced security measures,
have been increasing and may increase, possibly significantly, in the future. Repair costs are unpredictable and can
be substantial, some of which may not be covered by insurance. If Pyxis’ vessels are subject to unexpected or unscheduled
off-hire time, it could adversely affect its cash flow and may expose the company to claims for liquidated damages if the vessel
is chartered at the time of the unscheduled off-hire period. The cost of drydocking repairs, additional off-hire time, an increase
in the company’s operating expenses and/or the obligation to pay any liquidated damages could adversely affect its business,
financial condition and results of operations. In addition, to the extent Pyxis’ vessels are employed under voyage charters
in the future, its expenses may be impacted by increases in bunker costs and by canal costs, including the cost of canal-related
delays incurred by employment of its vessels on certain routes. Unlike time charters in which the charterer bears all bunker and
canal costs, in spot charters Pyxis bears these costs. Because it is not possible to predict the future price of bunkers or canal-related
costs when fixing spot charters, a significant rise in these costs could have an adverse impact on the costs associated with any
spot charters Pyxis enters into and hence its earnings. Additionally, an increase in the price of fuel beyond the company’s
expectations may adversely affect its profitability at the time it negotiates time or bareboat charters.
Pyxis will
be required to make substantial capital expenditures, for which it may be dependent on additional financing, to maintain the vessels
it owns or to acquire other vessels.
Pyxis must make substantial
capital expenditures to maintain, over the long term, the operating capacity of its fleet. Pyxis’ business strategy is
also based in part upon the expansion of its fleet through the purchase of additional vessels. Pyxis currently estimates,
based upon current and anticipated market conditions, its capital expenditures of potential acquisitions in the near term
will be in excess of $60 million. This amount includes the possible acquisition of the Miss Lucy and the Pyxis Loucas, two
vessels owned by affiliates of Pyxis chief executive officer that Pyxis may acquired in the future pursuant to the terms of
the Merger Agreement. While it may decide to sell or scrap any vessels in its fleet, especially any vessels for which
maintenance capital expenditures are expected to exceed operating income, the company will incur maintenance capital
expenditures for the vessels it chooses to continue operating. These maintenance capital expenditures include drydocking
expenses, modification of existing vessels or acquisitions of new vessels to the extent these expenditures are incurred to
maintain the operating capacity of its fleet. In addition, Pyxis expects to incur significant maintenance costs for its
current and any newly-acquired vessels. A newbuilding vessel must be drydocked within five years of its delivery from a
shipyard, and vessels are typically drydocked every 30 to 60 months thereafter depending on the vessel, not including any
unexpected repairs. Pyxis estimates the cost to drydock a vessel is between $0.3 and $0.8 million, depending on the size and
condition of the vessel and the location of drydocking.
Capital maintenance
expenditures could increase as a result of changes in:
| • | the cost of labor and materials; |
| • | increases in the size of its
fleet; |
| • | governmental regulations and
maritime self-regulatory organization standards relating to safety, security or the environment;
and |
To purchase additional
vessels from time to time, Pyxis may be required to incur additional borrowings or raise capital through the sale of debt or additional
equity securities. Its ability to obtain bank financing or to access the capital markets for future offerings may be limited by
its financial condition at the time of any such financing or offering as well as by adverse market conditions resulting from,
among other things, general economic conditions and contingencies and uncertainties that are beyond its control.
Pyxis cannot assure
you that it will be able to obtain such additional financing in the future on terms that are acceptable to the company or at all.
Its failure to obtain funds for capital expenditures could have a material adverse effect on its business, results of operations
and financial condition and on its ability to pay dividends. In addition, the company’s actual operating and maintenance
capital expenditures will vary significantly from quarter to quarter based on, among other things, the number of vessels drydocked
during that quarter. Even if Pyxis is successful in obtaining the necessary funds for capital expenditures, the terms of such
financings could limit its ability to pay dividends to its shareholders. Incurring additional debt may significantly increase
its interest expense and financial leverage, and issuing additional equity securities may result in significant shareholder ownership
or dividend dilution.
Any vessel
modification projects Pyxis undertakes could have significant cost overruns, delays or fail to achieve the intended results.
Market volatility
and higher fuel prices, coupled with increased regulation and concern about the environmental impact of the international shipping
industry, have led to an increased focus on fuel efficiency. Many shipbuilders have implemented vessel modification programs for
their existing ships in an attempt to capture potential efficiency gains. Pyxis will consider making modifications to its fleet
where it believes the efficiency gains will result in a positive return for its shareholders. However, these types of projects
are subject to risks of delay and cost overruns, resulting from shortages of equipment, unforeseen engineering problems, work
stoppages, unanticipated cost increases, inability to obtain necessary certifications and approvals, shortages of materials or
skilled labor, among other problems. In addition, any completed modification may not achieve the full expected benefits or could
even compromise the fleet’s ability to operate at higher speeds, which is an important factor in generating additional revenue
in an improving freight rate environment. The failure to successfully complete any modification project Pyxis undertakes or any
significant cost overruns or delays in any retrofitting projects could have a material adverse effect on its business, financial
position, cash flows and results of operations.
Pyxis expects
that a limited number of financial institutions, including financial institutions that may be located in Greece, will hold the
cash it deposits with them, which will subject Pyxis to credit risk.
Pyxis expects that
a limited number of financial institutions, including institutions that may be located in Greece, will hold the cash it deposits
with them. These financial institutions located in Greece may be subsidiaries of international banks or Greek financial institutions.
Pyxis does not expect that these balances will be covered by insurance in the event of default by these financial institutions.
The occurrence of such a default could have a material adverse effect on Pyxis’ business, financial condition, results of
operations and cash flows, and it may lose part or all of its cash that it deposits with such banks.
Because the
Public Company Accounting Oversight Board ("PCAOB") is not currently permitted to inspect Pyxis’ independent accounting
firm, you may not benefit from such inspections.
Auditors of U.S.
public companies are required by law to undergo periodic PCAOB inspections to assess their compliance with U.S. law and professional
standards in connection with performance of audits of financial statements filed with the SEC. Certain European Union countries,
including Greece, do not currently permit the PCAOB to conduct inspections of accounting firms established and operating in such
European Union countries, even if they are part of major international firms. Accordingly, unlike for most U.S. public companies,
the PCAOB is prevented from evaluating Pyxis’ auditor's performance of audits and its quality control procedures, and, unlike
shareholders of most U.S. public companies, Pyxis and its shareholders are deprived of the possible benefits of such inspections.
As a newly
formed company, Pyxis may not be able to implement its business strategy successfully or manage its growth
effectively.
Pyxis’ future
growth will depend on the successful implementation of its business strategy. A principal focus of its business strategy is to
grow by expanding the size of its fleet while capitalizing on a mix of charter types, including on the spot market.
Pyxis’ future
growth will depend upon a number of factors, some of which may not be within its control. These factors include its ability to:
| · | identify suitable
tankers and/or shipping companies for acquisitions at attractive prices; |
| · | identify and
consummate desirable acquisitions, joint ventures or strategic alliances |
| · | hire, train
and retain qualified personnel and crew to manage and operate its growing business and
fleet; |
| · | improve its
operating, financial and accounting systems and controls; and |
| · | obtain required
financing for its existing and new vessels and operations. |
Pyxis’ failure to effectively identify,
purchase and develop any tankers or businesses could adversely affect its business, financial condition and results of operations.
The number of individuals that perform services for Pyxis under its Head Management agreement and its current operating and financial
systems may not be adequate as Pyxis implements its plan to expand the size of its fleet, and it may not be able to effectively
obtain the services of more individuals or adequately improve those systems. Finally, acquisitions may require additional equity
issuances or debt issuances (with amortization payments). If Pyxis is unable to execute the points noted above, its financial
condition may be adversely affected.
Growing any business by acquisition presents
numerous risks such as undisclosed liabilities and obligations, difficulty in obtaining additional qualified personnel and managing
relationships with customers and suppliers and integrating newly acquired vessels and operations into existing infrastructures.
The expansion of Pyxis’ fleet may impose significant additional responsibilities on its management and staff, and the management
and staff of its commercial and technical managers, and may necessitate that Pyxis, and they, increase the number of personnel
to support such expansion.
Pyxis also seeks
to take advantage of changing market conditions, which may include taking advantage of pooling arrangements or profit sharing
components of the charters it may enter into. In addition, Pyxis’ future growth will depend upon its ability to:
| · | sell vessels
at prices that are favorable or reasonable to Pyxis; |
| · | maintain
or develop new and existing customer relationships; |
| · | employ
vessels consistent with its chartering strategy |
| · | take
delivery of and successfully integrate any additional vessels it may acquire in the future; |
| · | successfully
manage its liquidity and expenses; and |
| · | identify
and capitalize on opportunities in new markets. |
Changing market and
regulatory conditions may require or result in the sale or other disposition of vessels Pyxis is not able to charter because of
customer preferences or because they are not or will not be compliant with existing or future rules, regulations and conventions.
Additional vessels of the age and quality the company desires may not be available for purchase at prices it is prepared to pay
or at delivery times acceptable to the company, and it may not be able to dispose of vessels at reasonable prices, if at all.
However, even if
Pyxis successfully implements its business strategy, it may not improve the company’s net revenues or operating results.
Furthermore, it may decide to alter or discontinue aspects of its business strategy and may adopt alternative or additional strategies
in response to business or competitive factors or factors or events beyond its control.
Pyxis’ failure
to execute its business strategy or to manage its growth effectively could adversely affect its business, financial condition,
results of operations and amount of dividends it pays, if any.
Acquisitions
of vessels may not be profitable to Pyxis at or after the time it acquires them.
Acquisitions of vessels
may not be profitable to Pyxis at or after the time it acquires them. Pyxis may:
| · | fail
to realize anticipated benefits, such as new customer relationships, cost-savings or
cash flow enhancements; |
| · | decrease
its liquidity by using a significant portion of its available cash or borrowing capacity
to finance vessel acquisitions; |
| · | significantly
increase its interest expenses or financial leverage if it incurs additional debt to
finance vessel acquisitions; |
| · | fail
to integrate any acquired tankers or businesses successfully with its existing operations; |
| · | incur
or assume unanticipated liabilities, losses or costs associated with the business or
vessels acquired, particularly if any vessel it acquires proves not to be in good condition;
or |
| · | incur
other significant charges, such as impairment of goodwill or other intangible assets,
asset devaluation or restructuring charges. |
In addition, unlike
newbuildings, secondhand vessels typically provide very limited or no warranties with respect to the condition of the vessel.
While Pyxis typically inspects secondhand vessels prior to purchase, this does not provide it with the same knowledge about their
condition that it would have had if these vessels had been built for and operated exclusively by it. Generally, Pyxis does not
receive the benefit of warranties from the builders of the secondhand vessels that it acquires.
In general, the costs
to maintain a vessel in good operating condition increase with the age of the vessel. Older vessels are typically less fuel-efficient
than more recently constructed vessels due to improvements in engine technology. Cargo insurance rates increase with the age of
a vessel, making older vessels less desirable to charterers. Governmental regulations, safety or other equipment standards related
to the age of vessels may require expenditures for alterations or the addition of new equipment, to Pyxis’ vessels and may
restrict the type of activities in which the vessels may engage. As its vessels age, market conditions may not justify those expenditures
or enable Pyxis to operate its vessels profitably during the remainder of their useful lives. Pyxis’ ability to achieve
its business and financial objectives through the acquisition of vessels is subject to a variety of factors, many of which are
beyond its control and may not result in the benefits or profitability that it may expect at the time of any vessel acquisition.
New vessels
may experience initial operational difficulties.
New vessels, during
their initial period of operation, have the possibility of encountering structural, mechanical and electrical problems. Typically,
the purchaser of a newbuilding will receive the benefit of a warranty from the shipyard for newbuildings, but Pyxis cannot assure
you that any warranty it obtains will be able to resolve any problem with the vessel without additional costs to Pyxis and off-hire
periods for the vessel.
Delays in deliveries of vessels on order
or additional vessels, Pyxis’ decision to cancel an order for purchase of a vessel or its inability to otherwise complete
the acquisitions of additional vessels for its fleet, could harm its operating results.
Pyxis expects to purchase additional vessels
from time to time. The delivery of these vessels, or vessels on order, could be delayed, not completed or cancelled, which would
delay or eliminate its expected receipt of revenues from the employment of these vessels. The seller could fail to deliver these
vessels to Pyxis as agreed, or Pyxis could cancel a purchase contract because the seller has not met its obligations.
If the delivery of any vessel is materially
delayed or cancelled, especially if Pyxishas committed the vessel to a charter under which Pyxis becomes responsible for substantial
liquidated damages to the customer as a result of the delay or cancellation, Pyxis’ business, financial condition and results
of operations could be adversely affected.
The delivery of vessels on order could be
delayed because of, among other things:
| · | work
stoppages or other labor disturbances or other events that disrupt the operations of
the shipyard building the vessels; |
| · | quality
or other engineering problems; |
| · | changes
in governmental regulations or maritime self-regulatory organization standards; |
| · | bankruptcy
or other financial crisis of the shipyard building the vessels; |
| · | Pyxis’
inability to obtain requisite financing or make timely payments; |
| · | a
backlog of orders at the shipyard building the vessels; |
| · | hostilities
or political or economic disturbances in the countries where the vessels are being built; |
| · | weather
interference or catastrophic event, such as a major earthquake, typhoon or fire; |
| · | Pyxis’
requests for changes to the original vessel specifications; |
| · | shortages
or delays in the receipt of necessary construction materials, such as steel; |
| · | Pyxis’
inability to obtain requisite permits or approvals; or |
| · | a
dispute with the shipyard building the vessels. |
The delivery of the vessels Pyxis proposes
to acquire could be delayed because of, among other things, hostilities or political disturbances, non-performance of the purchase
agreement with respect to the vessels by the seller, Pyxis’ inability to obtain requisite permits, approvals or financings
or damage to or destruction of vessels while being operated by the seller prior to the delivery date.
Declines in charter rates and other
market deterioration could cause Pyxis to incur impairment charges.
Pyxis evaluates the carrying amounts of its
vessels to determine if events have occurred that would require an impairment of their carrying amounts. The recoverable amount
of vessels is reviewed based on events and changes in circumstances that would indicate that the carrying amount of the assets
might not be recovered. The review for potential impairment indicators and projection of future cash flows related to the vessels
is complex and requires Pyxis’ management to make various estimates including future charter rates, operating expenses and
drydock costs. All of these items have been historically volatile.
The failure of Pyxis’ charterers
to meet their obligations under Pyxis’ time charter agreements, on which it depends for a majority of its revenues, could
cause Pyxis to suffer losses or otherwise adversely affect its business.
As of February 28, 2015, four of Pyxis’
vessels in operation were employed under fixed rate time charter agreements. When Pyxis’ existing time charter agreements
expire and upon delivery of its vessels under construction or to be ordered, Pyxis may enter into new time charter agreements
for periods of one year or longer. The ability and willingness of each of Pyxis’ counterparties to perform its obligations
under a time charter agreement with Pyxis will depend on a number of factors that are beyond Pyxis’ control and may include,
among other things, general economic conditions, the condition of the tanker shipping industry and the overall financial condition
of the counterparties. Charterers are sensitive to the commodity markets and may be impacted by market forces affecting commodities.
In addition, in depressed market conditions, there have been reports of charterers renegotiating their charters or defaulting
on their obligations under charters. Pyxis’ customers may fail to pay charter hire or attempt to renegotiate charter rates.
Should counterparty fail to honor its obligations under agreements with Pyxis, it may be difficult to secure substitute employment
for such vessel, and any new charter arrangements Pyxis secures in the spot market or on time charters may be at lower rates.
The costs and delays associated with the default by a charterer under a charter of a vessel may be considerable. If Pyxis’
charterers fail to meet their obligations to Pyxis or attempt to renegotiate their charter agreements, Pyxis could sustain significant
losses, which could have a material adverse effect on its business, financial condition, results of operations and cash flows,
as well as its ability to pay dividends, if any, in the future, and compliance with covenants in its credit facilities.
Pyxis’ charterers may terminate
charters early or choose not to re-charter with Pyxis, which could adversely affect its results of operations and cash flow.
Pyxis’ charters may terminate earlier
than the dates indicated in the charter party agreements. The terms of Pyxis’ charters vary as to which events or occurrences
will cause a charter to terminate or give the charterer the option to terminate the charter, but these generally include a total
or constructive loss of the relevant vessel, the requisition for hire of the relevant vessel, the drydocking of the relevant vessel
for a certain period of time or the failure of the relevant vessel to meet specified performance criteria. An early termination
of Pyxis’ charters may adversely affect Pyxis’ business, results of operations, cash flows and financial condition
and its available cash.
Pyxis cannot predict whether its charterers
will, upon the expiration of their charters, re-charter our vessels on favorable terms or at all. If its charterers decide not
to re-charter our vessels, Pyxis may not be able to re-charter them on terms similar to its current charters or at all. In the
future, Pyxis may also employ its vessels on the spot-charter market, which is subject to greater rate fluctuation than the time
charter market. If Pyxis receives lower charter rates under replacement charters or is unable to re-charter all of its vessels,
its available cash may be significantly reduced or eliminated
Pyxis will
be dependent on the services of its founder and chief executive officer and other members of its senior management
team.
Pyxis will be
dependent upon its chief executive officer, Mr. Valentios (“Eddie”) Valentis, and the other members of its
senior management team for the principal decisions with respect to its business activities. The loss or unavailability of
the services of any of these key members of its management team for any significant period of time, or the inability of
these individuals to manage or delegate their responsibilities successfully as the company’s business grows, could
adversely affect its business, financial condition and results of operations. The company currently does not intend to
maintain “key man” life insurance for its chief executive or other members of its senior management team.
Pyxis’
founder, chairman and chief executive officer has affiliations with Maritime, its ship manager, which may create conflicts of
interest. Certain terms in Pyxis’ agreements with Maritime may be the result of negotiations that were not conducted at
arms-length and may not reflect market standard terms.
Mr. Valentis, Pyxis’
founder, chairman and chief executive officer, also owns and controls Maritime, its ship manager. His responsibilities and relationships
with Maritime could create conflicts of interest between Pyxis, on the one hand, and Maritime, on the other hand. These conflicts
may arise in connection with the chartering, purchase, sale and operations of the vessels in Pyxis’ fleet versus vessels
managed by other companies affiliated with Maritime. Maritime entered into a Head Management Agreement with Pyxis. The negotiation
of these management arrangements may have resulted in certain terms that may not reflect market standard terms or may include
terms that could not have been obtained from arms-length negotiations with unaffiliated third parties for similar services.
In addition, Maritime
may give preferential treatment to vessels that are time chartered-in by related parties because our founder, chairman and chief
executive officer and members of his family may receive greater economic benefits. In particular, as of March 1, 2015, Maritime
provides commercial management services to three vessels, other than the vessels in Pyxis’ fleet, that are owned or operated
by entities affiliated with Mr. Valentis, and such entities may acquire additional vessels that will compete with its vessels
in the future. Such conflicts may have an adverse effect on Pyxis’ results of operations.
Pyxis’
chief executive officer does not, and certain of its officers in the future may not, devote all of their time to Pyxis’
business, which may hinder its ability to operate successfully.
Mr. Valentis, the
chief executive officer, participates, and other senior officers of Pyxis which it may appoint in the future may also participate,
in business activities not associated with the company. As a result, they may devote less time to Pyxis than if they were not
engaged in other business activities and may owe fiduciary duties to the shareholders of both Pyxis as well as shareholders of
other companies which they may be affiliated. This may create conflicts of interest in matters involving or affecting Pyxis and
its customers and it is not certain that any of these conflicts of interest will be resolved in Pyxis’ favor. This could
have a material adverse effect on its business, financial condition, results of operations and cash flows.
Pyixs’
senior executive officers and directors may not be able to successfully organize and manage a publicly traded company.
Not all of Pyxis’
senior executive officers or directors have previously organized and managed a publicly traded company, and they may not be successful
in doing so. The demands of organizing and managing a publicly traded company such as Pyxis are much greater as compared to those
of a private company, and some of Pyxis’ senior executive officers and directors may not be able to successfully meet those
increased demands.
As Pyxis
expands its business, Pyxis and Maritime may need to improve their operating and financial systems and Maritime will need
to recruit and retain suitable employees and crew for Pyxis’ vessels.
The
current operating and financial systems of Pyxis and Maritime may not be adequate as the size of Pyxis’ fleet expands,
and attempts to improve those systems may be ineffective. In addition, as Pyxis expands its fleet, Maritime may need to
recruit and retain suitable additional seafarers and shore based administrative and management personnel. Pyxis cannot
guarantee that Maritime will be able to continue to hire suitable employees as Pyxis expands its fleet. If Pyxis or Maritime
encounters business or financial difficulties, Pyxis may not be able to adequately staff its vessels. If Pyxis is unable to
accomplish the above as Pyxis expands its fleet, Pyxis’ financial reporting performance may be adversely affected and,
among other things, it may not be compliant with SEC rules.
Pyxis’
insurance may be insufficient to cover losses that may result from its operations.
Although Pyxis carries
hull and machinery, protection and indemnity and war risk insurance on each of the vessels in its fleet, it faces several risks
regarding that insurance. The insurance is subject to deductibles, limits and exclusions. Since it is possible that a large number
of claims may be brought, the aggregate amount of these deductibles could be material. As a result, there may be other risks against
which Pyxis is not insured, and certain claims may not be paid. Pyxis does not carry insurance covering the loss of revenues resulting
from vessel off-hire time based on its analysis of the cost of this coverage compared to its off-hire experience.
Certain of Pyxis’
insurance coverage, such as tort liability including pollution-related liability, is maintained through mutual protection and
indemnity associations, and as a member of such associations Pyxis may be required to make additional payments over and above
budgeted premiums if member claims exceed association reserves. These additional payments will be based not only on Pyxis’
claim records but also on the claim records of other members of the protection and indemnity associations through which Pyxis
receive insurance coverage. Pyxis may be unable to procure adequate insurance coverage at commercially reasonable rates in the
future. For example, more stringent environmental regulations have led in the past to increased costs for, and in the future may
result in the lack of availability of, insurance against risks of environmental damage or pollution. Changes in the insurance
markets attributable to terrorist attacks may also make certain types of insurance more difficult for Pyxis to obtain. Pyxis maintains
for each of the vessels in Pyxis’ existing fleet pollution liability coverage insurance in the amount of $1.0 billion per
incident. A catastrophic oil spill or marine disaster could exceed such insurance coverage. The circumstances of a spill could
also result in a denial of coverage by insurers, protracted litigation and delayed or diminished insurance recoveries. In addition,
Pyxis’ insurance may be voidable by the insurers as a result of certain of Pyxis’ actions, such as its vessels failing
to maintain certification with applicable maritime self-regulatory organizations. The circumstances of a spill, including non-compliance
with environmental laws, could also result in the denial of coverage, protracted litigation and delayed or diminished insurance
recoveries or settlements. In addition, the insurance that may be available to Pyxis may be significantly more expensive than
its existing coverage. Furthermore, even if insurance coverage is adequate Pyxis may not be able to obtain a timely replacement
vessel in the event of a loss. Any of these circumstances or events could negatively impact Pyxis’ business, financial condition
and results of operations.
Pyxis and its
subsidiaries may be subject to group liability for damages or debts owed by one of Pyxis’ subsidiaries or by Pyxis.
Although each of
Pyxis’ vessels is and will be separately owned by individual subsidiaries, under certain circumstances, a parent company
and its ship-owning subsidiaries can be held liable under corporate veil piercing principles for damages or debts owed by one
of the subsidiaries or the parent. Therefore, it is possible that all of Pyxis’ assets and those of Pyxis’ subsidiaries
could be subject to execution upon a judgment against Pyxis or any of its subsidiaries.
Pyxis
Maritime Corp, Pxyis’s ship manager, International Tanker Management (“ITM”), Pyxis’ technical manager for all of its
vessels, and North Sea Tankers, Pyxis’ commercial manager for the Northsea Alpha and Northsea Beta, are privately held
companies and there is little or no publicly available information about them.
The ability of Maritime,
ITM and North Sea Tankers BV (“NST”) to render their respective management services will
depend in part on their own financial strength. Circumstances beyond each such company’s control could impair its financial
strength. Because each of these companies is privately held, information about each company’s financial strength is not
available. As a result, Pyxis and an investor in Pyxis’ securities might have little advance warning of financial or other
problems affecting either Maritime, ITM or NST even though its financial or other problems could have a material adverse effect
on Pyxis and its shareholders.
Pyxis’
vessels may operate in pooling arrangements in the future, which may or may not be beneficial to it compared to chartering its
vessels outside of a pool.
In a pooling arrangement,
the net revenues generated by all of the vessels in a pool are aggregated and distributed to pool members pursuant to a pre-arranged
weighting system that recognizes each vessel’s earnings capacity based on factors, which may include its cargo capacity,
speed and fuel consumption, and actual on-hire performance. Pooling arrangements are intended to maximize vessel utilization.
However, pooling arrangements are dependent on the spot charter market, in which rates fluctuate. Pyxis cannot assure you that
entering any of its vessels into a pool will be beneficial to the company compared to chartering its vessels outside of a pool.
If it participates in, or for any reason its vessels cease to participate in a pooling arrangement, their utilization rates could
fall and the amount of additional hire paid could decrease, either of which could have an adverse affect on the company’s
results of operations and it ability to pay dividends. Pyxis also cannot assure you that if it joins a pooling arrangement that
it will continue to use the pooling arrangement or whether the pools its vessels participate in will continue to exist in the
future.
Exchange rate
fluctuations could adversely affect Pyxis’ revenues, financial condition and operating results.
Pyxis generates a
substantial part of its revenues in U.S. dollars, but may incur costs in other currencies. The difference in currencies could
in the future lead to fluctuations in its net income due to changes in the value of the U.S. dollar relative to other currencies.
Pyxis has not hedged its exposure to exchange rate fluctuations, and as a result, its U.S. dollar denominated results of operations
and financial condition could suffer as exchange rates fluctuate.
Risks Related
to Pyxis’ Indebtedness
The market
values of Pyxis’ vessels may decrease, which could cause, as in the past, Pyxis to breach covenants in its
credit facility.
The fair market values
of tankers have generally experienced high volatility. You should expect the market value of Pyxis’ vessels to fluctuate.
Values for ships can fluctuate substantially over time due to a number of factors, including:
| · | prevailing
economic conditions in the energy markets; |
| · | a
substantial or extended decline in demand for refined products; |
| · | the
level of worldwide refined product production and exports; |
| · | changes
in the supply-demand balance of the global product tanker market; |
| · | the
availability of newbuild and newer, more advanced vessels at attractive prices compared
to Pyxis’ vessels; |
| · | changes
in prevailing charter hire rates; |
| · | the
physical condition of the ship; |
| · | the
vessel’s size, age, technical specifications, efficiency and operational flexibility;
and |
| · | the
cost of retrofitting or modifying existing ships, as a result of technological advances
in ship design or equipment, changes in applicable environmental or other regulations
or standards, customer requirements or otherwise. |
If the market value
of its fleet declines, Pyxis may not be able to incur debt at all or on terms that are acceptable to it. Further, a decrease in
these values could cause Pyxis to breach certain covenants that are contained in its credit facility and in future financing agreements
that Pyxis may enter into from time to time. Prior to the consummation of the Merger, vessel value fluctuations caused Pyxis to
not comply with the minimum security covenant in Fourthone’s loan agreement with Commerzbank. In connection with
Pyxis obtaining Commerzbank’s consent to the Merger, Pyxis plans to provide Commerzbank with a new guarantee (in place of
the prior one given by Maritime) and security in the Northern Alpha and Northsea Beta as additional collateral to
satisfy such non-compliance.
If Pyxis breaches
covenants in its loan agreements or future financing agreements and is unable to cure the breach, its lenders could limit its
ability to pay dividends and could accelerate its debt and foreclose on vessels in its fleet. In addition, its auditors may be
required to include an explanatory paragraph in their future report on Pyxis’ consolidated financial statements, which describes
these conditions, which could raise substantial doubt about its ability to continue as a going concern. In addition, as vessels
grow older, they generally decline in value. If for any reason Pyxis sells vessels at a time when prices have fallen, it could
incur a loss and its business, results of operations, cash flows, financial condition and ability to pay dividends in the future
could be adversely affected. The market value of its fleet may decline more rapidly than book value as the vessels age, and it
will incur losses on disposition if Pyxis sells vessels below depreciated book value. Please read “Information with Respect
to Pyxis” for information concerning historical prices of tankers.
Restrictive covenants in Pyxis’
current and future loan agreements may impose financial and other restrictions on the company.
The restrictions and covenants in Pyxis’
current and future loan agreements could adversely affect its ability to finance future operations or capital needs or to pursue
and expand its business activities. Pyxis’ current loan agreements contain, and future financing agreements may contain,
restrictive covenants that may prohibit it from, among other things:
| · | paying
dividends under certain circumstances, including if there is a default under the loan
agreements or if the ratio of the total liabilities and the market value adjusted total
assets of Pyxis and its subsidiaries as a group is greater than 65% in the relevant year; |
| · | incurring
or guaranteeing indebtedness; |
| · | charging,
pledging or otherwise encumbering its vessels; |
| · | changing
the flag, class, management or ownership of its vessels; |
| · | changing
ownership or structure, including through mergers, consolidations, liquidations or dissolutions; |
| · | making
certain investments; |
| · | entering
into a new line of business; |
| · | changing
the commercial and technical management of its vessels; and |
| · | selling,
transferring, assigning or changing the beneficial ownership or control of its vessels. |
Certain of Pyxis’ loan agreements and
guarantees require it to maintain specified financial ratios and satisfy financial covenants. These financial ratios and covenants
include requirements that:
| · | Pyxis
maintains minimum cash and cash equivalents based on the number of vessels owned and
chartered-in and debt service requirements. Pyxis’ required minimum cash balance
as of December 31, 2014 was $1.2 million; |
| · | the
aggregate fair market value of Pyxis’ vessels plus any additional collateral shall,
depending on the loan agreement, be no less than 125% to 133% of the debt outstanding
(value maintenance covenant); and |
| · | Pyxis
maintains, depending on the loan agreement, a total liabilities to total asset ratio
(as adjusted for market values) of no greater than 75%. |
Therefore, Pyxis may need to seek permission
from its lenders in order to engage in some corporate actions. The lenders’ interests may be different from Pyxis’
and Pyxis may not be able to obtain its lenders’ permission when needed. This may limit Pyxis’ ability to pay dividends
to you if it determines to do so in the future, finance its future operations or capital requirements, make acquisitions or pursue
business opportunities.
Pyxis’ ability to comply with covenants
and restrictions contained in its current and future loan agreements may also be affected by events beyond its control, including
prevailing economic, financial and industry conditions. If Pyxis’ cash flow is insufficient to service its current and future
indebtedness and to meet its other obligations and commitments, it will be required to adopt one or more alternatives, such as
reducing or delaying its business activities, acquisitions, investments, capital expenditures, the payment of dividends or the
implementation of its other strategies, refinancing or restructuring its debt obligations, selling vessels or other assets, seeking
to raise additional debt or equity capital or seeking bankruptcy protection. However, it may not be able to effect any of these
remedies or alternatives on a timely basis, on satisfactory terms or at all.
Pyxis’ ability to obtain additional
debt financing may be dependent on the performance of its then existing charters and the creditworthiness of its charterers.
The actual or perceived credit quality of
Pyxis’ charterers, and any defaults by them, may materially affect Pyxis’ ability to obtain the additional capital
resources that it will require to purchase additional vessels or may significantly increase its costs of obtaining such capital.
Pyxis’ inability to obtain additional financing at all, or its ability to only at a higher than anticipated, cost may materially
affect its results of operations and its ability to implement its business strategy.
Servicing debt, including debt which
Pyxis may incur in the future, would limit funds available for other purposes and if it cannot service its debt, Pyxis may lose
its vessels.
Borrowing under Pyxis’ existing loan
agreements and the loan agreements that it expects to enter in the future requires it to dedicate a part of its cash flow from
operations to paying principal and interest on its indebtedness. These payments limit funds available for working capital, capital
expenditures and other purposes, including further equity or debt financing in the future. Amounts borrowed under its credit facilities
bear interest at variable rates. Increases in prevailing rates could increase the amounts that Pyxis would have to pay to its
lenders, even though the outstanding principal amount remains the same, and its net income and cash flows would decrease. Pyxis
expects its earnings and cash flow to vary from year to year due to the cyclical nature of the tanker industry. If it does not
generate or reserve enough cash flow from operations to satisfy our debt obligations, Pyxis may have to:
| · | seek
to raise additional capital; |
| · | refinance
or restructure its debt; |
| · | reduce
or delay capital investments. |
However, these alternatives, if necessary,
may not be sufficient to allow it to meet its debt obligations. If Pyxis is unable to meet its debt obligations or if some other
default occurs under its credit facilities, the lenders could elect to declare that debt, together with accrued interest and fees,
to be immediately due and payable and proceed against the collateral vessels securing that debt even though the majority of the
proceeds used to purchase the collateral vessels did not come from its credit facilities.
If interest rates increase, it will
affect the interest rate under Pyxis’ credit facilities, which could affect its profitability, earnings and cash flow.
Amounts borrowed under Pyxis’ existing
credit facilities bear interest at an annual rate ranging from 1.2% to 3.35% above LIBOR. Interest rates have recently been at
historic lows and any normalization in interest rates would lead to an increase in LIBOR, which would affect the amount of interest
payable on amounts that Pyxis has drawn down from its loan agreements, which in turn would have an adverse effect on our profitability,
earnings and cash flow.
Risks Related to Pyxis Becoming a Public,
Emerging Growth Company
Pyxis’ costs of operating as a
public company will be significant, and its management will be required to devote substantial time to complying with public company
regulations.
As a public company, Pyxis expects to incur
significant legal, accounting and other expenses, including costs associated with its public company reporting requirements under
the Exchange Act. Pyxis must also follow the rules, regulations and requirements subsequently adopted by the U.S. Securities and
Exchange Commission, including Sarbanes-Oxley, and the rules of NASDAQ or the NYSE MKT. Although it cannot precisely predict the
final amount, Pyxis believes that such additional expenses could be in excess of approximately $0.5 million per year, which includes
accounting and legal fees, costs for remuneration of its board of directors and its committees and director and officer liability
insurance but does not include the payment to Maritime for administrative services, which include the services of Pyxis’
senior executive officers, none of whom has experience managing U.S. public companies, and other personnel will also need to devote
a substantial amount of time and financial resources to comply with these rules, regulations and requirements. Given their limited
experiences with U.S. public reporting and other facets of managing a U.S. public company, Pyxis’ management may initially
require additional services from accounting, legal and other professional advisors. In addition, these statutes, rules and regulations
may make it more difficult and more expensive for the company to obtain director and officer liability insurance and it may be
required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage.
As a result, it may be more difficult for the company to attract and retain qualified individuals to serve on its board of directors
or as executive officers as well as divert management’s attention from implementing its business strategy.
Pyxis is an “emerging growth company”
and it cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make its securities
less attractive to investors.
Pyxis is an “emerging growth company,”
as defined in the JOBS Act. It will remain an “emerging growth company” for up to five years. However, if its non-convertible
debt issued within a three-year period or revenues exceeds $1 billion, or the market value of its common shares that are held
by non-affiliates exceeds $700 million on the last day of the second fiscal quarter of any given fiscal year, it would cease to
be an emerging growth company as of the following fiscal year. As an emerging growth company, Pyxis is not required to comply
with the auditor attestation requirements of section 404 of the Sarbanes-Oxley Act, it has reduced disclosure obligations regarding
executive compensation in its periodic reports, and it is exempt from the requirements of holding a nonbinding advisory vote on
executive compensation and shareholder approval of any golden parachute payments not previously approved.
Further, Section 102(b)(1) of the JOBS Act
exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private
companies (that is, those that have not had a Securities Act registration statement declared effective or do not have a class
of securities registered under the Exchange Act) are required to comply with the new or revised financial accounting standards.
The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that
apply to non-emerging growth companies but any such an election to opt out is irrevocable. Pyxis has elected not to opt out of
such extended transition period which means that when a standard is issued or revised and it has different application dates for
public or private companies, Pyxis, as an emerging growth company, will not adopt the new or revised standard until the time private
companies are required to adopt the new or revised standard. This may make comparison of Pyxis’ financial statements with
another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using
the extended transition period difficult or impossible because of the potential differences in accountant standards used. The
company cannot predict if investors will find its common shares less attractive because it may rely on these provisions. If some
investors find its common shares less attractive as a result, there may be a less active trading market for its shares and its
share price may be more volatile.
If Pyxis fails to maintain an effective
system of internal control over financial reporting, it may not be able to accurately report its financial results or prevent
fraud. As a result, stockholders could lose confidence in Pyxis’ financial and other public reporting, which would harm
its business and the trading price of its common stock.
Effective internal controls over financial
reporting are necessary for Pyxis to provide reliable financial reports and, together with adequate disclosure controls and procedures,
are designed to prevent fraud. Any failure to implement required new or improved controls, or difficulties encountered in their
implementation, could cause Pyxis to fail to meet its reporting obligations. In addition, any testing by it conducted in connection
with Section 404 of Sarbanes-Oxley, or any subsequent testing by its independent registered public accounting firm, may reveal
deficiencies in its internal controls over financial reporting that are deemed to be material weaknesses or that may require prospective
or retroactive changes to its financial statements or identify other areas for further attention or improvement. Inferior internal
controls could also cause investors to lose confidence in Pyxis’ reported financial information, which could have a negative
effect on the trading price of its common stock.
Pyxis will be required to disclose changes
made in its internal controls and procedures and its management will be required to assess the effectiveness of these controls
annually. However, for as long as Pyxis is an “emerging growth company,” its independent registered public accounting
firm will not be required to attest to the effectiveness of its internal controls over financial reporting pursuant to Section
404 of Sarbanes-Oxley. An independent assessment of the effectiveness of its internal controls could detect problems that its
management’s assessment might not. Undetected material weaknesses in Pyxis’ internal controls could lead to financial
statements and restatements and require it to incur the expense of remediation.
Risks Related to Pyxis’ Common Stock
An investment in Pyxis’ common
stock is speculative and there can be no assurance of any return on any such investment.
An investment in Pyxis’ common stock
is highly speculative, and there is no assurance that investors will obtain any return on their investment. Investors will be
subject to substantial risks involved in their investment, including the risk of losing their entire investment.
The price of Pyxis’ common stock
may be volatile.
The price of Pyxis common shares may fluctuate
due to a variety of factors, including:
| · | actual
or anticipated fluctuations in Pyxis’ periodic results and those of other public
companies in industry; |
| · | mergers
and strategic alliances in the shipping industry; |
| · | market
prices and conditions in the shipping industry; |
| · | changes
in government regulation; |
| · | potential
or actual military conflicts or acts of terrorism; |
| · | natural
disasters affecting the supply chain or use of petroleum products; |
| · | the
failure of securities analysts to publish research about Pyxis, or shortfalls in Pyxis’
operating results compared to levels forecast by securities analysts; |
| · | announcements
concerning Pyxis or its competitors; and |
| · | the
general state of the securities market. |
These market and industry factors may materially
reduce the market price of Pyxis’ common shares, regardless of Pyxis’ operating performance.
Pyxis may issue additional common shares
or other equity securities without stockholder approval, which would dilute your ownership interests and may depress the market
price of Pyxis’ common stock.
Pyxis may issue additional common shares or
other equity securities of equal or senior rank in the future in connection with, among other things, future vessel acquisitions,
repayment of outstanding indebtedness or Pyxis’ equity incentive plan, without stockholder approval, in a number of circumstances.
Pyxis’ issuance of additional common stock or other equity securities of equal or senior rank would have the following effects:
| · | Pyxis’
existing stockholders’ proportionate ownership interest in Pyxis will decrease; |
| · | the
amount of cash available per share, including for payment of dividends in the future,
may decrease; |
| · | the
relative voting strength of each previously outstanding common share may be diminished;
and |
| · | the
market price of Pyxis’ common stock may decline. |
Pyxis is incorporated in the Republic
of the Marshall Islands, which does not have a well-developed body of corporate or bankruptcy law and, as a result, stockholders
may have fewer rights and protections under Marshall Islands law than under a typical jurisdiction in the United States.
Pyxis’ corporate affairs are governed
by its articles of incorporation and amended and restated bylaws and by the Marshall Islands Business Corporations Act (the “BCA”).
The provisions of the BCA resemble provisions of the corporation laws of a number of states in the United States. However, there
have been few judicial cases in the Republic of the Marshall Islands interpreting the BCA. The rights and fiduciary responsibilities
of directors under the law of the Republic of the Marshall Islands are not as clearly established as the rights and fiduciary
responsibilities of directors under statutes or judicial precedent in existence in certain U.S. jurisdictions. Stockholder rights
may differ as well. While the BCA does specifically incorporate the non-statutory law, or judicial case law, of the State of Delaware
and other states with substantially similar legislative provisions, Pyxis’ public stockholders may have more difficulty
in protecting their interests in the face of actions by management, directors or significant stockholders than would stockholders
of a corporation incorporated in a U.S. jurisdiction. Additionally, the Republic of the Marshall Islands does not have a legal
provision for bankruptcy or a general statutory mechanism for insolvency proceedings. As such, in the event of a future insolvency
or bankruptcy, Pyxis’ stockholders and creditors may experience delays in their ability to recover their claims after any
such insolvency or bankruptcy.
It may be difficult to serve process
on or enforce a U.S. judgment against Pyxis, its officers and its directors because it is a foreign corporation.
Pyxis is a corporation formed in the Republic
of the Marshall Islands, and a substantial portion of its assets are located outside of the United States. As a result, you may
have difficulty serving legal process within the United States upon Pyxis. You may also have difficulty enforcing, both in and
outside the United States, judgments you may obtain in U.S. courts against Pyxis in any action, including actions based upon the
civil liability provisions of U.S. federal or state securities laws. Furthermore, there is substantial doubt that the courts of
the Republic of the Marshall Islands or of the non-U.S. jurisdictions in which Pyxis’ offices are located would enter judgments
in original actions brought in those courts predicated on U.S. federal or state securities laws. As a result, it may be difficult
or impossible for you to bring an original action against Pyxis or against individuals in a Marshall Islands court in the event
that you believe that your rights have been infringed under the U.S. federal securities laws or otherwise because the Marshall
Islands courts would not have subject matter jurisdiction to entertain such a suit. A judgment entered in a foreign jurisdiction
is enforceable in the Republic of the Marshall Islands without a retrial on the merits so long as the provisions of the Republic
of the Marshall Islands Uniform Foreign Money-Judgments Recognition Act are complied with.
Pyxis cannot assure you that it will
pay dividends.
Pyxis does not intend to pay dividends in
the near future and will make dividend payments to its shareholders in the future only if its board of directors, acting in its
sole discretion, determines that such payments would be in Pyxis’ best interest and in compliance with relevant legal, fiduciary
and contractual requirements. The payment of any dividends is not guaranteed or assured, and if paid at all in the future, may
be discontinued at any time at the discretion of the board of directors.
Pyxis’ ability to pay dividends will
in any event be subject to factors beyond its control, including the following:
| · | its
earnings, financial condition and anticipated cash requirements; |
| · | the
terms of any current or future credit facilities or loan agreements Pyxis has or will
enter into (which it expects will prohibit the payment of dividends upon the occurrence
of customary events of default and other provisions); |
| · | the
loss of a vessel or the acquisition of one or more vessels; |
| · | required
capital expenditures; |
| · | reserves
that its board of directors considers necessary or advisable; |
| · | increased
or unanticipated expenses; |
| · | future
issuances of securities; |
| · | disputes
or legal actions; and |
| · | the
requirements of the laws of the Republic of the Marshall Islands, which limit payments
of dividends if Pyxis is, or could become, insolvent and generally prohibit the payment
of dividends other than from surplus (retaining earnings and the excess of consideration
received for the sale of shares above the par value of the shares). |
Pyxis is a holding company, and it depends
on the ability of its subsidiaries to distribute funds to Pyxis in order to satisfy its financial and other obligations.
Pyxis is a holding company and has no significant
assets other than the equity interests in its subsidiaries. Its subsidiaries own all of its existing vessels and subsidiaries
it forms in the future will own any other vessels it may acquire in the future. All payments under Pyxis’ charters will
be made to its subsidiaries. As a result, its ability to pay dividends and meet its other obligations will depend on the performance
of its subsidiaries and their ability to distribute funds to Pyxis. The ability of a subsidiary to make these distributions could
be affected by a claim or other action by a third party, including a creditor, by the terms of Pyxis’ credit facility, any
financing agreement it may enter into in the future or by Republic of the Marshall Islands law, which regulates the payment of
dividends by companies. If Pyxis or its subsidiary breaches a covenant in its credit facility or any financing agreement it may
enter into in the future, the subsidiary may be restricted from paying dividends. If Pyxis is unable to obtain funds from its
subsidiaries, it will not be able to pay dividends unless it obtains funds from other sources, which it may not be able to do.
At the time of the Merger, Maritime
Investors Corp. will beneficially own approximately 93% of Pyxis’ total outstanding common shares, which may limit shareholders’
ability to influence Pyxis’ actions.
Upon consummation of the Merger, Maritime
Investors will beneficially own approximately 93% of Pyxis’ outstanding common shares and will have the power to exert considerable
influence over Pyxis’ actions through Maritime Investors’ ability to effectively control matters requiring shareholder
approval, including the determination to enter into a corporate transaction or to prevent a transaction, regardless of whether
Pyxis’ shareholders believe that any such transaction is in their or Pyxis’ best interests. For example, Maritime
Investors could cause Pyxis to consummate a merger or acquisition that increases the amount of its indebtedness or cause Pyxis
to sell all of its revenue-generating assets. Pyxis cannot assure you that the interests of Maritime Investors will coincide with
the interests of other shareholders. As a result, the market price of Pyxis’ common shares could be adversely affected.
Additionally, Maritime Investors may invest
in entities that directly or indirectly compete with Pyxis, or companies in which Maritime Investors currently invests may begin
competing with us. Maritime Investors may also separately pursue acquisition opportunities that may be complementary to Pyxis’
business, and as a result, those acquisition opportunities may not be available to Pyxis. As a result of these relationships,
when conflicts arise between the interests of Maritime Investors and the interests of Pyxis’ other shareholders, Mr. Valentios
Valentis may not be a disinterested director. Maritime Investors will effectively control all of Pyxis’ corporate decisions
so long as they continue to own a substantial number of Pyxis’ common shares.
Pyxis’ corporate governance practices
will be in compliance with, and will not be prohibited by, the laws of the Republic of the Marshall Islands, and as such Pyxis
will be entitled to exemption from certain national exchange corporate governance standards. As a result, you may not have the
same protections afforded to stockholders of companies that are subject to all of the national exchange corporate governance requirements.
Pyxis’ corporate governance practices
will be in compliance with, and are not prohibited by, the laws of the Republic of the Marshall Islands. Therefore, Pyxis expects
to be exempt from many of national exchange corporate governance practices other than the requirements regarding the disclosure
of a going concern audit opinion, submission of a listing agreement, notification of material non-compliance with Nasdaq corporate
governance practices, and the establishment and composition of an audit committee and a formal written audit committee charter.
For a list of the practices followed by Pyxis in lieu of national exchange corporate governance rules, see “Management
of Pyxis Following the Merger—Other Corporate Governance Matters” in this proxy statement/prospectus.
Anti-takeover provisions in Pyxis’
Articles of Incorporation and bylaws could make it difficult for its shareholders to replace or remove its board of directors
or could have the effect of discouraging, delaying or preventing a merger or acquisition, which could adversely affect the market
price of its common stock.
Several provisions of Pyxis’ Articles
of Incorporation and bylaws could make it difficult for its shareholders to change the composition of its board of directors in
any one year, preventing them from changing the composition of management. In addition, the same provisions may discourage, delay
or prevent a merger or acquisition that shareholders may consider favorable. These provisions include:
| · | authorizing
the board of directors to issue "blank check" preferred stock without shareholder
approval; |
| · | providing
for a classified board of directors with staggered, three year terms; |
| · | prohibiting
cumulative voting in the election of directors; |
| · | authorizing
the removal of directors only for cause and only upon the affirmative vote of the holders
of two-thirds of the outstanding shares of Pyxis’ common stock entitled to vote
for the directors; |
| · | prohibiting
shareholder action by written consent unless consent is signed by all shareholders entitled
to vote on the action; |
| · | limiting
the persons who may call special meetings of shareholders; and |
| · | establishing
advance notice requirements for nominations for election to its board of directors or
for proposing matters that can be acted on by shareholders at shareholder meetings. |
These anti-takeover provisions could substantially
impede the ability of public shareholders to benefit from a change in control and, as a result, may adversely affect the market
price of Pyxis’ common stock and your ability to realize any potential change of control premium.
Pyxis may have to pay tax on United States source income.
Under the Code, 50.0% of the gross shipping income of a vessel
owning or chartering corporation that is attributable to transportation that either begins or ends, but does not both begin and
end, in the United States is characterized as United States source shipping income and such income is subject to a 4.0% United
States federal income tax without allowance for deductions, unless that corporation qualifies for exemption from tax under Section
883 of the Code or under an income tax treaty.
As Pyxis and its subsidiaries are Republic of the Marshall Islands
companies, they do not qualify for an exemption under any U.S. income tax treaties. After this offering, assuming the listing
of Pyxis’ stock on either the Nasdaq Capital Market or the NYSE MKT exchanges, Pyxis expects that it may qualify for the
Section 883 tax exemption.
If Pyxis or its subsidiaries are not entitled to this exemption
under Section 883 for any taxable year, Pyxis or its subsidiaries would be subject for those years to a 4.0% United States federal
gross income tax on 50.0% of the gross shipping income attributable to voyages that begin or end in the United States. The imposition
of this tax could have a negative effect on Pyxis’ business and would result in decreased earnings. See “Certain Tax Considerations – United States Federal Income Taxation of Pyxis.”
If U.S. tax authorities were to treat Pyxis or one or more
of Pyxis’ subsidiaries as a “passive foreign investment company,” there would be adverse tax consequences to
U.S. holders.
A foreign corporation will be treated as a
“passive foreign investment company,” or a PFIC, for United States federal income tax purposes if either (1) at least
75.0% of its gross income for any taxable year consists of certain types of “passive income,” or (2) at least 50.0%
of the average value of the corporation’s assets produce, or are held for the production of, such types of “passive
income.” For purposes of these tests, “passive income” includes dividends, interest and gains from the sale
or exchange of investment property and rents and royalties other than rents and royalties which are received from unrelated parties
in connection with the active conduct of trade or business. For purposes of these tests, time and voyage charter income is generally
viewed as income derived from the performance of services and not rental income and, therefore, would not constitute “passive
income.” Although recent case law has treated a time charter as a lease (thereby generating rental income) for a different
tax purpose even though such a charter arrangement would have been treated as service contract income (generating services income)
under Internal Revenue Service rulings, the IRS has announced that it will not follow the reasoning of this case, including in
the PFIC context. Nevertheless, if this case law is followed by a court or the Internal Revenue Service and applied in the PFIC
context, the time charter income of Pyxis and its subsidiaries would be treated as passive income unless an exception applies.
Those shareholders of a passive foreign investment
company who are citizens or residents of the United States or domestic entities would be subject to an adverse United States federal
income tax regime with respect to the income derived by the passive foreign investment company, the distributions they receive
from the passive foreign investment company and the gain, if any, they derive from the sale or other disposition of their shares
in the passive foreign investment company, and would be subject to annual information reporting to the Internal Revenue Service.
If Pyxis were to be treated as a passive foreign investment company for any taxable year (and regardless of whether Pyxis remained
a PFIC for subsequent taxable years), a U.S. taxpayer who does not make certain mitigating elections described more fully in this
proxy statement under “Certain Tax Considerations—United States Federal Income Taxation of U.S. Holders—Consequences
of Possible PFIC Classification” would be required to allocate ratably over such U.S. taxpayer’s holding period any
“excess distributions” received (i.e., the portion of any distributions received on Pyxis’ common stock in a
taxable year in excess of 125.0% of certain average historic annual distributions) and any gain realized on the sale, exchange
or other disposition of Pyxis’ common stock. The amount allocated to the current taxable year would be subject to U.S. Federal
income tax as ordinary income and the amount allocated to each of the other taxable years would be subject to tax at the highest
rate of tax in effect for the applicable class of taxpayer for that year. An interest charge for the deemed deferral benefit would
be imposed with respect to the resulting tax attributable to each such other taxable year. Investors in Pyxis’ common stock
are urged to consult with their own tax advisors regarding the tax consequences of the PFIC rules to them, including the benefit
of any available mitigating elections. For a more complete discussion of the U.S. Federal income tax consequences of passive foreign
investment company characterization, please read “Certain Tax Considerations—United States Federal Income Taxation
of U.S. Holders—Consequences of Possible PFIC Classification.”
Based on Pyxis’ current and projected
operations, it does not believe that it will be a passive foreign investment company in its current taxable year, nor does it
expect to become a passive foreign investment company with respect to any taxable year. Since Pyxis expects to derive a substantial
amount of its income each year from the time chartering and spot market activities of its wholly-owned subsidiaries, Pyxis believes
that more than 25.0% of such income will be treated for relevant United States federal income tax purposes as services income,
rather than rental income (notwithstanding the recent case law to the contrary). Accordingly, such income should not constitute
“passive income” and the assets that Pyxis or its wholly-owned subsidiaries own and operate in connection with the
production of that income, in particular vessels subject to time charters, should not constitute passive assets for purposes of
determining whether Pyxis is a passive foreign investment company in any taxable year. However, no assurance can be given that
the Internal Revenue Service will accept this position or that Pyxis would not constitute a passive foreign investment company
for any future taxable year if there were to be changes in the nature and extent of Pyxis’ operations.
If U.S. tax authorities were to treat Pyxis as a “controlled
foreign corporation,” there could be adverse U.S. federal income tax consequences to certain U.S. investors.
If more than 50.0% of the voting power or
value of Pyxis’ shares is treated as owned by U.S. citizens or residents, U.S. domestic corporations or partnerships, or
U.S. estates or trusts (as defined for U.S. federal income tax purposes), each of which owned at least 10.0% of Pyxis’ voting
power, or U.S. Shareholders, then Pyxis will be a controlled foreign corporation, or CFC, for U.S. federal income tax purposes.
If Pyxis is a CFC, then certain types of income, or Subpart F Income, earned by Pyxis would be taxed directly to persons who are
U.S. Shareholders even if such income is not distributed to such U.S. Shareholder. Active shipping charter income would not be
treated as Subpart F Income, but passive ship rental income, interest income and certain other portfolio, passive, or in certain
circumstances, services income, generally would be Subpart F Income. See “Certain Tax Considerations—United States
Federal Income Taxation of U.S. Holders—Consequences of Controlled Foreign Corporation Classification of Pyxis.”
THE SPECIAL MEETING
Date, Time and Place of the Special
Meeting
The Special Meeting
will be held at 10:00 a.m., local time, on _____, __________ __, 2015, at the offices of Sichenzia Ross Friedman Ference LLP,
61 Broadway, 32nd Floor, New York, NY 10006, to consider and vote upon the reverse split proposal, spin-off proposal merger proposal
and/or if necessary, the adjournment proposal to permit further solicitation and vote of proxies if, based upon the tabulated
vote at the time of the Special Meeting, LookSmart is not authorized to consummate the Reverse Split, Spin-Off and/or Merger.
Purpose of the Special Meeting
At the Special Meeting,
LookSmart is asking its stockholders as of the record date of ________________, 2015 (the “Record Date”) to
consider and vote upon:
(1) a
proposal to effect the Reverse Split of our issued and outstanding common stock by a ratio of not less than one-for-two and not
more than one-for-ten at any time prior to _____, 2015, with the exact ratio to be set at a whole number within this range
as determined by our board of directors in its sole discretion— we refer to this proposal as the “reverse split
proposal”;
(2) a
proposal to adopt the Spin-Off of LookSmart’s business, assets and liabilities into Holdco — we refer to this proposal
as the “spin-off proposal”;
(3) a
proposal to adopt the Merger Agreement and to approve the transactions contemplated by such agreement — we refer to this
proposal as the “merger proposal”; and
(4) to
consider and vote upon a proposal to adjourn the Special Meeting to a later date or dates, if necessary, to permit further solicitation
and vote of proxies if, based upon the tabulated vote at the time of the Special Meeting, LookSmart is not authorized to consummate
the transactions contemplated by the reverse split proposal, spin-off proposal and merger proposal — we refer to this proposal
as the “adjournment proposal.”
Record Date; Shares
Entitled to Vote; Quorum
Stockholders will
be entitled to vote or direct votes to be cast at the Special Meeting if they owned shares of LookSmart common stock on the Record
Date. Stockholders will have one vote for each share of LookSmart common stock owned at the close of business on the Record Date.
If your shares are held in “street name” or are in a margin or similar account, you should contact your broker to
ensure that votes related to the shares you beneficially own are properly counted. On the Record Date, there were ______________
shares of LookSmart common stock outstanding.
A quorum of LookSmart
stockholders is necessary to hold a valid meeting. A quorum will be present at the Special Meeting if a majority of the outstanding
shares entitled to vote at the meeting are represented in person or by proxy. Abstentions and broker non-votes will count as present
for the purposes of establishing a quorum.
Vote Required;
Abstentions and Broker Non-Votes
The affirmative vote
of the holders of a majority of the outstanding shares of our common stock is required to approve the reverse split proposal,
the spin-off proposal and the merger proposal. Approval of the proposal to adjourn the Special Meeting, whether or not a quorum
is present, requires the affirmative vote of a majority of the votes cast by the holders of shares of LookSmart’s common
stock entitled to vote. Abstentions and broker non-votes will have the same effect as a vote “against” the spin-off
proposal, the merger proposal, the reverse split proposal and the adjournment proposal, if presented.
Shares Held by LookSmart’s Directors
and Executive Officers
As of the Record
Date, the directors and executive officers of LookSmart as a group owned and were entitled to vote ________ shares of the common
stock of the Company, representing approximately ____% of the outstanding shares of LookSmart common stock on that date. LookSmart
expects that its directors and executive officers will vote their shares in favor of the reverse split proposal, spin-off proposal
and merger proposal, but none of the Company’s directors or executive officers other than Michael Onghai has entered into
any agreement obligating any of them to do so.
In connection with
their entry into the Merger Agreement, LookSmart, Pyxis and Michael Onghai, entered into the Voting Agreement, which generally
requires that Mr. Onghai, in his capacity as a stockholder of LookSmart, vote all of his shares of LookSmart common stock in favor
of the reverse split proposal, the spin-off proposal and the merger proposal, unless doing would violate his fiduciary duties
as an executive officer and member of the board of directors of the Company. As of the Record Date, Mr. Ongahi beneficially held
________ shares of LookSmart common stock, representing approximately ____% of the outstanding shares of the Company’s common
stock, of which ____________ shares are either held of record by Mr. Onghai as of the Record Date or over which he possesses voting
rights and are therefore in either case subject to the Voting Agreement.
Voting of Proxies
If your shares are registered in your name
with our transfer agent, VStock Transfer, LLC, you may cause your shares to be voted by returning a signed proxy card, or you
may vote in person at the special meeting. Additionally, you may submit electronically over the Internet or by phone a proxy authorizing
the voting of your shares by following the instructions on your proxy card. You must have the enclosed proxy card available, and
follow the instructions on the proxy card, in order to submit a proxy electronically over the Internet or by telephone. Based
on your proxy cards or Internet and telephone proxies, the proxy holders will vote your shares according to your directions.
If you plan to attend the Special Meeting
and wish to vote in person, you will be given a ballot at the meeting. If your shares are registered in your name, you are encouraged
to vote by proxy even if you plan to attend the Special Meeting in person. If you attend the Special Meeting and vote in person,
your vote by ballot will revoke any proxy previously submitted.
Voting instructions are included on your proxy
card. All shares represented by properly executed proxies received in time for the Special Meeting will be voted at the Special
Meeting in accordance with the instructions of the stockholder. Properly executed proxies that do not contain voting instructions
will be voted “FOR” approval of the reverse split proposal, “FOR” approval of the spin-off
proposal, “FOR” the merger proposal and “FOR” the adjournment of the special meeting, if
necessary or appropriate, to solicit additional proxies if there are insufficient votes to approve the merger agreement at the
time of the Special Meeting.
If your shares are held in “street name”
through a broker, bank or other nominee, you may vote through your broker, bank or other nominee by completing and returning the
voting form provided by your broker, bank or other nominee, or by the Internet or telephone through your broker, bank or other
nominee if such a service is provided. To vote via the Internet or telephone through your broker, bank or other nominee, you should
follow the instructions on the voting form provided by your broker, bank or other nominee. If you do not return your bank’s,
broker’s or other nominee’s voting form, do not vote via the Internet or telephone through your broker, bank or other
nominee, if possible, or do not attend the special meeting and vote in person with a proxy from your broker, bank or other nominee,
it will have the same effect as if you voted “AGAINST” the reverse split proposal, the spin-off proposal, the
merger proposal and the adjournment proposal, if presented.
Revocability of Proxies
If you are a stockholder of record, you may
change your vote or revoke your proxy at any time before it is voted at the Special Meeting by:
| · | Submitting
a new proxy electronically over the Internet or by telephone after the date of the earlier
submitted proxy; |
| · | Signing
another proxy card with a later date and returning it to us prior to the Special Meeting;
or |
| · | Attending
the Special Meeting and voting in person. |
Please note that to be effective, your new
proxy card, internet or telephonic voting instructions or written notice of revocation must be received by us prior to the Special
Meeting and, in the case of internet or telephonic voting instructions, must be received before 11:59 p.m. Eastern time on _______,
2015. If you have submitted a proxy, your appearance at the Special Meeting, in the absence of voting in person or submitting
an additional proxy or revocation, will not have the effect of revoking your prior proxy.
If you hold your shares of common stock in
“street name,” you should contact your bank, broker or other nominee for instructions regarding how to change your
vote. You may also vote in person at the special meeting if you obtain a valid “legal” proxy from your bank, broker
or other nominee. Any adjournment, recess or postponement of the Special Meeting for the purpose of soliciting additional proxies
will allow LookSmart stockholders who have already sent in their proxies to revoke them at any time prior to their use at the
Special Meeting as adjourned, recessed or postponed.
Board of Directors’ Recommendation
After careful consideration,
the Company’s board of directors has determined that the reverse split proposal, the spin-off proposal, the merger proposal
and the adjournment proposal are fair to and in the best interests of the Company and its stockholders and unanimously recommends
that you vote or give instruction to vote:
| · | “FOR”
the reverse split proposal; |
| · | “FOR”
the spin-off proposal; |
| · | “FOR”
the merger proposal; and |
| · | “FOR”
the adjournment proposal, if presented. |
Solicitation of Proxies
The expense of soliciting proxies in the enclosed
form will be borne by LookSmart. Proxies may also be solicited by some of our directors, officers and employees, personally or
by telephone, facsimile, e-mail or other means of communication. No additional compensation will be paid for such services.
Anticipated Date of Completion of the Merger
Assuming timely satisfaction of necessary
closing conditions, including the approval by our stockholders of the proposal to approve the Merger Agreement, we anticipate
that the Reverse Split, the Spin-Off and the Merger will be consummated in the second calendar quarter of 2015.
Other Matters
At this time, we know of no other matters to be submitted at the
Special Meeting.
Householding of Special Meeting Materials
Unless we have received contrary instructions,
we may send a single copy of this proxy statement and notice to any household at which two or more stockholders reside if we believe
the stockholders are members of the same family. Each stockholder in the household will continue to receive a separate proxy card.
This process, known as “householding,” reduces the volume of duplicate information received at your household and
helps to reduce our expenses.
Who Can Answer Your Questions About
Voting Your Shares
If you are a
stockholder and have any questions about how to vote or direct a vote in respect of your shares of LookSmart common stock,
you may call Michael Onghai at (415) 348-7000.
THE
REVERSE SPLIT
Our board of directors
has adopted resolutions (i) declaring that filing an amendment to the Company’s Certificate of Incorporation to effect
the Reverse Split of our issued and outstanding common stock was advisable, and (ii) directing that a proposal to approve
the Reverse Split be submitted to the holders of our common stock for their approval. The Reverse Split of our issued and outstanding
common stock will be effected by a ratio of not less than one-for-two and not more than one-for-ten at any time prior to ____, 2015, with the exact ratio to be set at a whole number within this range as determined by our board of directors in its sole
discretion.
Our board of
directors is submitting the Reverse Split to our stockholders for approval with the intent of increasing the market price of
our common stock to enhance our ability to meet the continued listing requirements of the Nasdaq Capital Market, to make our
common stock sufficiently attractive for Pyxis to consummate the Merger transaction and to ensure that Pyxis will be able to
meet the initial listing requirements of either the Nasdaq Capital Market or the NYSE MKT after consummation of the Merger
transaction.
Procedure for Implementing the Reverse Stock Split
The Reverse Split, if approved by our stockholders,
would become effective upon the filing (the “RS Effective Time”) of a certificate of amendment to our Certificate
of Incorporation with the Secretary of State of the State of Delaware. The exact timing of the filing of the certificate
of amendment that will effect the Reverse Split will be determined by our board of directors based on its evaluation as to when
such action will be the most advantageous to the Company and our stockholders. In addition, our board of directors
reserves the right, notwithstanding stockholder approval and without further action by the stockholders, to elect not to proceed
with the Reverse Split if, at any time prior to filing the amendment to the Company’s Certificate of Incorporation, our
board of directors, in its sole discretion, determines that it is no longer in our best interest and the best interests of our
stockholders to proceed with the Reverse Split. If a certificate of amendment effecting the Reverse Split has not been
filed with the Secretary of State of the State of Delaware by the close of business on ______, 2015, our board of directors
will abandon the Reverse Split.
Effect
of the Reverse Split on holders of LookSmart common stock
Depending
on the ratio for the Reverse Split determined by our board of directors, a minimum of two and a maximum of ten shares of existing
common stock will be combined into one new share of common stock. The actual number of shares issued after giving effect
to the Reverse Split, if implemented, will depend on the reverse stock split ratio that is ultimately determined by our board
of directors.
The
Reverse Split will affect all holders of our common stock uniformly and will not affect any stockholder’s percentage ownership
interest in the Company, except that as described below in “Fractional Shares,” record holders of common stock otherwise
entitled to a fractional share as a result of the Reverse Split will be rounded up to the next whole number. In addition,
the Reverse Split will not affect any stockholder’s proportionate voting power (subject to the treatment of fractional shares).
The Reverse
Split may result in some stockholders owning “odd lots” of less than 100 shares of common stock. Odd lot
shares may be more difficult to sell, and brokerage commissions and other costs of transactions in odd lots are generally somewhat
higher than the costs of transactions in “round lots” of even multiples of 100 shares
Beneficial
Holders of Common Stock (i.e. stockholders who hold in street name)
Upon the implementation
of the Reverse Split, we intend to treat shares held by stockholders through a bank, broker, custodian or other nominee in the
same manner as registered stockholders whose shares are registered in their names. Banks, brokers, custodians or other
nominees will be instructed to effect the Reverse Split for their beneficial holders holding our common stock in street name. However,
these banks, brokers, custodians or other nominees may have different procedures than registered stockholders for processing the
Reverse Split. Stockholders who hold shares of our common stock with a bank, broker, custodian or other nominee and
who have any questions in this regard are encouraged to contact their banks, brokers, custodians or other nominees.
Registered
“Book-Entry” Holders of Common Stock (i.e. stockholders that are registered on the transfer agent’s books and
records but do not hold stock certificates)
Certain of our
registered holders of common stock may hold some or all of their shares electronically in book-entry form with the transfer agent. These
stockholders do not have stock certificates evidencing their ownership of the common stock. They are, however, provided
with a statement reflecting the number of shares registered in their accounts.
Stockholders
who hold shares electronically in book-entry form with the transfer agent will not need to take action (the exchange will be automatic)
to receive whole shares of post-Reverse Split common stock, subject to adjustment for treatment of fractional shares.
Holders
of Certificated Shares of Common Stock
Stockholders
holding shares of our common stock in certificated form will be sent a transmittal letter by our transfer agent after the RS Effective
Time. The letter of transmittal will contain instructions on how a stockholder should surrender his, her or its certificate(s) representing
shares of our common stock (the “Old Certificates”) to the transfer agent in exchange for certificates representing
the appropriate number of whole shares of post-Reverse Split common stock (the “New Certificates”). No
New Certificates will be issued to a stockholder until such stockholder has surrendered all Old Certificates, together with a
properly completed and executed letter of transmittal, to the transfer agent. No stockholder will be required to pay
a transfer or other fee to exchange his, her or its Old Certificates. Stockholders will then receive a New Certificate(s) representing
the number of whole shares of common stock that they are entitled as a result of the Reverse Split, subject to the treatment of
fractional shares described below. Until surrendered, we will deem outstanding Old Certificates held by stockholders
to be cancelled and only to represent the number of whole shares of post-Reverse Split common stock to which these stockholders
are entitled, subject to the treatment of fractional shares. Any Old Certificates submitted for exchange, whether because
of a sale, transfer or other disposition of stock, will automatically be exchanged for New Certificates. If an Old
Certificate has a restrictive legend on the back of the Old Certificate(s), the New Certificate will be issued with the same restrictive
legends that are on the back of the Old Certificate(s).
STOCKHOLDERS
SHOULD NOT DESTROY ANY STOCK CERTIFICATE(S) AND SHOULD NOT SUBMIT ANY STOCK CERTIFICATE(S) UNTIL REQUESTED TO DO SO.
Fractional
Shares
We do not currently
intend to issue fractional shares in connection with the Reverse Split. Therefore, we will not issue certificates representing
fractional shares. In lieu of issuing fractions of shares, we will round up to the next whole number.
Accounting
Matters
The proposed
amendment to the Company’s Certificate of Incorporation will not affect the par value of our common stock per share, which
will remain $0.003 par value per share. As a result, as of the RS Effective Time, the stated capital attributable to
common stock and the additional paid-in capital account on our balance sheet will not change due to the Reverse Split. Reported
per share net income or loss will be higher because there will be fewer shares of common stock outstanding.
Certain
Federal Income Tax Consequences of the Reverse Split
The following
summary describes certain material U.S. federal income tax consequences of the Reverse Split to holders of our common stock.
Unless otherwise
specifically indicated herein, this summary addresses the tax consequences only to a beneficial owner of our common stock that
is a citizen or individual resident of the United States, a corporation organized in or under the laws of the United States or
any state thereof or the District of Columbia or otherwise subject to U.S. federal income taxation on a net income basis in respect
of our common stock (a “U.S. holder”). A trust may also be a U.S. holder if (1) a U.S. court
is able to exercise primary supervision over administration of such trust and one or more U.S. persons have the authority to control
all substantial decisions of the trust or (2) it has a valid election in place to be treated as a U.S. person. An
estate whose income is subject to U.S. federal income taxation regardless of its source may also be a U.S. holder. This
summary does not address all of the tax consequences that may be relevant to any particular investor, including tax considerations
that arise from rules of general application to all taxpayers or to certain classes of taxpayers or that are generally assumed
to be known by investors. This summary also does not address the tax consequences to (i) persons that may be subject
to special treatment under U.S. federal income tax law, such as banks, insurance companies, thrift institutions, regulated investment
companies, real estate investment trusts, tax-exempt organizations, U.S. expatriates, persons subject to the alternative minimum
tax, traders in securities that elect to mark to market and dealers in securities or currencies, (ii) persons that hold our
common stock as part of a position in a “straddle” or as part of a “hedging,” “conversion”
or other integrated investment transaction for federal income tax purposes, or (iii) persons that do not hold our common
stock as “capital assets” (generally, property held for investment).
If a partnership
(or other entity classified as a partnership for U.S. federal income tax purposes) is the beneficial owner of our common stock,
the U.S. federal income tax treatment of a partner in the partnership will generally depend on the status of the partner and the
activities of the partnership. Partnerships that hold our common stock, and partners in such partnerships, should consult
their own tax advisors regarding the U.S. federal income tax consequences of the Reverse Stock Split.
This summary
is based on the provisions of the Internal Revenue Code of 1986, as amended, U.S. Treasury regulations, administrative rulings
and judicial authority, all as in effect as of the date of this proxy statement. Subsequent developments in U.S. federal
income tax law, including changes in law or differing interpretations, which may be applied retroactively, could have a material
effect on the U.S. federal income tax consequences of the Reverse Split.
PLEASE CONSULT
YOUR OWN TAX ADVISOR REGARDING THE U.S. FEDERAL, STATE, LOCAL, AND FOREIGN INCOME AND OTHER TAX CONSEQUENCES OF THE REVERSE SPLIT
IN YOUR PARTICULAR CIRCUMSTANCES UNDER THE INTERNAL REVENUE CODE AND THE LAWS OF ANY OTHER TAXING JURISDICTION.
U.S.
Holders
The Reverse
Split should be treated as a recapitalization for U.S. federal income tax purposes. Therefore, a stockholder generally
will not recognize gain or loss on the Reverse Split, except to the extent of cash, if any, received in lieu of a fractional share
interest in the post-Reverse Split shares. The aggregate tax basis of the post-split shares received will be equal to the aggregate
tax basis of the pre-split shares exchanged therefore (excluding any portion of the holder’s basis allocated to fractional
shares), and the holding period of the post-split shares received will include the holding period of the pre-split shares exchanged.
A holder of the pre-split shares who receives cash will generally recognize gain or loss equal to the difference between the portion
of the tax basis of the pre-split shares allocated to the fractional share interest and the cash received. Such gain or loss will
be a capital gain or loss and will be short term if the pre-split shares were held for one year or less and long term if held
more than one year. No gain or loss will be recognized by us as a result of the Reverse Split.
No
Appraisal Rights
Under the DGCL
and our charter documents, holders of our common stock will not be entitled to dissenter’s rights or appraisal rights with
respect to the Reverse Split.
THE
MERGER
Parties
Involved in the Merger
LookSmart, Ltd.
LookSmart was
organized in 1996 and is incorporated in the State of Delaware. LookSmart is a digital advertising solutions company that provides
relevant solutions for search and display advertising customers, organized along five lines of business: (i) Clickable, (ii) LookSmart
AdCenter, (iii) Novatech.io, (iv) ShopWiki and (v) web searches. In addition, LookSmart formed a partnership with Conversion Media
Holdings, LLC, which supports the Company’s other lines of business through the creation of content sites directed at ecommerce
verticals. The Company operates each line of business, while being related to the others in terms of shared resources, as separate
business lines with their own core management, profits and losses, and the ability to operate independently as separate businesses.
As a result, this separation of business lines allows Looksmart to operate effectively as a holding company and as a capital allocator
to each of the Company’s separate businesses with the goal of finding mispriced assets in the public and private markets
and subsequently utilizing those assets to create scalable and sustainable businesses that may then be monetized for the ultimate
benefit of Looksmart’s stockholders.
After the Merger,
LookSmart will cease to exist.
LookSmart
Group, Inc.
Holdco is a
wholly-owned subsidiary of LookSmart formed solely for the purpose of effectuating the Spin-Off described herein, and to carry
on the historical business of LookSmart following the Merger. Holdco was incorporated under the laws of Nevada on March 6, 2015.
Pyxis Tankers
Inc.
Pyxis Tankers
Inc. is a newly formed international maritime transportation company with a focus on the tanker sector. At the consummation of
the Merger, Pyxis’ fleet will be comprised of six double hull tankers with an average current age of four years, that are
employed under a mix of short- and medium-term time charters and spot charters. Pyxis will acquire these six vessels prior to
the Merger from an affiliate of its founder and chief executive officer, Mr. Valentios (“Eddie”) Valentis. Four of
the vessels in the fleet will be medium-range, or MR, tankers, three of which have eco-efficient or eco-modified designs and two
will be short-range tanker sister ships. Each of the vessels in the fleet is capable of transporting refined petroleum products,
such as naphtha, gasoline, jet fuel, kerosene, diesel and fuel oil, as well as other liquid bulk items, such as vegetable oils
and organic chemicals.
Pyxis’
principal objective will be to own and operate its fleet in a manner that will enable it to benefit from short- and long-term
trends that Pyxis expects in the tanker sector to maximize its revenues and to enhance returns to its shareholders. Pyxis intends
to expand the fleet through selective acquisitions of modern product tankers in a manner that is accretive to shareholder value.
It expects to employ its vessels primarily through time charters to creditworthy customers and on the spot market. Pyxis intends
to continually evaluate the markets in which it operates and, based upon its view of market conditions, adjust its mix of vessel
employment by counterparty and stagger its charter expirations. In addition, Pyxis’ may choose to opportunistically direct
asset sales when conditions are primed to generate attractive returns for its shareholders.
Following
the consummation of the Merger, Pyxis will consider taking advantage of LookSmart’s experience in customizable internet
applications. LookSmart intends to upgrade without charge Pyxis’ web-site and internet capabilities in order to enhance
functionality and information, including shareholder interface. Pyxis also intends that Robert Ladd, LookSmart’s nominee
to Pyxis’ Board, and a number of Pyxis’ executive officers will monitor technological developments in the shipping
industry and when economically feasible, propose technologies for adoption by Pyxis and/or consider possible opportunities for
joint ventures or investments by Pyxis. In order to enhance its shareholder relations and capital markets access, Pyxis also intends
to establish a small representative office in the New York area in the near future.
Effect
of the Merger
Upon the terms
and subject to the conditions of the Merger Agreement, LookSmart will merge with and into Merger Sub, with Merger Sub continuing
as the surviving corporation. As a result of the Merger, Merger Sub will remain a wholly owned subsidiary of Pyxis, and each share
of LookSmart common stock (post-Reverse Split) will be exchanged for the right to receive _____ shares of Pyxis common stock.
LookSmart will no longer be publicly traded. In addition, LookSmart common stock will be delisted from NASDAQ and deregistered
under the Exchange Act, and LookSmart will no longer file periodic reports with the SEC on account of its exchange for Pyxis common
stock. If the Merger is completed, you will not own any shares of the capital stock of Merger Sub, and will instead own shares
of Pyxis Tankers Inc.
The time at which the Merger will
become effective, which we refer to as the effective time of the Merger, will occur upon the filing of a certificate of merger
with the Secretary of State of Delaware.
Effect
on LookSmart if the Merger is Not Completed
If the Merger
Agreement is not approved by LookSmart stockholders or if the Merger is not completed for any other reason, LookSmart stockholders
will not receive any payment or other compensation for their shares of common stock. Instead, LookSmart will remain an independent
public company, its common stock will continue to be listed and traded on NASDAQ (assuming the Company can meet all of NASDAQ’s
continued listing standards) and registered under the Exchange Act and LookSmart will continue to file periodic reports with the
SEC. In addition, if the Merger is not completed, LookSmart expects that management will operate the business in a manner similar
to that in which it is being operated today and that LookSmart’s stockholders will continue to be subject to the same risks
and opportunities to which they are currently subject, including, without limitation, risks related to the highly competitive
industry in which LookSmart operates and adverse economic conditions.
Furthermore,
if the Merger is not completed, and depending on the circumstances that would have caused the Merger not to be completed, the
price of LookSmart’s common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price
of LookSmart’s common stock would return to the price at which it trades as of the date of this proxy statement/prospectus.
Accordingly,
if the Merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value
of your shares of LookSmart’s common stock. If the Merger is not completed, LookSmart’s board of directors will continue
to evaluate and review the Company’s business operations, properties, dividend policy and capitalization, among other things,
make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value.
If the Merger Agreement is not approved by LookSmart’s stockholders or if the Merger is not completed for any other reason,
there can be no assurance that any other transaction acceptable to LookSmart will be offered or that LookSmart’s business,
prospects or results of operation will not be adversely impacted.
In
addition, under specified circumstances, LookSmart may be required to reimburse Pyxis’ expenses or pay Pyxis a
termination fee, upon the termination of the merger agreement, as described under “Termination Fees and Expenses”
beginning on page 92.
Merger
Consideration
Each
share of LookSmart held by holders of record of the Company’s common stock (post-Reverse Split) at the close of business
on _______, 2015 will be cancelled and exchanged for ____ share(s) of Pyxis common stock. In addition, the Company received a
cash payment of $600,000 upon execution of the Merger Agreement.
Make
Whole Record Date
In
the event that subsequent to the Merger, Pyxis completes a Future Pyxis Offering at a valuation lower than the valuation
ascribed to the shares of common stock received by LookSmart stockholders pursuant to the Merger Agreement, Pyxis will be
obligated to make “whole” the LookSmart stockholders as of April 29, 2015 (the “Make Whole
Record Date”) by offering such LookSmart stockholders the right to receive additional shares of Pyxis common stock
to compensate the LookSmart stockholders for the difference in value of their Pyxis common stock.
In
addition, should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of
the Merger, each Legacy LS Stockholder will have a 24-hour option beginning at the end of such 3 year period to require Pyxis
to purchase a pro rata amount of Pyxis common stock that would result in aggregate gross proceeds to the Legacy LS Stockholders
in an amount not to exceed $2,000,000; provided that in no event shall a Legacy LS Stockholder receive an amount per share greater
than the Consideration Value.
STOCKHOLDERS
PURCHASING SHARES OF LOOKSMART’S COMMON STOCK AFTER THE MAKE WHOLE RECORD DATE WILL NOT BE ENTITLED TO THE FOREGOING COMPENSATION
RELATED TO A FUTURE PYXIS OFFERING.
Background
of the Merger
The following
is a brief discussion of the background of the negotiations that led to the entry into the Merger Agreement and related documents.
These negotiations were conducted on an arm’s-length basis between representatives of LookSmart and Pyxis.
On October 15,
2014, Pyxis’ financial advisor, Maxim Group LLC (“Maxim”), approached LookSmart with respect to discussing
a possible reverse merger transaction with Pyxis.
The parties
entered into a mutual nondisclosure agreement on October 18, 2014.
On October 20,
2014, LookSmart received from Maxim preliminary background information regarding Pyxis and senior officers of LookSmart met with
Maxim at their offices the next day to discuss the reverse merger transaction in more detail.
Senior officers
of LookSmart and Pyxis met for the first time telephonically on October 22, 2014. During the conference call, during which Maxim
was present, the senior officers introduced their companies and answered questions about their respective operations and industries
and discussed the benefits of the reverse merger for both parties.
On October 24,
2014, Maxim sent LookSmart the first draft of a term sheet for the reverse merger transaction.
Senior officers
of LookSmart met with Maxim at their offices on October 28, 2014 to review the term sheet and discuss transaction mechanics.
On November
4, 2014, LookSmart provided Maxim with initial comments to the term sheet. Following Maxim’s request for clarifications,
LookSmart subsequently revised the term sheet and resent it to Maxim on November 7, 2014.
LookSmart received
a revised term sheet from Maxim on November 8, 2014. The revised term sheet included Pyxis’s comments relating primarily
to the amount of share and cash consideration that LookSmart would receive in connection with the reverse merger transaction.
Senior executives
of LookSmart and Pxyis held a conference call on November 15, 2014 to discuss the fundamentals of the product shipping industry.
On the call, LookSmart executives also explored changes to the structure to include possible down-side protection for the value
of the shares that LookSmart’s stockholders would receive in the reverse merger transaction.
On November
17, 2014, Maxim sent LookSmart information relating to a possible structure for the reverse merger with Pyxis. Maxim followed-up
the next couple days by providing LookSmart more specific information concerning possible mechanics for the reverse merger, the
spin out and a make-whole right as well as additional information regarding the product tanker market.
Pyxis, LookSmart
and its former counsel met telephonically on November 22, 2014 to discuss elements of the term sheet and the proposed mechanics.
On behalf of
Pyxis, Maxim sent to LookSmart a revised term sheet on November 25, 2014, which included a revised consideration amount and a
make-whole component for the stockholders of LookSmart.
On December
8, 2014, LookSmart sent Maxim a revised term sheet proposing an increase in the amount of consideration and a senior executive
of LookSmart met with Maxim at their offices later in the day to discuss the change and how to convert the term sheet into a more
definitive letter of intent.
On December
11, 2014, Maxim sent to LookSmart a draft of the term sheet the parties converted into a letter of intent for review.
On January 8,
2015, Pyxis and LookSmart entered into a letter of intent setting forth non-binding terms of a possible structure to the reverse
merger.
On January 19,
2015, LookSmart received the first draft of the Merger Agreement from Pyxis’s counsel.
On January 24,
2014, LookSmart’s counsel returned a revised Merger Agreement with comments to Pyxis and in the subsequent weeks, counsels
for LookSmart and Pyxis, with Maxim, conducted negotiations on the terms and provisions of the merger agreement.
On January 27,
2015, Maxim and the senior vice presidents of LookSmart and Pyxis met in New York for preliminary discussions concerning the timing
of the transactions.
On January 29,
2015, a senior executive officer of LookSmart met the senior officers of Pyxis at the offices of Maxim in New York to discuss
elements of the proposed Merger, including the preliminary mechanics of the spin-off.
On February
12, 2015, LookSmart, Pyxis, their respective counsels and Maxim discussed a possible structure for the spin-off, timing for the
preparation of the ancillaries and several remaining items in the Merger Agreement.
On February
25, 2015, LookSmart met with its tax counsel, Canadian counsel and auditors to discuss various implications of the transactions
contemplated by the Merger Agreement.
On March 2,
2015, LookSmart, Pyxis, their respective counsels and Maxim discussed a timeline for the preparation of the deliverables required
by the Merger Agreement.
On March 6,
2015, LookSmart caused LookSmart Group, Inc. to be incorporated in the State of Nevada in anticipation of the spin-off.
On March 12,
2015, LookSmart, Pyxis, their respective counsels and Maxim discussed progress on the various deliverables relating to the Merger
Agreement, and to discuss the necessity of a reverse split in order to satisfy NASDAQ listing requirements for Pyxis’ shares
in the future.
On March 21,
2015, LookSmart, Pyxis, their respective counsels and Maxim discussed the specific assets to be transferred into LookSmart Group,
Inc. prior to the execution of the Merger Agreement.
On March 25, 2015, Pyxis caused Maritime Technologies Corp. to be incorporated in the State of Delaware in anticipation of
the Merger.
On March 31, 2015, GLC rendered its oral opinion to the Company's board of directors, as to the business of the
Merger, from a financial stand point, to the Company's stockholders.
On April 23, 2015, GLC delivered to the Company's board
of directors its written opinion as to the business of the Merger.
Recommendation
of LookSmart’s Board of Directors and Reasons for the Merger
After
careful consideration and consulting with our financial advisor, GLC, the Company’s board of directors has determined that
the reverse split proposal, spin-off proposal, merger proposal and the adjournment proposal are fair to and in the best interests
of the Company and its stockholders and unanimously recommends that you vote or give instruction to vote:
| · | “FOR”
the reverse split proposal; |
| · | “FOR”
the spin-off proposal; |
| · | “FOR”
the merger proposal; and |
| · | “FOR”
the adjournment proposal, if presented. |
Reasons
for the Merger
In evaluating
the Merger Agreement and the transactions contemplated thereby and recommending that LookSmart’s stockholders vote in favor
of approval of the Merger Agreement and the transactions contemplated thereby, LookSmart’s board of directors, in consultation
with LookSmart’s senior management, outside legal counsel and financial advisor, considered numerous positive factors relating
to the Merger Agreement, the Merger and the other transactions contemplated thereby including the following material factors:
| · | The
aggregate value to be received by LookSmart’s stockholders in the Merger, in that
after the completion of the Merger and the Spin-Off, each LookSmart stockholder will
have received one share of the common stock of Holdco and the right to receive ____ share(s)
of the common stock of Pyxis in exchange for that stockholder’s one share of LookSmart. |
| · | The
Spin-Off allows Holdco to retain 100% of LookSmart’s current business, assets and
liabilities. |
| · | The
cost, time and effort to maintain a public listing. |
| · | LookSmart
will have a better ability to attract capital as a private company and possibly avoid
continuing going concern qualification by its auditors. |
| · | Challenges
facing LookSmart’s business, including the receipt of two notices from NASDAQ of
the Company’s failure to satisfy a continued listing standard and the possibility
that it could take a considerable period of time before the Company could increase the
trading price of its common stock to $1.00 per share in order to satisfy the NASDAQ’s
continued listing requirements. |
| · | The
expected continuation of decline in LookSmart’s share price caused in part by the
revenue decline in the Company’s AdCenter and Clickable business units. |
| · | The
prospective risks to LookSmart relating to the risks and uncertainties of maintaining
its growth in the highly competitive market for hosted software and technology products
and economic uncertainties over the past several years having resulted in many clients’
reassessment of technology product needs. |
| · | The
other strategic alternatives available to LookSmart, such as continuing to operate as
an independent company and pursuing its strategic plan and the possibility of growing
its business through acquisitions and internal growth, that the Company’s board
of directors believed was less attractive than Pyxis’ proposal to LookSmart’s
stockholders under the circumstances. |
| · | The
receipt of $600,000 upon signing of the Merger Agreement to fund continuing operations. |
| · | The
processes conducted by LookSmart over approximately the last year and a half prior to
entering into the Merger Agreement, involving a broad group of potential acquirers (that
included both strategic and financial parties) and which was conducted with the assistance
of LookSmart’s financial advisor(s) and which led to no other competitive and actionable
proposals given the facts and circumstances present at that time. |
| · | The
terms and conditions of the Merger Agreement and related transaction documents, including: |
| o | under
certain circumstances, LookSmart is permitted to entertain and negotiate unsolicited
alternative proposals, withdraw its recommendation with respect to the Merger Agreement
or terminate the Merger Agreement, subject, in each case, to compliance with certain
procedural requirements, which may include the payment of a customary break-up/termination
fee; |
| o | the
fact that the break-up/termination fee described above is a portion of the estimated
value of the shares of Pyxis’ common stock to be received by LookSmart’s
stockholders as result of the Merger, which amount the Company’s board of directors
believed was reasonable in light of, among other matters, the benefits of the Merger
to LookSmart’s stockholders, the typical size of such termination fees in similar
transactions and the likelihood that a fee of such size would not be a meaningful deterrent
to alternative acquisition proposals; |
| o | the
ability of the parties to consummate the Merger, including the fact that Pyxis’
obligation to complete the Merger is not conditioned upon receipt of financing and that
in the event that Pyxis conducts a future securities offering with gross proceeds exceeding
$5,000,000, the Legacy LS stockholders may receive additional shares of Pyxis common
stock if the price for which Pyxis’ shares are offered in such offering is less
than the value of the shares received pursuant to the Merger exchange; and |
| o | the
requirement that the Merger Agreement be approved by the holders of a majority of the
outstanding shares of LookSmart’s common stock. |
| · | The
fact that LookSmart’s board of directors received and reviewed a fairness opinion
from GLC approving the Merger and Spin-off transactions as fair. |
| · | The
fact that resolutions approving the Merger Agreement were unanimously approved by LookSmart’s
board of directors, which is comprised of a majority of independent directors. |
In the course
of reaching the determinations and decisions and making the recommendation described above, LookSmart’s board of directors,
in consultation with LookSmart’s senior management, outside legal counsel and financial advisor, considered the risks and
potentially negative factors relating to the Merger Agreement, the Merger and the other transactions contemplated thereby, including
the following material factors:
| · | The
possibility that the share price of Pyxis could decline after the Merger, reducing the
overall value proposition of the transaction. |
| · | The
possibility that the consummation of the Merger may be delayed or not occur at all, and
the adverse impact such event would have on LookSmart and its business. |
| · | The
possible disruption to LookSmart’s business that may result from announcement of
the Merger and the resulting distraction of management’s attention from the day-to-day
operations of the business. |
| · | The
potential negative effect of the pendency of the Merger on LookSmart’s business,
including uncertainty about the effect of the proposed Merger on the Company’s
employees, customers and other parties, which may impair its ability to attract, retain
and motivate key personnel, and could cause customers, suppliers and others to seek to
change existing business relationships with LookSmart. |
| · | That
if the Merger is not consummated, LookSmart may be required to pay its own expenses associated
with the Merger Agreement and the transactions contemplated thereby. |
| · | LookSmart’s
board of directors believed that, overall, the potential benefits of the Merger to LookSmart’s
stockholders outweighed the risks and uncertainties of the Merger. |
The foregoing
discussion of factors considered by LookSmart’s board of directors is not intended to be exhaustive, but includes the material
factors considered by the board of directors. In light of the variety of factors considered in connection with its evaluation
of the Merger, the board of directors did not find it practicable to, and did not, quantify or otherwise assign relative weights
to the specific factors considered in reaching its determinations and recommendations. Moreover, each member of the board of directors
applied his or her own personal business judgment to the process and may have given different weight to different factors. The
board of directors did not undertake to make any specific determination as to whether any factor, or any particular aspect of
any factor, supported or did not support its ultimate determination. The board of directors based its recommendation on the totality
of the information presented.
Opinion
of GLC
LookSmart
engaged GLC to render an opinion, as of April 23, 2015, as to the fairness of the Merger, from a financial point of
view, to LookSmart’s stockholders. GLC is an investment banking firm that regularly is engaged in the evaluation of
businesses and their securities in connection with acquisitions, corporate restructuring, private placements and for other
purposes. LookSmart’s board of directors decided to use the services of GLC because it is a nationally recognized
investment banking firm that has experience in similar matters. GLC rendered its oral opinion to LookSmart’s board of
directors on March 31, 2015 (which was subsequently confirmed in writing by delivery of GLC’s written opinion) the Merger and Spin-off were fair, from a financial point of view, to
LookSmart’s stockholders.
GLC’s
opinion was provided for the use and benefit of the LookSmart board of directors in connection with its consideration of the Merger
and only addressed the fairness, from a financial point of view, to LookSmart of the Merger pursuant to the Merger Agreement,
in each case as of the date of the opinion, and did not address any other aspect or implication of the Merger. The summary of
GLC’s opinion in this proxy statement is qualified in its entirety by reference to the full text of the written opinion,
which is included as Annex B to this proxy statement and sets forth the procedures followed, assumptions made, qualifications
and limitations on the review undertaken and other matters considered by GLC in preparing its opinion. However, neither GLC’s
written opinion nor the summary of its opinion and the related analyses set forth in this proxy statement are intended to be,
and do not constitute, advice or a recommendation to any stockholder as to how such stockholder should act or vote with respect
to any matter relating to the proposed Merger.
Interests
of LookSmart’s Directors and Officers in the Merger
As
of the Record Date, the directors and executive officers of LookSmart as a group owned and were entitled to vote ________ shares
of the common stock of the Company, representing approximately ____% of the outstanding shares of LookSmart common stock on that
date. LookSmart expects that its directors and executive officers will vote their shares in favor of the reverse split proposal,
spin-off proposal and merger proposal, but none of the Company’s directors or executive officers other than Michael Onghai
has entered into any agreement obligating any of them to do so.
Besides
the equity ownership of LookSmart detailed above, the directors and executive officers of the Company do not have interests different
than the other stockholders of LookSmart.
Voting
Agreement
In
connection with their entry into the Merger Agreement, LookSmart, Pyxis and Michael Onghai, entered into the Voting Agreement,
which is included as Annex C to this proxy statement. The Voting Agreement generally requires that Mr. Onghai, in his capacity
as a stockholder of LookSmart, vote all of his shares of LookSmart common stock in favor of the reverse split proposal, spin-off
proposal and merger proposal, unless doing so would violate his fiduciary duties as an executive officer and member of the board
of directors of the Company. As of the Record Date, the Mr. Ongahi beneficially held ________ shares of LookSmart common stock,
representing approximately ____% of the outstanding shares of the Company’s common stock, of which ____________ shares are
either held of record by the Mr. Onghai as of the Record Date or over which he possesses voting rights and are therefore in either
case subject to the Voting Agreement.
Closing
and Effective Time of the Merger
We
are working to complete the Reverse Split, the Spin-Off and the Merger as quickly as possible, and we expect to complete all these
transactions in the second quarter of 2015. However, LookSmart cannot assure you when or if the Merger will occur. The Merger
is subject to stockholder approvals and other conditions, and it is possible that factors outside the control of both LookSmart
and Pyxis could result in the Merger being completed at a later time, or not at all. There may be a substantial amount of time
between the Special Meeting and the completion of the Merger.
Appraisal
Rights
LookSmart
stockholders do not have appraisal rights in connection with the Spin-Off or the Merger under the DGCL.
Accounting
Treatment
Both LookSmart
and Pyxis prepare their financial statements in accordance with accounting principles generally accepted in the United States
of America (“GAAP”). The merger will be accounted for as a “purchase transaction” for financial
accounting purposes.
Marshall
Islands Tax Consequences of the Merger
In the opinion
of Seward & Kissel LLP, under current Marshall Islands law, we will not be subject to Marshall Islands income tax as a result
of the transactions described in the Merger Agreement and our shareholders will not be subject to any Marshall Islands income
withholding or capital gains by reason of such transactions.
United
States Federal Income Tax Consequences of the Merger
The following
discussion sets forth the material U.S. Federal income tax consequences to our stockholders and the Company of the following transactions
described in the Merger Agreement: (i) the distribution of stock in Holdco to our stockholders (following the contribution by
the Company of all of its assets to the capital of Holdco), and (ii) the exchange by our stockholders of their stock in the Company
for stock in Pyxis.
This discussion
is limited to U.S. holders (as defined below) of our common stock who hold such stock as a capital asset for Federal income tax
purposes. This discussion is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury
Regulations promulgated thereunder, judicial decisions, and the current administrative rules, practices and interpretations of
law of the U.S. Internal Revenue Service (“IRS”), all as in effect on the date of this document, and all of
which are subject to change, possibly with retroactive effect. This discussion does not address all aspects of Federal income
taxation that may be important to particular holders in light of their individual investment circumstances. Unless specifically
stated otherwise, this discussion does not apply to the following holders, even if they are U.S. holders, all of whom may be subject
to tax rules that differ significantly from those summarized below: (i) holders who may be subject to special tax rules, including,
without limitation, partnerships (including any entity or arrangement treated as a partnership for Federal income tax purposes);
(ii) dealers in securities or foreign currency, foreign persons, insurance companies, tax-exempt organizations, banks, financial
institutions, and broker-dealers; and (iii) holders of warrants or other convertible securities entitling them to receive stock,
holders who acquired common stock pursuant to the exercise of compensatory stock options or otherwise as compensation, or holders
who hold common stock as part of a hedge, straddle, conversion, constructive sale or other integrated security transaction.
We have not
sought, and will not seek, a ruling from the IRS regarding the Federal income tax consequences of these transactions. This discussion
is based on varying interpretations that could result in U.S federal income tax consequences different from those described below.
The following discussion does not address the tax consequences of this offering or the related share issuance under foreign, state,
or local tax laws, or the alternative minimum tax provisions of the Code. Accordingly, each U.S. holder of common stock is urged
to consult his, her or its (hereinafter, “his”) tax advisor with respect to the particular tax consequences of these
transactions.
For purposes
of this discussion, a “U.S. holder” is a holder who is for U.S. federal income tax purposes: (i) a citizen
or resident of the U.S.; (ii) a corporation or other entity taxable as a corporation that is organized in or under the laws of
the U.S., any state thereof or the District of Columbia; (iii) an estate, the income of which is subject to U.S. federal income
taxation, regardless of its source; or (iv) a trust, if a U.S. court is able to exercise primary supervision over the administration
of the trust and one or more U.S. persons have the authority to control all substantial decisions of the trust (or if the trust
was in existence on August 20, 1996, and validly elected to continue to be treated as a U.S. trust).
THIS SUMMARY
IS ONLY A GENERAL DISCUSSION AND IS NOT INTENDED TO BE, AND SHOULD NOT BE CONSTRUED TO BE, LEGAL OR TAX ADVICE. THE U.S. FEDERAL
INCOME TAX TREATMENT OF THESE TRANSACTIONS IS COMPLEX. ACCORDINGLY, EACH U.S. HOLDER IS STRONGLY URGED TO CONSULT HIS OWN TAX
ADVISER WITH RESPECT TO THE U.S. FEDERAL, STATE, LOCAL AND FOREIGN INCOME, ESTATE AND OTHER TAX CONSEQUENCES OF THE TRANSACTIONS
WITH SPECIFIC REFERENCE TO SUCH PERSON’S PARTICULAR FACTS AND CIRCUMSTANCES.
Distributions
of Stock in Holdco
The distribution
to our stockholders of stock interests in Holdco will be a taxable event to each Stockholder. The value of the interests in Holdco
received by each of our stockholders will be applied first to reduce the stockholder’s basis in his stock in LookSmart;
any value of those interests in excess of the stockholder’s basis in our company’s stock will be a capital gain to
the stockholder. Any capital gain will be long-term capital gain, taxable at favorable capital gains rates, if the Stockholder
has held his stock in our company for more than a year at the time of the distribution; otherwise, any gain will be short-term
capital gain taxable at ordinary income tax rates.
The foregoing
discussion assumes that the Company does not, at the time of the distribution, have current or accumulated earnings and profits
(“earnings and profits”). If the Company does have earnings and profits, then (i) the distribution of the interests
in Holdco will be treated as a dividend distribution to each Stockholder (taxable at ordinary income tax rates) to the extent
of the stockholder’s pro rata share of the Company’s earnings and profits; and (ii) the value of the distribution,
if any, in excess of the stockholder’s pro rata share of earnings and profits will be treated in the manner described in
the preceding paragraph.
If a stockholder’s
basis in our company’s stock is greater than the value of the interests in Holdco received by the stockholder, the stockholder
will not recognize a capital loss. However, as discussed in the next section (“Exchange of Company Shares for Pyxis Shares”),
a stockholder may recognize a capital loss on the exchange of his shares in LookSmart for stock in Pyxis.
The tax consequences
of the distribution of Holdco, and of the exchange of our company stock for Pyxis stock (as described below), are complex and
not free from doubt. We have provided what we believe are the most likely consequences. Stockholders may wish to consult their
own tax advisors on the tax consequences of these transactions.
Exchange
of Company Shares for Pyxis Shares
The exchange
by a stockholder of shares in our company for shares of stock in Pyxis will be a taxable event to the stockholder. The stockholder
will realize a capital gain to the extent that the value of the Pyxis stock received by the stockholder exceeds the stockholder’s
basis in our stock (a stockholder’s basis in our stock may be reduced by the value of Holdco distributed to the stockholder,
as described in “Distributions of Stock in Holdco”, above). Any gain will be long-term capital gain if the
stockholder has held his stock in our company for more than one year; otherwise any gain will be short-term capital gain. If the
stockholder’s basis in his stock in our company stock exceeds the value of the Pyxis stock received by the stockholder,
the stockholder will recognize a capital loss to the extent of the excess.
Net Investment
Income Tax
The net investment
income tax (the Medicare Tax on Unearned Income) – a tax of 3.8% on certain kinds of investment income – will apply
to (i) any portion of the distribution of the stock of Holdco that is treated as a dividend (see the discussion in the second
paragraph of “Distributions of Stock in Holdco”, above), and (ii) any capital gains recognized by a stockholder
on the exchange of his stock in our Company for Pyxis stock (see the discussion of capital gains under “Exchange of Company
Shares for Pyxis Shares”), above.
The net investment
income tax also appears to apply to any capital gain recognized on the distribution of interests in Holdco (see “Distribution
of Stock in Holdco”, above) but the treatment of such capital gain under the net investment income tax rules is not
entirely clear. Stockholders should consult their own tax advisors with respect to the applicability of the net investment income
tax to such gains.
The net investment
income tax applies to individual taxpayers who file joint returns and report adjusted gross income in excess of $250,000 ($125,000
in the case of married taxpayers filing separate returns), and to single taxpayers who report adjusted gross income in excess
of $200,000. The net investment income tax also applies to estates and trusts with adjusted gross income in excess of approximately
$7,500.
Company Tax
Liability on the Distribution of Holdco Common Stock
The Company
will recognize gain on the distribution of Holdco to our stockholders if Holdco has a fair market value in excess of the Company’s
adjusted basis in Holdco/ Holdco may have a value that exceeds the Company’s adjusted basis in Holdco Gain arising from
the distribution would be added to the Company’s other income in determining the Company’s taxable income (taking
into account the Company’s deductible expenses, credits, and allowable net operating loss carryforwards) and its tax liability,
if any. The Company expects that any gain recognized by it on the distribution of Holdco would be offset by its other expenses
and by its allowable net operating loss carryforwards, so that the Company would owe no tax as a result of these distributions,
but there is no certainty that that would be the case.
If the Company
did incur a tax as a result of the distribution of Holdco’s stock (or for any other reason), it is not expected that, following
the Merger, the Company will have sufficient assets to pay any such tax. Under the Merger Agreement, Holdco will indemnify Pyxis
against liability for any such taxes. Accordingly, it is expected that Holdco will pay any tax owed by the Company as a result
of the distribution of Holdco’s common stock.
See the discussion
in the next section, “Stockholders’ Transferee Liability for Company Taxes”.
Stockholders’
Transferee Liability for Company Taxes
Any taxes owed
or accrued by the Company as of (and including) the date of distribution of the interests in Holdco, including any tax arising
as a result of the distribution of Holdco’s stock (as discussed in the previous section, “Company Tax Liability
on the Distribution of Holdco Stocks”), will be the primary responsibility of the Company. However, as noted above,
the Company is not expected to have any assets following the Merger, and Holdco (and any of the Company’s subsidiaries transferred
to Holdco) have agreed to indemnify Pyxis against any such liability. If for any reason the Company does not pay any portion of
such tax (or if Holdco or its subsidiaries fails to pay such tax under their indemnification agreements), a stockholder who receives
a distribution of interests in Holdco (or who receives any other property from the Company) could be liable, under the theory
of transferee liability, for the Company’s taxes. Such liability would be limited to the value of the Holdco stock that
the Stockholder receives in the distribution.
Transferee liability
arises when a corporation distributes all of its property to its stockholders and, as a result thereof, has insufficient funds
with which to pay any taxes that it owes (or expects to owe) at that time. The Company does not expect to have any tax liability
as of the date of distribution of Holdco or to incur any tax as a result of the distribution. However, if a liability arises and
is not paid by the Company or Holdco (or Holdco’s subsidiaries), the IRS could collect such tax from the stockholders.
Information
reporting and backup withholding
Payments of
proceeds from the distribution of Holdco to a stockholder, and the exchange of Company for Pyxis stock, may be subject to information
reporting to the IRS and, possibly, U.S. federal backup withholding. Backup withholding will not apply if the stockholder furnishes
a correct taxpayer identification number (certified on the IRS Form W-9) or otherwise establishes that he is exempt from backup
withholding. Backup withholding is not an additional tax. Amounts withheld as backup withholding may be credited against the stockholder’s
U.S. federal income tax liability. The stockholder may obtain a refund of any excess amounts withheld under the backup withholding
rules by filing the appropriate claim for refund with the IRS and furnishing any required information. Since any backup withholding
that might be required on a distribution of Holdco stock to the stockholders would be an obligation of the Company, the Company
does not intend to distribute any Holdco stock until it has obtained from the distributee shareholder a Form W-9 or other information
establishing an exemption from backup withholding.
Regulatory
Approvals Required for the Merger
The
Merger and the transactions contemplated by the Merger Agreement are not subject to any additional federal or state regulatory
requirement or approval, except for filings with the State of Delaware necessary to effectuate the transactions contemplated by
the Merger Agreement.
Legal
Matters
LookSmart is
sometimes subject to other legal proceedings and claims that arise in the ordinary course of its business. While the amount of
ultimate liability with respect to such actions is not expected to materially affect the Company’s results of operations,
cash flows or financial position, any litigation resulting from any such legal proceedings or claims could be time consuming and
injure our reputation.
Pyxis is also
sometimes subject to other legal proceedings and claims that arise in the ordinary course of its business. While the amount of
ultimate liability with respect to such actions is not expected to materially affect its results of operations, cash flows or
financial position, any litigation resulting from any such legal proceedings or claims could be time consuming and injure Pyxis’
reputation.
The validity
of Pyxis common stock to be issued in the Merger will be passed upon by Seward & Kissel LLP.
THE
MERGER AGREEMENT
The
following is a brief summary of the material provisions of the Merger Agreement, a copy of which is attached as Annex A
to this proxy statement/prospectus and is incorporated by reference into this summary. This summary may not contain all of the
information about the Merger Agreement that is important to LookSmart stockholders, and LookSmart stockholders are encouraged
to read the Merger Agreement carefully in its entirety. The legal rights and obligations of the parties are governed by the specific
language of the Merger Agreement and not this summary.
Explanatory
Note Regarding the Merger Agreement
The
Merger Agreement has been included in its entirety as part of this proxy statement/prospectus to provide investors
with information regarding its terms. It is not intended to provide to any person not a party thereto any other factual information
about LookSmart, Pyxis, Merger Sub or Holdco. The Merger Agreement contains representations and warranties of LookSmart, Pyxis,
Merger Sub and Holdco, negotiated between the parties and made as of specific dates solely for purposes of the Merger Agreement,
including setting forth the respective rights of the parties with respect to their obligations to complete the Merger. The representations
and warranties may have been made for the purposes of allocating contractual risk between the parties to the agreement instead
of establishing these matters as facts, and may be subject to standards of materiality applicable to the contracting parties that
differ from those applicable to investors. Moreover, information concerning the subject matter of the representations and warranties
may change after the date of the Merger Agreement, which subsequent information may or may not be fully reflected in Pyxis’
public disclosures. As a result, no person should rely on the representations, warranties, covenants and agreements or any descriptions
thereof as characterizations of the actual state of facts or condition of LookSmart, Pyxis, Merger Sub or Holdco or any of their
respective subsidiaries or affiliates.
The
Merger
The
Merger Agreement provides for the Merger of LookSmart with and into Merger Sub. As a result of the Merger, LookSmart will cease
to exist, and Merger Sub will continue as the surviving corporation in the Merger. After the Merger, the surviving corporation
will be a direct wholly owned subsidiary of Pyxis, and the former LookSmart stockholders will have a direct equity ownership interest
in Pyxis and not the surviving corporation, Merger Sub.
When
the Merger Becomes Effective
Pursuant
to the terms of the Merger Agreement, the Merger must have been consummated by the outside date of October 31, 2015 and the Merger
will become effective at such time as a certificate of merger is duly filed with the Secretary of State of Delaware, unless a
later date is specified therein.
Consideration
to be Received Pursuant to the Merger
Conversion
of LookSmart Common Stock
The
Merger Agreement provides that each share of LookSmart common stock issued and outstanding immediately prior to the Effective
Time of the Merger (post-Reverse Split) will be cancelled and converted into the right to receive ______ shares of Pyxis common
stock. At the effective time, all shares of LookSmart that have been converted will be automatically cancelled and cease to exist.
Each holder of a “certificate” representing shares of LookSmart common stock will no longer have any rights with respect
to those shares, except for the right to receive the aforementioned Pyxis shares. After the completion of the proposed Merger
and assuming no significant adjustments pursuant to the terms of the Merger Agreement, the public stockholders of the Company
are expected to own 5.66% of the total issued and outstanding common stock of Pyxis.
Make
Whole Provision
In
the event that subsequent to the Merger, Pyxis completes Future Pyxis Offering at a valuation lower than the valuation
ascribed to the shares of common stock received by LookSmart stockholders pursuant to the Merger Agreement, Pyxis will be
obligated to make “whole” the LookSmart stockholders as of April 29, 2015 (the “Make Whole
Record Date”) by offering such LookSmart stockholders the right to receive additional shares of Pyxis common stock
to compensate the LookSmart stockholders for the difference in value of their Pyxis common stock.
In
addition, should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of
the Merger, each Legacy LS Stockholder will have a 24-hour option beginning at the end of such 3 year period to require Pyxis
to purchase a pro rata amount of Pyxis common stock that would result in aggregate gross proceeds to the Legacy LS Stockholders
in an amount not to exceed $2,000,000; provided that in no event shall a Legacy LS Stockholder receive an amount per share greater
than the Consideration Value.
STOCKHOLDERS
PURCHASING SHARES OF LOOKSMART’S COMMON STOCK AFTER THE MAKE WHOLE RECORD DATE WILL NOT BE ENTITLED TO THE FOREGOING COMPENSATION
RELATED TO A FUTURE PYXIS OFFERING.
Treatment
of Options and Warrants
At
the Effective Time, there shall be no outstanding options or warrants to purchase capital stock of LookSmart.
Fractional
Shares
No
fractional shares of Pyxis common stock will be issued by virtue of the Merger and any LookSmart stockholder entitled under the
Merger Agreement to receive a fractional share of Pyxis common stock will be rounded up to the next whole share.
Procedures
for Receiving Merger Consideration
As soon as reasonably
practicable after the completion of the Merger, the transfer agent will mail to each record holder of LookSmart common stock a
form of letter of transmittal and instructions for use in effecting the surrender of the LookSmart stock certificates in exchange
for the Merger consideration. Upon proper surrender of a LookSmart stock certificate for exchange and cancellation to the transfer
agent, together with a letter of transmittal and such other documents as may be specified in the instructions, the holder of the
LookSmart stock certificate will be entitled to receive the stock consideration. With respect to the stock consideration consisting
of Pyxis common shares, holders of LookSmart stock certificates will receive evidence of such shares in book-entry form.
Until you exchange
your LookSmart stock certificates for Merger consideration, you will not receive any dividends or other distributions in respect
of any Pyxis common shares which you may be entitled to receive in connection with that exchange.
Once you exchange
your LookSmart stock certificates for the Merger consideration, you will receive, without interest, any dividends or distributions
with a record date after the completion of the Merger and payable with respect to the Pyxis common shares, if any, that you are
entitled to receive.
Lost,
Stolen or Destroyed Certificates
If
any stockholder is unable to surrender such holder’s certificate because such certificate has been lost, mutilated or destroyed,
such holder may deliver in lieu thereof an affidavit and, if reasonably requested, an indemnity bond in customary amount.
Representations
and Warranties
The
Merger Agreement contains customary representations and warranties of the parties. These include representations and warranties
of LookSmart and Holdco, subject to certain limitations, with respect to:
| · | due
organization, valid existence, good standing and qualifications to do business; |
| · | disclosure
of organizational documents (including certificates of incorporation and bylaws) and
compliance with the terms thereof by LookSmart and its subsidiaries; |
| · | corporate
power and authority to enter into the Merger Agreement and consummate the transactions
contemplated by the Merger Agreement and enforceability of the Merger Agreement; |
| · | consents
and filings required for the Merger; |
| · | absence
of conflicts caused by the Merger with organizational documents, contracts or laws; |
| · | compliance
with any and all government permits and applicable laws; |
| · | accuracy
of LookSmart’s SEC reports and financial statements since January 1, 2013; |
| · | absence
of undisclosed litigation or liabilities; |
| · | intellectual
property matters; |
| · | employee
benefits matters; |
| · | labor
and employment matters; |
| · | opinion
from financial advisor; |
| · | completeness
or representations. |
The
Merger Agreement also contains customary representations and warranties of Pyxis and Merger Sub, subject to certain limitations,
with respect to:
| · | due
organization, valid existence, good standing and qualifications to do business; |
| · | disclosure
of organizational documents (including certificates of incorporation and bylaws) and
compliance with the terms thereof by Pyxis and its subsidiaries; |
| · | corporate
power and authority to enter into the Merger Agreement and consummate the transactions
contemplated by the Merger Agreement and enforceability of the Merger Agreement; |
| · | consents
and filings required for the Merger; |
| · | absence
of conflicts caused by the Merger with organizational documents, contracts or laws; |
| · | compliance
with any and all government permits and applicable law; |
| · | absence
of undisclosed litigation and liabilities; |
| · | intellectual
property matters; |
| · | employee
benefits matters; |
| · | labor
and employment matters; |
| · | matters
relating to Pyxis’ vessels; |
| · | operation
of the Merger Sub; |
| · | disclosure,
enforceability and validity of material contracts; |
| · | the
effect of applicable takeover laws on the merger; and |
| · | completeness
or representations. |
Certain
of the representations and warranties contained in the Merger Agreement shall survive beyond the Effective Time. The representations,
warranties and covenants in the Merger Agreement were made in part to allocate contractual risk between the parties and not as
a means of establishing facts. The Merger Agreement might have a different standard of materiality than securities laws, and the
representations, warranties and covenants are qualified by information contained in schedules of exceptions. Stockholders are
not third-party beneficiaries under the Merger Agreement and should not rely on the representations, warranties and covenants
or any descriptions thereof as characterizations of the actual state of facts or condition of LookSmart or any of its affiliates
or of Pyxis or any of its affiliates.
Additional
Agreements
The
Merger Agreement contains certain other agreements of the parties including, among other things, that:
| · | LookSmart
shall conduct the Reverse Split prior to the closing of the Merger; |
| · | LookSmart
shall conduct the Spin-Off immediately prior to the closing of the Merger; |
| · | LookSmart
and Pyxis shall cooperate in preparing and promptly cause to be filed with the SEC this
proxy statement/prospectus and the Registration Statement on Form F-4; |
| · | Pyxis
shall as soon as practicable following the date upon which the Registration Statement
on Form F-4 of which this proxy statement/prospectus forms a part becomes effective hold
a meeting of its stockholders for the purpose of obtaining the approval of the Merger
no later than 20 business days following the mailing of the definitive proxy statement/prospectus; |
| · | LookSmart
and Pyxis will consult with one another before issuing any public release or otherwise
making any public statements about the Merger, and will not release any such public release
(including public filings with the SEC) without prior consent of the other party (which
consent shall not be unreasonably conditioned, withheld or delayed) subject to certain
exceptions; |
| · | LookSmart
and Pyxis will promptly notify one another of the occurrence or non-occurrence of any
event that, individually or in the aggregate, would make the timely satisfaction of certain
conditions of the Merger Agreement (set forth below in “Merger Agreement—Conditions
of the Merger”) impossible or unlikely; |
| · | LookSmart
and Pyxis shall cooperate in taking all actions necessary so that upon closing of the
Merger, Pyxis’ common stock will be authorized for listing on NASDAQ or NYSE MKT; |
| · | LookSmart
shall cause all of its insiders to enter into a 6 month lock-up agreement prohibiting
them from selling or otherwise transferring any of their shares of Pyxis common stock
during the term of the lock-up; |
| · | Pyxis
shall reserve a sufficient number of shares of common stock to cover issuances pursuant
to the Merger Agreement; and |
| · | Pyxis
shall issue additional shares in the event of a Future Pyxis Offering or if the vessels
the Miss Lucy or the Pyxis Loucas, or the outstanding shares of the subsidiaries
owning such vessels, are transferred to Pyxis in the future. |
Certain
Fees and Expenses
At
or prior to closing of the Merger, each of LookSmart and Pyxis shall pay in full their respective financial advisor, outside legal
counsel and accountants for any fees and expenses incurred in connection with the Merger.
The estimated
fees and expenses* incurred or expected to be incurred by LookSmart in connection with the Merger are as follows:
LookSmart’s Financial Advisor’s Fees and
Expenses | |
$ | ** | |
Legal Fees | |
| ** | |
Accounting Fees | |
| ** | |
Printing and Mailing Costs | |
| ** | |
SEC Filing Fees | |
| ** | |
Miscellaneous | |
| ** | |
Total | |
$ | ** | |
| * | All fees and expenses, other than
SEC filing fees, are estimates. |
| ** | To be Provided by amendment. |
The
estimate for legal fees set forth in the table above does not include any amounts attributable to any existing or future litigation
challenging the Merger. See the section entitled “Legal Matters” beginning on page
86.
Indemnification
Subject
to the terms and conditions of the Merger Agreement, the Company (prior to the Merger), and Michael Onghai and each of Holdco
and its subsidiaries (following the Merger), have agreed to jointly and severally indemnify Pyxis and its directors, officers,
stockholders and affiliates from and against any and all claims, liabilities, losses, damages, judgments, costs and/or expenses,
including without limitation the fees and disbursements of counsel (which shall be paid by the indemnifying parties upon request
by the indemnified parties as incurred), or amounts that are paid in settlement (collectively, the “Indemnification Liabilities”),
based in whole or in part on or arising in whole or in part out of or related to (i) the breach of any representation, warranty
or covenant made by the Company or Holdco in the Merger Agreement or in any document delivered pursuant thereto, (ii) the failure
of the Company or Holdco to satisfy their conditions to closing the Merger, or (iii) the business or operations of the Company,
Holdco and their respective subsidiaries prior to the Merger closing (including taxes owed for all periods and activities prior
to closing); provided, however, that following the Merger, any and all Indemnification Liabilities, to the extent
they have not been timely paid as set forth in the Pledge Agreement, shall first be paid by Michael Onghai out of his Pyxis Shares
pledged pursuant to the Pledge Agreement, and then by each of Holdco and its subsidiaries.
In addition,
Pyxis has agreed to indemnify the Company and its directors, officers, stockholders and affiliates from and against any and all
Indemnification Liabilities, based in whole or in part on or arising in whole or in part out of or related to (i) the breach of
any representation, warranty or covenant made by Pyxis in the Merger Agreement or in any document delivered pursuant thereto,
(ii) the failure of Pyxis to satisfy their conditions to closing the Merger, or (iii) the business or operations of Pyxis and
its subsidiaries prior to the closing of the Merger.
The
Merger Agreement also requires that Pyxis have customary Directors & Officers liability insurance coverage at the Effective
Time.
Closing
Conditions of the Merger
The
obligations of the parties to consummate the transactions contemplated by the Merger Agreement are subject to the following conditions:
Conditions
to Each Party’s Obligations
LookSmart
and Pyxis’ respective obligations to complete the Merger are subject to the satisfaction or waiver of various conditions,
including the following:
| · | Stockholder
Approval. LookSmart stockholders holding a majority of the outstanding shares of
LookSmart’s common stock having approved the reverse split proposal, spin-off proposal
and merger proposal; |
| · | No
Injunction, Restraint or Litigation. The absence of any federal, state, local or
foreign statute, law, ordinance, rule, regulation, order, judgment, decree or legal requirement,
or any injunction by any United States or state court or United States governmental body
prohibiting, restraining or enjoining the completion of the Merger; |
| · | NASDAQ/NYSE
MKT Listing. The shares of Pyxis common stock issuable to LookSmart stockholders
pursuant to the Merger Agreement shall have been authorized for listing on either the
Nasdaq Capital Market or the NYSE MKT; and |
| · | Effectiveness
of the F-4. The Registration Statement on Form F-4 has become effective under
the Securities Act and is not the subject of any stop order or proceedings seeking a
stop order shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the SEC. |
Conditions
to LookSmart’s Obligations
LookSmart’s
obligations to complete the Merger are also subject to various conditions, including the following:
| · | Pyxis’
and Merger Sub’s representations and warranties in the Merger Agreement being true
and correct to the extent set forth in the merger agreement; |
| · | material
compliance by Pyxis and Merger Sub with the covenants and obligations as to the extent
set forth in the Merger Agreement; |
| · | receipt
of all required consents, approvals, authorizations, permits, actions, or notifications; |
| · | delivery
of Pyxis’ Marshall Island counsel’s legal opinion; and |
| · | receipt
of certificates executed by an officer of Pyxis that the aforementioned conditions have
been satisfied. |
Conditions
to Pyxis’ Obligations
Pyxis’
obligation to complete the Merger is also subject to various conditions, including the following:
| · | LookSmart’s
and Holdco’s representations and warranties in the Merger Agreement being true
and correct to the extent set forth in the Merger Agreement; |
| · | material
compliance by LookSmart and Holdco with their covenants and obligations as to the extent
set forth in the Merger Agreement; |
| · | LookSmart
shall have timely filed with the SEC all reports and other documents required to be filed; |
| · | delivery
of LookSmart’s counsel’s legal opinion; |
| · | delivery
of LookSmart’s financial advisor’s fairness opinion; and |
| · | receipt
of certificates executed by an executive officer of LookSmart that the aforementioned
conditions have been satisfied. |
Termination
The Merger
Agreement may be terminated at any time, but not later than the closing, as follows:
| • | by
mutual written consent of the Company and Pyxis, duly authorized, or by mutual action
of their respective boards of directors; |
| • | by
either the Company or Pyxis if the transactions contemplated by the Merger Agreement
are not consummated on or before October 31, 2015, provided that the right to terminate
will not be available to any party whose failure to fulfill any material obligation was
the cause of or resulted in the failure of the transactions contemplated by the Merger
Agreement to be consummated by such date; |
| • | by
either the Company or Pyxis if any governmental authority shall have enacted, issued,
promulgated, enforced or entered any order, law, rule regulation, judgment, injunction,
decree or ruling which has become final and nonappealable, and which permanently restrains,
enjoins or otherwise prohibits the transactions contemplated by the Merger Agreement; |
| • | by
either the Company or Pyxis if the other party has breached any of its covenants, agreements
or representations and warranties (and has not cured its breach within 30 days of the
giving of notice of such breach); |
| • | by
Pyxis if, at the Company’s stockholder meeting, the reverse split proposal, spin-off
proposal or merger proposal shall fail to be approved by holders of Company’s common
stock, or if the Company fails to hold said stockholder meeting within sixty 60 days
of the date of the execution of the Merger Agreement, unless such failure is as a result
of the Company responding in good faith to comments received from the SEC; |
| • | by
Pyxis if the LS board of directors approves or recommends to its stockholders an alternative
transaction, or resolves to do so, or enters into any letter of intent or similar binding
document or any agreement accepting an alternative proposal or (ii) withdraws, modifies
or changes its recommendation of the Merger; or by the Company if its board of directors
receives a superior offer and enters into a binding agreement in connection therewith. |
Termination
Fees and Expenses
In
the event of proper termination by either the Company or Pyxis, the Merger Agreement will be of no further force or effect and
the Merger will be abandoned, except that if the Merger Agreement is terminated due to (i) the proposals herein not being approved,
or (ii) a breach by LookSmart of its covenants, agreements or representations and warranties (and has not cured its breach within
30 days of the giving of notice of such breach), then the Company shall immediately repay Pyxis the $600,000 received upon execution
of the Merger Agreement plus legal and accounting fees incurred by Pyxis (up to $450,000 in fees) (collectively, the “Break-up
Fees”), and if the Merger Agreement is terminated because the board of directors of LookSmart withdraws its recommendation
of the Merger or approves an alternative proposal or enters into a superior proposal, then in addition to the Break-up Fees an
additional fee of $450,000 shall also be paid to Pyxis.
Effect
of Termination
In
the event of termination of the Merger Agreement prior to the Effective Time in accordance with the terms of the Merger Agreement,
the Merger Agreement will become void, and there shall be no liability or further obligation on the part of LookSmart, Pyxis or
Merger Sub other than:
| · | the
payment of fees and expenses described above under “Merger Agreement—Termination
Fees and Expenses”; |
| · | the
parties’ mutual obligations with respect to confidentiality and public announcements,
which survive termination, under the terms of the Merger Agreement; and |
| · | liability
arising out of fraud or material and intentional breach of any provision of the Merger
Agreement. |
No
Solicitation of Other Offers by LookSmart
Under
the terms of the Merger Agreement, subject to certain exceptions described below, LookSmart has agreed that it and its officers
and directors will not (and that it will use commercially reasonable efforts to ensure that its representatives will not) directly
or indirectly initiate, solicit or knowingly encourage or facilitate any inquiries or the making of any acquisition proposal,
or engage in any negotiations concerning, or provide access to its properties, books and records or any confidential information
or data to, any person relating to, an acquisition proposal. In addition, under the Merger Agreement, LookSmart has agreed
that it will, and it will cause its agents and representatives to, promptly cease and cause to be terminated any existing activities,
discussions or negotiations with respect to any acquisition proposal.
However,
if LookSmart receives an unsolicited bona fide written acquisition proposal, it may withdraw or modify its approval of the Merger
Agreement if:
| · | the
LookSmart board of directors determines in good faith, after consultation with its financial
advisors, that the proposal constitutes a “Superior Offer;” and |
| · | LookSmart
board of directors determine in good faith that, in light of the Superior Offer, the
withdrawal or modification of the LookSmart’s board of directors’ approval
is required to comply with the board’s fiduciary duties or the DGCL. |
Amendments,
Extensions and Waivers
At
any time before the Effective Time, by means of a written instrument executed by both parties, each of LookSmart and Pyxis may:
| · | extend
the time for the performance of any obligations or other acts of the other party; |
| · | waive
any inaccuracies in the representations and warranties contained in the Merger Agreement
or in any document delivered pursuant to the Merger Agreement; and |
| · | waive
compliance by the other party with any of the agreements or conditions contained in the
Merger Agreement, subject to the requirements of applicable laws. |
THE
VOTING AGREEMENT
The
following summary describes certain material provisions of the definitive Voting Agreement entered into by Pyxis and Michael Onghai
and is qualified in its entirety by reference to the Voting Agreement, a copy of which is attached hereto as Annex
C and incorporated herein by reference. This summary may not contain all of the information about the Voting Agreement
that is important to LookSmart stockholders, and LookSmart stockholders are encouraged to read the Voting Agreement carefully
in its entirety. The legal rights and obligations of the parties are governed by the specific language of the Voting Agreement
and not this summary.
In
connection with entry into the Merger Agreement, LookSmart, Pyxis and Michael Onghai, entered into the Voting Agreement. The Voting
Agreement generally requires that Mr. Onghai, in his capacity as a stockholder of LookSmart, vote all of his shares of LookSmart
common stock in favor of the reverse split proposal, spin-off proposal and merger proposal, unless doing would violate his fiduciary
duties as an executive officer and member of the board of directors of the Company. As of the Record Date, Mr. Ongahi beneficially
held ________ shares of LookSmart common stock, representing approximately ____% of the outstanding shares of the Company’s
common stock, of which ____________ shares are either held of record by Mr. Onghai as of the Record Date or over which he possesses
voting rights and are therefore in either case subject to the Voting Agreement.
UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
LookSmart is
providing the following unaudited pro forma condensed combined financial information to aid you in your analysis of the financial
aspects of the Merger.
The following
unaudited pro forma condensed balance sheet combines the audited historical balance sheet of LookSmart with the historical combined
balance sheet of the six vessel-owning companies that Pyxis intends to acquire prior to the Merger, which are collectively referred
to as the “Pyxis predecessor”, as of December 31, 2014, giving effect to the Merger as if it had been consummated
as of December 31, 2014.
The following
unaudited pro forma condensed income statement for the year ended December 31, 2014 combines the audited historical statement
of operations of LookSmart for the year ended December 31, 2014 with the audited combined statement of comprehensive income and
loss of Pyxis predecessor for the year ended December 31, 2014, giving effect to the Merger as if it had been consummated as of
January 1, 2014.
The historical
financial information has been adjusted to give effect to pro forma events that are related and/or directly attributable to the
Merger, are factually supportable and are expected to have a continuing impact on the combined results. In contemplation of the
Merger, Looksmart established LookSmart Group Inc. (“LSG”), a new wholly-owned subsidiary, which acquired all
of its current net assets and business activities into it. Immediately prior to the closing of the Merger, Looksmart will as part
of the Spin-off distribute the shares of LSG to its pre-Merger shareholders. The accompanying unaudited pro forma condensed combined
financial information reflects the Spin-off.
In addition,
the historical financial information of Pyxis predecessor, included elsewhere in this proxy statement prospectus, has been adjusted
to give effect of the delivery of the vessel, the Pyxis Epsilon, to Pyxis from the shipyard in January, 2015. The adjustments
presented in the unaudited pro forma condensed combined financial information have been identified and presented to provide relevant
information necessary for an accurate understanding of the combined company upon consummation of the Merger.
The historical
financial information of LookSmart was derived from the audited financial statements of LookSmart for the year ended December
31, 2014 included elsewhere in this proxy statement/prospectus. This information should be read together with Pyxis’ and
LookSmart’s audited financial statements and related notes, “Pyxis’ Management’s Discussion and Analysis
of Financial Condition and Results of Operations,” “LookSmart’s Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and other financial information included elsewhere in this proxy statement/prospectus.
In the Merger,
Maritime Investors, which will be Pyxis’s sole securityholder as of the closing date of the Merger, will receive in the
aggregate 16,675,000 Pyxis shares at the closing of the Merger assuming a final closing price of LookSmart’s shares (post-reverse
split) of $4.00 per share and there is no subsequent adjustment to the conversion number set forth in the Merger Agreement. Maritime
Investors may receive additional Pyxis shares if prior to the Merger closing, it repays loans or more than $0.8 million in cash
is at hand in Pyxis at closing. As a result of the Merger and assuming that none of such adjustments take effect, Maritime Investors
will own approximately 93% of the Pyxis shares to be outstanding immediately after the Merger and the LookSmart stockholders and
Maxim will own approximately 7% of the Pyxis shares to be outstanding immediately after the Merger.
The Merger will
be accounted for as a “reverse merger” at the date of the consummation of the transaction since Maritime Investors,
the sole security holder of Pyxis as of the closing date of the Merger, will remain the largest voting interest holder of Pyxis
immediately following the completion of the Merger, holding approximately 93% of the outstanding Pyxis shares; Pyxis will have
its officers assuming all corporate and day-to-day management of Maritime Technologies, the subsidiary of Pyxis into which LookSmart
will merge; and all of Pyxis’ officers and four out of the five board of directors of Pyxis will constitute the officers
and directors of Pxyis following the Merger. As a result of the Spin-off, LookSmart’s historical assets, liabilities and
results of operations will not be consolidated with the assets, liabilities and results of operations of Pyxis upon consummation
of the Merger. Accordingly, Pyxis will be deemed to be the accounting acquirer in the transaction and the assets and liabilities
and the historical operations that will be reflected in the financial statements after the consummation of the Merger will be
those of Pyxis and will be recorded at the historical cost basis of Pyxis.
The unaudited
pro forma condensed combined financial information is for illustrative purposes only. The financial results may have been different
had the companies always been combined. You should not rely on the unaudited pro forma condensed combined financial information
as being indicative of the historical results that would have been achieved had the companies always been combined or the future
results that Pyxis will experience following the Merger. Pyxis and LookSmart have not had any historical relationship prior to
the Merger. Accordingly, no pro forma adjustments were required to eliminate activities between the companies.
UNAUDITED
PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF DECEMBER 31, 2014
|
|
| |
Looksmart
Ltd. | | |
Pyxis
Tankers Inc. | | |
Delivery
of
"Epsilon” | | |
Transaction
cost | | |
Adjustments
for merger | | |
Looksmart
Spin-off Adjustment | |
|
Pro
Forma | |
|
|
Notes | |
| | |
| | |
2a | | |
2b | | |
2e | | |
2c,d | |
|
| |
|
|
| |
(in thousands
of U.S. Dollars) | |
|
|
| |
| | |
| | |
| | |
| | |
| | |
| |
|
| |
ASSETS |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
CURRENT ASSETS: |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Cash and cash equivalents |
|
| |
$ | 305 | | |
$ | 500 | | |
$ | - | | |
$ | (500 | ) | |
$ | - | | |
$ | (305 | ) |
|
$ | - | |
Restricted cash |
|
| |
| - | | |
| 147 | | |
| 750 | | |
| - | | |
| - | | |
| - | |
|
| 897 | |
Short-term investments |
|
| |
| 129 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (129 | ) |
|
| - | |
Inventories |
|
| |
| - | | |
| 904 | | |
| - | | |
| - | | |
| - | | |
| - | |
|
| 904 | |
Trade accounts receivables, net |
|
| |
| 255 | | |
| 1,203 | | |
| - | | |
| - | | |
| | | |
| (255 | ) |
|
| 1,203 | |
Due from related parties |
|
| |
| - | | |
| 2,523 | | |
| - | | |
| - | | |
| - | | |
| - | |
|
| 2,523 | |
Prepayments and other |
|
| |
| 602 | | |
| 618 | | |
| - | | |
| - | | |
| - | | |
| (602 | ) |
|
| 618 | |
Total Current Assets |
|
| |
| 1,291 | | |
| 5,895 | | |
| 750 | | |
| (500 | ) | |
| - | | |
| (1,291 | ) |
|
| 6,145 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
FIXED ASSETS, NET: |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Advances for vessel acquisition |
|
| |
| - | | |
| 13,728 | | |
| (13,728 | ) | |
| - | | |
| - | | |
| - | |
|
| - | |
Vessels, net |
|
| |
| - | | |
| 103,717 | | |
| 32,480 | | |
| - | | |
| - | | |
| - | |
|
| 136,197 | |
Property & equipment, net |
|
| |
| 3,403 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (3,403 | ) |
|
| - | |
Total Fixed Assets, net |
|
| |
| 3,403 | | |
| 117,445 | | |
| 18,752 | | |
| - | | |
| - | | |
| (3,403 | ) |
|
| 136,197 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
OTHER NON-CURRENT ASSETS: |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Deferred charges, net |
|
| |
| - | | |
| 559 | | |
| 250 | | |
| - | | |
| - | | |
| - | |
|
| 809 | |
Restricted cash, net of current portion |
|
| |
| - | | |
| 1,000 | | |
| - | | |
| - | | |
| - | | |
| - | |
|
| 1,000 | |
Other assets, net |
|
| |
| 62 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (62 | ) |
|
| - | |
Total assets |
|
| |
$ | 4,756 | | |
$ | 124,899 | | |
$ | 19,752 | | |
$ | (500 | ) | |
$ | - | | |
$ | (4,756 | ) |
|
$ | 144,151 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
LIABILITIES & STOCKHOLDERS’ EQUITY |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
CURRENT LIABILITIES: |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Current portion of long-term debt |
|
| |
$ | - | | |
$ | 5,663 | | |
$ | 1,200 | | |
$ | - | | |
$ | - | | |
$ | - | |
|
$ | 6,863 | |
Trade accounts payable |
|
| |
| 901 | | |
| 571 | | |
| - | | |
| 300 | | |
| - | | |
| (901 | ) |
|
| 871 | |
Due to related parties |
|
| |
| - | | |
| 2,654 | | |
| - | | |
| - | | |
| - | | |
| - | |
|
| 2,654 | |
Hire collected in advance |
|
| |
| - | | |
| 479 | | |
| - | | |
| - | | |
| - | | |
| - | |
|
| 479 | |
Accrued and other liabilities |
|
| |
| 398 | | |
| 337 | | |
| - | | |
| - | | |
| - | | |
| (398 | ) |
|
| 337 | |
Deferred revenue and customer deposits |
|
| |
| 1,018 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (1,018 | ) |
|
| - | |
Total Current Liabilities |
|
| |
| 2,317 | | |
| 9,704 | | |
| 1,200 | | |
| 300 | | |
| - | | |
| (2,317 | ) |
|
| 11,204 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
NON-CURRENT LIABILITIES |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Long term debt, net of current portion |
|
| |
| - | | |
| 61,294 | | |
| 19,800 | | |
| - | | |
| - | | |
| - | |
|
| 81,094 | |
Long term portion of deferred rent |
|
| |
| 22 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (22 | ) |
|
| - | |
Total Non-Current Liabilities |
|
| |
| 22 | | |
| 61,294 | | |
| 19,800 | | |
| - | | |
| - | | |
| (22 | ) |
|
| 81,094 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Total Liabilities |
|
| |
| 2,339 | | |
| 70,998 | | |
| 21,000 | | |
| 300 | | |
| - | | |
| (2,339 | ) |
|
| 92,298 | |
|
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
STOCKHOLDERS’ EQUITY: |
|
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
|
| | |
Common stock |
|
| |
| 17 | | |
| - | | |
| - | | |
| - | | |
| 17 | | |
| (17 | ) |
|
| 17 | |
Additional paid in capital |
|
| |
| 262,508 | | |
| 72,981 | | |
| (1,248 | ) | |
| (800 | ) | |
| (17 | ) | |
| (262,508 | ) |
|
| 70,916 | |
Accumulated other comprehensive loss |
|
| |
| (424 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| 424 | |
|
| - | |
Accumulated deficit |
|
| |
| (259,435 | ) | |
| (19,080 | ) | |
| - | | |
| - | | |
| - | | |
| 259,435 | |
|
| (19,080 | ) |
Treasury stock at cost |
|
| |
| (249 | ) | |
| - | | |
| - | | |
| - | | |
| - | | |
| 249 | |
|
| - | |
Total Stockholders’
Equity |
|
| |
| 2,417 | | |
| 53,901 | | |
| (1,248 | ) | |
| (800 | ) | |
| - | | |
| (2,417 | ) |
|
| 51,853 | |
Total Liabilities and
Stockholders’ Equity |
|
| |
$ | 4,756 | | |
$ | 124,899 | | |
$ | 19,752 | | |
$ | (500 | ) | |
$ | - | | |
$ | (4,756 | ) |
|
$ | 144,151 | |
UNAUDITED
PRO FORMA CONDENSED COMBINED STATEMENT OF INCOME AND LOSS
FOR THE YEAR ENDED DECEMBER 31, 2014
| |
Year
Ended December 31, 2014 | |
| |
Looksmart
Ltd. | | |
Pyxis
Tankers Inc. | | |
Looksmart
Spin-off
Adjustment | | |
Pro
forma | |
| |
(in
thousands of U.S. Dollars, except for share and per share data) | |
Revenues: | |
| | | |
| | | |
| | | |
| | |
Voyage revenues | |
$ | - | | |
$ | 27,760 | | |
$ | - | | |
$ | 27,760 | |
Revenue | |
| 4,702 | | |
| - | | |
| (4,702 | ) | |
| - | |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Cost of revenue | |
| (2,441 | ) | |
| - | | |
| 2,441 | | |
| - | |
Voyage related costs and commissions | |
| - | | |
| (10,030 | ) | |
| - | | |
| (10,030 | ) |
Vessel operating expenses | |
| - | | |
| (11,064 | ) | |
| - | | |
| (11,064 | ) |
Sales and marketing | |
| (1,690 | ) | |
| - | | |
| 1,690 | | |
| - | |
Product development and technical operations | |
| (4,561 | ) | |
| - | | |
| 4,561 | | |
| - | |
General and administrative expenses | |
| (2,561 | ) | |
| (93 | ) | |
| 2,561 | | |
| (93 | ) |
Management fees, related parties | |
| - | | |
| (611 | ) | |
| - | | |
| (611 | ) |
Management fees, other | |
| - | | |
| (922 | ) | |
| - | | |
| (922 | ) |
Amortization of dry-docking and special survey costs | |
| - | | |
| (203 | ) | |
| - | | |
| (203 | ) |
Depreciation | |
| - | | |
| (5,446 | ) | |
| - | | |
| (5,446 | ) |
Vessel impairment charge | |
| - | | |
| (16,930 | ) | |
| - | | |
| (16,930 | ) |
Restructuring charge | |
| (30 | ) | |
| - | | |
| 30 | | |
| - | |
Operating loss | |
| (6,581 | ) | |
| (17,539 | ) | |
| 6,581 | | |
| (17,539 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other income/(expenses): | |
| | | |
| | | |
| | | |
| | |
Interest income | |
| 81 | | |
| - | | |
| (81 | ) | |
| - | |
Interest and finance costs | |
| (14 | ) | |
| (1,704 | ) | |
| 14 | | |
| (1,704 | ) |
Other income, net | |
| 95 | | |
| - | | |
| (95 | ) | |
| - | |
Total other income/(expenses) | |
| 162 | | |
| (1,704 | ) | |
| (162 | ) | |
| (1,704 | ) |
| |
| | | |
| | | |
| | | |
| | |
Net loss | |
| (6,419 | ) | |
| (19,243 | ) | |
| 6,419 | | |
| (19,243 | ) |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income: | |
| | | |
| | | |
| | | |
| | |
Foreign currency translation adjustments | |
| (177 | ) | |
| - | | |
| 177 | | |
| - | |
Unrealized loss on investments | |
| (93 | ) | |
| - | | |
| 93 | | |
| - | |
Change in accumulated other comprehensive
loss | |
| (270 | ) | |
| - | | |
| 270 | | |
| - | |
Total comprehensive loss | |
$ | (6,689 | ) | |
$ | (19,243 | ) | |
$ | 6,689 | | |
$ | (19,243 | ) |
| |
| | | |
| | | |
| | | |
| | |
Earnings/(loss) per share, basic and diluted
(Note 3) | |
$ | (1.12 | ) | |
| - | | |
| - | | |
$ | (1.07 | ) |
| |
| | | |
| | | |
| | | |
| | |
Weighted average number of shares outstanding, basic and diluted | |
| 5,769,533 | | |
| - | | |
| - | | |
| 18,014,514 | |
(All amounts are presented in thousand
of U.S. Dollars, except per share data)
Note 1—Description
of transactions and basis of presentation:
The unaudited
pro forma condensed combined balance sheet and income statement as of December 31, 2014, is presented in thousands of U.S.
dollars and gives effect to the Merger as if such transaction was consummated on December 31, 2014. The unaudited pro forma
condensed combined statements of income/(loss) for the year ended December 31, 2014, are presented in thousands of U.S. dollars
and give effect to the Merger as if such transaction closed on January 1, 2014. All of the pro forma adjustments, made to the
unaudited pro forma condensed combined balance sheet and the unaudited pro forma condensed combined statements of income are discussed
in Note 2, below.
With respect
to the pro forma adjustments related to the unaudited pro forma condensed combined statements of income and loss, only adjustments
that are expected to have a continuing effect on the combined financial statements are taken into consideration. For example,
the unaudited pro forma condensed combined financial statements do not reflect any restructuring expenses, payments pursuant to
change-of-control provisions or integration costs that may be incurred as a result of the Merger.
Only adjustments
that are factually supportable and that can be estimated reliably are taken into consideration. For example, the unaudited pro
forma condensed combined financial statements do not reflect any cost savings potentially realizable from the elimination of certain
expenses or from potential synergies, if any.
Note 2—Other pro
forma adjustments:
| 2 a. | Pyxis
Epsilon adjustment |
On January 12,
2015, EIGHTHONE CORP. (“Eighthone”) entered into a new loan facility with DVB Bank SE. On January 14, 2015,
Eighthone drew down $21,000, the full amount available under the loan facility, and used such proceeds to (a) pay to the shipyard
the final delivery installment and other capitalized costs of $18,752 for the vessel Pyxis Epsilon, (b) pay $250 of loan
arrangement fees, (c) make a paid-in capital reimbursement to its shareholder of $1,248, which amount was used by Eighthone for
certain prior construction progress payments, and (d) deposit in a minimum liquidity bank account the remaining amount of $750.
The pro forma adjustments to vessels and other fixed assets, net, Deferred Charges, long-term debt (current and non-current portion)
and additional paid-in capital reflect the accounting for the above events.
| 2 b. | Pyxis’s
transaction costs relating to the Merger. |
Transaction
costs estimated to approximately $800 include the fees paid or payable to Pyxis’ legal advisors and auditors as well as
the cash fee component payable to Maxim, its financial advisor in connection with the Merger, accounted for as a reverse re-capitalization
transaction cost.
| 2 c. | Transfer
of LookSmart Ltd business to LookSmart Group Inc. |
Prior to the
execution of the Merger Agreement, LookSmart transferred all of its business, operations, assets and liabilities to LSG, so that
no assets or liabilities (or obligations that could create future liabilities, including any liabilities arising from legal proceedings)
exist in LS and, therefore, following consummation of the Spin-off and the closing of the Merger, neither Pyxis nor Maritime Technologies
will have any assets or liabilities (or obligations that could create future liabilities, including any liabilities arising from
legal proceedings) of LS, LSG or their respective subsidiaries. In addition, following the closing, no shares of LS capital stock
shall be outstanding and no rights to purchase or receive shares of LS capital stock shall exist.
| 2 d. | Cash
payment to LookSmart |
Upon execution
of the Merger Agreement, Pyxis paid LookSmart a cash amount equal to $600, any amount of which remaining at the time of the Spin-off
will be part of the assets of LSG distributed to LookSmart’s pre-Merger shareholders.
| 2 e. | Adjustment
for Merger |
Represents adjustment
to reflect the legal capital of the legal acquirer, LookSmart.
Note
3—Assumptions relating to the Reverse Stock Split and Equity Issuances.
LookSmart cannot
predict at what ratio it will implement the reverse stock split, one of the matters for which it is seeking approval in this proxy
statement/prospectus. As indicated elsewhere in this proxy statement/prospectus, the final reverse stock split ratio will be determined
by the board of directors of LookSmart and will depend on a number of factors including the trading price of LookSmart shares
in advance of the proposed closing date of the Merger and the likelihood that the NASDAQ or NYSE MKT requirements for the listing
of the Pyxis shares post-Merger will be met, which is one of the conditions to completing the Merger. The pro forma information
has been presented assuming the following additional circumstances:
| (1) | prior
to the effective date of the reverse stock split and the closing of the Merger, the LookSmart
trading price will be $[ ] per share and LookSmart elects a reverse stock split ratio
of 4.6 to one, which means that every 4.6 LookSmart shares will be converted into one
LookSmart share post reverse stock split and there will be 1,000,000 outstanding LookSmart
shares prior to the Merger with a trading price of $4.00 per share; and |
| (2) | there
will be no other adjustments, including to the $66,700 value that Maritime Investors
will receive in Pyxis shares (i.e., there would not be any additional debt repayments
or increased cash in Pyxis at closing) or to the conversion number since the pre-Merger
price of the LookSmart shares will be $[ ]
per share. |
Accordingly
based on these assumptions, LookSmart shareholders and Maritime Investors would be entitled to receive 1,000,000 and 16,675,000
Pyxis shares, respectively, in connection with the Merger. Based on the $4.00 closing price (post reverse split) of LookSmart’s
shares and in accordance with the terms of its engagement, Pyxis’ financial advisor, Maxim, would also be issued 339,514
Pyxis shares at the closing of the Merger.
As a consequence,
the number of shares to be issued is preliminary and subject to revision based on the final determination of LookSmart’s
closing share price and any subsequent adjustment to the conversion number as set forth in the Merger Agreement.
Note 4. Summary of Significant
Accounting Policies
The accounting
policies followed in preparing the unaudited pro forma combined balance sheet are those used by the Pyxis predecessor as set forth
in its historical combined carve-out financial statements contained elsewhere in this proxy statement/prospectus.
COMPARISON
OF CORPORATE GOVERNANCE AND STOCKHOLDER RIGHTS
Pyxis
will be a corporation organization under the BCA. The laws of the Republic of the Marshall Islands and Pyxis’ articles of
incorporation and bylaws will govern the rights of its stockholders. The provisions of the BCA resemble provisions of the corporation
laws of a number of states in the United States. While the BCA also provides that it is to be interpreted according to the laws
of the State of Delaware and other states with substantially similar legislative provisions, there have been few, if any, court
cases interpreting the BCA in the Republic of the Marshall Islands and we cannot predict whether Marshall Islands courts would
reach the same conclusions as courts in the United States. Thus, when you become a stockholder of Pyxis you may have more difficulty
in protecting your interests in the face of actions by the management, directors or significant stockholders than would stockholders
of a corporation incorporated in a U.S. jurisdiction which has developed a substantial body of case law. The following table provides
a comparison between the statutory provisions of the BCA and the Delaware General Corporation Law relating to stockholders’
rights. You also should review the articles of incorporation and bylaws of Pyxis attached as Annex D to this proxy statement/prospectus,
as well as the Delaware corporate law and corporate laws of BCA, including the BCA, to understand how these laws apply to LookSmart
and Pyxis.
STOCKHOLDER
MEETINGS
Marshall Islands |
|
Delaware |
|
|
|
Held at a time and place as designated in the
bylaws. |
|
May be held at such time or place as designated
in the certificate of incorporation or the bylaws, or if not so designated, as determined by the board of directors. |
|
|
|
Special meetings of the stockholders may be
called by the board of directors or by such person or persons as may be authorized by the articles of incorporation or by
the bylaws |
|
Special meetings of the stockholders may be
called by the board of directors or by such person or persons as may be authorized by the certificate of incorporation or
by the bylaws. |
|
|
|
May be held within or outside the Marshall
Islands. |
|
May be held within or outside Delaware. |
|
|
|
Notice: |
|
Notice: |
|
|
|
Whenever stockholders are required to take
any action at a meeting, written notice of the meeting shall be given which shall state the place, date and hour of the meeting
and, unless it is an annual meeting, indicate that it is being issued by or at the direction of the person calling the meeting. |
|
Whenever stockholders are required to take
any action at a meeting, a written notice of the meeting shall be given which shall state the place, if any, date and hour
of the meeting, and the means of remote communications, if any. |
|
|
|
A copy of the notice of any meeting shall be
given personally or sent by mail not less than 15 nor more than 60 days before the meeting. |
|
Written notice of any meeting shall be given
not less than 10 nor more than 60 days before the date of the meeting. |
STOCKHOLDERS’
VOTING RIGHTS
Marshall Islands |
|
Delaware |
|
|
|
Any action required to be taken by a meeting of stockholders
may be taken without meeting if consent is in writing and is signed by all the stockholders entitled to vote. |
|
Any action required to be taken at a meeting of stockholders
may be taken without a meeting if a consent for such action is in writing and is signed by stockholders having not fewer than
the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled
to vote thereon were present and voted. |
|
|
|
Any person authorized to vote may authorize another person or
persons to act for him by proxy. |
|
Any person authorized to vote may authorize another person or
persons to act for him or her by proxy. |
Unless otherwise provided in the articles of incorporation,
a majority of shares entitled to vote constitutes a quorum. In no event shall a quorum consist of fewer than one-third of
the shares entitled to vote at a meeting. |
|
For stock corporations, the certificate of incorporation
or bylaws may specify the number of shares required to constitute a quorum but in no event shall a quorum consist of less
than one-third of shares entitled to vote at a meeting. In the absence of such specifications, a majority of shares entitled
to vote shall constitute a quorum. |
|
|
|
Except as otherwise required by the BCA or the articles of incorporation,
directors shall be elected by a plurality of the votes cast by holders of shares entitled to vote, and, except as required
or permitted by the BCA or our articles of incorporation, any other corporate action shall be authorized by a majority of
votes cast by holders of shares entitled to vote thereon. |
|
Unless otherwise specified in the certificate of incorporation
or by-laws, directors shall be elected by a plurality of the votes of the shares entitled to vote on the election of directors,
and, in all other matters, the affirmative vote of the majority of the shares entitled to vote on the subject matter shall
be the act of the shareholders. |
|
|
|
The articles of incorporation may provide for cumulative voting
in the election of directors. |
|
The certificate of incorporation may provide for cumulative
voting in the election of directors. |
|
|
|
Any two or more domestic corporations may merge into a single
corporation if approved by the board and if authorized by a majority vote of the holders of outstanding shares at a stockholder
meeting. |
|
Any two or more corporations existing under the laws of the
state may merge into a single corporation pursuant to a board resolution and upon the majority vote by stockholders of each
constituent corporation at an annual or special meeting. |
|
|
|
Any sale, lease, exchange or other disposition of all or substantially
all the assets of a corporation, if not made in the corporation’s usual or regular course of business, once approved
by the board, shall be authorized by the affirmative vote of two-thirds of the shares of those entitled to vote at a stockholder
meeting. |
|
Every corporation may at any meeting of the board sell, lease
or exchange all or substantially all of its property and assets as its board of directors deems expedient and for the best
interests of the corporation when so authorized by a resolution adopted by the holders of a majority of the outstanding stock
of the corporation entitled to vote. |
|
|
|
Any domestic corporation owning at least 90% of the outstanding
shares of each class of another domestic corporation may merge such other corporation into itself without the authorization
of the stockholders of any corporation. |
|
Any corporation owning at least 90% of the outstanding shares
of each class of another corporation may merge the other corporation into itself and assume all of its obligations without
the vote or consent of stockholders; however, in case the parent corporation is not the surviving corporation, the proposed
merger shall be approved by a majority of the outstanding stock of the parent corporation entitled to vote at a duly called
stockholder meeting. |
|
|
|
Any mortgage, pledge of or creation of a security interest in
all or any part of the corporate property may be authorized without the vote or consent of the stockholders, unless otherwise
provided for in the articles of incorporation. |
|
Any mortgage or pledge of a corporation’s property and
assets may be authorized without the vote or consent of stockholders, except to the extent that the certificate of incorporation
otherwise provides. |
Dissenters'
Rights of Appraisal
Shareholders have a right to dissent from a merger or consolidation or
sale or exchange of all or substantially all assets not made in the usual and regular course of business, and receive payment
of the fair value of their shares, subject to exceptions |
|
Appraisal rights shall be available for the shares of a corporation in
a merger or consolidation, subject to exceptions |
|
|
|
A holder of any adversely affected shares who does not vote on or consent in writing to
an amendment to the articles of incorporation has the right to dissent and to receive payment for such shares if the amendment: |
|
The certificate of incorporation may provide that appraisal rights are available for shares
as a result of an amendment to the certificate of incorporation, any merger or consolidation or the sale of all or substantially
all of the assets |
|
|
|
Alters or abolishes any preferential right of any outstanding shares having preferences;
or |
|
|
|
|
|
Creates, alters, or abolishes any provision or right in respect to the redemption of any
outstanding shares; or |
|
|
Alters or abolishes any preemptive right of such holder to acquire shares
or other securities; or |
|
|
|
|
|
Excludes or limits the right of such holder to vote on any matter, except as such right
may be limited by the voting rights given to new shares then being authorized of any existing or new class |
|
|
DIRECTORS
Marshall Islands |
|
Delaware |
|
|
|
The board of directors must consist of at least one member. |
|
The board of directors must consist of at least one member. |
|
|
|
The number of board members may be changed by an amendment to
the bylaws, by the stockholders, or by action of the board under the specific provisions of a bylaw. |
|
The number of board members shall be fixed by, or in a manner
provided by, the bylaws, unless the certificate of incorporation fixes the number of directors, in which case a change in
the number shall be made only by an amendment to the certificate of incorporation. |
|
|
|
If the board is authorized to change the number of directors,
it can only do so by a majority of the entire board and so long as no decrease in the number shall shorten the term of any
incumbent director. |
|
If the number of directors is fixed by the certificate of incorporation,
a change in the number shall be made only by an amendment of the certificate |
|
|
|
Members of a board of directors owe a fiduciary duty to the
company to act honestly and in good faith with a view to the best interests of the company and to exercise the care, diligence
and skill that a reasonably prudent person would exercise in comparable circumstances. |
|
The business and affairs of a corporation are managed by or
under the direction of its board of directors. In exercising their powers, directors are charged with a fiduciary duty of
care to protect the interests of the corporation and a fiduciary duty of loyalty to act in the best interests of its shareholders. |
REMOVAL
Marshall Islands |
|
Delaware |
|
|
|
Any or all of the directors may be removed for cause by vote of the stockholders. |
|
Any or all of the directors may be removed, with or without cause, by the holders of a majority
of the shares entitled to vote unless the certificate of incorporation otherwise provides. |
|
|
|
If the articles of incorporation or the bylaws so provide, any or all of the directors may
be removed without cause by vote of the stockholders. |
|
In the case of a classified board, stockholders may affect removal of any or all directors
only for cause. |
INFORMATION
WITH RESPECT TO PYXIS
Overview
Pyxis Tankers
Inc. is an international maritime transportation company, formed on March 23, 2015, with a focus on the tanker sector. At the
consummation of the Merger, Pyxis’ fleet will be comprised of six double hull tankers with an average current age of four
years and that are employed under a mix of short- and medium-term time charters and spot charters. Pyxis will acquire these six
vessels prior to the Merger from an affiliate of its founder and chief executive officer, Mr. Valentios (“Eddie”)
Valentis. Four of the vessels in the fleet will be medium-range, or MR, tankers, three of which have eco-efficient or eco-modified
designs and two will be short-range tanker sister ships. Each of the vessels in the fleet is capable of transporting refined petroleum
products, such as naphtha, gasoline, jet fuel, kerosene, diesel and fuel oil, as well as other liquid bulk items, such as vegetable
oils and organic chemicals.
Pyxis’
principal objective will be to own and operate its fleet in a manner that will enable it to benefit from short- and long-term
trends that Pyxis expects in the tanker sector to maximize its revenues and to enhance returns to its shareholders. Pyxis intends
to expand the fleet through selective acquisitions of modern product tankers in a manner that is accretive to shareholder value.
It expects to employ its vessels primarily through time charters to creditworthy customers and on the spot market. Pyxis intends
to continually evaluate the markets in which it operates and, based upon its view of market conditions, adjust its mix of vessel
employment by counterparty and stagger its charter expirations. In addition, Pyxis’ may choose to opportunistically direct
asset sales when conditions are primed to generate attractive returns for its shareholders.
Following
the consummation of the Merger, Pyxis will consider taking advantage of LookSmart’s experience in customizable internet
applications. LookSmart intends to upgrade without charge Pyxis’ web-site and internet capabilities in order to enhance
functionality and information, including shareholder interface. Pyxis also intends that Robert Ladd, LookSmart’s nominee
to Pyxis’ Board, and a number of Pyxis’ executive officers will monitor technological developments in the shipping
industry and when economically feasible, propose technologies for adoption by Pyxis and/or consider possible opportunities for
joint ventures or investments by Pyxis. In order to enhance its shareholder relations and capital markets access, Pyxis also intends
to establish a small representative office in the New York area in the near future.
The Fleet
Pyxis’
fleet of six tankers have a weighted average age of approximately 4 years as of February 28, 2015 and aggregated 216,635 in carrying
capacity (dwt). The following chart provides summary information concerning the fleet:
Vessel Name | |
Shipyard | |
Carrying
Capacity
(dwt) | | |
Year
Built | |
Type of
Charter | |
Anticipated
Redelivery
Date(1) | |
Charter
Rate
(per day) (2) | |
| |
| |
| | |
| |
| |
| |
| |
Pyxis Epsilon | |
SPP-So. Korea | |
| 50,295 | | |
2015 | |
Time | |
Jan. 2017 | |
$ | 16,575 | |
Pyxis Theta | |
SPP–So. Korea | |
| 51,795 | | |
2013 | |
Time | |
Sept.2016 | |
$ | 15,600 | |
Pyxis Malou | |
SPP-So. Korea | |
| 50,667 | | |
2009 | |
Spot | |
n/a | |
| n/a | |
Pyxis Delta | |
Hyundai-So.Korea | |
| 46,616 | | |
2006 | |
Time | |
June 2015 | |
$ | 15,000 | |
Northsea Beta | |
Sumec- China | |
| 8,647 | | |
2010 | |
Spot | |
n/a | |
| n/a | |
Northsea Alpha | |
Sumec- China | |
| 8,615 | | |
2010 | |
Time | |
Oct. 2015 | |
$ | 9,650 | |
(1) Each time
charter contains a provision that allows for redelivery plus or minus 30-60 days. The Pyxis Epsilon’s charterer has
an option to extend the charter one year for $18,050/day. The Pyxis Theta’s charterer has an option to extend the
charter for one year for $16,600/day and for an additional year for $17,600/day. The Northsea Alpha’s charterer has
an option to extend the charter for two successive six month periods at a mutually acceptable rate to be determined.
(2) This table
shows gross rates and does not reflect any commissions payable.
Pyxis’
Charters
Pyxis generates
revenues by charging customers a fee, typically called charterhire, for the use of its vessels. Customers utilize the vessels
to transport their refined petroleum products and other liquid bulk items and have historically entered into the following types
of contractual arrangements with Pyxis or its affiliates:
• Time
charter: A time charter is a contract for the use of a vessel for a fixed period of time at a specified daily rate. Under a time
charter, the vessel owner provides crewing and other services related to the vessel’s operation, the cost of which is included
in the daily rate. The customer, also called a charterer, is responsible for substantially all of the vessel’s “voyage
expenses”, which are costs related to a particular voyage including the cost for fuel, which is also called bunkers, and
any port fees, cargo loading and unloading expenses, canal tolls and agency fees.
• Spot
charters: A spot charter is a contract to carry a specific cargo for a single voyage. Spot charters for voyages involve the carriage
of a specific amount and type of cargo on a load-port to discharge-port basis, subject to various cargo handling terms, and the
vessel owner is paid on a per-ton basis. Under a spot voyage charter, the vessel owner is responsible for the payment of all expenses
including voyage expenses, such as port, canal and bunker costs.
The table below
sets forth the basic distinctions between these types of charters:
|
|
Time Charter |
|
Spot Charters |
Typical contract length |
|
4 months - 5 years or more |
|
Indefinite but typically less than 6 months |
Basis on which charter rate is paid |
|
Per day |
|
Per ton, typically |
Voyage expenses |
|
Charterer pays |
|
Pyxis pays |
Vessel operating costs(1) |
|
Pyxis pays |
|
Pyxis pays |
Off-hire (2) |
|
Pyxis pays |
|
Pyxis pays |
(1) Pyxis
is responsible for vessel operating costs, which include crewing, repairs and maintenance, insurance, stores, lube oils, communication
expenses and the commercial and technical management fees payable to Pyxis’ ship managers. The largest components of Pyxis’
vessel operating costs are generally crews and repairs and maintenance.
(2) “Off-hire"
refers to the time a vessel is not available for service due primarily to scheduled and unscheduled repairs or drydocking.
Under both time
and spot charters on the vessels in the fleet, Pyxis is responsible for the technical management of the vessel and for maintaining
the vessel, periodic drydocking, cleaning and painting and performing work required by regulations. Pyxis will enter into a contract
with Pyxis Maritime Corp., an affiliate of Pyxis (“Maritime”), to provide commercial, sale and purchase, and
other operations and maintenance services to all of the vessels in Pyxis’ fleet, except for the chartering of the Northsea
Alpha and the Northsea Beta, which is performed by NST, a third party manager. Pyxis’ vessel owning subsidiaries
have contracted with ITM, a third party technical manager and subsidiary of V. Ships Limited, to provide crewing and technical
management to all of the vessels in the Pyxis fleet. See “Management of Ship Operations, Administration and Safety.”
Pyxis intends
to continue to outsource the chartering of the Northsea Alpha and the Northsea Beta to NST, and the day-to-day crewing
and technical management of all its vessels to ITM. Pyxis believes that ITM has a strong reputation for providing high quality
technical vessel services, including expertise in efficiently managing tankers.
In the future,
Pyxis may also place one or more of its vessels in pooling arrangements or on bareboat charters:
• Pooling
Arrangements. In pooling arrangements, vessels are managed by a single pool manager who markets a number of vessels as a single,
cohesive fleet and collects, or pools, their net earnings prior to distributing them to the individual owners, typically under
a pre-arranged weighting system that recognizes a vessel’s earnings capacity based on various factors. The vessel owner
also generally pays commissions on pooling arrangements generally ranging from 1.25% to 5.0% of the earnings.
• Bareboat
Charters. A bareboat charter is a contract pursuant to which the vessel owner provides the vessel to the charterer for a fixed
period of time at a specified daily rate, and the charterer generally provides for all of the vessel’s operating expenses
in addition to the voyage costs and assumes all risk of operation. A bareboat charterer will generally be responsible for operating
and maintaining the vessel and will bear all costs and expenses with respect to the vessel, including drydockings and insurance.
In accordance with the Merger Agreement, Pyxis may acquire in the future the MR tanker Miss Lucy from an affiliate controlled
by its founder. The Miss Lucy is currently on bareboat charter to an unaffiliated third party charterer.
Pyxis’
Business Strategy
Pyxis’
principal objective is to own, operate and grow its fleet in a manner that will enable it to benefit from short- and long-term
trends that Pyxis expects in the tanker sector to maximize its revenues and to enhance returns to its shareholders. Pyxis’
strategy to achieve this objective includes the following:
• Maintain
High Quality Fleet of Modern Tankers. Pyxis intends to maintain a high quality fleet that meets rigorous industry standards
and its charterers’ requirements and that has an average age of six years or less. Pyxis considers its fleet to be high
quality based on the specifications to which its vessels were built and the reputation of each of the shipyards that built the
vessels. Pyxis believes that its customers prefer the better reliability, fewer off-hire days and greater operating efficiency
of modern, high quality vessels. Pyxis’ MR tankers include eco-efficient and eco- modified designed vessels which offer
the benefits of lower fuel consumption and reduced emissions. Pyxis also intends to maintain the quality of its fleet through
ITM’s comprehensive planned maintenance and preventive maintenance programs.
• Grow
the Fleet Opportunistically. Pyxis plans to take advantage of what it believes to be attractive asset values in the product
tanker sector to expand its fleet through acquisitions. Pyxis believes that demand for tankers will expand as trade routes for
liquid cargoes continue to evolve to developed markets, such as those in the United States and Europe, and as changes in refinery
production patterns in developing countries such as China and India, contribute to increases in the transportation of refined
petroleum products. Pyxis believes that a diversified tanker fleet will enable it to serve its customers across the major tanker
trade routes and to continue to develop a global presence. Pyxis has strong relationships with reputable owners, charterers, banks
and shipyards, which it believes will assist it in identifying attractive vessel acquisition opportunities. Pyxis intends to focus
on the acquisition of IMO II and III class vessels of five years of age or less, which have been built in Tier 1 Asian shipyards.
Pyxis may also benefit in the future from the potential acquisition in accordance with the terms of the Merger Agreement of two
MR tankers from Mr. Valentis, the Miss Lucy and the Pyxis Loucas. Pyxis will also consider acquisitions of newbuild
vessels (i.e., re-sales) and focus primarily on tankers with modern fuel efficient designs given demands for lower bunker fuel
consumption and concerns about environmental emissions.
• Utilize
Portfolio Approach for Commercial Employment. Pyxis expects to employ the vessels in its fleet under a mix of time charters
(with and without profit share), bareboat charters, pooling arrangements and on the spot market. Long-term time charters with
a profit sharing component will offer it some protection in the event charter rates decrease, while allowing Pyxis to share in
increased profits in the event rates increase. In addition, Pyxis expects to diversify its charters by customer and staggered
duration. Pyxis believes that this portfolio approach to vessel employment is an integral part of risk management which will provide
it a base of stable cash flows while enabling it to take advantage of rising charter rates and market volatility.
• Preserve
Strong Safety Record & Commitment to Customer Service and Support. Maritime and ITM have strong histories of complying
with rigorous health, safety and environmental protection standards and have excellent vessel safety records. Pyxis intends to
maintain these high standards in order to provide its customers with a high level of safety, customer service and support.
• Maintain
Financial Flexibility. Following the Merger, Pyxis intends to maintain financial flexibility to expand its fleet by targeting
a balanced capital structure of debt and equity. As part of its risk management policies, at the time of vessel acquisition, Pyxis
expects to enter into time charters which provide it predictable cash flows for the duration of the charter and attract lower-cost
bank financing at more favorable terms. Pyxis believes this will allow it to build upon its strong commercial banking relationships
and optimize its ability to access the public capital markets to respond opportunistically to changes in its industry and financial
market conditions.
Management
of Ship Operations, Administration and Safety
Historically,
Pyxis’ ship manager, Maritime, and its technical manager, ITM, have entered into individual ship management agreements with
Pyxis’ vessel owning subsidiaries pursuant to which they provided Pyxis with:
• commercial
management services, which have included obtaining employment, i.e., the chartering, for Pyxis’ vessels and managing its
relationships with charterers;
• strategic
management services, which include providing it with strategic guidance with respect to locating, purchasing, financing and selling
vessels;
• technical
management services, which include managing day-to-day vessel operations, performing general vessel maintenance, ensuring regulatory
and classification society compliance, supervising the maintenance and general efficiency of vessels, arranging the hire of qualified
officers and crew, arranging and supervising drydocking and repairs, arranging insurance for vessels, purchasing stores, supplies,
spares and new equipment for vessels, appointing supervisors and technical consultants and providing technical support; and
• shoreside
personnel who carry out the management functions described above.
Ship Management
Agreements with Maritime. Headquartered in Athens, Greece, Pyxis Maritime Corp. was formed in May 2007 by Pyxis’ founder
and chief executive officer to take advantage of opportunities in the tanker sector. Maritime’s business employs or receives
consulting services from 10 people in four departments: technical, operations, chartering and finance/accounting. Pyxis will enter
into a Head Management Agreement with Maritime, pursuant to which Maritime will provide Pyxis and its vessels, among other things,
with ship management services. Under the Head Management Agreement, each vessel owning subsidiary that owns a vessel in Pyxis’
fleet also has entered into a separate ship management agreement with Maritime. Maritime provides Pyxis and its vessels with the
following services: commercial, sale and purchase, provisions, insurance, bunkering, operations and maintenance, dry-docking and
newbuilding construction supervision. Maritime also supervises the crewing and technical management performed by ITM for all Pyxis’
vessels and the chartering of the Northsea Alpha and the Northsea Beta, which is performed by NST. In return for
such services, Pyxis pays to Maritime for each vessel while in operation, a fixed fee per day of $325 (or $160 per day per vessel
for any subsidiaries that contract out the chartering of the vessels to NST or others), and for each vessel under construction,
a fixed fee of $450 plus an additional daily fee, which is dependent on the seniority of the personnel, to cover the cost of the
engineers employed to conduct the supervision. In addition, Maritime receives 1.0% of the purchase price of any sale and purchase
transaction from the seller of the vessel, and 1.25% of all chartering, hiring and freight revenue procured by or through it.
Pyxis believes these amounts payable to Maritime are very competitive to many of Pyxis’ U.S. publicly listed tanker competitors,
especially given its relative size. It is contemplated that once Pyxis’ fleet reaches 15 tankers, the fee that Pyxis pays
to Maritime for its ship management services for vessels in operation will recognize for a volume discount in an amount to be
determined by the parties at that time.
Ship Management
Agreements with ITM. Pyxis outsources the day-to-day technical management of its vessels to an unaffiliated third party, International
Tankers Management, which has been certified for ISO 9001:2008 and ISO 14001:2004. Each vessel owning subsidiary that owns a vessel
in Pyxis’ fleet under a time or spot charter has entered into a ship management agreement with ITM. ITM is responsible for
all technical management, including crewing, maintenance, repair, drydockings and maintaining required vetting approvals. In performing
its services, ITM is responsible to operate a management system that complies, and ensure that each vessel and its crew comply,
with all applicable health, safety and environmental laws and regulations. Absent a material change in the operating costs of
each vessel, Pyxis pays for all expenses that are incurred in respect of each vessel, which will be presented to Pyxis in an annual
budget. In addition to reimbursement of actual vessel related operating costs, Pyxis is also obligated to pay an annual fee to
ITM of $155,000 per vessel (equivalent to approximately $425/day). This fee is reduced to the extent any vessel ITM manages is
not fully operational for a time, i.e., a period of “lay-up”.
Each ship management
agreement with ITM will continue until it is terminated by either party. The ship management agreements can be cancelled by Pyxis
for any reason at any time upon three months’ advance notice, but neither party can cancel the agreement, other than for
specified reasons, until 18 months after the initial effective date of the ship management agreement. Pyxis has the right to terminate
the ship management agreement for a specific vessel upon 60 days’ notice if in its reasonable opinion ITM fails to manage
the vessel in accordance with sound ship management practice. ITM can cancel the ship management agreement if it has not received
payment it requests within 60 days. Each ship management agreement will be terminated if the relevant vessel is sold (other than
to Pyxis’ affiliates), becomes a total loss, becomes a constructive, compromised or arranged total loss or is requisitioned
for hire.
Commerical
Ship Management Agreements with NST. Pyxis also outsources the chartering of the Northsea Alpha and the Northsea
Beta to North Sea Tankers BV, an unaffiliated third party. Each of the subsidiaries owning these vessels has entered into
a commercial ship management agreement with NST. In return for the chartering and related services for these vessels, Pyxis pays
NST an annual fee of €55,000 per vessel (equivalent to approximately €151/day) plus a commission from 1.25% to 5% based
on the net daily revenue amount ranging from €3,374 to €8,500 and above. In case these vessels do not have certain specified
approvals from major oil companies in place, then the commission is set at 2.5% on gross revenue. The termination provisions are
comparable to those in the ship management agreements with ITM.
Pyxis is obligated
to keep insurance for each of its vessels, including hull and machinery insurance and protection and indemnity insurance (including
pollution risks and crew insurances), and Pyxis must ensure each vessel carries a certificate of financial responsibility as required.
Pyxis is responsible to ensure that all premiums are paid. See “Risk Management and Insurance” below.
Product Tanker Industry &
Market Conditions
The discussion
contained under this section has been prepared by Pyxis management, which believes that the information contained herein is reasonable.
The statistical information specifically referenced in this section as being provided by Poten and Partners (“Poten”)
has been derived from Poten’s databases. Poten compiles and publishes data in the shipping industry for the benefit of its
clients and has confirmed to Pyxis that it believes that the statistical information accurately describes the matter presented,
subject to the reliability of the data supporting the statistics. Its methodologies for collecting data, and therefore the data
collected, may differ from those of other sources, and its data does not reflect all or even necessarily a comprehensive set of
the actual transactions occurring in the industry.
Overview
of Refined Products: The refining of crude oil yields certain clean petroleum products (“CPP” or “clean
products”): gasoline and diesel to fuel vehicles, naphtha to make plastics, gasoil to heat homes and fuel generators,
and jet fuel to power aircraft. The trade in CPP has evolved over the years from a regional to an international market. The majority
of CPP is transported long distances through the use of ocean going vessels called product tankers.
The demand for
product tankers is primarily based on the global trading of CPP, which relies on international differentials in the price of CPP.
Based on Poten’s historical information on the fixtures of “Medium-Range” or MR tankers as a proxy for product
tankers of all sizes, Poten estimates that clean products represented 90%, 89% and 89% of the cargoes transported on product tankers
in years 2012, 2013 and 2014, respectively. In addition, major oil companies and CPP traders increasingly transport clean products
globally to satisfy their and their clients’ demands for CPP to meet international fuel specifications, which adds to the
number of tons of cargo and the distances that such cargo is carried (the number of cargo tons multiplied by the distance is more
commonly known as “ton-miles” and is one metric for tanker demand). This expanding ton-mile for product tankers is
itself positive for tanker demand and vessel utilization. Demand for new product tankers is also affected by current and future
charter market conditions.
The market for
CPP is currently experiencing a fundamental change and the trading patterns of CPP are becoming more complex, which may have a
positive effect on ton-miles and product tanker demand:
| · | The
United States, once a net importer of products, has become a major supplier of gasoil/diesel
and gasoline in the Atlantic Basin market; |
| · | Emerging
markets in South America and Africa, which have little to no refining capacity, require
CPP to fuel their economies; |
| · | The
closure of inefficient European refineries, falling European domestic demand and stricter
fuel and environmental standards are creating a strong import and export market for various
clean products; |
| · | Russian
CPP export ambitions are increasing with several refineries undergoing upgrades in the
Russian Baltic region; |
| · | An
increasing number of large scale refineries located closer to regions that produce crude
oil feedstocks, such as the Middle East, rather than near demand centers, results in
greater ton-mile demand; |
| · | Refinery
closures in Australia and Japan will require greater imports of CPP to fill shortfalls
in domestic supply in each of these markets; |
| · | Expanding
terminal capacity furthers worldwide arbitrage trading of CPP; |
| · | Global
adoption of standardized CPP specifications are increasing trading opportunities; |
| · | As
the number of participants trading CPP expands, there is a growth in the number of profitable
routes and cargoes for product tankers; and |
| · | Flexibility
in product tanker design specifications allows these vessels to carry multiple grades
of cargoes and improves their utilization. |
The Global
Product Tanker Fleet: The worldwide product tanker fleet ranges from small/coastal vessels of 3,000 metric tons of carrying
capacity (called “deadweight” or “dwt”) to “Long-Range” LR-2 tankers of up to 125,000 dwt.
According to Poten, as of February 28, 2015,the global product tanker fleet aggregated almost 4,098 vessels and over 94 million
dwt, with the fleet of smaller tankers below 35,000 dwt having an average age of approximately 11 years, whereas the worldwide
MR tanker fleet of 35,000 – 54,999 dwt having an average age of slightly over eight years.
The product
tanker fleet has grown significantly over the past decade, driven by not only increased CPP demand, but also changes in ownership
structure, regulations, technology and operating requirements. Historically, major fleet expansion can be linked to economic
growth in Asia, rising U.S. gasoline imports, rising oil prices and relatively low interest rates to fund vessel investment. Poten
estimates that the order book for new product tankers aggregated 519 vessels and over 25.9 million dwtas of February 28, 2015.
The product tanker industry is capital intensive and highly fragmented.
Medium Range
Tankers: Pyxis' fleet is comprised primarily of MR tankers. MR tankers have the broadest trading market of all the product
carriers and are considered the “work-horse” within the product tanker sector. The size of MR tankers allows them
to call on a large number of ports, including smaller and shallower destinations, as well as the capability to carry multiple
cargoes, such as CPP, dirty petroleum products (i.e., fuel oil), easy chemicals and edible and vegetable oils in more modern MR
tankers. According to Poten, as of February 28, 2015:
| · | the
global MR fleet stood at 1,639 tankers with an aggregate of over 74 million dwt; |
| · | the
order book for MR tankers currently represents just over 15% of the fleet, down from
a peak of approximately 58% in 2008 ; |
| · | the
worldwide MR fleet is expected to grow on average 4.9%/year between 2015 and 2017, exclusive
of scrapping of older vessels and delays in new vessel deliveries; |
| · | based
on the expected growth in net refining capacity, the demand for product tankers is expected
to grow in coming years. For example, the International Energy Agency states that global
refining capacity was 95.7 million barrels per day in 2014 and it projects that refining
capacity net of shutdowns will increase by 945 thousand barrels per day or “kb/d”
in 2015, 1,511 kb/d in 2016 and 1,289 kb/d in 2017. A significant portion of this projected
growth in refinery capacity is related to export refineries, located particularly in
the Middle East, which is expected to have a more significant impact on ton-miles given
the distances the additional CPP is likely to travel; |
| · | there
were 26 MR tankers removed from the fleet in 2014, which represents 1.6% of MR tanker
fleet as of the end of that year. Vessels that will be candidates for scrapping in the
coming years include73 MR tankers that will be 20 years old and older in 2015 as well
as32 and 17 that will turn 20 years old in 2016 and 2017, respectively; and |
| · | since
there is currently capacity at shipyards for additional new building orders, it is unlikely
that there will be many delays in MR tanker deliveries through 2016. |
Since 2001,
the prices for MR tankers have ranged from approximately $25.3 million in 2002 to $51.75 million in 2008 for new building vessels,
and from approximately $19.7 million in year 2002 to $51 million in 2008 for five-year old vessels. New building prices are dictated
mostly by shipyards’ input costs, led by steel prices and labor costs. However, shipyard capacity, exchange rates, contracted
order backlog, freight rates and second hand tanker prices are additional considerations. Currently, the cost of building a new
52,000 dwt MR tanker is approximately $36 million. Most of the top shipyards are located in Asia, led by Hyundai Mipo and SPP
in South Korea, which currently have the largest MR tanker order books. All of Pyxis’ MR tankers were built at Hyundai Mipo
or SPP.
Historically,
charter rates have shown tremendous variability, whether on a spot (voyage) or time charter basis. The spot market reflects the
immediate conditions underlying vessel supply and demand, thereby experiencing greater volatility. With a fixed charter rate for
a longer period of time, time charters are generally less volatile. For example, according to Poten, for the period 2001 to 2014,
the annual average time charter equivalent or “TCE” rate for spot charters from the route Caribbean to U.S.
East Coast ranged from $5,000/day in 2009 to $21,600/day in 2006, and during the same 14 year period, the average one year time
charter rate ranged from $12,600 in 2010 to $25,300 in 2006. The spot charter rate for the aforementioned route as of the middle
of March 2015 was $28,100/day and the one year time charter rate is $15,000. See “Management Discussion and Analysis—Important
Factors to Consider When Evaluating Pyxis’ Results of Operations” for a discussion of Pyxis’ historical
time and spot charter revenues. Charter rates can also reflect the specifications of the vessel, such as, whether the tanker is
designed as “ice-class”, meaning it has been built to conduct arctic trades, or “eco-efficient”, meaning
the tanker is equipped with a fuel efficient engine or had modifications made to it for lower fuel consumption and reduced emissions.
Vessels with higher specifications will typically be able to obtain greater charter rates. For example, a modern eco-efficient
MR tanker typically receives a charter premium of up to $1,500/day.
Vessel operating
expenses cover the cost of crewing, on-board provisions, lubricants, spares, insurance, as well as maintenance and repairs. Operating
costs for a modern MR tanker should range from $6,000 to $7,000 per day, while a 10-15 year old vessel should experience $7,500-$8,000/day
in operating costs.
Lastly, ownership
of the worldwide MR fleet is broad and fragmented. Poten estimates that there were over 300 owners of MR tankers in the world
as of February 28, 2015, with approximately 86% of the owners operating fewer than 10 vessels. This makes the MR fleet very liquid
for chartering as well as vessel sale and purchase opportunities. As of February 28, 2015, Scorpio Tankers was the largest owner
of MR tankers with 51 units, while Navig8 had the largest number of new builds on order with 23 units.
Classification,
Inspection and Maintenance
Every large,
commercial seagoing vessel must be “classed” by a classification society. The classification society certifies that
the vessel is “in class,” signifying that the vessel has been built and is maintained in accordance with the rules
of the classification society and complies with applicable rules and regulations of the vessel’s country of registry and
the international conventions of which that country is a party. In addition, where surveys are required by international conventions
and corresponding laws and ordinances of a flag state, the classification society will undertake them on application or by official
order, acting on behalf of the authorities concerned. The classification society also undertakes on request other surveys and
checks that are required by regulations and requirements of the flag state. These surveys are subject to agreements made in each
individual case and/or to the regulations of the country concerned.
For maintenance
of the class, regular and extraordinary surveys of hull and machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:
Annual Surveys.
For seagoing vessels, annual surveys are conducted for the hull and the machinery, including the electrical plant, and where applicable,
on special equipment classed at intervals of 12 months from the date of commencement of the class period indicated in the certificate.
Intermediate
Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years
after commissioning and each class renewal. Intermediate surveys may be carried out on the occasion of the second or third annual
survey.
Special (Class
Renewal) Surveys. Class renewal surveys, also known as “special surveys”, are carried out on the vessel’s
hull and machinery, including the electrical plant, and on any special equipment classed at the intervals indicated by the character
of classification for the hull. During the special survey, the vessel is thoroughly examined, including audio-gauging to determine
the thickness of the steel structures. Should the thickness be found to be less than class requirements, the classification society
would prescribe steel renewals. The classification society may grant a one-year grace period for completion of the special survey.
Substantial amounts of funds may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive
wear and tear. In lieu of the special survey every four or five years, depending on whether a grace period is granted, a ship
owner has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous
survey cycle, in which every part of the vessel would be surveyed within a five-year cycle. At an owner’s discretion, the
surveys required for class renewal may be split according to an agreed schedule to extend over the entire period of class. This
process is referred to as continuous class renewal.
Occasional
Surveys. These are inspections carried out as a result of unexpected events, for example, an accident or other circumstances
requiring unscheduled attendance by the classification society for re-confirming that the vessel maintains its class, following
such an unexpected event.
All areas subject
to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter
intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five
years. Most vessels are also drydocked every 30 to 36 months for inspection of the underwater parts and for repairs related to
inspections. If any defects are found, the classification surveyor will issue a “recommendation” which must be rectified
by the ship owner within prescribed time limits.
Most insurance
underwriters make it a condition for insurance coverage that a vessel be certified as “in class” by a classification
society which is a member of the International Association of Classification Societies. All of Pyxis’ operating vessels
in its existing fleet are certified as being “in class” by Nippon Kaiji Kyokai (Class NK) and DNV GL. Pyxis expects
that all vessels that it purchases will be certified prior to their delivery and that it will have no obligation to take delivery
of the vessel if it is not certified as “in class” on the date of closing.
Risk Management
and Insurance
General
The operation
of any cargo carrying ocean-going vessel embraces a wide variety of risks, including the following:
| • | mechanical
failure or damage, for example by reason of the seizure of a main engine crankshaft; |
| • | cargo
loss, for example arising from hull damage; |
| • | personal
injury, for example arising from collision or piracy; |
| • | environmental
damage, for example arising from marine disasters such as oil spills and other environmental
mishaps; |
| • | physical
damage to the vessel, for example by reason of collision; |
| • | damage
to other property, for example by reason of cargo damage or oil pollution; and |
| • | business
interruption, for example arising from strikes and political or regulatory change. |
It may also
include business interruption, for example by reason of political disturbance or labor disputes or losses due to piracy, terrorist
or war-like action between countries.
The value of
such losses or damages may vary from modest sums, for example for a small cargo shortage damage claim, to catastrophic liabilities,
for example arising out of a marine disaster, such as a serious oil or chemical spill, which may be virtually unlimited. While
Pyxis expects to maintain the traditional range of marine and liability insurance coverage for Pyxis’ fleet (hull and machinery
insurance, war risks insurance and protection and indemnity coverage) in amounts and to extents that Pyxis believes will be prudent
to cover normal risks in its operations, it cannot insure against all risks, and it cannot be assured that all covered risks are
adequately insured against. Furthermore, there can be no guarantee that any specific claim will be paid by the insurer or that
it will always be possible to obtain insurance coverage at reasonable rates. Any uninsured or under-insured loss could harm Pyxis’
business and financial condition.
The following
table sets forth information regarding the insurance coverage on Pyxis’ existing fleet as of February 28, 2015.
Type |
|
Aggregate Sum Insured For All
Vessels in Pyxis’ Existing
Fleet |
Hull and Machinery |
|
$234 million. |
War Risk |
|
$234 million. |
Protection and Indemnity (P&I) |
|
Pollution liability claims: limited to $1.0 billion per vessel per incident. |
Hull and
Machinery Insurance and War Risk Insurance
The principal
coverages for marine risks (covering loss or damage to the vessels, rather than liabilities to third parties) are hull and machinery
insurance and war risk insurance. These address the risks of the actual (or constructive) total loss of a vessel and accidental
damage to a vessel’s hull and machinery, for example from running aground or colliding with another vessel. These insurances
provide coverage which is limited to an agreed “insured value” which, as a matter of policy, is never less than the
particular vessel’s fair market value. Reimbursement of loss under such coverage is subject to policy deductibles which
vary according to the vessel and the nature of the coverage.
Protection
and Indemnity Insurance
P&I insurance
is the principal coverage for a ship owner’s third party liabilities as they arise out of the operation of its vessel. Such
liabilities include those arising, for example, from the injury or death of crew, passengers and other third parties working on
or about the vessel to whom the ship owner is responsible, or from loss of or damage to cargo carried on board or any other property
owned by third parties to whom the ship owner is answerable. P&I coverage is traditionally (and for the most part) provided
by mutual insurance associations, originally established by ship owners to provide coverage for risks that were not covered by
the marine policies that developed through the Lloyd’s market.
Pyxis’
P&I coverage for liabilities arising out of oil pollution is limited to $1.0 billion per vessel per incident in its existing
fleet. As the P&I associations are mutual in nature, historically, there has been no limit to the value of coverage afforded.
In recent years, however, because of the potentially catastrophic consequences to the membership of a P&I association having
to make additional calls upon the membership for further funds to meet a catastrophic liability, the associations have introduced
a formula based overall limit of coverage. Although contingency planning by the managements of the various associations has reduced
the risk to as low as reasonably practicable, it nevertheless remains the case that an adverse claims experience across an association’s
membership as a whole may require the members of that association to pay, in due course, unbudgeted additional funds to balance
its books.
Uninsured
Risks
Not all risks
are insured and not all risks are insurable. The principal insurable risks which nevertheless remain uninsured across Pyxis fleet
are “loss of hire” and “strikes.” Pyxis will not insure these risks because the costs are regarded as
disproportionate. These insurances provide, subject to a deductible, a limited indemnity for revenue or “loss of hire”
that is not receivable by the ship-owner for reasons set forth in the policy. For example, loss of hire risk may be covered on
a 14/90/90 basis, with a 14 days deductible, 90 days cover per incident and a 90-day overall limit per vessel per year. Should
a vessel on time charter, where the vessel is paid a fixed hire day by day, suffer a serious mechanical breakdown, the daily hire
will no longer be payable by the charterer. The purpose of the loss of hire insurance is to secure the loss of hire during such
periods.
Loan Agreements
Pyxis vessel
owning subsidiaries, as borrowers, entered into separate loan agreements (other than Secondone and Thirdone, which borrowed under
one loan agreement and Sixthone and Seventhone, which also borrowed under one loan agreement) to purchase each of the vessels
in Pyxis’ fleet. Each of these loan agreements is secured by a first priority mortgage over the vessel and a first priority
assignment of the vessel’s insurances and earnings. For more information on Pyxis’ loan agreements, see “Management’s
Discussion and Analysis of Financial Condition and Results of Operations.”
The events of
default under Pyxis’ loan documents generally include provisions relating to events of default, such as:
| • | the
non-payment on the due date of any amount under the loan agreements or any related document; |
| • | the
breach of any covenant or undertaking or failure to provide additional security as required; |
| • | any
untrue or incorrect representation or warranty; and |
In addition,
the loan agreements generally contain covenants requiring it, among other things, to ensure that:
• Pyxis
or the applicable vessel owning subsidiary that is the borrower under the loan must maintain pledged deposits equal to a percentage
of the outstanding loan;
• the
vessel owning subsidiary that is the borrower under the loan must maintain a retention account with monthly deposits equal to
one-sixth of the next semi-annual installment together with the appropriate percentage of interest next due; and
• the
fair market value of the mortgaged vessel must be no less than a certain percentage (ranging from 125% to 133%) of outstanding
borrowings under the applicable loan agreement, less any money in respect of the principal standing to the credit of the retention
account and any free or pledged cash deposits held with the lender in Pyxis’ or its subsidiary’s name.
Competition
Pyxis operates
in markets that are very competitive and based primarily on the supply and demand of commodities and number of vessels operating
at any given time. Pyxis competes for charters on the basis of price, vessel location, size, age and condition of the vessel,
as well as on Pyxis’ reputation. Pyxis will arrange charters for its vessels typically through the use of brokers, who negotiate
the terms of the charters based on market conditions. Pyxis competes primarily with other owners of tankers, many of which may
have more resources than it and may operate vessels that are more attractive to charterers than Pyxis’ vessels. Ownership
of tankers is highly fragmented and is divided among publicly listed companies, state-controlled owners and independent shipowners.
Some of Pyxis’ publicly listed competitors include Scorpio Tankers Inc. (NASDAQ: STNG), Ardmore Shipping Corporation (NYSE:
ASC), Capital Product Partners L.P. (NASDAQ: CPLP) and Tsakos Energy Navigation Limited (NYSE: TNP).
Customers
Pyxis markets
its vessels and related services to a broad range of customers, including international commodity trading companies, oil and gas,
and large shipping companies. During the last two years, Pyxis’ major customers include, among others, Vitol, Navig8, Clearlake,
Trafigura, ST Shipping, Hyproc Shipping and Repsol. In addition to these companies, Pyxis and its ship manager, Maritime, also
have historical and growing chartering relationships with major oil companies, including Exxon, Shell, BP, SK Energy, Statoil,
Total, Petramina, Gazprom and Petrobras. In addition, the Pyxis Delta is expected to enter into a time charter with Shell commencing
the second quarter of 2015.
Pyxis’
top five customers accounted for approximately 52.5% of its revenues in 2014 and 77.7% of its revenues in 2013. In 2014, Vitol,
Clearlake and ST Shipping accounted for 20.5%, 8.7% and 8.5%, of Pyxis’ revenues, respectively. Navig8, Trafigura and Hyproc
Shipping accounted for 35.9%, 22.1% and 8.3%, respectively, of Pyxis’ revenues in 2013. As of December 31, 2014, Pyxis did
not have any material trade receivable outstanding from any of its customers that accounted more than 10% of the customer’s
revenues during 2014. Pyxis does not believe that it is dependent on any one of its key customers. In the event of a default of
a charter by any of its key customers, Pyxis could seek to re-employ the vessel in the spot or charter markets, although the rate
could be lower than the charter rate agreed with such charterer.
Government
Regulation; Effect of Existing or Probable Governmental Regulations on the Business; Costs and Effects of Compliance with Environmental
Laws
General
Pyxis’
operations and its status as an operator and manager of ships are significantly regulated by international conventions, (i.e.,
SOLAS, the International Convention for the Prevention of Pollution from Ships, or “MARPOL”), class requirements,
U.S. federal, state and local and foreign health, safety and environmental protection laws and regulations, including the Oil
Pollution Act of 1990, as amended, or the “OPA,” the Comprehensive Environmental Response, Compensation, and
Liability Act, or CERCLA, the U.S. Port and Tanker Safety Act, the Act to Prevent Pollution from Ships, regulations adopted by
the IMO and the European Union, various volatile organic compound air emission requirements, IMO/U.S. Coast Guard pollution regulations
and various SOLAS and MARPOL amendments, as well as other regulations. In addition, various jurisdictions either have or are considering
regulating the management of ballast water to prevent the introduction of non-indigenous species considered to be invasive. Compliance
with these laws, regulations and other requirements would likely entail additional expense, including vessel modifications and
implementation of certain operating procedures.
Pyxis is also
required by various other governmental and quasi-governmental agencies and private organizations to obtain permits, licenses and
certificates for its vessels, depending upon such factors as the country of registry, the commodity transported, the waters in
which the vessel operates, the nationality of the vessel’s crew, the age and size of the vessel and its status as owner
or charterer. Failure to maintain necessary permits, licenses or certificates could require us to incur substantial costs or temporarily
suspend operations of one or more of its vessels.
Pyxis believes
that the heightened environmental and quality concerns of insurance underwriters, regulators and charterers will in the future
impose greater inspection and safety requirements on all vessels in the shipping industry. In addition to inspections by Pyxis,
its vessels are subject to both scheduled and unscheduled inspections by a variety of governmental and private entities, each
of which may have unique requirements. These entities include the local port authorities (such as U.S. Coast Guard, harbor Head
or equivalent), classification societies, flag state administration P&I Associations, charterers, and particularly terminal
operators and oil companies which conduct frequent vessel inspections.
Pyxis believes
that its vessels operate in full compliance with applicable environmental laws and regulations. However, because such laws and
regulations frequently change and may impose increasingly strict requirements, Pyxis cannot predict the ultimate cost of complying
with these and any future requirements or the impact of these and any future requirements on the resale value or useful lives
of its vessels.
International Maritime Organization
The International
Maritime Organization, or the IMO, is the United Nations agency for maritime safety and the prevention of pollution by ships.
The IMO has adopted several international conventions that regulate the international shipping industry, including but not limited
to the International Convention on Civil Liability for Oil Pollution Damage of 1969, generally referred to as CLC, the International
Convention on Civil Liability for Bunker Oil Pollution Damage, and the International Convention for the Prevention of Pollution
from Ships of 1973, or the MARPOL Convention. The MARPOL Convention is broken into six Annexes, each of which establishes environmental
standards relating to different sources of pollution: Annex I relates to oil leakage or spilling; Annexes II and III relate to
harmful substances carried, in bulk, in liquid or packaged form, respectively; Annexes IV and V relate to sewage and garbage management,
respectively; and Annex VI, adopted by the IMO in September of 1997, relates to air emissions.
In 2012, the
IMO’s Marine Environmental Protection Committee, or MEPC, adopted by resolution amendments to the international code for
the construction and equipment of ships carrying dangerous chemicals in bulk, or the IBC Code. The provisions of the IBC Code
are mandatory under MARPOL and SOLAS. These amendments, which are expected to enter into force in June 2014, pertain to revised
international certificates of fitness for the carriage of dangerous chemicals in bulk and identifying new products that fall under
the IBC Code. Pyxis may need to make certain financial expenditures to comply with these amendments.
In 2013, the
MEPC adopted by resolution amendments to the MARPOL Annex I Conditional Assessment Scheme, or CAS. The amendments, which are expected
to become effective on October 1, 2014, pertain to revising references to the inspections of bulk carriers and tankers after the
2011 ESP Code, which enhances the programs of inspections, becomes mandatory. Pyxis may need to make certain financial expenditures
to comply with these amendments.
Air Emissions
In September
of 1997, the IMO adopted Annex VI to MARPOL to address air pollution. Effective May 2005, Annex VI sets limits on nitrogen oxide
emissions from ships whose diesel engines were constructed (or underwent major conversions) on or after January 1, 2000. It also
prohibits “deliberate emissions” of “ozone depleting substances,” defined to include certain halons and
chlorofluorocarbons. “Deliberate emissions” are not limited to times when the ship is at sea; they can for example
include discharges occurring in the course of the ship’s repair and maintenance. Emissions of “volatile organic compounds”
from certain tankers, and the shipboard incineration (from incinerators installed after January 1, 2000) of certain substances
(such as polychlorinated biphenyls (PCBs)) are also prohibited. Annex VI also includes a global cap on the sulfur content of fuel
oil and allows for special areas to be established with more stringent controls of sulfur emissions known as “Emission Control
Areas” (“ECAs”) (see below).
The amended
Annex VI seeks to further reduce air pollution by, among other things, implementing a progressive reduction of the amount of sulfur
contained in any fuel oil used on board ships. As of January 1, 2012, the amended Annex VI requires that fuel oil contain no more
than 3.50% sulfur. By January 1, 2020, sulfur content must not exceed 0.50%, subject to a feasibility review to be completed no
later than 2018.
Sulfur content
standards are even stricter within certain ECAs. As of July 1, 2010, ships operating within an ECA were not permitted to use fuel
with sulfur content in excess of 1.0% (from 1.50%), which will be further reduced to 0.10% on January 1, 2015. Amended Annex VI
establishes procedures for designating new ECAs. Currently, the Baltic Sea and the North Sea have been so designated. On August
1, 2012, certain coastal areas of North America were designated ECAs and effective January 1, 2014, the applicable areas of the
United States Caribbean Sea were designated ECAs. If other ECAs are approved by the IMO or other new or more stringent requirements
relating to emissions from marine diesel engines or port operations by vessels are adopted by the EPA or the states where Pyxis
operates, compliance with these regulations could entail significant capital expenditures, operational changes, or otherwise increase
the costs of Pyxis’ operations.
As of January
1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for new ships in part to address greenhouse gas
emissions. It made the Energy Efficiency Design Index (“EEDI”) apply to all new ships, and the Ship Energy
Efficiency Management Plan (“SEEMP”) apply to all ships.
Amended Annex
VI also establishes new tiers of stringent nitrogen oxide emissions standards for new marine engines, depending on their date
of installation. The U.S. Environmental Protection Agency promulgated equivalent (and in some senses stricter) emissions standards
in late 2009. As a result of these designations or similar future designations, Pyxis may be required to incur additional operating
or other costs.
Safety Management
System Requirements
The IMO also
adopted the International Convention for the Safety of Life at Sea, or SOLAS, and the International Convention on Load Lines,
or LL, which impose a variety of standards that regulate the design and operational features of ships. The IMO periodically revises
the SOLAS and LL standards. May 2012 SOLAS amendments entered into force as of January 1, 2014. The Convention on Limitation for
Maritime Claims (“LLMC”) was recently amended and the amendments are expected to go into effect on June 8,
2015. The amendments alter the limits of liability for a loss of life or personal injury claim and a property claim against ship
owners.
Pyxis’
operations are also subject to environmental standards and requirements contained in the International Safety Management Code
for the Safe Operation of Ships and for Pollution Prevention, or ISM Code, promulgated by the IMO under Chapter IX of SOLAS. The
ISM Code requires the owner of a vessel, or any person who has taken responsibility for operation of a vessel, to develop an extensive
safety management system that includes, among other things, the adoption of a safety and environmental protection policy setting
forth instructions and procedures for operating its vessels safely and describing procedures for responding to emergencies. Pyxis
relies upon the safety management system that has been developed for its vessels for compliance with the ISM Code. The failure
of a ship owner or bareboat charterer to comply with the ISM Code may subject such party to increased liability, may decrease
available insurance coverage for the affected vessels and may result in a denial of access to, or detention in, certain ports.
The ISM Code
requires that vessel operators also obtain a safety management certificate for each vessel they operate. This certificate evidences
compliance by a vessel’s management with code requirements for a safety management system. No vessel can obtain a certificate
unless its manager has been awarded a document of compliance, issued by each flag state, under the ISM Code. Pyxis has obtained
documents of compliance for its offices and safety management certificates for all of its vessels for which the certificates are
required by the ISM Code. These documents of compliance and safety management certificates are renewed as required.
Noncompliance
with the ISM Code and other IMO regulations may subject the ship owner or bareboat charterer to increased liability, may lead
to decreases in, or invalidation of, available insurance coverage for affected vessels and may result in the denial of access
to, or detention in, some ports.
Pollution
Control and Liability Requirements
IMO has negotiated
international conventions that impose liability for pollution in international waters and the territorial waters of the signatory
nations to such conventions. For example, many countries have ratified and follow the liability plan adopted by the IMO and set
out in the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocol in 1976,
1984, and 1992, and amended in 2000, or the CLC. Under the CLC and depending on whether the country in which the damage results
is a party to the 1992 Protocol to the CLC, a vessel’s registered owner is strictly liable for pollution damage caused in
the territorial waters of a contracting state by discharge of persistent oil, subject to certain exceptions. The 1992 Protocol
changed certain limits on liability, expressed using the International Monetary Fund currency unit of Special Drawing Rights.
The limits on liability have since been amended so that compensation limits on liability were raised. The right to limit liability
is forfeited under the CLC where the spill is caused by the ship owner’s personal fault and under the 1992 Protocol where
the spill is caused by the ship owner’s personal act or omission by intentional or reckless conduct where the ship owner
knew pollution damage would probably result. The CLC requires ships covered by it to maintain insurance covering the liability
of the owner in a sum equivalent to an owner’s liability for a single incident. Pyxis believes that its protection and indemnity
insurance will cover the liability under the plan adopted by the IMO.
The IMO adopted
the International Convention on Civil Liability for Bunker Oil Pollution Damage, or the Bunker Convention, to impose strict liability
on ship owners for pollution damage in jurisdictional waters of ratifying states caused by discharges of bunker fuel. The Bunker
Convention requires registered owners of ships over 1,000 gross tons to maintain insurance for pollution damage in an amount equal
to the limits of liability under the applicable national or international limitation regime (but not exceeding the amount calculated
in accordance with the Convention on Limitation of Liability for Maritime Claims of 1976, as amended). With respect to non-ratifying
states, liability for spills or releases of oil carried as fuel in ship’s bunkers typically is determined by the national
or other domestic laws in the jurisdiction where the events or damages occur.
In addition,
the IMO adopted an International Convention for the Control and Management of Ships’ Ballast Water and Sediments, or the
BWM Convention, in February 2004. The BWM Convention will not become effective until 12 months after it has been adopted by 30
states, the combined merchant fleets of which represent not less than 35% of the gross tonnage of the world’s merchant shipping.
To date, there has not been sufficient adoption of this standard for it to take force, but it is close. Many of the implementation
dates originally written in the BWM Convention have already passed, so that once the BWM Convention enters into force, the period
for installation of mandatory ballast water exchange requirements would be extremely short, with several thousand ships a year
needing to install ballast water management systems (BWMS). For this reason, on December 4, 2013, the IMO Assembly passed a resolution
revising the application dates of BWM Convention so that they are triggered by the entry into force date and not the dates originally
in the BWM Convention. This in effect makes all vessels constructed before the entry into force date ‘existing’ vessels,
and allows for the installation of a BWMS on such vessels at the first renewal survey following entry into force. Once mid-ocean
ballast exchange or ballast water treatment requirements become mandatory, the cost of compliance could increase for ocean carriers.
Although Pyxis does not believe that the costs of compliance with a mandatory mid-ocean ballast exchange would be material, it
is difficult to predict the overall impact of such a requirement on its operations.
The IMO continues
to review and introduce new regulations. It is impossible to predict what additional regulations, if any, may be passed by the
IMO and what effect, if any, such regulations might have on Pyxis’ operations.
U.S. Regulations
The U.S. Oil
Pollution Act of 1990, or OPA, established an extensive regulatory and liability regime for the protection and cleanup of the
environment from oil spills. OPA affects all “owners and operators” whose vessels trade in the United States, its
territories and possessions or whose vessels operate in U.S. waters, which includes the U.S. territorial sea and its 200 nautical
mile exclusive economic zone. The United States has also enacted the Comprehensive Environmental Response, Compensation and Liability
Act, or CERCLA, which applies to the discharge of hazardous substances other than oil, whether on land or at sea. OPA and CERCLA
both define “owner and operator” “in the case of a vessel, as any person owning, operating or chartering by
demise, the vessel.” Accordingly, both OPA and CERCLA impact Pyxis’ operations.
Under OPA, vessel
owners and operators are “responsible parties” and are jointly, severally and strictly liable (unless the spill results
solely from the act or omission of a third party, an act of God or an act of war) for all containment and clean-up costs and other
damages arising from discharges or threatened discharges of oil from their vessels. OPA defines these other damages broadly to
include:
| • | injury to, destruction or loss
of, or loss of use of, natural resources and related assessment costs; |
| • | injury to, or economic losses
resulting from, the destruction of real and personal property; |
| • | net
loss of taxes, royalties, rents, fees or net profit revenues resulting from injury, destruction
or loss of real or personal property, or natural resources; |
| • | loss of subsistence use of natural
resources that are injured, destroyed or lost; |
| • | lost
profits or impairment of earning capacity due to injury, destruction or loss of real
or personal property or natural resources; and |
| • | net
cost of increased or additional public services necessitated by removal activities following
a discharge of oil, such as protection from fire, safety or health hazards, and loss
of subsistence use of natural resources. |
OPA contains
statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective July 31, 2009, the U.S. Coast
Guard adjusted the limits of OPA liability to the greater of $2,000 per gross ton or $17.088 million for any double-hull tanker
that is over 3,000 gross tons (subject to periodic adjustment for inflation), and Pyxis’ fleet is entirely composed of vessels
of this size class. These limits of liability do not apply if an incident was proximately caused by the violation of an applicable
U.S. federal safety, construction or operating regulation by a responsible party (or its agent, employee or a person acting pursuant
to a contractual relationship), or a responsible party’s gross negligence or willful misconduct. The limitation on liability
similarly does not apply if the responsible party fails or refuses to (i) report the incident where the responsibility party knows
or has reason to know of the incident; (ii) reasonably cooperate and assist as requested in connection with oil removal activities;
or (iii) without sufficient cause, comply with an order issued under the Federal Water Pollution Act (Section 311 (c), (e)) or
the Intervention on the High Seas Act.
CERCLA contains
a similar liability regime whereby owners and operators of vessels are liable for cleanup, removal and remedial costs, as well
as damage for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with assessing
same, and health assessments or health effects studies. There is no liability if the discharge of a hazardous substance results
solely from the act or omission of a third party, an act of God or an act of war. Liability under CERCLA is limited to the greater
of $300 per gross ton or $5 million for vessels carrying a hazardous substance as cargo or residue and the greater of $300 per
gross ton or $500,000 for any other vessel. These limits do not apply (rendering the responsible person liable for the total cost
of response and damages) if the release or threat of release of a hazardous substance resulted from willful misconduct or negligence,
or the primary cause of the release was a violation of applicable safety, construction or operating standards or regulations.
The limitation on liability also does not apply if the responsible person fails or refused to provide all reasonable cooperation
and assistance as requested in connection with response activities where the vessel is subject to OPA.
OPA and CERCLA
each preserve the right to recover damages under existing law, including maritime tort law.
OPA and CERCLA
both require owners and operators of vessels to establish and maintain with the U.S. Coast Guard evidence of financial responsibility
sufficient to meet the maximum amount of liability to which the particular responsible person may be subject. Vessel owners and
operators may satisfy their financial responsibility obligations by providing a proof of insurance, a surety bond, qualification
as a self-insurer or a guarantee. Pyxis has provided such evidence and received certificates of financial responsibility from
the U.S. Coast Guard’s for each of its vessels that is required to have one.
OPA permits
individual states to impose their own liability regimes with regard to oil pollution incidents occurring within their boundaries,
provided they accept, at a minimum, the levels of liability established under OPA. Some states have enacted legislation providing
for unlimited liability for discharge of pollutants within their waters, however, in some cases, states which have enacted this
type of legislation have not yet issued implementing regulations defining tanker owners’ responsibilities under these laws.
The 2010 Deepwater
Horizon oil spill in the Gulf of Mexico may also result in additional regulatory initiatives or statutes, including the raising
of liability caps under OPA. For example, on August 15, 2012, the U.S. Bureau of Safety and Environmental Enforcement (BSEE) issued
a final drilling safety rule for offshore oil and gas operations that strengthens the requirements for safety equipment, well
control systems, and blowout prevention practices. Compliance with any new requirements of OPA may substantially impact Pyxis’
cost of operations or require it to incur additional expenses to comply with any new regulatory initiatives or statutes.
Through its
P&I Club membership, Pyxis expects to maintain pollution liability coverage insurance in the amount of $1 billion per incident
for each of its vessels. If the damages from a catastrophic spill were to exceed its insurance coverage, it could have a material
adverse effect on Pyxis’ business, financial condition, results of operations and cash flows.
The U.S. Clean
Water Act, or CWA, prohibits the discharge of oil, hazardous substances and ballast water in U.S. navigable waters unless authorized
by a duly-issued permit or exemption, and imposes strict liability in the form of penalties for any unauthorized discharges. The
CWA also imposes substantial liability for the costs of removal, remediation and damages and complements the remedies available
under OPA and CERCLA. Furthermore, many U.S. states that border a navigable waterway have enacted environmental pollution laws
that impose strict liability on a person for removal costs and damages resulting from a discharge of oil or a release of a hazardous
substance. These laws may be more stringent than U.S. federal law.
The EPA and
U.S. Coast Guard, or USCG, have enacted rules relating to ballast water discharge, compliance with which requires the installation
of equipment on Pyxis’ vessels to treat ballast water before it is discharged or the implementation of other port facility
disposal arrangements or procedures at potentially substantial cost, and/or otherwise restrict its vessels from entering U.S.
waters.
The EPA requires
a permit regulating ballast water discharges and other discharges incidental to the normal operation of certain vessels within
United States waters under the Vessel General Permit for Discharges Incidental to the Normal Operation of Vessels, or VGP. For
a new vessel delivered to an owner or operator after September 19, 2009 to be covered by the VGP, the owner must submit a Notice
of Intent, or NOI, at least 30 days before the vessel operates in United States waters. On March 28, 2013 the EPA re-issued the
VGP for another five years. This VGP took effect on December 19, 2013. The VGP focuses on authorizing discharges incidental to
operations of commercial vessels and the new VGP contains numeric ballast water discharge limits for most vessels to reduce the
risk of invasive species in US waters, more stringent requirements for exhaust gas scrubbers and the use of environmentally acceptable
lubricants.
USCG regulations
adopted and proposed for adoption under the U.S. National Invasive Species Act, or NISA, impose mandatory ballast water management
practices for all vessels equipped with ballast water tanks entering U.S. waters, which require the installation of equipment
on Pyxis’ vessels to treat ballast water before it is discharged or the implementation of other port facility disposal arrangements
or procedures, and/or otherwise restrict its vessels from entering U.S. waters. The USCG must approve any technology before it
is placed on a vessel, but has not yet approved the technology necessary for vessels to meet the foregoing standards.
Notwithstanding
the foregoing, as of January 1, 2014, vessels are technically subject to the phasing-in of these standards. As a result, the USCG
has provided waivers to vessels which cannot install the as-yet unapproved technology. The EPA, on the other hand, has taken a
different approach to enforcing ballast discharge standards under the VGP. On December 27, 2013, the EPA issued an enforcement
response policy in connection with the new VGP in which the EPA indicated that it would take into account the reasons why vessels
do not have the requisite technology installed, but will not grant any waivers.
The U.S. Clean
Air Act of 1970, as amended by the Clean Air Act Amendments of 1977 and 1990, or the CAA, requires the EPA to promulgate standards
applicable to emissions of volatile organic compounds and other air contaminants. Pyxis’ vessels will be subject to vapor
control and recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations
in regulated port areas. Pyxis’ vessels that operate in such port areas with restricted cargoes will be equipped with vapor
recovery systems that satisfy these requirements. The CAA also requires states to adopt State Implementation Plans, or SIPs, designed
to attain national health-based air quality standards in primarily major metropolitan and/or industrial areas. Several SIPs regulate
emissions resulting from vessel loading and unloading operations by requiring the installation of vapor control equipment. As
indicated above, Pyxis’ vessels operating in covered port areas will be equipped with vapor recovery systems that satisfy
these existing requirements.
Compliance with
the EPA and the U.S. Coast Guard regulations could require the installation of equipment on Pyxis’ vessels to treat ballast
water before it is discharged or the implementation of other port facility disposal arrangements or procedures at potentially
substantial cost, and/or otherwise restrict Pyxis’ vessels from entering U.S. waters.
European
Union Regulations
In October 2009,
the European Union amended a directive to impose criminal sanctions for illicit ship-source discharges of polluting substances,
including minor discharges, if committed with intent, recklessly or with serious negligence and the discharges individually or
in the aggregate result in deterioration of the quality of water. Aiding and abetting the discharge of a polluting substance may
also lead to criminal penalties. Member States were required to enact laws or regulations to comply with the directive by the
end of 2010. Criminal liability for pollution may result in substantial penalties or fines and increased civil liability claims.
The European
Union has adopted several regulations and directives requiring, among other things, more frequent inspections of high-risk ships,
as determined by type, age, flag, and the number of times the ship has been detained. The European Union also adopted and then
extended a ban on substandard ships and enacted a minimum ban period and a definitive ban for repeated offenses. The regulation
also provided the European Union with greater authority and control over classification societies, by imposing more requirements
on classification societies and providing for fines or penalty payments for organizations that failed to comply.
Greenhouse
Gas Regulation
Currently, the
emissions of greenhouse gases from international shipping are not subject to the Kyoto Protocol to the United Nations Framework
Convention on Climate Change, which entered into force in 2005 and pursuant to which adopting countries have been required to
implement national programs to reduce greenhouse gas emissions. As of January 1, 2013, all new ships must comply with two new
sets of mandatory requirements to address greenhouse gas emissions from ships which were adopted by MEPC, in July 2011. Currently
operating ships are required to develop Ship Energy Efficiency Management Plans, and minimum energy efficiency levels per capacity
mile, outlined in the Energy Efficiency Design Index, will apply to new ships. These requirements could cause Pyxis to incur additional
compliance costs. The IMO is also planning to implement market-based mechanisms to reduce greenhouse gas emissions from ships.
The European Parliament and Council of Ministers are expected to endorse regulations that would require the monitoring and reporting
of greenhouse gas emissions from marine vessels in 2015. For 2020, the EU made a unilateral commitment to reduce overall greenhouse
gas emissions from its member states from 20% of 1990 levels. The EU also committed to reduce its emissions by 20% under the Kyoto
Protcol’s second period, from 2013 to 2020. If the strategy is adopted by the European Parliament and Council large vessels
using European Union ports would be required to monitor, report and verify their carbon dioxide emissions beginning in January
2018. In December 2013, the European Union environmental ministers discussed draft rules to implement monitoring and reporting
of carbon dioxide from ships.. In the United States, the EPA has issued a finding that greenhouse gases endanger the public health
and safety and has adopted regulations to limit greenhouse gas emissions from certain mobile sources and large stationary sources.
Although the mobile source emissions regulations do not apply to greenhouse gas emissions from vessels, such regulation of vessels
is foreseeable, and the EPA has in recent years received petitions from the California Attorney General and various environmental
groups seeking such regulation. Any passage of climate control legislation or other regulatory initiatives by the IMO, European
Union, the U.S. or other countries where Pyxis operates, or any treaty adopted at the international level to succeed the Kyoto
Protocol, that restrict emissions of greenhouse gases could require Pyxis to make significant financial expenditures, including
capital expenditures to upgrade its vessels, which it cannot predict with certainty at this time.
International
Labour Organization
The International
Labour Organization (ILO) is a specialized agency of the UN with headquarters in Geneva, Switzerland. The ILO has adopted the
Maritime Labor Convention 2006 (MLC 2006). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance will be
required to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. The MLC 2006 entered
into force on August 20, 2013. The MLC 2006 requires Pyxis to develop new procedures to ensure full compliance with its requirements.
Vessel Security
Regulations
Since the terrorist
attacks of September 11, 2001, there have been a variety of initiatives intended to enhance vessel security. On November 25, 2002,
the U.S. Maritime Transportation Security Act of 2002, or the MTSA, came into effect. To implement certain portions of the MTSA,
in July 2003, the U.S. Coast Guard issued regulations requiring the implementation of certain security requirements aboard vessels
operating in waters subject to the jurisdiction of the United States. The regulations also impose requirements on certain ports
and facilities, some of which are regulated by the EPA.
Similarly, in
December 2002, amendments to SOLAS created a new chapter of the convention dealing specifically with maritime security. The new
Chapter V became effective in July 2004 and imposes various detailed security obligations on vessels and port authorities, and
mandates compliance with the International Ship and Port Facilities Security Code (“ISPS Code”). The ISPS Code
is designed to enhance the security of ports and ships against terrorism. Amendments to SOLAS Chapter VII, made mandatory in 2004,
apply to vessels transporting dangerous goods and require those vessels be in compliance with the International Maritime Dangerous
Goods Code (“IMDG Code”).
To trade internationally,
a vessel must attain an International Ship Security Certificate (“ISSC”), from a recognized security organization
approved by the vessel’s flag state. Among the various requirements are:
• on-board
installation of automatic identification systems to provide a means for the automatic transmission of safety-related information
from among similarly equipped ships and shore stations, including information on a ship’s identity, position, course, speed
and navigational status;
• on-board
installation of ship security alert systems, which do not sound on the vessel but only alert the authorities on shore;
• the
development of vessel security plans;
• ship
identification number to be permanently marked on a vessel’s hull;
• a
continuous synopsis record kept onboard showing a vessel’s history, including the name of the ship, the state whose flag
the ship is entitled to fly, the date on which the ship was registered with that state, the ship’s identification number,
the port at which the ship is registered and the name of the registered owner(s) and their registered address; and
• compliance
with flag state security certification requirements.
Ships operating
without a valid certificate, may be detained at port until it obtains an ISSC, or it may be expelled from port, or refused entry
at port.
The USCG regulations,
intended to align with international maritime security standards, exempt from MTSA vessel security measures non-U.S. vessels provided
that such vessels have on board a valid ISSC that attests to the vessel’s compliance with SOLAS security requirements and
the ISPS Code. Pyxis has implemented the various security measures addressed by MTSA, SOLAS and the ISPS Code, and its fleet is
in compliance with applicable security requirements.
Inspection
by classification societies
Every seagoing
vessel must be “classed” by a classification society. The classification society certifies that the vessel is ’‘in
class,’’ signifying that the vessel has been built and maintained in accordance with the rules of the classification
society and complies with applicable rules and regulations of the vessel’s country of registry and the international conventions
of which that country is a member. In addition, where surveys are required by international conventions and corresponding laws
and ordinances of a flag state, the classification society will undertake them on application or by official order, acting on
behalf of the authorities concerned.
The classification
society also undertakes on request other surveys and checks that are required by regulations and requirements of the flag state.
These surveys are subject to agreements made in each individual case and/or to the regulations of the country concerned.
For maintenance
of the class, regular and extraordinary surveys of hull, machinery, including the electrical plant, and any special equipment
classed are required to be performed as follows:
• Annual
Surveys. For seagoing ships, annual surveys are conducted for the hull and the machinery, including the electrical plant,
and where applicable for special equipment classed, within three months before or after each anniversary date of the date of commencement
of the class period indicated in the certificate.
• Intermediate
Surveys. Extended annual surveys are referred to as intermediate surveys and typically are conducted two and one-half years
after commissioning and each class renewal. Intermediate surveys are to be carried out at or between the occasion of the second
or third annual survey.
• Class
Renewal Surveys. Class renewal surveys, also known as special surveys, are carried out for the ship’s hull, machinery,
including the electrical plant, and for any special equipment classed, at the intervals indicated by the character of classification
for the hull. At the special survey, the vessel is thoroughly examined, including audio-gauging to determine the thickness of
the steel structures. Should the thickness be found to be less than class requirements, the classification society would prescribe
steel renewals. The classification society may grant a one-year grace period for completion of the special survey. Substantial
amounts of money may have to be spent for steel renewals to pass a special survey if the vessel experiences excessive wear and
tear. In lieu of the special survey every four or five years, depending on whether a grace period was granted, a vessel owner
has the option of arranging with the classification society for the vessel’s hull or machinery to be on a continuous survey
cycle, in which every part of the vessel would be surveyed within a five-year cycle.
At an owner’s
application, the surveys required for class renewal may be split according to an agreed schedule to extend over the entire period
of class. This process is referred to as continuous class renewal.
All areas subject
to survey as defined by the classification society are required to be surveyed at least once per class period, unless shorter
intervals between surveys are prescribed elsewhere. The period between two subsequent surveys of each area must not exceed five
years.
Most vessels
are also dry-docked every 30 to 36 months for inspection of the underwater parts and for repairs related to inspections. If any
defects are found, the classification surveyor will issue a “recommendation’’ which must be rectified by the
ship owner within prescribed time limits.
Most insurance
underwriters make it a condition for insurance coverage that a vessel be certified as “in-class” by a classification
society which is a member of the International Association of Classification Societies (“IACS”). In December
2013 the IACS adopted new harmonized Common Structure Rules which will apply to oil tankers and bulk carriers to be constructed
on or after July 1, 2015. All Pyxis’ vessels are certified as being “in-class” by Nippon Kaiji Kyokai (“NKK”)
and DNV GL. All new and secondhand vessels that Pyxis purchases must be certified prior to their delivery under its standard purchase
contracts and memoranda of agreement. If the vessel is not certified on the scheduled date of closing, Pyxis has no obligation
to take delivery of the vessel.
In addition
to the classification inspections, many of Pyxis’ customers regularly inspect its vessels as a precondition to chartering
them for voyages. Pyxis believe that its well-maintained, high-quality vessels provide it with a competitive advantage in the
current environment of increasing regulation and customer emphasis on quality.
Exchange
Controls
Under Republic
of the Marshall Islands law, there are currently no restrictions on the export or import of capital, including foreign exchange
controls or restrictions that affect the remittance of dividends, interest or other payments to non-resident holders of Pyxis’
common shares.
Employees
Pyxis has no
direct employees. The services of Pyxis’ executive officers, internal auditor(s) and secretary are provided by Maritime.
Pyxis has entered into a Head Management Agreement with Maritime, pursuant to which Pyxis will pay approximately $1.6 million
per year for the services of these individuals, and for other services associated with Pyxis being a public company and other
services to its subsidiaries. See “Related Party Transactions.”
Properties
Other than its
vessels, Pyxis does not own any material property. Maritime provides office space to Pyxis in part of Maritime’s offices
in Maroussi, Greece in connection with the administrative services provided to Pyxis under the terms of the Head Management Agreement.
Legal Proceedings
Pyxis may, from
time to time, be involved in litigation and claims arising out of its operations in the normal course of business. Pyxis is not
aware of any proceedings against it or the vessels in its fleet or contemplated to be brought against it or the vessels in its
fleet which could have significant effects on Pyxis’ financial position or profitability. Following completion of the Merger,
Pyxis will maintain insurance policies with insurers in amounts and with coverage and deductibles as its board of directors believes
are reasonable and prudent. Pyxis expects that most claims arising in the normal course of business would be covered by insurance,
subject to customary deductibles. Any such claims, however, even if lacking merit, could result in the expenditure of significant
financial and managerial resources.
Enforceability
of Civil Liabilities Against Foreign Persons
Certain of the
directors and executive officers of Pyxis may be non-residents of the U.S. All or a substantial portion of the assets of such
non-resident persons and of Pyxis are located outside the U.S. As a result, it may not be possible to effect service of process
within the U.S. upon such persons or Pyxis, or to enforce against such persons or Pyxis in U.S. courts judgments obtained in such
courts predicated upon the civil liability provisions of the federal securities laws of the U.S. Pyxis has been advised by counsel
that there is doubt as to the enforceability in Greece against Pyxis and/or its executive officers and directors who are non-residents
of the U.S., in original actions or in actions for enforcement of judgments of U.S. courts, of liabilities predicated solely upon
the securities laws of the U.S.
Corporate
Information
Pyxis Tankers
Inc. is a holding company incorporated under the laws of the Republic of the Marshall Islands on March 23, 2015. Pyxis owns the
vessels in its fleet through separate wholly-owned subsidiaries that were incorporated in the Republic of the Marshall Islands.
Pyxis maintains its principal executive offices at the offices of Maritime located at K. Karamanli 59, Maroussi 15125, Athens,
Greece. Pyxis’ telephone number at that address is +30 210 638 0200. Pyxis will maintain its website at www.pyxistankers.com.
Information that will be available on or accessed through Pyxis’ website does not constitute part of, and is not incorporated
by reference into, this proxy statement/prospectus.
PYXIS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should
read the following discussion and analysis together with Pyxis’ financial statements and related notes included elsewhere
in this proxy statement. This discussion includes forward-looking statements which, although based on assumptions that Pyxis considers
reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those
currently anticipated and expressed or implied by such forward-looking statements. For a discussion of some of those risks and
uncertainties, please read “Forward-Looking Statements” and “Risk Related to Pyxis’ Business and Operations.”
As of December
31, 2014, one of the vessels in Pyxis’ fleet was under construction. The Pyxis Epsilon was delivered into service
from the shipyard in January 2015. Pyxis expects that its historical figures will not necessarily be indicative of its future
results because:
| · | not
all of the vessels in its fleet were operating during all periods reflected in its historical
results, with one of the vessels in its fleet under construction until January 2015 and
one vessel (the Pyxis Theta) delivered in September 2013; |
| · | the
number of operating days of its fleet increased in 2014 by 251 days as the fleet expanded; |
| · | its
expenses while its vessels were under construction were materially different as compared
to its expenses while its vessels are in operation; and |
| · | following
the consummation of the Merger, Pyxis expects to incur additional general and administrative
expenses, such as the fixed yearly fee payable to Maritime for the services of Pyxis’
executive officers and the general costs associated with being a public company. |
Important
Financial Terms
Revenues
Pyxis generates
revenues by chartering its vessels for the transportation of petroleum products and other liquid bulk items, such as organic chemicals
and vegetable oils. Revenues are driven primarily by the number of vessels in the Pyxis fleet, the number of voyage days employed
and the amount of daily charterhire earned under vessel charter. These factors, in turn, can be affected by a number of decisions
by Pyxis including the amount of time spent positioning a vessel for charter, drydockings, repairs, maintenance and upgrading,
as well as the age, condition and specifications of its ships and the supply and demand factors in the product tanker market.
Pyxis currently employs four of the vessels in its fleet on time charters and two vessels on the spot market. As of December 31,
2014, the average remaining term of its time charters was approximately one year. The average remaining term of its time charters
does not take into account that, after the expiration of the initial period of the charter, the charterers of the Pyxis Epsilon
and the Northsea Alpha have the option to extend their respective charters for a period of up to one year, and the
charterer of the Pyxis Theta has the option to extend its charter for a period of up to two years. Revenues are recognized
as they are earned ratably during the duration of the period of each time or spot charter. Vessels operating on time charters
provide more predictable cash flows but can yield lower profit margins than vessels operating in the spot market during periods
characterized by favorable market conditions. The vessel owner generally pays commissions on both types of charters on the gross
charter rate.
Time
Charters. A time charter is a contract for the use of a vessel for a specific period of time during which the charterer pays
substantially all of the voyage expenses, including port and canal charges and the cost of bunkers (fuel oil), but the vessel
owner pays vessel operating expenses, including the cost of crewing, insuring, repairing and maintaining the vessel, the costs
of spares and consumable stores and tonnage taxes. Time charter rates are usually set at fixed rates during the term of the charter.
Prevailing time charter rates fluctuate on a seasonal and on a year-to-year basis and, as a result, when employment is being sought
for a vessel with an expiring or terminated time charter, the prevailing time charter rates achievable in the time charter market
may be substantially higher or lower than the expiring or terminated time charter rate. Fluctuation in time charter rates are
influenced by changes in spot charter rates, which are in turn influenced by a number of factors including vessel supply and demand.
The main factors that could increase total vessel operating expenses are crew salaries, insurance premiums, spare parts orders,
repairs that are not covered under insurance policies and lubricants’ prices.
Spot
Charters. Generally a spot charter refers to a contract to carry a specific cargo for a single voyage, which generally lasts
from several days to three months. Spot charters typically involve the carriage of a specific amount and type of cargo on a load-port
to discharge-port basis, subject to various cargo handling terms, and the vessel owner is paid on a per-ton basis. Under a spot
charter, the vessel owner is responsible for the payment of all expenses including capital costs, voyage and expenses, such as
port, canal and bunker costs. Fluctuations in spot charter rates are caused by imbalances in the availability of cargoes for shipment
and the number of vessels available at any given time to transport these cargoes.
Voyage
Expenses
Pyxis incurs
voyage expenses for its vessels operating under spot charters, which mainly include brokerage commissions, port and canal charges
and fuel (bunker) expenses. Port and canal charges and bunker expenses primarily increase in periods during which vessels are
employed on spot charters because these expenses are for the account of the vessel owner. All voyage expenses are expensed as
incurred. The amount of brokerage commissions payable, if any, depends on a number of factors, including, among other things,
the number of shipbrokers involved in arranging the charter and the amount of commissions charged by brokers related to the charterer.
Commissions are deferred and amortized over the related voyage period as revenues are earned.
Vessel
Operating Expenses
Pyxis incurs
vessel operating expenses for its vessels operating under time and spot charters. Vessel operating expenses primarily consist
of crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable
stores, tonnage taxes and other miscellaneous expenses necessary for the operation of the vessel. All vessel operating expenses
are expensed as incurred.
General
and Administrative Expenses
After the
completion of the Merger, Pyxis will be a public company and it expects to incur additional general and administrative expenses
going forward as a public company. Pyxis expects that the primary components of general and administrative expenses will consist
of the fixed yearly fee payable to Maritime for the administrative services under its Head Management Agreement with Pyxis, which
includes the services of its senior executive officers, and the expenses associated with being a public company. Such expenses
related to being a public company include the preparation of public reporting documents, legal and accounting costs, including
hiring additional legal and accounting professionals and staff, and costs related to compliance with the rules, regulations and
requirements of the SEC, including Sarbanes-Oxley, and the rules of NASDAQ.
Management
Fees
Pyxis pays
management fees to Maritime, its ship manager, and International Tanker Management Limited, or ITM, its technical manager, for
the commercial and technical management services respectively, for Pyxis’ vessels. These services include obtaining employment
for its vessels and managing its relationships with charterers; strategic management services; technical management services,
which include managing day-to-day vessel operations, ensuring regulatory and classification society compliance, arranging its
hire of qualified officers and crew, arranging and supervising drydocking and repairs and arranging insurance for vessels; and
providing shoreside personnel who carry out the management functions described above. Pyxis also pays management fees to North
Sea Tankers BV, or NST, for their chartering services for the Northsea Alpha and the Northsea Beta. As part of their
ship management services, Maritime provides Pyxis with supervision services of new construction of vessels; these costs are capitalized
as part of the total delivered cost of the vessel.
Depreciation
Pyxis depreciates
the cost of its vessels after deducting the estimated residual value, on a straight-line basis over the expected useful life of
each vessel, which is estimated 25 years from the date of initial delivery from the shipyard. Pyxis estimated the residual values
of its vessels to be $250 per lightweight ton in 2013, and increased the estimated residual value to $300 per lightweight ton
effective January 1, 2014. Pyxis expects its depreciation charges to increase due to the expansion of its fleet.
Interest
Income
Interest
income represents the interest Pyxis earned on the amounts it held in cash. In the future, Pyxis also expects to earn interest
income from the cash generated from its operations.
Interest
and Finance Costs
Pyxis has
historically incurred interest expense and financing costs in connection with the debt incurred to partially finance the acquisition
of its existing fleet. The interest rate is generally linked to the three month LIBOR rate. In the future, Pyxis may consider
the use of financial hedging products to limit its interest rate exposure.
In evaluating
its financial condition, Pyxis focuses on the above measures as well as fleet utilization and time charter equivalent rates to
assess its operating performance. It also monitors its cash position and outstanding debt to assess short-term liquidity and its
ability to finance further fleet expansion. Discussions about possible acquisitions or sales of existing vessels are based on
Pyxis’ financial and operational criteria which depend on the state of the charter market, availability of vessel investments,
employment opportunities, anticipated dry-docking costs and general economic prospects.
Important
Factors to Consider When Evaluating Pyxis’ Results of Operations
Pyxis believes
that the important factors to consider in analyzing future trends in its results of operations include the following:
| · | charter
rates and periods of charter hire and any revenues it would receive in the future from
any pools in which its vessels may operate; |
| · | vessel
operating expenses and voyage costs, including commissions; |
| · | depreciation
and amortization expenses, which are a function of the cost of its vessels, significant
vessel improvement costs and its vessels’ estimated useful lives; |
| · | financing
costs related to its indebtedness, including hedging of interest rate risk; |
| · | costs
of being a public reporting company, including general and administrative expenses, compliance,
accounting and legal costs and regulatory expenses; and |
| · | fluctuations
in foreign exchange rates. |
Revenues
from time charters, and to the extent Pyxis enters into any in the future, bareboat charters, are stable over the duration of
the charter, provided there are no unexpected or periodic off-hire periods and no performance claims from the charterer or charterer
defaults. Revenues from spot charters fluctuate, depending on the hire rate in effect at the time of the charter.
As of December
31, 2014, Pyxis had five vessels in operation, three of which were employed on time charters and two of which were employed on
spot charters. Vessels owned for a full year typically operate for 360 days per year, which is the company’s historical
average, excluding any time for drydockings. The five days of non-operation per year are to provide for time spent off-hire. If
a vessel undergoes a scheduled intermediate or special survey, the estimated number of off-hire days are 5 and 20 days, respectively.
| |
Year
ended December 31, 2013 | | |
Year
ended December 31, 2014 | |
| |
(Thousands of dollars) | | |
(Thousands of dollars) | |
| |
Spot | | |
Time | | |
Spot | | |
Time | |
| |
| | |
| | |
| | |
| |
Revenue | |
$ | 5,598 | | |
$ | 16,382 | | |
$ | 15,881 | | |
$ | 11,879 | |
The following table reflects
Pyxis’ ownership days, its operating days, daily time charter equivalent, or TCE, rate, average number of vessels and number
of vessels at period end, in each case, for the years ended December 31, 2013 and 2014:
| |
Year
Ended December 31, | |
| |
2013 | | |
2014 | |
Ownership days(1) | |
| 1,566 | | |
| 1,825 | |
Operating days(2) | |
| 1,523 | | |
| 1,774 | |
Utilization (%) | |
| 97.2 | | |
| 97.2 | |
Daily time charter
equivalent rate(3) | |
$ | 11,926 | | |
$ | 9,994 | |
Average number of vessels(4) | |
| 4.3 | | |
| 5 | |
Number of vessels at
period end | |
| 5 | | |
| 5 | |
| (1) | Ownership
days are the total number of days in a period during which all of the vessels in the
fleet during the period were owned by Pyxis. |
| (2) | Operating
days are the total days the vessels were not off-hire or out of service due to any reason,
including technical breakdowns and unforeseen circumstances, exclusive of scheduled special
or intermediate survey dry dockings. |
| (3) | TCE
is a standard shipping industry performance measure of the average daily revenue performance
of a vessel on a per voyage basis. TCE is not calculated in accordance with accounting
principles generally accepted in the United States, or U.S. GAAP. Pyxis utilizes TCE
because it believes it is a meaningful measure to compare period-to-period changes in
its performance despite changes in the mix of charter types (i.e., spot charters, time
charters and bareboat charters) under which its vessels may be employed between the periods.
Pyxis’ management also utilizes TCE to assist them in making decisions regarding
employment of the vessels. Pyxis believes that its method of calculating TCE is consistent
with industry standards and is determined by dividing voyage revenues after deducting
voyage expenses, including commissions by operating days for the relevant period. Voyage
expenses primarily consist of brokerage commissions, port, canal and fuel costs that
are unique to a particular voyage, which would otherwise be paid by the charter under
a time charter contract. |
| (4) | Average
number of vessels is the number of vessels that constituted Pyxis’ fleet for the
relevant period, as measured by the sum of the number of days each vessel was part of
its fleet during such period divided by the number of calendar days in the period. |
The following table reflects
the calculation of Pyxis’ daily TCE rates for the years ended December 31, 2013 and 2014:
| |
Year
Ended December 31, | |
| |
(Thousands of dollars, except
total operating days
and daily TCE rates) | |
| |
2013 | | |
2014 | |
Voyage revenues | |
$ | 21,980 | | |
$ | 27,760 | |
Voyage expenses | |
| (3,817 | ) | |
| (10,030 | ) |
Time
charter equivalent revenue | |
| 18,163 | | |
| 17,730 | |
| |
| | | |
| | |
Total operating days | |
| 1,523 | | |
| 1,774 | |
| |
| | | |
| | |
Daily time charter equivalent rate | |
$ | 11,926 | | |
$ | 9,994 | |
The decline
in the TCE rate in 2014 reflects the lower charter rate of the Pyxis Malou as it operated in the spot market for virtually
all of 2014.
Indebtedness
Pyxis’
vessel owning subsidiaries, as borrowers, entered into separate loan agreements (other than SECONDONE CORP., or Secondone, and
THIRDONE CORP., or Thirdone, which borrowed under one loan agreement, and SIXTHONE CORP. and SEVENTHONE CORP., which also borrowed
under one loan agreement) to purchase each of the vessels in its fleet. As of February 28, 2015, Pyxis’ vessel owning subsidiaries
have outstanding loans under the following loan agreements:
| · | Secondone
(which owns the Northsea Alpha) and Thirdone (which owns the Northsea Beta)
entered as joint and several borrowers into a loan agreement on September 26, 2007, which
was amended on May 28, 2010, and supplemented in December 2010, with Commerzbank AG (formerly
Deutsche Schiffsbank Aktiengesellschaft) related to a term loan facility of up to $24.6
million, of which they borrowed $15.6 million. The term loan facility bears interest
at LIBOR plus a margin of 1.5% per annum, and matures in May 2020. This loan is repayable
in semi-annual installments and a balloon payment. The security for this loan is first
preferred mortgage over the Northsea Alpha for Secondone, and the Northsea
Beta for Thirdone. In accordance with the terms of the bank’s consent to the
transactions contemplated by the Merger, Pyxis intends to enter into a new guarantee
for this loan,to increase the margin to 1.75% per annum, prior to the consummation of
the Merger. |
| · | FOURTHONE
CORP., or Fourthone (which owns the Pyxis Malou), entered into a loan agreement
on December 12, 2008, with Commerzbank AG (formerly Deutsche Schiffsbank Aktiengesellschaft)
for a term loan facility of up to $41.6 million, which was drawdown in February 2009.
The loan bears interest at LIBOR plus a margin of 1.2% per annum, and matures in February
2026. This loan is repayable in semi-annual installments until maturity. At December
31, 2014 the Fourthone loan was not in compliance with its minimum security covenant
of 125% of its then outstanding loan balance. In return for the bank granting consent
to the transactions contemplated by the Merger and in order to remedy the breach of the
minimum security covenant under this loan, Pyxis intends prior to the consummation of
the Merger to guarantee this loan pursuant to a new guarantee agreement, increase the
loan margin to 1.75% per annum, reduce the loan maturity to May 2020 and add the Northsea
Alpha and Northsea Beta as additional collateral for this loan. |
| · | SIXTHONE
CORP., or Sixthone (which owns the Pyxis Delta), and SEVENTHONE CORP., or Seventhone
(which owns the Pyxis Theta), jointly and severally entered into a loan agreement
with HSH Nordbank AG, dated October 12, 2012, amended and supplemented as of February
13, 2013, for a term loan facility of up to $37.3 million. The total drawn down under
the loan agreement was $34.8 million in two tranches. The tranche relating to Sixthone
matures in May 2017 and the tranche relating to Seventhone matures in September 2018.
Under this loan, both the Pyxis Theta and the Pyxis Delta have been mortgaged.
Pyxis intends to enter into a new guarantee agreement for this loan prior to the consummation
of the Merger. |
| · | EIGHTHONE
CORP., or Eighthone (which owns the Pyxis Epsilon, a vessel delivered from the
shipyard on January 14, 2015),entered into a loan agreement with DVB Bank SE on January
12, 2015 for a term loan facility of up to US$21 million. The loan bears interest at
LIBOR plus a margin of 2.9% per annum, and matures in January 2022. The loan is repayable
in quarterly installments and a balloon payment. Pyxis intends to enter into a new guarantee
agreement for this loan and to pledge the shares it will acquire of Eighthone to the
bank prior to the consummation of the Merger. |
Each of
the loan agreements referenced above is secured by a first priority mortgage over the vessel and a first priority assignment of
the vessel(s)’s insurances and earnings.
Pyxis’
loan agreements generally contain, in addition to provisions relating to events of default, covenants requiring it, among other
things, to ensure that:
| · | Pyxis
or the applicable vessel owning subsidiary that is the borrower under the loan must maintain
pledged deposits equal to a percentage of the outstanding loan; |
| · | the
vessel owning subsidiary that is the borrower under the loan must maintain a retention
account with monthly deposits equal to one-sixth of the next semi-annual installment
together with the appropriate percentage of interest next due; and |
| · | the
fair market value of the mortgaged vessel must be no less than a certain percentage (ranging
from 125% to 133%) of outstanding borrowings under the applicable loan agreement, |
Combined Statements of Comprehensive
Income/(Loss) for the Fiscal Year Ended December 31, 2013 Compared to the Fiscal Year Ended December 31, 2014
| |
2013 | | |
2014 | | |
Change | | |
% | |
| |
(Thousands of dollars) | | |
| |
Voyage Revenues | |
$ | 22.0 | | |
$ | 27.8 | | |
$ | 5.8 | | |
| 26.4 | % |
| |
| | | |
| | | |
| | | |
| | |
Expenses: | |
| | | |
| | | |
| | | |
| | |
Voyage related costs and commissions | |
| (3.8 | ) | |
| (10.0 | ) | |
| (6.2 | ) | |
| 163.2 | % |
Vessel operating expenses | |
| (10.2 | ) | |
| (11.1 | ) | |
| (0.9 | ) | |
| 8.8 | % |
General and administrative expenses | |
| (0.2 | ) | |
| (0.1 | ) | |
| 0.1 | | |
| -50.0 | % |
Management fees, related parties | |
| (0.5 | ) | |
| (0.6 | ) | |
| (0.1 | ) | |
| 20.0 | % |
Management fees, other | |
| (0.8 | ) | |
| (0.9 | ) | |
| (0.1 | ) | |
| 12.5 | % |
Amortization of dry-docking and special survey costs | |
| (0.2 | ) | |
| (0.2 | ) | |
| - | | |
| 0.0 | % |
Depreciation | |
| (4.5 | ) | |
| (5.5 | ) | |
| (1.0 | ) | |
| 22.2 | % |
Vessel impairment charge | |
| - | | |
| (16.9 | ) | |
| (16.9 | ) | |
| - | |
Other income | |
| 0.2 | | |
| - | | |
| (0.2 | ) | |
| -100.0 | % |
Operating income/(loss) | |
| 2.0 | | |
| (17.5 | ) | |
| (19.5 | ) | |
| -975.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Other income/(expenses): | |
| | | |
| | | |
| | | |
| | |
Interest and finance costs | |
| (0.4 | ) | |
| (1.7 | ) | |
| (1.3 | ) | |
| 325,0 | % |
| |
| | | |
| | | |
| | | |
| | |
Total other expenses | |
| (0.4 | ) | |
| (1.7 | ) | |
| (1.3 | ) | |
| 325,0 | % |
| |
| | | |
| | | |
| | | |
| | |
Net income /(loss) | |
$ | 1.6 | | |
$ | (19.2 | ) | |
$ | (20.8 | ) | |
| -1,300.0 | % |
| |
| | | |
| | | |
| | | |
| | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | |
Total comprehensive income/(loss) | |
$ | 1.6 | | |
$ | (19.2 | ) | |
$ | (20.8 | ) | |
| -1,300.0 | % |
Voyage
Revenues: Voyage revenues of $27.8 million for the 12 months ended December 31, 2014 represented an increase of $5.8 million
or 26.4% from $22.0 million over the comparable period in 2013. The increase reflected the full year time charter revenue contribution
of the Pyxis Theta in 2014, which only operated approximately 100 days from delivery in 2013, as well as a higher spot
charter revenue primarily for the Pyxis Malou.
Voyage
Related Costs and Commissions: Voyage related costs and commissions in 2014 were $10.0 million, representing an increase of
$6.2 million or 163.2% from $3.8 million in 2013. This increase was substantially a result of a greater portion of the Pyxis fleet
operating under spot charters.
Vessel
Operating Expenses: Vessel operating expenses of $11.1 million in 2014 increased $0.9 million or 8.8% from $10.2 million in
the prior fiscal year. This increase was a result of the full year’s operation of the Pyxis Theta.
General
and Administrative Expenses: General and administrative expenses of $0.1 million in 2014 were slightly decreased from $0.2
million in 2013. Certain general and administrative expenses associated with the 2013 delivery of the Pyxis Theta were not incurred
in 2014 as no fleet additions occurred.
Management
Fees: Management fees to related parties of $0.6 million increased $0.1 million or 20.0% in 2014 from $0.5 million in 2013.
The increase was a result of the full year’s operation of the Pyxis Theta and supervision cost for the new build
vessel under construction. Management fees to others of $0.9 million in 2014 increased $0.1 million or 12.5% from $0.8 in 2013
due to technical management fees paid to ITM for a full year’s operation of the Pyxis Theta.
Amortization
of Dry-docking and Special Survey Costs: Amortization of dry-docking and special survey costs of $0.2 million in 2014 increased
less than $0.1million over the same period in 2013, mainly related to the amortization of the special survey cost associated with
the dry-docking of the Pyxis Malou of $0.07 million which was performed in 2014.
Depreciation:
Depreciation of $5.5 million in 2014 increased $1.0 million or 22.2% from $4.5 million in 2013. This increase reflected a full
year’s operation of the Pyxis Theta in 2014, offset by a $0.1 million change in scrap value for depreciation purposes
from $250 per light weight ton (“lwt”) in 2013 to $300/lwt in 2014. The increase in scrap value results in
a decrease in remaining annual depreciation per vessel, exclusive of future capital improvements.
Vessel
Impairment Charge: Vessel impairment charge of $16.9 million was incurred in 2014 due to a write-down in the carrying value
for the Pyxis Malou based on Pyxis’ year-end analysis, available market data and standard accounting procedures.
No impairment charge occurred in 2013. See below “Critical Accounting Policies–Vessel Impairment.”
Other
Income: Other income of nil in 2014 reflected a decline of $0.2 million over the prior year. The $0.2 million in 2013 was
a result of a receipt of a remaining payment under a vessel warranty claim.
Interest
and Finance Costs: Interest and finance costs for 2014 amounted to $1.7 million compared to $0.4 million for 2013, an increase
of $1.3 million. Interest and finance costs for 2013 are net of a discount realized in 2013 by Pyxis for the prepayment of then
outstanding bank loan on the Pyxis Delta. Excluding this discount, the increase of interest and finance costs for 2014
compared to 2013was $0.2 million, which was due to a full year’s interest expense for the Pyxis Theta.
Liquidity
and Capital Resources
Overview
Pyxis’
principal sources of liquidity are cash flows from operations, the incurrence of bank debt, and in the future, from the selective
sale of vessels and the proceeds of issuances of equity and debt securities. Pyxis expects that its future liquidity requirements
will relate primarily to:
| · | payments
of interest and other debt-related expenses and the repayment of principal on its bank
debt; |
| · | its
operating expenses, including drydocking and special survey costs; and |
| · | maintenance
of cash reserves to provide for contingencies. |
Pyxis expects
to rely upon operating cash flows, long-term borrowings, the proceeds from future equity and debt offerings to fund its liquidity
and capital needs and implement its growth plan. Pyxis believes that its operating cash flows from the employment of its vessels
on charters and on the spot market will be sufficient to fund its present and proposed cash requirements though the end of fiscal
year 2015. To the extent Pyxis acquires additional vessels other than the Miss Lucy and the Pyxis Loucas, which
will be acquired in exchange for additional issuance of common shares in accordance with the Merger Agreement, Pyxis may need
to rely on new bank debt, proceeds from future securities offerings and/or cash flows from operations to meet its liquidity needs.
Pyxis’
business is capital intensive and its future success will depend on its ability to maintain a high quality fleet through the acquisition
of modern tanker vessels and the selective sale of older tanker vessels. These acquisitions and dispositions will be principally
subject to management’s expectation of future market conditions as well as its ability to acquire and dispose of tanker
vessels on favorable terms.
Pyxis does
not intend to pay quarterly dividends to the holders of its shares in the near future and expects to retain its cash flows primarily
for debt repayment, reinvestment in its business (such as to fund vessel or fleet acquisitions), payment of vessel operating costs,
including drydocking, and for general corporate and administrative expenses, in each case, as determined by Pyxis’ board
of directors.
Cash
Flow Analysis
Net Cash
Provided by Operating Activities: Net cash provided by operating activities was $5.4 million for 2014 compared to $6.0 million
in 2013. The change in net cash provided by operating activities was primarily due to lower operating earnings in 2014. During
2014, the Pyxis Malou had a special survey at a cost of $0.5 million. Pyxis did not have any drydockings in 2013.
Net Cash
Used in Investing Activities: Net cash used in investing activities was $7.2 million in 2014 compared to $29.4 million in
2013. The change in net cash used in investing activities reflected the delivery of the Pyxis Theta in 2013 and advances
for construction of the new build vessel, the Pyxis Epsilon, in 2014.
Net Cash
Provided by Financing Activities: Net cash provided by financing activities was $0.2 million in 2014 compared to $24.9 million
in 2013. The change in net cash provided by financing activities reflected additional debt and equity investments for the Pyxis
Theta and the new build Pyxis Epsilon which was under construction in 2014, offset by scheduled principal amortization
payments under Pyxis’ bank loans.
Contractual
Obligations
The following
table sets forth Pyxis’ contractual obligations (expressed in thousands of U.S. dollars) and their maturity dates as of
December 31, 2014.
| |
Total | | |
Less
than 1 year | | |
1-3
years | | |
3-5
years | | |
More
than 5 years | |
| |
(Thousands of dollars) | |
| |
| | |
| | |
| | |
| | |
| |
Loan Principal (1) | |
$ | 66,957 | | |
$ | 5,663 | | |
$ | 18,413 | | |
$ | 22,095 | | |
$ | 20,786 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Loan Interest(2) | |
$ | 6,219 | | |
$ | 1,651 | | |
$ | 2,694 | | |
$ | 1,164 | | |
$ | 710 | |
| |
| | | |
| | | |
| | | |
| | | |
| | |
Shipyard Payments (3) | |
$ | 19,320 | | |
$ | 19,320 | | |
$ | - | | |
$ | - | | |
$ | - | |
(1) Secondone
and Thirdone together, Sixthone and Seventhone together, and Fourthone and Eighthone each independently, entered into a loan agreement
with a bank for which the vessel it owns is mortgaged as collateral. Please read “–Liquidity and Capital Resources–Indebtedness”
for more information.
(2) Assuming
scheduled loan principal amortization as described above based on an average LIBOR rate of 0.295% plus a margin per annum over
LIBOR for the five periods of approximately of 1.95%, 2.25%, 2.20%, 1.68% and 1.22%, respectively.
(3) The
final payment due the shipyard for the delivery of the Pyxis Epsilon was made on January 12, 2015. Pyxis borrowed $21.0 million
to partially fund the construction of this vessel. The interest rate on the loan is LIBOR plus a margin of 2.9% per annum. The
principal payments for the respective periods are: $21,000, $1,200, $2,900, $2,400 and $14,500.
Off-Balance
Sheet Arrangements
Pyxis does
not have any off-balance sheet arrangements as of the date of this proxy statement/prospectus.
Critical
Accounting Policies
The discussion
and analysis of Pyxis’ financial condition and results of operations is based upon its combined predecessor financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements requires it to make estimates
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the
date of its financial statements. Actual results may differ from these estimates under different assumptions and conditions. Critical
accounting policies are those that reflect significant judgments of uncertainties and potentially result in materially different
results under different assumptions and conditions. Pyxis has described below what it believes are its most critical accounting
policies, because they generally involve a comparatively higher degree of judgment in their application. For a description of
all of Pyxis’ significant accounting policies, see Note 2 to its audited predecessor combined financial statements included
elsewhere in this prospectus/prospectus.
Vessel
Impairment
The carrying
values of Pyxis’ vessels may not represent their fair market value at any point in time since the market prices of secondhand
vessels tend to fluctuate with changes in charter rates and the cost of newbuildings. Historically, both charter rates and vessel
values tend to be cyclical. Pyxis records impairment losses only when events occur that cause it to believe that future cash flows
for any individual vessel (which is considered a cash generating unit) will be less than its carrying value. The carrying amounts
of vessels held and used by Pyxis are reviewed for potential impairment whenever events or changes in circumstances indicate that
the carrying amount of a particular vessel may not be fully recoverable. In these instances, an impairment charge would be recognized
if the estimate of the undiscounted future cash flows expected to result from the use of the vessel and its eventual disposition
is less than the vessel’s carrying amount. This assessment is made at the individual vessel level as separately identifiable
cash flow information for each vessel is available. Measurement of the impairment loss is based on the fair value of the asset.
Pyxis determines the fair value of its assets based on management estimates and assumptions and by making use of available market
data and taking into consideration third party valuations.
Pyxis determines
future undiscounted net operating cash flows for each vessel and compares it to the vessel’s carrying value. The future
undiscounted net operating cash flows are determined by considering the:
| · | estimated
vessel utilization of 98.6%; |
| · | estimated
vessel scrap value at $300 per lightweight ton; |
| · | charter
revenues from existing time charters for the fixed fleet days, and an estimated daily
time charter equivalent using seven years historical time charter rates average for similar
vessels for the unfixed days over the remaining estimated useful life of the vessel,
net of Pyxis’ historical data on vessel operating expenses and adjusted for 2.5%
annual inflation; and |
| · | estimated
cost of scheduled intermediate and special survey drydockings. |
When the
estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying value, Pyxis
compares the carrying value to the vessel’s fair value. If the fair market value is lower than the vessel’s carrying
value, the carrying value is written down to the vessel’s fair market value, by recording a charge to operations.
Although
Pyxis believes that the assumptions used to evaluate potential impairment are reasonable and appropriate, these assumptions are
highly subjective. There can be no assurance as to how long charter rates and vessel values will remain at their present levels
or whether they will change by any significant degree. Based on its analysis, Pyxis determined that the carrying value of the
Pyxis Malou was impaired as of December 31, 2014. Consequently, it reduced the vessel’s book value by $16,930 based
on independent ship broker valuations.
Vessel
Lives and Depreciation
Pyxis depreciates
its vessels based on a straight line basis over the expected useful life of each vessel, which is 25 years from the date of their
initial delivery from the shipyard, which it believes is within industry standards and represents the most reasonable useful life
for each of its vessels. Depreciation is based on the cost of the vessel less its estimated residual value at the date of the
vessel’s acquisition, which is estimated at $300 per lightweight ton, which Pyxis’ management believes is common in
the shipping industry. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated
useful lives. A decrease in the useful life of a vessel or in its residual value would have the effect of increasing the annual
depreciation charge. When regulations place limitations over the ability of a vessel to trade on a worldwide basis, its useful
life is adjusted to end at the date such regulations become effective.
Quantitative
and Qualitative Disclosures About Market Risk
Interest
Rate Exposure
Pyxis’
debt obligations under each of its loan agreements bear interest at LIBOR plus a fixed margin. Increasing interest rates could
adversely affect its future profitability. Lower interest rates lower the returns on cash investments. Pyxis regularly monitors
interest rate exposure and will enter into swap arrangements with acceptable financial counterparties to hedge exposure where
it is considered economically advantageous to do so.
Operational
Risk
Pyxis is
exposed to operating costs risk arising from various vessel operations. The key areas of operating risk include drydock, repair
costs, insurance and piracy. Pyxis’ risk management includes various strategies for technical management of drydock and
repairs coordinated with a focus on measuring cost and quality. Pyxis’ relatively young fleet helps to minimize the risk.
Given the potential for accidents and other incidents that may occur in vessel operations, the fleet is insured against various
types of risk. Finally, Pyxis has established a set of countermeasures in order to minimize this risk of piracy attacks during
voyages, which includes hiring third party security to protect the crew and make navigation safer for the vessels.
Foreign
Exchange Rate Exposure
Pyxis’
vessel owning subsidiaries generate revenues in U.S. dollars but incur a portion of their vessel operating expenses, and Pyxis
incurs a majority of its general and administrative costs, in other currencies, primarily Euros. The amount and frequency of some
of these expenses (such as vessel repairs, supplies and stores) may fluctuate from period to period, while other of these expenses,
such as the compensation paid to Maritime for the administrative services, remain relatively fixed. Depreciation in the value
of the U.S. dollar relative to other currencies will increase the U.S. dollar cost to us of paying such expenses and as a result,
an adverse or positive movement could increase or decrease operating expenses. The portion of Pyxis’ business conducted
in other currencies could increase in the future, which could expand our exposure to losses arising from currency fluctuations.
Pyxis believes these adverse effects to be immaterial and has not entered into any derivative contracts for either transaction
or translation risk during the year.
Credit
Risk
There is
a concentration of credit risk with respect to cash and cash equivalents to the extent that substantially all of Pyxis’
amounts are held across four banks. While Pyxis believes this risk of loss is low, it keeps this under review and will revise
its policy for managing cash and cash equivalents if considered advantageous and prudent to do so. Pyxis limits its credit risk
with trade accounts receivable by performing ongoing credit evaluations of its customers’ financial condition. Pyxis generally
does not acquire collateral for trade accounts receivable.
Pyxis may
have a credit risk in relation to vessel employment and at times may have multiple vessels employed by one charterer. Pyxis considers
and evaluates concentration of credit risk regularly and performs on-going evaluations of these charterers for credit risk. As
of December 31, 2014, all of its vessels were employed with different charterers.
Commodity
Risk Exposure
The price
and supply of fuel is unpredictable and fluctuates as a result of events outside Pyxis’ control, including geo-political
developments, supply and demand for oil and gas, actions by members of the Organization of Petroleum Exporting Countries, or OPEC,
and other oil and gas producers, war and unrest in oil producing countries and regions, regional production patterns and environmental
concerns and regulations. Because Pyxis does not hedge its fuel costs, an increase in the price of fuel beyond its expectations
may adversely affect its profitability and cash flows.
Liquidity
Risk
The principal
objective in relation to liquidity is to ensure that Pyxis has access at minimum cost, to sufficient liquidity to enable it to
meet its obligations as they come due and to provide adequately for contingencies. Pyxis’ policy is to manage its liquidity
by strict forecasting of cash flows arising from time charter revenue, vessel operating expenses, general and administrative overhead
and servicing of debt.
Inflation
Pyxis does
not expect inflation to be a significant risk to it in the current and foreseeable economic environment. In the event that inflation
becomes a significant factor in the global economy, inflationary pressures would result in increased operating, voyage and finance
costs.
Certain
Tax Considerations
The following
is a summary of the material United States federal income tax consequences of an investment in Pyxis’ common stock. The
discussion set forth below is based upon laws, regulations, rulings and decisions in effect and available on the date hereof,
all of which are subject to change, possibly with retroactive effect. Prospective investors should note that no rulings have been
or are expected to be sought from the Internal Revenue Service, or IRS, with respect to any of the United States federal income
tax consequences discussed below, and no assurance can be given that the IRS will not take contrary positions.
Further,
the following summary does not deal with all United States federal income tax consequences applicable to any given investor, nor
does it address the United States federal income tax considerations applicable to categories of investors subject to special taxing
rules, such as expatriates, banks, real estate investment trusts, regulated investment companies, insurance companies, tax-exempt
organizations, dealers or traders in securities or currencies, partners and partnerships, S corporations, estates and trusts,
investors that hold their common stock as part of a hedge, straddle or an integrated or conversion transaction, investors whose
“functional currency” is not the U.S. dollar or investors that own, directly or indirectly 10.0% or more of Pyxis’
stock by vote or value. Furthermore, the discussion does not address alternative minimum tax consequences or estate or gift tax
consequences, nor any state tax consequences, and is generally limited to investors that will hold their common stock as “capital
assets” within the meaning of Section 1221 of the Code. Each prospective investor is strongly urged to consult, and depend
on, his or her own tax advisor in analyzing the United States federal, state, local and non-United States tax consequences particular
to him or her of the acquisition, ownership or disposition of Pyxis’ common stock.
THIS
DISCUSSION SHOULD NOT BE VIEWED AS TAX ADVICE. YOU SHOULD CONSULT YOUR OWN TAX ADVISERS CONCERNING THE U.S. FEDERAL TAX CONSEQUENCES
TO YOU IN LIGHT OF YOUR OWN PARTICULAR CIRCUMSTANCES, AS WELL AS ANY TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY OTHER TAXING
JURISDICTION, THE EFFECT OF ANY CHANGES IN APPLICABLE TAX LAW, AND YOUR ENTITLEMENT TO BENEFITS UNDER AN APPLICABLE INCOME TAX
TREATY.
United States Federal Income
Taxation of Pyxis
Taxation of Operating Income
Unless exempt
from United States federal income taxation under the rules described below in the “Section 883 Exemption,”
a foreign corporation that earns only transportation (as described below) income is generally subject to United States federal
income taxation under one of two alternative tax regimes: (1) the 4.0% gross basis tax or (2) the net basis tax and branch profits
tax. Because Pyxis and its subsidiaries are organized in the Marshall Islands and there is no comprehensive income tax treaty
between the Marshall Islands and the United States, Pyxis and its subsidiaries cannot claim an exemption from such taxes under
a treaty.
The 4.0% Gross Basis Tax
The United
States imposes a 4.0% United States federal income tax (without allowance of any deductions) on a foreign corporation’s
United States source gross transportation income to the extent such income is not treated as effectively connected with the conduct
of a United States trade or business. For this purpose, transportation income includes income from the use, hiring or leasing
of a vessel, or the performance of services directly related to the use of a vessel (and thus includes voyage, time and bareboat
charter income). The United States source portion of transportation income is 50.0% of the income attributable to voyages that
begin or end, but not both begin and end, in the United States. As a result of this sourcing rule, the effective tax is 2.0% of
the gross income attributable to voyages beginning or ending in the United States. Generally, no amount of the income from voyages
that begin and end outside the United States is treated as United States source, and consequently none of the transportation income
attributable to such voyages is subject to this 4.0% tax. Although the entire amount of transportation income from voyages that
both begin and end in the United States would be United States source, Pyxis does not expect to have any transportation income
from voyages that both begin and end in the United States.
The Net Basis Tax and Branch
Profits Tax
Pyxis does
not expect to engage in any activities in the United States or otherwise have a fixed place of business in the United States.
Nonetheless, if this situation were to change or if Pyxis were to be treated as engaged in a United States trade or business,
all or a portion of Pyxis’ taxable income, including gain from the sale of vessels, could be treated as effectively connected
with the conduct of this United States trade or business, or effectively connected income. Any effectively connected income, net
of allowable deductions, would be subject to United States federal corporate income tax (with the highest statutory rate currently
being 35.0%). In addition, an additional 30.0% branch profits tax would be imposed on Pyxis at such time as Pyxis’ after-tax
effectively connected income is viewed as having been repatriated to Pyxis’ offshore office. The 4.0% gross basis tax described
above is inapplicable to income that is treated as effectively connected income. Pyxis’ United States source transportation
income would be considered to be effectively connected income only if Pyxis has or is treated as having a fixed place of business
in the United States involved in the earning of the transportation income and substantially all of Pyxis’ United States
source transportation income is attributable to regularly scheduled transportation (such as a published schedule with repeated
sailings at regular intervals between the same points for voyages that begin or end in the United States). Based on its intended
mode of shipping operations and other activities, Pyxis does not expect to have any effectively connected income.
The Section 883 Exemption
The 4.0%
gross basis tax, the net basis tax and branch profits taxes described above are inapplicable to transportation income that qualifies
for exemption under Section 883 of the Code, or the Section 883 Exemption. To qualify for the Section 883 Exemption, a foreign
corporation must, among other things:
| · | be
organized in a jurisdiction outside the United States that grants an equivalent exemption
from tax to corporations organized in the United States (an “Equivalent Exemption”); |
| · | satisfy
one of the following three ownership tests (discussed in more detail below): (1) the
more than 50.0% ownership test, or 50.0% Ownership Test, (2) the controlled foreign corporation
test, or CFC Test or (3) the “Publicly Traded Test”; and |
| · | meet
certain substantiation, reporting and other requirements (which include the filing of
United States income tax returns). |
Pyxis is
organized under the laws of the Republic of the Marshall Islands. Each of the vessels in Pyxis’ existing fleet will be owned
by a separate wholly-owned subsidiary organized in the Republic of the Marshall Islands. Some of these subsidiaries may make elections
to be treated as disregarded entities for U.S. federal income tax purposes in which case all of their income, assets and operations
will be attributed to Pyxis. If Pyxis makes an election to treat any subsidiary entity as a disregarded entity, U.S. Holders may
have U.S. federal income tax reporting obligations in respect of those entities on IRS Form 8858 if, as discussed under “United
States Federal Taxation of U.S. Holders—Consequences of Controlled Foreign Corporation Classification of Pyxis,” Pyxis
is treated as a CFC. U.S. Holders are urged to consult with their own tax advisers regarding any such reporting obligations. The
U.S. Department of the Treasury recognizes the Republic of the Marshall Islands as a jurisdiction that grants an Equivalent Exemption;
therefore, Pyxis meets the first requirement for the Section 883 Exemption.
If after
this offering Pyxis’ common stock is traded on either the Nasdaq Capital Market or NYSE MKT exchanges, and if the shareholdings
in Pyxis are such that Pyxis believes that it or its subsidiaries may satisfy one of the ownership tests for claiming the Section
883 Exemption in respect of United States-source shipping income, Pyxis intends to attempt to comply with the substantiation,
reporting and other requirements that are applicable under Section 883 of the Code to claim the exemption. However, the substantiation
requirements may require cooperation of the shareholders of Pyxis and there is no assurance that a sufficient number of shareholders
will cooperate with Pyxis. As of the date hereof, Pyxis cannot determine its ability to satisfy one of the ownership tests enumerated
in the second requirement above for future taxable years as more fully described below.
The 50.0% Ownership Test
In order
to satisfy the 50.0% Ownership Test, a non-United States corporation must be able to substantiate that more than 50.0% of the
value of its shares is owned, directly or indirectly, by “qualified shareholders.” For this purpose, qualified shareholders
are: (1) individuals who are residents (as defined in the regulations promulgated under Section 883 of the Code, or Section 883
Regulations) of countries, other than the United States, that grant an Equivalent Exemption, (2) non-United States corporations
that meet the Publicly Traded Test of the Section 883 Regulations and are organized in countries that grant an Equivalent Exemption,
or (3) certain foreign governments, non-profit organizations, and certain beneficiaries of foreign pension funds. In order for
a shareholder to be a qualified shareholder, there cannot be any bearer shares in the chain of ownership between the shareholder
and the taxpayer claiming the exemption. A corporation claiming the Section 883 Exemption based on the 50.0% Ownership Test must
obtain all the facts necessary to satisfy the IRS that the 50.0% Ownership Test has been satisfied (as detailed in the Section
883 Regulations) and must meet certain substantiation and reporting requirements. After this offering, Pyxis does not know whether
it will be able to satisfy the 50.0% Ownership Test due to the expected ownership of its shares.
The CFC Test
The CFC
Test requires that the non-United States corporation be treated as a CFC for United States federal income tax purposes for more
than half of the days in the taxable year. A CFC is a foreign corporation, more than 50.0% of the vote or value of which is owned
by significant U.S. shareholders (meaning United States persons who own at least 10.0% of the voting power of the foreign corporation).
In addition, more than 50.0% of the value of the shares of the CFC must be owned by qualifying United States persons for more
than half of the days during the taxable year concurrent with the period of time that Pyxis qualifies as a CFC. For this purpose,
a qualifying United States person is defined as a U.S. citizen, a resident alien, a domestic corporation or domestic trust, in
each case, if such United States person, and each intermediary in the chain of ownership between Pyxis and the qualified United
States person, provides Pyxis with an ownership statement signed under penalty of perjury. Please read “—United States
Federal Income Taxation of Pyxis—The Publicly Traded Test.” Pyxis does not know whether it will be a CFC after this
offering based on the expected ownership of its shares and, hence, Pyxis does not know whether the requirements of the CFC Test
will be met.
The Publicly Traded Test
The Publicly
Traded Test requires that one or more classes of equity representing more than 50.0% of the voting power and value in a non-United
States corporation be “primarily and regularly traded” on an established securities market either in the United States
or in a foreign country that grants an Equivalent Exemption. The Section 883 Regulations also generally provide that shares will
be considered to be “regularly traded” on an established securities market if one or more classes of shares in the
corporation representing in the aggregate more than 50.0% of the total combined voting power and value of all classes of shares
of the corporation are listed on an established securities market. Upon completion of this offering, Pyxis intends its common
stock to be listed on either the Nasdaq Capital Market or NYSE MKT exchanges, each of which may be considered to be an established
securities market in the United States; therefore Pyxis expects that its common stock may be deemed to be “regularly traded”
on an established securities market, provided the further requirements described below are met.
Under the
applicable Treasury regulations, in order for Pyxis’ common stock to be considered “regularly traded” on an
established securities market, it is further required that with respect to each class of stock relied upon to meet the listing
threshold (1) such class of the stock is traded on the market, other than in minimal quantities, on at least 60 days during the
taxable year or 1/6 of the days in a short taxable year; and (2) the aggregate number of shares of such class of stock traded
on such market is at least 10.0% of the average number of shares of such class of stock outstanding during such year or as appropriately
adjusted in the case of a short taxable year. Pyxis refers to these requirements as the “trading frequency and trading volume
tests.” As of the date hereof, Pyxis cannot determine whether it will satisfy the trading frequency and trading volume tests
in any current or future taxable year. However, the regulations provide that the trading frequency and trading volume tests will
be deemed satisfied if such class of stock is traded on an established market in the United States and such stock is regularly
quoted by dealers making a market in such stock.
Notwithstanding
the foregoing, the applicable Treasury regulations provide, in pertinent part, that a class of Pyxis’ stock will not be
considered to be “regularly traded” on an established securities market for any taxable year in which 50.0% or more
of the vote and value of such class of the outstanding shares of Pyxis’ stock is owned, actually or constructively under
specified stock attribution rules, on more than half the days during the taxable year by a person or persons who each own 5.0%
or more of the vote and value of such class of Pyxis’ outstanding stock, which Pyxis refers to as the “Five Percent
Override Rule.”
For purposes
of being able to determine the persons who own 5.0% or more of Pyxis’ common stock, or “5.0% Shareholders,”
the regulations permit Pyxis to rely on those persons that are identified on Schedule 13G and Schedule 13D filings with the SEC,
as having a 5.0% or more beneficial interest in Pyxis’ common stock. The applicable Treasury regulations further provide
that an investment company which is registered under the Investment Company Act of 1940, as amended, will not be treated as a
5.0% Shareholder for such purposes.
In the event
the Five Percent Override Rule is triggered, the Section 883 Treasury regulations provide that the Five Percent Override Rule
will nevertheless not apply if Pyxis can establish that within the group of 5.0% shareholders, there are sufficient qualified
shareholders for purposes of Section 883 to preclude non-qualified shareholders in such group from owning 50.0% or more of Pyxis’
common stock for more than half the number of days during the taxable year.
If, after
this offering, the ownership of Pyxis is such that it will not satisfy the 50.0% Ownership Test, the CFC Test or the Publicly
Traded Test, it will be subject to the 4.0% gross basis tax on its United States source gross transportation income.
A corporation’s
qualification for the Section 883 Exemption is determined for each taxable year. If Pyxis and/or its subsidiaries were not to
qualify for the Section 883 Exemption in any year, the United States income taxes that become payable would have a negative effect
on the business of Pyxis and its subsidiaries, and would result in decreased earnings available for distribution to Pyxis’
shareholders. If the shareholdings in Pyxis are such that Pyxis and its subsidiaries may qualify for the Section 883 Exemption,
Pyxis would not be entitled to claim the exemption unless each of the shareholders needed to qualify for the 50.0% Ownership Test,
the Publicly Traded Test or the CFC Ownership test provided Pyxis or the relevant subsidiary with a statement, signed under penalty
of perjury, certifying such shareholder’s status as a qualifying shareholder for purposes of satisfying such tests. If in
future years the shareholders fail to update or correct such statements, Pyxis and its subsidiaries may not continue to qualify
for the Section 883 Exemption.
United States Taxation of
Gain on Sale of Vessels
If Pyxis
qualifies for the Section 883 Exemption, then gain from the sale of any vessel may be exempt from tax under Section 883. If, however,
the gain is not exempt from tax under Section 883, Pyxis will not be subject to United States federal income taxation with respect
to such gain provided that the income from the vessel has never constituted effectively connected income and that the sale is
considered to occur outside of the United States under United States federal income tax principles. In general, a sale of a vessel
will be considered to occur outside of the United States for this purpose if title to the vessel, and risk of loss with respect
to the vessel, pass to the buyer outside of the United States. To the extent possible, Pyxis will attempt to structure any sale
of a vessel so that it is considered to occur outside of the United States.
United States Federal Income
Taxation of U.S. Holders
As used
herein, “U.S. Holder” means a beneficial owner of common stock that is an individual citizen or resident of
the United States for United States federal income tax purposes, a corporation or other entity taxable as a corporation created
or organized in or under the laws of the United States or any state thereof (including the District of Columbia), an estate the
income of which is subject to United States federal income taxation regardless of its source or a trust where a court within the
United States is able to exercise primary supervision over the administration of the trust and one or more United States persons
(as defined in the Code) have the authority to control all substantial decisions of the trust (or a trust that has made a valid
election under U.S. Department of the Treasury regulations to be treated as a domestic trust). A “Non-U.S. Holder”
generally means any owner (or beneficial owner) of common stock that is not a U.S. Holder, other than a partnership. If a partnership
holds common stock, the tax treatment of a partner will generally depend upon the status of the partner and upon the activities
of the partnership. Partners of partnerships holding common stock should consult their own tax advisors regarding the tax consequences
of an investment in the common stock (including their status as U.S. Holders or Non-U.S. Holders).
Distributions
Subject
to the discussion of PFICs below, any distributions made by Pyxis with respect to its common stock to a U.S. Holder of common
stock will generally constitute dividends, which may be taxable as ordinary income or qualified dividend income as described in
more detail below, to the extent of Pyxis’ current or accumulated earnings and profits as determined under United States
federal income tax principles. Distributions in excess of Pyxis’ earnings and profits will be treated as a nontaxable return
of capital to the extent of the U.S. Holder’s tax basis in its common stock and, thereafter, as capital gain. U.S. Holders
that are corporations generally will not be entitled to claim a dividends received deduction with respect to any distributions
they receive from Pyxis.
Dividends
paid on the shares of a non-U.S. corporation to an individual generally will not be treated as qualified dividend income that
is taxable at a maximum tax rate of 15.0%. However, dividends paid in respect of Pyxis’ common stock may qualify as qualified
dividend income if: (1) the common stock is readily tradable on an established securities market in the United States; (2) Pyxis
is not a PFIC for the taxable year during which the dividend is paid or in the immediately preceding taxable year; (3) the U.S.
Holder has owned the common stock for more than 60 days in the 121-day period beginning 60 days before the date on which the common
stock become ex-dividend and (4) the U.S. Holder is not under an obligation to make related payments with respect to positions
in substantially similar or related property. Pyxis anticipates that the first requirement may be met immediately after this offering,
and anticipates that the second requirement will be met as more fully described below under “—Consequences of Possible
PFIC Classification”; satisfaction of the final two requirements will depend on the particular circumstances of each U.S.
Holder. Consequently, depending on the status of the U.S. Holder, the dividends paid to individual U.S. Holders in respect of
Pyxis’ common stock may be treated as qualified dividend income and may not be taxed as ordinary income. Dividends received
from Pyxis that are not eligible for the preferential tax rate will be taxed at the ordinary income rates.
Consequences of Possible PFIC
Classification
A non-United
States entity treated as a corporation for United States federal income tax purposes will be a PFIC in any taxable year in which,
after taking into account the income and assets of the corporation and certain subsidiaries pursuant to a “look through”
rule, either: (1) 75.0% or more of its gross income is “passive” income or (2) 50.0% or more of the average value
of its assets is attributable to assets that produce passive income or are held for the production of passive income. If a corporation
is a PFIC in any taxable year that a person holds shares in the corporation (and was not a qualified electing fund with respect
to such year, as discussed below), the shares held by such person will be treated as shares in a PFIC for all future years (absent
an election which, if made, may require the electing person to pay taxes in the year of the election). A U.S. Holder of shares
in a PFIC may be required to file an annual information return containing information regarding the PFIC as required by U.S. Department
of the Treasury regulations.
While there
are legal uncertainties involved in this determination, including as a result of adverse recent case law described herein, Pyxis
believes that (1) the time charters Pyxis (or its subsidiaries) has entered into with Navig8 or any other time charterer should
constitute service contracts rather than leases for United States federal income tax purposes and (2) as a result, the income
from these charters should not constitute “passive income,” and the assets that Pyxis owns for the production of this
income should not constitute passive assets.
Recently,
the Fifth Circuit Court of Appeals decided in Tidewater Inc. v. United States, 565 F.3d 299 (5th Cir., April 13, 2009),
that a typical time charter is a lease, and not a contract for the provision of transportation services. In that case, the court
was considering a tax issue that turned on whether the taxpayer was a lessor where a vessel was under a time charter, and the
court did not address the definition of passive income or the PFIC rules; however, the reasoning of the case could have implications
as to how the income from a time charter would be classified under such rules. If the reasoning of the Tidewater case is
applied to Pyxis’ situation and Pyxis’ time charters are treated as leases, Pyxis’ time charter income could
be classified as rental income and Pyxis would be a PFIC unless more than 25.0% of its income is from spot charters or an active
leasing exception applies. The IRS has announced that it will not follow the reasoning of the Tidewater case, and would
have treated the income from the time charters at issue in Tidewater as services income and not as passive income including
under the PFIC rules. Pyxis intends to take the position that all of its time chartering activities will generate active operating
income and not passive leasing income.
Based on
Pyxis’ intention and expectation that its income from its spot, time and voyage chartering activities will be greater than
25.0% of its total gross income at all relevant times and that the gross value of its vessels subject to such charters will exceed
the gross value of all other assets Pyxis owns at all relevant times, Pyxis does not expect that it will constitute a PFIC with
respect to any taxable year. However, there can be no assurance that Pyxis will be able to manage its vessels and its business
so as to avoid being classified as a PFIC for any particular taxable year.
There can
be no assurance that the nature of Pyxis’ assets, income and operations will remain the same in the future (notwithstanding
Pyxis’ current expectations). Additionally, no assurance can be given that the IRS or a court of law will accept Pyxis’
position that the time charters Pyxis has entered into with Navig8 or any other time charterer constitute service contracts rather
than leases for United States federal income tax purposes, or that future changes of law will not adversely affect this position.
Pyxis has not obtained a ruling from the IRS and does not intend to seek one. Any contest with the IRS may materially and adversely
impact the market for the shares of Pyxis’ common stock and the prices at which they trade. In addition, the costs of any
contest with the IRS will result in a reduction in cash available for distribution and thus will be borne indirectly by Pyxis’
shareholders.
If Pyxis
were to be classified as a PFIC in any year, each U.S. Holder of Pyxis’ common stock will be subject (in that year and all
subsequent years) to special rules with respect to: (1) any “excess distribution” (generally defined as any distribution
received by a shareholder in a taxable year that is greater than 125.0% of the average annual distributions received by the shareholder
in the three preceding taxable years or, if shorter, the shareholder’s holding period for the shares), and (2) any gain
realized upon the sale or other disposition of the common stock. Under these rules:
| · | the
excess distribution or gain will be allocated ratably over the U.S. Holder’s holding
period; |
| · | the
amount allocated to the current taxable year and any year prior to the first year in
which Pyxis was a PFIC will be taxed as ordinary income in the current year; and |
| · | the
amount allocated to each of the other taxable years in the U.S. Holder’s holding
period will be subject to United States federal income tax at the highest rate in effect
for the applicable class of taxpayer for that year, and an interest charge will be added
as though the amount of the taxes computed with respect to these other taxable years
were overdue. |
In order
to avoid the application of the PFIC rules, U.S. Holders may make a qualified electing fund, or a QEF, election provided in Section
1295 of the Code in respect of their common stock. In lieu of the PFIC rules discussed above, a U.S. Holder that makes a valid
QEF election will, in very general terms, be required to include its pro rata share of Pyxis’ ordinary income and net capital
gains, unreduced by any prior year losses, in income for each taxable year (as ordinary income and long-term capital gain, respectively)
and to pay tax thereon, even if the amount of that income is not the same as the distributions paid on the common stock during
the year. If Pyxis later distributes the income or gain on which the U.S. Holder has already paid taxes under the QEF rules, the
amounts so distributed will not again be subject to tax in the hands of the U.S. Holder. A U.S. Holder’s tax basis in any
common stock as to which a QEF election has been validly made will be increased by the amount included in such U.S. Holder’s
income as a result of the QEF election and decreased by the amount of nontaxable distributions received by the U.S. Holder. On
the disposition of a common share, a U.S. Holder making the QEF election generally will recognize capital gain or loss equal to
the difference, if any, between the amount realized upon such disposition and its adjusted tax basis in the common share. In general,
a QEF election should be made on or before the due date for filing a U.S. Holder’s federal income tax return for the first
taxable year for which Pyxis is a PFIC or, if later, the first taxable year for which the U.S. Holder held common stock. In this
regard, a QEF election is effective only if certain required information is made available by the PFIC. Subsequent to the date
that Pyxis first determines that it is a PFIC, Pyxis will use commercially reasonable efforts to provide any U.S. Holder of common
stock, upon request, with the information necessary for such U.S. Holder to make the QEF election.
In addition
to the QEF election, Section 1296 of the Code permits U.S. Holders to make a “mark-to-market” election with respect
to marketable shares in a PFIC, generally meaning shares regularly traded on a qualified exchange or market and certain other
shares considered marketable under U.S. Department of the Treasury regulations. Because Pyxis’ common stock may be regularly
traded on a qualified exchange, Pyxis’ common stock may be treated as marketable for this purpose, and the mark-to-market
election may be available if this is the case. If a U.S. Holder makes a mark-to-market election in respect of its common stock,
such U.S. Holder generally would, in each taxable year: (1) include as ordinary income the excess, if any, of the fair market
value of the common stock at the end of the taxable year over such U.S. Holder’s adjusted tax basis in the common stock,
and (2) be permitted an ordinary loss in respect of the excess, if any, of such U.S. Holder’s adjusted tax basis in the
common stock over their fair market value at the end of the taxable year, but only to the extent of the net amount previously
included in income as a result of the mark-to-market election (with the U.S. Holder’s basis in the common stock being increased
and decreased, respectively, by the amount of such ordinary income or ordinary loss). The consequences of this election are generally
less favorable than those of a QEF election for U.S. Holders that are sensitive to the distinction between ordinary income and
capital gain, although this is not necessarily the case. U.S. Holders are urged to consult their tax advisors as to the consequences
of making a mark-to-market or QEF election, as well as other United States federal income tax consequences of holding shares in
a PFIC.
As previously
indicated, if Pyxis were to be classified as a PFIC for a taxable year in which Pyxis pays a dividend or the immediately preceding
taxable year, dividends paid by Pyxis would not constitute “qualified dividend income” and, hence, would not be eligible
for the reduced rate of United States federal income tax.
Consequences of Controlled
Foreign Corporation Classification of Pyxis
If more
than 50.0% of either the total combined voting power of the shares of Pyxis entitled to vote or the total value of all of Pyxis’
outstanding shares were owned, directly, indirectly or constructively by (1) citizens or residents of the United States, (2) U.S.
partnerships or corporations, or (3) U.S. estates or trusts (as defined for U.S. federal income tax purposes), each of which owned,
directly, indirectly or constructively 10.0% or more of the total combined voting power of Pyxis shares entitled to vote (each
a “U.S. Shareholder”), Pyxis and its wholly-owned subsidiaries generally would be treated as CFCs. U.S. Shareholders
of a CFC are treated as receiving current distributions of their pro rata shares of Subpart F Income of the CFC even if they do
not receive actual distributions. Pyxis or its subsidiaries may have income that would be treated as Subpart F Income, such as
interest income or passive leasing income in respect of ship charters. (Please read “United States Federal Income Taxation
of U.S. Holders—Consequences of Possible PFIC Classification.”) Consequently, any U.S. Holders who are also U.S. Shareholders
may be required to include in their U.S. federal taxable income their pro rata share of the Subpart F income of Pyxis and its
subsidiaries, regardless of the amount of cash distributions received. Pyxis believes that its time charter income will not be
treated as passive rental income, but there can be no assurance that the IRS will accept this position.
In the case
where Pyxis is a CFC, to the extent that Pyxis’ distributions to a U.S. Holder who is also a U.S. Shareholder are attributable
to prior inclusions of Subpart F income of such U.S. Holder, such distributions are not required to be reported as additional
income of such U.S. Holder.
Whether
or not Pyxis or a subsidiary will be a CFC will depend on the identity of the shareholders of Pyxis during each taxable year of
Pyxis.
If Pyxis
or one of its subsidiaries is a CFC, certain burdensome U.S. federal income tax and administrative requirements would apply to
U.S. Holders that are U.S. Shareholders, but such U.S. Holders generally would not also be subject to all of the requirements
generally applicable to owners of a PFIC. For example, a U.S. Holder that is a U.S. Shareholder will be required to annually file
IRS Form 5471 to report certain aspects of its indirect ownership of a CFC or IRS Form 8858 to report in respect to the entities
through which Pyxis holds its vessels. U.S. Holders should consult with their own tax advisors as to the consequences to them
of being a U.S. Shareholder in a CFC.
Sale, Exchange or Other Disposition
of Common stock
A U.S. Holder
generally will recognize taxable gain or loss upon a sale, exchange or other disposition of common stock in an amount equal to
the difference between the amount realized by the U.S. Holder from such sale, exchange or other disposition and the U.S. Holder’s
tax basis in such common stock. Assuming Pyxis does not constitute a PFIC for any taxable year, this gain or loss will generally
be treated as long-term capital gain or loss if the U.S. Holder’s holding period is greater than one year at the time of
the sale, exchange or other disposition. A U.S. Holder’s ability to deduct capital losses is subject to certain limitations.
United States Federal Income
Taxation of Non-U.S. Holders
A Non-U.S.
Holder will generally not be subject to United States federal income tax on dividends paid in respect of Pyxis’ common stock
or on gains recognized in connection with the sale or other disposition of the common stock provided that the Non-U.S. Holder
makes certain tax representations regarding the identity of the beneficial owner of the common stock, that such dividends or gains
are not effectively connected with the Non-U.S. Holder’s conduct of a United States trade or business and that, with respect
to gain recognized in connection with the sale or other disposition of the common stock by a non-resident alien individual, such
individual is not present in the United States for 183 days or more in the taxable year of the sale or other disposition.
Backup Withholding and Information
Reporting
Information
reporting to the IRS may be required with respect to payments on Pyxis’ common stock and with respect to proceeds from the
sale of the common stock. With respect to Non-U.S. Holders, copies of such information returns reporting may be made available
to the tax authorities in the country in which the Non-U.S. Holder resides under the provisions of any applicable income tax treaty
or exchange of information agreement. A “backup” withholding tax may also apply to those payments if a non-corporate
holder of the common stock fails to provide certain identifying information (such as the holder’s taxpayer identification
number or an attestation to the status of the holder as a Non-U.S. Holder), such holder is notified by the IRS that he or she
has failed to report all interest or dividends required to be shown on his or her federal income tax returns, or in certain circumstances,
such holder has failed to comply with applicable certification requirements. Backup withholding is not an additional tax and may
be refunded (or credited against the holder’s United States federal income tax liability, if any), provided that certain
required information is furnished to the IRS in a timely manner.
Non-U.S.
Holders may be required to establish their exemption from information reporting and backup withholding by certifying their status
on IRS Form W-8BEN, W-8ECI or W-8IMY, as applicable. U.S. Holders of common stock may be required to file forms with the IRS under
the applicable reporting provisions of the Code. For example, such U.S. Holders may be required, under Sections 6038, 6038B and/or
6046 of the Code, to supply the IRS with certain information regarding the U.S. Holder, other U.S. Holders and Pyxis if (1) such
person owns at least 10.0% of the total value or 10.0% of the total combined voting power of all classes of shares entitled to
vote or (2) the acquisition, when aggregated with certain other acquisitions that may be treated as related under applicable regulations,
exceeds $100,000. In the event a U.S. Holder fails to file a form when required to do so, the U.S. Holder could be subject to
substantial tax penalties.
If a shareholder
of Pyxis is a Non-U.S. Holder and sells his or her common stock to or through a United States office of a broker, the payment
of the proceeds is subject to both United States backup withholding and information reporting unless the shareholder certifies
that he or she is not a United States person, under penalty of perjury, or he or she otherwise establishes an exemption. If a
shareholder of Pyxis is a Non-U.S. Holder and sells his or her common stock through a non-United States office of a non-United
States broker and the sales proceeds are paid to such shareholder outside the United States, then information reporting and backup
withholding generally will not apply to that payment. However, United States information reporting requirements, but not backup
withholding, will apply to a payment of sales proceeds, even if that payment is made to a shareholder outside the United States,
if the shareholder sells his or her common stock through a non-United States office of a broker that is a United States person
or has some other contacts with the United States. Such information reporting requirements will not apply, however, if the broker
has documentary evidence in its records that the shareholder is not a United States person and certain other conditions are met,
or the shareholder otherwise establishes an exemption.
Non-United States Tax Consequences
The following
discussion is the opinion of Pyxis’ counsel as to matters of the laws of the Republic of the Marshall Islands, and the current
laws of the Republic of the Marshall Islands applicable to persons who do not reside in, maintain offices in or engage in business
in the Republic of the Marshall Islands.
Because
Pyxis does not, and Pyxis does not expect that it will, conduct business or operations in the Republic of the Marshall Islands,
and because all documentation related to this offering will be executed outside of the Republic of the Marshall Islands, under
current Republic of the Marshall Islands law you will not be subject to Republic of the Marshall Islands taxation or withholding
on distributions, including upon a return of capital, Pyxis makes to you as a shareholder. In addition, you will not be subject
to Republic of the Marshall Islands stamp, capital gains or other taxes on the purchase, ownership or disposition of common stock,
and you will not be required by the Republic of the Marshall Islands to file a tax return relating to the common stock.
Pyxis
encourages each U.S. Holder and Non-U.S. Holder to consult with his, her or its own tax advisor as to the particular tax consequences
to it of holding and disposing of Pyxis’ common stock, including the applicability of any federal, state, local or foreign
tax laws and any proposed changes in applicable law.
In particular,
it is the responsibility of each shareholder to investigate the legal and tax consequences, under the laws of pertinent jurisdictions,
including the Republic of the Marshall Islands, of his or her investment in Pyxis. Accordingly, each prospective shareholder is
urged to consult, and depend upon, his or her tax counsel or other advisor with regard to those matters. Further, it is the responsibility
of each shareholder to file all state, local and non-United States, as well as United States federal tax returns that may be required
of him or her.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following
table provides information as of _______, 2015 as to the ordinary shares of Pyxis beneficially owned by all directors and nominees,
directors and executive officers as a group as of __________, 2015, and each person known to the Company to beneficially own more
than 5% of the common stock:
Name and Address of Beneficial Owner (1) | |
Shares
Beneficially
Owned | | |
Percent of
Class | * |
Maritime Investors Corp. | |
| 10,000,000 | | |
| 100 | % |
Valentios (“Eddie”) Valentis | |
| 10,000,000 | | |
| | (2) |
Antonios C. Backos | |
| 0 | | |
| - | |
Konstantinos Lytras | |
| 0 | | |
| - | |
Robin P. Das | |
| 0 | | |
| - | |
Robert B. Ladd | |
| 0 | | |
| - | |
Basil G. Mavroleon | |
| 0 | | |
| - | |
Aristides J. Pittas | |
| 0 | | |
| - | |
| |
| | | |
| | |
Directors and executive officers as a group
( 7 persons): | |
| 10,000,000 | | |
| 100 | % |
*
(1) |
To the Company's knowledge, except as otherwise provided herein,
each person named herein as a beneficial owner of securities has sole voting and investment power as to such securities and
such person's address is K. Karamanli 59, 15125 Maroussi, Greece |
(2) |
Valentios (“Eddie”) Valentis is 100% stockholder
of Maritime Investors Corp. |
Management
Pyxis’
management team has extensive experience in the shipping industry. Mr. Valentis, its founder, chairman and chief executive officer,
has over 25 years of experience in the shipping industry, including owning, operating and managing tankers. Following the consummation
of the Merger, assuming no other adjustments to the consideration amount, it is expected that Mr. Valentis will indirectly control
approximately 93% of the voting and economic interest of Pyxis’ company shares.
Pyxis’
management team, under the supervision of its board of directors, will oversee the implementation of Pyxis’ business strategy,
including the strategic management of all of the vessels in Pyxis’ fleet. Pyxis will not directly employ any individuals
but will enter into a Head Management Agreement with Maritime to furnish it with specific services of senior executives and other
individuals and to manage or oversee all of the commercial operations of the fleet for a fixed yearly fee. See “Related
Party Transactions—Head Management Agreement with Maritime” and “Management of Pyxis Following the Merger”
for more information.
Related
Party Transactions
Head
Management Agreement with Maritime.
The operations
of Pyxis’ vessels are managed by Maritime, an affiliated ship management company, under a Head Management Agreement with
Pyxis and separate management agreements with each of its ship owning subsidiaries. Under the Head Management Agreement, Maritime
will either be directly responsible for or oversee all aspects of ship management for Pyxis and its fleet. Under that agreement,
Maritime will also provide administrative services to Pyxis, which will include, among other things, the provision of the services
of Pyxis’ Chief Executive Officer, Chief Financial Officer, Senior Vice President of Corporate Development, General Counsel
and Corporate Secretary, Chief Operations Officer, one or more internal auditor(s) and a secretary, as well as use of office space
in Maritime’s premises. As part of the ship management services, Maritime will provide Pyxis and its vessels with the following
services: commercial, sale and purchase, provisions, insurance, bunkering, operations and maintenance, dry-docking and newbuilding
construction supervision. Maritime will also supervise the crewing and technical management performed by ITM for all Pyxis’
vessels and the chartering of the Northsea Alpha and the Northsea Beta, which is performed by NST.
Maritime
also currently manages two vessels, the Miss Lucy and the Pyxis Loucas, not owned by Pyxis, and oversees the construction
of one MR tanker under a shipbuilding contract entered into by a party affiliated with Mr. Valentis, Pyxis’founder and chief
executive officer.
The term
of the Head Management Agreement with Maritime commenced on March 23, 2015 and will continue until March 23, 2020. The Head Management
Agreement cannot be terminated by Maritime without cause or under other limited circumstances, such as sale of Pyxis or Maritime
or the bankruptcy of either party. The Head Management Agreement will automatically be extended after the initial period for an
additional five year period unless terminated on or before the 90th day preceding the preceding termination date. Pursuant to
the Head Management Agreement, each new subsidiary of Pyxis that acquires a vessel in the future will enter into a separate management
agreement with Maritime with a rate set forth in the Head Management Agreement. Under the Head Management Agreement, Pyxis will
pay Maritime a fixed cost of $1.6 million annually for the services of its executive officers and other administrative services,
including use of office space in Maritime’s premises. In return for Maritime’s ship management services, Pyxis will
pay to Maritime for each vessel while in operation, a fixed fee per day of $325, and for each vessel under construction, a fixed
fee of $450 plus an additional daily fee, which is dependent on the seniority of the personnel, to cover the cost of the engineers
employed to conduct the supervision. The fees payable to Maritime for the administrative and ship management services will be
adjusted effective as of every January 1st for inflation in Greece or such other country where it is headquartered.
In addition, Maritime will receive 1.0% of the purchase price of any sale and purchase transaction from the seller of the vessel,
and 1.25% of all chartering, hiring and freight revenue procured by or through it. During 2014 and 2013, Maritime received fees
from Pyxis for the ship management services of $0.9 million and $0.6 million, respectively.
Pyxis pays
as well additional commissions to major charterers and their brokers that usually range from 1.00% to 5.00%. During 2014 and 2013,
Maritime received chartering and vessel sale commissions of $0.2 million and $0.5 million, respectively.
INFORMATION
WITH RESPECT TO LOOKSMART
LOOKSMART
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should
read the following discussion and analysis together with LookSmart’s financial statements and related notes included elsewhere
in this proxy statement. This discussion includes forward-looking statements which, although based on assumptions that LookSmart
considers reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially
from those currently anticipated and expressed or implied by such forward-looking statements. For a discussion of some of those
risks and uncertainties, please read “Forward-Looking Statements” and “Additional Risks Related to LookSmart
and/or Holdco.”
Overview
LookSmart,
Ltd. (“LookSmart” or the “Company”) was organized in 1996 and is incorporated in the State of Delaware.
LookSmart is a digital advertising solutions company that provides relevant solutions for search and display advertising customers,
organized along five lines of business: (i) Clickable, (ii) LookSmart AdCenter, (iii) Novatech.io, (iv) ShopWiki and (v) web searches.
In addition, LookSmart formed a partnership with Conversion Media Holdings, LLC, which supports the Company’s other lines
of business through the creation of content sites directed at ecommerce verticals. The Company operates its partnership and each
line of business, while being related to the others in terms of shared resources, as separate business lines with their own core
management, profits and losses, and the ability to operate independently as separate businesses. As a result, this separation
of business lines allows Looksmart to operate effectively as a holding company and as a capital allocator to each of the Company’s
separate businesses with the goal of finding mispriced assets in the public and private markets and subsequently taking those
assets to create scalable and sustainable businesses that may then be monetized for the ultimate benefit of Looksmart’s
stockholders.
Clickable
In September
2013, LookSmart, through its wholly owned subsidiary LookSmart Canada Ltd., purchased the assets related to its Syncapse Inc.
(“Syncapse”) technology for $3 million from MNP Ltd., a receiver appointed by Ontario Superior Court of Justice
under an appointment order. As a result of this transaction, the Company acquired a social media platform that the Company
believes has allowed it to quickly scale into social media analytics, publishing, and moderation. This, in turn, should allow
our enterprise customers the ability to publish, monitor and analyze their social media presence on paid, owned and earned media.
In January 2014, LookSmart re-branded Syncapse as “Clickable.”
Clickable
helps brands and agencies measure marketing ROI through a customer’s lifetime by connecting critical marketing and advertising
products and services into one platform that gives customers the ability to analyze, publish, moderate, social media and search
marketing. Clickable also offers its platform as a white label solution to agencies who use it to save hours of time creating
reports, increase transparency to clients, increase stickiness of clients, increase recurring revenue streams, and upsell other
tools and services. The Company has begun to work with large international brands to assist them in creating, maintaining and
analyzing their social media presence online. The Company’s goal is to partner with social media companies such as Facebook,
Twitter, Pinterest and YouTube, as well as others, to provide vertically integrated solutions that will offer customers the ability
to maximize their ad spend in all relevant ad categories.
In addition,
Clickable allows customers to manage paid, owned and earned media by providing a suite of solutions for social media marketers
that include publishing, monitoring, data storage, compliance, management, ad placement and analytics. The “Clickable
Analytics” dashboard provides customers with the ability to easily put all their cross channel marketing (search, display,
social, email, video, offline) and audience data from various sources into one unified, flexible and customizable platform. The
platform allows the customer to better understand and utilize the data for the customizing and layering of customer specific key
performance indicators. The Company believes that this platform will allow customers to combine data in a way that better
suits their particular marketing, financial and operational goals both with standard and customized dashboards and analytics.
This platform allows companies to gather and manage Application Programming Interface (“API”) data from
many data providers that LookSmart aims to partner with, including Facebook, Twitter, YouTube, and Instagram, as well as analyze
such data in the “Clickable” proprietary platform and within a company’s own data warehouse.
LookSmart
AdCenter
We have
developed a proprietary web-based advertising auction platform, the “AdCenter”, that allows us to create, track, analyze,
report and optimize customers’ advertising campaigns. Through the AdCenter platform, our customers are provided with search,
social, display, mobile and video advertising solutions as well as analytic, moderation and publishing workflow solutions across
the entire social media marketing ecosystem. The AdCenter indexes ads, analyzes webpage information to match advertising to relevant
content, matches search queries to advertising and utilizes advanced fraud detection techniques in a high-volume ad serving environment.
The platform also collects impression and click data for each listing that we manage for our customers and provides us with billing
information. In addition, we provide each of our advertising customers with a password-protected online account that enables them
to track, analyze and optimize their search marketing campaigns using online reports. The platform also includes an interface
for publishers to access ad syndication feed reports and revenue information.
The advertisers
that comprise the Company’s customer network include intermediaries, direct advertising customers and their agencies, as
well as self-service customers in the United States and certain other countries. These AdCenter customers range from small and
medium-sized businesses to large Fortune 50 companies. Self-service advertisers are customers that sign-up directly online with
the Company and pay by credit card. Direct advertisers (and their agencies) include customers whose main objective is to obtain
conversions or sales from clicks. Intermediary customers (“Intermediaries”) do not directly advertise on our
platform but sell into the affiliate networks of the large search engine providers. Our Intermediary business model experienced
a significant change in the fourth quarter of 2011, such that the Company’s revenue from Intermediaries has declined significantly
as compared to 2011 and earlier. Decreasing Intermediary revenue represented a continued trend from 2012 and was the primary driver
of the Company's overall 2013 revenue decreases. Thus, in 2013, the Company made the decision to decrease the amount of revenue
that it received from Intermediaries compared to 2012. The Company believes that this decision is in the best interests of the
Company on a go-forward basis. The Company believes its revenue trends are tied to market-wide changes in the search ecosystem
that have had a severe impact on Intermediary business models and consequently the business Intermediaries conduct with the Company.
In 2014, 2013 and 2012, we ceased business with a number of Intermediaries. Intermediaries continue as our largest category of
customer.
Through
a web interface or our proprietary API, LookSmart’s AdCenter allows multiple search advertising customers to upload keywords,
manage daily budgets, set rates and view reports, including spend data that is updated hourly. Search advertising customers can
also access keyword suggestions, price and traffic estimates, online help and frequently asked questions (“FAQ”).
The AdCenter API is also available for search advertising customers and related agencies that use third-party or in-house systems
to analyze and manage their search campaigns.
LookSmart's
search advertising network generates advertisements that target search intent queries on Looksmart.com and partner publisher sites.
The network offers search advertising customers targeted search capability through a monitored search advertising distribution
network. LookSmart also offers advertisers the ability to buy graphical display advertising. LookSmart’s “trading
desk” personnel utilize Demand Side Platform (“DSP”) technology and licensed data from third party providers
to purchase targeted advertising on a real-time bidded basis. By leveraging our extensive historical search marketing network
data along with performance data from a conversion pixel, LookSmart constructs models of the highest performing audiences and
targets those audiences via the Company’s exchange inventory. LookSmart offers its trading desk as a managed service.
Further,
LookSmart offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology
(“Publisher Solutions”). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill
capability that allows publishers and portals to manage their advertiser relationships, distribution channels and accounts.
LookSmart
offers a suite of customizable search advertising management tools and solutions that help publishers grow their audience, control
advertiser relationships, and enhance and optimize the monetization of their sites. Our Publisher Solutions can be branded and
configured according to publishers’ needs. We offer publishers:
|
· |
Command and control over revenue diversification and growth
via the AdCenter for Publishers, a comprehensive private-labeled Application Service Provider (“ASP”) solution
that provides publishers with the ability to own and grow their advertiser relationships, increase their distribution capacity,
and diversify their revenue sources. |
|
· |
A customizable set of services and technology to integrate multiple
sources of advertisers, including dominant third-party feeds, within a single auction-based platform for cost-per-click (“CPC”)
text-based advertising. |
|
· |
Access to a “backfill” of advertisers so they can
quickly ramp their online operations and not lose time or existing revenue sources while establishing their advertiser relationships.
Connecting multiple installations of the AdCenter for Publishers together allows LookSmart to create an open marketplace environment
that empowers publishers to share, leverage, and exchange their advertisers for expanded distribution. |
Novatech.io
In November
of 2013, LookSmart acquired an approximately 10,000 square foot data center facility in Phoenix, Arizona. Looksmart has
completed the process of consolidating its cloud services in the newly occupied and wholly owned secure data center. As
a result, the Company intends to expand its cloud-based offerings to its customers.
NovaTech's
cloud based services include a private cloud ecosystem comprised of multi-vendor enterprise technologies and capabilities while
serving as a production research and development environment to support the needs of companies who need to scale their information
technology operations quickly and securely.
ShopWiki
ShopWiki
is a consumer shopping search engine that offers comprehensive results for both stores and products. ShopWiki uses crawling technology
to find anything and everything on the internet.
It was founded
by former DoubleClick Executives, along with a DoubleClick software developer. In January 2011, the Company was acquired by Oversee.net
from whom Looksmart acquired the company.
ShopWiki
does not sell any products; it simply helps our users find any product available for sale on the Web. ShopWiki actively crawls
the Internet and API feeds from merchants, to find and organize the widest selection of products from more than 250,000 online
merchants.
Web Searches
The Company
offers a LookSmart-branded search engine. For parties submitting search queries, the Company offers free-of-charge search
results ranked and presented based on proprietary algorithms. While early in its evolution, part of the Company's
current search engine monetization strategy is to generate sponsored search results as a part of overall search results and provide
links to paying advertisers’ websites.
Conversion
Media
In March
2014, the Company entered into a partnership with VisionNexus, LLC, a California limited liability company called Conversion Media
Holdings, LLC, a Delaware limited liability corporation, with the intent to create content sites directed at ecommerce verticals
like housewares, electronics and other consumer products. The operations of Conversion Media Holdings, LLC began in
April of 2014 and currently are in a testing phase. The Company believes that Conversion Media Holdings, LLC will begin to generate
revenue at the end the 2nd quarter of 2015.
Competition
The online
advertising industry is constantly evolving, changes rapidly and is highly competitive. One of the major factors contributing
to this competitive environment is that providers of all online advertising formats compete for a share of advertisers’
limited advertising budgets. The large search engines, such as Yahoo!, Google, and Bing often receive the biggest portion of the
search marketing budget. In addition, social networks such as Facebook and LinkedIn are rapidly scaling their advertising capabilities.
With greater capital and technical resources, and greater brand recognition, the larger brands are often first priority in the
mind of the advertiser, agency or buyer.
We compete
on two main fronts: 1) attracting and growing our base of advertising customers to purchase our online advertising products and
to incorporate their key words into our search advertising network, and 2) attracting and maintaining distribution network partners
to incorporate their search queries into our search advertising network. The basis on which we compete differs among the two fronts.
In addition, while online advertising continues to grow year over year, customers’ online advertising budgets are in competition
with advertising in other media such as television, radio and print.
Customers
For the
year ended December 31, 2014, our largest customer accounted for 12% of our revenue. For the year ended December 31, 2013, our
largest customer accounted for 13% of our revenue.
Intellectual Property
We rely
on a combination of patent, trade secret, copyright and trademark laws and contractual provisions to protect our intellectual
property and proprietary rights. Our trademarks include LookSmart ®, Clickable ® and Syncapse ®. We have an issued
patent on our search engine technology and have patents on various aspects of our ad delivery and search technologies.
Government Regulations
We are subject
to a number of domestic state and federal laws that affect companies conducting business on the Internet. In addition, because
of the increasing popularity of the Internet and the growth of online services, laws relating to user privacy, freedom of expression,
content, advertising, information security and intellectual property rights are being debated and considered for adoption.
In the U.S.,
state and federal laws relating to the liability of providers of online services for activities of their consumers, and the liability
of providers of online advertiser’s ads and activities, are currently being tested by a number of claims, which include
actions for defamation, libel, invasion of privacy and other data protection claims, tort, unlawful activity, copyright or trademark
infringement, or other theories based on the nature and content of the materials searched by consumers, the advertisements shown
to consumers or the content generated by consumers. Likewise, other federal laws could have an impact on our business. For example,
the Children’s Online Protection Act and the Children’s Online Privacy Protection Act restrict the distribution of
materials considered harmful to children and impose additional restrictions on the ability of online services to collect information
from minors. In addition, the Protection of Children from Sexual Predators Act of 1998 requires online service providers to report
evidence of violations of federal child pornography laws under certain circumstances.
In addition,
the application of existing laws regulating or requiring licenses for certain businesses of our search advertising customers,
including, for example, distribution of pharmaceuticals, adult content, online gambling, financial services, alcohol or firearms,
can be unclear. Application of these laws in an unanticipated manner could expose us to substantial liability and restrict our
ability to deliver services to our customers.
Research, Product Development
and Technical Operations Expense
Research,
product development and technical operations expense includes all costs related to the continued operation, development and enhancement
of our Clickable and AdCenter platforms. Our product development and technical operations expense for Clickable, net of capitalized
software development costs, was approximately $2.0 million during the year ended December 31, 2014 and approximately $0.7 million
during the year ended December 31, 2013. Our product development and technical operations expense for AdCenter, net of capitalized
software development costs, was approximately $4.6 million during the year ended December 31, 2014 and approximately $3.6 million
during the year ended December 31, 2013.
The Company
reviews assets for evidence of impairment annually at year end and whenever events or changes in circumstances indicate the carrying
values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance
and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic,
industry or market conditions, changes in business operations and changes in competition.
The fair
value of the long-lived assets was derived based on Level 3 inputs, which are based on significant inputs that are not observable.
The fair value of the capitalized software long-lived assets was determined using an income approach, based on expected future
cash flows and market considerations. The fair value of the computer equipment, furniture and fixtures, software and leasehold
improvements long-lived assets was determined using a market approach, based on comparable fair values of similar assets.
The Company expects to continue
to invest in internally developed software and other technology initiatives.
Employees
As of December
31, 2014, we had 18 total employees, all of which were full-time employees. None of our employees is represented by a union and we
believe our employee relations to be good.
Available Information
Our website,
www.looksmart.com, provides access, without charge, to our annual report on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and all amendments to those reports as soon as reasonably practicable after such material is electronically
filed with the. The information provided on our website is not part of this report, and is therefore not incorporated by reference
unless such information is otherwise specifically referenced elsewhere in this report.
Materials
filed by the Company with the SEC may be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington,
D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The
SEC also maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information
regarding our company that we file electronically with the SEC.
Properties
In November 2013, the Company
purchased a building in Phoenix, Arizona to house its data center, which was transferred to Holdco prior to the execution of the
Merger Agreement.
In October,
2014, the Company entered into a month-to-month based sublease in San Francisco, California for 250 square feet of office space.
We believe our existing facilities
are suitable for Company operations.
Legal
Proceedings
On September
4, 2013, Cowen and Company, LLC filed a complaint against LookSmart with the Superior Court of California for the County of San
Francisco. According to the complaint, Cowen claims that LookSmart is required by an engagement letter dated August 14, 2009 to
pay Cowen a $1,000,000 "Sale Transaction Fee" as a result of the third-party tender offer for LookSmart Ltd. consummated
by PEEK Investments LLC on January 14, 2013. The parties agreed to a $450,000 settlement at a mediation held on June 10, 2014.
This amount was subsequently paid by the Company on July 11, 2014. The Complaint and Counter Claim was dismissed with prejudice
on August 27, 2014.
On October
3, 2013, WeBoost Media S.R.L., a Societa responsabilita ("WeBoost") filed a complaint against LookSmart with the Superior
Court of California for the County of San Francisco. The matter was subsequently removed and is currently pending before the United
States District Court, Northern District of California. WeBoost’s complaint asserts claims for breach of contract and extra-contractual
tort and punitive damages related to "click fraud". No specific monetary amounts are indicated in the complaint. LookSmart
believes the claims are meritless and continues to vigorously defend the matter. The Company is unable to presently determine
the risk of loss associated with this matter.
Ability
To Continue as a Going Concern
Our independent
registered public accounting firm has issued its report dated March 16, 2015 in connection with the audit of our financial statements
as of December 31, 2014 that included an explanatory paragraph describing the existence of conditions that raise substantial doubt
about our ability to continue as a going concern. Our financial statements as of December 31, 2014 have been prepared under
the assumption that we will continue as a going concern. If we are not able to continue as a going concern, it is likely that
holders of our common stock will lose all of their investment. Our financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Critical Accounting Policies
and Estimates
Our financial
condition and results of operations are based upon certain critical accounting policies, which include estimates, assumptions,
and judgments on the part of management. We base our estimates on various factors and information which may include, but are not
limited to, history and prior experience, experience of other enterprises in the same industry, new related events, current economic
conditions and information from third party professionals that is believed to be reasonable under the circumstance, the results
of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent
from other sources. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of
the date of the financial statements, as well as the reported amounts of revenue and expenses during the periods presented. Actual
results may differ from those estimates.
The following
discussion highlights those policies and the underlying estimates and assumptions, which we consider critical to an understanding
of the financial information in this report.
Use of Estimates and Assumptions
The Consolidated
Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).
This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue,
expenses, and contingent assets and liabilities during the reporting period. We base our estimates on various factors and information
which may include, but are not limited to, history and prior experience, experience of other enterprises in the same industry,
new related events, and current economic conditions and information from third party professionals that is believed to be reasonable
under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results could differ from those estimates.
Investments
We invest
our excess cash primarily in debt instruments of high-quality corporate and government issuers. All highly liquid instruments
with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater
than one year from the balance sheet date are considered long-term investments unless management intends to liquidate such securities
in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale
and carried at fair value.
Changes
in value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature.
Except for declines in fair value that are not considered temporary, net unrealized gains or losses on these investments are reported
as a component of accumulated other comprehensive loss in stockholders’ equity. We recognize realized gains and losses upon
sale of investments using the specific identification method.
Fair Value of Financial Instruments
Our estimates
of fair value for assets and liabilities is based on a framework that establishes a hierarchy of the inputs used in valuation
and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations
when available. The disclosure of fair value estimates is based on whether the significant inputs into the valuation are observable.
In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted
prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. The three
levels of the hierarchy are as follows:
|
Level 1: |
Unadjusted quoted market prices for identical assets or liabilities
in active markets that we have the ability to access. |
|
Level 2: |
Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar assets in inactive markets; or valuations based on models where the significant inputs
are observable (e.g., interest rates, yield curves, default rates, etc.) or can be corroborated by observable market data. |
|
Level 3: |
Valuations based on models where significant inputs are not
observable. The unobservable inputs reflect our assumptions about the assumptions that market participants would use. |
Revenue Recognition
Our online
search advertising revenue is composed of per-click fees that we charge customers and profit sharing arrangements we enter with
Intermediaries. The per-click fee charged for keyword-targeted listings is calculated based on the results of online bidding for
keywords or page content, up to a maximum cost per keyword or page content set by the customer. The Company has profit-sharing
agreements with several customers that call for the sharing of profits and losses. Profit sharing arrangements are governed by
contractual agreement. Revenue from these profit-sharing agreements is reported net of the customer’s share of profit.
Revenue
also includes revenue share from licensing of private-labeled versions of our AdCenter Platform.
Revenues
associated with online advertising products, including Advertiser Networks, are generally recognized once collectability is established,
delivery of services has occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution
network partners based on clicks on the advertiser’s ad that are displayed on the websites of these distribution network
partners. These payments are called TAC and are included in cost of revenue. The revenue derived from these arrangements that
involve traffic supplied by distribution network partners is reported gross of the payment to the distribution network partners.
This revenue is reported gross due to the fact that we are the primary obligor to the advertisers who are the customers of the
advertising service.
We also
enter into agreements to provide private-labeled versions of our products, including licenses to the AdCenter platform technology.
These license arrangements may include some or all of the following elements: revenue-sharing based on the publisher’s customer’s
monthly revenue generated through the AdCenter application; upfront fees; minimum monthly fees; and other license fees. We recognize
upfront fees over the term of the arrangement or the expected period of performance, other license fees over the term of the license,
and revenue-sharing portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of
the resulting receivable is reasonably assured.
We provide
a provision against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these
provisions are evaluated periodically based upon customer experience and historical trends.
Deferred
revenue is recorded when payments are received in advance of performance in underlying agreements. Customer deposits are recorded
when customers make prepayments for online advertising.
The Company
evaluates individual arrangements with customers to make a determination under Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 605-45 Revenue Recognition . We test and record revenue accordingly.
Allowance for Doubtful Accounts
We maintain
an allowance for doubtful accounts for estimated losses resulting from customers failing to make required payments. This valuation
allowance is reviewed and adjusted on a periodic basis. The review is based on factors including the application of historical
collection rates to current receivables and economic conditions. Additional allowances for doubtful accounts are considered and
recorded if there is deterioration in past due balances, if economic conditions are less favorable than we anticipated or for
customer-specific circumstances, such as bankruptcy.
Concentrations, Credit Risk
and Credit Risk Evaluation
Concentration of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents,
investments, and accounts receivable. As of December 31, 2014 and 2013, the Company placed its cash equivalents and investments
primarily through one financial institution, City National Bank (“CNB”), and mitigated the concentration of
credit risk by placing percentage limits on the maximum portion of the investment portfolio which may be invested in any one investment
instrument. The Company also invests in fully collateralized funds with maturities of less than two years. These amounts exceed
federally insured limits at December 31, 2014 and 2013. The Company has not experienced any credit losses on these cash equivalents
and investment accounts and does not believe it is exposed to any significant credit risk on these funds. The fair value of these
accounts is subject to fluctuation based on market prices.
Credit Risk, Customer and
Vendor Evaluation
Accounts
receivable are typically unsecured and are derived from sales to customers. We perform ongoing credit evaluations of our customers
and maintain allowances for estimated credit losses. We apply judgment as to our ability to collect outstanding receivables based
primarily on our evaluation of the customer’s financial condition and past collection history and record a specific allowance.
In addition, we record an allowance based on the length of time the receivables are past due. Historically, such losses have been
within our expectations.
The following
table reflects customers that accounted for more than 10% of net accounts receivable:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Company 1 | |
| 24 | % | |
| ** | |
Company 2 | |
| 13 | % | |
| ** | |
Company 3 | |
| 12 | % | |
| ** | |
Company 4 | |
| 10 | % | |
| ** | |
Company 5 | |
| ** | | |
| 22 | % |
Company 6 | |
| ** | | |
| 18 | % |
Company 7 | |
| ** | | |
| 16 | % |
** Less than 10%
Revenue and Cost Concentrations
The following
table reflects the concentration of revenue by geographic locations that accounted for more than 10% of net revenue:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
United States | |
| 91 | % | |
| 82 | % |
Europe, Middle East and Africa | |
| ** | | |
| 12 | % |
** Less than 10%
LookSmart
derives its revenue from two service offerings, or “products”: Advertiser Networks and Publisher Solutions. The percentage
distributions between the two service offerings are as follows:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Advertiser Networks | |
| 91 | % | |
| 86 | % |
Publisher Solutions | |
| 9 | % | |
| 14 | % |
The following
table reflects the percentage of revenue attributed to customers who accounted for more than 10% of net revenue, all of which
are Intermediaries:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Company 1 | |
| 12 | % | |
| 13 | % |
The Company
derives its revenue primarily from its relationships with significant distribution network partners. The following table reflects
the distribution partners that accounted for more than 10% of total TAC:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Distribution Partner 1 | |
| 20 | % | |
| 26 | % |
Distribution Partner 2 | |
| 15 | % | |
| ** | |
Distribution Partner 3 | |
| 11 | % | |
| 12 | % |
Distribution Partner 4 | |
| ** | | |
| 11 | % |
** Less than 10%
Property and Equipment
Property
and equipment are stated at cost, except when an impairment analysis requires use of fair value, and depreciated using the straight-line
method over the estimated useful lives of the assets as follows:
Computer equipment |
3 to 4 years |
Furniture and fixtures |
5 to 7 years |
Software |
2 to 3 years |
Building Improvements |
10 years |
Building |
39 years |
Leasehold improvements are amortized
on a straight-line basis over the shorter of their estimated useful lives or the lease term.
When assets
are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective
accounts, and any gain or loss on such sale or disposal is reflected in operating expenses. Maintenance and repairs are charged
to expense as incurred. Expenditures that substantially increase an asset’s useful life are capitalized.
In the fourth
quarter of 2013, the Company acquired an approximately 10,000 square foot data center facility in Phoenix, Arizona. This facility
has allowed the Company to consolidate its data needs in a company-owned data center, and should allow for the expansion of its
cloud-based offerings to its customers.
Internal Use Software Development
Costs
We capitalize
external direct costs of materials and services consumed in developing and obtaining internal-use computer software and the payroll
and payroll-related costs for employees who are directly associated with and who devote time to developing the internal-use computer
software. These costs are capitalized after certain milestones have been achieved and generally amortized over a three-year period
once the project is placed in service.
Management
exercises judgment in determining when costs related to a project may be capitalized, in assessing the ongoing value of the capitalized
costs, and in determining the amortization period for the capitalized costs, which is generally three years. The Company expects
to continue to invest in internally developed software and to capitalize such costs in the future, although no such costs were
capitalized in the year ended December 31, 2014.
Restructuring Charges
In August
2012, the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to
its existing commitment. This lease ended on December 31,, 2014, at which time the company no longer had any obligations
under the terms of this lease and all restructuring charges have been fully amortized.
Impairment of Long-Lived Assets
The Company
reviews long-lived assets held or used in operations, including property and equipment and internally developed software, for
impairment in accordance with ASC 360-10 “Impairment and Disposal of Long-Lived Assets”.
The Company
reviews assets for evidence of impairment annually at year-end and whenever events or changes in circumstances indicate the carrying
values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance
and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic,
industry or market conditions, changes in business operations and changes in competition.
Traffic
Acquisition Costs
The Company
enters into agreements of varying durations with its distribution network partners that display the Company’s listings ads
on their sites in return for a percentage of the revenue-per-click that the Company receives when the ads are clicked on those
partners’ sites.
The Company
also enters into agreements of varying durations with third party affiliates. These affiliate agreements provide for variable
payments based on a percentage of the Company’s revenue or based on a certain metric, such as number of searches or paid
clicks.
TAC expense is recorded in cost
of revenue.
Share-Based Compensation
We recognize
share-based compensation costs for all share-based payment transactions, including grants of stock options and employee stock
purchases related to the Employee Stock Purchase Plan, over the requisite service period based on their relative fair values.
We estimate the fair value of share-based payment awards on the grant date using the Black-Scholes method. The value of the portion
of the award that is ultimately expected to vest is recognized as expense in our Consolidated Statement of Operations over the
requisite service periods. Share-based compensation expense, related to stock option grants and employee stock purchases, recognized
were not significant for the years ended December 31, 2014 and December 31, 2013.
Forfeitures
are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture
rate is determined at the end of each fiscal quarter, based on historical rates.
We elected
to adopt the alternative transition method for calculating the tax effects of share-based compensation to establish the beginning
balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and the Consolidated Statement of Cash Flows of the tax
effects of employee share-based compensation awards.
Advertising Costs
Advertising
costs are charged to sales and marketing expenses as incurred and were $0.05 million and insignificant in the years ended December
31, 2014 and 2013, respectively.
Product Development Costs
Research of new product ideas
and enhancements to existing products are charged to expense as incurred.
Income Taxes
The Company
accounts for income taxes using the liability method. Under the liability method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. The Company records liabilities, where appropriate, for all uncertain income
tax positions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations
as income tax expense.
Comprehensive Loss
Other comprehensive
loss as of December 31, 2014 and December 31, 2013, consists of unrealized gains and losses on marketable securities categorized
as available-for-sale and foreign currency translation adjustments.
Net Loss per Common Share
Basic net
loss per share is calculated using the weighted average shares of common stock outstanding, excluding treasury stock. Diluted
net loss per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding,
excluding treasury stock, during the period, using the treasury stock method for stock options. As a result of the Company’s
net loss position at both December 31, 2014 and 2013, there is no dilution.
Segment Information
The Company
has one operating segment, online advertising. While the Company operates under one operating segment, management reviews revenue
under five lines of business: (i) Clickable, (ii) LookSmart AdCenter, (iii) Novatech.io, (iv) ShopWiki and (v) web searches.
As of December
31, 2014 and December 31, 2013, the Company’s accounts receivable and deferred revenue are primarily related to the online
advertising segment. All long-lived assets are located in the United States and Canada.
Adoption of New Accounting
Standards
On January
2, 2014 we adopted guidance issued by the Financial Accounting Standards Board (“FASB”), ASU 2013-04, “Liabilities
– Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation is Fixed
at the Reporting Date”, an amendment providing guidance for the recognition, measurement, and disclosure of obligations
resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting
date. Adoption of this new guidance had no impact on the Company’s consolidated financial position or results of operations.
Recent Accounting Pronouncements
In April
2014, the FASB issued Accounting Standards Update No. 2014-08 (“ASU 2014-08”) “Presentation of Financial
Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures
of Disposals of Components of an Entity." ASU 2014-08 raises the threshold for a disposal to qualify as a discontinued operation
and requires new disclosures of both discontinued operations and certain other disposals that do not meet the definition of a
discontinued operation. It is effective for annual periods beginning on or after December 15, 2014. Early adoption is permitted
but only for disposals that have not been reported in financial statements previously issued. We do not expect the impact of the
adoption of ASU 2014-08 to be material to our consolidated financial statements.
In May 2014,
the FASB issued Accounting Standards Update No. 2014-09 (“ASU 2014-09”) "Revenue from Contracts with
Customers." ASU 2014-09 supersedes the revenue recognition requirements in “Revenue Recognition (Topic 605)”,
and requires entities to recognize revenue when it transfers promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 is effective
for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early
adoption is not permitted. We are currently in the process of evaluating the impact of the adoption of ASU 2014-09 on our consolidated
financial statements.
For a further
description of recent accounting pronouncements, please see Note 1 to our Consolidated Financial Statements below.
Results of Operations
The following
table sets forth selected information concerning our results of operations as a percentage of consolidated net revenue for the
years ended December 31, 2014 and 2013 (in thousands):
| |
Year
Ended December 31, | |
| |
| | |
% of | | |
| | |
% of | | |
Dollar | | |
% | |
| |
2014 | | |
Revenue | | |
2013 | | |
Revenue | | |
Change | | |
Change | |
Revenue | |
$ | 4,702 | | |
| 100.0 | % | |
$ | 6,679 | | |
| 100.0 | % | |
$ | (1,977 | ) | |
| (30 | )% |
Cost of revenue | |
| 2,441 | | |
| 51.9 | % | |
| 4,474 | | |
| 67.0 | % | |
| (2,033 | ) | |
| (45 | )% |
Gross profit | |
| 2,261 | | |
| 48.1 | % | |
| 2,205 | | |
| 33.0 | % | |
| 56 | | |
| 3 | % |
Operating expenses: | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Sales and marketing | |
| 1,690 | | |
| 35.9 | % | |
| 1,082 | | |
| 16.2 | % | |
| 608 | | |
| 56 | % |
Product development and technical operations | |
| 4,561 | | |
| 97.0 | % | |
| 3,557 | | |
| 53.3 | % | |
| 1,004 | | |
| 28 | % |
General and administrative | |
| 2,561 | | |
| 54.5 | % | |
| 3,052 | | |
| 45.7 | % | |
| (491 | ) | |
| (16 | )% |
Restructuring charge | |
| 30 | | |
| 0.7 | % | |
| 40 | | |
| 0.6 | % | |
| (10 | ) | |
| (25 | )% |
Total operating expenses | |
| 8,842 | | |
| 188.0 | % | |
| 7,731 | | |
| 115.8 | % | |
| 1,111 | | |
| 14 | % |
Loss from operations | |
| (6,581 | ) | |
| (140.0 | )% | |
| (5,526 | ) | |
| (82.7 | )% | |
| (1,055 | ) | |
| 19 | % |
Non-operating income (expense), net | |
| 162 | | |
| 3.4 | % | |
| 177 | | |
| 2.7 | % | |
| (15 | ) | |
| (8 | )% |
Loss from continuing operations before income
taxes | |
| (6,419 | ) | |
| (136.5 | )% | |
| (5,349 | ) | |
| (80.1 | )% | |
| (1,070 | ) | |
| 20 | % |
Income tax expense | |
| - | | |
| - | | |
| (7 | ) | |
| (0.1 | )% | |
| 7 | | |
| (100 | )% |
Net loss | |
$ | (6,419 | ) | |
| (136.5 | )% | |
$ | (5,356 | ) | |
| (80.1 | )% | |
$ | (1,063 | ) | |
| 20 | % |
Revenue
Total revenue
and revenue from Advertiser Networks and Publisher Solutions for the years ended December 31, 2014 and 2013, were as follows
(in thousands):
| |
Year
Ended December 31, | |
| |
| | |
% of | | |
| | |
% of | | |
Dollar | | |
% | |
| |
2014 | | |
Revenue | | |
2013 | | |
Revenue | | |
Change | | |
Change | |
Advertiser Networks | |
$ | 4,279 | | |
| 91 | % | |
$ | 5,762 | | |
| 86 | % | |
$ | (1,483 | ) | |
| (26 | )% |
Publisher Solutions | |
| 423 | | |
| 9 | % | |
| 917 | | |
| 14 | % | |
| (494 | ) | |
| (54 | )% |
Total revenue | |
$ | 4,702 | | |
| 100 | % | |
$ | 6,679 | | |
| 100 | % | |
$ | (1,977 | ) | |
| (30 | )% |
Advertiser Networks
In 2014,
revenue from Intermediaries decreased significantly compared to 2013. We experienced a continuing decrease in Advertising Network
revenue in 2014 following a trend from 2013 and 2012. This trend continued into 2014 as several Intermediary customers exited
the market or ceased business with the Company.
In 2014, revenue from Direct
Advertisers decreased from 2013.
In 2014,
revenue from Self Service Advertisers decreased. We did not invest significant resources to expand this business however the Company
views Self Service Advertisers as a source for modest potential growth and plans to invest accordingly in the future.
Publisher Solutions
In 2014,
Publisher Solutions revenue declined as compared to the prior year. The Company did not invest significant resources to grow this
business in 2014.
Cost of Revenue and Gross
Profit
Cost of
revenue is primarily TAC (costs paid to our distribution network partners). Other costs include data center rent and power usage,
commissions paid to advertising agencies and credit card fees.
Cost of revenue for the years
ended December 31, 2014 and 2013 were as follows (in thousands):
| |
Year
Ended December 31, | |
| |
| | |
% of | | |
| | |
% of | | |
Dollar | | |
% | |
| |
2014 | | |
Revenue | | |
2013 | | |
Revenue | | |
Change | | |
Change | |
Traffic acquisition costs | |
$ | 1,819 | | |
| 39 | % | |
$ | 2,759 | | |
| 41 | % | |
$ | (940 | ) | |
| (34 | )% |
Other costs | |
| 622 | | |
| 13 | % | |
| 1,715 | | |
| 26 | % | |
| (1,093 | ) | |
| (64 | )% |
Total cost of revenue | |
$ | 2,441 | | |
| 52 | % | |
$ | 4,474 | | |
| 67 | % | |
$ | (2,033 | ) | |
| (45 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Traffic acquisition costs as percentage of
Advertiser Network revenue | |
| | | |
| 43 | % | |
| | | |
| 48 | % | |
| | | |
| | |
TAC as a
percent of revenue decreased in 2014, as compared to 2013. Our Intermediary category of revenue generally has lower margins than
Direct and Self-Service and the change in revenue mix from 2014 to 2013 drove the margin decline.
Certain
other costs, such as data center rent and power usage, are generally fixed costs. However in 2013, there were some other cost
increases associated with planned data center and related transitions in order to effect the move from Raging Wire to our owned
data center in Phoenix, Arizona.
Total cost
of revenue decreased in 2014 as result of decreases of TAC, partially offset by increases in other costs in the current year.
Traffic
acquisition costs as a percentage of Advertiser Network revenue decreased to 43% in 2014, as compared to 48% in 2013, as a result
of overall revenue mix changes from 2014 to 2013.
Operating Expenses
Operating costs for the years
ended December 31, 2014 and 2013 were as follows (in thousands):
| |
Year
Ended December 31, | |
| |
| | |
% of | | |
| | |
% of | | |
Dollar | | |
% | |
| |
2014 | | |
Revenue | | |
2013 | | |
Revenue | | |
Change | | |
Change | |
Sales and marketing | |
$ | 1,690 | | |
| 36 | % | |
$ | 1,082 | | |
| 16 | % | |
$ | 608 | | |
| 56 | % |
Product development and technical operations | |
| 4,561 | | |
| 97 | % | |
| 3,557 | | |
| 53 | % | |
| 1,004 | | |
| 28 | % |
General and administrative | |
| 2,561 | | |
| 54 | % | |
| 3,052 | | |
| 46 | % | |
| (491 | ) | |
| (16 | )% |
Restructuring charge | |
| 30 | | |
| 1 | % | |
| 40 | | |
| 1 | % | |
| (10 | ) | |
| (25 | )% |
Total operating expenses | |
$ | 8,842 | | |
| 188 | % | |
$ | 7,731 | | |
| 116 | % | |
$ | 1,111 | | |
| 14 | % |
Sales and Marketing
Sales and
marketing expenses include salaries, commissions, share-based compensation and other costs of employment for our sales force,
sales administration and customer service staff and marketing personnel, overhead, facilities and allocation of depreciation.
Sales and marketing expenses also include the costs of advertising, trade shows, public relations activities and various other
activities supporting our customer acquisition effort.
Product Development and Technical
Operations
Product
development and technical operations expense includes all costs related to the continued operations, development and enhancement
of our core technology product, the AdCenter platform. The AdCenter is used to operate both our own Advertiser Network and other
publishers’ client networks, and is licensed to publishers to operate their own network. These costs include salaries and
associated costs of employment, including share-based compensation, overhead, and facilities. Software licensing and computer
equipment depreciation related to supporting product development and technical operations functions are included in product development
and technical operations expense.
Beginning in 2013, the company
had made a concentrated effort to rebuild product and technical human resources by increasing the Company’s product and
technical resources to a level that the Company feels appropriate for its current and expected businesses.
General and Administrative
General
and administrative expenses include personnel cost, legal, insurance, tax and accounting, consulting, professional services fees
and the provision for, and reductions of, the allowance for doubtful trade receivables.
General
and Administrative costs decreased $0.5 million in the year ended December 31, 2014, as compared to 2013, which is primarily attributed
to continuing cost containment efforts in 2014.
Share Based Compensation
Share-based compensation expense
for the years ended December 31, 2014 and 2013 was allocated as follows (in thousands):
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Sales and marketing | |
$ | 1 | | |
$ | 3 | |
Product development and technical operations | |
| 1 | | |
| 6 | |
General and administrative | |
| 3 | | |
| 33 | |
Total share-based
compensation expense | |
$ | 5 | | |
$ | 42 | |
Asset Impairment Charge
The Company
reviews assets for evidence of impairment annually at year end and whenever events or changes in circumstances indicate the carrying
values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance
and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic,
industry or market conditions, changes in business operations and changes in competition.
The fair
value of the long-lived assets was derived based on Level 3 inputs, which are based on significant inputs that are not observable.
The fair value of the capitalized software long-lived assets was determined using an income approach, based on expected future
cash flows and market considerations. The fair value of the computer equipment, furniture and fixtures, software and leasehold
improvements long-lived assets was determined using a market approach, based on comparable fair values of similar assets.
Restructuring Charges
In August
2012, the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to
its existing commitment. Restructuring costs associated with the sub-lease of the San Francisco office, totaling $0.03 and $0.02
million at December 31, 2014 and 2013, respectively, have been fully amortized as of December 31, 2014.
Other items
The table below sets forth other
continuing operations data for the years ended December 31, 2014 and 2013 (in thousands):
| |
Year
Ended December 31, | |
| |
| | |
% of | | |
| | |
% of | | |
Dollar | | |
% | |
| |
2014 | | |
Revenue | | |
2013 | | |
Revenue | | |
Change | | |
Change | |
Non-operating income (expense), net | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Interest income | |
$ | 81 | | |
| 1 | % | |
$ | 198 | | |
| 3 | % | |
$ | (117 | ) | |
| (59 | )% |
Interest expense | |
| (14 | ) | |
| - | | |
| (9 | ) | |
| - | | |
| (5 | ) | |
| 56 | % |
Other income (expense),
net | |
| 95 | | |
| 2 | % | |
| (12 | ) | |
| - | | |
| 107 | | |
| (892 | )% |
Total non-operating income (expense), net | |
$ | 162 | | |
| 3 | % | |
$ | 177 | | |
| 3 | % | |
$ | (15 | ) | |
| (8 | )% |
| |
| | | |
| | | |
| | | |
| | | |
| | | |
| | |
Income tax expense | |
$ | - | | |
| - | | |
$ | (7 | ) | |
| - | | |
$ | 7 | | |
| (100 | )% |
Interest Income and Expense
Interest
income, decreased 59% in the year ended December 31, 2014 from the year ended December 31, 2013. This decrease was primarily
due to maturation of the investment in collateralized debt obligations in the third quarter of 2014.
Interest
expense, which primarily consists of interest paid on capital leases, increased $5,000 in 2014, as compared to 2013, primarily
due to a new capital lease obligation in the first quarter of 2014.
Income
Tax Expense
Due to our
net operating losses, our income tax expense in the U.S. consists of minimum state taxes.
Liquidity and Capital Resources
Cash flows were as follows(in
thousands):
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | | |
Change | |
Net cash used in operating activities | |
$ | (4,059 | ) | |
$ | (5,575 | ) | |
$ | 1,516 | |
Net cash provided by investing activities | |
| 2,100 | | |
| 2,255 | | |
| (155 | ) |
Net cash used in financing activities | |
| (348 | ) | |
| (135 | ) | |
| (213 | ) |
Effect of exchange rate changes on cash and
cash equivalents | |
| (177 | ) | |
| (108 | ) | |
| (69 | ) |
Decrease in cash and cash equivalents | |
$ | (2,484 | ) | |
$ | (3,563 | ) | |
$ | 1,079 | |
Cash, cash
equivalents and short-term marketable investment balances were as follows as of December 31, 2014 and 2013(in thousands):
| |
December
31, | | |
| |
| |
2014 | | |
2013 | | |
Change | |
Cash and cash equivalents | |
$ | 305 | | |
$ | 2,789 | | |
$ | (2,484 | ) |
Short-term investments | |
| 129 | | |
| 3,102 | | |
| (2,973 | ) |
Long-term investments | |
| - | | |
| 154 | | |
| (154 | ) |
Total | |
$ | 434 | | |
$ | 6,045 | | |
$ | (5,611 | ) |
% of total assets | |
| 9 | % | |
| 52 | % | |
| | |
Total assets | |
$ | 4,756 | | |
$ | 11,646 | | |
| | |
At December 31,
2014, we had $0.4 million in cash, cash equivalents and short-term marketable investments. Cash equivalents, short-term marketable
investments are comprised primarily of highly liquid debt instruments of the U.S. government, commercial paper, time deposits,
money market mutual funds, U.S. corporate securities and collateralized debt obligations. We actively monitor the depository institutions
that hold our cash and cash equivalents and the institutions of whose debt instruments we hold. Our investment policy, which is
reviewed annually by our Board of Directors, primarily emphasizes safety of principal while secondarily maximizing yield on those
funds. We can provide no assurances that access to our invested cash and cash equivalents will not be impacted by adverse conditions
in the financial markets. These balances may exceed the Federal Deposit Insurance Corporation insurance limits. While we
monitor the cash balances in our operating accounts and adjust the cash balances as appropriate, these cash balances could be
impacted if the underlying financial institutions fail or could be subject to other adverse conditions in the financial markets.
Note 2 to our Consolidated Financial Statements below, further describes the composition of our cash, cash equivalents and short-
and long-term investments.
Cash, cash equivalents, short-
and long-term investments decreased $5.6 million in 2014 primarily due to operating losses, investment in other companies and
the purchase of property and equipment.
Our primary
source of liquidity is our cash, cash equivalents, short-term investments, and cash flow from operations. We believe that our
existing cash, cash equivalents, short-term investments and cash from operations will be sufficient to satisfy our current anticipated
cash requirements through at least the next 12 months, if not longer. Our liquidity could be negatively affected by a decrease
in demand for our services beyond the current quarter, and changes in customer buying behavior. Also, if the banking system or
the financial markets continue to remain volatile, our investment portfolio may be impacted and the values and liquidity of our
investments could be adversely affected. In addition, we may seek to raise additional capital through public or private debt or
equity financings in order to fund our operations and capital expenditures, take advantage of favorable business opportunities,
develop and upgrade our technology infrastructure, develop new product and service offerings, take advantage of favorable conditions
in capital markets or respond to competitive pressures. In addition, unanticipated developments in the short term requiring cash
payments, including the acquisition of businesses with negative cash flows, may necessitate additional financing. We cannot be
assured that additional financing will be available on terms favorable to us, or at all. If we issue additional equity or convertible
debt securities, our existing stockholders may experience substantial dilution.
Our consolidated
financial statements for the year ended December 31, 2014 were prepared on the basis of a going concern which contemplates that
the Company will be able to realize assets and discharge liabilities in the normal course of business. Accordingly, they do not
give effect to adjustments that would be necessary should the Company be required to liquidate its assets. The ability of the
Company to continue as a going concern is dependent upon the availability of future funding, continued growth of its business
and customer base, and the Company’s ability to profitably meet its after-sale service commitments with its existing customers.
The financial statements do not include any adjustments that might result from the outcome of these uncertainties.
Operating Activities
Cash used
in operating activities in the year ended December 31, 2014, consisted of our net loss adjusted for certain non-cash items, including
depreciation, amortization, provision for doubtful accounts, share-based compensation expense, and deferred lease incentive, as
well as the effect of changes in working capital and other activities. Cash used in operations in the year ended December 31,
2014 was $4.1 million and consisted of a net loss of $6.4 million, adjustments for non-cash items of $1.5 million, and cash used
in working capital and other activities of $0.8 million. Adjustments for non-cash items primarily consisted of $1.3 million of
depreciation and amortization expense on property and equipment, $0.08 million in deferred lease incentive, $0.03 million of restructuring
charge expense and $0.06 million of bad debt expense. In addition, changes in working capital activities primarily consisted of
$0.3 million decrease in accounts receivable offset by $0.1 million increase in accounts payable and accrued liabilities. The
decrease in accounts receivable is primarily attributed to reduced revenue while the increase in accounts payable and accrued
liabilities is primarily attributed to decrease in cash flow.
Cash used
in operating activities in the year ended December 31, 2013, consisted of our net loss adjusted for certain non-cash items, including
depreciation, amortization, provision for doubtful accounts, share-based compensation expense, and deferred lease incentive, as
well as the effect of changes in working capital and other activities. Cash used in operations in the year ended December 31,
2013 was $5.2 million and consisted of a net loss of $5.2 million, adjustments for non-cash items of $0.7 million, and cash used
in working capital and other activities of $0.6 million. Adjustments for non-cash items primarily consisted of $0.5 million of
depreciation and amortization expense on property and equipment, $0.08 million in deferred lease incentive, $0.04 million of restructuring
charge expense and $0.04 million of share-based compensation expense. In addition, changes in working capital activities primarily
consisted of $1.5 million decrease in accounts receivable offset by $1.6 million decrease in accounts payable and accrued liabilities.
The decrease in accounts receivable is primarily attributed to reduced revenue while the decrease in accounts payable and accrued
liabilities is primarily attributed to a reduction in expenditures.
Investing Activities
Cash provided
by investing activities during the year ended December 31, 2014 of $2.1 million was primarily attributed to $3.1 million net sale
of investments. Capital expenditures for the year ended December 31, 2014 consisted of $1.0 million for property, software and
equipment acquired during 2014.
Cash provided
by investing activities during the year ended December 31, 2013 of $1.9 million was primarily attributed to $6.2 million net sale
of investments. Capital expenditures for the year ended December 31, 2013 consisted of $4.2 million for property, software and
equipment acquired during 2013.
Financing Activities
Cash used
in financing activities in the year ended December 31, 2014 of $0.3 million is primarily attributed to $0.17 million in scheduled
capital lease payments and $0.17 million in repurchases of treasury stock.
Cash used
in financing activities in the year ended December 31, 2013 of $0.1 million is primarily attributed to $0.1 million in scheduled
capital lease payments.
Credit Arrangements
We have
an outstanding standby letter of credit issued by CNB of approximately $0.1 million at December 31, 2014, related to security
of our corporate office lease, which is secured by a restricted money market account held at CNB.
Off-Balance Sheet Arrangements
We do not
have any off-balance sheet arrangements as defined in Regulation S-K Item 303(a)(4), investments in special-purpose entities
or undisclosed borrowings or debt. Additionally, we are not a party to any derivative contracts or synthetic leases.
Contractual Obligations and
Commercial Commitments
We incur
various contractual obligations and commercial commitments in our normal course of business. The following table summarizes our
significant contractual obligations, net of related subleases, and commercial commitments as of December 31, 2014, and the
effect such obligations are expected to have on our liquidity and cash flows in future periods (in thousands):
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1
year |
|
|
1-3
years |
|
|
3-5
years |
|
|
Thereafter |
|
Operating lease obligations |
|
$ |
81 |
|
|
$ |
81 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Capital lease obligations (principal and interest) |
|
|
87 |
|
|
|
87 |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
168 |
|
|
$ |
168 |
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
Operating Leases
In August
2009, the Company entered into an agreement to sublease office space for its headquarters in San Francisco, California, under
an operating lease that commenced in November 2009 and expires on December 30, 2014. In July 2012, the Company entered into an
agreement to sublease this subleased office space under terms generally equivalent to its existing commitment for a term that
commenced in August 2012 and expired in December 2014.
The Company
entered into a 30-month operating lease agreement for various network operating equipment beginning in the fourth quarter of 2014.
Capital Leases
The Company has one capital lease
totaling approximately $0.1 million at December 31, 2014.
Purchase Obligations
The Company
had no outstanding purchase obligations as of December 31, 2014. The Company had outstanding purchase obligations of an insignificant
amount relating to an open purchase order for which the Company had not received the related services or goods.
Indemnification
We have
agreements whereby we indemnify our officers and directors for certain events or occurrences while the officer or director is
or was serving, at our request, in such capacity, to the maximum extent permitted under the laws of the State of Delaware. The
maximum potential amount of future payments we could be required to make under these indemnification agreements is unlimited.
However, we maintain directors and officers insurance coverage that may contribute, up to certain limits, a portion of any future
amounts paid for indemnification of directors and officers. We believe the estimated fair value of these indemnification agreements
in excess of applicable insurance coverage is minimal. Historically, we have not incurred any losses or recorded any liabilities
related to performance under these types of indemnities.
Additionally,
in the normal course of business, we have made certain guarantees, indemnities and commitments under which we may be required
to make payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to
our customers and distribution network partners in connection with the sales of our products, and indemnities to various lessors
in connection with facility leases for certain claims arising from such facility or lease. It is not possible to determine the
maximum potential loss under these guarantees, indemnities and commitment due to our limited history of prior indemnification
claims and the unique facts and circumstances involved in each particular provision.
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following
table provides information as of _______, 2015 as to the common stock of the Company beneficially owned by all directors and
nominees, directors and executive officers as a group as of December 31, 2014, and each person known to the Company to beneficially
own more than 5% of the common stock:
| |
Shares | | |
| |
| |
Beneficially | | |
Percent of | |
Name and
Address of Beneficial Owner (1) | |
Owned | | |
Class
* | |
Michael Onghai | |
| 3,123,047 | | |
| 54.1 | %(2) |
Thorsten Weigl | |
| 194,769 | | |
| 3.4 | %(3) |
Christian Chan | |
| - | | |
| 0.0 | % |
Paul Pelosi, Jr. | |
| - | | |
| 0.0 | % |
Directors and executive officers as a group
(5 persons): | |
| 3,317,816 | | |
| 57.5 | %(4) |
Platinum Partners Value Arbitrage Fund L.P. | |
| 576,000 | | |
| 9.98 | %(5) |
*
|
(1) |
To the Company's knowledge, except as otherwise provided herein,
each person named herein as a beneficial owner of securities has sole voting and investment power as to such securities and
such person's address is c/o LookSmart, Ltd., 50 California Street, 16th Floor, San Francisco, California 94111. |
|
(2) |
Represents securities owned or held by or for the account of
other persons as portfolio securities, which may be deemed to be beneficially owned directly by Snowy August Management LLC,
as an investment manager to such persons, and indirectly by Mr. Onghai, as the President of Snowy August Management. |
|
(3) |
Represents securities which may be deemed to be beneficially
owned directly by Solom GmbH and indirectly by Mr. Weigl, as the Chief Executive Officer of Solom GmbH. |
|
(4) |
Includes stock options vested or to be vested within the next
60 days issued to Lori House, which may be deemed to be beneficially owned by her. |
|
(5) |
According to the Schedule 13D/A filed January 17, 2013 (1,728,000
reported, adjusted by LookSmart for the 3:1 reverse split on November 6, 2013) by such persons with the Commission, such securities
are beneficially owned (and voting and investment power as to such securities is shared) by Platinum Partners Value Arbitrage
Fund L.P., Platinum Management (NY) LLC, Uri Landesman, and Mark Nordlicht and the address of such persons is 152 West 57th
Street, 54th Floor, New York, New York 10019. |
The following
table provides information as of the end of the most recently completed fiscal year with respect to compensation plans under which
equity securities of the Company are authorized for issuance:
Equity
Compensation Plan Information
| |
Number of Shares of | | |
Weighted- | | |
Number of Shares | |
| |
Common Stock to be | | |
Average Exercise | | |
Remaining Available | |
| |
Issued upon Exercise | | |
Price of | | |
for Future Issuance | |
| |
of Outstanding | | |
Outstanding | | |
under Equity | |
| |
Options | | |
Options | | |
Compensation Plans | |
Equity compensation plans approved by security holders | |
| 4,634 | | |
$ | 5.27 | | |
| 1,228,699 | |
Equity compensation plans not approved by
security holders | |
| - | | |
| - | | |
| - | |
Total | |
| 4,634 | | |
$ | 4.16 | | |
| 1,228,699 | |
MARKET
PRICES AND DIVIDEND DATA
LookSmart’s
common stock is listed on the Nasdaq Capital Market under the symbol “LOOK.” As of ______, 2015, there were
_________ shares of our common stock outstanding, held by approximately ________ stockholders of record.
The following table sets forth,
for the indicated periods, the high and low sales prices of LookSmart’s common stock for the period’s shown as reported
by the Nasdaq Capital Market. Looksmart declared no dividends in the periods shown:
|
|
Common Stock Prices
(1) |
|
|
|
High |
|
|
Low |
|
FY
2015 — Quarter Ended |
|
|
|
|
|
|
|
|
March 31 |
|
$ |
.99 |
|
|
$ |
.55 |
|
FY 2014 —
Quarter Ended |
|
|
|
|
|
|
|
|
December 31 |
|
$ |
2.68 |
|
|
$ |
1.94 |
|
September 30 |
|
|
2.30 |
|
|
|
1.22 |
|
June 30 |
|
|
2.88 |
|
|
|
1.50 |
|
March 31 |
|
|
2.01 |
|
|
|
0.66 |
|
FY 2013 —
Quarter Ended |
|
|
|
|
|
|
|
|
December 31 |
|
$ |
3.06 |
|
|
$ |
2.40 |
|
September 30 |
|
|
2.70 |
|
|
|
1.53 |
|
June 30 |
|
|
2.70 |
|
|
|
1.77 |
|
March 31 |
|
|
2.76 |
|
|
|
1.93 |
|
| (1) | Prices have been adjusted for
3:1 reverse split on November 7, 2013. |
The closing price of our
common stock on the Nasdaq Capital Market on April 22, 2015, the last completed trading day prior to the execution of the
Merger Agreement, was $1.75 per share. On ________, 2015, the latest practicable trading day before the printing of this
proxy statement, the closing price of our common stock on the Nasdaq Capital Market was $_____per share. You are encouraged
to obtain current market quotations for the common stock.
Following
the Merger, there will be no further market for our common stock and our stock will be delisted from the Nasdaq Capital Market
and deregistered under the Exchange Act. As a result, following the merger we will no longer file periodic reports with the SEC
on account of LookSmart’s common stock.
Under the terms of the Merger
Agreement, without Pyxis’ consent, we are prohibited from declaring or paying quarterly dividends to our common stockholders
prior to the closing of the Merger or the earlier termination of the Merger Agreement.
MANAGEMENT
OF PYXIS FOLLOWING THE MERGER
Directors and Executive Officers
The
directors will be divided into three classes and serve the following terms:
Class |
|
Term |
|
Class I |
|
Class I directors serve for a term of three years, and are elected
by the stockholders at the beginning of each term. The next full 3-year term for Class I directors extends to the Annual
Meeting of stockholders in 2018. |
|
Class II |
|
Class II directors serve for a term of one year, and are elected
by the stockholders at the beginning of each term. The next term for Class II directors extends to the 2016 annual meeting. |
|
Class III |
|
Class III directors serve for
a term of two years, and are elected by the stockholders at the beginning of each term. The next term for Class III
directors extends to the 2017 annual meeting. |
|
The following
table sets forth information regarding Pyxis’ executive officers and directors who will be in office upon completion of
Merger. The business address of each of the directors and officers is c/o Pyxis Tankers Inc., K. Karamanli 59, Maroussi 15125,
Athens, Greece.
Name |
|
Age |
|
Position |
Valentios (“Eddie”)
Valentis |
|
48 |
|
Chairman, Chief Executive Officer, Chief Financial Officer
and Class I Director |
Antonios C. Backos |
|
45 |
|
Senior Vice President for Corporate Development, General Counsel
and Secretary |
Konstantinos Lytras |
|
50 |
|
Chief Operations Officer |
Robin P. Das |
|
42 |
|
Class III Director |
Robert B. Ladd |
|
56 |
|
Class II Director |
Basil
G. Mavroleon |
|
67 |
|
Class III Director |
Aristides J. Pittas |
|
55 |
|
Class II Director |
Valentios (“Eddie”)
Valentis, a Class I director, has over 25 years of shipping industry experience, including owning, operating and managing
tankers. He has served as Chief Executive Officer and Chairman of Pyxis’ board of directors since its inception. In 2007,
Mr. Valentis founded and is the president of Maritime. In 2001, Mr. Valentis was appointed Managing Director of KONKAR SHIPPING
AGENCIES S.A., a drybulk operator based in Greece, which is a position he continues to hold. From 1998 to 2001, Mr. Valentis was
the Commercial Manager for Loucas G. Matsas Salvage & Towage. From 1996 through 1998, Mr. Valentis worked as a dry cargo chartering
broker for N. Cotzias Shipping. From 1989 to 1995, Mr. Valentis was involved in the operation of his family’s drybulk vessels.
Since 2013, Mr. Valentis has also served as a member of the Greek Committee of NKK Classification Society. Mr. Valentis has an
MBA from Southern New Hampshire University and a B.Sc. from Landsdowne College, London. Mr. Valentis also holds a Captain’s
diploma from the Aspropyrgos Naval Academy in Greece.
Antonios
C. Backos, has served as Senior Vice President for Corporate Development, General Counsel and Secretary of Pyxis since its
inception. Since October 2012, Mr. Backos has also been the Executive Director of AB Management LLC, a private consulting firm
providing transactional advisory services to international ultra-high net worth families and their affiliates primarily in the
shipping and natural resources sectors. He has been serving as a consultant to Pyxis’s affiliates since June 2013. Mr. Backos
was a partner focusing on capital markets, private equity, mergers & acquisitions and other corporate cross-border transactions
at the international law firms of Watson, Farley & Williams LLP from 2008 to 2012, Orrick Herrington & Sutcliffe LLP from
2006 to 2008 and Healy & Baillie LLP from 2005 to 2006. Mr. Backos commenced his corporate legal career in 1997 and worked
until 2005 at the New York and London offices of international law firm Weil, Gotshal & Manges LLP. Mr. Backos has a B.S.
(Wharton School of Business) and a B.A. from the University of Pennsylvania and graduate degrees from the London School of Economics
(M.Sc.) and the University of Michigan Law School (J.D.). Mr. Backos is a member of the New York Bar, the Connecticut Maritime
Association and the Maritime Law Association of the United States.
Konstantinos
Lytras, has served as Chief Operations Officer of Pyxis since its inception. Mr. Lytras has also served as Maritime’s
financial director since September 2008. Prior to joining Maritime, from 2007 through 2008, Mr. Lytras served as Managing Director
and Co-Founder of Navbulk Shipping S.A., a start-up shipping company focused on dry bulk vessels. From 2002 through 2007, Mr.
Lytras worked as Financial Director of Neptune Lines Shipping and Managing Enterprises S.A. Mr. Lytras served as Financial Controller
of Dioryx Maritime Corp. and Liquimar Tankers Management Inc. from 1996 through 2002. Mr Lytras worked as a Financial Assistant
from 1992 to 1994 at Inchcape Shipping Services. Mr. Lytras earned a B.A. in Business Administration from Technological Institute
of Piraeus and a B.S. in Economics and Politics from the Economic University of Athens.
Robin
P. Das, a Class III director, has worked in shipping finance and investment banking since 1995. He is the
founder and has been a director of Auld Partners Ltd, a boutique shipping and finance focused advisory firm since
2013. From 2011 to 2012, Mr. Das was Managing Director (partner) of Navigos Capital Management, an asset
management firm established to focus on the shipping sector. From 2005 until October 2011, Mr. Das was Global
Head of Shipping at HSH Nordbank, then the largest lender globally to the shipping industry. Before joining
HSH in 2005, he was Head of Shipping at WestLB and prior to that time, Mr. Das was joint Head of European Shipping
at J.P. Morgan. Mr. Das holds a BSc (Honours) degree from the University of Strathclyde.
Robert
B. Ladd, a Class II director, was appointed President and CEO of MGT Capital Investments, Inc. (NYSE: MGT) in
January 2012. From 2006 to 2012, Mr. Ladd served on the board of directors of Delcath Systems, Inc. (NASDAQ: DCTH) and from 2007
to 2009, he served on the board of directors of InFocus Systems, Inc. (NASDAQ: INFS). Mr. Ladd is also the managing member of
Laddcap Value Advisors, LLC, which serves as the investment manager for various private partnerships, including Laddcap Value
Partners LP. From 2002 to 2003, Mr. Ladd was a Managing Director at Neuberger Berman, a large international money management firm
catering to individuals and institutions. From 1992 through November 2002, Mr. Ladd was a portfolio manager for various high net
worth clients of Neuberger Berman. Prior to this experience, Mr. Ladd was a securities analyst at Neuberger from 1988 through
1992. Mr. Ladd has earned his designation as a Chartered Financial Analyst in 1986. Mr. Ladd holds a B.S. from the University
of Pennsylvania and an MBA from Northwestern University.
Basil
G. Mavroleon, a Class III director, has been in the shipping industry for over 40 years. In 1970, Mr. Mavroleon joined Charles
R. Weber company, Inc., one of the oldest and largest tanker brokerages and marine consultants in the United States. Mr. Mavroleon
was Managing Director of Charles R. Weber Company, Inc. for 25 years and Manager of the Projects Group for 5 years. Mr. Mavroleon
now serves as Managing Director of WeberSeas (Hellas) S. A., a comprehensive sale and purchase, newbuilding. marine projects and
ship finance brokerage in Athens, Greece. Mr. Mavroleon served as a Director of Genco Shipping and Trading Limited from 1997 until
2014 and is a Director of Baltic Trading Limited, (NYSE: BALT). Since its inception in 2003 through its liquidation in 2005, Mr.
Mavroleon served as Chairman of Azimuth Fund Management (Jersey) Limited, a hedge fund that dealt with tanker freight forward
agreements and derivatives. Mr. Mavroleon is a member of the Baltic Exchange, is on the board of the Associate Membership Committee
of INTERTANKO, a member of the Association of Ship Brokers and Agents, a member of the Hellenic Shipbrokers Association, is on
the Advisory Board of NAMMA(North American Maritime Ministry Association), is Director Emeritus of NAMEPA (North American Marine
Environmental Protection Association), and is the Chairman of World scale Association (NYC) INC. Mr. Mavroleon is a member of
the Hellenic Chamber of Commerce, the Connecticut Maritime Association (CMA), NYMAR (New York Maritime Inc.), an Honorary Director
of the Maritime Foundation Knowledge Center and an Associate Member of the Greek Shipping Hall of Fame Academy and a Trustee of
The Maritime Aquarium at Norwalk. He was educated at Windham College, Putney Vermont.
Aristides
J. Pittas, a Class II Director, has more than 30 years of shipping industry experience. Since May 2005, he has been a member
of board of directors and the chairman and chief executive officer of Euroseas Ltd. (NASDAQ: ESEA), an independent shipping company
that operates in the drybulk and container shipping industry. Since 1997, Mr. Pittas has also been the President of Eurochart,
Euroseas’ affiliate, which is a shipbroking company specializing in chartering, selling and purchasing ships. Since January
1995, Mr. Pittas has been the President and Managing Director of Eurobulk, Euroseas’ affiliated ship management company.
Eurobulk is a ship management company that provides ocean transportation services. Mr. Pittas has a B.Sc. in Marine Engineering
from University of Newcastle Upon Tyne and a M.Sc. in both Ocean Systems Management and Naval Architecture and Marine Engineering
from the Massachusetts Institute of Technology.
Board
of Directors
Pyxis’
board of directors and executive officers will oversee and supervise its operations. Upon the consummation of the Merger,
its board of directors will consist of the directors named above. In keeping with the corporate governance rules of the
NASDAQ, from which Pyxis has derived its definition for determining whether a director is independent, four directors
(namely Robert Ladd, Aristides Pittas, Robin Das and Basil Mavroleon) will be independent directors. Under the corporate
governance rules of the NASDAQ, a director will not be considered independent unless the board affirmatively determines that
the director has no material relationship with us. In making this determination, the board will broadly consider all facts
and circumstances the board deems relevant from the standpoint of the director and from that of persons or organizations with
which the director has an affiliation. Material relationships can include commercial, industrial, banking, consulting, legal,
accounting, charitable and familial relationships among others. In addition, a director would not be independent
if:
| · | the
director who is, or at any time during the past three years was, employed by Pyxis; |
| · | the
director who accepted or who has a family member who accepted any compensation from Pyxis
in excess of $120,000 during any period of twelve consecutive months within the three
years preceding the determination of independence, other than the following: |
(i) compensation
for board or board committee service;
(ii) compensation
paid to a family member who is an employee (other than an executive officer) of Pyxis; or
(iii) benefits
under a tax-qualified retirement plan, or non-discretionary compensation.
| · | the
director who is a family member of an individual who is, or at any time during the past
three years was, employed by Pyxis as an executive officer; |
| · | the
director who is, or has a family member who is, a partner in, or a controlling shareholder
or an executive officer of, any organization to which Pyxis made, or from which Pyxis
received, payments for property or services in the current or any of the past three fiscal
years that exceed 5% of the recipient's consolidated gross revenues for that year, or
$200,000, whichever is more, other than the following: |
(i) payments
arising solely from investments in the Pyxis’ securities; or
(ii) payments
under non-discretionary charitable contribution matching programs.
| · | the
director who is, or has a family member who is, employed as an executive officer of another
entity where at any time during the past three years any of the executive officers of
Pyxis serve on the compensation committee of such other entity; or |
| · | the
director who is, or has a family member who is, a current partner of Pyxis’ outside
auditor, or was a partner or employee of Pyxis’ outside auditor who worked on Pyxis’
audit at any time during any of the past three years. |
Committees
of the Board of Directors
While a
number of the NASDAQ’s corporate governance standards do not apply to Pyxis as a foreign private issuer, it intends to comply
with a number of those rules. For example, while not required under Marshall Islands law to do so, Pyxis intends to have upon
consummation of the Merger, a board of directors that will be comprised of a majority of independent directors. In addition, it
will have an audit committee comprised entirely of independent directors, although Pyxis’ nominating and corporate governance
committee will not be comprised entirely of independent directors. In addition, its board of directors may, from time to time,
designate one or more additional committees, which shall have the duties and powers granted to it by its board of directors. In
lieu of a compensation committee comprised of independent directors, Pyxis’ board of directors will be responsible for monitoring
the fee paid for the administrative services provided by Maritime and for overseeing the services of Pyxis’ executive officers.
Under Marshall Islands law, compensation of the executive officers is not required to be determined by an independent committee.
Audit
Committee
Upon consummation
of the Merger, Pyxis’ audit committee will consist of three independent, non-executive directors: Aristides Pittas, Robin
Das and Basil Mavroleon. Pyxis believes that Robin Das qualifies as an audit committee “financial expert,” as such
term is defined in Regulation S-K promulgated by the SEC. The audit committee will be responsible for, among other things:
| · | recommending
the hiring or termination of independent auditors and approving any non-audit work performed
by such auditor; |
| · | approving
the overall scope of the audit; |
| · | assisting
the board in monitoring the integrity of Pyxis’ financial statements, the independent
accountant’s qualifications and independence, the performance of the independent
accountants and its internal audit function and its compliance with legal and regulatory
requirements; |
| · | annually
reviewing an independent auditors’ report describing the auditing firms’
internal quality-control procedures, any material issues raised by the most recent internal
quality-control review, or peer review, of the auditing firm; |
| · | discussing
the annual audited financial and quarterly or interim statements with management and
the independent auditor; |
| · | discussing
earnings press releases, as well as financial information and earning guidance provided
to analysts and rating agencies; |
| · | discussing
policies with respect to risk assessment and risk management; |
| · | meeting
separately, periodically, with management, internal auditors and the independent auditor; |
| · | reviewing
with the independent auditor any audit problems or difficulties and managements’
response; |
| · | setting
clear hiring policies for employees or former employees of the independent auditors; |
| · | annually
reviewing the adequacy of the audit committee’s written charter; |
| · | reporting
regularly to the board of directors; and |
| · | handling
such other matters that are specifically delegated to the audit committee by the board
of directors from time to time. |
Nominating
and Corporate Governance Committee
Upon consummation
of this offering, Pyxis will have a nominating and corporate governance committee consisting of at least a majority of independent
directors. The nominating and corporate governance committee will be responsible for, among other things:
| · | developing
and recommending criteria for selecting new directors; |
| · | screening
and recommending to the board of directors individuals qualified to become executive
officers; |
| · | overseeing
evaluations of the board of directors, its members and committees of the board of directors;
and |
| · | handling
such other matters that are specifically delegated to the nominating and corporate governance
committee by the board of directors from time to time. |
The initial
members of Pyxis’ nominating and corporate governance committee will be Aristides Pittas, Basil Mavroleon and Valentos Valentis.
Other Corporate Governance
Matters
Pyxis’
corporate governance practices will be in compliance with, and are not prohibited by, the laws of the Republic of the Marshall
Islands. Therefore, we expect to be exempt from many of NASDAQ’s corporate governance practices other than the requirements
regarding the disclosure of a going concern audit opinion, submission of a listing agreement, notification of material non-compliance
with NASDAQ corporate governance practices, and the establishment and composition of an audit committee and a formal written audit
committee charter.
The practices
that Pyxis expects to follow in lieu of NASDAQ’s corporate governance rules include:
| · | in
lieu of obtaining an independent review of related party transactions for conflicts of
interests, consistent with Marshall Islands law requirements, a related party transaction
will be permitted if: (i) the material facts as to his or her relationship or interest
and as to the contract or transaction are disclosed or are known to Pyxis’ board
of directors and the board of directors in good faith authorizes the contract or transaction
by the affirmative votes of a majority of the disinterested directors, or, if the votes
of the disinterested directors are insufficient to constitute an act of the board of
directors as defined in Section 55 of the Marshall Islands Business Corporations Act,
by unanimous vote of the disinterested directors; or (ii) the material facts as to his
relationship or interest are disclosed and the shareholders are entitled to vote thereon,
and the contract or transaction is specifically approved in good faith by a simple majority
vote of the shareholders; or (iii) the contract or transaction is fair as to Pyxis as
of the time it is authorized, approved or ratified, by the board of directors, a committee
thereof or the shareholders. Common or interested directors may be counted in determining
the presence of a quorum at a meeting of the board of directors or of a committee which
authorizes the contract or transaction; |
| · | as
a foreign private issuer, Pyxis will not be required to solicit proxies or provide proxy
statements to NASDAQ pursuant to NASDAQ corporate governance rules or Marshall Islands
law. Consistent with Marshall Islands law, Pyxis intends to notify its shareholders of
meetings between 15 and 60 days before the meeting. This notification will contain, among
other things, information regarding business to be transacted at the meeting. In addition,
Pyxis’ bylaws provide that shareholders must give us advance notice to properly
introduce any business at a meeting of the shareholders and that shareholders may designate
in writing a proxy to act on their behalf; |
| · | in
lieu of holding regular meetings at which only independent directors are present, Pyxis’
entire board of directors, a majority of whom following the Merger will be independent,
will hold regular meetings as is consistent with the laws of the Republic of the Marshall
Islands; |
| · | Pyxis
will adopt an equity incentive plan prior to the consummation of the Merger and in the
future may amend or terminate this plan or approve a new incentive plan. Shareholder
approval will not be required to amend or terminate this equity incentive plan or to
establish a new equity incentive plan since Marshall Islands law permits the board of
directors to take these actions; |
| · | as
a foreign private issuer, Pyxis will not be required to obtain shareholder approval if
any of its directors, officers or 5% or greater shareholders will have a 5% or greater
interest (or such persons collectively have a 10% or greater interest), directly or indirectly,
in the company or assets to be acquired or in the consideration to be paid in the transaction(s)
and the present or potential issuance of common stock, or securities convertible into
or exercisable for common stock, could result in an increase in outstanding common stock
or voting power of 5% or more; and |
| · | in
lieu of obtaining shareholder approval prior to the issuance of securities, Pyxis intends
to comply with provisions of the Marshall Islands Business Corporations Act, providing
that the board of directors approves share issuances. |
Codes
of Business Conduct and Ethics
Prior to
consummation of the Merger, the board of directors will approve and adopt a Code of Business Conduct and Ethics for all officers
and employees, a copy of which will be available on Pyxis’ website and upon written request by its shareholders at no cost.
Compensation
of Directors, Executive Officers and Key Employees
Pyxis has
no direct employees. The services of Pyxis’ executive officers, internal auditor(s) and secretary are provided by Maritime.
Pyxis has entered into a Head Management Agreement with Maritime, pursuant to which Pyxis will pay approximately $1.6 million
per year for the services of these individuals, and for other administrative services associated with Pyxis being a public company
and other services to its subsidiaries. See “Related Party Transactions”
It is expected
that each of Pyxis’ non-employee directors will receive annual compensation in the aggregate amount of $0.04 million per
year, plus reimbursements for actual expenses incurred while acting in his or her capacity as a director. It does not have a retirement
plan for its officers or directors. There are no service contracts with its non-executive directors that provide for benefits
upon termination of their services as director. Individuals serving as chairs of committees will be entitled to receive additional
compensation from Pyxis.
Equity
Incentive Plan
Prior to
the completion of the Merger, Pyxis will adopt an equity incentive plan, titled the Pyxis Tankers Inc. 2015 Equity Incentive Plan,
or the Plan, which will entitle Pyxis’ officers, consultants and directors, as well as employees of Maritime, its affiliated
ship manager, to receive options, share appreciation rights, stock grants, stock units and dividend equivalents. The following
description of the Plan is a summary of the material terms of the Plan.
The Plan
will be administered by Pyxis’ board of directors or a committee of the board of directors. Subject to adjustment as provided
below, the maximum aggregate number of common shares that may be delivered pursuant to awards granted under the Plan during the
ten-year term of the Plan will be 10% of the then-issued and outstanding number of its common shares. The maximum number of shares
with respect to which awards may be granted to any participant in the Plan in any fiscal year is 15% of the then issued and outstanding
number of its common shares. If an award granted under the Plan is forfeited, or otherwise expires, terminates or is cancelled
without the delivery of shares, then the shares covered by such award will again be available to be delivered pursuant to other
awards under the Plan. No award may be granted under the Plan after the tenth anniversary of the date of shareholder approval
of the Plan.
In the event
that Pyxis is subject to a change of control, the Plan administrator in its discretion may make such adjustments and other substitutions
to the Plan and outstanding awards under the Plan as it deems equitable or desirable in its sole discretion.
Except as
otherwise determined by the Plan administrator in an award agreement, the exercise price for options cannot be less than 100%
of the fair market value on the date of grant. The maximum term of each stock option agreement may not exceed ten years from the
date of the grant.
Share appreciation
rights, or SARs, will provide for a maximum limit on the amount of any payout notwithstanding the fair market value on the date
of exercise of the SAR. The exercise price of a SAR will not be less than 100% of the fair market value on the date of grant.
The SAR agreement will also specify the maximum term of the SAR which will not exceed ten years from the date of grant.
Stock grants
may be issued with or without cash consideration under the Plan. The holder of a stock grant awarded under the Plan may have the
same voting, dividend and other rights as Pyxis’ other shareholders. The Plan administrator may provide a participant who
holds stock grants with dividends or dividend equivalents payable in cash, common shares or other property.
Settlement
of vested stock units may be in the form of cash, common shares or any combination of both, as determined by the Plan administrator
at the time of the grant of the stock units. Methods of converting stock units into cash may include, without limitation, a method
based on the average fair market value of common shares over a series of trading days. The holders of stock units will have no
voting rights.
Subject
to the provisions of the Plan, awards granted under the Plan may include dividend equivalents. The Plan administrator may determine
the amounts, terms and conditions of any such awards provided that they comply with applicable laws.
PROPOSAL
1: APPROVAL OF THE REVERSE SPLIT
The
Company is asking you to approve the reverse split proposal.
The
Reverse Split
Prior
to the execution of the Effective Time, the Company will effect the Reverse Split.
Our
board of directors has adopted resolutions (i) declaring that submitting an amendment to the Company’s Certificate
of Incorporation to effect the Reverse Split of our issued and outstanding common stock was advisable, and (ii) directing
that a proposal to approve the Reverse Split be submitted to the holders of our common stock for their approval. The Reverse Split
of our issued and outstanding common stock will be effected by a ratio of not less than one-for-two and not more than one-for-ten
at any time prior to ______, 2015, with the exact ratio to be set at a whole number within this range as determined by our board
of directors in its sole discretion.
Our
board of directors is submitting the Reverse Split to our stockholders for approval with the intent of increasing the market price
of our common stock to enhance our ability to meet the continued listing requirements of the Nasdaq Capital Market, to make our
common stock sufficiently attractive for Pyxis to consummate the Merger transaction and to ensure that Pyxis will be able to meet
the initial listing requirements of the Nasdaq Capital Market or NYSE MKT after consummation of the Merger transaction.
Consequences
if the Reverse Split Proposal is not Approved
If
the reverse split proposal is not approved by its stockholders, our common stock may be delisted from the Nasdaq Capital Market
as a result of failures to meet the continued listing requirements of NASDAQ and Pyxis may choose to not consummate the Merger
transaction.
Required
Vote
Approval
of the reverse split proposal requires a quorum to be present and an affirmative vote of a majority of our common stock voted
at the Special Meeting. Adoption of the reverse split proposal is not conditioned upon the adoption of any of the other proposals.
LOOKSMART’S
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LOOKSMART’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE REVERSE
SPLIT.
PROPOSAL
2: APPROVAL OF THE SPIN-OFF
The
Company is asking you to approve the spin-off proposal.
The
Spin-Off
Prior
to the execution of the Merger Agreement and the Effective Time, the Company will have transferred all of its businesses, assets
and liabilities to Holdco in anticipation of the Spin-Off of Holdco from LookSmart.
Pursuant
to the terms of the Merger Agreement and the Spin-off Agreement, Holdco will assume all liabilities of LookSmart, and the liabilities
of LookSmart’s subsidiaries.
After the
Spin-Off of Holdco from LookSmart is completed, all of LookSmart’s shares of the common stock of Holdco shall be cancelled
and Holdco shall be 100% owned by the Company’s stockholders of record as of ________, 2015.
Consequences
if the Spin-Off Proposal is not Approved
If
the spin-off proposal is not approved by its stockholders, Pyxis will likely not consummate the Merger transaction.
Required
Vote
Approval
of the spin-off proposal requires a quorum to be present and an affirmative vote of a majority of our common stock voted at the
Special Meeting. Adoption of the spin-off proposal is not conditioned upon the adoption of any of the other proposals.
LOOKSMART’S
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LOOKSMART’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE SPIN-OFF.
PROPOSAL
3: APPROVAL OF THE MERGER AGREEMENT
The
Company is asking you to approve the merger proposal. A copy of the Merger Agreement is attached as Annex A to this proxy
statement/prospectus.
The
Merger
Under
the terms of the Merger Agreement, upon completion of the Merger, LookSmart will merge with and into Merger Sub. Merger Sub will
be the surviving corporation in the Merger and will be a wholly owned subsidiary of Pyxis.
At
the Effective Time, each share of the Company’s common stock issued and outstanding prior to the Effective Time (post-Reverse
Split) will be exchanged for the right to receive___ shares of Pyxis’ common stock. After the completion of the proposed
Merger, and assuming no significant adjustments pursuant to the terms of the Merger Agreement, the public stockholders of the
Company are expected to own 5.66% of the total issued and outstanding common stock of Pyxis. In addition, the Company received
a cash payment of $600,000 upon execution of the Merger Agreement.
As
a result of the Merger, and subject to the terms and conditions of the Merger Agreement, Pyxis is expected to become a public
company. Pyxis intends to apply to have its common stock listed on the Nasdaq Capital Market or NYSE MKT under the symbol “PXS.”
In
the event that subsequent to the Merger, Pyxis completes a Future Pyxis Offering at a valuation lower than the valuation
ascribed to the shares of common stock received by LookSmart stockholders pursuant to the Merger Agreement, Pyxis will be
obligated to make “whole” the LookSmart stockholders as of April 29, 2015 (the
“Make Whole Record Date”) by offering such LookSmart stockholders the right to receive additional shares
of Pyxis common stock to compensate the LookSmart stockholders for the difference in value of their Pyxis common
stock.
In
addition, should Pyxis fail to complete a Future Pyxis Offering within a date which is 3 years from the date of the closing of
the Merger, each Legacy LS Stockholders will have a 24-hour option beginning at the end of such 3 year period to require Pyxis
to purchase a pro rata amount of Pyxis common stock that would result in aggregate gross proceeds to the Legacy LS Stockholders
in an amount not to exceed $2,000,000; provided that in no event shall a Legacy LS Stockholder receive an amount per share greater
than the Consideration Value.
STOCKHOLDERS
PURCHASING SHARES OF LOOKSMART’S COMMON STOCK AFTER THE MAKE WHOLE RECORD DATE WILL NOT BE ENTITLED TO THE FOREGOING COMPENSATION
RELATED TO A FUTURE PYXIS OFFERING.
Consequences
if the Merger Proposal is not Approved
If the Merger
Agreement is not approved by LookSmart stockholders or if the Merger is not completed for any other reason, LookSmart stockholders
will not receive any payment or other compensation for their shares of common stock. Instead, LookSmart will remain an independent
public company, its common stock will continue to be listed and traded on NASDAQ and registered under the Exchange Act and LookSmart
will continue to file periodic reports with the SEC. In addition, if the Merger is not completed, LookSmart expects that management
will operate the business in a manner similar to that in which it is being operated today and that LookSmart’s stockholders
will continue to be subject to the same risks and opportunities to which they are currently subject, including, without limitation,
risks related to the highly competitive industry in which LookSmart operates and adverse economic conditions.
Furthermore,
if the Merger is not completed, and depending on the circumstances that would have caused the Merger not to be completed, the
price of LookSmart’s common stock may decline significantly. If that were to occur, it is uncertain when, if ever, the price
of LookSmart’s common stock would return to the price at which it trades as of the date of this proxy statement.
Accordingly,
if the Merger is not completed, there can be no assurance as to the effect of these risks and opportunities on the future value
of your shares of LookSmart’s common stock. If the Merger is not completed, LookSmart’s board of directors will continue
to evaluate and review the Company’s business operations, properties, dividend policy and capitalization, among other things,
make such changes as are deemed appropriate and continue to seek to identify strategic alternatives to enhance stockholder value.
If the Merger Agreement is not approved by LookSmart’s stockholders or if the Merger is not completed for any other reason,
there can be no assurance that any other transaction acceptable to LookSmart will be offered or that LookSmart’s business,
prospects or results of operation will not be adversely impacted.
In
addition, under specified circumstances, LookSmart may be required to reimburse Pyxis’ expenses or pay Pyxis a
termination fee, upon the termination of the Merger Agreement, as described under “Termination Fees and expenses”
beginning on page 92.
Required
Vote
Adoption
of the merger proposal requires the affirmative vote of a majority of the issued and outstanding shares of LookSmart’s common
stock represented in person or by proxy at the meeting and entitled to vote thereon. Adoption of the merger proposal is conditioned
upon the adoption of the spin-off proposal.
LOOKSMART’S
BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT LOOKSMART’S STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE MERGER
AGREEMENT.
PROPOSAL
4: THE ADJOURNMENT PROPOSAL
The
adjournment proposal allows LookSmart’s board of directors to submit a proposal to adjourn the Special Meeting to a later
date or dates, if necessary, to permit further solicitation of proxies in the event, based on the tabulated votes, there are not
sufficient votes at the time of the special meeting to approve the consummation of the mergers. In no event will LookSmart solicit
proxies to adjourn the Special Meeting or consummate the Merger beyond the date by which it may properly do so under Delaware
law. The purpose of the adjournment proposal is to provide more time for the LookSmart’s stockholders to make purchases
of public shares or other arrangements that would increase the likelihood of obtaining a favorable vote on the reverse split proposal,
the spin-off proposal and the merger proposal.
In
addition to an adjournment of the Special Meeting upon approval of an adjournment proposal, the board of directors of LookSmart
is empowered under Delaware law to postpone the meeting at any time prior to the meeting being called to order. In such event,
LookSmart will issue a press release and take such other steps as it believes are necessary and practical in the circumstances
to inform its stockholders of the postponement.
Consequences
if the Adjournment Proposal is not Approved
If
an adjournment proposal is presented at the Special Meeting and such proposal is not approved by its stockholders, LookSmart’s
board of directors may not be able to adjourn the Special Meeting to a later date in the event, based on the tabulated votes,
there are not sufficient votes at the time of the Special Meeting to approve the consummation of the Merger. In such event, the
Merger would not be completed.
Required
Vote
Approval
of the proposal to adjourn the Special Meeting, whether or not a quorum is present, requires the affirmative vote of a majority
of the votes cast by the holders of shares of LookSmart’s common stock entitled to vote. Adoption of the adjournment proposal
is not conditioned upon the adoption of any of the other proposals.
THE
LOOKSMART BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE LOOKSMART STOCKHOLDERS VOTE “FOR” THE APPROVAL OF THE
ADJOUNRMENT PROPOSAL.
OTHER
MATTERS
As
of the date of this proxy statement/prospectus, the board of directors of LookSmart knows of no matters that will be presented
for consideration at the Special Meeting other than as described in this proxy statement/prospectus. If any other matters properly
come before the Special Meeting or any adjournments or postponements of the meeting and are voted upon, the enclosed proxy will
confer discretionary authority on the individuals named as proxy to vote the shares represented by the proxy as to any other matters.
The individuals named as proxies intend to vote in accordance with their best judgment as to any other matters.
LEGAL
MATTERS
The
validity of the shares of Looksmart common stock to be issued pursuant to the merger will be passed upon by Seward & Kissel
LLP
EXPERTS
The
consolidated financial statements of LookSmart set forth herein and also appearing in the Company’s Annual Report on Form
10-K for the years ended December 31, 2014 and December 31, 2013 have been audited by Albert Wong & Co., independent
registered public accounting firm, as set forth in their report thereon, included therein, and incorporated herein by reference.
Such consolidated financial statements and LookSmart’s management’s assessment of the effectiveness of internal control
over financial reporting as of December 31, 2014 are incorporated herein by reference in reliance upon such reports given
on the authority of such firm as experts in accounting and auditing.
The
combined financial statements of Pyxis Tankers Inc. Predecessor at December 31, 2014 and December 31, 2013, and for each of the
two years in the period ended December 31, 2014, appearing in this preliminary proxy statement/prospectus have been audited by
Ernst & Young (Hellas) Certified Auditors-Accountants S.A., independent registered public accounting firm, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance upon such report given on the authority of such
firm as experts in accounting and auditing.
FUTURE
STOCKHOLDER PROPOSALS
If the Merger
is completed, we will have no public stockholders and there will be no public participation in any future meetings of stockholders
of LookSmart. However, if the Merger is not completed, our stockholders will continue to be entitled to attend and participate
in our stockholders’ meetings.
LookSmart
will hold an annual meeting during the fiscal year ending December 31, 2015, only if the Merger has not already been completed.
If the Merger is not completed and LookSmart holds the 2015 Annual Meeting of Stockholders, any stockholder that intends to present
a proposal to be considered for inclusion in our proxy material in connection with the 2015 Annual Meeting of Stockholders must
follow the procedures of Rule 14a-8 under the Exchange Act. In general, stockholder proposals that are intended to be presented
at our 2015 Annual Meeting of Stockholders, but that are not intended to be considered for inclusion in our proxy material related
to that meeting, must be made in writing and sent to our Corporate Secretary either by hand or by certified or registered mail,
return receipt requested, at our corporate offices at the mailing address below no earlier than the close of business on the 120th
day prior to the one year anniversary of the preceding year’s annual meeting and no later than the close of business
on the later of the 90th day prior to the one year anniversary of the preceding year’s annual meeting. If LookSmart
calls for its 2015 Annual Meeting of Stockholders on a date that is more than 30 days before or more than 60 days after the anniversary
date of the 2015 Annual Meeting of Stockholders, stockholder proposals that are intended to be presented at our 2015 Annual Meeting
of Stockholders, but that are not intended to be considered for inclusion in our proxy material related to that meeting, must
be made in writing and sent to our Corporate Secretary either by hand or by certified or registered mail, return receipt requested,
at our corporate offices at the mailing address below no later than the close of business on the later of the 90th
day prior to the date of the annual meeting or the 10th day following the day on which public announcement of the date
of the annual meeting is made by LookSmart. In this circumstance, LookSmart will publicly announce an advance notice deadline
in advance of the 2015 Annual Meeting of Stockholders.
Any stockholder
who gives notice of any such proposal will deliver therewith a brief description of the business desired to be brought before
the meeting and the reasons for conducting such business at the meeting (including the text of any resolutions or bylaw amendments
proposed for consideration); all information relating to such proposed business that is required to be included in a proxy statement
or other filings required to be made in connection with solicitations of proxies pursuant to Section 14 under the Exchange
Act and the rules and regulations thereunder in connection with the meeting at which such proposed business is to be acted upon;
a brief description of any material interest in such business of each stockholder making such proposal and a brief description
of all agreements, arrangements and understandings between such stockholders and any other person or persons (including their
names) in connection with the proposal of such business; as to each stockholder making the proposal: the name and address of such
proposal and, as to the stockholder providing the notice, such name and address as they appear on LookSmart’s books, a statement
describing and quantifying in reasonable detail any material ownership interests, and whether the stockholder intends to solicit
proxies from stockholders in support of such business; and a representation that the stockholder providing the notice intends
to appear in person or by proxy at the meeting to propose the business identified in the stockholder’s notice. The chairman
of the meeting will determine whether business was properly brought before the meeting.
Such proposals
or nominations should be addressed to LookSmart, Ltd., 50 California Street, 16th Floor, San Francisco, California 94111.
WHERE
YOU CAN FIND MORE INFORMATION
We file
annual, quarterly and current reports, proxy statements and other documents with the SEC under the Exchange Act. You may read
and copy any reports, statements or other information that we file with the Securities and Exchange Commission at the SEC’s
public reference room at the following location: Station Place, 100 F Street, N.E., Room 1580, Washington, D.C. 20549. You may
also obtain copies of those documents at prescribed rates by writing to the Public Reference Section of the SEC at that address.
Please call the SEC at (800) SEC-0330 for further information on the public reference room. These SEC filings are also available
to the public from commercial document retrieval services and at www.sec.gov. In addition, stockholders may obtain free copies
of certain documents filed with the SEC by LookSmart through the “SEC Filings” section of our website.
You may obtain any of the documents
we file with the SEC, without charge, by requesting them in writing or by telephone from us at the following address:
LookSmart,
Ltd.
50 California
Street, 16th Floor
San Francisco,
California 94111
(415)
348-7000
MISCELLANEOUS
LookSmart
has supplied all information relating to LookSmart, Holdco and Pyxis has supplied, but LookSmart has not independently verified,
all of the information relating to Pyxis and Merger Sub contained in “Summary —The Parties” and “The Merger
— Parties Involved in the Merger.”
You should
not send in your LookSmart stock certificates until you receive transmittal materials after the Merger is completed.
You should
rely only on the information contained in this proxy statement/prospectus, the annexes to this proxy statement/prospectus and
the documents we refer to in this proxy statement/prospectus to vote on the reverse split proposal, spin-off proposal and merger
proposal. We have not authorized anyone to provide you with information that is different from what is contained in this proxy
statement/prospectus. This proxy statement/prospectus is dated __________, 2015. You should not assume that the information contained
in this proxy statement/prospectus is accurate as of any date other than that date (or as of an earlier date if so indicated in
this proxy statement/prospectus) and the mailing of this proxy statement/prospectus to stockholders does not create any implication
to the contrary. This proxy statement/prospectus does not constitute a solicitation of a proxy in any jurisdiction where, or to
or from any person to whom, it is unlawful to make a proxy solicitation.
INDEX
TO FINANCIAL INFORMATION
LOOKSMART,
LTD.
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and Board of
Directors of
LookSmart, Ltd.
We have audited
the accompanying consolidated balance sheets of LookSmart, Ltd. (the "Company") as of December 31, 2014 and 2013, and the related
consolidated statements of operations, comprehensive loss, stockholders' equity, and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion
on these consolidated financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements
are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial
position of LookSmart, Ltd. as of December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows
for the years then ended in conformity with accounting principles generally accepted in the United States of America.
The accompanying
financial statements have been prepared assuming that the Company will continue as a going concern. As described in Note 15, the
Company has recurring losses, has negative working capital and cash in operating activities, which raise substantial doubt about
its ability to continue as a going concern. Management’s plans in regard to this matter are also discussed in Note 15. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ Albert Wong & Co. LLP
New York, New York
March 17, 2015
LOOKSMART,
LTD.
CONSOLIDATED
BALANCE SHEETS
(In
thousands, except par value)
| |
December
31, | |
| |
2014 | | |
2013 | |
ASSETS | |
| | | |
| | |
Current assets: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 305 | | |
$ | 2,789 | |
Short-term investments | |
| 129 | | |
| 3,102 | |
Total cash, cash equivalents and short-term
investments | |
| 434 | | |
| 5,891 | |
Trade accounts receivable, net | |
| 255 | | |
| 606 | |
Prepaid expenses and
other current assets | |
| 602 | | |
| 1,077 | |
Total current assets | |
| 1,291 | | |
| 7,574 | |
Long-term investments | |
| - | | |
| 154 | |
Property and equipment, net | |
| 3,403 | | |
| 3,831 | |
Other assets, net | |
| 62 | | |
| 87 | |
Total assets | |
$ | 4,756 | | |
$ | 11,646 | |
| |
| | | |
| | |
LIABILITIES &
STOCKHOLDERS' EQUITY | |
| | | |
| | |
| |
| | | |
| | |
Current liabilities: | |
| | | |
| | |
Trade accounts payable | |
$ | 901 | | |
$ | 739 | |
Accrued liabilities | |
| 398 | | |
| 444 | |
Deferred revenue and
customer deposits | |
| 1,018 | | |
| 1,002 | |
Total current liabilities | |
| 2,317 | | |
| 2,185 | |
Long-term portion of deferred rent | |
| 22 | | |
| 186 | |
Total liabilities | |
| 2,339 | | |
| 2,371 | |
Commitment and contingencies | |
| - | | |
| - | |
Stockholders' equity: | |
| | | |
| | |
Convertible preferred stock, $0.001 par
value; Authorized: 5,000 shares; Issued and | |
| | | |
| | |
Outstanding: none at December 31 , 2014
and 2013, respectively | |
| - | | |
| - | |
Common stock, $0.003 par value; Authorized:
80,000 shares; Issued and | |
| | | |
| | |
Outstanding: 5,769 shares at both December
31, 2014 and 2013, respectively | |
| 17 | | |
| 17 | |
Additional paid-in capital | |
| 262,508 | | |
| 262,502 | |
Accumulated other comprehensive loss | |
| (424 | ) | |
| (154 | ) |
Accumulated deficit | |
| (259,435 | ) | |
| (253,016 | ) |
Treasury stock at cost: 130 shares and
32 shares at December 31, 2014 and 2013, respectively | |
| (249 | ) | |
| (74 | ) |
Total stockholders'
equity | |
| 2,417 | | |
| 9,275 | |
Total liabilities
and stockholders' equity | |
$ | 4,756 | | |
$ | 11,646 | |
The accompanying
notes are an integral part of these Consolidated Financial Statements.
LOOKSMART,
LTD.
CONSOLIDATED
STATEMENTS OF OPERATIONS
(In
thousands, except per share data)
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Revenue | |
$ | 4,702 | | |
$ | 6,679 | |
Cost of revenue | |
| 2,441 | | |
| 4,474 | |
Gross profit | |
| 2,261 | | |
| 2,205 | |
Operating expenses: | |
| | | |
| | |
Sales and marketing | |
| 1,690 | | |
| 1,082 | |
Product development and technical operations | |
| 4,561 | | |
| 3,557 | |
General and administrative | |
| 2,561 | | |
| 3,052 | |
Restructuring charge | |
| 30 | | |
| 40 | |
Total operating expenses | |
| 8,842 | | |
| 7,731 | |
Loss from operations | |
| (6,581 | ) | |
| (5,526 | ) |
Non-operating income (expense), net | |
| | | |
| | |
Interest income | |
| 81 | | |
| 198 | |
Interest expense | |
| (14 | ) | |
| (9 | ) |
Other income (expense),
net | |
| 95 | | |
| (12 | ) |
Loss from operations before income taxes | |
| (6,419 | ) | |
| (5,349 | ) |
Income tax expense | |
| - | | |
| (7 | ) |
Net loss | |
$ | (6,419 | ) | |
$ | (5,356 | ) |
Net loss per share - Basic and Diluted | |
$ | (1.12 | ) | |
$ | (0.93 | ) |
Weighted average shares outstanding used
in computing basic and diluted net loss per share | |
| 5,709 | | |
| 5,756 | |
The accompanying
notes are an integral part of these Consolidated Financial Statements.
LOOKSMART,
LTD.
CONSOLIDATED
STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Net loss | |
$ | (6,419 | ) | |
$ | (5,356 | ) |
Other comprehensive income (loss): | |
| | | |
| | |
Foreign currency translation adjustments | |
| (177 | ) | |
| (108 | ) |
Unrealized loss on
investments | |
| (93 | ) | |
| - | |
Change in accumulated other comprehensive
loss | |
| (270 | ) | |
| (108 | ) |
Comprehensive loss | |
$ | (6,689 | ) | |
$ | (5,464 | ) |
The accompanying
notes are an integral part of these Consolidated Financial Statements.
LOOKSMART,
LTD.
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
(In
thousands)
| |
| | |
| | |
| | |
Accumulated | | |
| | |
| | |
| | |
| |
| |
| | |
| | |
Additional | | |
Other | | |
| | |
| | |
| | |
Total | |
| |
Common
Stock | | |
Paid-in | | |
Comprehensive | | |
Accumulated | | |
Treasury
Stock | | |
Stockholder’s | |
| |
Shares | | |
Amount | | |
Capital | | |
Gain
(Loss) | | |
Deficit | | |
Shares | | |
Amount | | |
Equity | |
Balance at December 31, 2012 | |
| 5,768 | | |
$ | 17 | | |
$ | 262,463 | | |
$ | (46 | ) | |
$ | (247,660 | ) | |
| (19 | ) | |
$ | (48 | ) | |
$ | 14,726 | |
Common stock issued for employee
stock purchase plan | |
| 1 | | |
| - | | |
| 1 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 1 | |
Stock-based compensation | |
| - | | |
| - | | |
| 38 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 38 | |
Treasury stock at cost | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (13 | ) | |
| (26 | ) | |
| (26 | ) |
Changes in accumulated other
comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (108 | ) | |
| - | | |
| - | | |
| - | | |
| (108 | ) |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (5,356 | ) | |
| - | | |
| - | | |
| (5,356 | ) |
Balance at December 31, 2013 | |
| 5,769 | | |
$ | 17 | | |
$ | 262,502 | | |
$ | (154 | ) | |
$ | (253,016 | ) | |
| (32 | ) | |
$ | (74 | ) | |
$ | 9,275 | |
Stock-based compensation | |
| - | | |
| - | | |
| 6 | | |
| - | | |
| - | | |
| - | | |
| - | | |
| 6 | |
Treasury stock at cost | |
| - | | |
| - | | |
| - | | |
| - | | |
| - | | |
| (98 | ) | |
| (175 | ) | |
| (175 | ) |
Changes in accumulated other
comprehensive loss | |
| - | | |
| - | | |
| - | | |
| (270 | ) | |
| - | | |
| - | | |
| - | | |
| (270 | ) |
Net
loss | |
| - | | |
| - | | |
| - | | |
| - | | |
| (6,419 | ) | |
| - | | |
| - | | |
| (6,419 | ) |
Balance at December
31, 2014 | |
| 5,769 | | |
$ | 17 | | |
$ | 262,508 | | |
$ | (424 | ) | |
$ | (259,435 | ) | |
| (130 | ) | |
$ | (249 | ) | |
$ | 2,417 | |
The accompanying
notes are an integral part of these Consolidated Financial Statements.
LOOKSMART,
LTD.
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(In thousands)
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Cash flows from operating activities: | |
| | | |
| | |
Net loss | |
$ | (6,419 | ) | |
$ | (5,356 | ) |
Adjustment to reconcile net loss to net
cash used in operating activities: | |
| | | |
| | |
Depreciation and amortization | |
| 1,316 | | |
| 500 | |
Provision for doubtful accounts | |
| 55 | | |
| (20 | ) |
Share-based compensation | |
| 6 | | |
| 38 | |
Other non-cash charges | |
| 210 | | |
| 42 | |
Deferred rent | |
| (164 | ) | |
| 9 | |
Deferred lease incentive | |
| 77 | | |
| 77 | |
Restructuring charge | |
| 30 | | |
| 40 | |
Changes in operating assets and liabilities: | |
| | | |
| | |
Trade accounts receivable | |
| 296 | | |
| 1,469 | |
Prepaid expenses and other current assets | |
| 423 | | |
| (667 | ) |
Trade accounts payable | |
| 132 | | |
| (688 | ) |
Accrued liabilities | |
| (37 | ) | |
| (874 | ) |
Deferred revenue and
customer deposits | |
| 16 | | |
| (145 | ) |
Net cash used in operating
activities | |
| (4,059 | ) | |
| (5,575 | ) |
Cash flows from investing activities: | |
| | | |
| | |
Purchase of investments | |
| (76 | ) | |
| (7,928 | ) |
Proceeds from sale of investments | |
| 3,202 | | |
| 14,136 | |
Payments for property
and equipment | |
| (1,026 | ) | |
| (3,953 | ) |
Net cash provided by
investing activities | |
| 2,100 | | |
| 2,255 | |
Cash flows from financing activities: | |
| | | |
| | |
Principal payments of capital lease obligations | |
| (173 | ) | |
| (110 | ) |
Proceeds from issuance of common stock | |
| - | | |
| 1 | |
Payments for repurchase
of common stock | |
| (175 | ) | |
| (26 | ) |
Net cash used in financing
activities | |
| (348 | ) | |
| (135 | ) |
Effect of exchange rate
changes on cash and cash equivalents | |
| (177 | ) | |
| (108 | ) |
Decrease in cash and cash equivalents | |
| (2,484 | ) | |
| (3,563 | ) |
Cash and cash equivalents, beginning of period | |
| 2,789 | | |
| 6,352 | |
Cash and cash equivalents, end of period | |
$ | 305 | | |
$ | 2,789 | |
Supplemental disclosure of cash flow information: | |
| | | |
| | |
Interest paid | |
$ | 14 | | |
$ | 9 | |
Income taxes paid | |
$ | - | | |
$ | 7 | |
Supplemental disclosure of noncash activities: | |
| | | |
| | |
Assets acquired through capital lease obligations | |
$ | 164 | | |
$ | - | |
Change in unrealized gain (loss) on investments | |
$ | (93 | ) | |
$ | - | |
The accompanying
notes are an integral part of these Consolidated Financial Statements.
LOOKSMART,
LTD.
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
| 1. | Summary
of Significant Accounting Policies |
Nature of Business
LookSmart, Ltd.
("LookSmart" or the "Company") is a digital advertising solutions company that provides relevant solutions for search and display
advertising customers, organized along five lines of business: (i) Clickable, (ii) LookSmart AdCenter, (iii) Novatech.io, (iv)
ShopWiki and (v) web searches. LookSmart was organized in 1996 and is incorporated in the State of Delaware.
LookSmart operates
in a large online advertising ecosystem serving ads that target user queries on partner sites.
LookSmart offers
search advertising customers targeted search via a monitored search advertising distribution network using the Company’s
“AdCenter” platform technology. The Company’s search advertising network includes publishers and search advertising
customers, including intermediaries and direct advertising customers and their agencies as well as self-service customers in the
United States and certain other countries.
LookSmart also
offers advertisers the ability to buy graphical display advertising. LookSmart’s trading desk personnel utilize DSP technology
and licensed data from third party providers to buy targeted advertising on a real-time bidded basis. By leveraging our extensive
historical search marketing network data along with performance data from a conversion pixel, LookSmart constructs models of the
highest performing audiences, and targets them via exchange inventory. LookSmart offers its trading desk as a managed service.
In addition,
Looksmart, under its “Clickable” and “Syncapse” brands, allows customers to manage paid, owned and earned
media by providing a suite of solutions for social media marketers that include publishing, monitoring, data storage, compliance,
management, ad placement and analytics.
Further, LookSmart
offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology (“Publisher
Solutions”). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability that allows publishers
and portals to manage their advertiser relationships, distribution channels and accounts.
Lastly, in the
fourth quarter of 2013 the Company began to make available a LookSmart-branded search engine. For parties submitting search
queries, the Company offers free-of-charge search results ranked and presented based on proprietary algorithms.
While early in its evolution, part of the Company's current search engine monetization strategy is to generate sponsored
search results as a part of overall search results and provide links to paying advertisers’ websites.
Our largest
category of customers is Intermediaries, the majority of which sell into the affiliate networks of the large search engine providers.
Another category of customers is Direct Advertisers and their agencies whose objective is to obtain conversions or sales from
the clicks, while others want unique page views. The last category of customers is Self-Service advertisers that sign-up online
and pay by credit card.
Decreasing Intermediary
revenue represented a continued trend from 2012 and was the primary driver of the Company's overall 2013 revenue decreases. Thus,
in 2013, the Company made the decision to decrease the amount of revenue that it received from Intermediaries compared to 2012.
The Company believes that this decision is in the best interests of the Company on a go-forward basis. The Company believes its
revenue trends are tied to market-wide changes in the search ecosystem that have had a severe impact on Intermediary business
models and consequently the business Intermediaries conduct with the Company. In 2014, 2013 and 2012, we ceased business with
a number of Intermediaries. Intermediaries continue as our largest category of customer.
In September
2013, LookSmart purchased the Syncapse Technology Assets for $3 million from MNP Ltd., a Receiver appointed by Ontario Superior
Court of Justice under the Appointment Order. Upon the completion of this transaction, the Company acquired a social media platform
that allows enterprise customers the ability to publish, monitor and analyze their social media presence on paid, owned and earned
media. The Company has begun to work with large international brands to assist them in creating, maintaining and analyzing their
social media presence online. As a result of the Syncapse asset purchase, the Company is expanding its offerings to our current
customer base. Our expanded offering allows LookSmart’s traditional customers the ability to manage ad spend in both search
and social platforms. The Company intends to partner with social media companies such as Facebook, Twitter, Pinterest and YouTube,
as well as others, to offer customers the ability to maximize their ad spend in all relevant ad categories.
In November
of 2013, LookSmart acquired an approximate 10,000 square foot data center facility in Phoenix, Arizona. This facility will
allow the Company to consolidate its data needs in a company-owned data center, as well as expand its cloud based offerings to
our customers. Looksmart is in the process of consolidating its cloud services in its newly occupied wholly owned secure
data center.
In addition,
LookSmart offers publishers licensed private-label search advertiser network solutions based on its AdCenter platform technology
(“Publisher Solutions”). Publisher Solutions consist of hosted auction-based ad serving with an ad backfill capability
that allows publishers and portals to manage their advertiser relationships, distribution channels and accounts.
Principles of Consolidation
The Consolidated
Financial Statements include the accounts of the Company and its Subsidiaries. All significant inter-company balances and transactions
have been eliminated in consolidation.
Use of Estimates and Assumptions
The Consolidated
Financial Statements have been prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).
This requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenue,
expenses, and contingent assets and liabilities during the reporting period. The Company bases its estimates on various factors
and information which may include, but are not limited to, history and prior experience, experience of other enterprises in the
same industry, new related events, and current economic conditions and information from third party professionals that is believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of
assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
Investments
The Company
invests its excess cash primarily in debt instruments of high-quality corporate and government issuers. All highly liquid instruments
with maturities at the date of purchase greater than ninety days are considered investments. All instruments with maturities greater
than one year from the balance sheet date are considered long-term investments unless management intends to liquidate such securities
in the current operating cycle. Such securities are classified as short-term investments. These securities are classified as available-for-sale
and carried at fair value.
Changes in the
value of these investments are primarily related to changes in interest rates and are considered to be temporary in nature. Except
for declines in fair value that are not considered temporary, net unrealized gains or losses on these investments are reported
in the Consolidated Statements of Comprehensive Loss. The Company recognizes realized gains and losses upon sale of investments
using the specific identification method.
Fair Value of Financial Instruments
The Company’s
estimate of fair value for assets and liabilities is based on a framework that establishes a hierarchy of the inputs used in valuation
and gives the highest priority to quoted prices in active markets and requires that observable inputs be used in the valuations
when available. The disclosure of fair value estimates is based on whether the significant inputs into the valuation are observable.
In determining the level of the hierarchy in which the estimate is disclosed, the highest priority is given to unadjusted quoted
prices in active markets and the lowest priority to unobservable inputs that reflect our significant market assumptions. The three
levels of the hierarchy are as follows:
| Level 1: | Unadjusted
quoted market prices for identical assets or liabilities in active markets that we have
the ability to access. |
| Level 2: | Quoted
prices for similar assets or liabilities in active markets; quoted prices for identical
or similar assets in inactive markets; or valuations based on models where the significant
inputs are observable (e.g., interest rates, yield curves, default rates, etc.) or can
be corroborated by observable market data. |
| Level 3: | Valuations
based on models where significant inputs are not observable. The unobservable inputs
reflect our assumptions about the assumptions that market participants would use. |
Revenue Recognition
Our online search
advertising revenue is composed of per-click fees that we charge customers and profit sharing arrangements we enter with Intermediaries.
The per-click fee charged for keyword-targeted listings is calculated based on the results of online bidding for keywords or page
content, up to a maximum cost per keyword or page content set by the customer. The Company has profit-sharing agreements with
several customers that call for the sharing of profits and losses. Profit sharing arrangements are governed by contractual agreements.
Revenue from these profit-sharing agreements is reported net of the customer’s share of profit.
Revenue also
includes revenue share from licensing of private-labeled versions of our AdCenter Platform.
Revenues associated
with online advertising products, including Advertiser Networks, are generally recognized once collectability is established,
delivery of services has occurred, all performance obligations have been satisfied, and no refund obligations exist. We pay distribution
network partners based on clicks on the advertiser’s ad that are displayed on the websites of these distribution network
partners. These payments are called TAC and are included in cost of revenue. The revenue derived from these arrangements that
involve traffic supplied by distribution network partners is reported gross of the payment to the distribution network partners.
This revenue is reported gross due to the fact that we are the primary obligor to the advertisers who are the customers of the
advertising service.
We also enter
into agreements to provide private-labeled versions of our products, including licenses to the AdCenter platform technology. These
license arrangements may include some or all of the following elements: revenue-sharing based on the publisher’s customer’s
monthly revenue generated through the AdCenter application; upfront fees; minimum monthly fees; and other license fees. We recognize
upfront fees over the term of the arrangement or the expected period of performance, other license fees over the term of the license,
and revenue-sharing portions over the period in which such revenue is earned. In all cases, revenue is recognized only when the
price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of
the resulting receivable is reasonably assured.
We provide a
provision against revenue for estimated reductions resulting from billing adjustments and customer refunds. The amounts of these
provisions are evaluated periodically based upon customer experience and historical trends. The allowance included in trade receivables,
net is insignificant at both December 31, 2014 and 2013, respectively.
Deferred revenue
is recorded when payments are received in advance of performance in underlying agreements. Customer deposits are recorded when
customers make prepayments for online advertising.
The Company
evaluates individual arrangements with customers to make a determination under Financial Accounting Standards Board (“FASB”)
Accounting Standards Codification (“ASC”) 605-45 Revenue Recognition. We test and record revenue accordingly.
Allowance for Doubtful Accounts
The Company
maintains an allowance for doubtful accounts for estimated losses resulting from customers failing to make required payments.
This valuation allowance is reviewed on a periodic basis. The review is based on factors including the application of historical
collection rates to current receivables and economic conditions. Additional allowances for doubtful accounts are considered and
recorded if there is deterioration in past due balances, if economic conditions are less favorable than the Company anticipated
or for customer-specific circumstances, such as bankruptcy. The allowance for doubtful accounts included in trade accounts receivable,
net is $0.8 and $0.7 million for the years ended December 31, 2014 and 2013, respectively. Bad debt expense included in general
and administrative expense is $0.1 million and insignificant for the years ended December 31, 2014 and 2013, respectively.
Concentrations, Credit Risk and
Credit Risk Evaluation
Concentration
of Credit Risk
Financial instruments
that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents, investments,
and accounts receivable. As of December 31, 2014 and 2013, the Company placed its cash equivalents and investments primarily
through one financial institution, City National Bank (“CNB”), and mitigated the concentration of credit risk by placing
percentage limits on the maximum portion of the investment portfolio which may be invested in any one investment instrument. These
amounts exceed federally insured limits at December 31, 2013 and 2012. The Company has not experienced any credit losses
on these cash equivalents and investment accounts and does not believe it is exposed to any significant credit risk on these funds.
The fair value of these accounts is subject to fluctuation based on market prices.
Credit Risk,
Customer and Vendor Evaluation
Accounts receivable
are typically unsecured and are derived from sales to customers. The Company performs ongoing credit evaluations of its customers
and maintains allowances for estimated credit losses. The Company applies judgment as to its ability to collect outstanding receivables
based primarily on management’s evaluation of the customer’s financial condition and past collection history and records
a specific allowance. In addition, the Company records an allowance based on the length of time the receivables are past due.
Historically, such losses have been within management’s expectations.
The following
table reflects customers that accounted for more than 10% of net accounts receivable:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Company 1 | |
| 24 | % | |
| ** | |
Company 2 | |
| 13 | % | |
| ** | |
Company 3 | |
| 12 | % | |
| ** | |
Company 4 | |
| 10 | % | |
| ** | |
Company 5 | |
| ** | | |
| 22 | % |
Company 6 | |
| ** | | |
| 18 | % |
Company 7 | |
| ** | | |
| 16 | % |
** Less than 10%
Revenue and
Cost Concentrations
The following
table reflects the concentration of revenue by geographic locations that accounted for more than 10% of net revenue:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
United States | |
| 91 | % | |
| 82 | % |
Europe, Middle East and Africa | |
| ** | | |
| 12 | % |
** Less than 10%
LookSmart derives
its revenue from two service offerings, or “products”: Advertiser Networks and Publisher Solutions. The percentage
distributions between the two service offerings are as follows:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Advertiser Networks | |
| 91 | % | |
| 86 | % |
Publisher Solutions | |
| 9 | % | |
| 14 | % |
The following
table reflects the percentage of revenue attributed to customers who accounted for 10% or more of net revenue, all of which are
Intermediaries:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Company 1 | |
| 12 | % | |
| 13 | % |
The Company
derives its revenue primarily from its relationships with significant distribution network partners. The following table reflects
the distribution partners that accounted for more than 10% of the total TAC:
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Distribution Partner 1 | |
| 20 | % | |
| 26 | % |
Distribution Partner 2 | |
| 15 | % | |
| ** | |
Distribution Partner 3 | |
| 11 | % | |
| 12 | % |
Distribution Partner 4 | |
| ** | | |
| 11 | % |
** Less than 10%
Property and Equipment
Property and
equipment are stated at cost, except when an impairment analysis requires use of fair value, and depreciated using the straight-line
method over the estimated useful lives of the assets as follows:
Computer equipment |
3 to 4 years |
Furniture and fixtures |
5 to 7 years |
Software |
2 to 3 years |
Building Improvements |
10 years |
Building |
39 years |
Leasehold improvements
are amortized on a straight-line basis over the shorter of their estimated useful lives or the lease term.
When assets
are retired or otherwise disposed of, the cost and accumulated depreciation and amortization are removed from their respective
accounts, and any gain or loss on such sale or disposal is reflected in operating expenses. Maintenance and repairs are charged
to expense as incurred. Expenditures that substantially increase an asset’s useful life are capitalized.
In the fourth
quarter of 2013, the Company acquired a 10,000 square foot data center facility in Phoenix, Arizona. This facility will allow
the Company to consolidate its data needs in a company-owned data center, as well as expand its cloud-based offerings to our customers.
Internal Use Software Development
Costs
The Company
capitalizes external direct costs of materials and services consumed in developing and obtaining internal-use computer software
and the payroll and payroll-related costs for employees who are directly associated with and who devote time to developing the
internal-use computer software. These costs are capitalized after certain milestones have been achieved and generally amortized
over a three year period once the project is placed in service.
Management exercises
judgment in determining when costs related to a project may be capitalized, in assessing the ongoing value of the capitalized
costs, and in determining the amortization period for the capitalized costs, which is generally three years. The Company expects
to continue to invest in internally developed software, although no such costs were capitalized in 2014 or 2013.
Restructuring Charges
In August 2012,
the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing
commitment. Restructuring costs associated with the sub-lease of the San Francisco office, totaling $0.03 and $0.02 million at
December 31, 2014 and 2013, respectively, have been fully amortized as of December 31, 2014.
Impairment of Long-Lived Assets
The Company
reviews long-lived assets held or used in operations, including property and equipment and internally developed software, for
impairment in accordance with ASC 360-10 “Impairment and Disposal of Long-Lived Assets”
The Company
reviews assets for evidence of impairment annually at year end and whenever events or changes in circumstances indicate the carrying
values may not be recoverable. The impairment review requires the Company to make significant estimates about its future performance
and cash flows, as well as other assumptions. These estimates can be affected by numerous factors, including changes in economic,
industry or market conditions, changes in business operations and changes in competition.
Traffic Acquisition Costs
The Company
enters into agreements of varying durations with its distribution network partners that display the Company’s listings ads
on their sites in return for a percentage of the revenue-per-click that the Company receives when the ads are clicked on those
partners’ sites.
The Company
also enters into agreements of varying durations with third party affiliates. These affiliate agreements provide for variable
payments based on a percentage of the Company’s revenue or based on a certain metric, such as number of searches or paid
clicks.
TAC expense
is recorded in cost of revenue.
Share-Based Compensation
The Company
recognizes share-based compensation costs for all share-based payment transactions with employees, including grants of employee
stock options, restricted stock awards, and employee stock purchases related to the Employee Stock Purchase Plan, over the requisite
service period based on their relative fair values. We estimate the fair value of each option award on the date of grant using
the Black-Scholes option valuation model. Our assumptions about stock-price volatility are based on the actual volatility of our
publically traded stock. The risk-free interest rate for periods within the contractual life of the award is based on the U.S.
Treasury yield curve in effect at the time of the grant. We estimate the expected term based upon the historical exercise activity.
The value of the portion of the award that is ultimately expected to vest is recognized as expense in the Company’s Consolidated
Statements of Operations over the requisite service periods. Share-based compensation expense recognized for the years ended December 31,
2014 and 2013 was insignificant and $0.04 million, respectively, which was related to stock grants, options and employee stock
purchases.
Forfeitures
are estimated at the time of grant in order to estimate the amount of share-based awards that will ultimately vest. The forfeiture
rate is determined at the end of each fiscal quarter, based on historical rates.
The Company
elected to adopt the alternative transition method for calculating the tax effects of share-based compensation to establish the
beginning balance of the additional paid-in capital pool (“APIC pool”) related to the tax effects of employee share-based
compensation, and to determine the subsequent impact on the APIC pool and Consolidated Statements of Cash Flows of the tax effects
of employee share-based compensation awards.
Advertising Costs
Advertising
costs are charged to sales and marketing expenses as incurred and were $0.05 million and insignificant in the years ended December
31, 2014 and 2013, respectively.
Product Development Costs
Research of
new product ideas and enhancements to existing products are charged to expense as incurred.
Income Taxes
The Company
accounts for income taxes using the liability method. Under the liability method, deferred tax liabilities and assets are determined
based on the difference between the financial statement and tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. The Company records liabilities, where appropriate, for all uncertain income
tax positions. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations
as income tax expense.
Comprehensive Loss
Other comprehensive
loss as of December 31, 2014 and 2013 consists of unrealized gains and losses on marketable securities categorized as available-for-sale
and foreign currency translation adjustments.
Net Loss per Common Share
Basic net loss
per share is calculated using the weighted average shares of common stock outstanding, excluding treasury stock. Diluted net loss
per share is calculated using the weighted average number of common and potentially dilutive common shares outstanding, excluding
treasury stock, during the period, using the treasury stock method for stock options. As a result of the Company’s net loss
position at December 31, 2014 and 2013, there is no dilution.
Segment Information
The Company
has one operating segment, online advertising. While the Company operates under one operating segment, management reviews revenue
under two product offerings—Advertiser Networks and Publisher Solutions.
As of December 31,
2014 and 2013, all of the Company’s accounts receivable, intangible assets, and deferred revenue are related to the online
advertising segment. All long-lived assets are located in the United States and Canada.
Recent Accounting Pronouncements
In July 2012,
the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update No. 2012-02, "Testing Indefinite-Lived
Intangible Assets for Impairment" or ASU 2012-02. ASU 2012-02 simplifies the requirements for testing for indefinite-lived
intangible assets other than goodwill and permits an entity to first assess qualitative factors to determine whether it is necessary
to perform a quantitative fair value test. This new guidance is effective for us beginning in the first quarter of 2013 and will
be applied prospectively. We anticipate that the adoption of this standard will not have a material impact on us or our consolidated
financial statements.
In June 2011,
the FASB issued an amendment to an existing accounting standard which requires companies to present net income and other comprehensive
income in one continuous statement or in two separate, but consecutive, statements. The Company was required to adopt this standard
as of the beginning of 2012. This guidance did not have an impact on the Company’s results of operations, financial position
or cash flows as it is related only to the presentation of consolidated comprehensive loss.
| 2. | Cash
and Available for Sale Securities |
The following
table summarizes the Company’s cash and available-for-sale securities’ amortized cost and estimated fair value by
significant investment category as of December 31, 2014 and 2013 (in thousands):
| |
Amortized Cost and Estimated | |
| |
Fair
Value | |
| |
December
31, | |
| |
2014 | | |
2013 | |
Cash and cash equivalents: | |
| | | |
| | |
Cash | |
$ | 304 | | |
$ | 1,048 | |
Cash equivalents | |
| | | |
| | |
Money market mutual funds | |
| 1 | | |
| 1,641 | |
Commercial paper | |
| - | | |
| 100 | |
Total cash equivalents | |
| 1 | | |
| 1,741 | |
Total cash and cash
equivalents | |
| 305 | | |
| 2,789 | |
Short-term investments: | |
| | | |
| | |
Corporate bonds | |
| - | | |
| 501 | |
Certificates of deposit | |
| 123 | | |
| 800 | |
Commercial paper | |
| - | | |
| 500 | |
Other commodities | |
| 6 | | |
| - | |
Collateralized debt
obligations | |
| - | | |
| 1,301 | |
Total short-term investments | |
| 129 | | |
| 3,102 | |
Long-term investments: | |
| | | |
| | |
Certificates of deposit | |
| - | | |
| 154 | |
Total long-term investments | |
| - | | |
| 154 | |
Total cash, and cash equivalents, short-term
and long-term investments | |
$ | 434 | | |
$ | 6,045 | |
Realized gains
and realized losses were not significant for either of the years ended December 31, 2014 or 2013. As of December 31,
2014, unrealized loss on investments was $0.1 million. As of December 31, 2013, there was no significant unrealized loss on investments.
The cost of all securities sold is based on the specific identification method.
The contractual
maturities of cash equivalents and short-term investments at December 31, 2014 and 2013 were less than one year. There were
no long-term investments at December 31, 2014.The contractual maturity of long-term investments was just over one year as of December
31, 2013.
The Company
typically invests in highly-rated securities, and its policy generally limits the amount of credit exposure to any one issuer.
When evaluating the investments for other-than-temporary impairment, the Company reviews such factors as the length of time and
extent to which fair value has been below cost basis, the financial condition of the issuer, and the Company’s intent to
sell, or whether it is more likely than not it will be required to sell the investment before recovery of the investment’s
amortized cost basis. During the years ended December 31, 2014 and 2013, the Company did not recognize any impairment charges
on outstanding investments. As of December 31, 2014, the Company does not consider any of its investments to be other-than-temporarily
impaired.
Property and
equipment consisted of the following at December 31, 2014 and 2013 (in thousands):
| |
December
31, 2014 | | |
December
31, 2013 | |
| |
| | |
Accumulated | | |
Net Book | | |
| | |
Accumulated | | |
Net Book | |
| |
Cost | | |
Depreciation | | |
Value | | |
Cost | | |
Depreciation | | |
Value | |
Computer equipment | |
$ | 1,108 | | |
$ | (602 | ) | |
$ | 506 | | |
$ | 490 | | |
$ | (244 | ) | |
$ | 246 | |
Furniture and fixtures | |
| 22 | | |
| (4 | ) | |
| 18 | | |
| 21 | | |
| (1 | ) | |
| 20 | |
Software | |
| 2,733 | | |
| (1,137 | ) | |
| 1,596 | | |
| 2,962 | | |
| (246 | ) | |
| 2,716 | |
Building and Leasehold improvements | |
| 541 | | |
| (36 | ) | |
| 505 | | |
| 59 | | |
| (4 | ) | |
| 55 | |
Land and Buildings | |
| 797 | | |
| (19 | ) | |
| 778 | | |
| 797 | | |
| (3 | ) | |
| 794 | |
Total | |
$ | 5,201 | | |
$ | (1,798 | ) | |
$ | 3,403 | | |
$ | 4,329 | | |
$ | (498 | ) | |
$ | 3,831 | |
Depreciation expense on property
and equipment for the years ended December 31, 2014 and 2013, including cost of property and equipment under capital lease,
was $1.4 million and $0.5 million, respectively, and is recorded in operating expenses. Equipment under capital lease totaled
$0.16 million as of December 31, 2014. There was no equipment under capital lease at December 31, 2013. Depreciation expense
on equipment under capital lease was $0.04 million for the year ended December 31, 2014, and accumulated depreciation on
equipment under capital lease was $0.04 million as of December 31, 2014.
| 4. | Capitalized
Software and Other Assets |
The Company’s
capitalized software and other assets are as follows at December 31, 2014 and 2013 (in thousands):
| |
December
31, 2014 | | |
December
31, 2013 | |
| |
| | |
Accumulated | | |
Net Book | | |
| | |
Accumulated | | |
Net Book | |
| |
Gross
Amount | | |
Amortization | | |
Value | | |
Gross
Amount | | |
Amortization | | |
Value | |
Other assets | |
| 62 | | |
| - | | |
| 62 | | |
| 87 | | |
| - | | |
| 87 | |
Total | |
$ | 62 | | |
$ | - | | |
$ | 62 | | |
$ | 87 | | |
$ | - | | |
$ | 87 | |
Capitalized
software consists of external direct costs of materials and services consumed in developing and obtaining internal-use computer
software and the payroll and payroll-related costs for employees who are directly associated with and who devote time to developing
the internal-use computer software and is amortized over three years. Amortization expense was zero for both years ended December 31,
2014 and 2013.
Accrued liabilities
consisted of the following as of December 31, 2014 and 2013 (in thousands):
| |
December
31, | |
| |
2014 | | |
2013 | |
Accrued distribution and partner costs | |
$ | 89 | | |
$ | 176 | |
Accrued compensation and related expenses | |
| 102 | | |
| 87 | |
Accrued professional service fees | |
| 117 | | |
| 146 | |
Other | |
| 3 | | |
| 35 | |
Capital lease obligations (note 7) | |
$ | 87 | | |
$ | - | |
Total
accrued liabilities | |
$ | 398 | | |
$ | 444 | |
In August 2012,
the Company entered into an agreement to sublease its office space in San Francisco under terms generally equivalent to its existing
commitment. Restructuring costs associated with the sub-lease of the San Francisco office, totaling $0.03 and $0.02 million at
December 31, 2014 and 2013, respectively, have been fully amortized as of December 31, 2014.
| 7. | Capital
Lease and Other Obligations |
Capital lease
and other obligations consist of the following at December 31, 2014 and 2013 (in thousands):
| |
December
31, | |
| |
2014 | | |
2013 | |
Capital lease obligations | |
$ | 87 | | |
$ | - | |
Deferred rent | |
| 22 | | |
| 186 | |
Total capital lease and other obligations | |
| 109 | | |
| 186 | |
Less: current portion of capital lease obligations | |
| (87 | ) | |
| - | |
Capital lease and
other obligations, net of current portion | |
$ | 22 | | |
$ | 186 | |
Refer to Note
9 for future minimum payment details.
Capital Lease Obligations
City National Bank
We have an outstanding
standby letter of credit (“SBLC”) issued by City National Bank (“CNB”) of approximately $0.1 million at
December 31, 2014, related to security of the subleased corporate office lease and secured by a money market account held
at CNB.
For further
discussion see Note 9, Commitments and Contingencies.
In accordance
with ASC 740, Income Taxes (“ASC 740”), the Company accounts for uncertainty in tax positions and recognizes
in its financial statements the largest amount of a tax position that is more-likely-than-not to be sustained upon audit, based
on the technical merits of the position.
The Company
files income tax returns in the U.S. federal jurisdiction, Canada and various state jurisdictions. The Company remains subject
to U.S. federal tax examinations for years 2010-present and Canadian examinations for 2011 to present. The tax years that remain
subject to examination in state jurisdictions include 2012, 2013 and 2014-present. The Company believes that its income tax filing
positions and deductions will be sustained on audit and does not anticipate any adjustments that will result in a material adverse
effect on the Company’s financial condition, results of operations, or cash flows. Therefore, no reserves for uncertain
income tax positions have been recorded at December 31, 2014.
The Company’s
policy is to recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. The
Company did not have any accrued interest or penalties associated with unrecognized tax benefits, nor were any interest expenses
or penalties recognized during the years ended December 31, 2014 and 2013.
The Company
was in a net taxable loss position in 2014 and 2013. The income tax provision for all years includes minimum state tax and revisions
of prior years’ estimated taxes.
Total income
tax expense of $50 and $7,000 for the years ended December 31, 2014 and 2013, respectively, were allocated to income from
continuing operations and is classified as a current provision.
| |
December
31, | |
| |
2014 | | |
2013 | |
Deferred tax asset: | |
| | | |
| | |
Net operating loss carryforwards | |
| | | |
$ | 71,387 | |
Depreciation and amortization | |
| | | |
| 1,387 | |
Tax credits | |
| | | |
| 535 | |
Share-based compensation | |
| | | |
| 3,939 | |
Total deferred tax assets | |
| 0 | | |
| 77,869 | |
Less: valuation allowance | |
| 0 | | |
| (77,869 | ) |
Total | |
$ | - | | |
$ | - | |
As of December 31,
2014, the Company had Net Operating Loss (“NOL”) carryforwards of approximately $196.6 million and $77.9 million for
federal and state purposes, respectively. The Company also has Alternative Minimum Tax (“AMT”) credit carryforwards
of $110 thousand and $60 thousand for federal and state purposes, respectively. The NOL carryforwards will expire at various dates
beginning in 2015 through 2031 if not utilized. The AMT tax credit carryforwards may be carried forward indefinitely. Included
in the NOL carryforwards are losses resulting from the exercise of stock options totaling $47 million and $2 million for federal
and state purposes, respectively, which will be credited to Additional Paid-in-Capital when realized.
A valuation
allowance existed as of December 31, 2014 and 2013, due to the uncertainty of net operating loss utilization based on the
Company’s history of losses. The valuation allowance increased by $1.5 million and $1.5 million for the years ended December 31,
2014 and 2013, respectively.
On January 14,
2013, effective with the consummation of a tender offer by PEEK Investments LLC, a Delaware limited liability company (“PEEK”),
a change in ownership as defined by Section 382 of the Internal Revenue Code resulted in a limitation in the timing and amount
of available NOL carryforwards. Beginning in 2013, both federal and state NOL carryforwards will be significantly limited. The
Company is currently assessing the amount of the limitation. A valuation allowance fully offsets the deferred tax asset associated
with these NOL carryforwards.
The Company’s
effective income tax rate and the federal statutory rate for the years ended December 31, 2014 and 2013 is effectively zero
and the company does not expect to pay federal income tax in the near future.
| |
December
31, | |
| |
2014 | | |
2013 | |
Federal tax rate from continuing operations | |
| | | |
| 34.0 | % |
Permanent differences | |
| | | |
| -0.2 | % |
Change in valuation allowance | |
| | | |
| -33.8 | % |
Other | |
| | | |
| 0.1 | % |
Total | |
| 0.0 | % | |
| 0.0 | % |
| 9. | Commitments
and Contingencies |
As of December 31,
2014, future minimum payments under all operating leases, net of related subleases, are as follows (in thousands):
| |
Capital | | |
Operating | | |
| |
| |
Lease | | |
Leases | | |
Total | |
Years ending December 31, | |
| | | |
| | | |
| | |
2015 | |
$ | 87 | | |
$ | 81 | | |
$ | 168 | |
2016 | |
| - | | |
| - | | |
| - | |
2017 | |
| - | | |
| - | | |
| - | |
2018 | |
| - | | |
| - | | |
| - | |
Total minimum net payments | |
$ | 87 | | |
$ | 81 | | |
$ | 168 | |
Less: amount representing interest | |
| - | | |
| | | |
| | |
Present value of net minimum payments | |
| 87 | | |
| | | |
| | |
Less: current portion | |
| (87 | ) | |
| | | |
| | |
Long-term portion of capital lease obligations | |
$ | - | | |
| | | |
| | |
Operating Leases
In August 2009,
the Company entered into an agreement to sublease office space for its headquarters in San Francisco, California, under an operating
lease that commenced in November 2009 and expired on December 30, 2014. In July 2012, the Company entered into an agreement to
sublease this subleased office space under terms generally equivalent to its existing commitment for a term that commenced in
August 2012 and expired in December 2014.
In August 2013,
the Company leased office space of approximately 2,341 square feet for its corporate office in San Francisco, California under
a five year lease that commenced in September 2014 and expires on August 31, 2018. On October 15, 2014, the Company terminated
this lease, closed the office and was released from all obligations under this lease.
The Company
leases office space in Los Angeles, California of approximately of 4,803 square feet. The lease expires in July 2015.
The Company
terminated its lease and closed its Canadian office in Kitchener in August 2013.
The Company
entered into a 30-month operating lease agreement for various network operating equipment beginning in the fourth quarter of 2014.
Rent expense
under all operating leases was $0.1 million and $0.2 million for the years ended December 2014, and 2013, respectively.
Letters of Credit
We have an outstanding
standby letter of credit (“SBLC”) issued by City National Bank (“CNB”) of approximately $0.1 million at
December 31, 2014, related to security of the subleased corporate office lease and secured by a money market account held
at CNB.
For further
discussion, see Note 7, Capital Lease and Other Obligations.
Purchase Obligations
The Company
had no outstanding purchase obligations as of December 31, 2014. The Company had outstanding purchase obligations of an insignificant
amount relating to an open purchase order for which the Company had not received the related services or goods.
Guarantees and Indemnities
During its normal
course of business, the Company has made certain guarantees, indemnities and commitments under which it may be required to make
payments in relation to certain transactions. These indemnities include intellectual property and other indemnities to the Company’s
customers and distribution network partners in connection with the sales of its products, and indemnities to various lessors in
connection with facility leases for certain claims arising from such facility or lease.
Officer and Director Indemnification
Further, the
Company has agreements whereby it indemnifies its officers and directors for certain events or occurrences while the officer or
director is, or was, serving, at the Company’s request, in such capacity, to the maximum extent permitted under the laws
of the State of Delaware. The maximum potential amount of future payments the Company could be required to make under these indemnification
agreements is unlimited. However, the Company maintains directors and officers insurance coverage that may contribute, up to certain
limits, a portion of any future amounts paid, for indemnification of directors and officers. The Company believes the estimated
fair value of these indemnification agreements in excess of applicable insurance coverage is minimal. Historically, the Company
has not incurred any losses or recorded any liabilities related to performance under these types of indemnities.
Legal Proceedings
On September
4, 2013, Cowen and Company, LLC filed a complaint against LookSmart with the Superior Court of California for the County of San
Francisco. According to the complaint, Cowen claims that LookSmart is required by an engagement letter dated August 14, 2009 to
pay Cowen a $1,000,000 "Sale Transaction Fee" as a result of the third-party tender offer for LookSmart Ltd. consummated
by PEEK Investments LLC on January 14, 2013. The parties agreed to a $450,000 settlement at a June 10, 2014 mediation. This amount
was subsequently paid by the Company on July 11, 2014. The Complaint and Counter Claim was dismissed with prejudice on August
27, 2014.
On October 3,
2013, WeBoost Media S.R.L., a Societa responsabilita ("WeBoost") filed a complaint against LookSmart with the Superior
Court of California for the County of San Francisco. The matter was subsequently removed and is currently pending before the United
States District Court, Northern District of California. WeBoost’s complaint asserts claims for breach of contract and extra-contractual
tort and punitive damages related to "click fraud". No specific monetary amounts are indicated in the complaint. LookSmart
believes the claims are meritless and continues to vigorously defend the matter. The Company is unable to presently determine
the risk of loss associated with this matter.
The Company
is involved, from time to time, in various other legal proceedings arising from the normal course of business activities. Although
the results of litigation and claims cannot be predicted with certainty, the Company does not expect resolution of these matters
to have a material adverse impact on its consolidated results of operations, cash flows or financial position unless stated otherwise.
However, an unfavorable resolution of a matter could, depending on its amount and timing, materially affect its results of operations,
cash flows or financial position in a future period. Regardless of the outcome, litigation can have an adverse impact on the Company
because of defense costs, diversion of management resources and other factors.
Share-Based Compensation
Stock Option
Plans
The Company
effected a 3:1 reverse stock split on November 7, 2013. All share amounts and share prices have been adjusted for this reverse
split.
In December
1997, the Company approved the 1998 Stock Option Plan (the “Plan”). In June 2007, the stockholders approved the LookSmart
2007 Equity Incentive Plan (the “2007 Plan”). Under the 2007 Plan, the Company may grant incentive stock options,
nonqualified stock options, stock appreciation rights and stock rights to employees, directors and consultants. Share-based incentive
awards are provided under the terms of these two plans (collectively, the “Plans”).
The Compensation
Committee of the Board of Directors administers the Company’s Plans. Awards under the Plans principally include at-the-money
options and fully vested restricted stock. Outstanding stock options generally become exercisable over a four year period from
the grant date and have a term of seven years. Grants can only be made under the 2007 Plan. The 1998 Plan is closed to further
share issuance and all options have expired or been forfeited as of December 31, 2013. The number of shares issued or reserved
for issuance under the Plans was 1.2 million shares of common stock for the both years ended December 31, 2014 and 2013.
There were 1.2 million shares available to be granted under the 2007 Plan at December 31, 2014.
Share-based
compensation expense recorded during the years ended December 31, 2014 and 2013 was included in the Company’s Consolidated
Statements of Operations as follows (in thousands):
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Sales and marketing | |
$ | 1 | | |
$ | 3 | |
Product development and technical operations | |
| 1 | | |
| 6 | |
General and administrative | |
| 3 | | |
| 33 | |
Total share-based compensation
expense | |
$ | 5 | | |
$ | 42 | |
Total unrecognized
share-based compensation expense related to share-based compensation arrangements at December 31, 2014 was not significant
and is expected to be recognized over a weighted-average period of approximately 0.57 years. The total fair value of equity awards
vested during both the years ended December 31, 2014 and 2013 was not significant.
Option Awards
Stock option
activity under the Plans during the years ended December 31, 2014 and 2013 is as follows:
| |
| | |
| | |
Weighted- | | |
| |
| |
| | |
Weighted- | | |
Average | | |
| |
| |
| | |
Average | | |
Remaining | | |
Aggregate | |
| |
| | |
Exercise Price | | |
Contractual | | |
Intrinsic | |
| |
Shares | | |
Per
Share | | |
Term | | |
Value | |
| |
(in thousands) | | |
| | |
(in years) | | |
(in thousands) | |
Options outstanding at December 31, 2012 | |
| 705 | | |
$ | 7.41 | | |
| 2.96 | | |
$ | 15 | |
Granted | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| (138 | ) | |
| 11.94 | | |
| | | |
| | |
Forfeited | |
| (542 | ) | |
| 7.60 | | |
| | | |
| | |
Options outstanding at December 31, 2013 | |
| 25 | | |
$ | 4.16 | | |
| 4.67 | | |
| - | |
Granted | |
| - | | |
| - | | |
| | | |
| | |
Exercised | |
| - | | |
| - | | |
| | | |
| | |
Expired | |
| - | | |
| - | | |
| | | |
| | |
Forfeited | |
| (20 | ) | |
| 3.90 | | |
| | | |
| | |
Options outstanding at December 31, 2014 | |
| 5 | | |
$ | 5.27 | | |
| 2.93 | | |
$ | - | |
Vested and expected to vest at December
31, 2014 | |
| 4 | | |
$ | 5.32 | | |
| 0.55 | | |
$ | - | |
Exercisable at Decewmber 31, 2014 | |
| 4 | | |
$ | 5.45 | | |
| 0.47 | | |
$ | - | |
The aggregate
intrinsic values in the table above represent the total pre-tax intrinsic value (the difference between the market price of the
Company’s stock on the last trading day of the period and the exercise price, multiplied by the number of in-the-money options)
that would have been received by the option holder had all option holders exercised their options at year-end. The intrinsic value
amount changes with changes in the fair market value of the Company’s stock.
The following
table summarizes information about stock options outstanding at December 31, 2014:
| | |
| | |
Options
Outstanding | | |
Options
Exercisable | |
| | |
| | |
| | |
| | |
Weighted- | | |
| | |
Weighted- | |
| | |
| | |
| | |
Weighted- | | |
Average | | |
| | |
Average | |
| | |
| | |
| | |
Average | | |
Exercise | | |
| | |
Exercise | |
| | |
| | |
| | |
Remaining | | |
Price | | |
| | |
Price | |
Price
Ranges | | |
Shares | | |
Contractual
Term | | |
Per
Share | | |
Shares | | |
Per
Share | |
| | |
| | |
(in thousands) | | |
(in years) | | |
| | |
(in thousands) | | |
| |
$ | 4.14 - | | |
$ | 5.64 | | |
| 4 | | |
| 3.55 | | |
$ | 4.53 | | |
| 3 | | |
$ | 4.59 | |
| 8.10 - | | |
| 8.10 | | |
| 1 | | |
| 0.55 | | |
| 8.10 | | |
| 1 | | |
| 8.10 | |
| | | |
| | | |
| 5 | | |
| 2.93 | | |
| 5.27 | | |
| 4 | | |
| 5.45 | |
Stock Awards
The Company
did not issue restricted stock during the years ended December 31, 2014 and 2013.
Employee Stock Purchase Plan
On July 14,
2009, the 2009 Employee Stock Purchase Plan (the “2009 ESPP”) was approved by the shareholders and authorized to issue
up to 500 thousand shares of common stock to employees. Substantially all employees may purchase the Company’s common
stock through payroll deductions at 85 percent of the lower of the fair market value at the beginning or end of the offering period.
Each offering and purchase period is 6 months. ESPP contributions are limited to a maximum of 15 percent of an employee’s
eligible compensation, and ESPP participants are limited to purchasing a maximum of 5,000 shares per purchase period. Share-based
compensation expense for the 2009 ESPP was zero and insignificant in 2014 and 2013, respectively. As of December 31, 2014,
28 thousand shares have been issued under the 2009 Plan. Following the February 15, 2013 purchase, the ESPP was suspended
pending a review of all equity incentive arrangements by the Company’s Board of Directors.
Share-Based Compensation Valuation
Assumptions
We estimate
the fair value of each option award on the date of grant using the Black-Scholes option valuation model. Our assumptions about
stock-price volatility are based on the actual volatility of our publically traded stock. The risk-free interest rate for periods
within the contractual life of the award is based on the U.S. Treasury yield curve in effect at the time of the grant. We estimate
the expected term based upon the historical exercise activity.
No options were
granted in 2014 or 2013, therefore no weighted average assumptions are included here.
Share-based
compensation expense recognized in the Consolidated Statements of Operations is based on awards ultimately expected to vest and
has been reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent
periods if actual forfeitures differ from those estimates.
Exercise of Employee and Director
Stock Options and Purchase Plans
There were no
options exercised in the years ended December 31, 2014 and 2013. The Company issues new shares of common stock upon exercise of
stock options. No income tax benefits have been realized from exercised stock options.
Repurchase of Equity Securities
by the Company
In May 2012,
the Company’s Board of Directors authorized the repurchase of up to $1 million of the Company’s common shares. Under
the program, the Company may purchase its common shares from time to time in the open market or in privately negotiated transactions.
Approximately
98 thousand shares were purchased during the year ended December 31, 2014 at an average price of $1.78 per share under the program
and recorded as treasury stock at cost totaling approximately $175 thousand dollars. Approximately 13 thousand shares were purchased
at an average price of $2.34 per share under the program during the year ended December 31, 2013, and recorded as treasury stock
at cost totaling approximately $26 thousand dollars.
| 11. | Fair Value Measurements |
Fair Value of
Financial Assets
The Company’s
financial assets measured at fair value on a recurring basis subject to disclosure requirements at December 31, 2014 and 2013
were as follows (in thousands):
| |
| | |
Quoted Prices | | |
| | |
| |
| |
| | |
in Active | | |
Significant | | |
| |
| |
| | |
Markets for | | |
Other | | |
Significant | |
| |
Balance at | | |
Identical | | |
Observable | | |
Unobserved | |
| |
December 31, | | |
Assets | | |
Inputs | | |
Inputs | |
| |
2014 | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
Cash equivalents: | |
| | | |
| | | |
| | | |
| | |
Money market
mutual funds | |
$ | 1 | | |
$ | 1 | | |
$ | - | | |
$ | - | |
Total cash equivalents | |
| 1 | | |
| 1 | | |
| - | | |
| - | |
Short-term investments: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit | |
| 123 | | |
| - | | |
| 123 | | |
| - | |
Other commodities | |
| 6 | | |
| - | | |
| 6 | | |
| - | |
Total short-term investments | |
| 129 | | |
| - | | |
| 129 | | |
| - | |
Total financial assets measured at fair
value | |
$ | 130 | | |
$ | 1 | | |
$ | 129 | | |
$ | - | |
| |
| | |
Quoted Prices | | |
| | |
| |
| |
| | |
in Active | | |
Significant | | |
| |
| |
| | |
Markets for | | |
Other | | |
Significant | |
| |
Balance at | | |
Identical | | |
Observable | | |
Unobserved | |
| |
December 31, | | |
Assets | | |
Inputs | | |
Inputs | |
| |
2013 | | |
(Level
1) | | |
(Level
2) | | |
(Level
3) | |
Cash equivalents: | |
| | | |
| | | |
| | | |
| | |
Money market mutual funds | |
$ | 1,641 | | |
$ | 1,641 | | |
$ | - | | |
$ | - | |
Commercial paper | |
| 100 | | |
| - | | |
| 100 | | |
| - | |
Total cash equivalents | |
| 1,741 | | |
| 1,641 | | |
| 100 | | |
| - | |
Short-term investments: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit | |
| 800 | | |
| - | | |
| 800 | | |
| - | |
Corporate bonds | |
| 501 | | |
| - | | |
| 501 | | |
| - | |
Commercial paper | |
| 500 | | |
| - | | |
| 500 | | |
| - | |
Collateralized debt securities | |
| 1,301 | | |
| - | | |
| - | | |
| 1,301 | |
Total short-term investments | |
| 3,102 | | |
| - | | |
| 1,801 | | |
| 1,301 | |
Long-term investments: | |
| | | |
| | | |
| | | |
| | |
Certificates of deposit | |
| 154 | | |
| - | | |
| 154 | | |
| - | |
Total long-term investments | |
| 154 | | |
| - | | |
| 154 | | |
| - | |
Total financial assets measured at fair
value | |
$ | 4,997 | | |
$ | 1,641 | | |
$ | 2,055 | | |
$ | 1,301 | |
The Company
held no Level 3 investments at December 31, 2014. The Company held approximately $1.3 million in Level 3 investments at December
31, 2013.
Investments
For investments
that have quoted market prices in active markets, the Company uses the quoted market prices as fair value and includes these prices
in the amounts disclosed in Level 1 of the hierarchy. The Company receives the quoted market prices from a third party, nationally
recognized pricing service (“pricing service”). When quoted market prices are unavailable, the Company utilizes a
pricing service to determine a single estimate of fair value, which is mainly for its fixed maturity investments. The fair value
estimates provided from this pricing service are included in the amount disclosed in Level 2 of the hierarchy. The Company bases
all of its estimates of fair value for assets on the bid price as it represents what a third party market participant would be
willing to pay in an arm’s length transaction.
The Company
validates the prices received from the pricing service using various methods including, applicability of Federal Deposit Insurance
Corporation or other national government insurance or guarantees, comparison of proceeds received on individual investments subsequent
to reporting date, prices received from publicly available sources, and review of transaction volume data to confirm the presence
of active markets. The Company does not adjust the prices received from the pricing service unless such prices are determined
to be inconsistent. At December 31, 2014 and 2013, the Company did not adjust prices received from the pricing service.
On June 1, 2013
the Company invested approximately $2.0 million in a fully collateralized fund with a maturity date of September 30, 2014. The
investment generally entitles the Company to monthly payments of principal and interest, subject to certain restrictions. During
2014, the Company received payments of $1.1 million in principal and $0.1 million in interest. During 2013, the Company received
payments of $0.7 million in principal and $0.2 million in interest. The investment was recorded at amortized cost, reduced
for non-temporary losses charged to earnings. No non-temporary losses were recognized by the Company as of and for the periods
since the date of investment. As of September 30, 2014, the investment was fully redeemed.
Level 3 Assets
– Roll forward (in thousands):
| |
Fair Value | |
| |
Measurements | |
| |
Using | |
| |
Significant | |
| |
Unobservable | |
| |
Inputs
(Level 3) | |
| |
Collateralized | |
| |
Debt
Securities | |
Balance at December 31, 2013 | |
$ | 1,301 | |
Transfers into Level 3 | |
| - | |
Transfers out of Level 3 | |
| - | |
Total gains or losses | |
| | |
Included in earnings (or changes in net assets) | |
| 47 | |
Included in Other comprehensive income | |
| - | |
Purchases, issuances, sales, and settlements | |
| | |
Purchases | |
| - | |
Issuances | |
| - | |
Sales | |
| - | |
Settlements | |
| (541 | ) |
Balance at March 31, 2014 | |
$ | 807 | |
Transfers into Level 3 | |
| - | |
Transfers out of Level 3 | |
| - | |
Total gains or losses | |
| | |
Included in earnings (or changes in net assets) | |
| 26 | |
Included in Other comprehensive income | |
| - | |
Purchases, issuances, sales, and settlements | |
| | |
Purchases | |
| - | |
Issuances | |
| - | |
Sales | |
| - | |
Settlements | |
| (513 | ) |
Balance at June 30, 2014 | |
$ | 320 | |
Transfers into Level 3 | |
| - | |
Transfers out of Level 3 | |
| - | |
Total gains or losses | |
| | |
Included in earnings (or changes in net assets) | |
| 7 | |
Included in Other comprehensive income | |
| - | |
Purchases, issuances, sales, and settlements | |
| | |
Purchases | |
| - | |
Issuances | |
| - | |
Sales | |
| - | |
Settlements | |
| (327 | ) |
Balance at September 30, 2014 | |
| - | |
Trade accounts
receivable, net: The carrying value reported in the Consolidated Balance Sheets approximates fair value and is net of allowances
for doubtful accounts and returns which estimate customer non-performance risk.
Trade accounts
payable and accrued liabilities: The carrying value reported in the Consolidated Balance Sheets for these items approximates
their fair value, which is the likely amount which the liability with short settlement periods would be transferred to a market
participant with a similar credit standing as the Company.
The Company
has a 401(k) retirement plan covering all eligible employees. Employees may contribute amounts ranging from 1% to 50% of annual
salary, up to the maximum limits established by the Internal Revenue Service. The Company matches these contributions in cash
up to 5% of annual salary up to a total match of $3 thousand per year per employee. Employees vest 100% immediately in their own
contributions and 50% per year in Company matching contributions. Any employer contributions that are not vested are forfeited
if an employee leaves the Company, but are reinstated if the employee returns to service within five years. The Company made matching
contributions of $0.06 million and $0.03 million, respectively, for each of 2014 and 2013.
| 13. | Related Party Transactions |
The Company
paid Michael Onghai $0.08 million in both the years ended December 31, 2014 and 2013, in connection with his services as the Company’s
Chief Executive Officer.
The Company
has paid over $50,000.00 in each month of 2014 for salaries and office expense for LookSmart India, a company incorporated under
the laws of India, with 25 employees, which is owned by Michael Onghai. The services of LookSmart India are for the exclusive
benefit of the Company and the money paid by the Company to it only goes to pay Looksmart India expenses. Mr. Onghai
has agreed to transfer ownership of LookSmart India to the Company for no consideration when allowable under Indian law.
The Company
paid fees directly or indirectly to Jean-Yves Dexmier of $0.04 million, in the year ended December 31, 2013, in connection with
his services as the Company’s Chief Executive Officer and Board member.
The Company
had advanced $0.25 million as at December 31, 2014 to Conversion Media Holdings, LLC. One of the directors of Conversion Media
Holdings, LLC is also a director of the Company. The receivable from Conversion Media Holdings, LLC relates to ordinary business
transactions, bearing no interest or collateral , and is repayable within one year and renewable under normal advancement terms
and conditions.
| 14. | Net Income (Loss) per Share |
A reconciliation
of the numerator and denominator of basic and diluted net income (loss) per share (“EPS”) is provided as follows (in
thousands, except per share amounts):
| |
Year
Ended December 31, | |
| |
2014 | | |
2013 | |
Numerator | |
| | | |
| | |
Net loss | |
$ | (6,419 | ) | |
$ | (5,356 | ) |
Denominator | |
| | | |
| | |
Weighted average shares used to compute basic
EPS | |
| 5,709 | | |
| 5,756 | |
Effect of dilutive securities: | |
| | | |
| | |
Dilutive common stock
equivalents | |
| - | | |
| - | |
Weighted average shares
used to compute diluted EPS | |
| 5,709 | | |
| 5,756 | |
Net loss per share - Basic and Diluted | |
| | | |
| | |
Net loss per share
- Basic and Diluted | |
$ | (1.12 | ) | |
$ | (0.93 | ) |
Options to purchase
common stock are not included in the diluted loss per share calculations when their effect is antidilutive. For the year ended
December 31, 2014, 4 thousand shares of potential common stock related to outstanding stock options were excluded from the calculation
of diluted net loss per share as such shares are antidilutive when there is a loss.
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates
the realization of assets and the liquidation of liabilities in the normal course of business. As of and for the year ended
December 31, 2014, the Company had a loss from operations of $6.4 million and accumulated deficit of $259 million. As of year
ended December 31, 2014, the working capital deficiency was $1 million; the cash used in operating activities was $4 million.
The Company intends to fund operations through debt and equity financing arrangements. The ability of the Company to survive is
dependent upon, among other things, obtaining additional financing to continue operations, and development of its business plan.
In response to these problems, management intends to raise additional funds through public or private placement offerings, and
related party loans. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern.
The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
From
December 2014 to March 2015, Snowy August Management LLC advanced certain funds to the Company in the aggregate amount of $750,000.
The Company’s Chief Executive Offier, Michael Onghai is the manager of Snowy August Management LLC. The Company intends
to repay in full such funds to Snowy August Management LLC.
PYXIS
TANKERS INC. PREDECESSOR
INDEX
TO FINANCIAL STATEMENTS
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors of Pyxis
Tankers Inc.
We have
audited the accompanying combined balance sheets of Pyxis Tankers Inc. Predecessor as of December 31, 2014 and 2013, as described
in Note 1, and the related combined statements of comprehensive income/(loss), stockholder’s equity, and cash flows for
each of the two years in the period ended December 31, 2014. These financial statements are the responsibility of Pyxis Tankers
Inc. Predecessor’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted
our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material
misstatement. We were not engaged to perform an audit of the Pyxis Tankers Inc. Predecessor’s internal control over financial
reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures
that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Pyxis
Tankers Inc. Predecessor’s internal control over financial reporting. Accordingly, we express no such opinion. An audit
also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion,
the financial statements referred to above present fairly, in all material respects, the combined financial position of Pyxis
Tankers Inc. Predecessor at December 31, 2014 and 2013, and the combined results of its operations and its cash flows for each
of the two years in the period ended December 31, 2014, in conformity with U.S. generally accepted accounting principles.
Ernst &
Young (Hellas) Certified Auditors-Accountants S.A.
Athens,
Greece
April 23, 2015
PYXIS TANKERS INC.PREDECESSOR
Combined
Balance Sheets
December 31, 2013 and 2014
(Expressed in thousands of U.S.
Dollars)
| |
2013 | | |
2014 | |
ASSETS | |
| | | |
| | |
CURRENT ASSETS: | |
| | | |
| | |
Cash and cash equivalents | |
$ | 2,048 | | |
$ | 500 | |
Restricted cash current portion | |
| 152 | | |
| 147 | |
Inventories (Note 4) | |
| 422 | | |
| 904 | |
Trade receivables | |
| 1,072 | | |
| 1,203 | |
Prepayments and other | |
| 401 | | |
| 618 | |
Due from related parties (Note 3) | |
| 5,657 | | |
| 2,523 | |
Total current assets | |
| 9,752 | | |
| 5,895 | |
| |
| | | |
| | |
FIXED ASSETS, NET: | |
| | | |
| | |
Advances for vessel acquisition (Note 5) | |
| 6,805 | | |
| 13,728 | |
Vessels, net (Note 6) | |
| 125,460 | | |
| 103,717 | |
Total fixed assets, net | |
| 132,265 | | |
| 117,445 | |
| |
| | | |
| | |
OTHER NON CURRENT ASSETS: | |
| | | |
| | |
Restricted cash, net of current portion | |
| 1,000 | | |
| 1,000 | |
Deferred charges, net (Note 7) | |
| 829 | | |
| 559 | |
Total assets | |
$ | 143,846 | | |
$ | 124.899 | |
| |
| | | |
| | |
LIABILITIES AND
STOCKHOLDERS’ EQUITY | |
| | | |
| | |
| |
| | | |
| | |
CURRENT LIABILITIES: | |
| | | |
| | |
Current portion of long-term debt (Note 8) | |
$ | 6,705 | | |
$ | 5,663 | |
Accounts payable | |
| 243 | | |
| 571 | |
Due to related parties (Note 3) | |
| 14,835 | | |
| 2,654 | |
Hire collected in advance | |
| 900 | | |
| 479 | |
Accrued and other liabilities | |
| 408 | | |
| 337 | |
Total current liabilities | |
| 23,091 | | |
| 9,704 | |
| |
| | | |
| | |
NON-CURRENT LIABILITIES: | |
| | | |
| | |
Long-term debt, net of current portion (Note
8) | |
| 66,435 | | |
| 61,294 | |
Total non-current liabilities | |
| 66,435 | | |
| 61,294 | |
| |
| | | |
| | |
COMMITMENTS AND CONTINGENCIES
(Note 11) | |
| | | |
| | |
| |
| | | |
| | |
STOCKHOLDER’S EQUITY: | |
| | | |
| | |
Common stock, (Note 9) | |
| | | |
| | |
Additional paid-in capital | |
| 54,157 | | |
| 72,981 | |
Retained earnings/(Accumulated deficit) | |
| 163 | | |
| (19,080 | ) |
Total stockholder’s
equity | |
| 54,320 | | |
| 53,901 | |
Total liabilities and
stockholder’s equity | |
$ | 143,846 | | |
$ | 124,899 | |
The accompanying
notes are an integral part of these combined financial statements.
PYXIS TANKERS INC. PREDECESSOR
Combined
Statements of Comprehensive Income /(Loss)
For the years ended December
31, 2013 and 2014
(Expressed in thousands of U.S.
Dollars)
| |
2013 | | |
2014 | |
Voyage revenues: | |
$ | 21,980 | | |
$ | 27,760 | |
| |
| | | |
| | |
Expenses: | |
| | | |
| | |
Voyage related costs and commissions | |
| (3,817 | ) | |
| (10,030 | ) |
Vessel operating expenses | |
| (10,220 | ) | |
| (11,064 | ) |
General and administrative expenses | |
| (173 | ) | |
| (93 | ) |
Management fees, related parties (Note 3) | |
| (468 | ) | |
| (611 | ) |
Management fees, other | |
| (823 | ) | |
| (922 | ) |
Amortization of dry-docking and special survey costs (Note 7) | |
| (157 | ) | |
| (203 | ) |
Depreciation (Note 6) | |
| (4,520 | ) | |
| (5,446 | ) |
Vessel impairment charge (Note 6) | |
| - | | |
| (16,930 | ) |
Other income | |
| 192 | | |
| - | |
Operating income/(loss) | |
| 1,994 | | |
| (17,539 | ) |
| |
| | | |
| | |
Other income/(expenses): | |
| | | |
| | |
Interest and finance costs (Note 12) | |
| (402 | ) | |
| (1,704 | ) |
| |
| | | |
| | |
Total other expenses | |
| (402 | ) | |
| (1,704 | ) |
| |
| | | |
| | |
Net income /(loss) | |
$ | 1,592 | | |
$ | (19,243 | ) |
| |
| | | |
| | |
Other comprehensive income | |
| - | | |
| - | |
Total comprehensive income/(loss) | |
$ | 1,592 | | |
$ | (19,243 | ) |
The accompanying notes are an
integral part of these combined financial statements.
PYXIS TANKERS INC. PREDECESSOR
Combined
Statements of Stockholder's Equity
For the years ended December
31, 2013 and 2014
(Expressed in thousands of U.S.
Dollars - except for share data)
| |
| | |
| | |
Retained | | |
| |
| |
| | |
Additional | | |
Earnings / | | |
Total | |
| |
Common | | |
paid-in | | |
(Accumulated | | |
Stockholder's | |
| |
Stock | | |
capital | | |
Deficit) | | |
Equity | |
| |
| | | |
| | | |
| | | |
| | |
BALANCE, January 1, 2013 | |
| - | | |
| 45,367 | | |
| (1,429 | ) | |
| 43,938 | |
Net income | |
| - | | |
| - | | |
| 1,592 | | |
| 1,592 | |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | |
Total comprehensive income | |
| - | | |
| - | | |
| 1,592 | | |
| 1,592 | |
Stockholder’s contributions | |
| - | | |
| 22,247 | | |
| - | | |
| 22,247 | |
Stockholder’s re-imbursement/distribution | |
| - | | |
| (13,457 | ) | |
| - | | |
| (13,457 | ) |
BALANCE, December 31, 2013 | |
| - | | |
| 54,157 | | |
| 163 | | |
| 54,320 | |
Net Loss | |
| - | | |
| - | | |
| (19,243 | ) | |
| (19,243 | ) |
Other comprehensive income | |
| - | | |
| - | | |
| - | | |
| - | |
Total comprehensive loss | |
| - | | |
| - | | |
| (19,243 | ) | |
| (19,243 | ) |
Stockholder’s contributions | |
| - | | |
| 18,824 | | |
| - | | |
| 18,824 | |
BALANCE, December 31, 2014 | |
| - | | |
| 72,981 | | |
| (19,080 | ) | |
| 53,901 | |
The accompanying notes are an
integral part of these combined financial statements.
PYXIS TANKERS INC. PREDECESSOR
Combined
Statements of Cash Flows
For the years ended December
31, 2013 and 2014
(Expressed in thousands of U.S.
Dollars)
| |
2013 | | |
2014 | |
Cash flows from operating activities: | |
| | | |
| | |
Net Income/ (loss) | |
$ | 1,592 | | |
$ | (19,243 | ) |
Adjustments to reconcile net income/(loss) to net cash from operating
activities: | |
| | | |
| | |
| |
| | | |
| | |
Depreciation | |
| 4,520 | | |
| 5,446 | |
Amortization and write-off of deferred financing costs | |
| 193 | | |
| 136 | |
Amortization of deferred dry-docking and special survey costs | |
| 157 | | |
| 203 | |
Vessel impairment charge | |
| - | | |
| 16,930 | |
| |
| | | |
| | |
(Increase)/Decrease in: | |
| | | |
| | |
Inventories | |
| (90 | ) | |
| (482 | ) |
Prepayments and other | |
| (121 | ) | |
| (217 | ) |
Due to / from related parties | |
| (412 | ) | |
| 3,353 | |
Trade receivables | |
| (674 | ) | |
| (131 | ) |
Special and intermediate surveys cost | |
| - | | |
| (469 | ) |
| |
| | | |
| | |
Increase/(Decrease) in: | |
| | | |
| | |
Accounts payable | |
| (256 | ) | |
| 328 | |
Hire collected in advance | |
| 900 | | |
| (421 | ) |
Accrued and other liabilities | |
| 183 | | |
| (71 | ) |
Net cash provided by operating
activities | |
| 5,992 | | |
| 5,362 | |
| |
| | | |
| | |
Cash flows from investing activities: | |
| | | |
| | |
| |
| | | |
| | |
Advances for vessel acquisition | |
| (29,389 | ) | |
| (6,923 | ) |
Additions to vessel cost | |
| - | | |
| (233 | ) |
Net cash used in investing
activities | |
| (29,389 | ) | |
| (7,156 | ) |
| |
| | | |
| | |
Cash flows from financing activities: | |
| | | |
| | |
Proceeds from long-term debt | |
| 34,800 | | |
| - | |
Repayment of long-term debt | |
| (17,801 | ) | |
| (6,183 | ) |
Change in restricted cash | |
| (887 | ) | |
| 5 | |
Proceeds from equity contributions | |
| 22,247 | | |
| 6,424 | |
Paid-in capital re-imbursement | |
| (13,457 | ) | |
| - | |
Net cash provided by financing
activities | |
| 24,902 | | |
| 246 | |
| |
| | | |
| | |
Net increase/(decrease) in cash and cash equivalents | |
| 1,505 | | |
| (1,548 | ) |
| |
| | | |
| | |
Cash and cash equivalents
at beginning of year | |
| 543 | | |
| 2,048 | |
| |
| | | |
| | |
Cash and cash equivalents
at end of year | |
$ | 2,048 | | |
$ | 500 | |
SUPPLEMENTAL INFORMATION | |
| | | |
| | |
| |
| | | |
| | |
Cash paid for interest, net of amounts capitalized | |
$ | 1,307 | | |
$ | 1,788 | |
The accompanying notes are an
integral part of these combined financial statements.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 1. | Basis
of Presentation and General Information: |
PYXIS
TANKERS INC. ( the “Company”) was formed as a corporation under the laws of the Republic of Marshall Islands on March
23, 2015 for the purpose of acquiring 100% ownership interest in six vessel-owning companies, SECONDONE CORP. (“Secondone”),
THIRDONE CORP. (“Thirdone”), FOURTHONE CORP. (“Fourthone”), and SIXTHONE CORP. (“Sixthone”),
SEVENTHONE CORP. (“Seventhone”) and EIGHTHONE CORP. (“Eighthone”), established under the laws of the Republic
of Marshall Islands and engaged in the marine transportation of liquid cargoes through the ownership and operation of tanker vessels,
as listed below:
Vessel-owning
subsidiary | |
Incorporation
date | |
Vessel | |
DWT | | |
Year
Built | | |
Acquisition
date |
Secondone | |
23/05/2007 | |
Northsea Alpha | |
| 8,615 | | |
| 2010 | | |
28/05/2010 |
Thirdone | |
23/05/2007 | |
Northsea Beta | |
| 8,647 | | |
| 2010 | | |
25/05/2010 |
Fourthone | |
30/05/2007 | |
Pyxis Malou | |
| 50,667 | | |
| 2009 | | |
16/02/2009 |
Sixthone | |
18/01/2010 | |
Pyxis Delta | |
| 46,616 | | |
| 2006 | | |
4/03/2010 |
Seventhone | |
31/05/2011 | |
Pyxis Theta | |
| 51,795 | | |
| 2013 | | |
16/09/2013 |
Eighthone | |
8/02/2013 | |
Pyxis Epsilon | |
| 50,295 | | |
| 2015 | | |
14/01/2015 |
All
of the Company’s vessels are double-hulled and are engaged in the transportation of refined petroleum products and other
liquid bulk items, such as, organic chemicals and vegetable oils. The vessels Northsea Alpha and the Northsea Beta
are smaller tanker sister ships and Pyxis Malou, Pyxis Delta, Pyxis Theta and Pyxis Epsilon, are medium-range
tankers.
Secondone,
Thirdone, Fourthone, Sixthone, Seventhone and Eighthone are hereinafter referred to as the “Predecessor Companies”.
The combined net assets and results of operations of the Predecessor Companies are collectively referred to as the “Predecessor”
and are presented in the combined financial statements.
The
Company is a wholly-owned subsidiary of MARITIME INVESTORS CORP. (“Maritime Investors”), a corporation established
under the laws of the Republic of Marshall Islands. The founder and sole stockholder of Maritime Investors is Mr. Valentios ("Eddie")
Valentis.
Mr.
Valentis is the sole ultimate stockholder of the Company, holding all of its issued and outstanding share capital through Maritime
Investors. Since Maritime Investors owns directly 100% of Secondone and Thirdone, and owns indirectly (through intermediate holding
company PYXIS HOLDINGS INC.) 100% of Fourthone, Sixthone, Seventhone and Eighthone, prior to their transfer to the Company, there
is no change in ownership or control of the business, and therefore the transaction constitutes a reorganization of companies
under common control, and will be accounted for in a manner similar to a pooling of interests. Accordingly, upon the transfer
of the assets and liabilities of the Predecessor Companies the financial statements of the Company will be presented using combined
historical carrying amounts of the assets and liabilities of the vessel owning companies and present the consolidated financial
position and results of operations as if the Company and its wholly-owned subsidiaries were consolidated for all periods presented.
PYXIS
MARITIME CORP. (“Maritime”), a corporation established under the laws of the Republic of the Marshall Islands, which
is beneficially owned by Mr. Valentis, provides certain ship management services to the Predecessor Companies (Note 3). With effect
from the delivery of each vessel, the crewing and technical management of the vessels were contracted to International Tanker
Management Ltd. (“ITM”) with permission from Maritime. ITM is an unrelated third party technical manager, represented
by its branch based in Dubai, UAE. Each agreement with ITM will continue indefinitely until terminated by either party with three
months’ prior notice.
In
September 2010, Secondone and Thirdone entered into commercial management agreements with North Sea Tankers BV (“NST”),
an unrelated company established in the Netherlands. Pursuant to these agreements, NST provides chartering services to Northsea
Alpha and Northsea Beta. The agreements with NST will continue indefinitely until terminated by either party with three
months’ prior notice.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars)
| 2. | Significant
Accounting Policies: |
| (a) | Basis
and Principles of Combination: The predecessor combined financial statements as described
in Note 1 above, are prepared in accordance with U.S. generally accepted accounting principles
(“U.S. GAAP”), by adding up the historical carrying amounts of all assets
and liabilities, and income and expenses on a line by line basis as presented in the
individual financial statements of each of the Predecessor Companies. All intercompany
balances and transactions have been eliminated. |
| (b) | Use
of Estimates: The preparation of financial statements in conformity with U.S. GAAP
requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. |
| (c) | Foreign
Currency Translation: The functional currency of the Company is the U.S. Dollar as
the Company’s vessels operate in international shipping markets, and therefore
primarily transact business in U.S. Dollars. The Company’s books of accounts are
maintained in U.S. Dollars. Transactions involving other currencies during the year are
converted into U.S. Dollars using the exchange rates in effect at the time of the transactions.
At the balance sheet dates, monetary assets and liabilities, which are denominated in
other currencies, are translated into U.S. Dollars at the exchange rates in effect at
the balance sheet date. Resulting gains or losses are reflected separately in the accompanying
combined statements of comprehensive income, if significant. |
| (d) | Concentration
of Credit Risk: Financial instruments, which potentially subject the Company to significant
concentrations of credit risk, consist principally of cash and cash equivalents and accounts
receivable. The Company places its cash and cash equivalents, consisting mostly of deposits,
with qualified financial institutions with high creditworthiness. The Company performs
periodic evaluations of the relative creditworthiness of those financial institutions
that are considered in the Company’s investment strategy. The Company limits its
credit risk with accounts receivable by performing ongoing credit evaluations of its
customers’ financial condition and generally does not require collateral for its
accounts receivable. |
| (e) | Cash
and Cash Equivalents and Restricted Cash: The Company considers highly liquid investments
such as time deposits and certificates of deposit with an original maturity of three
months or less to be cash equivalents. Restricted cash is associated with pledged retention
accounts in connection with the loan repayments and is presented separately in the accompanying
combined balance sheets. |
| (f) | Income
Taxation: Under the laws of the countries of the companies’ incorporation and/or
vessels’ registration, the companies are not liable for any income tax on its income
derived from shipping operations. Instead, a tax is levied based on the tonnage of the
vessels, which is included in Vessel operating expenses in the accompanying Combined
Statements of Comprehensive Income and Loss. The vessel owning companies with vessels
that have called on the United States during the relevant year of operation are obliged
to file tax returns with the Internal Revenue Service. The applicable tax is 50% of 4%
of U.S. related gross transportation income unless an exemption applies. Management believes
that based on current legislation the relevant vessel owning companies are entitled to
an exemption because they satisfy the relevant requirements, namely that (i) the related
vessel owning companies are incorporated in a jurisdiction granting an equivalent exemption
to U.S. corporations and (ii) over 50% of the ultimate stockholders of the vessel owning
companies are residents of a country granting an equivalent exemption to U.S. persons. |
| (g) | Inventories:
Inventories consist of lubricants and bunkers which are stated at the lower
of cost or market value. Cost is determined by the first in, first out method. |
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 2. | Significant
Accounting Policies (continued): |
| (h) | Trade
Receivables: The amount shown as receivables, at each balance sheet date, includes
receivables from charterers for hire, freight and demurrage billings, net of a provision
for doubtful accounts, if any. At each balance sheet date, all potentially uncollectible
accounts are assessed individually for purposes of determining the appropriate provision
for overdue accounts receivable. The allowance for overdue accounts at both December
31, 2013 and 2014 was $nil. |
| (i) | Advances
for Vessels under Construction and Related Costs: This represents amounts expended
by the Company in accordance with the terms of the construction contracts for its vessels
as well as other expenses incurred directly or under a management agreement with a related
party in connection with onsite supervision. The carrying value of vessels under construction
represents the accumulated costs at the balance sheet date. |
Costs
components include payments for yard installments and variation orders, commissions to a related party, construction supervision,
equipment, spare parts, capitalized interest, costs related to first time mobilization and commissioning costs.
| (j) | Vessels,
Net: Vessels are stated at cost, which consists of the contract price and any material
expenses incurred in connection with the acquisition (initial repairs, improvements,
delivery expenses and other expenditures to prepare the vessel for her initial voyage
as well as professional fees directly associated with the vessel acquisition). Subsequent
expenditures for major improvements are also capitalized when they appreciably extend
the life, increase the earning capacity or improve the efficiency or safety of the vessels;
otherwise, these amounts are charged to expense as incurred. Amounts paid to sellers
of vessels as advances and for other costs related with the acquisition of a vessel are
included in Advances for vessel acquisitions in the accompanying Combined Balance Sheets
until the date the vessel is delivered to the Company, when the amounts are transferred
to Vessels, net. |
The
cost of each of the Company’s vessels is depreciated from the date of acquisition on a straight-line basis over the vessels’
remaining estimated economic useful life, after considering the estimated residual value. A vessel’s residual value is equal
to the product of its lightweight tonnage and estimated scrap rate of $0.250 and $0.300 per ton as of December 31, 2013 and 2014
respectively. The effect in the change of this estimation on January 1, 2014 was accounted prospectively and resulted in a decrease
in annual depreciation of $89. Management estimates the useful life of the Company’s vessels to be 25 years from the date
of initial delivery from the shipyard. When regulations place limitations over the ability of a vessel to trade on a worldwide
basis, its remaining useful life is adjusted at the date such regulations are adopted.
| (k) | Impairment
of long lived assets: The Company reviews its long lived assets for impairment whenever
events or changes in circumstances indicate that the carrying amount of these assets
may not be recoverable. |
As
of December 31, 2013 and 2014, the Company concluded that the economic and market conditions, including the significant disruptions
in the global credit markets in the prior years, had broad effects on participants in a wide variety of industries. Time charter
rates and charter free vessel values remained at depressed levels during 2013 and 2014 as reduced demand for transportation services
occurred during a time of increased supply of vessels, conditions that were considered to be indicators of possible impairment.
As a result, the Company performed an impairment assessment of the Company’s long-lived assets by comparing the undiscounted
projected net operating cash flows for each vessel to its respective carrying value.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 2. | Significant
Accounting Policies (continued): |
| (k) | Impairment
of long lived assets (continued): |
In
developing estimates of future undiscounted cash flows, the Company makes assumptions and estimates about the vessels’ future
performance, with the significant assumptions relating to time charter rates, vessels’ operating expenses, vessels’
capital expenditures, vessels’ residual value, fleet utilization and the estimated remaining useful life of each vessel.
The assumptions used to develop estimates of future undiscounted cash flows are based on historical trends as well as future expectations.
To
the extent impairment indicators are present, the projected net operating cash flows are determined by considering the charter
revenues from existing time charters for the fixed fleet days and an estimated daily time charter rate for the unfixed days (based
on the most recent seven year historical average rates, over the remaining estimated useful life of the vessel, expected outflows
for vessels’ operating expenses assuming an annual inflation rate of 2.50% (in line with the average world Consumer Price
Index forecasted), planned dry-docking and special survey expenditures, management fees expenditures which are adjusted every
year, after December 31, 2014, pursuant to the Company’s existing group management agreement, and fleet utilization of 98.6%
(excluding the scheduled off-hire days for planned dry-dockings and vessel surveys which are determined separately ranging from
five days for intermediate and up to 20 days for special surveys depending on the size and age of each vessel) based on historical
experience.
The
salvage value used in the impairment test is estimated to be approximately $0.300 per light weight ton in accordance with the
vessels’ depreciation policy for 2014 ($0.250 for 2013). The Company’s assessment concluded that measurement of impairment
was required for one vessel as of December 31, 2014. As the undiscounted projected net operating cash flows for one vessel were
less than its carrying value, the Company obtained valuations from two independent ship brokers to determine the market value
of the vessel based on which an impairment loss of $16,930, was recorded as of December 31, 2014, of which $16,530 was charged
against Vessels, net and $400 against Deferred charges, net (Note 6 and Note 7).
| (l) | Accounting
for Special Survey and Drydocking Costs: The Company follows the deferral method
of accounting for special survey and drydocking costs whereby actual costs incurred at
the yard and parts used in the drydocking or special survey, are deferred and are amortized
on a straight-line basis over the period through the date the next survey is scheduled
to become due. Costs deferred are limited to actual costs incurred at the shipyard and
costs incurred in the dry-docking or special survey. If a drydock or a survey is performed
prior to the scheduled date, the remaining unamortized balances of the previous drydock
and survey are immediately written off. Unamortized drydock and survey balances of vessels
that are sold are written off and included in the calculation of the resulting gain or
loss in the period of the vessel’s sale. |
| (m) | Financing
Costs: Costs associated with new loans or refinancing of existing loans, including
fees paid to lenders or required to be paid to third parties on the lender’s behalf
for obtaining new loans or refinancing existing loans, are recorded as deferred charges.
Such costs are deferred and amortized to Interest and finance costs in the Combined Statements
of Comprehensive Income/(Loss) during the life of the related debt using the effective
interest method. Unamortized costs relating to loans repaid or refinanced, meeting the
criteria of debt extinguishment, are expensed in the period the repayment or refinancing
is made. Commitment fees relating to undrawn loan principal are expensed as incurred. |
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 2. | Significant
Accounting Policies (continued): |
| (n) | Revenue
and Related Expenses: The Company generates its revenues from charterers for the
charter hire of its vessels. Vessels are chartered using either spot charters, where
a contract is made in the spot market for the use of a vessel for a specific voyage for
a specified charter rate, or time charters, where a contract is entered into for the
use of a vessel for a specific period of time and a specified daily charter hire rate.
If a charter agreement exists and collection of the related revenue is reasonably assured,
revenue is recognized as it is earned ratably during the duration of the period of each
spot or time charter. Revenues from time charter agreements providing for varying annual
rates are accounted for as operating leases and thus recognized on a straight line basis
over the term of the time charter as service is performed. A voyage is deemed to commence
upon the completion of discharge of the vessel’s previous cargo and is deemed to
end upon the completion of discharge of the current cargo. Demurrage income represents
payments by a charterer to a vessel owner when loading or discharging time exceeds the
stipulated time in the spot charter and is recognized ratably as earned during the related
spot charter’s duration period. Hire collected in advance includes cash received
prior to the balance sheet date and is related to revenue earned after such date. |
Voyage
expenses, primarily consisting of commissions, port, canal and bunker expenses that are unique to a particular charter, are paid
for by the charterer under time charter arrangements or by the Company under spot charter arrangements, except for commissions,
which are always paid for by the Company, regardless of the charter type. All voyage and vessel operating expenses are expensed
as incurred, except for commissions. Commissions are deferred and amortized over the related voyage period in a charter to the
extent revenue has been deferred since commissions are earned as the Company’s revenues are earned.
Revenues
for 2013 and 2014, deriving from significant charterers individually accounting for 10% or more of revenues (in percentages of
total revenues), were as follows:
Charterer | |
2013 | | |
2014 | |
A | |
| 36 | % | |
| - | |
B | |
| 22 | % | |
| - | |
C | |
| - | | |
| 21 | % |
| |
| 58 | % | |
| 21 | % |
| (o) | Other
Comprehensive Income/(Loss): The Company presents items of net income/(loss), items
of other comprehensive income (“OCI”) and total Comprehensive Income in two
separate but consecutive statements. In the Combined Statements of Comprehensive Income/(Loss),
the Company presents the change in equity (net assets) during a period from transactions
and other events and circumstances from non-owner sources. It includes all changes in
equity during a period except those resulting from investments by stockholder and distributions
to stockholder. Reclassification adjustments between OCI and net income/(loss) are required
to be presented separately on the Statements of Comprehensive Income/(Loss). For the
years ended December 31, 2013 and 2014, the Company had no such transactions which affected
comprehensive income and, accordingly, comprehensive income was equal to net income. |
| (p) | Commitments
and Contingencies: Commitments are recognized when the Company has a present legal
or constructive obligation as a result of past events and it is probable that an outflow
of resources embodying economic benefits will be required to settle this obligation,
and a reliable estimate of the amount of the obligation can be made. Provisions are reviewed
at each balance sheet date and adjusted to reflect the present value of the expenditure
expected to be required to settle the obligation. Contingent liabilities for which an
outflow of resources is less than probable are not recognized in the financial statements
but are disclosed, unless the possibility of an outflow of resources embodying economic
benefits is determined to be remote. Contingent assets are not recognized in the financial
statements but are disclosed when an inflow of economic benefits is probable. |
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 2. | Significant
Accounting Policies (continued): |
| (q) | Fair
Value Measurements: The Company follows the provisions of Accounting Standard Updated
(“ASU”) 820 “Fair Value Measurements and Disclosures”, which
defines and provides guidance as to the measurement of fair value. This standard creates
a hierarchy of measurement and indicates that, when possible, fair value is the price
that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants. The fair value hierarchy gives the highest priority
(Level 1) to quoted prices in active markets and the lowest priority (Level 3) to unobservable
data, for example, the reporting entity’s own data. Under the standard, fair value
measurements are separately disclosed by level within the fair value hierarchy (Note
10). |
| (r) | Segment
Reporting: The Company reports financial information and evaluates its operations
by charter revenues and not by the length of ship employment for its customers, i.e.,
spot or time charters. The Company does not use discrete financial information to evaluate
the operating results for each such type of charter. Although revenue can be identified
for these types of charters, management cannot and does not identify expenses, profitability
or other financial information for these charters. Furthermore, when the Company charters
a vessel to a charterer, the charterer is free to trade the vessel worldwide (subject
to certain agreed exclusions) and, as a result, the disclosure of geographic information
is impracticable. As a result, management, including the chief operating decision maker,
reviews operating results solely by revenue per day and operating results of the fleet
and thus the Company has determined that it operates under one reportable segment. |
| (s) | Recent
Accounting Standards Updates: |
Revenue
from Contracts with Customers: The Financial Accounting Standards Board ("FASB") and the International Accounting
Standards Board ("IASB") (collectively, the "Boards") jointly issued a standard in May 2014 that will supersede
virtually all of the existing revenue recognition guidance in U.S. GAAP and International Financial Reporting Standards ("IFRS")
and is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting
period. Early application is not permitted. The standard establishes a five-step model that will apply to revenue earned from
a contract with a customer (with limited exceptions), regardless of the type of revenue transaction or the industry. The standard's
requirements will also apply to the recognition and measurement of gains and losses on the sale of some non-financial assets that
are not an output of the entity's ordinary activities (e.g., sales of property, plant and equipment or intangibles). Extensive
disclosures will be required, including disaggregation of total revenue, information about performance obligations, changes in
contract asset and liability account balances between periods, and key judgments and estimates. The guidance in ASU 2014-09 Revenue
from Contracts with Customers (Topic 606) supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and
most industry-specific guidance throughout the Industry Topics of the Codification. Additionally, this ASU supersedes some cost
guidance included in Subtopic 605-35, Revenue Recognition—Construction-Type and Production-Type Contracts. In addition,
the existing requirements for the recognition of a gain or loss on the transfer of nonfinancial assets that are not in a contract
with a customer are amended to be consistent with the guidance on recognition and measurement (including the constraint on revenue)
in this ASU. Management is in the process of accessing the impact of the new standard on the Company's financial position and
performance.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 2. | Significant
Accounting Policies (continued): |
| (t) | Recent
Accounting Standards Updates (continued): |
Going
Concern: In August 2014, the FASB issued ASU No. 2014-15 – Presentation of Financial Statements - Going Concern.
ASU 2014-15 provides guidance about management’s responsibility to evaluate whether there is substantial doubt about an
entity’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 requires an entity’s
management to evaluate at each reporting period based on the relevant conditions and events that are known at the date when financial
statements are issued, whether there are conditions or events, that raise substantial doubt about the entity’s ability to
continue as a going concern within one year after the date that the financial statements are issued and to disclose the necessary
information. ASU 2014-15 is effective for the annual period ending after December 15, 2016, and for annual periods and interim
periods thereafter. Early application is permitted.
| 3. | Transactions
with Related Parties: |
The
Company uses the services of Maritime, a ship management company with an office in Greece. Maritime is engaged under separate
management agreements directly by the Company’s respective subsidiaries to provide a wide range of shipping services, including
but not limited to, chartering (other than for Northsea Alpha and Northsea Beta, which is performed by NST), sale
and purchase, insurance, operations and dry-docking and construction supervision, all provided at a fixed daily fee per vessel.
For the ship management services, Maritime charges a daily fee payable by each subsidiary of $0.325 per day per vessel while the
vessel is in operation including any pool arrangements (out of which a fee Euro 151 per day was paid to NST with respect to vessels
for which chartering was contracted to NST) and $0.450 per day per vessel while the vessel is under construction as well as an
additional daily fee (which is dependent on the seniority of the personnel) to cover the cost of engineers employed to conduct
the supervision. In addition, Maritime charges the Company a commission of 1.0% of the purchase price of any vessel’s sale
or purchase transaction from the seller and a commission of 1.25% of all charter hire agreements arranged by Maritime. The management
agreements for the vessels Northsea Alpha, Northsea Beta and Pyxis Delta will continue until December 31,
2015 and for Pyxis Theta until December 31, 2017, and will thereafter continue until terminated by either party on three
months’ notice. The management agreements for the Hull S-1153 (Pyxis Epsilon) that commenced on January 1, 2014 and
Pyxis Malou will continue until December 31, 2018.
The
fees charged by Maritime during the year ended December 31, 2013 and 2014, totaled $1,150 and $1,102, respectively. Of these amounts,
(a) $468 and $611 for 2013 and 2014, respectively, are separately reflected in the accompanying Combined Statements of Comprehensive
Income /(Loss) as Management fees, related parties, (b) $503 and $255 for 2013 for 2014, respectively, which relate to the supervision
costs during the vessels construction period and commission on the acquisition of the vessels and are included as a component
of Vessels, net in the accompanying Combined Balance Sheets (Note 6), and (c) $179 and $236 for 2013 and 2014, respectively, are
included in Voyage related costs and commissions in the accompanying Combined Statements of Comprehensive Income /(Loss). During
2013 and 2014, no commissions on revenues from charter hire agreements relating to Northsea Alpha and Northsea Beta
were charged by Maritime since Secondone and Thirdone entered into separate commercial management agreements with NST, discussed
in Note 1 above.
At
December 31, 2013 and 2014, the net amounts due to Maritime totaled $9,178 and $131 respectively and are separately reflected
in the accompanying Combined Balance Sheets.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
The
amounts in the accompanying Combined Balance Sheets relate to lubricants and bunkers on board of the vessels:
| |
2013 | | |
2014 | |
Lubricants | |
| 422 | | |
| 643 | |
Bunkers | |
| - | | |
| 261 | |
Total | |
| 422 | | |
| 904 | |
| 5. | Advances
for Vessel Acquisition: |
On
October 6, 2011, Seventhone contracted with a shipyard for the construction and purchase of a newbuilding vessel (Pyxis Theta)
at a contract price of $37,100. The vessel was delivered to Seventhone on September 16th, 2013 at cost of $38,155 (Note 6).
On
February 28, 2013, Eighthone contracted with a shipyard for the construction and purchase of a newbuilding vessel (Pyxis Epsilon)
at a contract price of $32,200. The vessel was delivered on January 14, 2015 (Note 13(b)).
The
amounts shown in the accompanying Combined Balance Sheets include payments to the shipyard, capitalized commissions, management
fees and supervision services from Maritime and capitalized interest cost.
The
movement of the account during 2013 and 2014 was as follows:
| |
2013 | | |
2014 | |
| |
| | | |
| | |
Beginning balance | |
| 15,571 | | |
| 6,805 | |
| |
| | | |
| | |
Pre-delivery instalments and other vessel
equipment | |
| 28,580 | | |
| 6,440 | |
Supervision fees - related parties (Note
3) | |
| 181 | | |
| 255 | |
Capitalised interest (Note 12) | |
| 306 | | |
| 228 | |
Purchase commission – related parties
(Note 3) | |
| 322 | | |
| - | |
Transferred to vessel
cost | |
| (38,155 | ) | |
| - | |
Total | |
| 6,805 | | |
| 13,728 | |
The
amount of $28,580 comprises payments towards Pyxis Theta for various equipment of $83 and installments paid to the shipyard
of $22,057, net of $263, concerning compensation for the vessel’s late delivery and items not delivered by the shipyard
and payments towards Hull S-1153 (Pyxis Epsilon) of $6,440.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
The
amounts in the accompanying Combined Balance Sheets are analyzed as follows:
| |
Vessel
Cost | | |
Accumulated
Depreciation | | |
Net Book
Value | |
Balance January 1, 2013 | |
| 105,350 | | |
| (13,525 | ) | |
| 91,825 | |
Transfer from Advances for vessel acquisition
(Note 5) | |
| 38,155 | | |
| - | | |
| 38,155 | |
Depreciation | |
| - | | |
| (4,520 | ) | |
| (4,520 | ) |
Balance December 31, 2013 | |
| 143,505 | | |
| (18,045 | ) | |
| 125,460 | |
Additions to vessel cost | |
| 233 | | |
| - | | |
| 233 | |
Depreciation | |
| - | | |
| (5,446 | ) | |
| (5,446 | ) |
Vessel impairment charge | |
| (16,530 | ) | |
| - | | |
| (16,530 | ) |
Balance December
31, 2014 | |
| 127,208 | | |
| (23,491 | ) | |
| 103,717 | |
Seventhone
took delivery of Pyxis Theta on September 16, 2013. As a result, $36,920 of advances paid to the shipyard together with
$1,235 of capitalized costs (out of which $22,141 and $444, respectively, were incurred during the year ended December 31, 2013),
were transferred from Advances for vessel acquisition to Vessels, net.
As
of December 31, 2014, the Company reviewed the carrying amount in connection with the estimated recoverable amount for each
of its vessels. This review indicated that such carrying amount was not fully recoverable for the Company’s vessel Pyxis
Malou. Consequently the carrying value of this vessel was written down resulting in total impairment charge of $16,930, of
which $16,530 was charged against Vessels, net, based on level 3 inputs of the fair value hierarchy, as determined by management
taking into consideration valuations from independent marine brokers.
The
Company’s vessels have been pledged as collateral to secure the bank loans discussed in Note 8.
The
amounts in the accompanying Combined Balance Sheets are analyzed as follows:
| |
Financing
Costs | | |
Special Survey
Costs | | |
Total | |
Balance, January 1, 2013 | |
| 766 | | |
| 413 | | |
| 1,179 | |
Amortization | |
| (98 | ) | |
| (157 | ) | |
| (255 | ) |
Write-off | |
| (95 | ) | |
| - | | |
| (95 | ) |
Balance, December 31,
2013 | |
| 573 | | |
| 256 | | |
| 829 | |
Additions | |
| - | | |
| 469 | | |
| 469 | |
Amortization | |
| (136 | ) | |
| (162 | ) | |
| (298 | ) |
Write-off | |
| - | | |
| (41 | ) | |
| (41 | ) |
Impairment charge | |
| - | | |
| (400 | ) | |
| (400 | ) |
Balance, December
31, 2014 | |
| 437 | | |
| 122 | | |
| 559 | |
Financing
costs represent fees paid to the lenders for the conclusion of the bank loans discussed in Note 8. The amortization of loan financing
costs is included in Interest and finance costs and the amortization of the deferred special survey costs is separately reflected
in the accompanying Combined Statements of Comprehensive Income/(Loss). Following the extinguishment of the bank loan discussed
under Note 8(c), in 2013, the Company wrote off the financing costs amounting to $95 related to this facility.
Impairment
charge of $400 relates to the impairment of Pyxis Malou as of December 31, 2014 discussed in Note 2 and Note 6.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
At
December 31, 2013 and 2014, the Company was a party to the following term loans:
Vessel (Borrower) | |
2013 | | |
2014 | |
(a) Northsea Alpha (Secondone) | |
| 6,188 | | |
| 5,728 | |
(a) Northsea Beta (Thirdone) | |
| 6,188 | | |
| 5,728 | |
(b) Pyxis Malou (Fourthone) | |
| 27,290 | | |
| 24,630 | |
(b) Pyxis Delta (Sixthone) | |
| 12,487 | | |
| 11,137 | |
(c) Pyxis Theta (Seventhone) | |
| 20,987 | | |
| 19,734 | |
Total | |
| 73,140 | | |
| 66,957 | |
Less current portion | |
| (6,705 | ) | |
| (5,663 | ) |
Long-term portion | |
| 66,435 | | |
| 61,294 | |
| (a) | In
September 2007, Secondone and Thirdone jointly entered into a loan agreement with a financial
institution for an amount up to $24,560, in order to partly finance the acquisition cost
of the vessels Northsea Alpha and Northsea Beta. The loan bore interest
at six month LIBOR plus a margin of 0.95% per annum during the construction period (0.85%
per annum upon delivery of the vessels), payable semi-annually. |
During
May 2010, the loan was restructured and the total loan amount was reduced to $15,596. In addition, the applicable margin was increased
to 1.5% per annum. For each of Secondone and Thirdone, the outstanding balance of the loan at December 31, 2014, of $5,728, is
repayable in 11 semiannual installments of $230 each, the first falling due in May 2015, and the last installment accompanied
by a balloon payment of $3,198 falling due in May 2020.
The
loan is secured by a first priority mortgage over the two vessels, a first priority assignment of the vessels’ insurances
and earnings and by a corporate guarantee issued by Maritime. The loan agreement contains customary ship finance covenants including
restrictions as to changes in management and ownership of the vessels, restrictions on payment of dividends as well as a requirement
that the minimum security cover (“MSC”) be at least 133%.
| (b) | Based
on the loan agreement concluded on December 12, 2008, in February 2009, Fourthone borrowed
$41,600 in order to partly finance the acquisition cost of Pyxis Malou. The loan
bears interest at six month LIBOR plus a margin of 1.2% per annum, payable semi-annually.
The outstanding balance of the loan at December 31, 2014, of $24,630 is repayable in
22 semiannual installments of $1,070 each and the last of $1,090 falling due in February
2026. |
| (c) | In
March 2010, Sixthone borrowed $15,000 in order to partly finance the acquisition cost
of the Pyxis Delta. The outstanding balance of the loan at December 31, 2012 of
$12,375 was fully prepaid using proceeds received from a capital contribution and existing
available cash on January 29, 2013 at a discount on the then outstanding amount (Note9(b)).
Savings of $1,114 is reflected under interest and finance costs in the 2013 Combined
Statements of Comprehensive Income/(Loss) (Note 12). A new financing in the form of a
loan facility with a bank was also concluded on October 12, 2012. Under this loan facility,
Sixthone and Seventhone, are joint and several borrowers and the proceeds were used to
partly finance the acquisition and construction cost of: (i) Pyxis Delta (Tranche
A: up to the lesser of $16,000 and 60% of the market value of the Pyxis Delta)
and (ii) Pyxis Theta (Tranche B: up to the lesser of $21,300 and 60% of the initial
market value of Pyxis Theta) (Note 5). On February 13, 2013, Sixthone and Seventhone
entered into a supplemental agreement with the bank to revise Tranche A to an amount
up to $14,000. The amount drawn down by Sixthone associated with Tranche A on February
15, 2013, was $13,500. On September 9, 2013, Seventhone drew down $21,300 associated
with Tranche B. |
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 8. | Long-term
Debt (continued): |
For
both Tranches A and B, the tenor is five years but in no event later than June 30, 2017 for Tranche A and January 31, 2019 for
Tranche B. The loan bears interest at three month LIBOR plus a margin of 3.35% per annum, payable quarterly. As of December 31,
2014, the outstanding balance of Tranche A of $11,137 corresponding to Sixthone, is repayable in 10 quarterly installments of
$338 each, the last together with a balloon payment of $7,757. As of December 31, 2014, the outstanding balance of Tranche B of
$19,734 corresponding to Seventhone, is repayable in 15 quarterly installments of $313 each, the last together with a balloon
payment of $15,039.
Each
loan is secured by a first priority mortgage over the vessel and a first priority assignment of the vessel’s insurances
and earnings. Each loan agreement contains customary ship finance covenants including restrictions as to changes in management
and ownership of the vessel, conditions to the payment of dividends as well as requirements regarding MSC ratios. The obligations
under the loan facility discussed in Note 8(c) above are guaranteed by PYXIS HOLDINGS INC a related party under ultimate common
ownership.
As
of December 31, 2013, Fourthone was not in compliance with its loan covenant related to the MSC ratio for the loan discussed in
Note 8(b) above. The covenant requires Fourthone to maintain a market value of Pyxis Malou of at least 125% of its balance
under the loan agreement. No waiver has been obtained for this non-compliance and, accordingly, the bank has the right to require
Fourthone, within 30 business days from the date of the written demand of the bank, to either prepay the loan in such amount as
may be necessary to cause the aggregate fair market value of the vessel to equal or exceed the MSC ratio or provide such additional
collateral as may be acceptable to the bank to bring Fourthone into compliance with the required MSC ratio. As a result, in accordance
with ASC 470-10, “Classification of Obligations When a Violation Is Waived by the Creditor,” $523, outstanding under
the loan have been classified as current liabilities as of December 31, 2013, respectively, in addition to the required scheduled
payments under the terms of the loan. Management believes that the bank will not demand payment of the loan before its maturity,
provided that Fourthone pays scheduled loan installments and accumulated or accrued interest as they fall due under the existing
loan agreement. On March 23, 2015, Fourthone obtained a letter from the lending bank consenting to the Company’s acquisition
of the 100% ownership interest in Secondone, Thirdone and Fourthone in return for certain changes to the loan agreements with
these vessel-owning companies. In accordance with the terms of this letter, Fourthone will not be required to make any deficiency
payment but plans to provide, among other things, additional collateral to the bank to satisfy the non-compliance. Management
also expects to settle the loan interest and scheduled loan repayments with cash generated from operations.
The
annual principal payments required to be made after December 31, 2014, are as follows:
Year
ending December 31, | |
Amount | |
2015 | |
| 5,663 | |
2016 | |
| 5,663 | |
2017 | |
| 12,750 | |
2018 | |
| 19,035 | |
2019 | |
| 3,060 | |
2020 and thereafter | |
| 20.786 | |
| |
| 66,957 | |
Total
interest expense on long-term debt 2013 and 2014, amounted to $1,455 and $1,793, respectively, and is included in Interest and
finance costs (Note 12) in the accompanying Combined Statements of Comprehensive Income/(Loss). Of the above amounts $306 and
$228 for 2013 and 2014 respectively were capitalized and are included in Advances for vessels acquisition and/or Vessels, net.
The Company’s weighted average interest rate (including the margin) for 2013 and 2014, was 2.40% and 2.57% per annum, respectively.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 9. | Common
Stock Equity of Contributed Entities and Additional Paid-In Capital: |
| (a) | Common
stock in the accompanying combined balance sheets represents the combined authorized,
issued and outstanding common shares of the Predecessor Companies (500 shares for each
vessel owning company without par value) listed in Note 1 above. |
| (b) | The
amounts shown in the accompanying combined balance sheets as Additional paid-in capital
represent contributions made by the stockholder at various dates to finance vessel acquisitions
in excess of the amounts of bank loans obtained and advances for working capital purposes,
net of subsequent distributions primarily for re-imbursement for certain shipyard payments
for vessel newbuildings. |
| (c) | The
capital contributions for 2013 of $22,247 consist of $5,550 representing the 4th installment
payment for the construction of Pyxis Theta, $6,440 representing the 1st and 2nd
installment payments for the construction of Pyxis Epsilon (Note 13) and $10,257
relating to the early repayment of the outstanding principal under the loan discussed
in Note 8(c) above. |
| (d) | The
capital contributions for 2014 of $18,824 consist of $6,424 representing the 3rd and
4th installment payments for the construction of Pyxis Epsilon (Note 13) and of
$12,400 representing amounts due to the Maritime which PYXIS HOLDINGS INC. undertook
the obligation to pay. |
| (e) | Capital
re-imbursements for 2013 and 2014 amounted to $13,457 and $nil respectively. |
The
principal financial assets of the Company consist of cash and cash equivalents, amounts due from related parties and trade accounts
receivable due from charterers. The principal financial liabilities of the Company consist of long-term bank loans and accounts
payable.
Interest
Rate Risk
The
Company’s interest rates are calculated at LIBOR plus a margin. Long-term loans and repayment terms are described in Note
8. The Company’s exposure to market risk from changes in interest rates relates to the Company’s bank debt obligations.
Credit
Risk
Credit
risk is minimized since accounts receivable from charterers are presented net of the relevant provision for uncollectible amounts,
whenever required. On the balance sheet date there were no significant concentrations on credit risk. The maximum exposure to
credit risk is represented by the carrying amount of each financial asset in the balance sheet.
Currency
risk
The
Company’s transactions are denominated primarily in U.S. Dollars; therefore overall currency exchange risk is limited. Balances
in foreign currency other than U.S. Dollars are not considered significant.
Fair
Value
The
carrying amounts reflected in the accompanying Combined predecessor Balance Sheets approximate their respective fair values due
to the short maturity of these instruments. The fair value of long-term bank loans with variable interest rates approximate the
recorded values, generally due to their variable interest rates.
The
Company in 2014 has determined the fair value of one of its vessels at market value, determined through Level 3 of the fair value
hierarchy as defined in FASB guidance for Fair Value Measurements and are derived principally from or corroborated by to unobservable
data, for example brokers valuations. All other nonfinancial assets or nonfinancial liabilities carried at fair value at December
31, 2014.
PYXIS
TANKERS INC. PREDECESSOR
Notes
to Combined Financial Statements
December
31, 2013 and 2014
(Expressed
in thousands of U.S. Dollars, except for share data)
| 11. | Commitments
and Contingencies: |
As
of December 31, 2014 contractual obligations of Eighthone towards the shipyard amounted to $19,320.
Long-term
Time Charters: Future minimum contractual charter revenues, gross of 1.25% brokerage commissions to Maritime, and of
any other brokerage commissions to third parties based on vessels committed to non-cancelable, long-term time charter contracts
as of December 31, 2014 are as follows:
Year
ending December 31, | |
Amount | |
2015 | |
| 16,394 | |
2016 | |
| 10,200 | |
2017 | |
| 282 | |
| |
| 26,876 | |
Other:
Various claims, suits, and complaints, including those involving government regulations and product liability, arise in the ordinary
course of the shipping business. In addition, losses may arise from disputes with charterers, agents, insurance and other claims
with suppliers relating to the operations of the Company’s vessels. Currently, management is not aware of any such claims
not covered by insurance or contingent liabilities, which should be disclosed, or for which a provision has not been established
in the accompanying predecessor combined financial statements.
The
Company accrues for the cost of environmental liabilities when management becomes aware that a liability is probable and is able
to reasonably estimate the probable exposure. Currently, management is not aware of any other claims or contingent liabilities
which should be disclosed or for which a provision should be established in the accompanying predecessor combined financial statements.
The Company is covered for liabilities associated with the individual vessels’ actions to the maximum limits as provided
by Protection and Indemnity (P&I) Clubs, members of the International Group of P&I Clubs.
| 12. | Interest
and Finance Cost: |
The
amounts in the accompanying Combined Statements of Comprehensive Income and Loss are analyzed as follows:
| |
2013 | | |
2014 | |
Interest on long-term debt (Note
8) | |
| 1,455 | | |
| 1,793 | |
Interest capitalized (Note 5) | |
| (306 | ) | |
| (228 | ) |
Loan commitment fees | |
| 169 | | |
| - | |
Amortization and write-off of financing fees
(Note 7) | |
| 193 | | |
| 136 | |
Discount on early debt repayment (Note 8) | |
| (1,114 | ) | |
| - | |
Other | |
| 5 | | |
| 3 | |
Total | |
| 402 | | |
| 1,704 | |
| (a) | On
January 12, 2015, Eighthone borrowed concluded a loan agreement and borrowed $21,000
in order to finance the acquisition cost of Pyxis Epsilon. The loan bears interest
at three month LIBOR plus a margin of 2.90% per annum, payable quarterly and matures
in January 2022. |
| (b) | On
January 14, 2015, Eighthone took delivery of the Pyxis Epsilon which was fixed
for trading under a time charter for two years at $16.6 per day, with an option to extend
the charter for one year at $18.1 per day. |
SPECIAL MEETING
OF STOCKHOLDERS
OF
LOOKSMART,
LTD.
_____, 2015
THE
BOARD OF DIRECTORS RECOMMENDS A VOTE “FOR” PROPOSALS 1, 2 AND 3.
PLEASE
SIGN, DATE AND RETURN THIS PROXY CARD PROMPTLY IN THE ENCLOSED ENVELOPE.
PLEASE
MARK YOUR VOTE IN BLUE OR BLACK INK AS SHOWN HERE x
In their discretion, the
proxies are authorized to vote upon such other business as may properly come before the special meeting of the stockholders
of LookSmart, Ltd. This proxy when properly executed will be voted as directed herein by the undersigned stockholder.
If no direction is made, this proxy will be voted FOR Proposals 1, 2 and 3.
|
1. APPROVAL OF THE REVERSE SPLIT |
|
3. APPROVAL OF THE MERGER AGREEMENT |
|
|
|
|
|
FOR ¨ AGAINST ¨ ABSTAIN ¨ |
FOR ¨ AGAINST ¨ ABSTAIN ¨ |
|
|
|
|
|
2. APPROVAL OF THE SPIN-OFF |
|
|
|
|
|
FOR ¨ AGAINST ¨ ABSTAIN ¨ |
|
|
|
|
|
Proxy for
Special Meeting of Stockholders on _____, 2015
Solicited
on Behalf of the Board of Directors of LookSmart, Ltd.
The undersigned
hereby appoints Michael Onghai, with full power of substitution and power to act alone, as proxies to vote all the shares of common
stock which the undersigned would be entitled to vote if personally present and acting at the special meeting of stockholders
of LookSmart, Ltd. to be held on _____, 2015, at the offices of Sichenzia Ross Friedman Ference LLP, 61 Broadway, 32nd
Floor, New York, NY 10006.
To change
the address on your account, please check the box at right and indicate your new address in the address space on this
Proxy Card. Please note that changes to the registered name(s) on the account may not be submitted via this method. |
|
Note: Please sign exactly as your
name or names appear on this Proxy. When shares are held jointly, each holder should sign. When signing as executor, administrator,
attorney, trustee or guardian, please give full title as such. If the signer is a corporation, please sign full corporate
name by duly authorized officer, giving full title as such. If signer is a partnership, please sign in partnership name by
authorized person. |
|
|
|
|
|
|
|
Signature |
|
Date |
|
Signature (Joint Owners) |
|
Date |
Looksmart (NASDAQ:LOOK)
Gráfico Histórico do Ativo
De Mai 2024 até Jun 2024
Looksmart (NASDAQ:LOOK)
Gráfico Histórico do Ativo
De Jun 2023 até Jun 2024