PART
I
ITEM
1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not
applicable.
ITEM
2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not
applicable.
ITEM
3. KEY INFORMATION
A.
Selected Financial Data
The
following table presents in each case for the periods and at the dates indicated, our selected consolidated financial and operating
data for each of the years in the three-year period ended December 31, 2018. You should read the table together with “Item
5. Operating and Financial Review and Prospects”. Our selected consolidated financial data is a summary of, is derived from,
and is qualified by reference to, our audited consolidated financial statements and notes thereto, which have been prepared in
accordance with U.S. GAAP. The selected consolidated statements of comprehensive income and cash flow statement data for
the fiscal year ended December 31, 2015 and the selected balance sheet data for the fiscal years ended December 31, 2016, and
2015 have been derived from our consolidated financial statements not included herein. Our audited consolidated statements of
comprehensive loss, stockholders’ equity and cash flows for the years ended December 31, 2016, 2017 and 2018 and
the consolidated balance sheets at December 31, 2017 and 2018, together with the notes thereto, are included in “Item 18.
Financial Statements” and you should read them in their entirety.
Statements
of Comprehensive Income / (Loss) Data
|
|
Year
ended December 31,
|
|
(In
thousands of U.S. dollars, except per share data)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues,
net*
|
|
$
|
32,929
|
|
|
$
|
30,387
|
|
|
$
|
29,579
|
|
|
$
|
28,457
|
|
Voyage
related costs and commissions*
|
|
|
(4,484
|
)
|
|
|
(6,288
|
)
|
|
|
(8,463
|
)
|
|
|
(11,817
|
)
|
Vessel
operating expenses
|
|
|
(13,188
|
)
|
|
|
(12,871
|
)
|
|
|
(12,761
|
)
|
|
|
(12,669
|
)
|
General
and administrative expenses
|
|
|
(1,773
|
)
|
|
|
(2,574
|
)
|
|
|
(3,188
|
)
|
|
|
(2,404
|
)
|
Management
fees, related parties
|
|
|
(577
|
)
|
|
|
(631
|
)
|
|
|
(712
|
)
|
|
|
(720
|
)
|
Management
fees, other
|
|
|
(1,061
|
)
|
|
|
(1,024
|
)
|
|
|
(930
|
)
|
|
|
(930
|
)
|
Depreciation
and amortization of special survey costs
|
|
|
(5,884
|
)
|
|
|
(6,004
|
)
|
|
|
(5,640
|
)
|
|
|
(5,633
|
)
|
Vessel
impairment charge
|
|
|
—
|
|
|
|
(3,998
|
)
|
|
|
—
|
|
|
|
(2,282
|
)
|
Bad
debt provisions
|
|
|
—
|
|
|
|
—
|
|
|
|
(231
|
)
|
|
|
(13
|
)
|
Gain
from debt extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,306
|
|
Loss
from financial derivative instrument
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
Interest
expenses and finance cost, net
|
|
|
(2,531
|
)
|
|
|
(2,810
|
)
|
|
|
(2,897
|
)
|
|
|
(4,490
|
)
|
Other
income
|
|
|
74
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
income / (loss)
|
|
$
|
3,505
|
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
/ (loss) per common share, basic and diluted
|
|
$
|
0.19
|
|
|
$
|
(0.32
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares, basic
|
|
|
18,244,671
|
|
|
|
18,277,893
|
|
|
|
18,461,455
|
|
|
|
20,894,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares, diluted
|
|
|
18,277,893
|
|
|
|
18,277,893
|
|
|
|
18,461,455
|
|
|
|
20,894,202
|
|
* Pursuant to the adoption
of ASU 2014-09, Revenues have been presented net of address commissions which were previously recognized under Voyage related
costs and commissions. Comparative amounts have been reclassified accordingly.
Balance
Sheets Data
|
|
Year
ended December 31,
|
|
(In
thousands of U.S. dollars)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
$
|
6,028
|
|
|
$
|
4,184
|
|
|
$
|
3,895
|
|
|
$
|
4,307
|
|
Total
other non-current assets
|
|
|
5,193
|
|
|
|
5,215
|
|
|
|
5,144
|
|
|
|
4,318
|
|
Total
fixed assets, net
|
|
|
130,501
|
|
|
|
121,341
|
|
|
|
115,774
|
|
|
|
107,992
|
|
Total
assets
|
|
|
141,722
|
|
|
|
130,740
|
|
|
|
124,813
|
|
|
|
116,617
|
|
Total
current liabilities
|
|
|
11,200
|
|
|
|
12,870
|
|
|
|
12,531
|
|
|
|
13,545
|
|
Total
non-current liabilities
|
|
|
75,956
|
|
|
|
69,117
|
|
|
|
64,126
|
|
|
|
63,129
|
|
Total
stockholders’ equity
|
|
$
|
54,566
|
|
|
$
|
48,753
|
|
|
$
|
48,156
|
|
|
$
|
39,943
|
|
Statements
of Cash Flows Data
|
|
Year
ended December 31,
|
|
(In
thousands of U.S. dollars)
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by / (used in) operating activities
|
|
$
|
12,366
|
|
|
$
|
4,446
|
|
|
$
|
3,677
|
|
|
$
|
(2,203
|
)
|
Net
cash used in investing activities
|
|
|
(18,766
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(99
|
)
|
Net
cash provided by / (used in) financing activities *
|
|
|
13,375
|
|
|
|
(7,285
|
)
|
|
|
(2,767
|
)
|
|
|
(
187
|
)
|
Change
in cash and cash equivalents and restricted cash
|
|
$
|
6,975
|
|
|
$
|
(2,839
|
)
|
|
$
|
910
|
|
|
$
|
(2,489
|
)
|
*Comparative
amounts have been reclassified due to current presentation of restricted cash following the adoption of ASU No. 2016-18-Statement
of Cash Flows-Restricted Cash.
|
|
Year
ended December 31,
|
|
Fleet Operating
Data
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Ownership
days (1)
|
|
|
2,177
|
|
|
|
2,196
|
|
|
|
2,190
|
|
|
|
2,190
|
|
Available
days (2)
|
|
|
2,137
|
|
|
|
2,176
|
|
|
|
2,190
|
|
|
|
2,154
|
|
Operating
days (3)
|
|
|
2,092
|
|
|
|
1,986
|
|
|
|
1,956
|
|
|
|
1,816
|
|
Utilization
% (4)
|
|
|
97.9
|
%
|
|
|
91.3
|
%
|
|
|
89.3
|
%
|
|
|
84.3
|
%
|
Daily
time charter equivalent rate (5)
|
|
$
|
13,597
|
|
|
$
|
12,134
|
|
|
$
|
10,795
|
|
|
$
|
9,163
|
|
Daily
vessel operating expenses (6)
|
|
$
|
6,058
|
|
|
$
|
5,861
|
|
|
$
|
5,827
|
|
|
$
|
5,785
|
|
Average number
of vessels (7)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Number
of vessels at period end
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Weighted average
age of vessels (8)
|
|
|
4.8
|
|
|
|
5.8
|
|
|
|
6.8
|
|
|
|
7.8
|
|
(1)
|
Ownership
days are the total number of days in a period during which we owned each of the vessels in our fleet. Ownership days are an
indicator of the size of our fleet over a period and affect both the amount of revenues generated and the amount of expenses
incurred during the respective period.
|
(2)
|
Available
days are the number of ownership days in a period, less the aggregate number of days that our vessels were off-hire due to
scheduled repairs or repairs under guarantee, vessel upgrades or special surveys and intermediate dry-dockings and the aggregate
number of days that we spent positioning our vessels during the respective period for such repairs, upgrades and surveys.
Available days measures the aggregate number of days in a period during which vessels should be capable of generating revenues.
|
(3)
|
Operating
days are the number of available days in a period, less the aggregate number of days that our vessels were off-hire or out
of service due to any reason, including technical breakdowns and unforeseen circumstances. Operating days measures the aggregate
number of days in a period during which vessels actually generate revenues.
|
(4)
|
We
calculate fleet utilization by dividing the number of operating days during a period by the number of available days during
the same period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable
employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled
repairs or repairs under guarantee, vessel upgrades, special surveys and intermediate dry-dockings or vessel positioning.
|
(5)
|
Daily
time charter equivalent (“TCE”) rate 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 U.S. GAAP. We utilize TCE
because we believe it is a meaningful measure to compare period-to-period changes in our performance despite changes in the
mix of charter types (i.e. spot charters, time charters and bareboat charters) under which our vessels may be employed between
the periods. Our management also utilizes TCE to assist them in making decisions regarding employment of the vessels. We believe
that our method of calculating TCE is consistent with industry standards and is calculated 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 bunker costs that are unique to a particular voyage, which would otherwise be paid
by the charterer under a time charter contract. Please see reconciliation of TCE under Item 5.A. Operating Results
|
(6)
|
Daily
vessel operating expenses are direct operating expenses such as crewing, provisions, repairs and maintenance, insurance, deck
and engine stores, lubricating oils and tonnage tax divided by ownership days.
|
(7)
|
Average
number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the
number of days each vessel was part of our fleet during such period divided by the number of calendar days in the period.
|
(8)
|
Weighted
average age of the fleet is the sum of the ages of our vessels, weighted by the dead weight tonnage (“dwt”) of
each vessel on the total fleet dwt.
|
Recent
Daily Fleet Data:
|
|
|
(In
U.S. dollars, except for Utilization %)
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Eco-Efficient
MR2: (2 of our vessels)
|
|
TCE
|
|
|
15,631
|
|
|
|
15,015
|
|
|
|
13,027
|
|
|
|
10,524
|
|
|
|
Opex
|
|
|
6,430
|
|
|
|
5,754
|
|
|
|
5,838
|
|
|
|
5,962
|
|
|
|
Utilization
%
|
|
|
99.4
|
%
|
|
|
97.0
|
%
|
|
|
94.1
|
%
|
|
|
91.8
|
%
|
Eco-Modified
MR2: (1 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
17,480
|
|
|
|
10,705
|
|
|
|
13,042
|
|
|
|
12,383
|
|
|
|
Opex
|
|
|
6,461
|
|
|
|
6,255
|
|
|
|
6,433
|
|
|
|
6,505
|
|
|
|
Utilization
%
|
|
|
91.3
|
%
|
|
|
92.9
|
%
|
|
|
90.1
|
%
|
|
|
86.6
|
%
|
Standard
MR2: (1 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
17,237
|
|
|
|
15,504
|
|
|
|
12,209
|
|
|
|
8,887
|
|
|
|
Opex
|
|
|
6,325
|
|
|
|
6,772
|
|
|
|
6,036
|
|
|
|
6,039
|
|
|
|
Utilization
%
|
|
|
100.0
|
%
|
|
|
90.5
|
%
|
|
|
99.2
|
%
|
|
|
91.0
|
%
|
Handysize
Tankers: (2 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
7,622
|
|
|
|
7,939
|
|
|
|
5,979
|
|
|
|
5,844
|
|
|
|
Opex
|
|
|
5,358
|
|
|
|
5,315
|
|
|
|
5,408
|
|
|
|
5,122
|
|
|
|
Utilization
%
|
|
|
98.6
|
%
|
|
|
85.1
|
%
|
|
|
79.2
|
%
|
|
|
72.6
|
%
|
Fleet:
(6 vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
13,597
|
|
|
|
12,134
|
|
|
|
10,795
|
|
|
|
9,163
|
|
|
|
Opex
|
|
|
6,058
|
|
|
|
5,861
|
|
|
|
5,827
|
|
|
|
5,785
|
|
|
|
Utilization
%
|
|
|
97.9
|
%
|
|
|
91.3
|
%
|
|
|
89.3
|
%
|
|
|
84.3
|
%
|
Vessel
operating expenses per day (“Opex”) are our vessel operating expenses for a vessel, which consist primarily of crew
wages and related costs, insurance, lube oils, communications, spares and consumables, tonnage taxes as well as repairs and maintenance,
divided by the days in the applicable period. Please see “Item 4. Information on the Company – B. Business Overview
– The International Product Tanker Shipping Industry – Eco Ships” for a description of the terms “eco-efficient”,
“eco-modified” and “standard”.
B.
Capitalization and Indebtedness
Not
applicable.
C.
Reasons for the Offer and Use of Proceeds
Not
applicable.
D.
Risk Factors
Risks
Related to Our Industry
We
operate our vessels worldwide and as a result, our vessels are exposed to international and inherent operational risks that may
reduce revenue or increase expenses.
The
international shipping industry is an inherently risky business involving global operations. The operation of ocean-going vessels
in international trade is affected by a number of risks. Our vessels and their cargoes will be at risk of being damaged or lost
because of events, including bad weather, grounding, fire, explosions, mechanical failure, vessel and cargo property loss or damage,
hostilities, labor strikes, adverse weather conditions, stowaways, placement on our 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 our vessels could result in death or injury to persons, loss of property or
environmental damage, delays in the delivery of cargo, damage to our customer relationships, loss of revenues from or termination
of charter contracts, governmental fines, penalties or restrictions on conducting business or higher insurance rates. These sorts
of events could interfere with shipping routes (such as delay or rerouting), and result in market disruptions that may reduce
our revenue or increase our expenses and also subject us to litigation. International shipping is also subject to various security
and customs inspection and related procedures in countries of origin and destination and transshipment points. Inspection procedures
can result in the seizure of 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 or an increase in the frequency
of vessel inspections could impose additional financial and legal obligations on us. Furthermore, changes to inspection procedures
could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain
types of cargo uneconomical or impractical.
The
operation of tankers has unique operational risks associated with the transportation of refined petroleum products. A spill of
such cargoes may cause significant environmental damage, and the associated costs could exceed the insurance coverage available
to the Company. 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 refined petroleum products
transported in tankers. If the Company’s vessels suffer damage, they may need to be repaired at a drydocking facility. The
costs of drydock repairs are unpredictable and may be substantial. The Company 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 the Company’s business, results of operations and financial condition. In addition,
space at drydocking facilities is sometimes limited and not all drydocking facilities are conveniently located. The Company 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 the vessels’ positions. The loss of earnings while these vessels are forced to wait for space
or to travel to more distant drydocking facilities may adversely affect the Company’s business, results of operations and
financial condition. Further, the total loss of any of the Company’s vessels could harm its reputation as a safe and reliable
vessel owner and operator. If the Company 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, results of operations and financial condition.
Our
revenues are derived substantially from a single segment where charter hire rates for product tankers are cyclical and volatile.
Substantially
all of our revenues are derived from a single market, the product tanker segment, and therefore our financial results depend on
chartering activities and developments in this segment. The product tanker market is cyclical and volatile in charter hire rates.
The degree of charter hire rate volatility among different types of product tankers has varied widely, and, as a result, our ability
to charter, or to re-charter our vessels upon the expiration or termination of our current charters, the charter rates payable
under any replacement charters and vessel values will depend upon, among other things, economic conditions in the product tanker
market at that time and changes in the supply and demand for vessel capacity. Any renewal or replacement charters that the Company
enters into may not be sufficient to allow the Company to operate its vessels profitably. After reaching historic highs in mid-2008,
charter hire rates for product tankers declined significantly before increasing in 2015 and then declining again in 2016. Since
then, charter hire rates have remained volatile. If charter hire rates remain depressed or fall further in the future when our
charters expire, we may be unable to re-charter our vessels at rates as favorable to us, with the result that our earnings and
available cash flow will continue to be adversely affected. In addition, a decline in charter hire rates will likely cause the
value of our vessels to decline.
Charter
hire rates depend on the demand for, and supply of, product tanker vessels.
The
factors that influence the demand for product tanker vessel capacity are unpredictable and outside of our control, and include,
among others:
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demand
and supply for refined petroleum products and other liquid bulk products such as vegetable and edible oils;
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competition
from alternative sources of energy and a shift in consumer demand towards other energy resources such as wind, solar or water
energy as well as greater use of electric powered vehicles;
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the
globalization of manufacturing and developments of transportation services;
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regional
availability of refining capacity;
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increases
in the production of refined petroleum products in areas linked by pipelines to consuming areas, the extension of existing,
or the development of new, pipeline systems in markets we may serve, or the conversion of existing non-oil pipelines to refined
petroleum products pipelines in those areas;
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the
distance oil and petroleum products are moved by sea; changes in seaborne and other transportation patterns, including changes
in the distances over which refined petroleum and chemical cargoes are transported;
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competition
from other shipping companies and other modes of transportation, such as railroads that compete with product tankers;
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product
imbalances across regions (affecting the level of trading activity);
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global
and regional economic and political conditions, including armed conflicts, terrorist activities, and strikes; environmental
and other regulatory developments; developments in international trade generally;
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international
sanctions, embargoes, import and export restrictions, nationalizations and wars;
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currency
exchange rates; and
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weather
and natural disasters.
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The
factors that influence the supply of product tanker vessel capacity are also outside of our control and unpredictable and include,
among others:
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demand
and supply for refined petroleum products and other liquid bulk products such as vegetable and edible oils;
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availability
and pricing of other energy resources such as natural gas;
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the
number of product tanker newbuilding deliveries;
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the
efficiency and age of the global product tanker fleet;
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the
scrapping rate of older product tankers or casualties;
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the
price of steel and vessel equipment;
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the
cost of newbuildings and the cost of retrofitting or modifying secondhand product tankers as a result of charterer requirements;
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shipyard
capacity, financial condition and new vessel construction throughput/delays in deliveries;
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availability,
terms and cost of capital;
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cost
and supply of labor;
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technological
innovations and advances in product tanker design and capacity, including the introduction of scrubbers;
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conversion
of product tankers to other uses and the conversion of other vessels to product tankers;
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the
number of product tankers used for floating storage;
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the
number of product tankers trading crude or “dirty” oil products;
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availability
of crude tankers to take petroleum products on their maiden voyage upon delivery from shipyards;
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product
tanker freight rates, whether time or spot charters, including spot market related pools the Company may join, which are themselves
affected by factors that may affect the rate of newbuilding, scrapping and laying-up of product tankers;
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port
and canal congestion;
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the
cost of bunkers and fuel oil, and their impact on vessel speed; currency exchange rate fluctuations;
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changes
in governmental or maritime self-regulatory organizations’ rules and regulations or actions taken by regulatory authorities;
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changes
in environmental and other regulations that may limit the useful lives of product tankers; and
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the
number of product tankers that are out of service.
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These
factors influencing the supply of and demand for product tanker capacity and charter rates are outside of our control, and we
may not be able to correctly assess the nature, timing and degree of changes in industry conditions. A global economic downturn
may reduce demand for transportation of refined petroleum products and chemicals. We cannot assure you that we will be able to
successfully charter our product tankers in the future at all or at rates sufficient to allow us to meet our contractual obligations,
including repayment of our indebtedness, or to pay dividends to our stockholders.
Product
tanker rates fluctuate based on seasonal variations in demand.
Product
tanker markets are typically stronger in the winter months as a result of increased refined petroleum products consumption in
the northern hemisphere and weaker in the summer months as a result of lower consumption in the northern hemisphere and refinery
maintenance that is typically conducted in the summer months. Unpredictable weather patterns during the winter months in the northern
hemisphere tend to disrupt vessel routing and scheduling. The price volatility of products resulting from these factors has historically
led to increased product trading activities in the winter months. As a result, revenues generated by vessels are typically weaker
during the quarters ended June 30 and September 30, and stronger in the quarters ended March 31 and December 31. If increased
revenues generated in the fall/winter months are not sufficient to offset any decreases in revenue in the spring/summer months,
it may have an adverse effect on our business, results of operations and financial condition.
An
over-supply of product tanker capacity may lead to reductions in charter rates, vessel values and profitability.
The
market supply of product tankers is affected by a number of factors such as the demand for energy resources, oil, petroleum and
chemical products, the level of current and expected charter hire rates, asset and newbuilding prices and the availability of
financing, as well as overall global economic growth in parts of the world economy, including Asia, and has been increasing as
a result of the delivery of substantial newbuilding orders over the last few years.
There
has been a global trend towards energy efficient technologies, lower environmental emissions and alternative sources of energy.
In the long-term, demand for oil may be reduced by increased availability of such energy sources and machines that run on them.
In addition, reduced global supply of oil due to coordinated action, such as the production cuts recently agreed by the Organization
of Petroleum Exporting Countries (“OPEC”) and other oil producing nations, may lead to an over-supply of product tanker
capacity due to lower demand for the transportation of refined petroleum products.
Newly
built product tankers were delivered in significant numbers starting at the beginning of 2006 through 2018 and continuing into
2019. Furthermore, if the capacity of new ships delivered exceeds the capacity of product tankers being scrapped and lost, product
tanker capacity will increase. For example, as of February 28, 2019, there were 179 product and product/chemical tankers on order,
equivalent to 6.5% of the existing fleet by units and 7.0% of the existing fleet by dwt and the orderbook may increase further
in the future. If the supply of product tanker capacity increases and if the demand for product tanker capacity does not increase
correspondingly, charter rates and vessel values could materially decline. If that happens, as the Company’s charters expire,
the Company may only be able to re-charter its vessels at reduced or unprofitable rates, or the Company may not be able to charter
its vessels at all. A reduction in charter rates and the value of our vessels for any of these reasons may have a material adverse
effect on our business, results of operations and financial condition.
In
addition, product tankers currently used to transport crude oil and other “dirty” products may be “cleaned up”
and reintroduced into the product tanker market, which would increase the available product tanker tonnage which may affect the
supply and demand balance for product tankers. This could have an adverse effect on our business, results of operations and financial
position.
Over
the last seven years, a number of vessel owners have ordered and taken delivery of so-called “eco-efficient” vessel
designs, which offer significant bunker savings as compared to older designs. Increased demand for and supply of “eco-efficient”
vessels could reduce demand for certain of our vessels that are not classified as such and expose us to lower vessel utilization
and/or decreased charter rates.
We
estimate that a significant proportion of newbuilding orders have been based on new vessel designs, which purport to offer material
bunker savings compared to older designs, such as a significant proportion of our tanker vessels. See “Item 4. Information
on the Company – B. Business Overview – The Fleet.” New vessel designs have resulted in a significant reduction
of bunker consumption and consequently cost for charterers. As the supply of “eco-efficient” tankers expands, if charterers
prefer those vessels over our tankers that are not classified as such, this may reduce demand for our non- “eco-efficient”
tankers, impair our ability to re-charter such tankers at competitive rates or at all and have a material adverse effect on our
business, results of operations and financial condition.
Acts
of piracy on ocean-going vessels could adversely affect our 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 has decreased since 2014, piracy incidents continue to occur, such as 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 our vessels
are deployed are characterized as “war risk’’ zones or “war and strikes” listed areas by insurers,
or other parties such as the Joint War Committee of Lloyds Insurance and IUA Company, premiums payable for coverage could increase
significantly and such insurance coverage may be more difficult to obtain. In addition, crew and security equipment costs, including
employing onboard security guards, could increase in such circumstances. We may not be adequately insured to cover losses from
these incidents. In addition, any detention hijacking as a result of an act of piracy against our vessels, increases in cost associated
with seeking to avoid such events (including increased bunker costs resulting from vessels being rerouted or travelling at increased
speeds as recommended by BMP4), or unavailability or increases in cost of insurance for our vessels, could have a material adverse
impact on our business, results of operations and financial condition.
An
economic slowdown or changes in the economic and political environment in the Asia Pacific region could have a material adverse
effect on our business, financial condition and results of operations.
We
anticipate a significant number of the port calls made by our vessels will continue to involve the loading or discharging of cargoesin
ports in the Asia Pacific region. As a result, any negative changes in economic conditions in any Asia Pacific country, particularly
in China, may have a material adverse effect on our business, financial condition and results of operations, as well as our future
prospects. Before the global economic financial crisis that began in 2008, China had one of the world’s fastest growing
economies in terms of gross domestic product, or GDP, which had a significant impact on shipping demand. The quarterly year-over-year
growth rate of China’s GDP was approximately 6.5% for the year ended December 31, 2018, as compared to approximately 6.9%
for the year ended December 31, 2017, and continues to remain below pre-2008 levels. We cannot assure you that the Chinese economy
will not experience a significant contraction in the future.
Although
state-owned enterprises still account for a substantial portion of the Chinese industrial output, in general, the Chinese government
is reducing the level of direct control that it exercises over the economy through state plans and other measures. There is an
increasing level of freedom and autonomy in areas such as allocation of resources, production, pricing and management and a gradual
shift in emphasis to a “market economy” and enterprise reform. Limited price reforms were undertaken with the result
that prices for certain refined petroleum products are principally determined by market forces. Many of the reforms are unprecedented
or experimental and may be subject to revision, change or abolition based upon the outcome of such experiments. If the Chinese
government does not continue to pursue a policy of economic reform, the level of imports to and exports from China could be adversely
affected by changes to these economic reforms by the Chinese government, as well as by changes in political, economic and social
conditions or other relevant policies of the Chinese government, such as changes in laws, regulations or export and import restrictions.
Notwithstanding economic reform, the Chinese government may adopt policies that favor domestic shipping and tanker companies and
may hinder our ability to compete with them effectively. For example, China imposes a tax for non-resident international transportation
enterprises engaged in the provision of services of passengers or cargo, among other items, in and out of China using their own,
chartered or leased vessels. The regulation may subject international transportation companies to Chinese enterprise income tax
on profits generated from international transportation services passing through Chinese ports. This could have an adverse impact
on our charterers’ business, operating results and financial condition and could thereby affect their ability to make timely
charter hire payments to us and to renew and increase the number of their time charters with us. Moreover, an economic slowdown
in the economies of the European Union and other Asian countries may further adversely affect economic growth in China and elsewhere.
In
addition, concerns regarding the possibility of sovereign debt defaults by European Union member countries, including Greece,
have in the past disrupted financial markets throughout the world, and may lead to weaker consumer demand in the European Union,
the United States, and other parts of the world. The possibility of sovereign debt defaults by European Union member countries,
including Greece, and the possibility of market reforms to float the Chinese renminbi, either of which development could weaken
the Euro against the Chinese renminbi, could adversely affect consumer demand in the European Union. Moreover, the revaluation
of the renminbi may negatively impact the United States’ demand for imported goods, many of which are shipped from China.
Future weak economic conditions could have a material adverse effect on our business, results of operations and financial condition
and our ability to pay dividends to our stockholders. Our business, financial condition, results of operations, as well as our
future prospects, will likely be materially and adversely affected by another economic downturn in any of the aforementioned countries
and regions.
The
current global economic condition and financial environment may negatively affect our business.
In
recent years, businesses in the global economy have faced periods of slower growth, recessions, limited or no credit or credit
on less favorable terms than previously obtained, lower demand for goods and services, reduced liquidity and volatile capital
markets. These factors have had, and in part continue to have, a negative effect on the demand for refined petroleum products
including fuel oil or bunkers, which, along with diminished trade credit available for the delivery of such cargoes have led to
periodic decreased demand for product tankers, creating downward pressure on charter rates and reduced product tanker values.
In particular, a significant number of the port calls we expect our vessels to make will likely involve the loading or discharging
of cargo in ports in Organization of Economic Cooperation and Development countries and the Asia Pacific region. China’s
economy has shown signs of slowing its growth rate. We cannot assure you that the Chinese, Indian or Japanese economies, which
generate a substantial amount of demand for shipping companies, will not experience a significant contraction or otherwise negatively
change in the future, especially due to the recent effects from the turmoil in the Chinese capital markets. Moreover, a significant
or protracted slowdown in the economies of the United States, the European Union (“EU”) or various Asian countries
may adversely affect economic growth in China and elsewhere. In addition, concerns persist regarding the debt burden of certain
Eurozone countries and their ability to meet future financial obligations and the overall stability of the Euro. An extended period
of adverse development in the outlook for European countries could reduce the overall demand for our services.
The
United Kingdom’s decision to leave the European Union following a referendum in June 2016 (“Brexit”), contributes
to considerable uncertainty concerning the current and future economic environment. Brexit could adversely affect European or
worldwide political, regulatory, economic or market conditions and could contribute to instability in global political institutions,
regulatory agencies and financial markets. We believe that these effects of Brexit won’t materially affect our business,
results of operations and financial condition.
Further,
governments may turn to trade barriers to protect their domestic industries against foreign imports, thereby depressing shipping
demand. In particular, leaders in the United States have indicated the United States may seek to implement more protective trade
measures. President Trump was elected on a platform promoting trade protectionism. The results of the presidential election have
thus created significant uncertainty about the future relationship between the United States, China and other exporting countries,
including with respect to trade policies, treaties, government regulations and tariffs. For example, on January 23, 2017, President
Trump signed an executive order withdrawing the United States from the Trans-Pacific Partnership, a global trade agreement intended
to include the United States, Canada, Mexico, Peru and a number of Asian countries. In March 2018, President Trump announced tariffs
on imported steel and aluminum into the United States that could have a negative impact on international trade generally. Most
recently, in January 2019, the United States announced expanded sanctions against Venezuela, which may have an effect on its oil
output and in turn affect global oil supply. Protectionist developments, or the perception they may occur, may have a material
adverse effect on global economic conditions, and may significantly reduce global trade. Moreover, increasing trade protectionism
may cause an increase in (a) the cost of goods exported from regions globally, (b) the length of time required to transport goods
and (c) the risks associated with exporting goods. Such increases may significantly affect the quantity of goods to be shipped,
shipping time schedules, voyage costs and other associated costs, which could have an adverse impact on our charterers’
business, operating results and financial condition and could thereby affect their ability to make timely charter hire payments
to us and to renew and increase the number of their time charters with us. This could have a material adverse effect on our business,
results of operations and financial condition.
These
issues, along with the re-pricing of credit risk and the difficulties currently experienced by financial institutions, especially
those lending in the shipping industry, have made, and will likely continue to make, it difficult to obtain financing. As a result
of the disruptions in the credit markets and higher capital requirements, many lenders have enacted tighter lending standards,
required more restrictive terms (including higher collateral ratios for advances, shorter maturities and smaller loan amounts),
increased margins or lending rates or have refused to refinance existing debt at all. Moreover, certain banks that have historically
been significant lenders to the shipping industry have reduced or ceased lending activities in the shipping industry. Further
tightening of capital requirements and the resulting policies adopted by lenders, could further reduce lending activities.
Global
economic conditions remain fragile with uncertainty surrounding sustainable recovery and long-term prospects. If the current global
economic and financial environment persists or worsens, we may be negatively affected in the following ways, among others:
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we
may not be able to employ our vessels at charter rates as favorable to us as historical rates or operate our vessels profitably;
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the
market value of our vessels could decrease, which may cause us to, among other things, recognize losses if any of our vessels
are sold or if their values are impaired, violate covenants in our current loan agreements and future financing agreements
and be unable to incur debt at all or on terms that are acceptable to us; and
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we
may experience difficulties obtaining financing commitments or be unable to fully draw under loans we arrange in the future
if the lenders are unwilling to extend financing to us or unable to meet their funding obligations due to their own liquidity,
capital or solvency issues. We cannot be certain that financing will be available on acceptable terms or at all. If financing
is not available when needed, or is available only on unfavorable terms, we may be unable to meet our future obligations as
they come due. In the absence of available financing, we also may be unable to take advantage of business opportunities or
respond to competitive pressures.
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occurrence of any of the foregoing could have a material adverse effect on our business, results of operations and financial condition.
Changes
in fuel, or bunkers, prices may adversely affect profits.
Fuel,
or bunkers, is a significant expense in shipping operations for our vessels employed on the spot market and changes in the price
of fuel may adversely affect the Company’s profitability and can have a significant impact on earnings. With respect to
our vessels employed on time charter, the charterer is generally responsible for the cost and supply of fuel, but such cost may
affect the charter rates we are able to negotiate for our vessels. The price and supply of fuel is unpredictable and fluctuates
based on events outside our 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, including as a result of the imposition of lower sulfur
oxide emissions under new IMO 2020 regulations, which may reduce the profitability and competitiveness of our business versus
other forms of transportation, such as truck or rail. Also, older vessels usually consume more fuel than eco-efficient vessels.
Consequently, employment of our older vessels may be lower and less profitable. Changes in the price of fuel may adversely affect
our profitability.
Our
vessels may call on ports located in or may operate in countries that are subject to restrictions imposed by the United States,
the European Union or other governments that could result in fines and penalties imposed on us and may adversely affect our reputation
and the market price of our common shares.
During
the year ended December 31, 2018, none of our vessels called on ports located in countries subject to sanctions and embargoes
imposed by the U.S. government and other authorities or countries or regions identified by the U.S. government or other authorities
as state sponsors of terrorism; however, our vessels may call on ports in these countries or regions from time to time in the
future on our charterers’ instructions. The U.S. 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.
We
believe that we are currently in compliance with all applicable sanctions and embargo laws and regulations. In order to maintain
compliance, we monitor and review the movement of our vessels on a frequent basis.
All
or most of our future charters shall include provisions and trade exclusion clauses prohibiting the vessels from calling on ports
where there is an existing U.S, embargo. Furthermore, as of the date hereof, neither the Company nor its subsidiaries have ever
entered into or have any future plans to enter into, directly or indirectly, any contracts, agreements or other arrangements with
the governments of North Korea, Iran, Syria, Cuba or Crimea or any entities owned or controlled by the governments of these countries
or regions, including any entities organized in these countries or regions.
Due
to the nature of our business and the evolving nature of the foregoing sanctions and embargo laws and regulations, there can be
no assurance that we will be in compliance at all times in the future, particularly as the scope of certain laws may be unclear
and may be subject to changing interpretations. Any such violation could result in fines, penalties or other sanctions that could
severely impact our ability to access the U.S. capital markets and conduct our business, and could result in some investors deciding,
or being required, to divest their interest, or refrain from investing, in us. In addition, certain institutional investors may
have investment policies or restrictions that prevent them from holding securities of companies that have contracts with countries
identified by the U.S. government as state sponsors of terrorism. The determination by these investors not to invest in, or to
divest from, our common stock may adversely affect the price at which our common stock trades. Moreover, our charterers may violate
applicable sanctions and embargo laws and regulations as a result of actions that do not involve us or our vessels, and those
violations could in turn negatively affect our reputation. In addition, our reputation and the market for our securities may be
adversely affected if we engage in certain other activities, such as entering into charters with individuals or entities in countries
subject to U.S. sanctions and embargo laws that are not controlled by the governments of those countries, or engaging in operations
associated with those countries pursuant to contracts with third parties that are unrelated to those countries or entities controlled
by their governments. Investor perception of the value of our common stock may be adversely affected by the consequences of war,
the effects of terrorism, civil unrest and governmental actions in these and surrounding countries.
Our
vessels could be arrested by maritime claimants, which could result in a significant loss of earnings and cash flow if we are
not able to post the required security to lift the arrest or attachment.
Generally,
under the terms of the time charters for our vessels, a vessel would be placed off-hire (that is, the charterer could cease to
pay charter hire) 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”
or “attaching” a vessel through court processes. In addition, claims may be brought by parties 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 the ship owner would have to post security to have the arrest lifted and to 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 (“ITM”) (but otherwise with
no affiliation to us at all), would not be asserted against us or one or more of our vessels. The arrest of one or more vessels
in our fleet could result in a material loss of cash flow for us and/or require us to pay substantial sums to have the arrest
lifted.
Governments
could requisition our vessels during a period of war or emergency.
A
government could take actions for requisition of title, hire or seize our vessels. Requisition for title occurs when a government
takes control of a vessel and becomes its owner. Also, a government could requisition our vessels for hire, which 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 our vessels could negatively impact our business,
results of operations and financial condition.
We
are subject to increasingly complex laws and regulations, including environmental and safety laws and regulations, which expose
us to liability and significant additional expenditures, and can adversely affect our insurance coverage and access to certain
ports as well as our business, results of operations and financial condition.
Our
operations are affected by extensive and changing international, national and local laws, regulations, treaties, conventions and
standards in force in international waters, the jurisdictional waters of the countries in which our vessels operate, as well as
the countries of our vessels’ registration.
These
laws and regulations include, but are not limited to, the U.S. Oil Pollution Act of 1990 (the “OPA”), requirements
of the U.S Coast Guard (“USCG”) and the U.S. Environmental Protection Agency (the “EPA”), the U.S. Comprehensive
Environmental Response, Compensation and Liability Act of 1980 (the “CERCLA”), the U.S. Clean Air Act of 1970 (as
amended from time to time and referred to herein as the “CAA”), the U.S. Clean Water Act of 1972 (as amended from
time to time and referred to herein as the “CWA”), the International Maritime Organization (the “IMO”),
the International Convention on Civil Liability for Oil Pollution Damage of 1969 (as amended from time to time and referred to
herein as the “CLC”), the IMO International Convention on Civil Liability for Bunker Oil Pollution Damages (the “Bunker
Convention”), the IMO International Convention for the Prevention of Pollution from Ships of 1973 (as amended from time
to time and referred to herein as “MARPOL”), including designation of Emission Control Areas (“ECAs”)
thereunder, the IMO International Convention for the Safety of Life at Sea of 1974 (as amended from time to time and referred
to herein as the “SOLAS Convention”) and the International Management Code for the Safe Operation of Ships and Pollution
Prevention (the “ISM Code”) promulgated thereby, the International Convention for the Control and Management of Ships’
Ballast Water and Sediments (the “BWM Convention”), the IMO International Convention on Load Lines of 1966 (as from
time to time amended) (the “LL Convention”), the U.S. Maritime Transportation Security Act of 2002 (the “MTSA”),
the International Labour Organization (“ILO”), the Maritime Labour Convention, EU regulations, and the International
Ship and Port Facility Security Code (the “ISPS Code”).
Environmental
laws often impose strict liability for remediation of spills and releases of oil and hazardous substances, which could subject
us to liability without regard to whether we were negligent or at fault. Under the 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 our reputation with current or potential charterers of our tankers. We are
required to satisfy insurance and financial responsibility requirements for potential oil (including marine fuel) spills and other
pollution incidents. Although we have arranged insurance to cover certain environmental risks, there can be no assurance that
such insurance will be sufficient to cover all such risks.
The
safe operation of our vessels is affected by the requirements of the ISM Code, promulgated by the IMO under the SOLAS Convention.
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 we fail to comply with the ISM Code, we may be subject
to increased liability, invalidation of our existing insurance, or reduction in available insurance coverage for our affected
vessels. Such noncompliance may also result in a denial of access to, or detention in, certain ports which could have a material
adverse impact on the Company’s business, results of operations and financial condition.
Compliance
with such laws and regulations, where applicable, may require installation of costly equipment, vessel modifications, operational
changes or restrictions, a reduction in cargo-capacity and may affect the resale value or useful lives of our vessels as well
as result in the denial of access to, or detention in, certain jurisdictional waters or ports. We 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. Government regulation of the shipping industry, particularly as it may relate to safety, ship
recycling requirements, greenhouse gas emissions and climate change, and other environmental matters, can be expected to become
stricter in the future, and may require us to incur significant capital expenditures on our vessels to keep them in compliance,
may require us to scrap or sell certain vessels altogether, may reduce the residual value we receive if a vessel is scrapped,
and may generally increase our compliance costs. A failure to comply with applicable laws and regulations may result in administrative
and civil penalties, criminal sanctions or the suspension or termination of operations. Increased inspection procedures could
increase costs and disrupt our business. International shipping is subject to various security and customs inspection and related
procedures in countries of origin and destination and trans-shipment 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 us, could also impose additional costs and obligations on our customers and may, in certain cases, render the shipment of certain
types of cargo uneconomical or impractical. All of the above, including any changes or developments, both individually and cumulatively,
could have a material adverse effect on our business, results of operations and financial condition.
Recent
action by the IMO’s Maritime Safety Committee and U.S. agencies indicate that cyber-security regulations for the maritime
industry are likely to be further developed in the near future in an attempt to combat cyber-security threats. This might cause
companies to cultivate additional procedures for monitoring cyber-security, which could require additional expenses and/or capital
expenditures. However, the impact of such regulations is hard to predict at this time.
The
failure to maintain class certifications of authorized classification societies on one or more of our vessels would affect our
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 SOLAS Convention. The
operating vessels in our fleet are classed by the major classification societies, Nippon Kaiji Kyokai (“NKK”) and
Det Norske Veritas (“DNV GL”). ITM and the vessels in our fleet have also been awarded certifications from major classification
societies under the ISM Code. 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 our 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 dry-docked 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
us to claims from the charterer if it has chartered the vessel, which would negatively impact our revenues as well as our reputation.
We
could be adversely affected by violations of the U.S. Foreign Corrupt Practices Act of 1977 (the “FCPA”) and similar
worldwide anti-bribery laws.
The
FCPA 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. Our policies mandate compliance with these laws. In
certain circumstances, third parties may request our employees and agents to make payments that may not comply with the FCPA and
other anti-bribery laws. Despite such compliance program, we cannot assure you that our internal control policies and procedures
always will protect us from reckless or negligent acts committed by our employees or agents. Violations of these laws, or allegations
of such violations, could result in substantial fines, sanctions, civil and/or criminal penalties and curtailment of operations
in certain jurisdictions and could have a negative impact on our business, results of operations and financial condition. In addition,
actual or alleged violations could damage the Company’s reputation and ability to do business. Furthermore, detecting, investigating,
and resolving actual or alleged violations is expensive and can consume significant time and attention of the Company’s
senior management.
The
Company obtains some of its insurance through protection and indemnity associations, which could result in significant
additional premium payments.
The
Company may be subject to increased premium payments, or calls, in amounts based on its claim records, the claim records of Maritime
or ITM, as well as the claim records of other members of the protection and indemnity associations through which the Company receives
insurance coverage for tort liability, including pollution-related liability. The Company’s protection and indemnity associations
may not have sufficient resources to cover claims made against them. The Company’s payment of these calls could result in
significant expense to the Company, which could have a material adverse effect on us. Changes in the insurance markets or increased
risks to other members of the Company’s protection and indemnity associations attributable to terrorist attacks, piracy,
environmental disasters or other maritime and non-maritime perils may cause increases to premiums and may make certain types of
insurance more difficult for the Company to obtain due to increased premiums or reduced or restricted coverage, which could have
a material adverse impact on its business, results of operations and financial condition.
We
are subject to funding calls by our protection and indemnity associations, and our associations may not have enough resources
to cover claims made against them.
We
are indemnified for certain liabilities incurred while operating our 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 our association has entered into inter-association agreements. We
cannot assure you that the associations to which we belong will remain viable.
We
will incur additional costs to retrofit ballast water treatment systems in our vessels to comply with new regulations.
Vessels
unload ballast water during passage by taking ballast water in one port and unloading it in another. This helps maintain safety
and stability. However, the ballast water can contain local organisms and pathogens. When vessels unload ballast water they can
then release organisms and pathogens in different parts of the world, which can be invasive to that local ecosystem. To avoid
transfers of invasive species in ballast water, the IMO and United States have regulations that require ballast water is treated
prior to the discharge. In order to comply with IMO and U.S. ballast water regulations, we are required to install ballast water
treatment plants on all vessels from March 2019 to June 2022.
In
February 2004, the IMO adopted the International Convention for the Control and Management of Ships’ Ballast Water and Sediments
(“BWM Convention”). The BWM Convention aims to prevent the spread of harmful aquatic organisms from one region to
another by establishing standards and procedures for the management and control of ships’ ballast water and sediments. The
BWM Convention contains an environmentally protective numeric standard for the treatment of ship’s ballast water before
it is discharged. This standard, detailed in Regulation “D-2” of the BWM Convention, sets out the numbers of organisms
allowed in specific volumes of treated discharge water. The IMO “D-2” standard is also the standard that has been
adopted by the U.S. Coast Guard’s ballast water regulations and the U.S. EPA’s Vessel General Permit. The BWM Convention
also contains an implementation schedule for the installation of IMO member state type approved treatment systems in existing
ships and in new vessels, requirements for the development of vessel ballast water management plans, requirements for the safe
removal of sediments from ballast tanks, and guidelines for the testing and type approval of ballast water treatment technologies.
In July 2017 the IMO has extended the regulatory requirement of compliance to BWM Convention from September 8, 2017 to September
8, 2019. Vessels trading internationally will have to comply with the BWM Convention upon their next special survey after that
date and for an MR2 tanker, the retrofit cost could be as much as $1.0 million per vessel including labor. The cost of compliance
per vessel for us is estimated to be between $0.4 and $0.6 million, depending on specifications of the vessel. Significant investments
in ballast water treatment systems may have a material adverse effect on our future performance, results of operations, cash flows
and financial position depending on the ability to install effective ballast water treatment systems, including ship yard availability,
and the extent to which existing vessels must be modified to accommodate such systems
As
of the date of this filing, one vessel in the Company’s fleet currently has a ballast water treatment system installed.
The Company cannot be assured that this system will be approved by the regulatory bodies of every jurisdiction in which it may
wish to conduct its business. Accordingly, the Company may have to make additional investments in this vessel and substantial
investments in the remaining vessels in its fleet that do not carry any such equipment. Also, as part of our loan agreements,
lenders may require us to periodically deposit additional funds as a reserve to cover these expenditures.
Furthermore,
United States regulations are currently changing. Although the 2013 Vessel General Permit (“VGP”) program and U.S.
National Invasive Species Act (“NISA”) are currently in effect to regulate ballast discharge, exchange and installation,
the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on December 4, 2018, requires that the U.S.
Coast Guard develop implementation, compliance, and enforcement regulations regarding ballast water within two years. The new
regulations could require the installation of new equipment, which may cause us to incur substantial costs.
Developments
in safety and environmental requirements relating to the recycling of vessels may result in escalated and unexpected costs.
The
2009 Hong Kong International Convention for the Safe and Environmentally Sound Recycling of Ships (the “Hong Kong Convention”)
aims to ensure ships, being recycled once they reach the end of their operational lives, do not pose any unnecessary risks to
the environment, human health, and safety. The Hong Kong Convention has yet to be ratified by the required number of countries
to enter into force. Upon the Hong Kong Convention’s entry into force, however, each ship sent for recycling will have to
carry an inventory of its hazardous materials. The hazardous materials, whose use or installation is prohibited in certain circumstances,
are listed in an appendix to the Hong Kong Convention. Ships will be required to have surveys to verify their inventory of hazardous
materials initially, throughout their lives, and prior to the ship being recycled.
The
Hong Kong Convention will enter into force 24 months after the date on which 15 IMO Member States, representing 40% of world
merchant shipping by gross tonnage, have ratified or approved accession. As of January 31, 2019, seven
countries have ratified the Hong Kong Convention. Even though the Hong Kong Convention is currently not in effect, the
European Parliament and the Council of the EU have adopted the Ship Recycling Regulation, which retains the requirements of
the Hong Kong Convention. Starting in December 31, 2018, certain commercial seagoing vessels flying the flag of an EU
Member State may be recycled only in facilities included on the European list of permitted ship recycling
facilities.
These
regulatory developments, when implemented, may lead to cost escalation by shipyards, repair yards and scrap yards. This may then
result in a decrease in the residual scrap value of a vessel, and a vessel could potentially not cover the cost to comply with
latest requirements which may have an adverse effect on our future performance, results of operations, cash flows and financial
position.
The
Company does not plan to install scrubbers and may have to pay more for fuel starting 2020 which could adversely affect the Company’s
business, results of operations and financial condition.
In
October 2016, the IMO set January 1, 2020 as the implementation date for vessels to comply with its low sulfur fuel oil (“LSFO”)
requirement, which cuts sulfur levels from 3.5% to 0.5%. The interpretation of “fuel oil used on board” includes use
in main engine, auxiliary engines and boilers. Shipowners may comply with this regulation by (i) using 0.5% sulfur fuels on board,
which is likely to be available around the world by 2020 but likely at a higher cost; (ii) installing scrubbers for cleaning of
the exhaust gas; or (iii) by retrofitting vessels to be powered by liquefied natural gas , which may not be a viable option due
to the lack of supply network and high costs involved in this process. Costs of compliance with these regulatory changes may be
significant and may have a material adverse effect on our future performance, results of operations, cash flows and financial
position. See “Item 4. Information on the Company – B. Business Overview – Government Regulation; Effect of
Existing or Probable Governmental Regulations on the Business; Costs and Effects of Compliance with Environmental Laws.”
In
light of operating and economic uncertainties surrounding the use of scrubbers, the Company has chosen not to purchase and install
these units. However, the Company may, in the future, determine to purchase scrubbers for installation on its vessels. While scrubbers
rely on technology that has been developed over a significant period of time for use in a variety of applications, their use for
maritime applications is a more recent development. Each vessel will require physical modifications to be made in order to install
a scrubber, the scope of which will depend on, among other matters, the age and type of vessel, its engine and its existing fixtures
and equipment. The purchase and installation of scrubbers will involve significant capital expenditures, currently estimated at
$2 million per vessel, and the vessel will be out of operation for as long as 25 days or more in order for the scrubbers to be
installed. In addition, future arrangements that the Company may enter into with respect to shipyard drydock capacity to implement
these scrubber installations may be affected by delays or issues affecting vessel modifications being undertaken by other vessel
owners at those shipyards, which could cause the Company’s vessels to be out of service for even longer periods or installation
dates to be delayed. In addition, as there is a limited operating history of scrubbers on vessels such as those owned and
operated by the Company, the operation and maintenance of scrubbers and related ongoing costs to these vessels is uncertain. Any
unforeseen complications or delays in connection with acquiring, installing, operating or maintaining scrubbers installed on the
Company’s vessels could adversely affect the Company’s business, results of operations and financial condition.
Furthermore,
it is uncertain how the availability of high-sulfur fuel oil (“HSFO”) and LSFO around the world will be affected by
implementation of the IMO 2020 Regulations, as well as the prices of HSFO and LSFO generally and the price differential between
the two fuels after January 1, 2020, are also uncertain. If LSFO is unavailable in port and we or our charterers cannot
obtain a temporary waiver to refuel and use HSFO for the next voyage, we or our charterers could be subject to fines by regulatory
authorities and be in violation of the charter agreements. Scarcity in the supply of LSFO, or a higher-than-anticipated difference
in the costs between the two types of fuel, may cause the Company to pay more than for its fuel than scrubber fitted vessels,
which could adversely affect the Company’s business, results of operations and financial condition.
Effective
March 1, 2020, as part of the IMO 2020 Regulations, our vessels cannot carry HSFO. The charterer shall be responsible for off-loading
of any remaining HSFO by that time. If any of our vessels are under spot charters and are carrying such bunker fuel, we would
incur off-loading costs, tank cleaning expenses, potentially a write-down of inventory values and delays in our voyage activities.
There
is limited operating history of using LSFO on our vessels and potentially new compliant fuel blends could be introduced but the
vessel performance, economic impact and timing of using such fuels on our vessels is uncertain. In addition, our vessels will
likely incur higher fuel costs associated with using more expensive compliant fuel. Such costs may be material and could adversely
affect the Company’s business, results of operations and financial condition, particularly in any case where we are unable
to pass through the costs of higher fuel to charterers due to competition with vessels that have installed scrubbers, market conditions
or otherwise.
Climate
change and greenhouse gas restrictions may adversely impact our operations and markets.
Due
to concern over the risk of climate change, a number of countries and the IMO have adopted, or are considering the adoption of,
regulatory frameworks to reduce greenhouse gas emissions. These regulatory measures may include, among others, adoption of cap
and trade regimes, carbon taxes, increased efficiency standards and incentives or mandates for renewable energy. In addition,
although the emissions of greenhouse gases from international shipping currently are not subject to the Kyoto Protocol to the
United Nations Framework Convention on Climate Change (the “Paris Agreement”), a new treaty may be adopted in the
future that includes restrictions on shipping emissions. Compliance with changes in laws, regulations and obligations relating
to climate change could increase our costs related to operating and maintaining our vessels and require us to install new emission
controls, acquire allowances or pay taxes related to our greenhouse gas emissions or administer and manage a greenhouse gas emissions
program. Revenue generation and strategic growth opportunities may also be adversely affected.
On
June 29, 2017, the Global Industry Alliance (“GIA”), was officially inaugurated. The GIA is a program, under the Global
Environmental Facility-United Nations Development Program-IMO project, which supports shipping, and related industries, as they
move towards a low carbon future. Organizations including, but not limited to, shipowners, operators, classification societies
and oil companies, signed to launch the GIA.
Adverse
effects upon the oil and gas industry relating to climate change, including growing public concern about the environmental impact
of climate change, may also adversely affect demand for our services. For example, increased regulation of greenhouse gases or
other concerns relating to climate change may reduce the demand for oil and gas in the future or create greater incentives for
use of alternative energy sources and electric powered vehicles. Therefore, any long-term material adverse effect on the oil and
gas industry could have a material adverse effect on our future performance, results of operations, cash flows and financial position.
Please read “Item 4. Information on the Company – B. Business Overview – Government Regulation; Effect of Existing
or Probable Governmental Regulations on the Business; Costs and Effects of Compliance with Environmental Laws.”
Technological
innovation could reduce our charter hire income and the value of our vessels.
The
charter hire 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, the
impact of the stress of operations and stipulations from classification societies. If new product tankers are built that are more
efficient or more flexible or have longer physical lives than our vessels, competition from these more technologically advanced
vessels could adversely affect the amount of charter hire payments we receive for our vessels once their initial charters expire
and the resale value of our vessels could significantly decrease. As a result, our financial condition and available cash could
be adversely affected.
Risks
Related to Our Business and Operations
We
operate in highly competitive international markets.
The
product tanker industry is highly fragmented, with many charterers, owners and operators of vessels, and the transportation of
refined 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 financial and other resources
than we do. Although we believe that no single competitor has a dominant position in the markets in which we compete, the trend
towards consolidation in the industry is creating an increasing number of global enterprises capable of competing in multiple
markets, which will likely result in greater competition to us. Our competitors may be better positioned to devote greater resources
to the development, promotion and employment of their businesses than we are. Competition for charters, including for the transportation
of refined petroleum products, is intense and depends on price as well as on vessel location, size, age, condition and acceptability
of the vessel and its operator to the charterer and reputation. Competition may increase in some or all of our principal markets,
including with the entry of new competitors. We may not be able to compete successfully or effectively with our competitors and
our competitive position may be eroded in the future, which could have an adverse effect on our business, results of operations
and financial condition.
Because
we intend to charter some of the vessels in our fleet in the spot market or in pools trading in the spot market, we expect to
have exposure to the cyclicality and volatility of the spot charter market and incur additional working capital. At March 26,
2019, we operated two vessels in the spot market which is highly competitive and volatile. Spot charter rates may fluctuate dramatically
based on the competitive factors listed in the preceding risk factor. Significant fluctuations in spot charter rates may result
in significant fluctuations in our ability to continuously re-charter our vessels upon the expiration or termination of their
current spot charters and in the earnings of our vessels operating on the spot market. Since we charter a number of our vessels
on the spot market, and may in the future also admit our vessels in pools trading on the spot market, we have exposure to fluctuations
in cash flows due to the cyclicality and volatility of the spot charter market. By focusing the employment of some of the vessels
in our fleet on the spot market, we will benefit if conditions in this market strengthen. However, we will also be particularly
vulnerable to declining spot charter rates. Future spot charters may continue to be at the rates currently prevailing in the spot
market at which we cannot operate our vessels profitably and may fall further. If spot charter rates remain at current levels
or decrease further, our earnings will be adversely impacted to the extent we have vessels trading on the spot market. Trading
our vessels in the spot market or in pools requires greater working capital than operating under a time charter as the vessel
owner is responsible for various voyage related costs, such as, fuel, port and canal charges, as well as additional timing for
collections of charter receivables, including additional demurrage revenues.
We
may be unable to secure medium- and long-term employment for our vessels at profitable rates and present and future vessel employment
could be adversely affected by an inability to clear the oil majors’ risk assessment process.
One
of our 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 our fleet in order to provide us 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. Shipping, and especially
refined petroleum product tankers have been, and will remain, heavily regulated. The so-called “oil majors”, together
with a number of commodities traders, represent a significant percentage of the production, trading and shipping logistics (terminals)
of refined products worldwide. Concerns for the environment have led the oil majors to develop and implement a strict ongoing
due diligence process when selecting their commercial partners. This vetting process has evolved into a sophisticated and comprehensive
risk assessment of both the vessel operator and the vessel, including physical ship inspections, completion of vessel inspection
questionnaires performed by accredited inspectors and the production of comprehensive risk assessment reports.
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:
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office
assessments and audits of the vessel operator;
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the
operator’s environmental, health and safety record;
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compliance
with heightened industry standards that have been set by several oil companies and other charterers;
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compliance
with the standards of the IMO;
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compliance
with several oil companies and other charterers’ codes of conduct, policies and guidelines, including transparency,
anti-bribery and ethical requirements and relationships with third-parties;
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shipping
industry relationships, reputation for customer service, technical and operating expertise and safety record;
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shipping
experience and quality of ship operations, including cost-effectiveness;
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quality,
experience and technical capability of crews;
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the
ability to finance vessels at competitive rates and overall financial stability;
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relationships
with shipyards and the ability to obtain suitable berths with on-time delivery of new vessels according to customer’s
specifications;
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willingness
to accept operational risks pursuant to the charter, such as allowing termination of the charter for force majeure events;
and
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competitiveness
of the bid in terms of overall price.
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We
cannot assure you that we would be successful in winning medium- and long-term employment for our vessels at profitable rates.
A
substantial portion of our revenues is derived from a limited number of customers, and the loss of any of these customers could
result in a significant loss of revenues and cash flow.
We
currently derive substantially all of our revenues from a limited number of customers. In 2018, three customers accounted for
approximately 47% of our total revenues. The loss of any significant customer or a decline in the amount of services provided
to a significant customer could have a material adverse effect on our future performance, results of operations, cash flows and
financial position.
Additionally,
oil and natural gas companies, refineries and energy companies have undergone significant consolidation. Further consolidation
is possible and could result in fewer companies to charter or contract our services. Merger activity may result in a budget for
a combined company that is less than the combined budget of the companies before consolidation. Future consolidation of the Company’s
customer base could reduce demand for our vessels and could have a material adverse impact on our business, results of operations
and financial condition.
The
Company’s growth depends on its ability to expand relationships with existing customers and obtain new customers, for which
it will face substantial competition.
The
process of obtaining new charters is highly competitive, generally involves an intensive screening process and competitive bids
and often extends for several months. Contracts are awarded based upon a variety of factors, including:
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the
owner’s management experience, including the ability to obtain on-time delivery of new build vessels according to customer
specifications;
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the
operator’s industry relationships, experience and reputation for customer service, quality operations and safety;
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the
quality and age of the vessels;
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the
quality, experience and technical capability of the crew;
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the
operator’s willingness to accept operational risks pursuant to the charter, such as allowing termination of the charter
for force majeure events; and
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the
competitiveness of the bid in terms of overall price.
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The
Company’s ability to obtain new customers will also depend upon a number of factors, many of which are beyond our control,
including:
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successfully
manage our liquidity and obtain the necessary financing to fund our anticipated growth;
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identify
and consummate desirable acquisitions, joint ventures or strategic alliances; and
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identify
and capitalize on opportunities in new markets;
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attract,
hire, train and retain qualified personnel and managers to manage and operate its fleet; and
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being
approved through the vessel vetting process of certain charterers.
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If
we cannot meet our customers’ quality and compliance requirements we may not be able to operate our vessels profitably which
could have an adverse effect on our future performance, results of operations, cash flows and financial condition.
Our
customers, in particular those in the petroleum products industry, have a high and increasing focus on quality and compliance
standards with their suppliers across the entire value chain, including the shipping and transportation segment. Our continuous
compliance with these standards and quality requirements is vital for our operations. Related risks could materialize in multiple
ways, including a sudden and unexpected breach in quality and/or compliance concerning one or more vessels, or a continuous decrease
in the quality concerning one or more vessels occurring over time. Moreover, continuous increasing requirements from petroleum
products industry customers can further complicate our ability to meet the standards. Any noncompliance by us, either suddenly
or over a period of time, on one or more vessels, or an increase in requirements by petroleum products operators above and beyond
what we deliver, may have a material adverse effect on our future performance, results of operations, cash flows and financial
condition.
We
may not be able to successfully mix our charter durations profitably.
It
may be difficult to properly balance time and spot charters and anticipate trends in these markets. If we are successful in employing
vessels under medium- and long-term charters, those vessels will not be available for the spot market during an upturn in the
product tanker demand cycle, when spot trading may be more profitable. By contrast, at the expiration of our charters, if a charter
terminates early for any reason or if we acquire vessels charter-free, we may want to charter or re-charter our vessels under
medium- and long-term charters. Should more vessels be available on the spot or short-term market at the time we are seeking to
fix new medium- to long-term time charters, we may have difficulty entering into such charters at profitable rates and for any
term other than a short-term and, as a result, our cash flow may be subject to instability. A more active short-term or spot market
may require us to enter into charters on all our vessels based on fluctuating market rates, as opposed to long-term contracts
based on a fixed rate, which could result in a decrease in our cash flow in periods when the charter rates for product tankers
are depressed. If we cannot successfully employ our vessels in a profitable mix of medium- and long-term time charters and on
the spot market, our business, results of operations and financial condition could be adversely affected.
We
have limited current liquidity and have become reliant on Pyxis Maritime Corp. (“Maritime”), an entity affiliated
with our Chairman and Chief Executive Officer, Mr. Valentis, for our short-term working capital financing.
At
December 31, 2018, we had cash of $0.5 million and restricted cash, required deposits by our lenders, of $3.7 million. At December
31, 2018, Maritime extended $3.4 million of advances which we used to pay various operating costs, debt service and other obligations.
During the quarter ended September 30, 2018, such advances increased to a highpoint of $7.5 million. In the near-term, we expect
Maritime to advance us additional funds for similar purposes. There are no specific repayment terms with respect to these advances,
which Maritime controls as our manager. We cannot assure you that in the future we will be able to rely on Maritime for this working
capital financing on similar terms, or at all, or on what terms Maritime will request repayment. If our operating cash flows are
insufficient to satisfy our liquidity needs, we may have to rely on the sale of assets or additional equity financing to raise
adequate funds or restructure our indebtedness, or a combination thereof. An inability to continue this financing in the future
from Maritime or the imposition by Maritime of repayment terms that are unfavorable to us may negatively affect our liquidity
position and our ability to fund our ongoing operations.
On
June 29, 2018, we entered into an amendment to the Amended & Restated Promissory Note which we issued in favor of Maritime
Investors on December 29, 2017. This amendment (i) extended the maturity date from June 15, 2019 to March 31, 2020, and (ii) increased
the interest rate from 4.0% to 4.5% per annum effective July 1, 2018. The Amended & Restated Promissory Note can not be repaid
until the principal payments of the loan agreement of one of our subsidiaries, Eighthone Corp. with certain institutional funds
managed by EnTrust Partners LLC (“EntrustPermal”) have been fully paid up under a cash flow sweep mechanism. Under
the terms of the credit facility agreement of one of our subsidiaries, Eighthone Corp. with EntrustPermal, no repayment of principal
under the Amended & Restated Promissory Note may be made while any Pay-in-kind (“PIK”) interest
or Principal Deficiency Amount (as defined in the credit facility agreement) is outstanding under the credit facility.
Counterparties,
including charterers or technical managers, could fail to meet their obligations to us.
We
enter into, among other things, memoranda of agreement, charter parties, ship management agreements and loan agreements with third
parties with respect to the purchase and operation of our fleet and our business. Such agreements subject us to counterparty risks.
The ability and willingness of each of our counterparties to perform its obligations under these agreements with us depends on
a number of factors that are beyond our 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. In particular, we face credit risk
with our charterers. It is possible that not all of our charterers will provide detailed financial information regarding their
operations. As a result, charterer risk is largely assessed on the basis of our 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 we enter 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.
Our 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 us, it may be difficult to secure substitute employment for that vessel, and any new charter
arrangements we secure on the spot market or on substitute charters may be at lower rates depending on the then existing charter
rate levels. The costs and delays associated with the default by a charterer under a charter of a vessel may be considerable.
In addition, if the charterer of a vessel in our fleet that is used as collateral under our loan agreements defaults on its charter
obligations to us, such default may constitute an event of default under our loan agreements, which may allow the banks to exercise
remedies under our loan agreements.
As
a result of these risks, we could sustain significant losses, which could have a material adverse effect on our business, results
of operations and financial condition.
We
depend on ITM and Maritime to operate our business and our business could be harmed if they fail to perform their services satisfactorily.
Pursuant
to our management agreements, ITM provides us with day-to-day technical management services (including crewing, maintenance, repair,
dry-dockings and maintaining required vetting approvals) and Maritime provides us with ship management and administrative services
for our vessels. Our operational success depends significantly upon ITM and Maritime’s satisfactory performance of these
services. Our business would be harmed if ITM or Maritime failed to perform these services satisfactorily. In addition, if our
management agreements with either ITM or Maritime were to be terminated or if their terms were to be altered, our business could
be adversely affected, as we may not be able to immediately replace such services, and even if replacement services were immediately
available, the terms offered could be less favorable than those under our management agreements. A change of technical manager
may require approval by certain customers of ours for employment of a vessel.
Our
ability to compete for and enter into new period time and spot charters and to expand our relationships with our existing charterers
will depend largely on our relationship with ITM and Maritime, and their respective reputation and relationships in the shipping
industry. If ITM or Maritime suffers material damage to its reputation or relationships, it may harm our ability to:
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obtain
new charters;
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obtain
financing on commercially acceptable terms;
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maintain
satisfactory relationships with our charterers and suppliers; and
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successfully
execute our business strategies.
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If
our ability to do any of the things described above is impaired, it could have a material adverse effect on our business, results
of operations and financial condition.
We
may fail to successfully control our operating and voyage expenses.
Our
operating results are dependent on our ability to successfully control our operating and voyage expenses. Under our ship management
agreements with ITM we are 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 our or the technical manager’s control, including unexpected increases in costs for crews, insurance
or spare parts for our vessels, unexpected dry-dock repairs, mechanical failures or human error (including revenue lost in off-hire
days), vessel age, arrest action against our vessels due to failure to pay debts, disputes with creditors or claims by third parties,
labor strikes, severe weather conditions, any quarantines of our vessels and uncertainties in the world oil markets. Some of these
costs, primarily relating to voyage expenses, 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 our vessels are subject to unexpected
or unscheduled off-hire time, it could adversely affect our cash flow and may expose us to claims for liquidated damages if the
vessel is chartered at the time of the unscheduled off-hire period. The cost of dry-docking repairs, additional off-hire time,
an increase in our operating expenses and/or the obligation to pay any liquidated damages could adversely affect our business,
results of operations and financial condition.
In
addition, to the extent our vessels are employed under spot charters in the future, our expenses may be impacted by increases
in bunker costs and by canal costs, including the cost of canal-related delays incurred by employment of the vessels on certain
routes. Unlike time charters in which the charterer bears all bunker and canal costs, in spot charters we bear these costs. Because
it is not possible to predict the future price of bunker 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 we enter into and our earnings. Additionally,
an increase in the price of bunkers beyond our expectations may adversely affect our profitability at the time we negotiate time
or bareboat charters, and new LSFO rules may result in a significant increase in vessel fuel costs starting in 2020.
We
will be required to make substantial capital expenditures, for which we may be dependent on additional financing, to maintain
the vessels we own or to acquire other vessels.
We
must make substantial capital expenditures to maintain, over the long-term, the operating capacity of our fleet. Our business
strategy is also based in part upon the expansion of our fleet through the purchase of additional vessels. Maintenance capital
expenditures include dry-docking expenses, modification of existing vessels or acquisitions of new vessels to the extent these
expenditures are incurred to maintain the operating capacity of our fleet. In addition, we expect to incur significant maintenance
costs for our current and any newly-acquired vessels. A newbuilding vessel must be dry-docked within five years of its delivery
from a shipyard, and vessels are typically dry-docked every 30 to 60 months thereafter depending on the vessel, not including
any unexpected repairs. We estimate the cost to dry-dock a vessel is between $0.8 and $1.1 million (including estimated expenditures
for upgrades to comply with new ballast water treatment system regulations), depending on the age, size and condition of the vessel
and the location of dry-docking. In addition, capital maintenance expenditures could increase as a result of changes in the cost
of labor and materials, customer requirements, increases in the size of our fleet, governmental regulations and maritime self-regulatory
organization standards relating to safety, security or the environment and competitive standards.
To
purchase additional vessels from time to time, we may be required to incur additional borrowings or raise capital through the
sale of debt or additional equity securities. Asset impairments, financial stress, enforcement actions and credit rating pressures
experienced in recent years by financial institutions to extend credit to the shipping industry due to depressed shipping rates
and the deterioration of asset values that have led to losses in many banks’ shipping portfolios, as well as changes in
overall banking regulations, have severely constrained the availability of credit for shipping companies like us. For example,
following heavy losses in its shipping portfolio, and at the EU Commission’s behest, one of our lenders, HSH Nordbank AG
(“HSH”), completed its sale on November 29, 2018, was subsequently renamed Hamburg Commercial Bank and its ongoing
financing of the shipping industry is uncertain.
In
addition, our ability to obtain bank financing or to access the capital markets for future offerings may be limited by the terms
of our existing credit agreements, our financial condition, the actual or perceived credit quality of our customers, and any defaults
by them, as well as by adverse market conditions resulting from, among other things, general economic conditions and contingencies
and uncertainties that are beyond our control.
We
cannot assure you that we will be able to obtain such additional financing in the future on terms that are acceptable to us or
at all. Our failure to obtain funds for capital expenditures could have a material adverse effect on our business, results of
operations and financial condition. In addition, our actual operating and maintenance capital expenditures will vary significantly
from quarter to quarter based on, among other things, the number of vessels dry-docked during that quarter. Even if we are successful
in obtaining the necessary funds for capital expenditures, the terms of such financings could limit our ability to pay dividends
to our stockholders. Incurring additional debt may significantly increase our interest expense and financial leverage, and issuing
additional equity securities may result in significant dilution.
Any
vessel modification projects we undertake could have significant cost overruns, delays or fail to achieve the intended results.
Market
volatility and higher bunker prices, coupled with increased regulation and concern about the environmental impact of the international
shipping industry, have led to an increased focus on bunker efficiency. Some shipowners have implemented vessel modification programs
for their existing ships in an attempt to capture potential efficiency gains. We will consider making modifications to our fleet
in instances when we believe the efficiency gains will result in a positive return for our stockholders. 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 we undertake or
any significant cost overruns or delays in any retrofitting projects could have a material adverse effect on our business, results
of operations and financial condition.
We
may not be able to implement our business strategy successfully or manage our growth effectively.
Our
future growth will depend on the successful implementation of our business strategy. A principal focus of our business strategy
is to grow by expanding the size of our fleet while capitalizing on a mix of charter types, including on the spot market. 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 operations
into existing infrastructures. The expansion of the Company’s fleet may impose significant additional responsibilities on
our management and may necessitate an increase in the number of personnel. Other risks and uncertainties include distraction of
management from current operations, insufficient revenue to offset liabilities assumed, potential loss of significant revenue
and income streams, unexpected expenses, inadequate return of capital, regulatory or compliance issues, the triggering of certain
covenants in the Company’s debt instruments (including accelerated repayment) and other unidentified issues not discovered
in due diligence. As a result of the risks inherent in such transactions, the Company cannot guarantee that any such transaction
will ultimately result in the realization of the anticipated benefits of the transaction or that significant transactions will
not have a material adverse impact on its business, results of operations and financial condition. Our future growth will depend
upon a number of factors, some of which are not within our control. These factors include, among others, our ability to:
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identify
suitable tankers and/or shipping companies for acquisitions at attractive prices;
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identify
and consummate desirable acquisitions, joint ventures or strategic alliances;
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integrate
any acquired tankers or businesses successfully with the Company’s existing operations, including obtaining any approvals
and qualifications necessary to operate vessels that the Company acquires;
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hire,
train and retain qualified personnel to manage and operate our growing business and fleet;
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identify
additional new markets;
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enhance
the Company’s customer base;
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improve
our operating, financial and accounting systems and controls; and
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obtain
required financing for our existing and new vessels and operations.
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Acquisitions
of vessels may not be profitable to us at or after the time we acquire them. We may:
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fail
to realize anticipated benefits, such as new customer relationships, cost-savings or cash flow enhancements;
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decrease
our liquidity by using a significant portion of our available cash or borrowing capacity to finance vessel acquisitions;
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significantly
increase our interest expense or financial leverage if we incur additional debt to finance vessel acquisitions;
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fail
to integrate any acquired tankers or businesses successfully with our existing operations, accounting systems and infrastructure
generally;
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incur
or assume unanticipated liabilities, losses or costs associated with the business or vessels acquired, particularly if any
vessel we acquire proves not to be in good condition; or
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incur
other significant charges, such as impairment of goodwill or other intangible assets, asset devaluation or restructuring charges.
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The
Company’s failure to effectively identify, purchase, develop and integrate additional tankers or businesses could adversely
affect our business, results of operations and financial condition. The number of employees that perform services for the Company
and our current operating and financial systems may not be adequate as the Company implements its plan to expand the size of our
fleet, and we may not be able to effectively hire more employees or adequately improve those systems. Future acquisitions may
also require additional equity issuances or debt issuances (with amortization payments). If any such events occur, the Company’s
financial condition may be adversely affected. The Company cannot give any assurance that we will be successful in executing our
growth plans or that we will not incur significant expenses and losses in connection with our future growth.
In
addition, unlike newbuildings, secondhand vessels typically provide very limited or no warranties with respect to the condition
of the vessel. While we expect we would inspect secondhand vessels prior to purchase, this does not provide us with the same knowledge
about their condition that we would have had if these vessels had been built for, and operated exclusively by, us. Generally,
we do not receive the benefit of warranties from the builders of the secondhand vessels that we acquire.
We
also seek to take advantage of changing market conditions, which may include taking advantage of pooling arrangements or profit
sharing components of the charters we may enter into. In addition, our future growth will depend upon our ability to: maintain
or develop new and existing customer relationships; employ vessels consistent with our chartering strategy; successfully manage
our 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 we are 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 we desire may not be available for purchase at prices we are prepared to pay or at delivery times acceptable
to us, and we may not be able to dispose of vessels at reasonable prices, if at all.
However,
even if we successfully implement our business strategy, we may not improve our net revenues or operating results. Furthermore,
we may decide to alter or discontinue aspects of our business strategy and may adopt alternative or additional strategies in response
to business or competitive factors or factors or events beyond our control. Our failure to execute our business strategy or to
manage our growth effectively could adversely affect our business, results of operations and financial condition.
If
we purchase and operate secondhand vessels, we will be exposed to increased operating costs which could adversely affect our earnings
and, as our fleet ages, the risks associated with older vessels could adversely affect our ability to obtain profitable charters.
The
Company’s current business strategy includes additional future growth through the acquisition of secondhand vessels and
newbuild resales. While the Company typically inspects secondhand vessels prior to purchase, this does not provide the Company
with the same knowledge about their condition that it would have had if these vessels had been built for and operated exclusively
for us. Generally, the Company does not receive the benefit of warranties from the builders for the secondhand vessels that we
acquire.
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 our vessels and may restrict the type of activities in which the vessels may engage. As our vessels
age, market conditions may not justify those expenditures or enable us to operate our vessels profitably during the remainder
of their useful lives.
In
addition, unless we maintain cash reserves or raise external funds on acceptable terms for vessel replacement, we may be unable
to replace the vessels in our fleet upon the expiration of their useful lives. We estimate the useful life of our vessels to be
25 years from the date of initial delivery from the shipyard and range from 2031 to 2040. Our cash flows and income are dependent
on the revenues we earn by chartering our vessels to customers. If we are unable to replace the vessels in our fleet upon the
expiration of their useful lives, our business, results of operations and financial condition will be materially adversely affected.
Any reserves set aside for vessel replacement may not be available for other cash needs, including improvement of working capital,
early repayment of debt or possible cash dividends.
New
vessels may experience initial operational difficulties and unexpected incremental start-up costs.
New
vessels, during their initial period of operation, have the possibility of encountering structural, mechanical and electrical
problems as well as unexpected incremental start-up costs. Typically, the purchaser of a newbuilding will receive the benefit
of a warranty from the shipyard for newbuildings, but we cannot assure you that any warranty we obtain will be able to resolve
any problem with the vessel without additional costs to us and off-hire periods for the vessel. Upon delivery of a newbuild vessel
from a shipyard, we may incur operating expenses above the incremental start-up costs typically associated with such a delivery
and such expenses may include, among others, additional crew training, consumables and spares.
Delays
in deliveries of additional vessels, our decision to cancel an order for purchase of a vessel, or our inability to otherwise complete
the acquisitions of additional vessels for our fleet, could harm our operating results.
Although
we currently have no vessels on order, under construction or subject to purchase agreements, we expect 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 our expected receipt of revenues from the employment of these vessels. The seller could fail to deliver
these vessels to us as agreed, or we could cancel a purchase contract because the seller has not met its obligations. The delivery
of vessels we propose to order or that are on order could be delayed because of, among other things:
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work
stoppages or other labor disturbances or other events that disrupt the operations of the shipyard building the vessels;
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quality
or other engineering problems;
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changes
in governmental regulations or maritime self-regulatory organization standards;
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lack
of raw materials;
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bankruptcy
or other financial crisis of the shipyard building the vessels;
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our
inability to obtain requisite financing or make timely payments;
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a
backlog of orders at the shipyard building the vessels;
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hostilities
or political or economic disturbances in the countries where the vessels are being built;
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weather
interference or a catastrophic event, such as a major earthquake, typhoon or fire;
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our
requests for changes to the original vessel specifications;
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shortages
or delays in the receipt of necessary construction materials, such as steel;
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our
inability to obtain requisite permits or approvals;
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a
dispute with the shipyard building the vessels, non-performance of the purchase or construction agreement with respect to
a vessel by the seller or the shipyard as applicable;
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non-performance
of the vessel purchase agreement by the seller;
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our
inability to obtain requisite permits, approvals or financings; or
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damage
to or destruction of vessels while being operated by the seller prior to the delivery date.
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If
the delivery of any vessel is materially delayed or cancelled, especially if we have committed the vessel to a charter under which
we become responsible for substantial liquidated damages to the customer as a result of the delay or cancellation, our business,
results of operations and financial condition could be adversely affected.
Declines
in charter rates and other market deterioration could cause us to incur impairment charges.
We
evaluate the carrying amounts of our vessels to determine if events have occurred that would require an impairment of their carrying
amounts. The Company reviews the carrying values of its vessels for impairment whenever events or changes in circumstances indicate
that the carrying amounts may not be recoverable. Whenever certain indicators of potential impairment are present, such as third
party vessel valuation reports, the Company performs a test of recoverability of the carrying amount of the assets.
The projection of future cash flows related to the vessels is complex and requires the Company to make various estimates including
future freight rates, residual values, future dry-dockings and operating costs, which are included in the analysis. All of these
items have been historically volatile. The Company recognizes an impairment charge if the carrying value is in excess of the estimated
future undiscounted net operating cash flows. The impairment loss is measured based on the excess of the carrying amount over
the fair market value of the asset.
Although
the Company believes that the assumptions used to evaluate potential impairment are reasonable and appropriate at the time they
are made, such assumptions are highly subjective and likely to change, possibly materially, in the future. There can be no assurance
as to how long charter rates and vessel values will remain at their current levels or whether they will improve by a significant
degree. If charter rates were to remain at depressed levels, future assessments of vessel impairments would be adversely affected.
Any impairment charges incurred as a result of further declines in charter rates could have a material adverse impact on the Company’s
business, results of operations and financial condition. We reviewed, at December 31, 2018, the carrying amount in connection
with the estimated recoverable amount for each of our vessels. This review indicated that such carrying amount was not fully recoverable
for the
Northsea Alpha
and the
Northsea Beta
. Consequently, we wrote down the carrying value of these vessels and
recorded a total vessel impairment charge of $2.3 million in 2018.
Our
charterers may terminate charters early or choose not exercise options to extend charters or to re-charter with us, which could
adversely affect our business, results of operations and financial condition.
Our
charters may terminate earlier than the dates indicated in the charter party agreements. The terms of our 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 dry-docking
of the relevant vessel for a certain period of time or the failure of the relevant vessel to meet specified performance criteria.
Also, a time charter may grant a charterer an option to extend the contract for a certain period of time at a higher rate. However,
the failure to exercise that option could result in the vessel being re-delivered to us in a more difficult market environment.
An early termination or decision not to exercise an option to extend an existing charter by our charters may adversely affect
our business, results of operations and financial condition.
We
cannot predict whether any of our charterers will, upon the expiration of their charters, re-charter our vessels on favorable
terms or at all. If our charterers decide not to re-charter our vessels, we may not be able to re-charter them on terms similar
to our current charters or at all. Also, we may incur additional costs depending on where the vessel is re-delivered to us. We
may also employ our vessels on the spot-charter market, which is subject to greater rate fluctuation than the time charter market.
If we receive lower charter rates under replacement charters or are unable to re-charter all of our vessels, our available cash
may be significantly reduced or eliminated.
We
are dependent on the services of our founder and Chief Executive Officer and other members of our senior management team.
We
are dependent upon our Chief Executive Officer, Mr. Valentios (“Eddie”) Valentis, and the other members of our senior
management team for the principal decisions with respect to our business activities. The loss or unavailability of the services
of any of these key members of our management team for any significant period of time, or the inability of these individuals to
manage or delegate their responsibilities successfully as our business grows, could adversely affect our business, results of
operations and financial condition. If the individuals were no longer to be affiliated with us, we may be unable to recruit other
employees with equivalent talent and experience, and our business and financial condition may suffer as a result. We do not maintain
“key man” life insurance for our Chief Executive Officer or other members of our senior management team.
Our
founder, Chairman and Chief Executive Officer has affiliations with Maritime, which may create conflicts of interest.
Mr.
Valentis, our founder, Chairman and Chief Executive Officer, also owns and controls Maritime. His responsibilities and relationships
with Maritime could create conflicts of interest between us, 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 our fleet versus vessels managed
by other companies affiliated with Maritime and may not be resolved in our favor. Maritime entered into a Head Management Agreement
(as defined herein) with us and into separate ship management agreements with our subsidiaries. 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 December
31, 2018, Maritime provided commercial management services to one tanker vessel, other than the vessels in our fleet, that was
owned or operated by one or more entities affiliated with Mr. Valentis. Such conflicts may have an adverse effect on our business,
results of operations and financial condition.
Several
of our senior executive officers do not, and certain of our officers in the future may not, devote all of their time to our business,
which may hinder our ability to operate successfully.
Mr.
Valentis, our Chairman and Chief Executive Officer, Mr. Lytras, our Chief Operating Officer and Secretary and Mr. Williams, our
Chief Financial Officer, participate, and other of our senior officers which we may appoint in the future may also participate,
in business activities not associated with us. As a result, they may devote less time to us than if they were not engaged in other
business activities and may owe fiduciary duties to our stockholders as well as stockholders of other companies with which they
may be affiliated. This may create conflicts of interest in matters involving or affecting us and our customers and it is not
certain that any of these conflicts of interest will be resolved in our favor. This could have a material adverse effect on our
business, results of operations and financial condition.
As
we expand our business, both we and Maritime may need to improve our operating and financial systems and Maritime will need to
recruit and retain suitable employees and crew for our vessels.
Our
and Maritime’s current operating and financial systems may not be adequate as the size of our fleet expands, and attempts
to improve those systems may be ineffective. In addition, as we expand our fleet, Maritime may need to recruit and retain suitable
additional seafarers and shore based administrative and management personnel. We cannot guarantee that Maritime will be able to
continue to hire suitable employees as we expand our fleet. If we or Maritime encounter business or financial difficulties, we
may not be able to adequately staff our vessels. If we are unable to accomplish the above, our financial reporting performance
may be adversely affected and, among other things, it may not be compliant with the Securities and Exchange Commission (“SEC”)
rules.
Our
insurance may be insufficient to cover losses that may result from our operations.
Although
we carry hull and machinery, protection and indemnity and war risk insurance on each of the vessels in our fleet, we face 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 we are not insured, and certain claims may not be paid. We do not carry insurance covering the loss of revenues
resulting from vessel off-hire time based on our analysis of the cost of this coverage compared to our off-hire experience.
Certain
of our 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 we may be required to make additional payments over and above
budgeted premiums if member claims exceed association reserves. 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 our association has entered into inter-association agreements. We cannot assure you that the associations to which
we belong will remain viable. If such associations do not remain viable or are unable to cover our losses, we may have to pay
what our insurance does not cover in full.
We
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 us to obtain. We maintain for each of the vessels in our 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. In addition, our insurance may be voidable by the insurers as a result of certain
of our actions, such as our 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. The insurance that may be available to us may be significantly
more expensive than our existing coverage. Furthermore, even if insurance coverage is adequate, we 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 our business, results
of operations and financial condition.
We
may be subject to litigation that, if not resolved in our favor and not sufficiently insured against, could have a material adverse
effect on us.
We
may be, from time to time, involved in various litigation matters. These matters may include, among other things, contract disputes,
environmental claims or proceedings, employment and personal injury matters, and other litigation that arises in the ordinary
course of our business. Although we intend to defend these matters vigorously, we cannot predict with certainty the outcome or
effect of any claim or other litigation matter, and the ultimate outcome of any litigation or the potential costs to resolve them
may have a material adverse effect on us. Insurance may not be applicable or sufficient in all cases or insurers may not remain
solvent, which may have a material adverse effect on our financial condition.
We
and our subsidiaries may be subject to group liability for damages or debts owed by one of our subsidiaries or by us.
Although
each of our 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 our assets and those of our subsidiaries could be subject
to execution upon a judgment against us or any of our subsidiaries.
Maritime
and ITM are privately held companies and there is little or no publicly available information about them.
The
ability of Maritime and ITM 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, we and an investor in
our securities might have little advance warning of financial or other problems affecting either Maritime or ITM even though its
financial or other problems could have a material adverse effect on us and our stockholders.
Our
vessels may operate in pooling arrangements in the future, which may or may not be beneficial compared to chartering our 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 bunker 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.
Also, the pool manager requires the prompt payment of up to $0.5 million of vessel working capital upon entry into the pool. Exit
from the pool typically requires a minimum of three months advance notice to the pool manager. We cannot assure you that entering
any of our vessels into a pool will be beneficial to us compared to chartering our vessels outside of a pool. If we participate
in, or for any reason our 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 effect on our business, results of operations and
financial condition. We also cannot assure you that if we join a pooling arrangement that we will continue to use the pooling
arrangement or whether the pools our vessels could participate in will continue to exist in the future.
Exchange
rate fluctuations could adversely affect our revenues, financial condition and operating results.
We
generate a substantial part of our revenues in U.S. dollars, but incur costs in other currencies. The difference in currencies
could in the future lead to fluctuations in our net income due to changes in the value of the U.S. dollar relative to other currencies.
We have not hedged our exposure to exchange rate fluctuations, and as a result, our U.S. dollar denominated results of operations
and financial condition could suffer as exchange rates fluctuate.
We
must protect the safety and condition of the cargoes transported on our vessels and any failure to do so may subject us to claims
for loss or damage.
Under
our time and spot charters, we are responsible for the safekeeping of cargo entrusted to us 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 our reputation and adversely affect our business, results of operations and
financial condition.
Increase
in frequency of immigrant salvage operations in the Mediterranean could adversely affect our business.
In
2017 and 2018, a significant portion of the
Northsea Alpha’s
and the
Northsea Beta’s
trading routes
occurred in the Mediterranean Sea. In recent years, the number of immigrants attempting to cross the Mediterranean from North
Africa to Europe in unseaworthy vessels has increased significantly. Many of the vessels are in such a poor condition that they
either capsize and sink, incur engine problems or are otherwise incapacitated en route to Europe. As a result, commercial ships
may, if witnessing an immigrant vessel in distress, deviate from the task and course and conduct a salvage operation. Such salvage
operation may prove costly in terms of time and resources spent and can thus prove a substantial cost for the commercial vessel
and may pose risks to the safety of the crew, vessel and cargo. If we are not able to mitigate this potential exposure, and dependent
on the number of such salvage operations which must be carried out in the future, this could have a material adverse effect on
our future performance, results of operations, cash flows and financial position.
We
may face labor interruptions, which if not resolved in a timely manner, could have a material adverse effect on our business.
We,
indirectly through our technical managers, employ masters, officers and crews to operate our vessels, exposing us to the risk
that industrial actions or other labor unrest may occur. We may suffer labor disruptions if relationships deteriorate with the
seafarers or the unions that represent them. A majority of the crew members on the vessels in our fleet that are under time or
spot charters are employed under collective bargaining agreements. ITM 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 our fleet may not prevent
labor interruptions, particularly since they 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 our
fleet, are not resolved in a timely and cost-effective manner, industrial action or other labor unrest could prevent or hinder
our operations from being carried out as we expect, could disrupt our operations and could adversely affect our business, results
of operations and financial condition.
We
do not currently enter into hedging arrangements with respect to the cost of fuel.
We
have not entered into hedging arrangements to establish, in advance, a price for the cost of fuel. As a result, although we may
realize the benefit of any short-term decrease in the price of fuel, we will not be protected against increases in the price of
fuel, which could materially adversely affect our business, results of operation and financial condition.
In
addition, to the extent we decide to enter into hedging arrangements in the future, the success of any hedging arrangement generally
depends on the degree of correlation between price movements of a derivative instrument and the position being hedged, the creditworthiness
of the counterparty, the costs of the hedging transaction and other factors. While such transactions may reduce the risks of losses
with respect to adverse movements in market factors, the transaction may also limit the opportunity for gain. In addition, these
arrangements may require the posting of cash or other collateral at a time when we have insufficient cash or illiquid assets such
that the posting of the cash is either impossible or requires the sale of assets at prices that do not reflect their underlying
value. Moreover, these hedging arrangements may generate significant transactions costs, including potential tax costs and legal
fees, which reduce the anticipated returns on an investment. There can be no assurance that any future hedging transaction we
enter will successfully hedge the risks associated with hedged positions or that it will not result in poorer overall investment
performance than if it had not been executed.
A
cyber-attack could materially disrupt our business.
We
and our ship managers rely on information technology systems and networks in our and their operations and business administration.
The efficient operation of our business, including processing, transmitting and storing electronic and financial information,
is dependent on computer hardware and software systems. Information systems are vulnerable to security breaches by computer hackers
and cyber terrorists. We rely on industry accepted security measures and technology to securely maintain confidential and proprietary
information maintained on our information systems. However, these measures and technology may not adequately prevent security
breaches. Therefore, our or any of our ship managers’ operations and business administration could be targeted by individuals
or groups seeking to sabotage or disrupt such systems and networks, or to steal data and these systems may be damaged, shutdown
or cease to function properly (whether by planned upgrades, force majeure, telecommunications failures, hardware or software break-ins
or viruses, other cyber-security incidents or otherwise). A successful cyber-attack could materially disrupt our or our managers’
operations, which could also adversely affect the safety of our operations or result in the unauthorized release or alteration
of information in our or our managers’ systems. Such an attack on us, or our managers, could result in significant expenses
to investigate and repair security breaches or system damages and could lead to litigation, fines, other remedial action, heightened
regulatory scrutiny, diminished customer confidence and damage to our reputation. We do not maintain cyber-liability insurance
at this time to cover such losses. As a result, a cyber-attack or other breach of any such information technology systems could
have a material adverse effect on our business, results of operations and financial condition
The
EU has recently adopted a comprehensive overhaul of its data protection regime from the current national legislative approach
to a single European Economic Area Privacy Regulation, the General Data Protection Regulation (“GDPR”). The GDPR came
into force on May 25, 2018, and applies to organizations located within the EU, as well as to organizations located outside of
the EU if they offer goods or services to, or monitor the behavior of, EU data subjects. It imposes a strict data protection compliance
regime with significant penalties and includes new rights such as the “portability” of personal data. It applies to
all companies processing and holding the personal data of data subjects residing in the EU, regardless of the company’s
location. Implementation of the GDPR could require changes to certain of our business practices, thereby increasing our costs.
Risks
Related to our Indebtedness
We
may not be able to generate sufficient cash flow to meet our debt service and other obligations.
Our
ability to make scheduled payments on our outstanding indebtedness and other obligations will depend on our ability to generate
cash from operations in the future. Our future financial and operating performance will be affected by a range of economic, financial,
competitive, regulatory, business and other factors that we cannot control, such as general economic and financial conditions
in the tanker sector or the economy generally. In particular, our ability to generate steady cash flow will depend on our ability
to secure charters at acceptable rates. Our ability to renew our existing charters or obtain new charters at acceptable rates
or at all will depend on the prevailing economic and competitive conditions.
Amounts
borrowed under our loan agreements bear interest at both fixed rates and variable rates. Increases in prevailing interest
rates could increase the amounts that we would have to pay to our lenders, even though the outstanding principal amount remains
the same, and our net income and cash flows would decrease.
In
addition, our existing loan agreements require us to maintain various cash balances, our financial and operating performance is
also dependent on our subsidiaries’ ability to make distributions to us, whether in the form of dividends, loans or otherwise.
The timing and amount of such distributions will depend on restrictions on our various debt instruments, our earnings, financial
condition, cash requirements and availability, fleet renewal and expansion, the provisions of Marshall Islands and Maltese laws
affecting the payment of dividends and other factors. Under Maltese law, dividends may only be distributed out of profits available
for distribution and/or out of any distributable accumulated reserves.
At
any time that our operating cash flows are insufficient to service our debt and other liquidity needs, we may be forced to take
actions such as increasing our accounts payable and/or our amounts due to related parties, reducing or delaying capital expenditures,
selling assets, restructuring or refinancing our indebtedness, seeking additional capital, seeking bankruptcy protection or any
combination of the foregoing. For example, at December 31, 2017, our trade accounts payable were $2.3 million and the amount due
to related parties was $2.1 million, but increased to $4.7 million and $3.4 million, respectively, at December 31, 2018.
At September 30, 2018, accounts payable and the amount due to related parties were as high as $6.3 million and $7.5 million, respectively,
but were reduced from the excess proceeds obtained from the refinancing of the outstanding loan on the Eighthone. We cannot assure
you that any of the actions listed above could be effected on satisfactory terms, if at all, or that they would yield sufficient
funds to make required payments on our outstanding indebtedness and to fund our other liquidity needs. As of December 31, 2018,
our total funded debt outstanding, net of deferred financing costs, aggregated $67.5 million. Also, the terms of existing or future
debt agreements may restrict us from pursuing any of these actions as, among other things, if we are unable to meet our debt obligations
or if some other default occurs under our loan agreements, the lenders could elect to declare that debt, together with accrued
interest and fees, to be immediately due and payable and foreclose against the collateral vessels securing that debt. Any such
action could also result in an impairment of cash flows and our ability to service debt in the future. Further, our debt level
could make us more vulnerable than our competitors with less debt to competitive pressures or a downturn in our business or the
economy generally.
The
market values of tanker vessels are highly volatile, have decreased in the past and may decrease further in the future which may
cause the Company to recognize losses if we sell our tankers or record impairments and affect the Company’s ability to comply
with its loan covenants and refinance its debt. The fair market values of product tankers have generally experienced high volatility.
The fair market values for tankers declined significantly from historically high levels reached in 2008, and remain at average
levels of the past 10 years. You should expect the market value of our vessels to fluctuate. Values for ships can fluctuate substantially
over time due to a number of factors, including, among others:
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prevailing
economic conditions in the energy markets; general economic and market conditions affecting the international shipping industry,
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a
substantial or extended decline in demand for refined products;
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competition
from other shipping companies and other modes of transportation;
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number
of vessels in the world fleet;
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the
level of worldwide refined petroleum product production and exports;
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demand
for product tankers; changes in the supply-demand balance of the global product tanker market;
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applicable
governmental regulations;
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the
availability of newbuild and newer, more advanced vessels at attractive prices compared to our vessels;
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changes
in prevailing charter hire rates;
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the
physical condition of the vessel;
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the
vessel’s size, age, technical specifications, efficiency and operational flexibility; and
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the
cost of newbuildings 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.
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As
vessels grow older, they naturally depreciate in value. If the market value of our fleet declines further, we may not be able
to refinance our debt or obtain additional financing and our subsidiaries may not be able to make distributions to the Company.
An additional decrease in these values could cause us to breach certain covenants that are contained in our loan agreements and
in future financing agreements. The prepayment of certain debt facilities may be necessary to cause the Company to maintain compliance
with certain covenants in the event that the value of the vessels falls below certain levels.
If
we breach covenants in our loan agreements or future financing agreements and are unable to cure the breach, our lenders could
accelerate our debt repayment and foreclose on vessels in our fleet securing those debt instruments or seek other similar remedies.
In addition, if a charter contract expires or is terminated by the charterer, the Company may be unable to re-charter the affected
vessel at an attractive rate and, rather than continue to incur maintenance and financing costs for that vessel, the Company may
seek to dispose of the affected vessel. If the Company sells one or more of its vessels at a time when vessel prices have fallen,
the sale price may be less than the vessel’s carrying value on the Company’s consolidated financial statements, resulting
in a loss on sale or an impairment loss being recognized, ultimately leading to a reduction of net income. Furthermore, if vessel
values fall significantly, this could indicate a decrease in the recoverable amount for the vessel and may have a material adverse
impact on its business, results of operations and financial condition. During 2018, the market value of our fleet was less than
its book value. Accordingly, we will incur losses on disposition if we sell vessels below their depreciated book value.
Restrictive
covenants in our current and future loan agreements may impose financial and other restrictions on us.
The
restrictions and covenants in our current and future loan agreements could adversely affect our ability to finance future operations
or capital needs or to pursue and expand our business activities. Our current loan agreements contain, and future financing agreements
will likely contain, restrictive covenants that prohibit us or our subsidiaries from, among other things:
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paying
dividends under certain circumstances, including if there is a default under the loan
agreements or, only with respect to our subsidiaries, Sixthone Corp. (“Sixthone”)
and Seventhone Corp. (“Seventhone”), if the ratio of our and our subsidiaries
as a group total liabilities to market value adjusted total assets is greater than 65%
in the relevant year. As of December 31, 2018, the ratio of total liabilities over the
market value of our adjusted total assets was 68%, or 3% higher than the required threshold
and therefore, Sixthone and Seventhone are not permitted to distribute dividends to us;
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incurring
or guaranteeing indebtedness;
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charging,
pledging or otherwise encumbering our vessels;
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changing
the flag, class, management or ownership of our vessels;
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utilizing
available cash;
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changing
ownership or structure, including through mergers, consolidations, liquidations or dissolutions;
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making
certain investments;
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entering
into a new line of business;
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changing
the commercial and technical management of our vessels;
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selling,
transferring, assigning or changing the beneficial ownership or control of our vessels; and
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changing
the control, or Mr. Valentis maintaining less than 50% ownership, of the corporate guarantor.
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In
addition, the loan agreements generally contain covenants requiring us, among other things, to ensure that:
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we
maintain minimum cash and cash equivalents based on the number of vessels owned and debt service requirements. Our required
minimum cash balance as of December 31, 2017 and 2018 was $5.0 million and $3.7 million, respectively;
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our
subsidiaries, Sixthone and Seventhone, maintain retention accounts with monthly deposits equal to one-third of the next quarterly
principal installment together with the appropriate amount of interest expense due; and
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the
fair market value of the mortgaged vessel plus any additional collateral must be no less than a certain percentage, ranging
from 115% to 140%, of outstanding borrowings under the applicable loan agreement, less, in certain loan agreements, any money
in respect of the principal outstanding with the credit of any applicable retention account and any free or pledged cash deposits
held with the lender in our or its subsidiary’s name.
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As
a result of the above, we may need to seek permission from our lenders in order to engage in some corporate actions. The lenders’
interests may be different from ours and we may not be able to obtain our lenders’ permission when needed. This may limit
our ability to pay dividends, finance our future operations or capital requirements, make acquisitions or pursue business opportunities.
Our
ability to comply with covenants and restrictions contained in our current and future loan agreements may also be affected by
events beyond our control, including prevailing economic, financial and industry conditions. If our cash flow is insufficient
to service our current and future indebtedness and to meet our other obligations and commitments, we will be required to adopt
one or more alternatives, such as reducing or delaying our business activities, acquisitions, investments, capital expenditures,
the payment of dividends or the implementation of our other strategies, refinancing or restructuring our debt obligations, selling
vessels or other assets, seeking to raise additional debt or equity capital or seeking bankruptcy protection. However, we may
not be able to effect any of these remedies or alternatives on a timely basis, on satisfactory terms or at all, which could lead
to events of default under these loan agreements, giving the lenders foreclosure rights on our vessels.
Our
ability to obtain additional debt financing may be dependent on the performance of our then existing charters and the creditworthiness
of our charterers.
The
actual or perceived credit quality of our charterers, and any defaults by them, may materially affect our ability to obtain the
additional capital resources that we will require to purchase additional vessels or may significantly increase our costs of obtaining
such capital. Our inability to obtain additional financing at all, or our ability to do so only at a higher than anticipated cost,
may materially affect our results of operations and our ability to implement our business strategy.
If
LIBOR is volatile and potential changes as a benchmark could affect our profitability, earnings and cash flow.
London
Interbank Offered Rate (“LIBOR”) is the subject of recent national, international and other regulatory guidance and
proposals for reform. These reforms and other pressures may cause LIBOR to be eliminated or to perform differently than in the
past. The consequences of these developments cannot be entirely predicted, but could include an increase in the cost of our variable
rate indebtedness and obligations. LIBOR has been volatile in the past, with the spread between LIBOR and the prime lending rate
widening significantly at times. Because the interest rates borne by a majority of our outstanding indebtedness fluctuates with
changes in LIBOR, significant changes in LIBOR would have a material effect on the amount of interest payable on our debt, which
in turn, could have an adverse effect on our financial condition. In order to hedge our variable interest rate exposure, on January
19, 2018, Seventhone entered into an interest rate cap agreement with its lender for a notional amount of $10.0 million and a
cap rate of 3.5%. The interest rate cap will terminate on July 18, 2022.
Furthermore,
interest in most financing agreements in our industry has been based on published LIBOR rates. Recently, however, there is uncertainty
relating to the LIBOR calculation process, which may result in the phasing out of LIBOR in the future. As a result, lenders have
insisted on provisions that entitle the lenders, in their discretion, to replace published LIBOR as the base for the interest
calculation with their cost-of-funds rate. If we are required to agree to such a provision in future financing agreements, our
lending costs could increase significantly, which would have an adverse effect on our profitability, earnings and cash flow. In
addition, the banks currently reporting information used to set LIBOR will likely stop such reporting after 2021, when their commitment
to reporting information ends. The Alternative Reference Rate Committee, or “Committee”, a committee convened by the
Federal Reserve that includes major market participants, has proposed an alternative rate to replace U.S. Dollar LIBOR: the Secured
Overnight Financing Rate, or “SOFR.” The impact of such a transition away from LIBOR would be significant for us because
of our substantial indebtedness.
Risks
Related to Being a Public, Emerging Growth Company
We
are an “emerging growth company,” and we cannot be certain if the reduced disclosure requirements applicable to emerging
growth companies make our securities less attractive to investors.
We
are an “emerging growth company,” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”).
We expect to remain an “emerging growth company” until December 31, 2020. As an emerging growth company, we are not
required to comply with, among other things, the auditor attestation requirements of the Sarbanes-Oxley Act. Further, the JOBS
Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private
companies 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. We have 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, we, 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 our financial statements with other public companies difficult or impossible because of
the potential differences in accountant standards used. Investors may find our securities less attractive because we rely on these
provisions. If investors find our securities less attractive as a result, there may be a less active trading market for our securities
and prices of the securities may be more volatile.
If
we fail to maintain an effective system of internal control over financial reporting, we may not be able to accurately report
our financial results or prevent fraud. As a result, stockholders could lose confidence in our financial and other public reporting,
which would harm our business and the trading price of our securities.
Effective
internal controls over financial reporting are necessary for us 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 us to fail to meet our reporting obligations. Any testing by
us conducted in connection with Section 404 of the Sarbanes-Oxley Act, or any subsequent testing by our independent registered
public accounting firm, may reveal deficiencies in our internal controls over financial reporting that may require prospective
or retroactive changes in our financial statements or identify other areas for further attention or improvement. In addition,
for as long as we are an “emerging growth company,” our independent registered public accounting firm will not be
required to attest to the effectiveness of our internal controls over financial reporting pursuant to Section 404 of the Sarbanes-Oxley
Act. An independent assessment of the effectiveness of our internal controls could detect problems that our management’s
assessment might not. Undetected material weaknesses in our internal controls could lead to restatements of our financial statements
and require us to incur the expense of remediation. Inferior internal controls could also cause investors to lose confidence in
our reported financial information, which could have a negative effect on the trading price of our securities.
The
Public Company Accounting Oversight Board (“PCAOB”) inspection of our independent accounting firm could lead to findings
in our auditors’ reports and challenge the accuracy of our published audited consolidated financial statements.
Auditors
of U.S. public companies are required by law to undergo periodic PCAOB inspections that assess their compliance with U.S. law
and professional standards in connection with performance of audits of financial statements filed with the SEC. These PCAOB inspections
could result in findings in our auditors’ quality control procedures, question the validity of the auditor’s reports
on our published consolidated financial statements and cast doubt upon the accuracy of our published audited financial statements.
Risks
Related to our Common Stock
An
investment in our common stock is speculative and there can be no assurance of any return on any such investment.
An
investment in our 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 our Common Stock may be volatile.
Our
shares of common stock have been listed on the NASDAQ since November 2, 2015. We cannot assure you that the public market for
our common stock will be active and liquid. The price of shares of our common stock may fluctuate due to a variety of factors,
some of which are beyond our control, including:
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actual
or anticipated fluctuations in our periodic results and those of other public companies in the shipping industry;
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changes
in market valuations of similar companies and stock market price and volume fluctuations generally;
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speculation
in the press or investment community about our business or the shipping industry generally;
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mergers
and strategic alliances in the shipping industry;
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market
prices and conditions in the shipping industry;
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changes
in government regulation;
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introduction
of new technology by the Company or its competitors;
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commodity
prices and in particular prices of oil and natural gas;
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the
ability or willingness of OPEC to set and maintain production levels for oil;
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oil
and gas production levels by non-OPEC countries;
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potential
or actual military conflicts or acts of terrorism;
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natural
disasters affecting the supply chain or use of petroleum products;
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the
failure of securities analysts to publish research about us, or shortfalls in our operating results compared to levels forecast
by securities analysts;
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the
thin trading market for our common stock, which makes it somewhat illiquid;
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the
Company’s capital structure;
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additions
or departures of key personnel;
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announcements
concerning us or our competitors;
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the
general state of the securities market; and
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domestic
and international economic, market and currency factors unrelated to our performance.
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These
market and industry factors may materially reduce the market price of shares of our common stock, regardless of our operating
performance. The seaborne transportation industry has been highly unpredictable and volatile. The market for shares of our common
stock may be equally volatile, and has been particularly volatile during the period from October through December 2018. Consequently,
you may not be able to sell shares of our common stock at prices equal to or greater than those paid by you in any previous or
future offerings.
We
may issue additional shares of our common stock or other equity securities without stockholder approval, which would dilute your
ownership interests and may depress the market price of our common stock.
We
may issue additional shares of our common stock 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 our equity incentive plan, without
stockholder approval, in a number of circumstances. Our issuance of additional common stock or other equity securities of equal
or senior rank would have the following effects:
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our
existing stockholders’ proportionate ownership interest in us will decrease;
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the
amount of cash available per share, including for payment of dividends in the future, may decrease;
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the
relative voting strength of each previously outstanding share of our common stock may be diminished; and
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the
market price of our common stock may decline.
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Future
sales of shares of our common stock by existing stockholders could negatively impact our ability to sell equity in the future
and cause the market price of shares of our common stock to decline.
The
market price for shares of our common stock could decline as a result of sales by existing stockholders of large numbers of shares
of our common stock, including Maritime Investors (the parent of Pyxis Holdings Inc.) and the selling stockholders named herein,
or as a result of the perception that such sales may occur. Any future sales of shares of our common stock by these stockholders
might make it more difficult to us to sell equity or equity-related securities in the future at a time and at the prices that
we deem appropriate.
Reports
published by analysts, including projections in those reports that exceed the Company’s actual results, could adversely
affect the price and trading volume of the Company’s common stock.
The
Company currently expects that securities research analysts will continue to publish their own periodic projections for the Company’s
business. These projections may vary widely and may not accurately predict the results the Company actually achieves. The Company’s
share price may decline if our actual results do not match the projections of these securities research analysts. Similarly, if
one or more of the analysts who write reports on the Company downgrades the Company’s stock or publishes inaccurate or unfavorable
research about the Company’s business, our share price could decline. If one or more of these analysts ceases coverage of
the Company or fails to publish reports on the Company regularly, our share price or trading volume could decline.
We
are incorporated in 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 U.S. jurisdiction.
Our
corporate affairs are governed by our Articles of Incorporation, Bylaws and 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 laws 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, our 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, our stockholders and creditors may experience delays in their ability to recover their claims
after any such insolvency or bankruptcy. Further, in the event of any bankruptcy, insolvency, liquidation, dissolution, reorganization
or similar proceeding involving us or any of our subsidiaries, bankruptcy laws other than those of the United States could apply.
If we become a debtor under U.S. bankruptcy law, bankruptcy courts in the United States may seek to assert jurisdiction over all
of our assets, wherever located, including property situated in other countries. There can be no assurance, however, that we would
become a debtor in the United States, or that a U.S. bankruptcy court would be entitled to, or accept, jurisdiction over such
a bankruptcy case, or that courts in other countries that have jurisdiction over us and our operations would recognize a U.S.
bankruptcy court’s jurisdiction if any other bankruptcy court would determine it had jurisdiction.
We
are a holding company, and we depend on the ability of our subsidiaries to distribute funds to us in order to satisfy our financial
and other obligations.
We
are a holding company and have no significant assets other than the equity interests in our subsidiaries. Our subsidiaries own
all of our existing vessels, and subsidiaries we form in the future will own any other vessels we may acquire in the future. All
payments under our charters will be made to our subsidiaries. As a result, our ability to meet our financial and other obligations,
and to pay dividends in the future, will depend on the performance of our subsidiaries and their ability to distribute funds to
us. 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 our loan agreements, any financing agreement we may enter into in the future, or by Marshall Islands
or Maltese law, which regulates the payment of dividends by our companies. The applicable loan agreement entered into by our subsidiaries,
Sixthone and Seventhone, prohibits such subsidiaries from paying any dividends to us unless the ratio of the total liabilities
to the market value adjusted total assets (total assets adjusted to reflect the market value of all our vessels) of us and our
subsidiaries as a group is 65% or less. As of December 31, 2018, the ratio of total liabilities over the market value of our adjusted
total assets was 68%, or 3% higher than the required threshold. If we, Sixthone or Seventhone do not satisfy the 65% requirement
or if we or a subsidiary breach a covenant in our loan agreements or any financing agreement we may enter into in the future,
such subsidiary may be restricted from paying dividends. If we are unable to obtain funds from our subsidiaries, we will not be
able to fund our liquidity needs or pay dividends in the future unless we obtain funds from other sources, which we may not be
able to do.
It
may be difficult to serve process on or enforce a U.S. judgment against us, our officers and our directors because we are not
a U.S. corporation.
We
are a Marshall Islands corporation, a substantial portion of our assets are located outside of the United States and many of our
directors and executive officers are not residents of the United States. As a result, you may have difficulty serving legal process
within the United States upon us. You may also have difficulty enforcing, both in and outside the United States, judgments you
may obtain in U.S. courts against us 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 Marshall Islands or of the non-U.S. jurisdictions
in which our 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 us 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 Marshall Islands without a retrial on the merits so
long as the provisions of the Marshall Islands Uniform Foreign Money-Judgments Recognition Act are complied with. In addition,
there is doubt as to the enforceability in Greece against us and/or our 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.
We
do not intend to pay dividends in the near future and cannot assure you that we will ever pay dividends.
We
do not intend to pay dividends in the near future, and we will make dividend payments to our stockholders in the future only if
our board of directors, acting in its sole discretion, determines that such payments would be in our 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.
Our
ability to pay dividends will in any event be subject to factors beyond our control, including the following, among others:
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our
earnings, financial condition and anticipated cash requirements;
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the
terms of any current or future credit facilities or loan agreements;
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the
loss of a vessel or the acquisition of one or more vessels;
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required
capital expenditures;
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increased
or unanticipated expenses;
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future
issuances of securities;
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disputes
or legal actions; and
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the
requirements of the laws of the Marshall Islands, which limit payments of dividends if we are, 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).
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The
payment of dividends would not be permitted if we are not in compliance with our loan agreements or in default of such agreements.
Maritime
Investors beneficially owns approximately 80.9% of our total outstanding common stock, which may limit stockholders’ ability
to influence our actions.
Maritime
Investors, a corporation controlled by our Chief Executive Officer, Mr. Valentis, beneficially owns approximately 80.9% of our
outstanding common stock. As a result, Maritime Investors has the power to exert considerable influence over our actions through
Maritime Investors’ ability to effectively control matters requiring stockholder approval, including the determination to
enter into a corporate transaction or to prevent a transaction, regardless of whether our other stockholders believe that any
such transaction is in their or our best interests. For example, Maritime Investors could cause us to consummate a merger or acquisition
that increases the amount of our indebtedness or causes us to sell all of our revenue-generating assets. We cannot assure you
that the interests of Maritime Investors will coincide with the interests of other stockholders. As a result, the market price
of shares of our common stock could be adversely affected.
Additionally,
Maritime Investors may invest in entities that directly or indirectly compete with us, 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 our business, and as a result, those acquisition opportunities may not be available to us. As a result of
these relationships, when conflicts arise between the interests of Maritime Investors and the interests of our other stockholders,
Mr. Valentis may not be a disinterested director. Maritime Investors will effectively control all of our corporate decisions so
long as they continue to own a substantial number of shares of our common stock.
If
our common stock does not meet the NASDAQ’s minimum share price requirement, and if we cannot cure such deficiency within
the prescribed timeframe, our common stock could be delisted.
Under
the rules of NASDAQ, listed companies are required to maintain a share price of at least $1.00 per share. If the share price declines
below $1.00 for a period of 30 consecutive business days, then the listed company has a cure period of at least 180 days to regain
compliance with the $1.00 per share minimum. If the price of our common stock closes below $1.00 for 30 consecutive days, and
if we cannot cure that deficiency within the 180-day timeframe, then our common stock could be delisted. On September 6, 2018
we received a deficiency notice from The NASDAQ Stock Market, Inc. stating that, for a period of 30 consecutive trading days,
our shares of common stock closed below the minimum price of $1.00 per share as required for continued listing on NASDAQ.
In accordance with the notice, we had until March 5, 2019 or 180 calendar days from the date of the notice, to regain compliance
with NASDAQ’s continued listing minimum closing bid price requirements (Marketplace Rule 5550(a)(2)). We received a written
notification from the exchange on October 31, 2018 stating that the closing bid price of our shares had been $1.00 per share or
higher for 10 consecutive trading days, from October 15 to October 26, 2018, and, accordingly, we were again in compliance with
the exchange’s minimum closing bid price rule.
As
a foreign private issuer, our corporate governance practices are exempt from certain NASDAQ corporate governance requirements
applicable to U.S. domestic companies. As a result, our corporate governance practices may not have the same protections afforded
to stockholders of companies that are subject to all of the NASDAQ corporate governance requirements.
We
believe that our corporate governance practices are in compliance with the applicable NASDAQ listing rules and are not prohibited
by the laws of the Republic of the Marshall Islands.
Anti-takeover
provisions in our Articles of Incorporation and Bylaws could make it difficult for our stockholders to replace our board of directors
or could have the effect of discouraging an acquisition, which could adversely affect the market price of our common stock.
Several
provisions of our Articles of Incorporation and Bylaws make it difficult for our stockholders to change the composition of our
board of directors in any one year. In addition, the same provisions may discourage, delay or prevent a merger or acquisition
that stockholders may consider favorable. These provisions include:
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providing
for a classified board of directors with staggered, three year terms;
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authorizing
the board of directors to issue so-called “blank check” preferred stock without stockholder approval;
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prohibiting
cumulative voting in the election of directors;
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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 our common stock cast at an annual meeting of stockholders;
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prohibiting
stockholder action by written consent unless consent is signed by all stockholders entitled to vote on the action;
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limiting
the persons who may call special meetings of stockholders;
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establishing
advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted
on by stockholders at stockholder meetings; and
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restricting
business combinations with interested stockholders.
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These
anti-takeover provisions could substantially impede the ability of public stockholders to benefit from a change in control and,
as a result, may adversely affect the market price of our common stock and your ability to realize any potential change of control
premium.
Tax
Risks
We
may have to pay tax on U.S. source income, which would reduce our earnings and cash flow.
Under
the Internal Revenue Code of 1986, as amended (the “Code”), 50% of the gross shipping income of a vessel-owning or
chartering corporation (or “shipping income”) that is attributable to voyages that either begin or end in the United
States is characterized as “U.S.-source shipping income” and such income is generally subject to a 4% U.S. federal
income tax (on a gross basis) unless that corporation qualifies for exemption from tax under Section 883 of the Code or under
an applicable U.S. income tax treaty.
During
our 2018 taxable year, we and our shipowning subsidiaries are organized under the laws of the Republic of the Marshall Islands
and the laws of the Republic of Malta. The Republic of the Marshall Islands, is a country that does not have an income tax treaty
with the United States. The Republic of Malta is a country that has an income tax treaty with the United States. In particular,
this income tax treaty sets out the relevant rule to the effect that profits of an enterprise of a contracting state from the
operation of ships in international traffic shall be taxable only in that state. Accordingly, income earned by our subsidiaries
organized under the laws of Malta may qualify for a treaty-based exemption. Income earned by our subsidiaries under the law of
the Marshall Islands don’t qualify for a treaty-based exemption. However, we believe that we qualify for the exemption from
tax under Section 883 of the Code for the 2018 taxable year and intend to take such position on our returns for the 2018 taxable
year. Nevertheless, for the 2019 or any later taxable year, there are factual circumstances beyond our control that could cause
us to lose the benefit of this tax exemption and thereby cause us to become subject to U.S. federal income tax on our U.S.-source
shipping income. For example, there is a risk that we could no longer qualify for exemption under Section 883 of the Code for
a particular taxable year if additional shares of our common stock are issued to new stockholders such that, due to their status
or unwillingness to cooperate with certain substantiation and reporting requirements, we no longer satisfy one of the ownership
test requirements for qualification. Due to the factual nature of the issues involved, we can give no assurances on the availability
of the exemption to us.
If
we and/or one or more of our Marshall Island subsidiaries are not entitled to this exemption under Section 883 of the Code for
any taxable year, we and/or such subsidiaries would generally be subject for that year to a 4% U.S. federal income tax on the
U.S.-source shipping income for that year. The imposition of this tax could have a negative effect on our business and would result
in decreased earnings and cash flow. See “Item 10. Additional Information – E. Taxation – U.S. Federal Income
Taxation of the Company” for a detailed discussion of the qualification for the exemption under Section 883 of the Code.
Our
subsidiaries organized under the laws of the Republic of Malta would always benefit from the treaty based exemption since voyages
that either begin or end in the United States (characterised by the Code as “U.S.-source shipping income”) would qualify
as international transport for purposes of the tax treaty. Furthermore and in addition to the tax treaty provisions, under article
12(1)(c)(iii)(k) of the Malta Income Tax Act, the profits of a non-resident shipowner as defined in article 28, are exempt from
tax in Malta, provided that the country to which such non-resident shipowner belongs extends a similar exemption to shipowners
who are not resident in such country but who are resident in Malta. This exemption is therefore extended on a reciprocity basis.
Various
tax rules may adversely impact the Company’s business, results of operations and financial condition.
The
Company may be subject to taxes in the United States and other jurisdictions in which it operates. If the Internal Revenue Service
(the “IRS”), or other taxing authorities disagree with the positions the Company has taken on the tax returns of its
subsidiaries, the Company could face additional tax liability, including interest and penalties. If material, payment of such
additional amounts upon final adjudication of any disputes could have a material impact on the Company’s business, results
of operations and financial condition. In addition, complying with new tax rules, laws or regulations could impact the Company’s
financial condition, and increases to federal or state statutory tax rates and other changes in tax laws, rules or regulations
may increase the Company’s effective tax rate. Any increase in the Company’s effective tax rate could have a material
adverse impact on our business, results of operations and financial condition.
If
U.S. tax authorities were to treat us or one or more of our subsidiaries as a “passive foreign investment company,”
there could be adverse tax consequences to U.S. holders.
A
non-U.S. corporation will be treated as a “passive foreign investment company” (or a “PFIC”) for U.S.
federal income tax purposes if either (i) at least 75% of its gross income for any taxable year consists of certain types of “passive
income,” or (ii) at least 50% 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.” U.S. stockholders of a PFIC are subject to a disadvantageous U.S. federal income
tax regime with respect to the income derived by the PFIC, the distributions they receive from the PFIC and the gain, if any,
they derive from the sale or other disposition of their shares in the PFIC.
U.S.
shareholders of a PFIC generally are subject to an adverse U.S. federal income tax regime with respect to the income derived by
the PFIC, the distributions they receive from the PFIC and the gain, if any, they derive from the sale or other disposition of
their shares in the PFIC, and would be subject to annual information reporting to the U.S. Internal Revenue Service (the “IRS”).
If we were to be treated as a PFIC for any taxable year (and regardless of whether we remained a PFIC for subsequent taxable years),
a U.S. shareholder who does not make certain mitigating elections (as described more fully under “Item 10. Additional Information
– E. Taxation – U.S. Federal Income Taxation of U.S. Holders”) would be required to allocate ratably over such
U.S. shareholder’s holding period any “excess distributions” received (i.e., the portion of any distributions
received on our common stock in a taxable year in excess of 125% of certain average historic annual distributions) and any gain
realized on the sale, exchange or other disposition of our common stock. The amount allocated to the current taxable year and
any year prior to the first year in which we were a PFIC 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 our 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, see “Item
10. Additional Information – E. Taxation – U.S. Federal Income Taxation of U.S. Holders.”
Based
on our current and projected operations, we do not believe that we (or any of our subsidiaries) were a PFIC in our 2017 taxable
year, and we do not expect to become (or any of our subsidiaries to become) a PFIC with respect to the 2018 or any later taxable
year. In this regard, we intend to treat the gross income we derive or are deemed to derive from our time chartering activities
as services income, rather than rental income. Accordingly, we believe that our income from our time chartering activities does
not constitute “passive income,” and the assets that we own and operate in connection with the production of that
income do not constitute “passive assets.” There is, however, no direct legal authority under the PFIC rules addressing
our method of operation. Accordingly, no assurance can be given that the IRS or a court of law will accept our position, and there
is a risk that the IRS or a court of law could determine that we are (or were in a prior taxable year) a PFIC. Moreover, no assurance
can be given that we would not constitute a PFIC for any taxable year if there were to be changes in the nature and extent of
our operations.
If
U.S. tax authorities were to treat us as a “controlled foreign corporation,” there could be adverse U.S. federal income
tax consequences to certain U.S. investors.
If
more than 50% of the voting power or value of our shares is treated as owned by U.S. citizens or residents, U.S. 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%
of our voting power or value (each, a “U.S. Stockholder”), then we and one or more of our subsidiaries will be a controlled
foreign corporation (or “CFC”) for U.S. federal income tax purposes. If we were treated as a CFC for any taxable year,
our U.S. Stockholders may face adverse U.S. federal income tax consequences and information reporting obligations. See “Item
10. Additional Information – E. Taxation – U.S. Federal Income Taxation of U.S. Holders.”
ITEM
4. INFORMATION ON THE COMPANY
A.
History and Development of the Company
Our
legal and commercial name is Pyxis Tankers Inc. We are an international maritime transportation holding company that was incorporated
under the laws of the BCA on March 23, 2015, and we maintain our principal place of business at the offices of our ship manager,
Pyxis Maritime Corp. (“Maritime”), at 59 K. Karamanli, Maroussi 15125, Athens, Greece. Our telephone number at that
address is +30 210 638 0200. Our registered agent in the Marshall Islands is The Trust Company of the Marshall Islands, Inc. located
at Trust Company Complex, Ajeltake Road, Ajeltake Island, Majuro, Marshall Islands MH96960.
We
own the vessels in our fleet through six separate wholly-owned subsidiaries that are incorporated in the Marshall Islands and
Malta. We acquired the vessel-owning subsidiaries from affiliates of our founder and Chief Executive Officer in connection with
our merger with LookSmart in October 2015. Pursuant to which, LookSmart merged with and into Maritime Technologies Corp. and we
commenced trading on the NASDAQ Capital Market under the symbol “PXS”. As part of the merger transactions, LookSmart
transferred all of its then existing business, assets and liabilities to its wholly-owned subsidiary, which was spun off to the
LookSmart stockholders.
Implications
of Being an Emerging Growth Company
As
a company with less than $1.07 billion in revenues for the last fiscal year, we qualify as an “emerging growth company”
pursuant to the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other requirements
that are otherwise applicable generally to public companies. These provisions include, but are not limited to, exemption from
the auditor attestation requirement under Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”), in the assessment
of the emerging growth company’s internal control over financial reporting. The JOBS Act also provides that an emerging
growth company does not need to comply with any new or revised financial accounting standards until such date that a private company
is otherwise required to comply with such new or revised accounting standards. Emerging growth companies are also exempt from
mandatory auditor rotation and furthermore, we are not required to present selected financial information or any management’s
discussion herein for any period prior to the earliest audited period presented in connection with this Annual Report.
We
will remain an emerging growth company until the earliest of (a) the last day of the fiscal year during which we have total annual
gross revenues of at least $1.07 billion; (b) the last day of our fiscal year following the fifth anniversary of the completion
of the merger on December 31, 2020; (c) the date on which we have, during the previous three-year period, issued more than $1.0
billion in non-convertible debt; or (d) the date on which we are deemed to be a “large accelerated filer” under the
Securities Exchange Act of 1934, as amended (the “Exchange Act”), which would occur if the market value of our common
stock that are held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal
quarter. Once we cease to be an emerging growth company, we will not be entitled to the exemptions provided in the JOBS Act discussed
above.
B.
Business Overview
Overview
We
are an international maritime transportation company focused on the product tanker sector. Our fleet is comprised of six double
hull product tankers, which are employed under a mix of spot and medium-term time charters. As of March 26, 2019, our fleet
had an average age of 8.1 years, based on dead weight tonnage, compared to an industry average of approximately 11 years,
with a total cargo carrying capacity of 216,635 dwt. We acquired these six vessels in 2015 from affiliates of our founder and
Chief Executive Officer, Mr. Eddie Valentis. Four of the vessels in the fleet are medium range (“MR”) tankers, three
of which have eco-efficient or eco-modified designs, and two are short-range tanker sister ships. Each of the vessels in the fleet
has IMO certifications and 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.
Our
principal objective is to own and operate our fleet in a manner that will enable us to benefit from short- and long-term trends
that we expect in the product tanker sector to maximize our revenues. We intend to expand the fleet through selective acquisitions
of modern product tankers, primarily MRs, and to employ our vessels through time charters to creditworthy customers and on the
spot market. We intend to continually evaluate the markets in which we operate and, based upon our view of market conditions,
adjust our mix of vessel employment by counterparty and stagger our charter expirations. In addition, we may choose to opportunistically
direct asset sales or acquisitions when conditions are appropriate.
The
Fleet
The
following table provides summary information concerning our fleet as of March 26, 2019:
Vessel
Name
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Shipyard
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Vessel
type
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Carrying
Capacity (dwt)
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Year
Built
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Type
of Charter
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Charter
Rate
(per day)
(1)
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Earliest
Redelivery Date
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Pyxis Epsilon
(2)
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SPP* / S. Korea
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MR
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50,295
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2015
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Time
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$
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13,350
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March 2019
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Pyxis Theta
(3)
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SPP / S. Korea
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MR
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51,795
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2013
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Time
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$
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13,800
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May 2019
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Pyxis Malou
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SPP / S. Korea
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MR
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50,667
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2009
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Time
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$
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14,000
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September 2019
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Pyxis Delta
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Hyundai / S. Korea
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MR
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46,616
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2006
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Time
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$
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12,800
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April
2019
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Northsea Alpha
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Kejin / China
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Small Tanker
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8,615
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2010
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|
|
Spot
|
|
|
|
n/a
|
|
|
n/a
|
Northsea Beta
|
|
Kejin / China
|
|
Small Tanker
|
|
|
8,647
|
|
|
|
2010
|
|
|
|
Spot
|
|
|
|
n/a
|
|
|
n/a
|
|
|
|
|
|
|
|
216,635
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
These
are gross charter rates and do not reflect any commissions payable.
|
|
|
|
|
(2)
|
Pyxis
Epsilon
is contracted to begin a new time charter on April 1, 2019 at a gross charter rate of $15,350 for 12 months (plus
/ minus 30 days) with another 12 months at a gross charter rate of $17,500 at charterer’s option.
|
|
|
|
|
(3)
|
Pyxis
Theta
is contracted to begin a new time charter on June 1, 2019 at a gross charter rate of $15,375 for 12 months (plus
/ minus 30 days) with another 12 months at a gross charter rate of $17,500 at charterer’s option.
|
*SPP
is SPP Shipbuilding Co., Ltd.
Our
Charters
We
generate revenues by charging customers a fee, typically called charter hire, for the use of our 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 us or our affiliates:
|
●
|
Time
charters: 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 bunkers and any port fees, cargo loading
and unloading expenses, canal tolls and agency fees. In addition, a time charter may include a profit share component, which
would enable us to participate in increased profits in the event rates increase above the specified daily rate.
|
|
|
|
|
●
|
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
|
|
Typically
3 months - 5 years or more
|
|
Indefinite
but typically less than 3 months
|
Basis
on which charter rate is paid
|
|
Per
day
|
|
Per
ton, typically
|
Voyage
expenses
|
|
Charterer
pays
|
|
We
pay
|
Vessel
operating costs (1)
|
|
We
pay
|
|
We
pay
|
Off-hire
(2)
|
|
We
pay
|
|
We
pay
|
(1)
|
We
are 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 our ship managers. The largest components
of our 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 dry-docking.
|
Under
both time and spot charters on the vessels in the fleet, we are responsible for the technical management of the vessel and for
maintaining the vessel, periodic dry-docking, cleaning and painting and performing work required by regulations. We have entered
into a contract with Maritime to provide commercial, sale and purchase, and other operations and maintenance services to all of
the vessels in our fleet. The chartering services of the Northsea Alpha and the Northsea Beta were performed by North Sea Tankers
BV (“NST”), a third party manager, until we terminated our commercial management agreements with NST in 2016, as discussed
below. Our 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 our fleet. Please see “– Management of Ship Operations,
Administration and Safety” below. We intend to continue to outsource the day-to-day crewing and technical management of
all our vessels to ITM. We believe that ITM has a strong reputation for providing high quality technical vessel services, including
expertise in efficiently managing tankers. Following our delivery of termination notices to NST, Maritime assumed full commercial
management of the Northsea Beta and the Northsea Alpha in June and November 2016, respectively.
In
the future, we may also place one or more of our 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 dry-dockings
and insurance.
|
Our
Competitive Strengths
We
believe that we possess a number of competitive strengths relative to other product tanker companies, including:
|
●
|
High
Quality Fleet of Modern Tankers.
As of March 26, 2019, our fleet had an average age of 8.1 years, based
on dead weight tonnage, compared to an industry average of approximately 11 years. Our fleet of vessels consists mainly of
MR tankers that were built in Korean shipyards. We believe these MR tankers, along with our smaller tankers, provide our customers
with high quality and reliable transportation of cargos at competitive operating costs. Owning a modern fleet reduces off-hire
time, repairs and maintenance costs, including dry-docking expenses, and improves safety and environmental performance. Also,
lenders are attracted to modern, well maintained vessels, which can result in more reasonable terms for secured loans.
|
|
|
|
|
●
|
Established
Relationships with Charterers
. We have developed long-standing relationships with a number of leading tanker charterers,
including major integrated and national oil companies, refiners, international trading firms and large vessel operators, which
we believe will benefit us in the future as we continue to grow our business. Our customers have included, among others, BP,
SK Energy, Equinor, Total, Petramina, Vitol, ST Shipping (an affiliate of Glencore), Repsol, Petrobras and their respective
subsidiaries. We strive to meet high standards of operating performance, achieve cost-efficient operations, reliability and
safety in all of our operations and maintain long-term relationships with our customers. We believe that our charterers value
our fleet of modern, quality tankers as well as our management team’s industry experience. These attributes should allow
us to continue to charter our vessels and expand our fleet.
|
|
|
|
|
●
|
Competitive
Cost Structure.
Even though we currently operate a relatively small number of vessels, we believe we are very cost competitive
as compared to other companies in our industry. For example, during the year ended December 31, 2018, our daily operating
costs per vessel were $5,785, while our general and administrative expenses were $1,098 per vessel, per ownership day, excluding
non-cash items. This is a result of our fleet profile, our experienced technical and commercial managers as well as the hands-on
approach and substantial equity ownership of our management team. Our technical manager, ITM, manages 46 tankers, including
our vessels. Our technical and commercial management fees aggregate to approximately $755 per day per vessel, which is competitive
within our industry. Our collaborative approach between our management team and our external managers creates a platform that
we believe is able to deliver excellent operational results at competitive costs and positions us for further growth.
|
|
|
|
|
●
|
Well-Positioned
to Capitalize on Improving Rates.
We believe our current fleet is positioned to capitalize when spot and time charter
rates improve. As of March 26, 2019, we had four tankers contracted under time charters and two under spot voyages.
As of March 26, 2019, 45% of our fleet’s remaining available days in 2019 were contracted, exclusive of
charterers’ options. For any additional tankers we acquire, we expect to continue to employ our mixed chartering strategy.
|
|
|
|
|
●
|
Experienced
Management Team
. Our four senior officers, led by our Chairman and Chief Executive Officer, Mr. Valentios Valentis, have
combined over 100 years of industry experience in shipping, including vessel ownership, acquisitions, divestitures, newbuildings,
dry-dockings and vessel modifications, on-board operations, chartering, technical supervision, corporate management, legal/regulatory,
accounting and finance.
|
Our
Business Strategy
Our
principal objective is to own, operate and grow our fleet in a manner that will enable us to benefit from short- and long-term
trends that we expect in the tanker sector. Our strategy to achieve this objective includes the following:
|
●
|
Maintain
High Quality Fleet of Modern Tankers.
We intend to maintain a high quality fleet that meets rigorous industry standards
and our charterers’ requirements and that has an average age of 10 years or less. We consider our fleet to be high quality
based on the specifications to which our vessels were built and the reputation of each of the shipyards that built the vessels.
We believe that our customers prefer the better reliability, fewer off-hire days and greater operating efficiency of modern,
high quality vessels. Our MR tankers include eco-efficient and eco-modified designed vessels which offer the benefits of lower
bunker consumption and reduced emissions. In addition, we are able to cost-effectively operate standard older MRs. We also
intend to maintain the quality of our fleet through ITM’s comprehensive planned maintenance and preventive maintenance
programs.
|
|
●
|
Grow
the Fleet Opportunistically.
We plan to take advantage of what we believe to be attractive asset values in the product
tanker sector to expand our fleet through acquisitions. We believe 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, as well as in the Middle East, contribute to increases
in the transportation of refined petroleum products. We believe that a diversified tanker fleet will enable us to serve our
customers across the major tanker trade routes and to continue to develop a global presence. We have strong relationships
with reputable owners, charterers, banks and shipyards, which we believe will assist us in identifying attractive vessel acquisition
opportunities. We intend to focus primarily on the acquisition of IMO II and III class MR tankers of 10 years of age or less,
which have been built in Tier 1 Asian shipyards and have modern bunker efficient designs given demands for lower bunker consumption
and concerns about environmental emissions. We will also consider acquisitions of newbuild vessels (also called re-sales),
which typically have lower operating costs, and of fleets of existing vessels when such acquisitions are accretive to stockholders
or provide other strategic or operating advantages to us.
|
|
|
|
|
●
|
Optimize
the Operating Efficiency of our Fleet.
We evaluate each of our existing and future vessels regarding their operating efficiency,
and if we believe it will advance the operation of our fleet and benefit our business, we may make vessel modifications to
improve fuel consumption and meet stricter environmental standards. We will consider making such modifications when the vessels
complete their charter contracts or undergo scheduled dry-docking, including installation of required of ballast water treatment
systems, or with new acquisitions, at the time we acquire them. Among the modifications that we monitor and may make in the
future to our vessels include: fitting devices that reduce main engine bunker consumption without reducing available power
and speed; fitting devices that improve bunker combustion and therefore bunker consumption for auxiliary equipment; efficient
electrical power generation and usage; minimizing hull and propeller frictional losses; systems that allow for optimized routing;
and systems that allow for improved maintenance, performance monitoring and management. We refer to vessels that have one
or more of these modifications as “eco-modified.” We have evaluated and successfully installed in vessels a variety
of technologies and equipment that have resulted in operating efficiencies. For example, we completed modifications on the
Pyxis Malou
during its first year special survey that we believe has resulted in our attaining an attractive return
on such capital investment in the first year of operation. We will continue to build on our experience with these and other
modifications and seek methods to efficiently improve the operational performance of our vessels while keeping costs competitive
and in full regulatory compliance.
|
|
|
|
|
●
|
Utilize
Portfolio Approach for Commercial Employment.
We expect to employ the vessels in our fleet under a mix of spot and time
charters (with and without profit share), bareboat charters and pooling arrangements. We expect to diversify our charters
by customer and staggered duration. In addition, any long-term time charters we enter into with a profit sharing component
will offer us some protection when charter rates decrease, while allowing us to share in increased profits in the event rates
increase. We believe that this portfolio approach to vessel employment is an integral part of risk management which will provide
us a base of stable cash flows while providing us the optionality to take advantage of rising charter rates and market volatility
in the spot market.
|
|
|
|
|
●
|
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. We intend to
maintain these high standards in order to provide our customers with a high level of safety, customer service and support.
|
|
|
|
|
●
|
Maintain
Financial Flexibility.
We intend to maintain financial flexibility to expand our fleet by targeting a balanced capital
structure of debt and equity. As part of our risk management policies, we expect to enter into time charters for most of the
vessels we acquire, which provide us predictable cash flows for the duration of the charter and attract lower-cost debt financing
at more favorable terms. We believe this will allow us to build upon our strong commercial lending relationships and optimize
our ability to access the public capital markets to respond opportunistically to changes in our industry and financial market
conditions.
|
The
LookSmart Agreement and the expiration of the Make-Whole Right
On
April 23, 2015, we and our wholly-owned subsidiary, Maritime Technologies Corp., entered into the LookSmart Agreement with LookSmart
and its then wholly-owned subsidiary, LSG. On October 28, 2015, LookSmart completed its merger with and into Maritime Technologies
Corp. As a condition to the consummation of the merger, LookSmart transferred all of its business, assets and liabilities to LSG,
which was spun off to the then existing LookSmart stockholders. In connection with the closing of the merger, each share of LookSmart
was cancelled and exchanged for the right to receive 1.0667 shares of our common stock.
Pursuant
to the Make-Whole Right included in the Looksmart Agreement, if Pyxis Tankers Inc. conducts an offering of its common stock or
a sale of Pyxis Tankers Inc. and/or substantially all of its assets (either, a “Future Pyxis Offering”) at a price
per share that is less than $4.30 following the merger with Looksmart, then Looksmart stockholders of record on April 29, 2015,
who on the date of the consummation of such Future Pyxis Offering continue to hold such Pyxis common shares (the “MWR Holder”),
are entitled to receive in Pyxis common shares the difference between the offering price of the Future Pyxis Offering and $4.30;
provided that the MWR Holders are only entitled to the Make-Whole Right in the event the Future Pyxis Offering exceeds $5.0 million.
In 2017, we completed a Future Pyxis Offering for less than $5.0 million and as a result the Make-Whole Right may no longer be
exercised.
Seasonality
For
a description of the effect of seasonality on our business, please see “Item 3. Key Information – D. Risk Factors
– Product tanker rates fluctuate based on seasonal variations in demand”.
Management
of Ship Operations, Administration and Safety
Our
executive officers, internal auditors and secretary are employed by and their services are provided by Maritime.
Typically,
Maritime and ITM enter into individual ship management agreements with our vessel-owning subsidiaries pursuant to which they provide
us with:
|
●
|
commercial
management services, which include obtaining employment, that is, the chartering, for our vessels and managing our relationships
with charterers;
|
|
|
|
|
●
|
strategic
management services, which include providing us 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 dry-docking 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.
|
Head
Management Agreement and Ship Management Agreements with Maritime.
Headquartered in Maroussi, Greece, Maritime was formed
in May 2007 by our founder and Chief Executive Officer to take advantage of opportunities in the tanker sector. Maritime’s
business employs or receives consulting services from 14 people in four departments: technical, operations, chartering and finance/accounting.
We entered into a head management agreement with Maritime (the “Head Management Agreement”) pursuant to which they
provide us and our vessels, among other things, with ship management services and administrative services. Under the Head Management
Agreement, each vessel-owning subsidiary that owns a vessel in our fleet also enters into a separate ship management agreement
with Maritime. Maritime provides us and our vessels with the following services: commercial, sale and purchase, provisions, insurance,
bunkering, operations and maintenance, dry-docking and newbuilding construction supervision. Maritime also provides administrative
services to us such as executive, financial, accounting and other administrative services. As part of its responsibilities, Maritime
supervises the crewing and technical management performed by ITM for all our vessels. In return for such services, Maritime receives
from us:
|
●
|
for
each vessel while in operation a fee of $325 per day subject to annual inflationary adjustments, and for each
vessel under construction, a fee of $450 per day, 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 (collectively the “Ship-Management
Fees”);
|
|
|
|
|
●
|
1.00%
of the purchase price of any sale and purchase transaction from the seller of the vessel;
|
|
|
|
|
●
|
1.25%
of all chartering, hiring and freight revenue we receive that was procured by or through Maritime; and
|
|
|
|
|
●
|
a
lump sum of approximately $1.6 million per annum for the administrative services it provides to us (the “Administration
Fees”).
|
The
Ship-Management Fees and the Administration Fees are subject to annual adjustments to take into account inflation in Greece
or such other country where Maritime was headquartered during the preceding year. Effective January 1, 2019, the Ship-Management
Fees and the Administration Fees were increased by 0.62% in line with the average inflation rate in Greece in 2018. We believe
these amounts payable to Maritime are very competitive to many of our U.S. publicly listed tanker competitors, especially given
our relative size. We anticipate that once our fleet reaches 15 tankers, the fee that we pay to Maritime for its ship management
services for vessels in operation will recognize a volume discount in an amount to be determined by the parties at that time.
The
Head Management Agreement will continue until March 23, 2020, unless terminated by either party on 90 days’ notice. Following
the initial expiration date, the Head Management Agreement will automatically be renewed for a five year period. In addition,
the ship management agreements have an initial term of five years, while following their initial expiration dates, they will automatically
be renewed for consecutive five year periods, or until terminated by either party on three months’ notice.
For
more information on our Head Management Agreement and our ship management agreements with Maritime, please see “Item 7.
Major Shareholders and Related Party Transactions – B. Related Party Transactions.”
Ship
Management Agreements with ITM.
We outsource the day-to-day technical management of our vessels to an unaffiliated third
party, ITM, which has been certified for ISO 9001:2008 and ISO 14001:2004. Each vessel-owning subsidiary that owns a vessel in
our fleet under a time or spot charter also typically enters into a separate ship management agreement with ITM. ITM is responsible
for all technical management, including crewing, maintenance, repair, dry-dockings and maintaining required vetting approvals.
In performing its services, ITM is responsible for operating a management system that complies, and ITM ensures that each vessel
and its crew comply, with all applicable health, safety and environmental laws and regulations. In addition to reimbursement of
actual vessel related operating costs, we also pay an annual fee to ITM which in 2018 was $155,000 per vessel (equivalent to approximately
$425 per day). This fee is reduced to the extent any vessel ITM manages is not fully operational for a time, which is also referred
to as any period of “lay-up.”
Each
ship management agreement with ITM continues by its terms until it is terminated by either party. The ship management agreements
can be cancelled by us 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. We have the
right to terminate the ship management agreement for a specific vessel upon 60 days’ notice if in our 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 our affiliates), becomes a total loss, becomes a constructive, compromised or arranged total loss or is
requisitioned for hire.
Insurance.
We are obligated to keep insurance for each of our vessels, including hull and machinery insurance and protection and
indemnity insurance (including pollution risks and crew insurances), and we must ensure each vessel carries a certificate of financial
responsibility as required. We are responsible to ensure that all premiums are paid. Please see “– Risk Management
and Insurance” below.
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 of vessels 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, 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 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 (the “IACS”). In December 2013,
the IACS adopted new harmonized Common Structure Rules which apply to oil tankers and bulk carriers constructed on or after July
1, 2015. All of our vessels are certified as being “in-class” by NKK and DNV GL. We expect that all vessels that we
purchase will be certified prior to their delivery and that we 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:
|
●
|
Physical
damage to the vessel:
|
|
|
mechanical
failure or damage, for example by reason of the seizure of a main engine crankshaft;
|
|
|
|
|
|
physical
damage to the vessel by reason of a grounding, collision or fire; and
|
|
|
|
|
|
other
physical damage due to crew negligence.
|
|
●
|
Liabilities
to third parties:
|
|
|
cargo
loss or shortage incurred during the voyage;
|
|
|
|
|
|
damage
to third party property, such as during a collision or berthing operation;
|
|
|
|
|
|
personal
injury or death to crew and/or passengers sustained due to accident; and
|
|
|
|
|
|
environmental
damage, for example arising from marine disasters such as oil spills and other environmental mishaps.
|
|
●
|
Business
interruption and war risk or war-like operations:
|
|
|
this
would include business interruption, for example by reason of political disturbance, strikes or labor disputes, or physical
damage to the vessel and/or crew and cargo resulting from deliberate actions such as piracy, war-like actions between countries,
terrorism and malicious acts or vandalism.
|
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 we expect to maintain the traditional range of marine and liability insurance coverage for our fleet (hull and machinery
insurance, war risks insurance and protection and indemnity coverage) in amounts and to extents that we believe will be prudent
to cover normal risks in our operations, we 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 our
business and financial condition.
The
following table sets forth information regarding the insurance coverage on our existing fleet as of December 31, 2018.
Type
|
|
Aggregate
Sum Insured For All Vessels in our Existing Fleet
|
Hull and Machinery
|
|
$202.0 million
|
War Risk
|
|
$202.0 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 liable. 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.
Our
P&I coverage for liabilities arising out of oil pollution is limited to $1.0 billion per vessel per incident in our 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
our fleet are “loss of hire” and “strikes.” We 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 under 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.
Competition
We
operate in international markets that are highly competitive. As a general matter, competition is based primarily on the supply
and demand of commodities and the number of vessels operating at any given time. We compete for charters, in particular, on the
basis of price and vessel location, size, age and condition, as well as the acceptability of the vessel’s operator to the
charterer and on our reputation. We will arrange charters for our vessels typically through the use of brokers, who negotiate
the terms of the charters based on market conditions. Competition arises primarily from other product tanker owners, including
major oil companies as well as independent tanker companies, some of which have substantially greater financial and other resources
than we do. Although we believe that no single competitor has a dominant position in the markets in which we compete, the trend
towards consolidation in the industry is creating an increasing number of global enterprises capable of competing in multiple
markets, which will likely result in greater competition to us. Our competitors may be better positioned to devote greater resources
to the development, promotion and employment of their businesses than we are. Ownership of product tankers is highly fragmented
and is divided among publicly listed companies, state-controlled owners and independent shipowners, some of which also have other
types of tankers or vessels that carry diverse cargoes. Several of our publicly listed competitors include Scorpio Tankers Inc.,
Ardmore Shipping Corporation, Capital Product Partners L.P., Top Ships Inc. and Tsakos Energy Navigation Limited.
Customers
We
market our vessels and related services to a broad range of customers, including international commodity trading companies and
oil, gas, and large shipping companies.
Our
significant customers that accounted for more than 10% of our revenues in 2017 and 2018 were as follows:
Charterer
|
|
2017
|
|
|
2018
|
|
Trafigura
Maritime Logistics Pte. Ltd.
|
|
|
—
|
|
|
|
23
|
%
|
PMI Trading Ltd.
|
|
|
18
|
%
|
|
|
—
|
|
MTM Trading LLC
|
|
|
16
|
%
|
|
|
—
|
|
Koch Shipping Pte.
Ltd.
|
|
|
—
|
|
|
|
15
|
%
|
Shell
Tankers (Singapore) Pte. Ltd.
|
|
|
15
|
%
|
|
|
—
|
|
|
|
|
49
|
%
|
|
|
38
|
%
|
In
addition to these companies, we and our ship manager, Maritime, also have historical and growing chartering relationships with
major integrated oil and international trading companies, including BP, SK Energy, Equinor, Total, Petramina, Vitol, ST Shipping
(an affiliate of Glencore), Repsol, Petrobras and their respective subsidiaries.
As
of December 31, 2018, we did not have any material trade receivable outstanding from any of our customers that accounted more
than 10% of our revenues during 2018. We do not believe that we are dependent on any one of our key customers. In the event of
a default of a charter by any of our key customers, we could seek to re-employ the vessel in the spot or time charter markets,
although the rate could be lower than the charter rate agreed with the defaulting charterer.
The
International Product Tanker Shipping Industry
All
the information and data contained in this section, including the analysis of relating to the international product tanker shipping
industry, has been provided by Drewry Maritime Advisors (“Drewry”). Drewry has advised us that the statistical and
graphical information contained in this section is drawn from its database and other sources. In connection therewith, Drewry
has advised that: (i) certain information in its database is derived from estimates or subjective judgments, (ii) the information
in the databases of other maritime data collection agencies may differ from the information in its database, and (iii) while Drewry
has taken reasonable care in the compilation of the statistical and graphical information and believe it to be accurate and correct,
data compilation is subject to limited audit and validation procedures. We believe that all third-party data provided in this
section, “The International Product Tanker Shipping Industry,” is reliable.
Summary
The
refined petroleum products (“products”) tanker shipping industry has undergone some fundamental changes since 2003.
From 2003 to 2008 seaborne trade in products was spurred on by rising global oil demand and by changes in the location of refinery
capacity. While in recent years, the development of shale oil reserves in the United States (U.S.) has helped to underpin the
continued expansion in seaborne products trades, with the U.S. becoming the world’s largest exporter of products.
Overall,
seaborne trade in products grew by a compound annual growth rate (CAGR) of 3.1% between 2008 and 2018, rising from 765 to 1,033
million tons. However, product tanker ton-mile demand increased at a CAGR of 3.2% over the same period as geographical shifts
in the trade pattern have led to increased trade on long-haul routes. Apart from the U.S., countries such as India and Saudi Arabia
have also seen more growth in their products export in the last decade.
Products
- Seaborne Trade Index
*
Provisional estimate
Source:
Drewry
Future
growth in seaborne product trades is dependent on a number of factors, not least of which will be prevailing trends in the global
economy and in oil demand. However, it is apparent that seaborne trade will continue to be underpinned by the emergence of the
US as a major exporter of products and the growth in refining capacity in countries such as India and the Middle East, which are
heavily focused on servicing export markets.
In
terms of vessel supply, products are carried in product tankers, product/chemical tankers and to a limited extent in chemical
tankers. Within the context of this report, product tankers include coated and uncoated ships with average tank sizes in excess
of 3,000 cubic meters and product/chemical tankers, which are certified by the IMO to transport products, and certain chemicals/edible
oils, with average tank sizes of less than 3,000 cubic meters. Chemical tankers are all IMO certified and they normally possess
multiple tanks of less than 3,000 cubic meters, which are used almost exclusively to transport bulk liquid chemicals and edible
oils. They have therefore been excluded in this report. The fleet trading in products, therefore, consists principally of product
tankers and product/chemical tankers. As of February 28, 2019, the total fleet of these two categories amounted to 2,734 ships,
with a combined capacity of 148.9 million deadweight tons (dwt).
Between
2010 and 2014, fleet growth in these sectors was relatively subdued and this helped to create a tighter balance between vessel
supply and demand, which ultimately led to an improvement in freight rates. However, there were other factors which also facilitated
the creation of a healthier market, including:
|
(i)
|
increased
trade due to higher stocking activity and improved demand for oil products
|
|
|
|
|
(ii)
|
longer
voyage distances because of refining capacity additions in Asia and the Middle East
|
|
|
|
|
(iii)
|
product
tankers are also carrying crude oil encouraged by firm freight rates for dirty tankers
|
|
|
|
|
(iv)
|
lower
bunker prices were a factor contributing to higher net earnings
|
As
a result of these developments, the average daily time charter equivalent (TCE) rate for a Medium Range 1 (MR1) product tanker
in 2015 was $21,050/day, compared with an average of $12,125/day in 2014. Similarly, the average TCE rate for a Medium Range 2
(MR2) product tanker was $20,133/day in 2015, compared with $6,875/day in 2014. On a one-year time charter rate basis, MR1 rates
rose from $12,938/day in 2014 to $14,958/day in 2015. For MR2 vessels, the equivalent rates were $14,438/day and $17,271/day,
respectively. However, the increase in freight rates encouraged new ordering, and at its highest point in 2016, the ratio of the
MR2 product tanker orderbook to the existing global MR2 fleet was 11.7%. Negative market sentiment and newbuild deliveries combined
to push the market down, and in 2016, the average one-year time charter rates for a MR2 tanker declined to $15,125/day –
a decrease of 12.4% from 2015.
A
spate of newbuilding deliveries in 2017 aggravated the situation further for shipowners, and the average one-year time charter
rate for a MR2 tanker declined further by 12.8% to average $13,188/ day in 2017. The market remained weak in 2018 and the average
time charter rate for these vessels slid marginally to $13,133/day. Nevertheless, the product tanker market bottomed out in the
fall of 2018. There were signs that the market will improve over the next two years as supply growth will be moderate in the wake
of reduced new vessel ordering. As of February 28, 2019, the orderbook-to-existing fleet ratio by dwt stood at 7.0% for the product
fleet as a whole, and in the case of MR2 tankers to 7.4%. Moreover, in December 2018, at $13,500/day, the MR2 one-year time charter
rates were 12.5% higher than the low of $12,000/day in October 2016. The rate has been improving gradually since October 2018,
and MR2 vessels were locked in for one-year time charters at $13,500/day in February 2019.
Product
Tanker One-Year Time Charter Rates
(US$
Per Day)
|
|
|
2008-2018
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Vessels
|
|
|
Averages
|
|
|
Low
|
|
|
High
|
|
|
Averages
|
|
|
Averages
|
|
|
Averages
|
|
|
Averages
|
|
|
Averages
|
|
|
Averages
|
|
|
MR1
|
|
|
|
13,458
|
|
|
|
9,700
|
|
|
|
22,500
|
|
|
|
12,833
|
|
|
|
12,938
|
|
|
|
14,958
|
|
|
|
13,833
|
|
|
|
11,458
|
|
|
|
11,646
|
|
|
MR2
|
|
|
|
14,972
|
|
|
|
10,800
|
|
|
|
25,000
|
|
|
|
14,246
|
|
|
|
14,438
|
|
|
|
17,271
|
|
|
|
15,125
|
|
|
|
13,188
|
|
|
|
13,133
|
|
|
LR1
|
|
|
|
15,674
|
|
|
|
12,500
|
|
|
|
25,000
|
|
|
|
13,708
|
|
|
|
15,188
|
|
|
|
19,333
|
|
|
|
17,000
|
|
|
|
12,979
|
|
|
|
12,938
|
|
|
LR2
|
|
|
|
17,836
|
|
|
|
12,500
|
|
|
|
30,250
|
|
|
|
14,488
|
|
|
|
15,708
|
|
|
|
21,688
|
|
|
|
22,063
|
|
|
|
15,625
|
|
|
|
15,125
|
|
Source:
Drewry
There
is also a vibrant second-hand market for ships and product tankers change hands between owners on a regular basis. Second-hand
prices are generally influenced by potential vessel earnings, which in turn are influenced by trends in the supply and demand
for shipping capacity. The improvement in freight rates and more positive market sentiment in the period from late 2014 to early
2016 had a beneficial impact on second-hand vessel values. For example, in the winter months of 2015-16, a five-year old MR2 was
valued at $27.0 million, compared with $25.0 million in the corresponding month of 2014-15. However, limited access and higher
cost of capital, including traditional bank debt, have slowed down sale and purchase activity and resulted in lower vessel valuations;
value of these vessels dropped to $22.0 million by October 2016.
Despite
the low freight rates in both 2017 and 2018, values for younger vessels of good quality have moved up in the last two years, and
in February 2019, a five-year old MR2 tanker was valued at $28.0 million – close to the average price between 2008 and 2018.
The increased activity in the S&P market at historically low vessel values in 2017 and expected recovery in the tanker market
– in 2019-20 – were the key factors that drove asset prices in 2018.
The
Products Market
The
maritime transport industry is fundamental to international trade as it is the only pragmatic and economic way of transporting
large volumes of many essential commodities, semi-finished and finished goods around the world. In turn, the product tanker shipping
industry is a vital link in the global energy supply chain, given its ability to carry large quantities of products and bulk liquid
chemicals as well as vegetable oils and fats between points of production and points of consumption.
The
product tanker shipping industry is highly competitive, with vessel earnings sensitive to changes in the demand for and supply
of shipping capacity and it is consequently cyclical and volatile in nature. The wider oil tanker market is divided between crude
tankers that carry either crude oil or dirty products such as residual fuel oil, product tankers that carry cargoes such as gas
oils and gasoline and more sophisticated product/chemical and chemical tankers, which can carry additionally chemicals and vegetable
oils and fats. Petroleum products consist of a number of different grades of dirty products (e.g., fuel oil) and different grades
of clean products (e.g., gasoline). The basic structure of the tanker shipping market is shown in the following diagram.
Source:
Drewry
Demand
for tanker shipping is a product of the physical quantity of the cargo (measured in tons) together with the distance the cargo
is carried (measured in miles). Generally, demand cycles move in line with developments in the global economy, but other factors
such as changes in sources of oil production and refinery capacity, plus movements in oil prices also play a key role.
The
volume of oil moved by sea was adversely affected by the global financial crisis of 2008 and 2009, but since then, renewed growth
in the world economy and in oil demand has had a positive impact on seaborne trade. Oil demand has benefited from economic growth
in Asia, especially in China, where oil consumption increased at a CAGR of 5.2% to 13.1 million barrels per day (mbpd) between
2008 and 2018. World oil demand grew from 86.3 mbpd in 2008 to 99.2 mbpd in 2018 at a CAGR of 1.4%. The provisional estimates
suggest that world oil demand in 2019 will be 100.6 mbpd – an increase of 1.4% from 2018.
World
Oil Consumption: 1991-2018
(Million
bpd)
Source:
Drewry
Low
per capita oil consumption in developing countries such as China and India compared to the developed world provides scope for
higher oil consumption in these economies. Conversely, oil consumption in developed OECD economies has been in decline for much
of the last decade. However, this trend was reversed in 2015 because of the positive impact of lower oil prices on demand for
products such as gasoline and record new vehicle sales. Oil demand in OECD economies increased at a CAGR of 1.2% from 45.8 mbpd
in 2014 to 47.4 mbpd in 2017. In 2018, OECD oil demand further grew by 0.4 mbpd to reach 47.8 mbpd. Provisional data for the U.S.
and some European countries indicates continued rising consumption because of higher industrial activity on the back of improving
general economic conditions in developed economies. In 2019, OECD oil consumption is provisionally estimated at 48.2 mbpd.
In
2018, 3,417 million tons of crude oil, products and vegetable oils/chemicals were moved by sea. Of this, crude shipments accounted
for 2,135 million tons of cargo, products 1,033 million tons, with the balance made up of other bulk liquids, including vegetable
oils, chemicals and associated products. During the period 2013-18, the seaborne trade of products and vegetable oils/chemicals
increased at an average CAGR of 2.7% – 0.5% higher than the growth in seaborne trade of crude oil during the same period.
Additionally, lower growth in trade in 2018 compared with 2017 is due to inventory drawdown, as well as as lower growth in oil
demand. The oil demand grew 1.2% in 2018 compared with 1.8% in 2017. During the period of 2008-18, the seaborne transportation
of products and vegetable oils/chemicals increased at an average CAGR of 3.3%, which is highly correlated to average global GDP
growth of 3.4% per year during the same period.
World
Seaborne Tanker Trade: 2001-2018
|
|
Crude
Oil
|
|
|
Oil
Products
|
|
|
Chemicals
|
|
|
Total
|
|
|
Global
GDP (IMF)
|
|
Year
|
|
Million
tons
|
|
|
%
y-o-y
|
|
|
Million
tons
|
|
|
%
y-o-y
|
|
|
Million
tons
|
|
|
%
y-o-y
|
|
|
Million
tons
|
|
|
%
y-o-y
|
|
|
%
y-o-y
|
|
2001
|
|
|
1,751
|
|
|
|
3.2
|
%
|
|
|
518
|
|
|
|
3.0
|
%
|
|
|
114
|
|
|
|
-3.1
|
%
|
|
|
2,382
|
|
|
|
2.8
|
%
|
|
|
2.3
|
%
|
2002
|
|
|
1,756
|
|
|
|
0.3
|
%
|
|
|
519
|
|
|
|
0.3
|
%
|
|
|
122
|
|
|
|
7.0
|
%
|
|
|
2,396
|
|
|
|
0.6
|
%
|
|
|
2.9
|
%
|
2003
|
|
|
1,860
|
|
|
|
5.9
|
%
|
|
|
550
|
|
|
|
6.0
|
%
|
|
|
129
|
|
|
|
5.9
|
%
|
|
|
2,538
|
|
|
|
5.9
|
%
|
|
|
3.7
|
%
|
2004
|
|
|
1,963
|
|
|
|
5.6
|
%
|
|
|
599
|
|
|
|
8.8
|
%
|
|
|
141
|
|
|
|
9.5
|
%
|
|
|
2,703
|
|
|
|
6.5
|
%
|
|
|
5.0
|
%
|
2005
|
|
|
1,994
|
|
|
|
1.6
|
%
|
|
|
646
|
|
|
|
8.0
|
%
|
|
|
156
|
|
|
|
10.5
|
%
|
|
|
2,797
|
|
|
|
3.5
|
%
|
|
|
4.6
|
%
|
2006
|
|
|
1,996
|
|
|
|
0.1
|
%
|
|
|
677
|
|
|
|
4.7
|
%
|
|
|
166
|
|
|
|
6.5
|
%
|
|
|
2,839
|
|
|
|
1.5
|
%
|
|
|
5.5
|
%
|
2007
|
|
|
2,008
|
|
|
|
0.6
|
%
|
|
|
723
|
|
|
|
6.8
|
%
|
|
|
176
|
|
|
|
5.9
|
%
|
|
|
2,907
|
|
|
|
2.4
|
%
|
|
|
5.6
|
%
|
2008
|
|
|
2,014
|
|
|
|
0.3
|
%
|
|
|
765
|
|
|
|
5.8
|
%
|
|
|
179
|
|
|
|
1.8
|
%
|
|
|
2,957
|
|
|
|
1.7
|
%
|
|
|
3.0
|
%
|
2009
|
|
|
1,928
|
|
|
|
-4.2
|
%
|
|
|
777
|
|
|
|
1.6
|
%
|
|
|
185
|
|
|
|
3.3
|
%
|
|
|
2,889
|
|
|
|
-2.3
|
%
|
|
|
-0.1
|
%
|
2010
|
|
|
1,997
|
|
|
|
3.6
|
%
|
|
|
810
|
|
|
|
4.3
|
%
|
|
|
197
|
|
|
|
6.8
|
%
|
|
|
3,004
|
|
|
|
4.0
|
%
|
|
|
5.4
|
%
|
2011
|
|
|
1,941
|
|
|
|
-2.8
|
%
|
|
|
860
|
|
|
|
6.3
|
%
|
|
|
207
|
|
|
|
4.7
|
%
|
|
|
3,008
|
|
|
|
0.1
|
%
|
|
|
4.3
|
%
|
2012
|
|
|
1,988
|
|
|
|
2.4
|
%
|
|
|
859
|
|
|
|
-0.2
|
%
|
|
|
212
|
|
|
|
2.6
|
%
|
|
|
3,059
|
|
|
|
1.7
|
%
|
|
|
3.5
|
%
|
2013
|
|
|
1,918
|
|
|
|
-3.5
|
%
|
|
|
904
|
|
|
|
5.3
|
%
|
|
|
217
|
|
|
|
2.5
|
%
|
|
|
3,039
|
|
|
|
-0.6
|
%
|
|
|
3.5
|
%
|
2014
|
|
|
1,893
|
|
|
|
-1.3
|
%
|
|
|
914
|
|
|
|
1.1
|
%
|
|
|
222
|
|
|
|
2.2
|
%
|
|
|
3,029
|
|
|
|
-0.3
|
%
|
|
|
3.6
|
%
|
2015
|
|
|
1,962
|
|
|
|
3.6
|
%
|
|
|
963
|
|
|
|
5.3
|
%
|
|
|
234
|
|
|
|
5.3
|
%
|
|
|
3,158
|
|
|
|
4.3
|
%
|
|
|
3.4
|
%
|
2016
|
|
|
2,051
|
|
|
|
4.6
|
%
|
|
|
1,003
|
|
|
|
4.2
|
%
|
|
|
234
|
|
|
|
0.1
|
%
|
|
|
3,288
|
|
|
|
4.1
|
%
|
|
|
3.2
|
%
|
2017
|
|
|
2,101
|
|
|
|
2.4
|
%
|
|
|
1,032
|
|
|
|
2.9
|
%
|
|
|
248
|
|
|
|
5.9
|
%
|
|
|
3,381
|
|
|
|
2.8
|
%
|
|
|
3.6
|
%
|
2018*
|
|
|
2,135
|
|
|
|
1.6
|
%
|
|
|
1,033
|
|
|
|
0.1
|
%
|
|
|
248
|
|
|
|
0.1
|
%
|
|
|
3,417
|
|
|
|
1.1
|
%
|
|
|
3.6
|
%
|
CAGR (2013-2018)
|
|
|
2.2
|
%
|
|
|
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
2.7
|
%
|
|
|
|
|
|
|
2.4
|
%
|
|
|
|
|
|
|
|
|
CAGR
(2008-2018)
|
|
|
0.6
|
%
|
|
|
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
*
Provisional estimates
Source:
Drewry
Tanker
supply is determined by the size of the existing fleet, measured in terms of dwt. Changes in supply are influenced by a variety
of factors such as the size of the existing fleet by number and ship size, the rate of deliveries of newbuildings from the vessel
orderbook, and the rate of removals from the fleet through scrapping, conversion and regulatory obsolescence. Other factors, such
as port congestion and vessel speeds, also influence supply.
Crude
oil, products and chemicals/vegetable oils and fats are essentially carried by four different types of tankers.
Crude
oil is transported in uncoated vessels, which range upwards in size from 55,000 dwt. Clean products are carried in coated tankers
ranging in size from 10,000 dwt to 80,000 dwt plus and by product/chemical tankers which have the ability to carry both products
and certain chemicals because they have an IMO Certificate of Fitness to Carry Bulk Liquid Chemicals. This latter category represents
‘swing’ ships, with the ability to move between the product and chemical sectors depending on market conditions. Finally,
there is a specialist chemical fleet which is all IMO rated, and which is employed primarily in transporting chemicals and vegetable
oils and fats. The pure chemical fleet represents nearly 28.0% of all tankers (based on capacity) that can carry products, but
because the majority of it is trading in chemicals, it is excluded from the analysis of the fleets and orderbook.
The
main types of product tanker, together with indicative vessel sizes by class, the type and average size of tanks, IMO certification
and the main cargoes carried are shown in the table below. Unless otherwise specified, references in this section to “product
tankers” include both non-IMO product tankers and IMO-certified product/chemical tankers.
Types
of Product Tanker
Product
Tanker Type
|
|
Products
|
|
|
|
Product
/Chemical
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sub Types/Size (Dwt)
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
Long
Range 1 (LRI)
|
|
|
|
55-79,999
|
|
|
|
Long Range 1 (LRI)
|
|
|
55-79,999
|
|
|
|
Medium
Range 2 (MR2)
|
|
|
|
37-54,999
|
|
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
Medium
Range 1 (MR1)
|
|
|
|
25-36,999
|
|
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
Handy
|
|
|
|
10-24,999
|
|
|
|
Handy
|
|
|
10-24,999
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average Tank Size
(1)
|
|
>3,000 cbm
|
|
|
|
|
|
|
>3,000
cbm
|
|
|
|
|
|
Tanks
(2)
|
|
Coated/Uncoated
|
|
|
|
|
|
|
Coated
|
|
|
|
|
|
IMO Certification
(3)
|
|
Non IMO
|
|
|
|
|
|
|
IMO
2/3 & IMO 3
|
|
|
|
|
|
Cargoes Carried
(4)
|
|
Clean Products
|
|
|
|
|
|
|
Clean
Products
|
|
|
|
|
|
|
|
Dirty Products
|
|
|
|
|
|
|
Vegetable
Oils
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Certain
chemicals
|
|
|
|
|
|
(1)
Product capable tankers with an average tank size above 3,000 cubic metres (cbm) are deemed to be Product or Product/Chemical
tankers.
Tankers
with an average tank size below 3,000 cbm are deemed to be chemical tankers.
(2)
Type of tank coating. Coated ships includes epoxy, zinc etc, while some chemical tankers have all/part stainless steel tanks.
(3)
International Maritime Organisation (“IMO”) Certificate of Fitness for the Carriage of Chemicals in Bulk.
(4)
The main cargoes carried by each ship type.
Source:
Drewry
Product
tankers are employed in the market through a number of different chartering options:
|
●
|
A
single
or
spot voyage charter
involves the carriage of a specific amount and type of cargo on a load port to
discharge port basis, subject to various cargo handling terms. Most of these charters are of a single or spot voyage nature.
The cost of repositioning the ship to load the next cargo falls outside the charter and is at the cost and discretion of the
owner. The owner of the vessel receives one payment derived by multiplying the tons of cargo loaded on board by the agreed
upon freight rate expressed on a per cargo ton basis. The owner is responsible for the payment of all expenses including voyage,
operating and capital costs of the vessel.
|
|
|
|
|
●
|
A
time charter
involves the use of the vessel, either for a number of months or years or in few instances, for a trip
between specific delivery and redelivery positions. The charterer pays all voyage related costs. The owner of the vessel receives
monthly charter hire payments on a per day basis and is responsible for the payment of all vessel-operating expenses and capital
costs of the vessel.
|
|
|
|
|
●
|
A
contract of affreightment
, or
COA
, relates to the carriage of multiple cargoes over the same route and enables
the COA holder to nominate different ships to perform individual voyages. This arrangement constitutes a number of voyage
charters to carry a specified amount of cargo during the term of the COA, which usually spans a number of years. All of the
ship’s operating; voyage and capital costs are borne by the ship-owner. The freight rate is normally agreed on a per
cargo ton basis.
|
|
|
|
|
●
|
A
bareboat charter
involves the use of a vessel usually over long periods ranging up to several years. All voyage related
costs, including vessel fuel, or bunkers, and port dues as well as all vessel operating expenses, such as day-to-day operations,
maintenance, crewing and insurance are the responsibility of the charterer. The owner of the vessel receives monthly charter
hire payments on a per day basis and is responsible only for the payment of capital costs related to the vessel.
|
The
basic structure of the products tanker shipping industry and certain major trading routes of product tankers are outlined in the
following diagram.
The
Product Tanker Shipping Industry
Source:
Drewry
Seaborne
Trade in Products, Vegetable Oils and Bulk Liquid Chemicals
In
2018, total seaborne trade in products, vegetable oils and fats, and bulk liquid chemicals amounted to 1,281.6 million tons. The
development of trade in these cargoes between 2008 and 2018 is shown in the table below. Since 2008, seaborne trade in these cargoes
has increased in every year.
Seaborne
Trade in Products, Vegetable Oils & Fats and Bulk Liquid Chemicals: 2008-2018
(Million
Tons)
Sector
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2008-18
CAGR %
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fuel Oil
|
|
|
238.1
|
|
|
|
240.0
|
|
|
|
248.3
|
|
|
|
259.0
|
|
|
|
241.3
|
|
|
|
256.6
|
|
|
|
247.1
|
|
|
|
246.3
|
|
|
|
246.1
|
|
|
|
253.9
|
|
|
|
242.6
|
|
|
|
0.2
|
%
|
Gasoil/Diesel
|
|
|
187.3
|
|
|
|
208.4
|
|
|
|
212.1
|
|
|
|
230.0
|
|
|
|
237.6
|
|
|
|
252.2
|
|
|
|
259.0
|
|
|
|
273.7
|
|
|
|
295.2
|
|
|
|
311.4
|
|
|
|
309.8
|
|
|
|
5.2
|
%
|
Gasoline
|
|
|
124.2
|
|
|
|
126.9
|
|
|
|
136.4
|
|
|
|
147.7
|
|
|
|
146.2
|
|
|
|
148.3
|
|
|
|
149.3
|
|
|
|
165.8
|
|
|
|
179.6
|
|
|
|
184.6
|
|
|
|
188.8
|
|
|
|
4.3
|
%
|
Kerosene/Jet Fuel
|
|
|
76.2
|
|
|
|
74.3
|
|
|
|
75.5
|
|
|
|
82.1
|
|
|
|
79.6
|
|
|
|
88.3
|
|
|
|
90.2
|
|
|
|
95.6
|
|
|
|
98.3
|
|
|
|
100.1
|
|
|
|
102.6
|
|
|
|
3.0
|
%
|
Lubricating Oil
|
|
|
17.5
|
|
|
|
17.3
|
|
|
|
19.1
|
|
|
|
21.4
|
|
|
|
22.9
|
|
|
|
23.1
|
|
|
|
23.5
|
|
|
|
27.5
|
|
|
|
27.3
|
|
|
|
29.4
|
|
|
|
30.8
|
|
|
|
5.8
|
%
|
Naphtha
|
|
|
44.5
|
|
|
|
46.0
|
|
|
|
50.8
|
|
|
|
49.8
|
|
|
|
49.6
|
|
|
|
54.2
|
|
|
|
94.7
|
|
|
|
96.7
|
|
|
|
98.6
|
|
|
|
98.6
|
|
|
|
96.9
|
|
|
|
8.1
|
%
|
Other/Unknown
|
|
|
76.9
|
|
|
|
63.7
|
|
|
|
67.4
|
|
|
|
70.4
|
|
|
|
81.4
|
|
|
|
81.5
|
|
|
|
50.6
|
|
|
|
55.9
|
|
|
|
58.4
|
|
|
|
54.1
|
|
|
|
62.0
|
|
|
|
-2.1
|
%
|
Total
Products
|
|
|
764.6
|
|
|
|
776.5
|
|
|
|
809.5
|
|
|
|
860.3
|
|
|
|
858.7
|
|
|
|
904.2
|
|
|
|
914.3
|
|
|
|
961.5
|
|
|
|
1003.6
|
|
|
|
1032.0
|
|
|
|
1033.5
|
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vegetable Oils
& Fats
|
|
|
56.8
|
|
|
|
59.1
|
|
|
|
61.5
|
|
|
|
63.6
|
|
|
|
68.7
|
|
|
|
70.1
|
|
|
|
72.7
|
|
|
|
79.8
|
|
|
|
75.3
|
|
|
|
81.3
|
|
|
|
79.6
|
|
|
|
3.4
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Bulk Liquid Chemicals
|
|
|
121.9
|
|
|
|
125.5
|
|
|
|
135.6
|
|
|
|
142.6
|
|
|
|
142.9
|
|
|
|
146.5
|
|
|
|
149.1
|
|
|
|
154.1
|
|
|
|
158.8
|
|
|
|
166.5
|
|
|
|
168.5
|
|
|
|
3.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
943.2
|
|
|
|
961.1
|
|
|
|
1,006.6
|
|
|
|
1,066.5
|
|
|
|
1,070.3
|
|
|
|
1,120.8
|
|
|
|
1,136.1
|
|
|
|
1,195.5
|
|
|
|
1,237.7
|
|
|
|
1,279.9
|
|
|
|
1,281.6
|
|
|
|
3.1
|
%
|
Source:
Drewry
A
prime factor driving products trades in the last few years has been developments in E&P activity in the U.S. energy sector.
Horizontal drilling and hydraulic fracturing have enabled shale oil deposits in the U.S. to be developed and this has led to a
steep rise in U.S. domestic oil production. Between 2008 and 2018, U.S. oil production rose from 5.0 mbpd to 10.9 mbpd. Rising
crude oil production also ensured the availability of cheaper feedstocks to local refineries, and as a result, the U.S. became
a major net exporter of refined products.
U.S.
Crude Oil Production and Refined Petroleum Product Exports to Latin America: Jan 2008-Jan 2019
(Million
Barrels Per Day)
Source:
Drewry
In
a relatively short span of time, the U.S. has become the largest exporter of refined products in the world, with supplies from
the U.S. Gulf Coast terminals heading to most parts of the globe. By way of illustration, the U.S. products exports to Latin America
were close to 14.9 million tons in 2005, but by 2018 had grown to 84.6 million tons at a CAGR of 14.3%. This was due to strong
import demand from Latin American countries and the growth in the availability of U.S. products. Most of these exports were carried
by MR product tankers, which constitute about 55% of global product tanker fleet capacity and have been the mainstay of seaborne
trade in refined petroleum products.
However,
lower crude oil prices in 2015 and 2016 have adversely impacted U.S. shale oil producers. The U.S. crude oil production peaked
at 9.6 mbpd in April 2015 and was on declining trend till September 2016. Nevertheless, the production cut by OPEC members from
January 2017 came as a relief for domestic producers, and U.S. crude production is on the rise; the U.S. became the largest crude
producer in September 2018. The U. S. crude production increased at a CAGR of 11.3% between 2016 and 2018. Additionally, U.S.
producers pumped a record 12 mbpd in the second week of February 2019; a surge in U.S. output will further strengthen its position
in the global oil market.
The
U.S. Products Sector
Source:
Drewry
The
shift in the location of global oil production is also being accompanied by a shift in the location of global refinery capacity
and throughput. In short, capacity and throughput are moving from the developed to the developing world. Between 2008 and 2018,
refining throughput in OECD Europe and OECD Asia Oceania declined by 9.0% and 3.1% respectively, whereas throughput in OECD Americas
during the same period moved up by 8.5% to reach 19.5 mbpd. Overall, total OECD refining throughput remained flat over the last
decade – largely as a result of cutbacks in OECD Europe and OECD Asia Oceania. In 2018, refining throughput of OECD countries
stood at 38.6 mbpd and accounted for 46.9% of global refinery throughput down from 51.4% in 2008.
Refinery
Throughput (1) 2008-2018
(‘000
Barrels Per Day)
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
OECD Americas
|
|
|
17,928
|
|
|
|
17,443
|
|
|
|
17,841
|
|
|
|
17,825
|
|
|
|
18,113
|
|
|
|
18,429
|
|
|
|
18,817
|
|
|
|
18,952
|
|
|
|
18,802
|
|
|
|
19,133
|
|
|
|
19,449
|
|
OECD Europe
|
|
|
13,359
|
|
|
|
12,385
|
|
|
|
12,266
|
|
|
|
11,961
|
|
|
|
11,953
|
|
|
|
11,320
|
|
|
|
11,278
|
|
|
|
13,120
|
|
|
|
12,400
|
|
|
|
12,630
|
|
|
|
12,155
|
|
OECD Asia Oceania
|
|
|
7,195
|
|
|
|
6,816
|
|
|
|
6,940
|
|
|
|
6,896
|
|
|
|
6,910
|
|
|
|
6,868
|
|
|
|
6,689
|
|
|
|
6,828
|
|
|
|
6,981
|
|
|
|
6,900
|
|
|
|
6,974
|
|
FSU
|
|
|
6,232
|
|
|
|
6,224
|
|
|
|
6,411
|
|
|
|
6,678
|
|
|
|
6,835
|
|
|
|
7,029
|
|
|
|
7,324
|
|
|
|
7,200
|
|
|
|
6,700
|
|
|
|
6,700
|
|
|
|
6,990
|
|
Non-OECD Europe
|
|
|
699
|
|
|
|
641
|
|
|
|
658
|
|
|
|
627
|
|
|
|
587
|
|
|
|
559
|
|
|
|
557
|
|
|
|
500
|
|
|
|
500
|
|
|
|
570
|
|
|
|
585
|
|
China
|
|
|
7,299
|
|
|
|
7,762
|
|
|
|
8,630
|
|
|
|
9,041
|
|
|
|
9,749
|
|
|
|
10,427
|
|
|
|
10,864
|
|
|
|
10,400
|
|
|
|
10,790
|
|
|
|
11,830
|
|
|
|
12,000
|
|
Other Asia
|
|
|
7,739
|
|
|
|
8,038
|
|
|
|
8,435
|
|
|
|
8,541
|
|
|
|
8,659
|
|
|
|
8,525
|
|
|
|
8,562
|
|
|
|
9,200
|
|
|
|
10,244
|
|
|
|
9,720
|
|
|
|
10,598
|
|
Latin America
|
|
|
5,307
|
|
|
|
5,066
|
|
|
|
4,818
|
|
|
|
4,992
|
|
|
|
4,607
|
|
|
|
4,725
|
|
|
|
4,677
|
|
|
|
4,680
|
|
|
|
4,200
|
|
|
|
4,050
|
|
|
|
3,507
|
|
Middle East
|
|
|
6,685
|
|
|
|
6,530
|
|
|
|
6,837
|
|
|
|
6,870
|
|
|
|
7,029
|
|
|
|
6,951
|
|
|
|
7,090
|
|
|
|
6,900
|
|
|
|
7,100
|
|
|
|
7,450
|
|
|
|
7,951
|
|
Africa
|
|
|
2,398
|
|
|
|
2,303
|
|
|
|
2,422
|
|
|
|
2,153
|
|
|
|
2,210
|
|
|
|
2,253
|
|
|
|
2,226
|
|
|
|
2,099
|
|
|
|
2,000
|
|
|
|
1,920
|
|
|
|
2,022
|
|
Total
|
|
|
74,841
|
|
|
|
73,208
|
|
|
|
75,258
|
|
|
|
75,584
|
|
|
|
76,652
|
|
|
|
77,086
|
|
|
|
78,084
|
|
|
|
79,879
|
|
|
|
79,717
|
|
|
|
80,903
|
|
|
|
82,232
|
|
(1)
|
The
difference between oil consumption and refinery throughput is accounted for by condensates, output gains; direct burning of
crude oil and other non-gas liquids.
|
Source:
Drewry
Asia
(excluding China) and the Middle East added over 0.63 mbpd of refinery capacity in 2017, a substantial part of which is destined
for international markets, whereas there was no material change in refining capacity in OECD America and OECD Europe. Nearly 0.60
mbpd of new refining capacity in the Middle East and another 0.24 mbpd in Asia (excluding China) came online in 2018. As a result
of these developments, countries such as India and Saudi Arabia have consolidated their positions as major exporters of products.
Export-oriented refineries in India and the Middle East, coupled with the closure of refining capacity in the developed world,
have promoted long-haul shipments to cater to products demand.
In
the products market, there has been growth in U.S. domestic oil production, which ensured greater availability of crude feedstock,
rising refinery throughput and the expansion of pipeline infrastructure to make large-scale product exports feasible, particularly
of middle distillates from the U.S. Gulf. Average U.S. exports of products have grown from 1.6 mbpd in 2008 to 5.1 mbpd in 2018
at a CAGR of 12.3%. Changes in the U.S., Saudi Arabian and Indian product exports from January 2008 to January 2019 are shown
in the following chart.
Oil
Product Exports – Major Exporters: Jan 2008-Jan 2019
(Million
Barrels Per Day)
Source:
Drewry
Changing
Product Trades - Longer Haul Voyages
Source:
Drewry
New
refining capacity of 1.7 mbpd came online in 2018 and further new refinery capacity is currently scheduled for both the Middle
East and Asia from 2019 to 2023. In the period 2019 to 2023, anticipated additions to refinery capacity on a regional basis amount
to 6.2 mbpd, or 6.2% of existing refinery capacity.
Planned
Additions to Global Refining Capacity
(1)
(Million
Barrels Per Day)
(1)
Assumes all announced plans go ahead as scheduled
Source:
Drewry
In
developed economies, such as Europe, refinery capacity is on the decline. This trend is likely to continue as refinery development
plans are concentrated in areas such as Asia and the Middle East or close to oil producing centers, and majority of the planned
refining capacities are export orientated. These new refineries are more competitive as they can process sour (higher sulfur)
crude oil and are technically more advanced, as well as more environment friendly compared with existing European refineries.
By contrast, Chinese and Indian refinery capacity has grown at faster rates than any other global regions in the last decade,
owing to strong domestic oil consumption and the construction of export-orientated refineries. From 2008 to 2018, Chinese refining
capacity increased by 76.3% and Indian refining capacity expanded by 65.9%.
China
& India – Refining Capacity
(‘000
Barrels Per Day)
Capacity
for 2019 to 2021 assumes all announced plans go ahead as scheduled
Source:
Drewry
The
trend in product imports of major product importing regions of the world from January 2008 to January 2019 is shown in the following
chart.
Oil
Product Imports – Major Regions: Jan 2008-Jan 2019
(Million
Barrels Per Day)
Source:
Drewry
On
the whole, the changes that are taking place in both the volume and geographical structure of seaborne product trades are of benefit
to MR product tankers, the workhorses of the industry. In addition to being the mainstay for key trade routes such as gasoline
movements across the Atlantic, MR vessels have the flexibility to service a diverse range of ports and the capability to accommodate
the most common parcel sizes.
Product
Tanker Demand
Changes
in seaborne product trades and product tanker ton-mile demand in the period 2008 to 2018 are shown in the table given below.
Seaborne
Product Trade and Ton Mile Demand: 2008-2018
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
2013
|
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
2008-18
CAGR %
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Products
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade - Million Tons
|
|
|
764.6
|
|
|
|
776.5
|
|
|
|
809.6
|
|
|
|
860.3
|
|
|
|
858.8
|
|
|
|
904.3
|
|
|
|
914.3
|
|
|
|
961.5
|
|
|
|
1001.5
|
|
|
|
1032.0
|
|
|
|
1033.5
|
|
|
|
3.1
|
%
|
Ton Miles - Billion Ton Miles
|
|
|
2,283
|
|
|
|
2,450
|
|
|
|
2,514
|
|
|
|
2,566
|
|
|
|
2,586
|
|
|
|
2,733
|
|
|
|
2,859
|
|
|
|
3,022
|
|
|
|
3,139
|
|
|
|
3,126
|
|
|
|
3,132
|
|
|
|
3.2
|
%
|
Avg Haul Length - Miles
|
|
|
2,986
|
|
|
|
3,155
|
|
|
|
3,105
|
|
|
|
2,983
|
|
|
|
3,011
|
|
|
|
3,022
|
|
|
|
3,127
|
|
|
|
3,142
|
|
|
|
3,134
|
|
|
|
3,029
|
|
|
|
3,031
|
|
|
|
0.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vegetable Oils
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade - Million Tons
|
|
|
56.8
|
|
|
|
59.1
|
|
|
|
61.5
|
|
|
|
63.6
|
|
|
|
68.7
|
|
|
|
70.1
|
|
|
|
72.7
|
|
|
|
79.8
|
|
|
|
75.3
|
|
|
|
81.3
|
|
|
|
79.6
|
|
|
|
3.4
|
%
|
Ton Miles - Billion Ton Miles
|
|
|
244
|
|
|
|
250
|
|
|
|
263
|
|
|
|
255
|
|
|
|
282
|
|
|
|
297
|
|
|
|
298
|
|
|
|
330
|
|
|
|
312
|
|
|
|
337
|
|
|
|
324
|
|
|
|
2.9
|
%
|
Avg Haul Length - Miles
|
|
|
4,306
|
|
|
|
4,223
|
|
|
|
4,279
|
|
|
|
4,008
|
|
|
|
4,107
|
|
|
|
4,240
|
|
|
|
4,104
|
|
|
|
4,138
|
|
|
|
4,141
|
|
|
|
4,143
|
|
|
|
4,069
|
|
|
|
-0.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chemicals
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade - Million Tons
|
|
|
121.9
|
|
|
|
125.5
|
|
|
|
135.6
|
|
|
|
142.6
|
|
|
|
142.9
|
|
|
|
146.5
|
|
|
|
149.4
|
|
|
|
154.1
|
|
|
|
158.8
|
|
|
|
166.5
|
|
|
|
168.5
|
|
|
|
3.3
|
%
|
Ton Miles - Billion Ton Miles
|
|
|
431
|
|
|
|
438
|
|
|
|
475
|
|
|
|
501
|
|
|
|
493
|
|
|
|
490
|
|
|
|
497
|
|
|
|
521
|
|
|
|
555
|
|
|
|
583
|
|
|
|
593
|
|
|
|
3.2
|
%
|
Avg Haul Length
- Miles
|
|
|
3,535
|
|
|
|
3,491
|
|
|
|
3,500
|
|
|
|
3,512
|
|
|
|
3,453
|
|
|
|
3,341
|
|
|
|
3,323
|
|
|
|
3,380
|
|
|
|
3,496
|
|
|
|
3,500
|
|
|
|
3,520
|
|
|
|
0.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trade - Million Tons
|
|
|
943
|
|
|
|
961
|
|
|
|
1,007
|
|
|
|
1,067
|
|
|
|
1,070
|
|
|
|
1,121
|
|
|
|
1,136
|
|
|
|
1,196
|
|
|
|
1,236
|
|
|
|
1,280
|
|
|
|
1,282
|
|
|
|
3.1
|
%
|
Ton Miles - Billion
Ton Miles
|
|
|
2,959
|
|
|
|
3,138
|
|
|
|
3,252
|
|
|
|
3,322
|
|
|
|
3,361
|
|
|
|
3,519
|
|
|
|
3,654
|
|
|
|
3,873
|
|
|
|
4,005
|
|
|
|
4,046
|
|
|
|
4,049
|
|
|
|
3.2
|
%
|
Avg Haul Length -
Miles
|
|
|
3,137
|
|
|
|
3,265
|
|
|
|
3,230
|
|
|
|
3,115
|
|
|
|
3,140
|
|
|
|
3,140
|
|
|
|
3,215
|
|
|
|
3,239
|
|
|
|
3,242
|
|
|
|
3,161
|
|
|
|
3,159
|
|
|
|
0.1
|
%
|
Source:
Drewry
Tanker
demand, expressed in terms of ton-miles, can be calculated by multiplying the volume of products carried on the loaded leg (measured
in metric tons) by the distance over which it is carried (measured in miles). Based on the ton-mile approach, demand in the product
sector increased at a CAGR of 3.2% between 2008 and 2018. In effect, changes in the geographical pattern of product movements
have led to an increase in average voyage lengths. For example, in 2008, the average loaded voyage length in the product sector
was 2,986 miles, but by 2015, the average voyage length had increased to around 3,141 miles. However, because of growth in intra-Asian
products trades, average voyage lengths dropped to 3,031 miles in 2018. The changes that have taken place in total product tanker
trade and ton-mile demand between 2008 and 2018 are illustrated in the chart below. Continued growth at these historical levels
is feasible, but will be subject to global economic growth and a continuation of recent trade and refinery trends.
Product
Tanker - Seaborne Trade and Vessel Demand: 2008-2018
*
Provisional estimates
Source:
Drewry
Changes
in the volume of seaborne trade on the main product routes in the period 2008-2018 are shown in the table below. The data in the
table substantiates the previous remarks regarding the expansion of export trades from countries such as the US, China and India.
Seaborne
Product Trades: 2008-2018
(‘000
Tons)
Exporter
|
|
Importer
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013
|
|
|
|
2014
|
|
|
|
2015
|
|
|
|
2016
|
|
|
|
2017
|
|
|
|
2018
|
*
|
|
|
CAGR
% 08-18
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
India
|
|
Brazil
|
|
|
1,479
|
|
|
|
943
|
|
|
|
2,432
|
|
|
|
3,079
|
|
|
|
3,456
|
|
|
|
2,700
|
|
|
|
5,149
|
|
|
|
1,519
|
|
|
|
294
|
|
|
|
50
|
|
|
|
24
|
|
|
|
-33.8
|
%
|
|
|
Saudi Arabia
|
|
|
1,417
|
|
|
|
1,725
|
|
|
|
906
|
|
|
|
1,395
|
|
|
|
4,624
|
|
|
|
7,050
|
|
|
|
7,828
|
|
|
|
3,771
|
|
|
|
1,092
|
|
|
|
660
|
|
|
|
684
|
|
|
|
-7.0
|
%
|
|
|
Singapore
|
|
|
5,713
|
|
|
|
4,013
|
|
|
|
7,961
|
|
|
|
9,865
|
|
|
|
10,882
|
|
|
|
8,547
|
|
|
|
7,426
|
|
|
|
6,223
|
|
|
|
9,389
|
|
|
|
13,577
|
|
|
|
12,038
|
|
|
|
7.7
|
%
|
|
|
United Arab Emirates
|
|
|
7,456
|
|
|
|
5,563
|
|
|
|
7,885
|
|
|
|
7,134
|
|
|
|
7,046
|
|
|
|
4,534
|
|
|
|
6,940
|
|
|
|
6,959
|
|
|
|
8,095
|
|
|
|
7,985
|
|
|
|
8,991
|
|
|
|
1.9
|
%
|
|
|
United States
|
|
|
292
|
|
|
|
180
|
|
|
|
952
|
|
|
|
1,689
|
|
|
|
1,377
|
|
|
|
3,507
|
|
|
|
4,585
|
|
|
|
3,428
|
|
|
|
3,655
|
|
|
|
3,555
|
|
|
|
4,516
|
|
|
|
31.5
|
%
|
|
|
Total
named routes
|
|
|
16,356
|
|
|
|
12,424
|
|
|
|
20,136
|
|
|
|
23,161
|
|
|
|
27,384
|
|
|
|
26,337
|
|
|
|
31,929
|
|
|
|
21,900
|
|
|
|
22,524
|
|
|
|
25,827
|
|
|
|
26,254
|
|
|
|
4.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Russia
|
|
Germany
|
|
|
618
|
|
|
|
162
|
|
|
|
437
|
|
|
|
340
|
|
|
|
662
|
|
|
|
1,609
|
|
|
|
3,729
|
|
|
|
3,310
|
|
|
|
2,453
|
|
|
|
2,289
|
|
|
|
2,509
|
|
|
|
15.0
|
%
|
|
|
Netherlands
|
|
|
12,148
|
|
|
|
13,649
|
|
|
|
16,325
|
|
|
|
15,741
|
|
|
|
18,350
|
|
|
|
18,127
|
|
|
|
19,107
|
|
|
|
20,244
|
|
|
|
16,961
|
|
|
|
14,619
|
|
|
|
13,673
|
|
|
|
1.2
|
%
|
|
|
Singapore
|
|
|
2,139
|
|
|
|
3,828
|
|
|
|
3,769
|
|
|
|
1,999
|
|
|
|
1,819
|
|
|
|
836
|
|
|
|
5,979
|
|
|
|
5,619
|
|
|
|
5,726
|
|
|
|
7,557
|
|
|
|
5,207
|
|
|
|
9.3
|
%
|
|
|
South Korea
|
|
|
647
|
|
|
|
1,008
|
|
|
|
700
|
|
|
|
852
|
|
|
|
1,419
|
|
|
|
2,946
|
|
|
|
6,156
|
|
|
|
7,445
|
|
|
|
3,980
|
|
|
|
3,504
|
|
|
|
4,671
|
|
|
|
21.9
|
%
|
|
|
Turkey
|
|
|
5,964
|
|
|
|
8,332
|
|
|
|
10,719
|
|
|
|
8,944
|
|
|
|
9,081
|
|
|
|
6,539
|
|
|
|
5,041
|
|
|
|
6,102
|
|
|
|
6,571
|
|
|
|
8,176
|
|
|
|
10,178
|
|
|
|
5.5
|
%
|
|
|
United States
|
|
|
4,927
|
|
|
|
6,468
|
|
|
|
3,784
|
|
|
|
6,073
|
|
|
|
4,491
|
|
|
|
4,469
|
|
|
|
5,953
|
|
|
|
8,426
|
|
|
|
12,102
|
|
|
|
8,506
|
|
|
|
7,226
|
|
|
|
3.9
|
%
|
|
|
Total
named routes
|
|
|
26,443
|
|
|
|
33,448
|
|
|
|
35,734
|
|
|
|
33,949
|
|
|
|
35,823
|
|
|
|
34,525
|
|
|
|
45,965
|
|
|
|
51,146
|
|
|
|
47,793
|
|
|
|
44,651
|
|
|
|
43,463
|
|
|
|
5.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Saudi Arabia
|
|
Singapore
|
|
|
2,024
|
|
|
|
4,555
|
|
|
|
2,775
|
|
|
|
4,029
|
|
|
|
4,200
|
|
|
|
4,141
|
|
|
|
5,857
|
|
|
|
4,466
|
|
|
|
5,072
|
|
|
|
4,740
|
|
|
|
4,089
|
|
|
|
7.3
|
%
|
United
Arab Emirates
|
|
Singapore
|
|
|
1,979
|
|
|
|
2,219
|
|
|
|
3,140
|
|
|
|
3,687
|
|
|
|
4,100
|
|
|
|
5,782
|
|
|
|
5,884
|
|
|
|
6,343
|
|
|
|
4,785
|
|
|
|
6,056
|
|
|
|
5,658
|
|
|
|
11.1
|
%
|
|
|
Total
named routes
|
|
|
4,003
|
|
|
|
6,774
|
|
|
|
5,914
|
|
|
|
7,715
|
|
|
|
8,300
|
|
|
|
9,922
|
|
|
|
11,741
|
|
|
|
10,809
|
|
|
|
9,856
|
|
|
|
10,795
|
|
|
|
9,748
|
|
|
|
9.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Brazil
|
|
|
984
|
|
|
|
1,268
|
|
|
|
3,434
|
|
|
|
4,195
|
|
|
|
5,628
|
|
|
|
4,891
|
|
|
|
6,182
|
|
|
|
4,848
|
|
|
|
8,558
|
|
|
|
13,590
|
|
|
|
10,737
|
|
|
|
27.0
|
%
|
|
|
Chile
|
|
|
3,994
|
|
|
|
3,307
|
|
|
|
3,136
|
|
|
|
5,356
|
|
|
|
6,079
|
|
|
|
5,634
|
|
|
|
5,727
|
|
|
|
6,124
|
|
|
|
6,076
|
|
|
|
6,265
|
|
|
|
6,565
|
|
|
|
5.1
|
%
|
|
|
Colombia
|
|
|
1,106
|
|
|
|
1,893
|
|
|
|
3,242
|
|
|
|
3,159
|
|
|
|
3,756
|
|
|
|
5,915
|
|
|
|
7,384
|
|
|
|
8,998
|
|
|
|
6,928
|
|
|
|
4,667
|
|
|
|
3,927
|
|
|
|
13.5
|
%
|
|
|
Ecuador
|
|
|
678
|
|
|
|
1,712
|
|
|
|
2,873
|
|
|
|
2,527
|
|
|
|
2,607
|
|
|
|
3,442
|
|
|
|
4,237
|
|
|
|
4,618
|
|
|
|
3,908
|
|
|
|
4,018
|
|
|
|
3,931
|
|
|
|
19.2
|
%
|
|
|
France
|
|
|
893
|
|
|
|
1,106
|
|
|
|
982
|
|
|
|
2,027
|
|
|
|
3,186
|
|
|
|
4,756
|
|
|
|
4,862
|
|
|
|
4,747
|
|
|
|
4,063
|
|
|
|
3,184
|
|
|
|
2,486
|
|
|
|
10.8
|
%
|
|
|
Netherlands
|
|
|
6,452
|
|
|
|
9,258
|
|
|
|
7,659
|
|
|
|
10,552
|
|
|
|
10,926
|
|
|
|
10,723
|
|
|
|
9,134
|
|
|
|
8,811
|
|
|
|
7,664
|
|
|
|
6,113
|
|
|
|
7,001
|
|
|
|
0.8
|
%
|
|
|
Panama
|
|
|
2,597
|
|
|
|
3,159
|
|
|
|
4,135
|
|
|
|
4,917
|
|
|
|
5,932
|
|
|
|
6,251
|
|
|
|
6,819
|
|
|
|
6,459
|
|
|
|
4,725
|
|
|
|
5,202
|
|
|
|
6,003
|
|
|
|
8.7
|
%
|
|
|
Singapore
|
|
|
3,853
|
|
|
|
5,729
|
|
|
|
6,119
|
|
|
|
5,954
|
|
|
|
5,786
|
|
|
|
6,800
|
|
|
|
5,703
|
|
|
|
4,694
|
|
|
|
4,785
|
|
|
|
6,056
|
|
|
|
5,658
|
|
|
|
3.9
|
%
|
|
|
Total
named routes
|
|
|
20,557
|
|
|
|
27,433
|
|
|
|
31,580
|
|
|
|
38,688
|
|
|
|
43,899
|
|
|
|
48,413
|
|
|
|
50,049
|
|
|
|
49,299
|
|
|
|
46,705
|
|
|
|
49,095
|
|
|
|
46,308
|
|
|
|
8.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
China
|
|
Singapore
|
|
|
1,579
|
|
|
|
3,893
|
|
|
|
4,312
|
|
|
|
1,811
|
|
|
|
1,961
|
|
|
|
3,783
|
|
|
|
4,160
|
|
|
|
6,850
|
|
|
|
2,472
|
|
|
|
1,676
|
|
|
|
1,803
|
|
|
|
1.3
|
%
|
|
|
Panama
|
|
|
3,750
|
|
|
|
3,664
|
|
|
|
4,371
|
|
|
|
5,321
|
|
|
|
5,019
|
|
|
|
4,144
|
|
|
|
3,471
|
|
|
|
3,276
|
|
|
|
936
|
|
|
|
1,003
|
|
|
|
320
|
|
|
|
-21.8
|
%
|
|
|
South Korea
|
|
|
971
|
|
|
|
750
|
|
|
|
883
|
|
|
|
1,133
|
|
|
|
1,328
|
|
|
|
1,539
|
|
|
|
1,813
|
|
|
|
2,261
|
|
|
|
3,223
|
|
|
|
3,322
|
|
|
|
2,785
|
|
|
|
11.1
|
%
|
|
|
Vietnam
|
|
|
572
|
|
|
|
2,347
|
|
|
|
1,663
|
|
|
|
1,247
|
|
|
|
1,272
|
|
|
|
1,525
|
|
|
|
1,934
|
|
|
|
1,902
|
|
|
|
10,503
|
|
|
|
12,297
|
|
|
|
12,546
|
|
|
|
36.2
|
%
|
|
|
Indonesia
|
|
|
826
|
|
|
|
2,002
|
|
|
|
2,638
|
|
|
|
2,865
|
|
|
|
2,131
|
|
|
|
2,594
|
|
|
|
2,096
|
|
|
|
1,212
|
|
|
|
2,017
|
|
|
|
3,295
|
|
|
|
1,235
|
|
|
|
4.1
|
%
|
|
|
Australia
|
|
|
106
|
|
|
|
159
|
|
|
|
88
|
|
|
|
104
|
|
|
|
196
|
|
|
|
147
|
|
|
|
599
|
|
|
|
1,453
|
|
|
|
1,488
|
|
|
|
1,238
|
|
|
|
1,607
|
|
|
|
31.3
|
%
|
|
|
Total
named routes
|
|
|
7,804
|
|
|
|
12,814
|
|
|
|
13,955
|
|
|
|
12,480
|
|
|
|
11,908
|
|
|
|
13,732
|
|
|
|
14,073
|
|
|
|
16,954
|
|
|
|
20,640
|
|
|
|
22,833
|
|
|
|
20,296
|
|
|
|
10.0
|
%
|
*
Provisional estimates
Source:
Drewry
Product
Tankers –Vessel Types
To
recap, within the context of this review the product capable fleet consists of product tankers and product/chemical tankers, and
as such, pure chemical tankers are excluded from the analysis. The product capable fleet can be further divided into the five
main size sectors which are shown in the table below.
Product
Tanker Types and Main Uses
Class
of Tanker
|
|
Cargo
Capacity (Dwt)
|
|
Typical
Use
|
|
|
|
|
|
Long Range 2 (LR2)
|
|
80,000 +
|
|
Short- to medium-haul
crude oil and refined petroleum products transportations from the North Sea or West Africa to Europe or the East Coast of
the United States, from the Middle East Gulf to the Pacific Rim.
|
|
|
|
|
|
Long Range 1 (LR1)
|
|
55,000 - 79,999
|
|
Short- to medium-haul
crude oil and refined petroleum products transportations worldwide, mostly on regional trade routes.
|
|
|
|
|
|
Medium Range
2 (MR2)
|
|
37,000-54,999
|
|
Flexible
vessels involved in medium-haul petroleum products trades both in the Atlantic Basin and the growing intra-Asian/Middle East/ISC
trades.
|
|
|
|
|
|
Medium Range 1 (MR1)
|
|
25,000-36,999
|
|
|
|
|
|
Small
|
|
1,000 - 24,999
|
|
Short-haul of mostly
refined petroleum products worldwide, usually on local or regional trade routes.
|
Source:
Drewry
Long
Range (LR) product tankers are normally classed as either LR1 or LR2 ships depending on their size. They are employed on various
routes, but are less flexible than Medium Range (“MR”) tankers as many ports do not have the facilities to accommodate
larger ships. MR tankers carry the majority of products transported by sea as their size allows the greatest flexibility on trade
routes and port access. The MR fleet can be divided into MR1, typically sized 25,000 dwt to 36,999 dwt, and MR2 typically sized
37,000 dwt to 54,999 dwt. The smallest product tankers, often referred to as “Handies”, are largely deployed on short-haul
routes.
The
Product Tanker Fleet
As
of February 28, 2019, the product tanker fleet comprised of 2,734 vessels with a combined capacity of 148.9 million dwt. The product
tanker fleet by vessel type and size as on February 28, 2019, is shown in the table given below.
The
Product Tanker Fleet
(1)
Total
Product Fleet
|
|
Deadweight
Tons (Dwt)
|
|
|
Number
of Vessels
|
|
|
%
of Fleet
|
|
|
Capacity
‘000 Dwt
|
|
|
%
of Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
329
|
|
|
|
12.0
|
|
|
|
36,479
|
|
|
|
24.5
|
|
Long Range 1 (LR1)
|
|
|
55-79,999
|
|
|
|
369
|
|
|
|
13.5
|
|
|
|
27,047
|
|
|
|
18.2
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
1,662
|
|
|
|
60.8
|
|
|
|
77,391
|
|
|
|
51.9
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
135
|
|
|
|
4.9
|
|
|
|
4,509
|
|
|
|
3.0
|
|
Handy
|
|
|
10-24,999
|
|
|
|
239
|
|
|
|
8.7
|
|
|
|
3,546
|
|
|
|
2.4
|
|
Total
|
|
|
|
|
|
|
2,734
|
|
|
|
100.0
|
|
|
|
148,972
|
|
|
|
100.0
|
|
Of Which:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Product
Tankers
|
|
Deadweight
Tons (Dwt)
|
|
|
Number
of Vessels
|
|
|
%
of Fleet
|
|
|
Capacity
‘000 Dwt
|
|
|
%
of Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
326
|
|
|
|
22.5
|
|
|
|
36,181
|
|
|
|
41.1
|
|
Long Range 1 (LRI)
|
|
|
55-79,999
|
|
|
|
331
|
|
|
|
22.9
|
|
|
|
24,289
|
|
|
|
27.6
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
458
|
|
|
|
31.7
|
|
|
|
21,067
|
|
|
|
23.9
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
93
|
|
|
|
6.4
|
|
|
|
3,043
|
|
|
|
3.5
|
|
Handy
|
|
|
10-24,999
|
|
|
|
238
|
|
|
|
16.5
|
|
|
|
3,521
|
|
|
|
4.0
|
|
Total
|
|
|
|
|
|
|
1,446
|
|
|
|
100.0
|
|
|
|
88,101
|
|
|
|
100.0
|
|
Product/Chemical
|
|
Deadweight
Tons (Dwt)
|
|
|
Number
of Vessels
|
|
|
%
of Fleet
|
|
|
Capacity
‘000 Dwt
|
|
|
%
of Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
3
|
|
|
|
0.2
|
|
|
|
298
|
|
|
|
0.5
|
|
Long Range 1 (LRI)
|
|
|
55-79,999
|
|
|
|
38
|
|
|
|
3.0
|
|
|
|
2,758
|
|
|
|
4.5
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
1,204
|
|
|
|
93.5
|
|
|
|
56,324
|
|
|
|
92.5
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
42
|
|
|
|
3.3
|
|
|
|
1,467
|
|
|
|
2.4
|
|
Handy
|
|
|
10-24,999
|
|
|
|
1
|
|
|
|
0.1
|
|
|
|
25
|
|
|
|
0.0
|
|
Total
|
|
|
|
|
|
|
1,288
|
|
|
|
100.0
|
|
|
|
60,871
|
|
|
|
100.0
|
|
(1)
As of February 28, 2019. Excludes U.S. flag vessels
Source:
Drewry
Future
supply will be affected by the size of the newbuilding orderbook. As of February 28, 2019, there were 179 product and product/chemical
tankers on order, equivalent to 6.5% of the existing fleet by units and 7.0% of the existing fleet by dwt. The MR2 orderbook was
equivalent to 7.1% of the existing MR2 fleet by units and 7.4% by dwt. The existing orderbook to fleet ratio for product tankers
is substantially lower than ~25% in 2009 and ~15% in 2016. A total of 52 vessels (including 43 MR2) were ordered in the last 12
months ended February 28, 2019.
Product
Tanker Orderbook (1) and Scheduled Year of Delivery
Total Product Fleet
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled
Year of Delivery
|
|
|
|
Deadweight
|
|
|
Orderbook
|
|
|
%
Fleet
|
|
|
2019
|
|
|
2020
|
|
|
2021+
|
|
Vessel Size
|
|
Tons
(Dwt)
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
Long Range
2 (LR2)
|
|
|
80,000+
|
|
|
|
31
|
|
|
|
3,388
|
|
|
|
9.4
|
|
|
|
9.3
|
|
|
|
13
|
|
|
|
1,402
|
|
|
|
8
|
|
|
|
842
|
|
|
|
10
|
|
|
|
1,144
|
|
Long Range 1 (LR1)
|
|
|
55-79,999
|
|
|
|
10
|
|
|
|
751
|
|
|
|
2.7
|
|
|
|
2.8
|
|
|
|
6
|
|
|
|
449
|
|
|
|
4
|
|
|
|
302
|
|
|
|
0
|
|
|
|
0
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
118
|
|
|
|
5,745
|
|
|
|
7.1
|
|
|
|
7.4
|
|
|
|
74
|
|
|
|
3,574
|
|
|
|
40
|
|
|
|
1,971
|
|
|
|
4
|
|
|
|
200
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
6
|
|
|
|
203
|
|
|
|
4.4
|
|
|
|
4.5
|
|
|
|
5
|
|
|
|
170
|
|
|
|
1
|
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
Handy
|
|
|
10-24,999
|
|
|
|
14
|
|
|
|
267
|
|
|
|
5.9
|
|
|
|
7.5
|
|
|
|
7
|
|
|
|
116
|
|
|
|
7
|
|
|
|
151
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
|
|
|
|
179
|
|
|
|
10,354
|
|
|
|
6.5
|
|
|
|
7.0
|
|
|
|
105
|
|
|
|
5,711
|
|
|
|
60
|
|
|
|
3,299
|
|
|
|
14
|
|
|
|
1,344
|
|
Of
Which:
Product Tankers
|
|
Deadweight
|
|
|
Orderbook
|
|
|
%
Fleet
|
|
|
2019
|
|
|
2020
|
|
|
2021+
|
|
|
|
Tons
(Dwt)
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
31
|
|
|
|
3,388
|
|
|
|
9.5
|
|
|
|
9.4
|
|
|
|
13
|
|
|
|
1,402
|
|
|
|
8
|
|
|
|
842
|
|
|
|
10
|
|
|
|
1,144
|
|
Long Range 1 (LRI)
|
|
|
55-79,999
|
|
|
|
10
|
|
|
|
751
|
|
|
|
3.0
|
|
|
|
3.1
|
|
|
|
6
|
|
|
|
449
|
|
|
|
4
|
|
|
|
302
|
|
|
|
0
|
|
|
|
0
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
6
|
|
|
|
297
|
|
|
|
1.3
|
|
|
|
1.4
|
|
|
|
1
|
|
|
|
45
|
|
|
|
5
|
|
|
|
252
|
|
|
|
0
|
|
|
|
0
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
1
|
|
|
|
33
|
|
|
|
1.1
|
|
|
|
1.1
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1
|
|
|
|
33
|
|
|
|
0
|
|
|
|
0
|
|
Handy
|
|
|
10-24,999
|
|
|
|
13
|
|
|
|
243
|
|
|
|
5.5
|
|
|
|
6.9
|
|
|
|
6
|
|
|
|
92
|
|
|
|
7
|
|
|
|
151
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
|
|
|
|
61
|
|
|
|
4,712
|
|
|
|
4.2
|
|
|
|
5.3
|
|
|
|
26
|
|
|
|
1,988
|
|
|
|
25
|
|
|
|
1,580
|
|
|
|
10
|
|
|
|
1,144
|
|
Product/Chemical
|
|
Deadweight
|
|
|
Orderbook
|
|
|
%
Fleet
|
|
|
2019
|
|
|
2020
|
|
|
2021+
|
|
|
|
Tons
(Dwt)
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
|
No
|
|
|
000
Dwt
|
|
Long Range 2 (LR2)
|
|
|
80,000+
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Long Range 1 (LRI)
|
|
|
55-79,999
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0.0
|
|
|
|
0.0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Medium Range 2 (MR2)
|
|
|
37-54,999
|
|
|
|
112
|
|
|
|
5,448
|
|
|
|
9.3
|
|
|
|
9.7
|
|
|
|
73
|
|
|
|
3,529
|
|
|
|
35
|
|
|
|
1,719
|
|
|
|
4
|
|
|
|
200
|
|
Medium Range 1 (MR1)
|
|
|
25-36,999
|
|
|
|
5
|
|
|
|
170
|
|
|
|
11.9
|
|
|
|
11.6
|
|
|
|
5
|
|
|
|
170
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Handy
|
|
|
10-24,999
|
|
|
|
1
|
|
|
|
24
|
|
|
|
100.0
|
|
|
|
97.3
|
|
|
|
1
|
|
|
|
24
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
Total
|
|
|
|
|
|
|
118
|
|
|
|
5,642
|
|
|
|
9.2
|
|
|
|
9.3
|
|
|
|
79
|
|
|
|
3,723
|
|
|
|
35
|
|
|
|
1,719
|
|
|
|
4
|
|
|
|
200
|
|
(1)
As of February 28, 2019. Excludes U.S. flag vessels
Source:
Drewry
Based
on the total orderbook and scheduled deliveries as of February 28, 2019, nearly 5.7 million dwt is expected to be delivered in
the next 10 months of 2019, 3.3 million dwt in 2020 and 1.3 million dwt in 2021 and beyond. Nearly 88 newbuild MR2 vessels with
an aggregate capacity of 4.24 million dwt are expected to join the global product tanker fleet in 2019. In recent years, however,
the orderbook has been affected by the non-delivery of vessels (sometimes referred to as ‘‘slippage’’),
which in certain years has been as high as 35% of the scheduled deliveries. In 2018, the newbuild deliveries of MR2 vessels recorded
a slippage of 17.9%. Some of this slippage resulted from delays, either through mutual agreement or through shipyard problems,
while some were due to vessel cancellations. Slippage is likely to remain an issue going forward and, as such, it will have a
moderating effect on product tanker fleet growth in over next two years.
Tanker
supply is also affected by vessel scrapping or demolition and the removal of vessels through loss and conversion. As a product
tanker ages, vessel owners often conclude that it is more economical to scrap a vessel that has exhausted its useful life than
to upgrade the vessel to maintain its “in-class” status. Often, particularly when tankers reach approximately 25 years
of age (less in the case of larger vessels), the costs of conducting the class survey and performing required repairs become economically
inefficient. Nearly 51 product tankers with an aggregate capacity of 2.5 million dwt were scrapped in 2018, which is the highest
since 2011. The average age of the product and product/chemical fleet was 11.0 years as of February 28, 2019. The age profile
is shown in the following table.
Product
and Product/Chemical Fleet – Age Profile
(1)
Product
|
|
<
5 Yrs
|
|
|
5-10
Yrs
|
|
|
10-15
Yrs
|
|
|
15-20
Yrs
|
|
|
20-25
Yrs
|
|
|
25+
Yrs
|
|
|
Average
Age - Yrs
|
|
10-24,999 Dwt
|
|
|
8
|
%
|
|
|
17
|
%
|
|
|
18
|
%
|
|
|
13
|
%
|
|
|
13
|
%
|
|
|
31
|
%
|
|
|
19.5
|
|
25-36,999 Dwt
|
|
|
2
|
%
|
|
|
13
|
%
|
|
|
18
|
%
|
|
|
30
|
%
|
|
|
17
|
%
|
|
|
19
|
%
|
|
|
18.8
|
|
37-54,999 Dwt
|
|
|
1
|
%
|
|
|
28
|
%
|
|
|
37
|
%
|
|
|
22
|
%
|
|
|
8
|
%
|
|
|
5
|
%
|
|
|
13.8
|
|
55-79,999 Dwt
|
|
|
14
|
%
|
|
|
28
|
%
|
|
|
48
|
%
|
|
|
8
|
%
|
|
|
1
|
%
|
|
|
0
|
%
|
|
|
10.1
|
|
80,000+ Dwt
|
|
|
41
|
%
|
|
|
26
|
%
|
|
|
22
|
%
|
|
|
6
|
%
|
|
|
4
|
%
|
|
|
0
|
%
|
|
|
7.6
|
|
Product/Chemical
|
|
<
5 Yrs
|
|
|
5-10
Yrs
|
|
|
10-15
Yrs
|
|
|
15-20
Yrs
|
|
|
20-25
Yrs
|
|
|
25+
Yrs
|
|
|
Average
Age - Yrs
|
|
10-24,999 Dwt
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
19.0
|
|
25-36,999 Dwt
|
|
|
5
|
%
|
|
|
14
|
%
|
|
|
31
|
%
|
|
|
50
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
14.1
|
|
37-54,999 Dwt
|
|
|
31
|
%
|
|
|
24
|
%
|
|
|
33
|
%
|
|
|
9
|
%
|
|
|
3
|
%
|
|
|
0
|
%
|
|
|
8.8
|
|
55-79,999 Dwt
|
|
|
26
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
5
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
7.8
|
|
80,000+ Dwt
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
100
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
0
|
%
|
|
|
14.3
|
|
(1)
Based on February 28, 2019 fleet
Source:
Drewry
The
age profile data indicates that the more sophisticated product/chemical fleet is generally younger than its straight product tanker
counterpart. The average age of MR1 and MR2 product tankers is 18.8 and 13.8 years respectively, whereas for product/chemical
tankers, the average age of MR1 and MR2 tankers are 14.1 and 8.8 years, respectively. As on February 28, 2019 the average age
of global MR2 fleet is 10.2 years. Nearly 37% of the MR1 product tanker fleet is over 20 years of age, and for MR2s, the equivalent
figure is 13%. In the product/chemical fleet, there are no MR1 ships over 20 years of age and nearly 3.0% of MR2s are aged 20
years or more. Overall, 5.6% of the current MR2 fleet or 93 vessels are aged 20 years or more.
In
addition to vessel age, demolitions are also influenced by freight markets. During periods of high freight rates, scrapping activity
will decline and the opposite will occur when freight rates are low. This is evident from the chart below, which shows the trend
in product tanker demolitions from 2011 to 2018. High levels of demolitions were seen from 2011 to 2014, and this was also a key
factor that facilitated the recovery of product tanker freight rates. Scrapping levels declined in 2015 and 2016 due to a stronger
freight market and the fact that the age profile of the product fleet was reduced by the influx of newbuildings. In 2017, weak
vessel earnings led to increased scrapping activity, and vessels with combined capacity of 1.5 million dwt were sent to the scrapyards,
with 13 MR2s demolished. A depressed freight market has stimulated even greater demolitions and an aggregate capacity of 2.5 million
dwt (including 21 MR2 vessels with combined capacity of 0.942 million dwt) were scrapped in 2018.
Product
Tanker Scrapping: 2011-2018
(‘000
Dwt)
Source:
Drewry
Two
other important factors are likely to affect product tanker supply in the future. The first is the requirement to retrofit Ballast
Water Management Systems (BWTS) to existing vessels. In February 2004, the IMO adopted the International Convention for the Control
and Management of Ships’ Ballast Water and Sediments. The IMO Ballast Water Management Convention (the “BWM Convention”)
contains an environmentally protective numeric standard for the treatment of a ship’s ballast water before it is discharged.
This standard, detailed in Regulation ‘D-2’ of the BWM Convention, sets out the numbers of organisms allowed in specific
volumes of treated discharge water. The IMO ‘D-2’ standard is also the standard that has been adopted by the U.S.
Coast Guard’s ballast water regulations and the U.S. EPA’s Vessel General Permit. The BWM Convention also contains
an implementation schedule for the installation of IMO member state type approved treatment systems in existing ships and in new
vessels, requirements for the development of vessel ballast water management plans, requirements for the safe removal of sediments
from ballast tanks, and guidelines for the testing and type approval of ballast water treatment technologies. In July 2017, the
IMO extended the regulatory requirement of compliance to the BWM Convention from September 8, 2017 to September 8, 2019. Vessels
trading internationally will have to comply with the BWM Convention upon their next special survey after that date, and for an
MR2 tanker, the retrofit cost could be as much as $1.0 million per vessel, including labor. Expenditure of this kind will be another
factor impacting the decision to scrap older vessels once the BWM convention comes into force in September 2019.
The
second factor that is likely to impact future vessel supply is the drive to introduce low sulfur fuels. Heavy fuel oil (HFO) has
been the main fuel of the shipping industry since many years. It is relatively inexpensive and widely available, but it is ‘dirty’
from an environmental point of view. The sulfur content of HFO is extremely high and it is the reason that maritime shipping accounts
for 8% of global emissions of sulfur dioxide (“SO2”), an important source for acid rain, as well as respiratory diseases.
In some port cities, such as Hong Kong, shipping is the largest single source of SO2 emissions, as well as emissions of particulate
matter (PM), which are directly tied to the sulfur content of the fuel. One estimate suggests that PM emissions from maritime
shipping led to 87,000 premature deaths worldwide in 2012.
The
implementation of IMO’s 2020 sulfur cap regulation will require all ships to burn fuel with less than 0.5% sulfur content,
compared with a present limit of 3.5%. As on February 28, 2019 the worldwide commercial fleet consists of 95,821 vessels with
total capacity of 1,347.7 million GT. For shipowners, the principal options are: (i) Burn alternative bunker fuels, such as Marine
Gas Oil and Low Sulfur Fuel Oil (LSFO), (ii) Retrofit existing ships with an Exhaust Gas Cleaning System (EGCS) also known as
scrubbers, which will allow the continued use of fuels with higher sulfur content and (iii) For those owners ordering newbuildings,
there is also the option to order LNG dual-fueled vessels, but with a significant price premium. Vessel owners might prefer to
demolish the older vessels over installing scrubbers, a first-hand estimate suggest that 29 MR2 vessels are scheduled to face
their fourth special survey in the remaining 10 months of 2019. As on February 28, 2019 there were 122 MR2 vessels which were
19 years of age or older and account for 7.3% of the global MR2 fleet.
At
the moment, the ramifications of the IMO’s 2020 regulations are not clear as refineries are not revealing their upgrading
capacity expansion plans to cope with the expected surge in demand for low-sulphur bunker fuel. However, as there is a high chance
of tight supply in LSFO, it is likely to lead to a surge in demand for low-sulphur marine gas oil (LSMGO). Similarly, the high
cost of bunkers is likely to force the shipowners not opting for scrubbers to resort to slow steaming, which will curb vessel
supply.
The
IMO, the governing body of international shipping, has made a decisive effort to diversify the industry away from HFO into cleaner
fuels with less harmful effects on the environment and human health. Effective in 2015, ships operating within the Emission Control
Areas (“ECAs”) covering the Economic Exclusive Zone of North America, the Baltic Sea, the North Sea, and the English
Channel are required to use marine gas oil with allowable sulfur content up to 0.1%. The IMO’s 2020 regulations stipulates
that from January 1, 2020, ships sailing outside ECAs will switch to an alternate fuel with permitted sulfur content up to 0.5%.
This will create openings for a variety of new fuels, or major capital expenditures for costly scrubbers to be retrofitted on
existing ships, and as such, it will be another factor hastening the demise of older ships. Within the context of the wider market,
increased vessel scrapping is a positive development as it helps to counterbalance new ship deliveries and moderates the fleet
growth.
The
Product Tanker Charter Market
The
product tanker charter market is fragmented and highly competitive. Competition is based primarily on the offered charter rate,
the location and technical specification of the vessel. Similarly, the reputation of the vessel and its manager also play a major
role in the product tanker market than other shipping sectors. Typically, the agreed terms are based on standard industry charter
parties prepared to streamline the negotiation and documentation processes.
The
major charterers of product tanker tonnage are oil companies, both private and state-controlled, oil traders and refiners, and
in some cases independent ship owners. The oil companies, in particular, have their own predefined set of procedures for vetting
and approving tonnage suitable for charter. Oil companies’ vetting procedures are generally more stringent than others,
especially when vessels are being taken on time charter. Typically, the vetting procedures will include periodic assessments of
the vessel owner’s office set-up and management, the setting of key performance indicators (KPIs), and examination of crew
retention rates and appraisal of the financial accounts of the company providing the ship for charter.
Product
Tanker Charter Rates
Worldscale
is the tanker shipping industry’s standard reference for calculating spot charter rates. Worldscale provides the flexibility
required for the oil trade. Products are a fairly homogenous commodity as it does not vary significantly in quality and it is
relatively easy to transport by a variety of methods. These attributes, combined with the volatility of the world oil markets,
means that a products cargo may be bought and sold many times while at sea, and therefore, the cargo owner requires greater flexibility
in the choice of discharge options. If tanker fixtures were priced in the same way as dry cargo fixtures, this would involve the
shipowner calculating separate individual charter rates for a wide variety of discharge points. Worldscale provides a set of nominal
rates designed to provide roughly the same daily income irrespective of the discharge point. Time charter equivalent (TCE) is
the measurement that describes the earnings potential of any spot market voyage based on the quoted Worldscale rate. As described
above, the Worldscale rate is set and can then be converted into dollars per cargo ton. A voyage calculation is then performed
which removes all expenses (port costs, bunkers and commission) from the gross revenue, resulting in a net revenue which is then
divided by the total voyage days, which includes the days from discharge of the prior cargo until discharge of the cargo for which
the charter is paid (at sea and/or in port), to give a daily TCE rate.
The
supply and demand for product tanker capacity influences product tanker charter hire rates and vessel values. In general, time
charter rates are less volatile than spot rates as they reflect the fact that the vessel is fixed for a longer period. In the
spot market, rates will reflect the immediate underlying conditions in vessel supply and demand and are thus more prone to volatility.
The chart and table below illustrate changes in the monthly average TCE rates for product tankers in the period from January 2008
to January 2019 for selected representative routes.
Product
Tanker Time Charter Equivalent (TCE) Rates: Jan 2008-Jan 2019
(US$/Day – Period Averages)
Source:
Drewry
Time
Charter Equivalent (TCE) Rates: 2008-February 2019 (1)
(US$/Day – Period Averages)
Year
|
|
MR1
|
|
|
MR2
|
|
|
LR1
|
|
|
LR2
|
|
Period
Average
|
|
Med-Med
(Clean)
|
|
|
Caribs-USAC
|
|
|
AG-Japan
(Clean)
|
|
|
AG-Japan
(Clean)
|
|
2008
|
|
|
19,600
|
|
|
|
23,358
|
|
|
|
28,800
|
|
|
|
n/a
|
|
2009
|
|
|
5,417
|
|
|
|
8,575
|
|
|
|
9,267
|
|
|
|
n/a
|
|
2010
|
|
|
8,908
|
|
|
|
9,875
|
|
|
|
6,608
|
|
|
|
11,580
|
|
2011
|
|
|
6,750
|
|
|
|
8,442
|
|
|
|
2,408
|
|
|
|
7,515
|
|
2012
|
|
|
8,117
|
|
|
|
7,875
|
|
|
|
4,800
|
|
|
|
8,246
|
|
2013
|
|
|
9,375
|
|
|
|
9,142
|
|
|
|
5,417
|
|
|
|
8,490
|
|
2014
|
|
|
12,125
|
|
|
|
6,875
|
|
|
|
8,858
|
|
|
|
14,283
|
|
2015
|
|
|
21,050
|
|
|
|
20,133
|
|
|
|
21,742
|
|
|
|
28,673
|
|
2016
|
|
|
11,633
|
|
|
|
13,200
|
|
|
|
12,142
|
|
|
|
14,858
|
|
2017
|
|
|
10,386
|
|
|
|
11,575
|
|
|
|
7,225
|
|
|
|
7,936
|
|
2018
|
|
|
10,006
|
|
|
|
13,133
|
|
|
|
8,002
|
|
|
|
9,411
|
|
Feb-19
|
|
|
12,864
|
|
|
|
14,000
|
|
|
|
11,331
|
|
|
|
18,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008-2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
|
11,215
|
|
|
|
12,017
|
|
|
|
10,479
|
|
|
|
12,339
|
|
Low
|
|
|
1,600
|
|
|
|
1,100
|
|
|
|
-3,800
|
|
|
|
-1,252
|
|
High
|
|
|
32,400
|
|
|
|
32,400
|
|
|
|
51,600
|
|
|
|
49,945
|
|
(1)
|
TCE
rates are based on normal sailing speeds/consumption. In weak freight markets this can
theoretically lead to negative rates, but in most cases, this is avoided by reducing
sailing speeds and fuel consumption
.
|
Source:
Drewry
After
a period of favourable market conditions between 2004 and 2008, demand for products fell as the world economy went into recession
in the latter half of 2008 and there was a negative impact on product tanker demand. With supply at the same time increasing at
a fast pace, falling utilization levels pushed tanker charter rates downwards in 2009. The product tanker market continued to
remain weak on account of surge in newbulding deliveries and as a result shipowners faced a period of suppressed vessel earning
between 2009 and 2014.
Charter
rates in the tanker sector started to improve in the second half of 2014 as result of low growth in vessel supply and rising vessel
demand. In the products sector, a number of other factors combined to push up rates, including:
|
●
|
Falling
crude oil prices
|
|
●
|
Increased
trade due to higher stocking activity and improved demand for oil products
|
|
●
|
Longer
voyage distances because of refining capacity additions in Asia
|
|
●
|
Product
tankers also carrying crude encouraged by firm charter rates for dirty tankers
|
|
●
|
Lower
bunker prices contributing to higher net earnings
|
|
●
|
Freight
rates remained firm throughout 2015 and this led to higher revenue and improved profitability for ship-owners
|
However,
by early 2016 product tanker charter rates were on decline as newbuilding orders placed in 2013-2015 led to a sharp increase in
product tanker supply in 2016. Moreover, high levels of newbuilding deliveries of product and product/chemical tankers in 2017
outpaced demand growth and TCE rates declined accordingly. The market remained weak through the fall of 2018 before reflecting
signs of improvement in vessel earnings in the latter months of the year. Time charter rates have followed a similar trend to
spot market rates. The trend in one- year period average time charter (TC) rates for product tankers from January 2008 to January
2019 are shown in the chart and table given below.
Product
Tanker One Year Time Charter Rates: 2008- Jan 2019
(US$
Per Day – Period Averages)
Source:
Drewry
One
Year Time Charter Rates: 2008-February 2019
(US$
Per Day – Period Averages)
Year
Period Average
|
|
MR1
|
|
|
MR2
|
|
|
LR1
|
|
|
LR2
|
|
2008
|
|
|
21,438
|
|
|
|
23,092
|
|
|
|
23,429
|
|
|
|
28,525
|
|
2009
|
|
|
13,675
|
|
|
|
14,850
|
|
|
|
16,338
|
|
|
|
18,617
|
|
2010
|
|
|
11,038
|
|
|
|
12,388
|
|
|
|
14,608
|
|
|
|
16,333
|
|
2011
|
|
|
12,208
|
|
|
|
13,633
|
|
|
|
13,767
|
|
|
|
14,758
|
|
2012
|
|
|
12,013
|
|
|
|
13,325
|
|
|
|
13,129
|
|
|
|
13,263
|
|
2013
|
|
|
12,833
|
|
|
|
14,246
|
|
|
|
13,708
|
|
|
|
14,488
|
|
2014
|
|
|
12,938
|
|
|
|
14,438
|
|
|
|
15,188
|
|
|
|
15,708
|
|
2015
|
|
|
14,958
|
|
|
|
17,271
|
|
|
|
19,333
|
|
|
|
21,688
|
|
2016
|
|
|
13,833
|
|
|
|
15,125
|
|
|
|
17,000
|
|
|
|
22,063
|
|
2017
|
|
|
11,458
|
|
|
|
13,188
|
|
|
|
12,979
|
|
|
|
15,625
|
|
2018
|
|
|
11,646
|
|
|
|
13,133
|
|
|
|
12,938
|
|
|
|
15,125
|
|
Feb-19
|
|
|
12,750
|
|
|
|
13,500
|
|
|
|
14,500
|
|
|
|
18,750
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008-2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Averages
|
|
|
13,458
|
|
|
|
14,972
|
|
|
|
15,674
|
|
|
|
17,836
|
|
Low
|
|
|
9,700
|
|
|
|
10,800
|
|
|
|
12,500
|
|
|
|
12,500
|
|
High
|
|
|
22,500
|
|
|
|
25,000
|
|
|
|
25,000
|
|
|
|
30,250
|
|
Source:
Drewry
During
weak freight markets owners often use slow steaming to reduce bunker consumption, but the use of triangulation voyage can help
to bolster earnings. Triangulation in effect reduces the amount of time a vessel will spend sailing in ballast (i.e., empty) and
seeks to maximize the amount of time the vessel is on a revenue-generating voyage. The map below indicates how triangulation works
for a typical MR tanker.
Typical
MR Triangulation in the Atlantic Basin
Source:
Drewry
Eco
Ships
Shipbuilders
have designed and built ships that use less fuel while carrying the same amount of cargo as an existing ship. These vessels are
referred to in the industry as “eco” ships. In addition, an eco-ship has a number of technical innovations designed
to reduce emissions. Such vessels are a comparatively new development, with the first designs appearing in 2012 and are typically
called “eco-efficient” tankers.
A
newbuild eco-ship has an optimized hull form and a fuel-efficient engine, which will reduce fuel consumption. Existing ships can
also reduce fuel consumption by lowering sailing speeds, but in practice, this only happens when markets are substantially over-supplied
and bunker prices are high. Other options for existing ships to reduce fuel consumption include retrofitting equipment such as
applying low friction paint or installing Mewis ducts (which maximizes propeller thrust) and a rudder bulb or other similar features
(vessels with such features are typically called “eco-modified” tankers).
Size
is important in evaluating the relative benefits of eco vessels as smaller ships spend a greater proportion of their trading year
in port, where there is little economic benefit between an eco-design and an older or “standard” tanker without added
or retrofitted fuel consumption reduction features. Shipbuilders do not provide warranted performance data for eco-ships, but
the experience of vessels delivered to date appears to suggest that fuel savings of about 15% over standard tankers are achievable
under normal sailings speeds. For an MR2 product tanker, the difference in daily fuel consumption between an eco and a non-eco
ship is approximately 15% lower fuel consumption per day, while sailing at design speeds. It also seems to be the case that the
first eco ships that were delivered in 2012 are less sophisticated in design than ships delivered post-2015. The eco-designed
MR2 vessels could command a premium of $1,000/day to 1,500/day over non eco-designed counterparts in time charter market.
Newbuilding
Prices and Second-hand Values
Vessels
are constructed at shipyards of varying size and technical sophistication. Drybulk carriers are generally considered to be the
least technically sophisticated vessels to construct, with oil and product tankers, container vessels and LNG carriers entailing
a much higher degree of technical sophistication. The actual construction of a vessel can take place in two years and can be sub-divided
into five stages: contract signing, steel cutting, keel laying, launching and delivery. The amount of time between signing a newbuilding
contract and the date of delivery is usually between 20-24 months, but in times of high shipbuilding demand, it can extend up
to three years.
The
table which follow illustrate the trend in newbuilding (“NB”) prices and second-hand (“SH”) values (5
years old and 10 years old) for an MR2 product and product/chemical tanker.
MR2
Product & Product/Chemical Tanker
Newbuilding
Price & Second-hand Value: 2008-February 2019
(US$
Million)
|
|
MR2
|
|
End
Year
|
|
NB
Price
|
|
|
NB
Price Average 08-18
|
|
|
SH
Price - 5 Yrs Old
|
|
|
SH
Price Average 08-18
|
|
|
SH
Price - 10 Yrs Old
|
|
|
SH
Price - 10 Yrs Average 08-18
|
|
2008
|
|
|
46.5
|
|
|
|
36.9
|
|
|
|
42.0
|
|
|
|
28.6
|
|
|
|
34.0
|
|
|
|
20.2
|
|
2009
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
24.0
|
|
|
|
28.6
|
|
|
|
17.0
|
|
|
|
20.2
|
|
2010
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
24.0
|
|
|
|
28.6
|
|
|
|
18.0
|
|
|
|
20.2
|
|
2011
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
27.0
|
|
|
|
28.6
|
|
|
|
18.0
|
|
|
|
20.2
|
|
2012
|
|
|
33.0
|
|
|
|
36.9
|
|
|
|
24.0
|
|
|
|
28.6
|
|
|
|
15.0
|
|
|
|
20.2
|
|
2013
|
|
|
35.0
|
|
|
|
36.9
|
|
|
|
29.0
|
|
|
|
28.6
|
|
|
|
19.0
|
|
|
|
20.2
|
|
2014
|
|
|
37.0
|
|
|
|
36.9
|
|
|
|
24.0
|
|
|
|
28.6
|
|
|
|
16.0
|
|
|
|
20.2
|
|
2015
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
27.0
|
|
|
|
28.6
|
|
|
|
19.0
|
|
|
|
20.2
|
|
2016
|
|
|
32.0
|
|
|
|
36.9
|
|
|
|
22.0
|
|
|
|
28.6
|
|
|
|
15.0
|
|
|
|
20.2
|
|
2017
|
|
|
33.0
|
|
|
|
36.9
|
|
|
|
24.0
|
|
|
|
28.6
|
|
|
|
16.0
|
|
|
|
20.2
|
|
2018
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
27.0
|
|
|
|
28.6
|
|
|
|
18.0
|
|
|
|
20.2
|
|
Feb-19
|
|
|
36.0
|
|
|
|
36.9
|
|
|
|
28.0
|
|
|
|
28.6
|
|
|
|
18.0
|
|
|
|
20.2
|
|
Note:
Newbuilding prices prior to 2016 and second hand prices are for Tier II vessels, Newbuilding prices from 2016 are for Tier III
vessels. Additionally scrubber installation on an MR2 vessel will be in the range of $1.0 to 1.5 million
Source:
Drewry
Newbuilding
prices increased significantly between 2003 and 2007 primarily as a result of increased tanker demand. Thereafter, prices weakened
in the face of a depressed freight market and lower levels of new ordering. In late 2013, prices started to recover and they continued
to edge up slowly during 2014 before falling marginally in late 2015. Moreover, newbuilding prices fell further in 2016 because
of excess capacity available at shipyards accompanied with low steel prices. New orders declined on account of diminishing earning
potential of oil tankers, and mandatory compliance to Tier III emission for ships ordered on or after January 1, 2016, as well
as owners’ limited access to cost-effective capital. However, newbuild prices increased in the range of 5 to 15% over last
two years mainly on the back of increased steel prices and improved bargaining power of shipyards.
The
IMO’s Tier III norms aims to reduce nitrogen oxides (“NOx”) emission by approximately 70% compared with current
Tier II regulations. The implementation of Tier III emission norms apply to vessels in North America, the Caribbean, the Baltic
Sea, the North Sea, and all future NOx Emission Control Areas: any vessel that might pass through must comply. The shipowners
have to adopt Selective Catalytic Reduction (“SCR”) to comply with Tier III emission norms. The IMO stipulates that
all vessels ordered on or after January 1, 2016 must have SCR installed on it.
Second-hand
values primarily, albeit with a lag, reflect prevailing and expected charter rates. During extended periods of high charter rates
vessel values tend to appreciate and vice versa. However, vessel values are also influenced by other factors, including the age
of the vessel. Prices for young vessels, those approximately up to five years old, are also influenced by newbuilding prices while
prices for old vessels, near the end of their useful economic life, those approximately at or in excess of 25 years, are influenced
by the value of scrap steel. In addition, values for younger vessels tend to fluctuate less on a percentage basis than values
for older vessels. This is attributed to the finite useful economic life of older vessels which makes the value of younger vessels,
commensurate with longer remaining economic lives, less susceptible to the level of prevailing and expected charter rates in the
short term.
Vessel
values are determined on a daily basis in the sale and purchase (“S&P”) market, where vessels are sold and bought
through specialized sale and purchase brokers who regularly report these transactions to the market. The sale and purchase market
for product tankers is transparent and quite liquid, with a large number of vessels changing hands on a regular basis.
In
the period 2005 to 2007, second-hand values of modern tankers rose substantially as a result of the underlying trend in freight
rates and newbuilding prices. At times, during the height of the boom, values for modern second-hand tankers exceeded newbuilding
prices. However, the downturn in tanker charter rates in the second half of 2008 had an immediate and adverse impact on second-hand
values as the tables indicate. There was a brief rally in values in late 2010/early 2011, but this proved to be short-lived, and
thereafter, prices continued to decline until the middle of 2013.
In
late 2013, prices for all modern tankers increased as a result of improvement in freight rates and positive market sentiment and
further gains were recorded in 2014 and 2015. However, in 2016, second-hand prices saw a double-digit decline on account of weakening
charter rates. For illustration, the second-hand price of a five-year old MR 2 tanker fell by 18.5% from $27.0 million at end-2015
to $ 22.0 million by end-2016. However, the market saw increased demand for modern second-hand vessels in 2017-18, in anticipation
of a recovery in the freight market and buyers trying to take advantage of historically low asset prices. As such, second-hand
modern product tanker prices showed a rising trend in the last two years. For example, the second-hand price of a five-year old
MR2 increased by 27.3% since December 2016, and as of February 28, 2019, five-year old MR2 vessels were changing hands at $28
million. The second-hand price for 5 year old MR2 vessels from January 2018 reflects the asset values of first generation Eco-efficient
MR2 vessels.
Environmental
and Other Regulations in the Shipping Industry
Government
regulation and laws significantly affect the ownership and operation of our fleet. We are subject to international conventions
and treaties, national, state and local laws and regulations in force in the countries in which our vessels may operate or are
registered relating to safety and health and environmental protection including the storage, handling, emission, transportation
and discharge of hazardous and non-hazardous materials, and the remediation of contamination and liability for damage to natural
resources. Compliance with such laws, regulations and other requirements entails significant expense, including vessel modifications
and implementation of certain operating procedures.
A
variety of government and private entities subject our vessels to both scheduled and unscheduled inspections. These entities include
the local port authorities (applicable national authorities such as the United States Coast Guard (“USCG”), harbor
master or equivalent), classification societies, flag state administrations (countries of registry) and charterers, particularly
terminal operators. Certain of these entities require us to obtain permits, licenses, certificates and other authorizations for
the operation of our vessels. Failure to maintain necessary permits or approvals could require us to incur substantial costs or
result in the temporary suspension of the operation of one or more of our vessels.
Increasing
environmental concerns have created a demand for vessels that conform to stricter environmental standards. We are required to
maintain operating standards for all of our vessels that emphasize operational safety, quality maintenance, continuous training
of our officers and crews and compliance with United States and international regulations. We believe that the operation of our
vessels is in substantial compliance with applicable environmental laws and regulations and that our vessels have all material
permits, licenses, certificates or other authorizations necessary for the conduct of our operations. However, because such laws
and regulations frequently change and may impose increasingly stricter requirements, we cannot predict the ultimate cost of complying
with these requirements, or the impact of these requirements on the resale value or useful lives of our vessels. In addition,
a future serious marine incident that causes significant adverse environmental impact could result in additional legislation or
regulation that could negatively affect our profitability.
International
Maritime Organization
The
International Maritime Organization, the United Nations agency for maritime safety and the prevention of pollution by vessels
(the “IMO”), has adopted the International Convention for the Prevention of Pollution from Ships, 1973, as modified
by the Protocol of 1978 relating thereto, collectively referred to as MARPOL 73/78 and herein as “MARPOL,” adopted
the International Convention for the Safety of Life at Sea of 1974 (“SOLAS Convention”), and the International Convention
on Load Lines of 1966 (the “LL Convention”). MARPOL establishes environmental standards relating to oil leakage or
spilling, garbage management, sewage, air emissions, handling and disposal of noxious liquids and the handling of harmful substances
in packaged forms. MARPOL is applicable to drybulk, tanker and LNG carriers, among other vessels, and is broken into six Annexes,
each of which regulates a different source of pollution. Annex I relates to oil leakage or spilling; Annexes II and III relate
to harmful substances carried in bulk in liquid or in packaged form, respectively; Annexes IV and V relate to sewage and garbage
management, respectively; and Annex VI, lastly, relates to air emissions. Annex VI was separately adopted by the IMO in September
of 1997.
In
2012, the IMO’s Marine Environmental Protection Committee, or the “MEPC,” adopted a resolution amending 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 the SOLAS Convention. These amendments, which entered 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. We 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 from vessels. Effective May 2005, Annex VI sets
limits on sulfur oxide and nitrogen oxide emissions from all commercial vessel exhausts and prohibits “deliberate emissions”
of ozone depleting substances (such as halons and chlorofluorocarbons), emissions of volatile compounds from cargo tanks, and
the shipboard incineration of specific substances. 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 on sulfur emissions, as explained below. Emissions of “volatile
organic compounds” from certain vessels, and the shipboard incineration (from incinerators installed after January 1, 2000)
of certain substances (such as polychlorinated biphenyls, or PCBs) are also prohibited. We believe that all our vessels are currently
compliant in all material respects with these regulations.
The
MEPC, adopted amendments to Annex VI regarding emissions of sulfur oxide, nitrogen oxide, particulate matter and ozone depleting
substances, which entered into force on July 1, 2010. 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. On October
27, 2016, at its 70th session, the MEPC agreed to implement a global 0.5% m/m sulfur oxide emissions limit (reduced from 3.50%)
starting from January 1, 2020. This limitation can be met by using low-sulfur compliant fuel oil, alternative fuels, or certain
exhaust gas cleaning systems. Once the cap becomes effective, ships will be required to obtain bunker delivery notes and International
Air Pollution Prevention (“IAPP”) Certificates from their flag states that specify sulfur content. Additionally, at
MEPC 73, amendments to Annex VI to prohibit the carriage of bunkers above 0.5% sulphur on ships were adopted and will take
effect March 1, 2020. These regulations subject ocean-going vessels to stringent emissions controls, and may cause us to incur
substantial costs.
Sulfur
content standards are even stricter within certain “ECAs. As of January 1, 2015, ships operating within an ECA were not
permitted to use fuel with sulfur content in excess of 0.1%. Amended Annex VI establishes procedures for designating new ECAs.
Currently, the IMO has designated four ECAs, including specified portions of the Baltic Sea area, North Sea area, North American
area and United States Caribbean area. Ocean-going vessels in these areas will be subject to stringent emission controls and may
cause us to incur additional costs. Areas in China are subject to local regulations that impose stricter emission controls.
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 U.S. Environmental Protection Agency (“EPA”) or the states
where we operate, compliance with these regulations could entail significant capital expenditures or otherwise increase the costs
of our operations.
Amended
Annex VI also establishes new tiers of stringent nitrogen oxide emissions standards for marine diesel engines, depending on their
date of installation. At the MEPC meeting held from March to April 2014, amendments to Annex VI were adopted which address the
date on which Tier III NOx standards in ECAs will go into effect. Under the amendments, Tier III NOx standards apply to ships
that operate in the North American and U.S. Caribbean Sea ECAs designed for the control of NOx produced by vessels with a marine
diesel engine installed and constructed on or after January 1, 2016. Tier III requirements could apply to areas that will be designated
for Tier III NOx in the future. At MEPC 70 and MEPC 71, the MEPC approved the North Sea and Baltic Sea as ECAs for nitrogen oxide
for ships built after January 1, 2021. The EPA promulgated equivalent (and in some senses stricter) emissions standards in late
2009. As a result of these designations or similar future designations, we may be required to incur additional operating or other
costs.
As
determined at the MEPC 70, the new Regulation 22A of MARPOL Annex VI became effective as of March 1, 2018 and requires ships above
5,000 gross tonnage to collect and report annual data on fuel oil consumption to an IMO database, with the first year of data
collection commencing on January 1, 2019. The IMO intends to use such data as the first step in its roadmap (through 2023) for
developing its strategy to reduce greenhouse gas emissions from ships, as discussed further below.
As
of January 1, 2013, MARPOL made mandatory certain measures relating to energy efficiency for ships. All ships are now required
to develop and implement Ship Energy Efficiency Management Plans (“SEEMPS”), and new ships must be designed in compliance
with minimum energy efficiency levels per capacity mile as defined by the Energy Efficiency Design Index (“EEDI”).
Under these measures, by 2025, all new ships built will be 30% more energy efficient than those built in 2014.
We
may incur costs to comply with these revised standards. Additional or new conventions, laws and regulations may be adopted that
could require the installation of expensive emission control systems and could adversely affect our business, results of operations,
cash flows and financial condition.
Safety
Management System Requirements
The
SOLAS Convention was amended to address the safe manning of vessels and emergency training drills. The Convention of Limitation
of Liability for Maritime Claims (the “LLMC”) sets limitations of liability for a loss of life or personal injury
claim or a property claim against ship owners. We believe that our vessels are in substantial compliance with SOLAS and LLMC standards.
Under
Chapter IX of the SOLAS Convention, or the International Safety Management Code for the Safe Operation of Ships and for Pollution
Prevention (the “ISM Code”), our operations are also subject to environmental standards and requirements. The ISM
Code requires the party with operational control 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. We rely upon the safety management system that we
and our technical management team have developed for compliance with the ISM Code. The failure of a vessel 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 obtain a safety management certificate for each vessel they operate. This certificate
evidences compliance by a vessel’s management with the ISM Code requirements for a safety management system. No vessel can
obtain a safety management certificate unless its manager has been awarded a document of compliance, issued by each flag state,
under the ISM Code. We have obtained applicable documents of compliance for our offices and safety management certificates for
all of our vessels for which the certificates are required by the IMO. The document of compliance and safety management certificate
are renewed as required.
Regulation
II-1/3-10 of the SOLAS Convention governs ship construction and stipulates that ships over 150 meters in length must have adequate
strength, integrity and stability to minimize risk of loss or pollution. Goal-based standards amendments in SOLAS regulation II-1/3-10
entered into force in 2012, with July 1, 2016 set for application to new oil tankers and bulk carriers. The SOLAS Convention regulation
II-1/3-10 on goal-based ship construction standards for bulk carriers and oil tankers, which entered into force on January 1,
2012, requires that all oil tankers and bulk carriers of 150 meters in length and above, for which the building contract is placed
on or after July 1, 2016, satisfy applicable structural requirements conforming to the functional requirements of the International
Goal-based Ship Construction Standards for Bulk Carriers and Oil Tankers (GBS Standards).
Amendments
to the SOLAS Convention Chapter VII apply to vessels transporting dangerous goods and require those vessels be in compliance with
the International Maritime Dangerous Goods Code (“IMDG Code”). Effective January 1, 2018, the IMDG Code includes (1)
updates to the provisions for radioactive material, reflecting the latest provisions from the International Atomic Energy Agency,
(2) new marking, packing and classification requirements for dangerous goods, and (3) new mandatory training requirements.
The
IMO has also adopted the International Convention on Standards of Training, Certification and Watchkeeping for Seafarers (“STCW”).
As of February 2017, all seafarers are required to meet the STCW standards and be in possession of a valid STCW certificate. Flag
states that have ratified SOLAS and STCW generally employ the classification societies, which have incorporated SOLAS and STCW
requirements into their class rules, to undertake surveys to confirm compliance.
Furthermore,
recent action by the IMO’s Maritime Safety Committee and United States agencies indicate that cybersecurity regulations
for the maritime industry are likely to be further developed in the near future in an attempt to combat cybersecurity threats.
For example, cyber-risk management systems must be incorporated by ship-owners and managers by 2021. This might cause companies
to create additional procedures for monitoring cybersecurity, which could require additional expenses and/or capital expenditures.
The impact of such regulations is hard to predict at this time.
Pollution
Control and Liability Requirements
The
IMO has negotiated international conventions that impose liability for pollution in international waters and the territorial waters
of the signatories to such conventions. For example, the IMO adopted an International Convention for the Control and Management
of Ships’ Ballast Water and Sediments (the “BWM Convention”) in 2004. The BWM Convention entered into force
on September 9, 2017. The BWM Convention requires ships to manage their ballast water to remove, render harmless, or avoid the
uptake or discharge of new or invasive aquatic organisms and pathogens within ballast water and sediments. The BWM Convention’s
implementing regulations call for a phased introduction of mandatory ballast water exchange requirements, to be replaced in time
with mandatory concentration limits, and require all ships to carry a ballast water record book and an international ballast Water
management certificate.
On
December 4, 2013, the IMO Assembly passed a resolution revising the application dates of BWM Convention so that the dates are
triggered by the entry into force date and not the dates originally in the BWM Convention. This, in effect, makes all vessels
delivered before the entry into force date “existing vessels” and allows for the installation of ballast water management
systems on such vessels at the first International Oil Pollution Prevention (IOPP) renewal survey following entry into force of
the convention. The MEPC adopted updated guidelines for approval of ballast water management systems (G8) at MEPC 70. At MEPC
71, the schedule regarding the BWM Convention’s implementation dates was also discussed and amendments were introduced to
extend the date existing vessels are subject to certain ballast water standards. Ships over 400 gross tons generally must comply
with a “D-1 standard,” requiring the exchange of ballast water only in open seas and away from coastal waters. The
“D-2 standard” specifies the maximum amount of viable organisms allowed to be discharged, and compliance dates vary
depending on the IOPP renewal dates. Depending on the date of the IOPP renewal survey, existing vessels must comply with the D-2
standard on or after September 8, 2019. For most ships, compliance with the D-2 standard will involve installing on-board
systems to treat ballast water and eliminate unwanted organisms. Ballast Water Management systems, which include systems that
make use of chemical, biocides, organisms or biological mechanisms, or which alter the chemical or physical characteristics of
the Ballast Water, must be approved in accordance with IMO Guidelines (Regulation D-3). Costs of compliance with these regulations
may be substantial.
Once
mid-ocean ballast water treatment requirements become mandatory under the BWM Convention, the cost of compliance could increase
for ocean carriers and may have a material effect on our operations. However, many countries already regulate the discharge of
ballast water carried by vessels from country to country to prevent the introduction of invasive and harmful species via such
discharges. The U.S., for example, requires vessels entering its waters from another country to conduct mid-ocean ballast exchange,
or undertake some alternate measure, and to comply with certain reporting requirements.
The
IMO adopted the International Convention on Civil Liability for Oil Pollution Damage of 1969, as amended by different Protocols
in 1976, 1984, and 1992, and amended in 2000 (“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 may be 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, the Special
Drawing Rights. The limits on liability have since been amended so that the compensation limits on liability were raised. The
right to limit liability is forfeited under the CLC where the spill is caused by the shipowner’s actual fault and under
the 1992 Protocol where the spill is caused by the shipowner’s intentional or reckless act or omission where the shipowner
knew pollution damage would probably result. The CLC requires ships over 2,000 tons 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. We have protection and indemnity
insurance for environmental incidents. P&I Clubs in the International Group issue the required Bunkers Convention “Blue
Cards” to enable signatory states to issue certificates. All of our vessels are in possession of a CLC State issued certificate
attesting that the required insurance coverage is in force.
The
IMO also adopted the International Convention on Civil Liability for Bunker Oil Pollution Damage (the “Bunker Convention”)
to impose strict liability on ship owners (including the registered owner, bareboat charterer, manager or operator) 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
LLMC). 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.
Ships
are required to maintain a certificate attesting that they maintain adequate insurance to cover an incident. In jurisdictions,
such as the United States where the CLC or the Bunker Convention has not been adopted, various legislative schemes or common law
govern, and liability is imposed either on the basis of fault or on a strict-liability basis.
Anti-Fouling
Requirements
In
2001, the IMO adopted the International Convention on the Control of Harmful Anti-fouling Systems on Ships, or the “Anti-fouling
Convention.” The Anti-fouling Convention, which entered into force on September 17, 2008, prohibits the use of organotin
compound coatings to prevent the attachment of mollusks and other sea life to the hulls of vessels. Vessels of over 400 gross
tons engaged in international voyages will also be required to undergo an initial survey before the vessel is put into service
or before an International Anti-fouling System Certificate is issued for the first time; and subsequent surveys when the anti-fouling
systems are altered or replaced. We have obtained Anti-fouling System Certificates for all of our vessels that are subject to
the Anti-fouling Convention.
Compliance
Enforcement
Noncompliance
with the ISM Code or other IMO regulations may subject the ship owner or bareboat charterer to increased liability, may lead to
decreases in available insurance coverage for affected vessels and may result in the denial of access to, or detention in, some
ports. The USCG and European Union authorities have indicated that vessels not in compliance with the ISM Code by applicable deadlines
will be prohibited from trading in U.S. and European Union ports, respectively. As of the date of this report, each of our vessels
is ISM Code certified. However, there can be no assurance that such certificates will be maintained in the future
.
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 our operations.
United
States Regulations
The
U.S. Oil Pollution Act of 1990 and the Comprehensive Environmental Response, Compensation and Liability Act
The
U.S. Oil Pollution Act of 1990 (“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 or operate
within the U.S., its territories and possessions or whose vessels operate in U.S. waters, which includes the U.S.’s territorial
sea and its 200 nautical mile exclusive economic zone around the U.S. The U.S. has also enacted the Comprehensive Environmental
Response, Compensation and Liability Act (“CERCLA”), which applies to the discharge of hazardous substances other
than oil, except in limited circumstances, 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. Both OPA and CERCLA impact our 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, including bunkers (fuel).
OPA defines these other damages broadly to include:
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(i)
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injury
to, destruction or loss of, or loss of use of, natural resources and related assessment costs;
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(ii)
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injury
to, or economic losses resulting from, the destruction of real and personal property;
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(iv)
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loss
of subsistence use of natural resources that are injured, destroyed or lost;
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(iii)
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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;
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(v)
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lost
profits or impairment of earning capacity due to injury, destruction or loss of real or personal property or natural resources;
and
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(vi)
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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.
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OPA
contains statutory caps on liability and damages; such caps do not apply to direct cleanup costs. Effective December 21, 2015,
the USCG adjusted the limits of OPA liability for a tank vessel, other than a single-hull tank vessel, over 3,000 gross tons liability
to the greater of $2,200 per gross ton or $18,796,800 (subject to periodic adjustment for inflation). 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 responsible 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 damages for injury to, or destruction or loss of, natural resources, including the reasonable costs associated with
assessing the 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 $5.0 million for vessels carrying a hazardous substance as cargo 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 USCG 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. We comply and plan to comply going forward with the USCG’s financial responsibility regulations by providing
applicable certificates of financial responsibility.
The
2010
Deepwater Horizon
oil spill in the Gulf of Mexico resulted in additional regulatory initiatives or statutes, including
higher liability caps under OPA, new regulations regarding offshore oil and gas drilling, and a pilot inspection program for offshore
facilities. However, several of these initiatives and regulations have been or may be revised. For example, the U.S. Bureau of
Safety and Environmental Enforcement’s (“BSEE”) revised Production Safety Systems Rule (“PSSR”),
effective December 27, 2018, modified and relaxed certain environmental and safety protections under the 2016 PSSR. Additionally,
the BSEE released proposed changes to the Well Control Rule, which could roll back certain reforms regarding the safety of drilling
operations, and the U.S. President proposed leasing new sections of U.S. waters to oil and gas companies for offshore drilling,
expanding the U.S. waters that are available for such activity over the next five years. The effects of these proposals are currently
unknown. Compliance with any new requirements of OPA and future legislation or regulations applicable to the operation of our
vessels could impact the cost of our operations and adversely affect our business.
OPA
specifically 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 and some states have
enacted legislation providing for unlimited liability for oil spills. 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. Moreover, some states have
enacted legislation providing for unlimited liability for discharge of pollutants within their waters, although in some cases,
states which have enacted this type of legislation have not yet issued implementing regulations defining vessel owners’
responsibilities under these laws. The Company intends to comply with all applicable state regulations in the ports where the
Company’s vessels call.
We
currently maintain pollution liability coverage insurance in the amount of $1.0 billion per incident for each of our vessels.
If the damages from a catastrophic spill were to exceed our insurance coverage, it could have an adverse effect on our business,results
of operation and financial condition.
Other
United States Environmental Initiatives
The
U.S. Clean Air Act of 1970 (including its amendments of 1977 and 1990) (“CAA”) requires the EPA to promulgate standards
applicable to emissions of volatile organic compounds and other air contaminants. Our vessels are subject to vapor control and
recovery requirements for certain cargoes when loading, unloading, ballasting, cleaning and conducting other operations in regulated
port areas. The CAA also requires states to draft State Implementation Plans, or SIPs, designed to attain national health-based
air quality standards in each state. Although state-specific, SIPs may include regulations concerning emissions resulting from
vessel loading and unloading operations by requiring the installation of vapor control equipment. Our vessels operating in such
regulated port areas with restricted cargoes are equipped with vapor recovery systems that satisfy these existing requirements.
The
U.S. Clean Water Act (“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. In 2015, the EPA expanded the definition of “waters of the United States” (“WOTUS”),
thereby expanding federal authority under the CWA. Following litigation on the revised WOTUS rule, in December 2018, the EPA and
Department of the Army proposed a revised, limited definition of “waters of the United States.” The effect of this
proposal on U.S. environmental regulations is still unknown.
The
EPA and the USCG have also enacted rules relating to ballast water discharge, compliance with which requires the installation
of equipment on our vessels to treat ballast water before it is discharged or the implementation of other port facility disposal
arrangements or procedures at potentially substantial costs, and/or otherwise restrict our vessels from entering U.S. Waters.
The EPA will regulate these ballast water discharges and other discharges incidental to the normal operation of certain vessels
within United States waters pursuant to the Vessel Incidental Discharge Act (“VIDA”), which was signed into law on
December 4, 2018 and will replace the 2013 Vessel General Permit (the “VGP”) program (which authorizes discharges
incidental to operations of commercial vessels, and contains numeric ballast water discharge limits for most vessels to reduce
the risk of invasive species in U.S. waters, stringent requirements for exhaust gas scrubbers, and requirements for the use of
environmentally acceptable lubricants) and current Coast Guard ballast water management regulations adopted under the U.S. National
Invasive Species Act (“NISA”), such as mid-ocean ballast exchange programs and installation of approved USCG technology
for all vessels equipped with ballast water tanks bound for U.S. ports or entering U.S. waters. VIDA establishes a new framework
for the regulation of vessel incidental discharges under Clean Water Act (CWA), requires the EPA to develop performance standards
for those discharges within two years of enactment, and requires the U.S. Coast Guard to develop implementation, compliance, and
enforcement regulations within two years of EPA’s promulgation of standards. Under VIDA, all provisions of the 2013 VGP
and USCG regulations regarding ballast water treatment remain in force and effect until the EPA and U.S. Coast Guard regulations
are finalized. Non-military, non-recreational vessels greater than 79 feet in length must continue to comply with the requirements
of the VGP, including submission of a Notice of Intent (“NOI”) or retention of a PARI form and submission of annual
reports. We have submitted NOIs for our vessels where required. Compliance with the EPA, U.S. Coast Guard and state regulations
could require the installation of ballast water treatment equipment on our vessels or the implementation of other port facility
disposal procedures at potentially substantial cost, or may otherwise restrict our 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. The directive applies to all types of vessels, irrespective of their flag, but certain exceptions
apply to warships or where human safety or that of the ship is in danger. Criminal liability for pollution may result in substantial
penalties or fines and increased civil liability claims. Regulation (EU) 2015/757 of the European Parliament and of the Council
of 29 April 2015 (amending EU Directive 2009/16/EC) governs the monitoring, reporting and verification of carbon dioxide emissions
from maritime transport, and, subject to some exclusions, requires companies with ships over 5,000 gross tonnage to monitor and
report carbon dioxide emissions annually starting on January 1, 2018, which may cause us to incur additional expenses.
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, and flag as well as the number of times the ship has been detained. The European Union also
adopted and 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.
Furthermore, the EU has implemented regulations requiring vessels to use reduced sulfur content fuel for their main and auxiliary
engines. The EU Directive 2005/33/EC (amending Directive 1999/32/EC) introduced requirements parallel to those in Annex VI relating
to the sulfur content of marine fuels. In addition, the EU imposed a 0.1% maximum sulfur requirement for fuel used by ships at
berth in EU ports.
International
Labour Organization
The
International Labor Organization (the “ILO”) is a specialized agency of the UN that has adopted the Maritime Labor
Convention 2006 (“MLC 2006”). A Maritime Labor Certificate and a Declaration of Maritime Labor Compliance is required
to ensure compliance with the MLC 2006 for all ships above 500 gross tons in international trade. We believe that all our vessels
are in substantial compliance with and are certified to meet MLC 2006.
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 with targets extended through 2020. International negotiations
are continuing with respect to a successor to the Kyoto Protocol, and restrictions on shipping emissions may be included in any
new treaty. In December 2009, more than 27 nations, including the U.S. and China, signed the Copenhagen Accord, which includes
a non-binding commitment to reduce greenhouse gas emissions. The 2015 United Nations Climate Change Conference in Paris resulted
in the Paris Agreement, which entered into force on November 4, 2016 and does not directly limit greenhouse gas emissions from
ships. On June 1, 2017, the U.S. President announced that the United States intends to withdraw from the Paris Agreement. The
timing and effect of such action has yet to be determined, but the Paris Agreement provides for a four-year exit process.
At
MEPC 70 and MEPC 71, a draft outline of the structure of the initial strategy for developing a comprehensive IMO strategy on reduction
of greenhouse gas emissions from ships was approved. In accordance with this roadmap, in April 2018, nations at the MEPC 72 adopted
an initial strategy to reduce greenhouse gas emissions from ships. The initial strategy identifies “levels of ambition”
to reducing greenhouse gas emissions, including (1) decreasing the carbon intensity from ships through implementation of further
phases of the EEDI for new ships; (2) reducing carbon dioxide emissions per transport work, as an average across international
shipping, by at least 40% by 2030, pursuing efforts towards 70% by 2050, compared to 2008 emission levels; and (3) reducing the
total annual greenhouse emissions by at least 50% by 2050 compared to 2008 while pursuing efforts towards phasing them out entirely.
The initial strategy notes that technological innovation, alternative fuels and/or energy sources for international shipping will
be integral to achieve the overall ambition. These regulations could cause us to incur additional substantial expenses.
The
EU made a unilateral commitment to reduce overall greenhouse gas emissions from its member states from 20% of 1990 levels by 2020.
The EU also committed to reduce its emissions by 20% under the Kyoto Protocol’s second period from 2013 to 2020. Starting
in January 2018, large ships calling at EU ports are required to collect and publish data on carbon dioxide emissions and other
information.
In
the United States, the EPA issued a finding that greenhouse gases endanger the public health and safety, adopted regulations to
limit greenhouse gas emissions from certain mobile sources, and proposed regulations to limit greenhouse gas emissions from large
stationary sources. However, in March 2017, the U.S. President signed an executive order to review and possibly eliminate the
EPA’s plan to cut greenhouse gas emissions. The EPA or individual U.S. states could enact environmental regulations that
would affect our operations.
Any
passage of climate control legislation or other regulatory initiatives by the IMO, the EU, the U.S. or other countries where we
operate, or any treaty adopted at the international level to succeed the Kyoto Protocol or Paris Agreement, that restricts emissions
of greenhouse gases could require us to make significant financial expenditures which we cannot predict with certainty at this
time. Even in the absence of climate control legislation, our business may be indirectly affected to the extent that climate change
may result in sea level changes or certain weather events.
Vessel
Security Regulations
Since
the terrorist attacks of September 11, 2001 in the United States, there have been a variety of initiatives intended to enhance
vessel security such as the U.S. Maritime Transportation Security Act of 2002 (“MTSA”). To implement certain portions
of the MTSA, the USCG issued regulations requiring the implementation of certain security requirements aboard vessels operating
in waters subject to the jurisdiction of the United States and at certain ports and facilities, some of which are regulated by
the EPA.
Similarly,
Chapter XI-2 of the SOLAS Convention imposes detailed security obligations on vessels and port authorities and mandates compliance
with the International Ship and Port Facilities Security Code (“the ISPS Code”). The ISPS Code is designed to enhance
the security of ports and ships against terrorism. 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. Ships operating
without a valid certificate may be detained, expelled from, or refused entry at port until they obtain an ISSC. The various requirements,
some of which are found in the SOLAS Convention, include, for example, 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.
The
USCG regulations, intended to align with international maritime security standards, exempt non-U.S. vessels from MTSA vessel security
measures, provided such vessels have on board a valid ISSC that attests to the vessel’s compliance with the SOLAS Convention
security requirements and the ISPS Code. Future security measures could have a significant financial impact on us. We intend to
comply with the various security measures addressed by MTSA, the SOLAS Convention and the ISPS Code.
The
cost of vessel security measures has also been affected by the escalation in the frequency of acts of piracy against ships, notably
off the coast of Somalia, including the Gulf of Aden, Arabian Sea area and West Africa area. Substantial loss of revenue and other
costs may be incurred as a result of detention of a vessel or additional security measures, and the risk of uninsured losses could
significantly affect our business. Costs are incurred in taking additional security measures in accordance with Best Management
Practices to Deter Piracy, notably those contained in the BMP4 industry standard.
Inspection
by Classification Societies
The
hull and machinery of every commercial vessel must be classed by a classification society authorized by its country of registry.
The classification society certifies that a vessel is safe and seaworthy in accordance with the applicable rules and regulations
of the country of registry of the vessel and SOLAS. Most insurance underwriters make it a condition for insurance coverage and
lending that a vessel be certified “in class” by a classification society which is a member of the International Association
of Classification Societies, the IACS. The IACS has adopted harmonized Common Structural Rules, or the Rules, which apply to oil
tankers and bulk carriers constructed on or after July 1, 2015. The Rules attempt to create a level of consistency between IACS
Societies. All of our vessels are certified as being “in class” by all the applicable Classification Societies (
e.g.
,
DNV-GL and NKK).
A
vessel must undergo annual surveys, intermediate surveys, drydockings 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 periodically over a five-year period.
Every vessel is also required to be drydocked every 30 to 36 months for inspection of the underwater parts of the vessel. If any
vessel does not maintain its class and/or fails any annual survey, intermediate survey, drydocking or special survey, the vessel
will be unable to carry cargo between ports and will be unemployable and uninsurable which could cause us to be in violation of
certain covenants in our loan agreements. Any such inability to carry cargo or be employed, or any such violation of covenants,
could have a material adverse impact on our business, results of operations and financial condition.
Risk
of Loss and Liability Insurance
General
The
operation of any cargo vessel includes risks such as mechanical failure, physical damage, collision, property loss, cargo loss
or damage and business interruption due to political circumstances in foreign countries, piracy incidents, hostilities and labor
strikes. In addition, there is always an inherent possibility of marine disaster, including oil spills and other environmental
mishaps, and the liabilities arising from owning and operating vessels in international trade. OPA, which imposes virtually unlimited
liability upon shipowners, operators and bareboat charterers of any vessel trading in the exclusive economic zone of the United
States for certain oil pollution accidents in the United States, has made liability insurance more expensive for shipowners and
operators trading in the United States market. We carry insurance coverage as customary in the shipping industry. However, not
all risks can be insured, specific claims may be rejected, and we might not be always able to obtain adequate insurance coverage
at reasonable rates.
Hull
and Machinery Insurance
We
procure hull and machinery insurance, protection and indemnity insurance, which includes environmental damage and pollution insurance
and war risk insurance and freight, demurrage and defense insurance for our fleet. We generally do not maintain insurance against
loss of hire (except for certain charters for which we consider it appropriate), which covers business interruptions that result
in the loss of use of a vessel.
Protection
and Indemnity Insurance
Protection
and indemnity insurance is provided by mutual protection and indemnity associations, or P&I Associations, covers our third-party
liabilities in connection with our shipping activities. This includes third-party liability and other related expenses of injury
or death of crew, passengers and other third parties, loss or damage to cargo, claims arising from collisions with other vessels,
damage to other third-party property, pollution arising from oil or other substances, and salvage, towing and other related costs,
including wreck removal. Protection and indemnity insurance is a form of mutual indemnity insurance, extended by protection and
indemnity mutual associations, or “clubs.”
Our
current protection and indemnity insurance coverage for pollution is $1 billion per vessel per incident. The 13 P&I Associations
that comprise the International Group insure approximately 90% of the world’s commercial tonnage and have entered into a
pooling agreement to reinsure each association’s liabilities. The International Group’s website states that the Pool
provides a mechanism for sharing all claims in excess of US$ 10 million up to, currently, approximately US$ 8.2 billion. As a
member of a P&I Association, which is a member of the International Group, we are subject to calls payable to the associations
based on our claim records as well as the claim records of all other members of the individual associations and members of the
shipping pool of P&I Associations comprising the International Group.
Exchange
Controls
Under
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 shares of our common
stock.
C.
Organizational Structure
We
were incorporated under the laws of the Republic of the Marshall Islands on March 23, 2015. We own the vessels in our fleet through
six separate wholly-owned subsidiaries that are incorporated in the Republic of Marshall Islands and the Republic of Malta.
The
following is a list of our subsidiaries:
Name
of Company
|
|
Country
of Incorporation
|
|
Principal
Activities
|
|
Ownership
(%)
|
|
SECONDONE CORPORATION LTD
|
|
Malta
|
|
Ship ownership and operations
|
|
|
100
|
%
|
THIRDONE CORPORATION LTD.
|
|
Malta
|
|
Ship ownership and operations
|
|
|
100
|
%
|
FOURTHONE CORPORATION LTD.
|
|
Malta
|
|
Ship ownership and operations
|
|
|
100
|
%
|
SIXTHONE CORP.
|
|
Marshall Islands
|
|
Ship ownership and operations
|
|
|
100
|
%
|
SEVENTHONE CORP.
|
|
Marshall Islands
|
|
Ship ownership and operations
|
|
|
100
|
%
|
EIGHTHONE CORP.
|
|
Marshall Islands
|
|
Ship ownership and operations
|
|
|
100
|
%
|
MARITIME TECHNOLOGIES CORP.
|
|
Delaware
|
|
Non-operating subsidiary
|
|
|
100
|
%
|
D.
Property, Plants and Equipment
Other
than our vessels, we do not own any material property. Maritime, our affiliated ship management company, provides office space
to us in part of Maritime’s offices in Maroussi, Greece in connection with the administrative services provided to us under
the terms of the Head Management Agreement.
ITEM
4A. UNRESOLVED STAFF COMMENTS
Not
applicable.
ITEM
5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
This
section is a discussion of our financial condition and results of operations as of and for the years ended December 31, 2016,
2017 and 2018. You should read the following discussion and analysis together with our financial statements and related notes
included elsewhere in this Annual Report. This discussion includes forward-looking statements which are subject to risks and uncertainties
that could cause actual events or conditions to differ materially from those currently anticipated, expressed or implied by such
forward-looking statements. For a discussion of some of those risks and uncertainties, please read the section entitled “Forward-Looking
Statements” and “Item 3. Key Information – D. Risk Factors.”
Important
Financial and Operational Terms
We
use a variety of financial and operational terms and concepts. These include the following:
Voyage
Revenues, net
We
generate revenues by chartering our vessels for the transportation of petroleum products and other liquid bulk items, such as
organic chemicals and vegetable oils. Revenues are generated primarily by the number of vessels in our fleet, the number of voyage
days employed and the amount of daily charter hire earned under vessels’ charters. These factors, in turn, can be affected
by a number of decisions by us, including the amount of time spent positioning a vessel for charter, dry-dockings, repairs, maintenance
and upgrading, as well as the age, condition and specifications of our ships and supply and demand factors in the product tanker
market. At December 31, 2018, we employed three of our vessels on time charters with the remaining three vessels in our fleet
employed in the spot market. Revenues from time charter agreements providing for varying daily rates are accounted as operating
leases and thus are recognized on a straight line basis over the term of the time charter as service is performed. Revenue under
spot charters is recognized from loading of the current spot charter to discharge of the current spot charter as discussed below.
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.
As
of January 1, 2018, we adopted Accounting Standard Update (“ASU”) 2014-09 “
Revenue from Contracts with Customers
(Topic 606)
”. The core principle is that a company should recognize revenue when promised goods or services are transferred
to customers in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services.
We analyzed our contacts with charterers and determined that our spot charters fall under the provisions of ASC 606, while our
time charter agreements are lease agreements that contain certain non-lease components.
We
elected to adopt ASC 606 by applying the modified retrospective transition method, recognizing the cumulative effect of adopting
this guidance as an adjustment to the 2018 opening balance of accumulated deficit. As of December 31, 2017, there were
no vessels employed under spot charters and as a result, we have not included any adjustments to the 2018 opening balance of accumulated
deficit and prior periods were not retrospectively adjusted.
We
assessed our contract with charterers for spot charters during the year ended December 31, 2018 and concluded that there is one
single performance obligation for each of our spot charters, which is to provide the charterer with a transportation service within
a specified time period. In addition, we have concluded that spot charters meet the criteria to recognize revenue over time as
the charterer simultaneously receives and consumes the benefits of our performance. The adoption of this standard resulted in
a change whereby our method of revenue recognition changed from discharge-to-discharge (assuming a new charter has been
agreed before the completion of the previous spot charter) to load-to-discharge. This resulted in no revenue being recognized
from discharge of the prior spot charter to loading of the current spot charter and all revenue being recognized from loading
of the current spot charter to discharge of the current spot charter. This change results in revenue being recognized later in
the voyage, which may cause additional volatility in revenues and earnings between periods. Demurrage income represents payments
by a charterer to a vessel owner when loading or discharging time exceeds the stipulated time in the spot charter. We have determined
that demurrage represents variable consideration and we estimate demurrage at contract inception. Demurrage income estimated,
net of address commission, is recognized over the time of the charter as the performance obligation is satisfied.
Under
a spot charter, we incur and pay for certain voyage expenses, primarily consisting of brokerage commissions, port and canal costs
and bunker consumption, during the spot charter (load-to-discharge) and during the ballast voyage (date of previous discharge
to loading, assuming a new charter has been agreed before the completion of the previous spot charter). Before the adoption of
ASC 606, all voyage expenses were expensed as incurred, except for brokerage commissions. Brokerage 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
revenues are earned. Under ASC 606 and after implementation of ASC 340-40
“Other assets and deferred costs”
for
contract costs, incremental costs of obtaining a contract with a customer and contract fulfillment costs, should be capitalized
and amortized as the performance obligation is satisfied, if certain criteria are met. We assessed the new guidance and concluded
that voyage costs during the ballast voyage represented costs to fulfil a contract which give rise to an asset and should be capitalized
and amortized over the spot charter, consistent with the recognition of voyage revenues from spot charter from load-to-discharge,
while voyage costs incurred during the spot charter should be expensed as incurred.
As of
December 31, 2018, deferred contract fulfillment costs were not material.
With respect to incremental costs, we have selected
to adopt the practical expedient in the guidance and any costs to obtain a contract will be expensed as incurred (for the Company’s
spot charters that do not exceed one year). Vessel operating expenses are expensed as incurred. The Company’s adoption
of the new revenue standard, did not have a material effect on the consolidated statement of comprehensive loss for the year ended
December 31, 2018 and the consolidated balance sheet as of December 31, 2018, since only one vessel was under spot charter as
of December 31, 2018.
In
addition, pursuant to this standard, and the new Leases standard discussed below, as of January 1, 2018, we elected to
present Revenues, net of address commissions. Address commissions represent a discount provided directly to the charterers based
on a fixed percentage of the agreed upon charter. Since address commissions represent a discount (sales incentive) on services
rendered by us and no identifiable benefit is received in exchange for the consideration provided to the charterer, these commissions
are presented as a reduction of revenue in the accompanying audited consolidated statements of comprehensive loss included elsewhere
herein. In this respect, for the years ended December 31, 2016 and 2017, Revenues, net and Voyage related costs and commissions
each decreased by $0.3 million and $0.2 million, respectively. This reclassification has no impact on our consolidated financial
position and results of operations for any of the periods presented.
We
do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or
less, in accordance with the optional exception in ASC 606.
In
February 2016, Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “
Leases (Topic 842)
”
,
which was amended and supplemented by ASU 2017-13, ASU 2018-01 and ASU 2018-11. The new lease standard does not substantially
change lessor accounting
. ASC 842 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early application is permitted.
Lessees and lessors will be required
to apply the new standard at the beginning of the earliest period presented in the financial statements in which they first apply
the new guidance, using a modified retrospective transition method.
Entities are also provided with practical expedients
that allow entities to not (i) reassess whether any expired or existing contracts are considered or contain leases; (ii) reassess
the lease classification for any expired or existing leases; and (iii) reassess initial direct costs for any existing leases.
In addition, the new standard
(i) provides entities with an additional (and optional) transition
method to adopt the new leases standard, under which an entity initially applies the new leases standard at the adoption date
and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption consistent
with preparers’ requests and (ii) provide lessors with a practical expedient, by class of underlying asset, to not separate
non-lease components from the associated lease component and, instead, to account for those components as a single component if
both of the following are met: (a) The timing and pattern of transfer of the non-lease component(s) and associated lease component
are the same and (b) The lease component, if accounted for separately, would be classified as an operating lease. If the non-lease
component or components associated with the lease component are the predominant component of the combined component, an entity
is required to account for the combined component in accordance with ASC 606. Otherwise, the entity should account for the combined
component as an operating lease in accordance with ASC 842.
We elected to early adopt
ASC 842 as of September 30, 2018 with adoption reflected as of January 1, 2018. We adopted the standard by using the modified
retrospective method and selected the optional transition method. We also selected to apply all the practical expedients discussed
above. In this respect no cumulative-effect adjustment was recognized to the 2018 opening balance of accumulated deficit.
We assessed our new time charter contracts at the adoption date under the new guidance and concluded that these contracts
contain a lease with the related executory costs (insurance), as well as non-lease
components
to provide other services related to the operation of the vessel,
with the most substantial service being the crew cost to operate the vessel. We concluded that the criteria for not separating
lease and non-lease components of its time charter contracts are met, since (i) the time pattern of recognizing revenues for crew
and other services for the operation of the vessels, is similar to the time pattern of recognizing rental income, (ii) the lease
component of the time charter contracts, if accounted for separately, would be classified as an operating lease, and (iii) the
predominant component in its time charter agreements is the lease component. Brokerage and address commissions on time charter
revenues are deferred and amortized over the related voyage period, to the extent revenue has been deferred, since commissions
are earned as revenues earned, and are presented in voyage expenses and as a reduction to voyage revenues, respectively. Vessel
operating expenses are expensed as incurred. By taking the practical expedients, existing time charterers at January 1, 2018
continue to be accounted for under ASC 840, while new time charterers commenced in 2018 are accounted for under ASC 842. The early
adoption of ASC 842 had no effect on our consolidated financial position and results of operations for the year ended December
31, 2018.
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 bunker (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. Fluctuations 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 lubricant prices.
Spot
Charters
Generally,
a spot charter refers to a contract to carry a specific cargo for a single voyage, which commonly lasts from several days up 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 its capital costs, voyage expenses (such as port, canal and bunker
costs) and vessel operating expenses. 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 at a given port.
Voyage
Related Costs and Commissions
We
incur voyage related costs for our vessels operating under spot charters, which mainly include port and canal charges and 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. Brokerage commissions payable, if any, depend 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. Such 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 revenues are earned.
Vessel
Operating Expenses
We
incur vessel operating expenses for our 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
The
primary components of general and administrative expenses consist of the annual fee payable to Maritime for the administrative
services under our Head Management Agreement, which includes the services of our senior executive officers, and the expenses associated
with being a public company. Such public company expenses include the costs of preparing public reporting documents, legal and
accounting costs, including costs of legal and accounting professionals and staff, and costs related to compliance with the rules,
regulations and requirements of the SEC, the rules of NASDAQ, board of directors’ compensation and investor relations.
Management
Fees
We
pay management fees to Maritime and ITM for commercial and technical management services, respectively, for our vessels. These
services include: obtaining employment for our vessels and managing our relationships with charterers; strategic management services;
technical management services, which include managing day-to-day vessel operations, ensuring regulatory and classification society
compliance, arranging our hire of qualified officers and crew, arranging and supervising dry-docking and repairs and arranging
insurance for vessels; and providing shoreside personnel who carry out the management functions described above. As part of their
ship management services, Maritime provides us with supervision services for new construction of vessels; these costs are capitalized
as part of the total delivered cost of the vessel.
Previously,
we paid management fees to NST for their chartering services for the
Northsea Alpha
and the
Northsea Beta
. In June
and November 2016, we terminated the commercial management agreements for both such vessels with NST, and Maritime assumed full
commercial management of the
Northsea Beta
and the
Northsea Alpha
, respectively.
Depreciation
We
depreciate the cost of our vessels after deducting the estimated residual value, on a straight-line basis over the expected useful
life of each vessel, which is estimated to be 25 years from the date of initial delivery from the shipyard. We estimate the residual
values of our vessels to be $300 per lightweight ton. The rule under Maltese tax law is to the effect that for tax purposes, seagoing
vessels are depreciated over a ten year period even though there is more flexibility for accounting purposes as long as the period
adopted is reasonable.
Special
Survey and Drydocking
We
are obliged to periodically drydock each of our vessels for inspection, and to make significant modifications to comply with industry
certification or governmental requirements. Generally, each vessel is drydocked every 30 to 60 months for scheduled inspections,
depending on its age. The capitalized costs of drydockings for a given vessel are amortized on a straight-line basis to the next
scheduled drydocking of the vessel.
Interest
and Finance Costs
We
have historically incurred interest expense and financing costs in connection with the debt incurred to partially finance the
acquisition of our existing fleet. We have also incurred interest expense in relation to the $5.0 million promissory note we issued
in favor of Maritime Investors. Except for the interest payments under our promissory note and the new loan for the Eighthone
that are based on fixed rates, the interest rate under our debt agreements is linked to the three month LIBOR rate. In order to
hedge our variable interest rate exposure, on January 19, 2018, we, via one of our vessel-owning subsidiaries, purchased an interest
rate cap with one of our lenders for a notional amount of $10.0 million and a cap rate of 3.5%. The interest rate cap will terminate
on July 18, 2022. In the future, we may consider the use of additional financial hedging products to further limit our interest
rate exposure.
In
evaluating our financial condition, we focus on the above financial and operating measures as well as fleet and vessel type for
utilization, time charter equivalent rates and operating expenses to assess our operating performance. We also monitor our cash
position and outstanding debt to assess short-term liquidity and our ability to finance further fleet expansion. Discussions about
possible acquisitions or sales of existing vessels are based on our 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.
We
believe that the important factors to consider in analyzing future results of operations and trends in future periods include
the following:
|
●
|
charter
rates and periods of charter hire and any revenues we would receive in the future from any pools in which our vessels may
operate;
|
|
|
|
|
●
|
vessel
operating expenses and voyage related costs and commissions;
|
|
|
|
|
●
|
depreciation
and amortization expenses, which are a function of the cost of our vessels, significant vessel maintenance or improvement
costs, our vessels’ estimated useful lives and estimated residual values;
|
|
|
|
|
●
|
financing
costs related to our 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 because our revenues are in U.S. dollars but some of our expenses are paid in other currencies.
|
Revenues
from time charters, and to the extent we enter 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 fluctuate from spot charters and, in case we also decide to participate in pools, depending on the hire rate
in effect at the time of the charter or the results of the spot based pool.
Recent
accounting pronouncements are discussed in Note 2 of the consolidated financial statements contained within this Annual Report.
A.
Operating Results
At
December 31, 2018, we employed three of the vessels in our fleet on time charters and three vessels were operating in the spot
market. Our MR vessels are available to operate the entire year, except for scheduled special surveys and dry-dockings. Due to
challenging market conditions and greater spot trading activities, the number of non-operating days per year, which represent
average time spent off-hire, has recently increased. If a vessel undergoes a scheduled intermediate or special survey, the estimated
duration is five and 20 days, respectively.
The
break-out of revenue by spot and time charters for the recent reported periods is reflected below (in thousands of U.S. dollars):
|
|
Year
ended
December
31, 2016
|
|
|
Year
ended
December
31, 2017
|
|
|
Year
ended
December
31, 2018
|
|
|
|
Spot
|
|
|
Time
|
|
|
Spot
|
|
|
Time
|
|
|
Spot
|
|
|
Time
|
|
Revenues, net
|
|
$
|
9,295
|
|
|
$
|
21,092
|
|
|
$
|
16,668
|
|
|
$
|
12,911
|
|
|
$
|
16,990
|
|
|
$
|
11,467
|
|
The
following table reflects our fleet’s ownership days, available days, operating days, utilization, TCE, average number of
vessels, number of vessels at period end, average age and operating expenses in each case, for the years ended December 31, 2016,
2017 and 2018.
|
|
Year
ended December 31,
|
|
Fleet Operating Data
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Ownership days (1)
|
|
|
2,196
|
|
|
|
2,190
|
|
|
|
2,190
|
|
Available days (2)
|
|
|
2,176
|
|
|
|
2,190
|
|
|
|
2,154
|
|
Operating days (3)
|
|
|
1,986
|
|
|
|
1,956
|
|
|
|
1,816
|
|
Utilization % (4)
|
|
|
91.3
|
%
|
|
|
89.3
|
%
|
|
|
84.3
|
%
|
Daily time charter equivalent rate (5)
|
|
$
|
12,134
|
|
|
$
|
10,795
|
|
|
$
|
9,163
|
|
Daily vessel operating expenses (6)
|
|
$
|
5,861
|
|
|
$
|
5,827
|
|
|
$
|
5,785
|
|
Average number of vessels (7)
|
|
|
6.0
|
|
|
|
6.0
|
|
|
|
6.0
|
|
Number of vessels at period end
|
|
|
6
|
|
|
|
6
|
|
|
|
6
|
|
Weighted average age of vessels (8)
|
|
|
5.8
|
|
|
|
6.8
|
|
|
|
7.8
|
|
(1)
|
Ownership
days are the total number of days in a period during which we owned each of the vessels in our fleet. Ownership days are an
indicator of the size of our fleet over a period and affect both the amount of revenues generated and the amount of expenses
incurred during the respective period.
|
(2)
|
Available
days are the number of ownership days in a period, less the aggregate number of days that our vessels were off-hire due to
scheduled repairs or repairs under guarantee, vessel upgrades or special surveys and intermediate dry-dockings and the aggregate
number of days that we spent positioning our vessels during the respective period for such repairs, upgrades and surveys.
Available days measures the aggregate number of days in a period during which vessels should be capable of generating revenues.
|
(3)
|
Operating
days are the number of available days in a period, less the aggregate number of days that our vessels were off-hire or out
of service due to any reason, including technical breakdowns and unforeseen circumstances. Operating days measures the aggregate
number of days in a period during which vessels actually generate revenues.
|
(4)
|
We
calculate fleet utilization by dividing the number of operating days during a period by the number of available days during
the same period. The shipping industry uses fleet utilization to measure a company’s efficiency in finding suitable
employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled
repairs or repairs under guarantee, vessel upgrades, special surveys and intermediate dry-dockings or vessel positioning.
|
(5)
|
Daily
TCE rate 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 U.S. GAAP. We utilize TCE because we believe it is a meaningful measure
to compare period-to-period changes in our performance despite changes in the mix of charter types (i.e., spot charters, time
charters and bareboat charters) under which our vessels may be employed between the periods. Our management also utilizes
TCE to assist them in making decisions regarding employment of the vessels. We believe that our method of calculating TCE
is consistent with industry standards and is calculated 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 bunker costs that are unique to a particular voyage, which would otherwise be paid by the charter under a time charter
contract.
|
(6)
|
Daily
vessel operating expenses are direct operating expenses such as crewing, provisions, repairs and maintenance, insurance, deck
and engine stores, lubricating oils and tonnage tax divided by ownership days.
|
(7)
|
Average
number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the
number of days each vessel was part of our fleet during such period divided by the number of calendar days in the period.
|
(8)
|
Weighted
average age of the fleet is the sum of the ages of our vessels, weighted by the dwt of each vessel on the total fleet dwt.
|
The
following table reflects the calculation of our daily TCE rates for the years ended December 31, 2016, 2017 and 2018 (in thousands
of U.S. dollars, except total operating days and daily TCE rates):
|
|
Year
ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues, net
|
|
$
|
30,387
|
|
|
$
|
29,579
|
|
|
$
|
28,457
|
|
Voyage related
costs and commissions
|
|
|
(6,288
|
)
|
|
|
(8,463
|
)
|
|
|
(11,817
|
)
|
Time charter
equivalent revenues *
|
|
$
|
24,099
|
|
|
$
|
21,116
|
|
|
$
|
16,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating days
|
|
|
1,986
|
|
|
|
1,956
|
|
|
|
1,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Daily time charter equivalent rate
|
|
$
|
12,134
|
|
|
$
|
10,795
|
|
|
$
|
9,163
|
|
*
Subject to rounding
The
decline in the TCE rate in 2017 and 2018 over the same period in 2016 is primarily attributable to weaker freight markets in the
product tanker sector, lower vessel utilization and greater spot market chartering activity, which resulted in lower revenues
net of voyage related costs and commissions.
Recent
Daily Fleet Data:
(In
U.S. dollars, except for Utilization %)
|
|
|
|
|
Year
ended December 31,
|
|
|
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Eco-Efficient
MR2: (2 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
|
15,015
|
|
|
|
13,027
|
|
|
|
10,524
|
|
|
|
|
Opex
|
|
|
|
5,754
|
|
|
|
5,838
|
|
|
|
5,962
|
|
|
|
|
Utilization
%
|
|
|
|
97.0
|
%
|
|
|
94.1
|
%
|
|
|
91.8
|
%
|
Eco-Modified MR2:
(1 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
|
10,705
|
|
|
|
13,042
|
|
|
|
12,383
|
|
|
|
|
Opex
|
|
|
|
6,255
|
|
|
|
6,433
|
|
|
|
6,505
|
|
|
|
|
Utilization
%
|
|
|
|
92.9
|
%
|
|
|
90.1
|
%
|
|
|
86.6
|
%
|
Standard MR2: (1
of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
|
15,504
|
|
|
|
12,209
|
|
|
|
8,887
|
|
|
|
|
Opex
|
|
|
|
6,772
|
|
|
|
6,036
|
|
|
|
6,039
|
|
|
|
|
Utilization
%
|
|
|
|
90.5
|
%
|
|
|
99.2
|
%
|
|
|
91.0
|
%
|
Handysize Tankers:
(2 of our vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
|
7,939
|
|
|
|
5,979
|
|
|
|
5,844
|
|
|
|
|
Opex
|
|
|
|
5,315
|
|
|
|
5,408
|
|
|
|
5,122
|
|
|
|
|
Utilization
%
|
|
|
|
85.1
|
%
|
|
|
79.2
|
%
|
|
|
72.6
|
%
|
Fleet: (6 vessels)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
TCE
|
|
|
|
12,134
|
|
|
|
10,795
|
|
|
|
9,163
|
|
|
|
|
Opex
|
|
|
|
5,861
|
|
|
|
5,827
|
|
|
|
5,785
|
|
|
|
|
Utilization
%
|
|
|
|
91.3
|
%
|
|
|
89.3
|
%
|
|
|
84.3
|
%
|
Our
fleet consists of two eco-efficient MR2 tankers, the
Pyxis Theta
and the
Pyxis Epsilon
, one eco-modified MR2, the
Pyxis Malou
, one standard MR2 (a non-eco-efficient or eco-modified tanker, which was built prior to 2012), the
Pyxis
Delta
, and the handysize tankers, the
Northsea Alpha
and the
Northsea Beta
. During 2016 to 2018, the vessels
in our fleet were employed at various occasions under time and spot charters.
Consolidated
Statements of Comprehensive Loss for the Fiscal Year Ended December 31, 2017 Compared to the Fiscal Year Ended December 31, 2018
|
|
2017
|
|
|
2018
|
|
|
Change
|
|
|
%
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Revenues,
net:
|
|
$
|
29,579
|
|
|
$
|
28,457
|
|
|
$
|
(1,122
|
)
|
|
|
(3.8
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage related costs and commissions
|
|
|
(8,463
|
)
|
|
|
(11,817
|
)
|
|
|
(3,354
|
)
|
|
|
39.6
|
%
|
Vessel operating expenses
|
|
|
(12,761
|
)
|
|
|
(12,669
|
)
|
|
|
92
|
|
|
|
(0.7
|
)%
|
General and administrative expenses
|
|
|
(3,188
|
)
|
|
|
(2,404
|
)
|
|
|
784
|
|
|
|
(24.6
|
)%
|
Management fees, related parties
|
|
|
(712
|
)
|
|
|
(720
|
)
|
|
|
(8
|
)
|
|
|
1.1
|
%
|
Management fees, other
|
|
|
(930
|
)
|
|
|
(930
|
)
|
|
|
—
|
|
|
|
—
|
|
Amortization of special survey costs
|
|
|
(73
|
)
|
|
|
(133
|
)
|
|
|
(60
|
)
|
|
|
82.2
|
%
|
Depreciation
|
|
|
(5,567
|
)
|
|
|
(5,500
|
)
|
|
|
67
|
|
|
|
(1.2
|
)%
|
Vessel impairment charge
|
|
|
—
|
|
|
|
(2,282
|
)
|
|
|
(2,282
|
)
|
|
|
—
|
|
Bad debt provisions
|
|
|
(231
|
)
|
|
|
(13
|
)
|
|
|
218
|
|
|
|
(94.4
|
)%
|
Operating
loss
|
|
$
|
(2,346
|
)
|
|
$
|
(8,011
|
)
|
|
$
|
(5,665
|
)
|
|
|
241.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain from debt extinguishment
|
|
|
—
|
|
|
|
4,306
|
|
|
|
4,306
|
|
|
|
—
|
|
Loss from financial derivative
|
|
|
—
|
|
|
|
(19
|
)
|
|
|
(19
|
)
|
|
|
—
|
|
Interest and
finance costs, net
|
|
|
(2,897
|
)
|
|
|
(4,490
|
)
|
|
|
(1,593
|
)
|
|
|
55.0
|
%
|
Total
other expenses, net
|
|
$
|
(2,897
|
)
|
|
$
|
(203
|
)
|
|
$
|
2,694
|
|
|
|
(93.0
|
)%
|
Net
loss
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
|
$
|
(2,971
|
)
|
|
|
56.7
|
%
|
Revenues,
net
: Revenues, net, of $28.5 million for the year ended December 31, 2018, represent a decrease of $1.1 million, or 3.8%,
from $29.6 million in the comparable period in 2017. We owned six vessels during the year, the same number as in the prior year,
with 2,154 available days for revenue generation in 2018 compared to 2,190 available days in 2017. Available days were lower in
2018 due to the scheduled special survey of
Pyxis Theta
and the drydocking of
Pyxis Malou
. Our Handysize tankers
operated solely in the spot market during 2018 whereas our MR tankers operated both on spot and in the time charter market, all
under difficult conditions for most of 2018.
Revenue
from spot voyages in 2018 was $17.0 million, an increase of $0.3 million from $16.7 million in 2017. Time charter revenue decreased
by 11.2% or $1.4 million, from $12.9 million in 2017 to $11.5 million in 2018. The overall revenue decrease in 2018 was attributable
to lower time charter equivalent rates from weaker freight markets as well as to a decrease in total operating days as a result
of increased idle days between charters, particularly for the Handysize vessels, and the dry docking of the two vessels during
the year.
Voyage
related costs and commissions
: Voyage related costs and commissions of $11.8 million for the year ended December 31, 2018,
represented an increase of $3.4 million, or 39.6%, from $8.5 million in the comparable period in 2017. The increase is largely
attributable to the number of days that the fleet operated under spot charter. Under spot charters, all voyage expenses are typically
borne by us rather than the charterer and the increase in spot chartering results in an increase in voyage related costs and commissions.
Vessel
operating expenses
: Vessel operating expenses of $12.7 million for the year ended December 31, 2018, represented a slight
decrease of $0.1 million, or 0.7%, from $12.8 million in the comparable period in 2017.
General
and administrative expenses
: General and administrative expenses were $2.4 million for the year ended December 31, 2018, a
decrease of $0.8 million, or 24.6%, from $3.2 million in the comparable period in 2017. The reduction in general and administrative
expenses in 2018 was largely a result of lower non-cash restricted stock compensation of $0.4 million and lower legal, audit and
other expenses of $0.4 million, substantially associated with a terminated securities offering in 2017.
Management
fees, related parties
: Management fees to Maritime of $0.7 million for the year ended December 31, 2018, remained the same
in
2017.
Management
fees, other
: Management fees, payable to ITM of $0.9 million for the year ended December 31, 2018, were the same in 2017.
Amortization
of special survey costs
: Amortization of special survey costs of $0.1 million for the year ended December 31, 2018, was relatively
the same as the prior year.
Depreciation
:
Depreciation of $5.5 million for the year ended December 31, 2018, remained flat compared to the year ended December 31, 2017.
Vessel
Impairment Charge:
Vessel impairment charge for the year ended December 31, 2018 was $2.3 million compared to $0.0 million
in the prior year. The impairment charges for the year ended December 31, 2018 related to vessels
Northsea Alpha
and
Northsea
Beta
whereas there was no vessel impairments charge in 2017.
Bad
debt provisions
: Bad debt provisions of $0.2 million for the year ended December 31, 2017, which represent doubtful trade
accounts receivables, decreased to $0.0 million for the year ended December 31, 2018.
Gain
from debt extinguishment
: Gain from debt extinguishment in 2018 was $4.3 million compared to zero in the prior year. The gain
was a result of debt discount received for the early prepayment of loans from Commerzbank when
Northsea Alpha
,
Northsea
Beta
and
Pyxis Malou
were refinanced in full with Amsterdam Trade Bank, N.V. (“ATB”) in February,
2018.
Interest
and finance costs, net
: Interest and finance costs, net, for the year ended December 31, 2018, amounted to $4.5 million, compared
to $2.9 million in the comparable period in 2017, an increase of $1.6 million, or 55.0%. The increase was attributed to the increase
of the LIBOR-based interest rates applied to our outstanding bank debt and a refinancing of the loans for four of our vessels
at significantly higher interest rates. While the total loans outstanding decreased from $66.9 million at December 31, 2017 to
$63.4 million at December 31, 2018, the overall weighted average interest rate increased from 3.7% in 2017 to 6.0% in 2018.
Consolidated
Statements of Comprehensive Income / (Loss) for the Fiscal Year Ended December 31, 2016 Compared to the Fiscal Year Ended December
31, 2017
|
|
2016
|
|
|
2017
|
|
|
Change
|
|
|
%
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Revenues,
net:
|
|
$
|
30,387
|
|
|
$
|
29,579
|
|
|
$
|
(808
|
)
|
|
|
(2.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage related costs and commissions
|
|
|
(6,288
|
)
|
|
|
(8,463
|
)
|
|
|
(2,175
|
)
|
|
|
34.6
|
%
|
Vessel operating expenses
|
|
|
(12,871
|
)
|
|
|
(12,761
|
)
|
|
|
110
|
|
|
|
(0.9
|
)%
|
General and administrative expenses
|
|
|
(2,574
|
)
|
|
|
(3,188
|
)
|
|
|
(614
|
)
|
|
|
23.9
|
%
|
Management fees, related parties
|
|
|
(631
|
)
|
|
|
(712
|
)
|
|
|
(81
|
)
|
|
|
12.8
|
%
|
Management fees, other
|
|
|
(1,024
|
)
|
|
|
(930
|
)
|
|
|
94
|
|
|
|
(9.2
|
)%
|
Amortization of special survey costs
|
|
|
(236
|
)
|
|
|
(73
|
)
|
|
|
163
|
|
|
|
(69.1
|
)%
|
Depreciation
|
|
|
(5,768
|
)
|
|
|
(5,567
|
)
|
|
|
201
|
|
|
|
(3.5
|
)%
|
Vessel impairment charge
|
|
|
(3,998
|
)
|
|
|
—
|
|
|
|
3,998
|
|
|
|
(100.0
|
)%
|
Bad debt provisions
|
|
$
|
—
|
|
|
$
|
(231
|
)
|
|
$
|
(231
|
)
|
|
|
n/a
|
|
Operating income
/ (loss)
|
|
|
(3,003
|
)
|
|
|
(2,346
|
)
|
|
|
657
|
|
|
|
(21.9
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other income / (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
finance costs, net
|
|
|
(2,810
|
)
|
|
|
(2,897
|
)
|
|
|
(87
|
)
|
|
|
3.1
|
%
|
Total
other expenses, net
|
|
$
|
(2,810
|
)
|
|
$
|
(2,897
|
)
|
|
$
|
(87
|
)
|
|
|
3.1
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income / (loss)
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
570
|
|
|
|
(9.8
|
)%
|
Revenues,
net
: Revenues, net of $29.6 million for the year ended December 31, 2017, represented a decrease of $0.8 million, or 2.7%,
from $30.4 million in the comparable period in 2016. The decrease in 2017 was attributed to lower time charter equivalent rates
as well as to a decrease in total operating days attributed to increased idle days between voyage charter employments.
Voyage
related costs and commissions
: Voyage related costs and commissions of $8.5 million for the year ended December 31, 2017,
represented an increase of $2.2 million, or 34.6%, from $6.3 million in the comparable period in 2016. The increase was primarily
attributed to greater spot charter activity, which incurs voyage costs.
Vessel
operating expenses
: Vessel operating expenses of $12.8 million for the year ended December 31, 2017, represented a slight
decrease of approximately $0.1 million, or 0.9%, from $12.9 million in the comparable period in 2016.
General
and administrative expenses
: General and administrative expenses of $3.2 million for the year ended December 31, 2017, increased
by $0.6 million, or 23.9%, from $2.6 million in the comparable period in 2016. The increase in general and administrative expenses
was primarily attributed to the $0.4 million non-cash restricted stock compensation that was recorded in the fourth quarter of
2017 and to the one-off expenses of $0.3 million relating to the public equity offering that was terminated in July 2017.
Management
fees, related parties
: Management fees to Maritime of $0.7 million for the year ended December 31, 2017, increased by $0.1
million, or 12.8%, from $0.6 million in the comparable period in 2016. The increase was attributed to the increase in the daily
management fee of the
Northsea Beta
and the
Northsea Alpha
as a result of Maritime’s assumption of full commercial
management of these vessels in June and November 2016, respectively.
Management
fees, other
: Management fees mainly payable to ITM of $0.9 million for the year ended December 31, 2017, decreased by $0.1
million, or 9.2%, compared to the year ended December 31, 2016, which included the services of North Sea Tankers BV, the former
commercial manager of the
Northsea Alpha
and the
Northsea Beta
.
Amortization
of special survey costs
: Amortization of special survey costs was $0.1 million for the year ended December 31, 2017, compared
to $0.2 million for the year ended December 31, 2016. The decrease in amortization of special survey costs is attributed to the
write-off of the unamortized portion of the special survey costs of the
Northsea Alpha
and the
Northsea Beta
since
an impairment charge was recognized on both vessels as of December 31, 2016.
Depreciation
:
Depreciation of $5.6 million for the year ended December 31, 2017, remained relatively stable compared to the year ended December
31, 2016.
Vessel
Impairment Charge:
Vessel impairment charge for the year ended December 31, 2017 was $0.0 million compared to $4.0 million
in the prior year. The prior year vessel impairment charge relates to the vessels
Northsea Alpha
and
Northsea Beta
.
Bad
debt provisions
: Bad debt provisions of $0.2 million for the year ended December 31, 2017, represented an increase in doubtful
trade accounts receivable.
Interest
and finance costs, net
: Interest and finance costs, net, for the year ended December 31, 2017, amounted to $2.9 million, compared
to $2.8 million in the comparable period in 2016, an increase of $0.1 million, or 3.1%. The increase was mainly attributed to
the increase of the LIBOR-based interest rates applied to our outstanding bank debt.
B.
Liquidity and Capital Resources
Overview
Our
principal sources of liquidity are cash flows from operations, borrowings from bank debt, proceeds from issuances of equity and,
we expect in the future, from the selective sale of vessels and the proceeds from further issuances of equity and debt. We expect
that our future liquidity requirements will relate primarily to:
|
●
|
payments
of interest and other debt-related expenses and the repayment of principal on our loans;
|
|
|
|
|
●
|
our
operating expenses, including dry-docking and special survey costs;
|
|
|
|
|
●
|
maintenance
of cash reserves to provide for contingencies and to adhere to minimum liquidity for loan covenants; and
|
|
|
|
|
●
|
vessel
acquisitions.
|
On
March 30, 2018, we filed with the SEC a prospectus supplement to sell up to $2.3 million of common shares through an At-the-Market
(“ATM”) offering or similar direct placement. We did not issue any securities under this program, but in November
19, 2018 we amended the prospectus supplement to increase the offering to $3.675 million. In November 2018 we sold 182,297 common
shares at weighted average price per share of $1.73. Following this sale, Mr. Valentis’ beneficial ownership of our common
stock declined to 80.9%.
We
expect to rely upon operating cash flows from the employment of our vessels on spot and time charters and amounts due to related
parties, long-term borrowings and the proceeds from future equity and debt offerings to fund our liquidity and capital needs and
implement our growth plan.
The Company performs on a regular basis cash flow projections to evaluate
whether it will be in a position to cover its liquidity needs for the next 12-month period and be in compliance with the financial
and security collateral cover ratio covenants under its existing debt agreements. In developing estimates of future cash flows,
the Company makes assumptions about the vessels’ future performance, with significant assumptions relating to time charter
equivalent rates by vessel type, vessels’ operating expenses, vessels’ capital expenditures, fleet utilization, the
Company’s management fees, general and administrative expenses, and debt servicing requirements. The assumptions used to
develop estimates of future cash flows are based on historical trends as well as future expectations. As of December 31, 2018
the Company had a working capital deficit of $9.2 million, defined as current assets minus current liabilities. As of the filing
date of the consolidated financial statements, the Company expects that it will be in a position to cover its liquidity needs
for the next 12-month period through cash generated from operations and by managing its working capital requirements. In addition,
the Company may consider the raising of capital including debt, equity securities, joint ventures and / or sale of assets.
Our
business is capital intensive and our future success will depend on our ability to maintain a high quality fleet through the acquisition
of modern tanker vessels and the selective sale of older tanker vessels. We may pursue a sale or other long-term strategy such
as a bareboat charter agreement with purchase option or commitment for the
Northsea Alpha
and the
Northsea Beta
.
These acquisitions and dispositions will be principally subject to management’s expectation of future market conditions,
our ability to acquire and dispose of tanker vessels on favorable terms as well as access to cost-effective capital on reasonable
terms.
We
do not intend to pay dividends to the holders of our shares in the near future and expect to retain our cash flows primarily for
the payment of vessel operating costs, dry-docking costs, debt servicing and other obligations, general corporate and administrative
expenses, and reinvestment in our business (such as to fund vessel or fleet acquisitions), in each case, as determined by our
board of directors.
Cash
Flow Analysis
Cash
and cash equivalents as of December 31, 2018, amounted to $0.5 million, compared to $1.7 million as of December 31, 2017. We define
working capital as current assets minus current liabilities. We had a working capital deficit of $9.2 million as of December 31,
2018, compared to the working capital deficit of $8.6 million as of December 31, 2017. The increase in our working capital deficit
is due to a decrease in cash and cash equivalents of $1.1 million and an increase in trade accounts receivable of $1.9
million, offset by a $3.0 million decrease in the current portion of long-term debt, net of deferred financing costs, an increase
of $2.5 million in trade accounts payable, an increase of $1.3 million in amounts due to related parties, an increase of $0.4
million in hire received in advance and an increase of $0.2 million in the remaining current liabilities, net of the remaining
current assets.
Consolidated
Cash Flows information:
Statements of
Cash Flows Data
|
|
Year
ended December 31,
|
|
(In millions
of U.S. dollars)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by / (used
in) operating activities
|
|
$
|
4.4
|
|
|
$
|
3.7
|
|
|
$
|
(2.2
|
)
|
Net cash used in investing activities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(0.1
|
)
|
Net cash used in financing activities
|
|
$
|
(7.3
|
)
|
|
$
|
(2.8
|
)
|
|
$
|
(0.2
|
)
|
Operating
Activities: Net cash used in operating activities was $2.2 million for 2018, compared to net cash provided by operating activities
of $3.7 million for 2017. There were a number of factors driving the decrease in our net cash from operating activities. Firstly,
a decrease in revenues in 2018 of $1.1 million was attributable to lower time charter equivalent rates from weaker freight markets
as well as to a decrease in total operating days as a result of increased idle days between charters, particularly for the Handysize
vessels, and the dry docking of the two vessels during the year. Secondly, there was an increase in voyage related costs and
commissions of $3.4 million due to greater spot chartering activity during 2018 compared to 2017. Finally, the movement in
changes to assets and liabilities increased cash from operating activities by $2.0 million in 2018 compared to $2.5 million in
2017.
Net
cash provided by operating activities was $3.7 million for 2017, compared to $4.4 million for 2016. The decrease in our net cash
from operating activities was mainly due to a decrease in voyage revenues, net of voyage related costs and commissions by $3.0
million due to lower time charter equivalent and utilization rates, an increase in general and administrative expenses, excluding
the non-cash share based compensation recorded in 2017, of $0.3 million following the write-off of costs from the terminated public
equity offering, and an increase in cash outflows from changes in other assets and liabilities that in aggregate amounted to $0.3
million, partially offset by an increase in cash inflows from changes in trade receivables, net, of $2.0 million, an increase
in cash inflows from changes in balances due to related parties by $0.8 million, and a decrease in vessel operating expenses by
$0.1 million. The effects of greater spot charter activity in 2017 primarily resulted in lower operating income and changes to
other current assets and current liabilities.
Investing
Activities
: Net cash used in investing activities was $0.1 million during 2018 which relates to an advance payment for the
ballast water treatment system that will be fitted on
Pyxis Malou
in early 2019 during her scheduled special survey. There
was no net cash provided by or used in investing activities for 2017.
Financing
Activities
: Net cash used in financing activities in 2018 amounted to $0.2 million. During 2018, the Company received $44.5
million in new loan facilities with ATB and EntrustPermal and repaid long-term debt of $43.6 million as discussed below, including
fully repaying the debt outstanding with Commerzbank and DVB Bank of $26.9 million (before the $4.3 million gain from debt extinguishment)
and $16.0 million, respectively. Financing costs of $0.9 million were paid in relation to the new loan facilities during 2018
and $0.3 million of cash received from issuing common stock during 2018 was offset by $0.4 million payment of costs related
to the filing of the Universal Shelf Registration Statement under Form F-3 and the ATM program in 2018.
Net
cash used in financing activities was $2.8 million for 2017, which mainly reflects long-term debt repayments of $7.0 million,
and the payment of common stock offering costs of $0.4 million and financing costs of $0.2 million, partially offset by the gross
proceeds of $4.8 million from the issuance of common stock pursuant to the Private Placement discussed above. Net cash used in
financing activities was $7.3 million for 2016, which mainly reflects long-term debt repayments.
Indebtedness
Our
vessel-owning subsidiaries, as borrowers, entered into loan agreements in connection with the purchase of each of the vessels
in our fleet. As of December 31, 2018, our vessel-owning subsidiaries had outstanding borrowings under the following loan agreements:
|
●
|
SECONDONE
CORP. (“Secondone”) (which owns the
Northsea Alpha
), THIRDONE CORP. (“Thirdone”) (which owns
the
Northsea Beta
) and FOURTHONE CORP. (“Fourthone”) (which owns the
Pyxis Malou
) refinanced existing
indebtedness of $26.9 million on February 28, 2018 under the Secondone, Thirdone and Fourthone loan agreements utilizing a
new 5-year secured term loan of $20.5 million with Amsterdam Trade Bank N.V., and cash of $2.1 million. The remaining balance
of approximately $4.3 million was written-off by the previous lender at closing and was recorded as gain from debt extinguishment
in the first quarter of 2018. The new loan bears interest at LIBOR plus a margin of 4.65% per annum, and matures in February
2023. The loan is repayable in quarterly installments and a balloon payment. Standard loan covenants include, amongst others,
a minimum loan to value ratio and liquidity. As a condition subsequent to the execution of this loan agreement, the borrowers,
Secondone, Thirdone and Fourthone, proceeded with all required procedures for their re-domiciliation to the jurisdiction of
the Republic of Malta. The re-domiciliation became effective on March 1, 2018 and the borrowers were renamed to Secondone
Corporation Ltd., Thirdone Corporation Ltd. and Fourthone Corporation Ltd., respectively. The loan is secured by joint-and-several
first preferred mortgages over the
Northsea Alpha
, the
Northsea Beta
and the
Pyxis Malou
. As of December
31, 2017 and 2018, the aggregate outstanding balance of the loans for these vessels was $26.9 million and $19.3 million, respectively.
|
|
|
|
|
●
|
SIXTHONE
CORP. (“Sixthone”) (which owns the
Pyxis Delta
), and SEVENTHONE CORP. (“Seventhone”) (which
owns the
Pyxis Theta
), jointly and severally entered into a loan agreement on October 12, 2012, as subsequently amended
and supplemented, with HSH Nordbank AG providing for a loan facility up to $37.3 million. In February 2013, Sixthone drew
down an amount of $13.5 million and, in September 2013, Seventhone drew down an amount of $21.3 million (“Tranche A”
and “Tranche B”, respectively). The loan bears interest at LIBOR plus a margin of 3.35% per year. Under the original
agreement, the tranche relating to Sixthone matured in May 2017 and the tranche relating to Seventhone matured in September
2018. On September 29, 2016, we agreed with the lender of Sixthone to extend the maturity of Tranche A from May 2017 to September
2018, under the same amortization schedule and applicable margin. In addition, on June 6, 2017, HSH Nordbank AG agreed to
further extend the maturity of the respective loans from September 2018 to September 2022 under the same applicable margin,
but with an extended amortization profile. The loan is repayable in quarterly installments and a balloon payment. The loan
is secured by joint-and-several first preferred mortgages over
Pyxis Delta
and
Pyxis Theta
. As of December 31,
2017 and 2018, the aggregate outstanding balance of the loan for these vessels was $23.1 million and $20.1 million, respectively.
|
|
|
|
|
●
|
EIGTHONE
CORP. (“Eighthone”), (which owns the
Pyxis Epsilon
), entered into a new $24.0 million loan agreement with
Wilmington Trust National Association on September 27, 2018 for the purpose of refinancing the outstanding indebtedness with
DVB Bank SE. The loan facility bears an interest rate of 11.0% per annum and matures in September 2023. Fees are payable upon
early prepayment or on final repayment of outstanding principal. The principal obligation amortizes in 18 quarterly installments
starting in March 29, 2019, equal to the lower of $0.4 million and excess cash computed through a cash sweep mechanism, plus
a balloon payment due at maturity. The facility is secured by a first priority mortgage over
Pyxis Epsilon
, As of December
31, 2017 and 2018, the aggregate outstanding balance of the loan for
Pyxis Epsilon
was $16.9 million and $24.0 million,
respectively.
|
Each
of the loan agreements referenced above is secured by a first priority mortgage over the respective vessel and a first priority
assignment of the vessel’s insurances and earnings, and guaranteed by the parent company. In addition, certain of our loan
agreements and guarantees require us to maintain specified financial ratios and satisfy financial covenants. These financial ratios
and covenants include requirements that:
|
●
|
the
certain vessel-owning subsidiaries that are a borrower under the respective loan agreement must maintain pledged deposits
equal to a specified dollar amount;
|
|
|
|
|
●
|
we
must maintain minimum liquidity of between $0.3 million and $0.85 million per vessel;
|
|
|
|
|
●
|
certain
of our vessel-owning subsidiaries maintain a retention account with monthly deposits equal to one-third of the next principal
installment together with the appropriate percentage of interest next due;
|
|
●
|
the
fair market value of the mortgaged vessel plus any additional collateral must be no less than a certain percentage, ranging
from 115% to 140%, of outstanding borrowings under the applicable loan agreement, less, in certain loan agreements, 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 our or its subsidiary’s name (the minimum security collateral cover or “MSC”); and
|
|
|
|
|
●
|
for
the HSH credit facility, the total liabilities to market value adjusted total assets ratio should not exceed 65% in order
for the relevant vessel-owning companies to proceed with dividend distributions. As of December 31, 2018, the ratio of total
liabilities to market value adjusted total assets was 68%, or 3% higher than the required threshold. Until such time as the
ratio of total liabilities to market value adjusted total assets falls below the 65% threshold, the borrowers under the credit
facility, Sixthone and Seventhone, will be unable to pay any dividend or make any other form of distribution.
|
The
events of default under our 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
|
|
|
|
|
●
|
any
cross-default.
|
As
of December 31, 2018, we were in compliance with all of our financial covenants with respect to our loan agreements and there
was no amount available to be drawn down under our existing loan agreements.
As
discussed above, with the exception of the Eigthone loan, our interest rates are calculated at LIBOR plus a margin, and hence
we are exposed to movements in LIBOR. In order to hedge our variable interest rate exposure, on January 19, 2018, Seventhone entered
into an interest rate cap agreement with its lender for a notional amount of $10.0 million and a cap rate of 3.5%. The interest
rate cap will terminate on July 18, 2022. At inception, Seventhone paid $0.05 million to enter into the interest rate cap which
at December 31, 2018 had a value of $0.03 million.
Major
Capital Expenditures
In
January 2018, $0.3 million was paid for certain work carried out on
Pyxis Malou
in advance of her dry docking scheduled
in early 2019 and in September 2018, $0.3 million was paid for the scheduled first fifth year special survey of
Pyxis Theta
.
Critical
Accounting Policies
The
discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements,
which have been prepared in accordance with U.S. GAAP. The preparation of those financial statements required us to make estimates
and judgments that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosure at the
date of our 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. We have described below what we believe are our most critical accounting policies,
because they generally involve a comparatively higher degree of judgment in their application. For a description of all of our
significant accounting policies, please see Note 2 to our audited consolidated financial statements included elsewhere in this
Annual Report.
Going
Concern
We
perform on cash flow projections on a regular basis to evaluate whether we will be in a position to both cover our liquidity needs
for the next 12-month period and be in compliance with the financial and security collateral cover ratio covenants under our existing
debt agreements. In developing estimates of future cash flows, we make assumptions about the vessels’ future performance,
with significant assumptions relating to time charter equivalent rates by vessel type, vessels’ operating expenses, vessels’
capital expenditures, fleet utilization, our management fees and general and administrative expenses, and cash flow requirements
for debt servicing. The assumptions used to develop estimates of future cash flows are based on historical trends as well as future
expectations.
We
determine cash flow projections by considering the:
|
●
|
estimated
vessel utilization ranging from 85.0% and 98.6%, depending on the vessel type and whether the vessel is operating
on spot or under time charter;
|
|
|
|
|
●
|
charter
revenues from existing time charters for the fixed fleet days, and an estimated daily time charter equivalent using independent
market analysts’ estimates for similar vessels for the unfixed days over the remaining period until the end of the 12-month
period, net of our recent historical data on vessel operating expenses, management fees and general and administrative expenses;
and
|
|
|
|
|
●
|
estimated
cost of scheduled intermediate and special survey dry-dockings.
|
As
of December 31, 2018, we had a working capital deficit of $9.2 million, defined as current assets minus current liabilities. We
considered such deficit in conjunction with the future market prospects and potential future financings. As of the filing date
of this Annual Report, we believe that we will be in a position to cover our liquidity needs for the next 12-month period and
in compliance with the financial and security collateral cover ratio covenants under our existing debt agreements.
Vessel
Impairment
The
carrying values of our 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. We record impairment losses only when events occur that cause us 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 us are reviewed accordingly 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 our 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. We determine the fair value of our assets based on management estimates and assumptions and by making use of available
market data and taking into consideration third party valuations. As of December 31, 2017 and 2018, our fleet was independently
valued at $109.3 million and $103.4 million, respectively, based on the average of appraisals from two internationally
recognized maritime brokers.
As
of December 31, 2016, we obtained market valuations for all of our vessels from reputable marine appraisers. Based on these valuations,
we identified impairment indications for all of our vessels, except for the
Pyxis Epsilon
. More specifically, the market
values of these vessels were, in aggregate, $15.8 million lower than their carrying values, including any unamortized deferred
charges relating to special survey costs, as of December 31, 2016. In this respect, we performed an impairment analysis to estimate
the future undiscounted cash flows for each of these vessels. The analysis resulted in higher undiscounted cash flows than each
vessel’s carrying value as of December 31, 2016, except for the
Northsea Alpha
and the
Northsea Beta
for which
a total vessel impairment charge of $4.0 million was recorded as of December 31, 2016, of which $3.4 million was charged against
vessels, net, and $0.6 million against deferred charges, net.
As
of December 31, 2017, we obtained market valuations for all of our vessels from reputable marine appraisers. Based on these valuations,
we identified impairment indications for certain of our vessels. More specifically, the market values of these vessels were, in
aggregate, $8.3 million lower than their carrying values, including any unamortized deferred charges relating to special survey
costs, as of December 31, 2017. In this respect, we performed an impairment analysis to estimate the future undiscounted cash
flows for each of these vessels. The analysis resulted in higher undiscounted cash flows than each vessel’s carrying value
as of December 31, 2017, and accordingly, no adjustment to the vessels’ carrying values was required.
As
of December 31, 2018, we obtained market valuations for all of our vessels from reputable marine appraisers. Based on these valuations,
we identified impairment indications for all of our vessels, except for the
Pyxis Epsilon.
More specifically, the market
values of these vessels were, in aggregate, $10 million lower than their carrying values, including any unamortized deferred charges
relating to special survey costs, as of December 31, 2018. In this respect, we performed an impairment analysis to estimate the
future undiscounted cash flows for each of these vessels. The analysis resulted in higher undiscounted cash flows than each vessel’s
carrying value as of December 31, 2018 with the exception of
Northsea Alpha
and
Northsea Beta
. A total impairment
charge of $0.7 million was recorded at December 31, 2018, all of which was charged against vessels, net on the balance sheet.
This impairment charge was in addition to the $1.6 million impairment charge recorded in the first quarter, 2018 relating
to the write down of the carrying amount of
Northsea Alpha
and
Northsea Beta
to their fair values following the
impairment analysis carried out for the fleet at March 31, 2018. The aggregate non-cash impairment charges for the Handysize vessels
in 2018 was approximately $2.3 million.
For
the purposes of the impairment test, we determine future undiscounted net operating cash flows for each vessel and compare it
to the vessel’s carrying value. The future undiscounted net operating cash flows are determined by considering the:
|
●
|
estimated
vessel utilization of 85.0% to 98.6% (depending on the type of the vessel) for the first year and 98.0% or 93.0%, including
scheduled off-hire days for planned dry-dockings and vessel surveys, for the years thereafter, based on historical experience;
|
|
|
|
|
●
|
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 based on recent
market estimates for the first year and the most recent seven year historical average time charter rates, where available,
for similar vessels for the unfixed days over the remaining estimated useful life of the vessel, net of our recent historical
data on vessel operating expenses;
|
|
|
|
|
●
|
estimated
cost of scheduled intermediate and special survey dry-dockings; and
|
|
|
|
|
●
|
inflationary
factor for vessel operating expenses and dry-docking costs of 2.0% per year.
|
When
the estimate of future undiscounted net operating cash flows for any vessel is lower than the vessel’s carrying value, we
compare 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
we believe that the assumptions used to evaluate potential impairment are reasonable and appropriate, these assumptions are highly
subjective. For example, we determined future undiscounted net operating cash flows, in part, based on the average gross one year
time charter equivalent rate for the most recent seven-year period. This seven year period represents a reasonable amount
of time in which a substantial portion of the worldwide product tankers newbuild orderbook was delivered and the global economic
conditions gradually improved. Historically, actual freight rates, which have experienced wide spreads between peaks and troughs,
industry costs and scrap prices have been volatile, and long-term estimates may differ considerably. 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.
Vessel
Lives and Depreciation
We
depreciate our vessels on a straight line basis over the expected useful life of each vessel, which is 25 years from the date
of its initial delivery from the shipyard, which we believe is within industry standards and represents the most reasonable useful
life for each of our 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 our 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.
C.
Research and Development, Patents and Licenses, etc.
Not
applicable.
D.
Trend Information
Our
results of operations depend primarily on the charter hire rates that we are able to realize for our vessels, which depend on
the supply and demand dynamics characterizing the product tanker market at any given time. The product tanker industry has been
highly cyclical in recent years, experiencing volatility in charter hire rates and vessel values resulting from changes in the
supply of and demand for products and tanker capacity. For other trends affecting our business please see other discussions in
“Item 4. Information on the Company” and “Item 5. Operating and Financial Review and Prospects”.
E.
Off-Balance Sheet Arrangements.
We
do not have any off-balance sheet arrangements as of the date of this Annual Report.
F.
Tabular Disclosure of Contractual Obligations
The
following table sets forth our contractual obligations and their maturity dates as of December 31, 2018.
|
|
Total
|
|
|
Less
than
1 year
|
|
|
1-3
years
|
|
|
3-5
years
|
|
|
More
than
5 years
|
|
|
|
(In
thousands of U.S. dollars)
|
|
Loan agreements - principal
(1)
|
|
$
|
63,422
|
|
|
$
|
4,503
|
|
|
$
|
9,506
|
|
|
$
|
49,413
|
|
|
$
|
—
|
|
Interest on loans (2)
|
|
$
|
24,580
|
|
|
$
|
5,924
|
|
|
$
|
10,909
|
|
|
$
|
7,747
|
|
|
$
|
—
|
|
Promissory note - principal (3)
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
5,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Interest on promissory note (3)
|
|
$
|
281
|
|
|
$
|
225
|
|
|
$
|
56
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Technical management agreements –
ITM (4)
|
|
$
|
229
|
|
|
$
|
229
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Ship management agreements – Maritime
(5)
|
|
$
|
179
|
|
|
$
|
179
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Administrative
services – Maritime (6)
|
|
$
|
1,997
|
|
|
$
|
1,628
|
|
|
$
|
369
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total
|
|
$
|
95,688
|
|
|
$
|
12,688
|
|
|
$
|
25,840
|
|
|
$
|
57,160
|
|
|
$
|
—
|
|
(1)
|
Secondone,
Thirdone and Fourthone, together, Sixthone and Seventhone, together, and Eighthone, independently, entered into loan agreements
with lenders, for which the vessels they own are mortgaged as collateral. Please read “– Liquidity and Capital
Resources – Indebtedness” above for more information.
|
(2)
|
Assumes
scheduled loan principal amortization as described above, based on an average 3-month LIBOR rate of 2.81% plus the applicable
margin over LIBOR for the entire duration of the existing loan agreements. Please read “Item 7. Major Shareholders and
Related Party Transactions – B. Related Party Transactions – Promissory Note Issued to Maritime Investors”
for more information.
|
(3)
|
On
October 28, 2015, we and Maritime Investors entered into a promissory note, which as subsequently amended and supplemented,
has an outstanding principal balance of $5.0 million payable on March 31, 2020, which bore a fixed interest rate of 4.00%
per annum from December 29, 2017 to June 30, 2018 and an increased fixed rate of 4.5% per annum from July 1, 2018 and until
paid in full, payable quarterly in cash. Please refer to “Item 7 – Related Party Transactions” below for
more information.
|
(4)
|
The
technical management agreements with ITM can be cancelled by us 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. As of December 31, 2018, all such agreements were cancelable upon three months’
advance notice.
|
(5)
|
The
management agreements for the vessels had initial terms of five years. For Northsea Alpha, Northsea Beta and Pyxis Delta the
base term expired on December 31, 2015, for Pyxis Theta it expired on December 31, 2017 and they expired on December 31, 2018
for Pyxis Epsilon and Pyxis Malou. Following their initial expiration dates, the management agreements renewed for consecutive
five year periods, but may be terminated by either party on three months’ notice.
|
(6)
|
Pursuant
to our Head Management Agreement, administrative services will be provided at least until March 23, 2020.
|
G.
Safe Harbor
Forward-looking
information discussed in this Item 5 includes assumptions, expectations, projections, intentions and beliefs about future events.
These statements are intended as “forward-looking statements”. We caution that assumptions, expectations, projections,
intentions and beliefs about future events may and often do vary from actual results and the differences can be material. Please
see the section entitled “Forward-Looking Statements” in this Annual Report.
ITEM
6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A.
Directors and Senior Management
Directors
and Executive Officers
The
following table sets forth information regarding our executive officers and directors as of the date of the Annual Report. The
business address of each of the below-listed directors and officers is c/o Pyxis Tankers Inc., K.Karamanli 59, Maroussi 15125,
Athens, Greece.
Name
|
|
Age
|
|
Position
|
Eddie
Valentis
|
|
52
|
|
Chairman,
Chief Executive Officer and Class I Director
|
Henry
P. Williams
|
|
63
|
|
Chief
Financial Officer and Treasurer
|
Konstantinos
Lytras
|
|
54
|
|
Chief
Operating Officer and Secretary
|
Robin
P. Das
|
|
45
|
|
Class
III Director
|
Basil
G. Mavroleon
|
|
70
|
|
Class
III Director
|
Aristides
J. Pittas
|
|
59
|
|
Class
II Director
|
Biographical
information with respect to each of our directors and executive officers is set forth below.
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 our board of directors since our 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, and, since 2016, as
a council member of the International Association of Independent Tanker Owners (INTERTANKO). 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.
Henry
P. Williams
was appointed as our Chief Financial Officer and Treasurer in August 2015. Mr. Williams has over 35 years of commercial,
investment and merchant banking experience. From February 2015, he served as a financial consultant to and is employed by Maritime
and its affiliates. From March 2014 to January 2015, Mr. Williams was Managing Director, Head of Maritime, Energy Services &
Infrastructure (U.S.) investment banking for Canaccord Genuity Inc. From August 2012 to February 2014, Mr. Williams was a Senior
Advisor to North Sea Securities LLC, a boutique advisory firm in New York. From November 2010 to June 2012, Mr. Williams was Managing
Director, Global Sector Head, Shipping of Nordea Markets in Oslo, Norway and Head of its U.S. Investment Banking division in New
York. From 1992 until 2010, Mr. Williams was employed by Oppenheimer & Co. Inc., as Managing Director, Head of Energy &
Transportation of its investment banking division. Mr. Williams has an MBA in Finance from New York University Leonard N. Stern
School of Business and a BA in Economics and Business Administration from Rollins College.
Konstantinos
Lytras
, has served as our Chief Operating Officer since our inception and as our Secretary since October 15, 2018. Mr. Lytras
has also served as Maritime’s Financial Director since 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 Ltd. Mr. Lytras earned a B.A. in Business Administration
from Technological Institute of Piraeus and a B.S. in Economics from the University of Athens.
Robin
P. Das
, serves as a Class III director. Mr. Das 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 LLC, an asset management firm established
to focus on the shipping sector. From 2005 until 2011, Mr. Das was Global Head of Shipping at HSH Nordbank AG, then the largest
lender globally to the shipping industry. Before joining HSH Nordbank AG 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. Since October 2016, Mr. Das also serves as director
of Nimrod Sea Assets Limited (LSE:NSA), which invests in marine assets associated with the offshore oil and gas industry. Mr.
Das holds a BSc (Honours) degree from the University of Strathclyde.
Basil
G. Mavroleon
, serves as a Class III director. Mr. Mavroleon has been in the shipping industry for 45 years. Since 1970, Mr.
Mavroleon has worked for 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 five years, from 2009 until 2013. Mr. Mavroleon currently serves as Managing Director of WeberSeas (Hellas) S.A., a
comprehensive sale and purchase, newbuilding, marine projects and ship finance brokerage based in Athens, Greece. He is a Director
of Genco Shipping and Trading Limited (NYSE: GNK), a company engaged in the shipping business focused on the drybulk industry
spot market. 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 invested in tanker freight forward agreements and derivatives. Mr. Mavroleon is on the board
of the Associate Membership Committee of INTERTANKO, is on the Advisory Board of NAMMA (North American Maritime Ministry Association),
is Director Emeritus of NAMEPA (North American Marine Environmental Protection Association), and the Chairman of the New York
World Scale Committee (NYC) INC. Mr. Mavroleon was educated at Windham College, Putney Vermont.
Aristides
J. Pittas
, serves as a Class II Director. Mr. Pittas has more than 30 years of shipping industry experience. Since 2005, he
has been a member of the board of directors and the Chairman and Chief Executive Officer of Euroseas Ltd. (NASDAQ: ESEA) (“Euroseas”),
an independent shipping company that operates in the drybulk and container shipping industry. Since 1997, Mr. Pittas has also
been the President of Eurochart S.A., Euroseas’ affiliate, which is a shipbroking company specializing in chartering, selling
and purchasing ships. Since 1995, Mr. Pittas has been the President and Managing Director of Eurobulk Ltd., Euroseas’ affiliated
ship management company. Eurobulk Ltd. 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.
Family
Relationships
There
are no family relationships among any of our executive officers or directors.
B.
Compensation of Directors, Executive Officers and Key Employees
We
have no direct employees. The services of our executive officers, internal auditors and secretary are provided by Maritime. We
have entered into a Head Management Agreement with Maritime, pursuant to which we pay approximately $1.6 million per year for
the services of these individuals, and for other administrative services associated with our being a public company and other
services to our subsidiaries. Please see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party
Transactions”.
Our
non-executive directors receive in aggregate an annual compensation in the amount of $125,000 per year, plus reimbursements for
actual expenses incurred while acting in their capacity as a director. We may in the future also grant directors awards under
our Pyxis Tankers Inc. 2015 equity incentive plan as compensation. We do not have a retirement plan for our officers or directors.
There are no service contracts with our 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 us as the board
of directors may determine.
Equity
Incentive Plan
On
October 28, 2015, we adopted the Pyxis Tankers Inc. 2015 equity incentive plan (the “EIP”), an equity incentive plan
which entitles our and our subsidiaries’ and affiliates’ employees, officers and directors, as well as consultants
and service providers to us (including persons who are employed by or provide services to any entity that is itself a consultant
or service provider) and our subsidiaries (including employees of Maritime, our affiliated ship manager), to receive stock options,
stock appreciation rights, restricted stock grants, restricted stock units, unrestricted stock grants, other equity-based or equity-related
awards, and dividend equivalents. We summarize below the material terms of the EIP.
The
nominating and corporate governance committee of our board of directors serves as the administrator under the EIP. Subject to
adjustment for changes in capitalization as provided in the EIP, the maximum aggregate number of shares of common stock that may
be delivered pursuant to awards granted under the EIP during the ten-year term of the EIP will be 15% of the then-issued and outstanding
number of shares of our common stock. If an award granted under the EIP is forfeited, or otherwise expires, terminates or is cancelled
or settled 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 EIP. Any shares that are held back to satisfy the exercise price or tax withholding obligation pursuant
to any stock options or stock appreciation rights granted under the EIP will again be available for delivery pursuant to other
awards under the EIP. No award may be granted under the EIP after the tenth anniversary of the date the EIP was adopted by our
board of directors.
In
the event that we are subject to a “change of control” (as defined in the EIP), the EIP administrator may, in accordance
with the terms of the EIP, make such adjustments and other substitutions to the EIP and outstanding awards under the EIP as it
deems equitable or desirable.
Except
as otherwise determined by the EIP administrator in an award agreement, the exercise price for options shall be equal to the fair
market value of a share of our common stock on the date of grant, but in no event can the exercise price 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.
Stock
appreciation rights (“SARs”), will provide for a payment of the difference between the fair market value of a share
of our common stock on the date of exercise of the SAR and the exercise price of a SAR, which will not be less than 100% of the
fair market value on the date of grant, multiplied by the number of shares for which the SAR is exercised. The SAR agreement will
also specify the maximum term of the SAR, which will not exceed ten years from the date of grant. Payment upon exercise of the
SAR may be made in the form of cash, shares of our common stock or any combination of both, as determined by the EIP administrator.
Restricted
and/or unrestricted stock grants may be issued with or without cash consideration under the EIP and may be subject to such restrictions,
vesting and/or forfeiture provisions as the EIP administrator may provide. The holder of a restricted stock grant awarded under
the EIP may have the same voting, dividend and other rights as our other stockholders.
Settlement
of vested restricted stock units may be in the form of cash, shares of our common stock or any combination of both, as determined
by the EIP administrator. The holders of restricted stock units will have no voting rights.
Subject
to the provisions of the EIP, awards granted under the EIP may include dividend equivalents. The EIP administrator may determine
the amounts, terms and conditions of any such awards provided that they comply with applicable laws. We have not set aside any
amounts to provide pension, retirement or similar benefits to persons eligible to receive awards under the EIP or otherwise.
On
October 28, 2015, our board of directors approved the issuance of 33,222 restricted shares of our common stock to certain of our
officers. As of December 31, 2015, all such shares had been vested, but were not issued until March 2016. On November 15, 2017,
200,000 restricted shares of our common stock were granted and issued to one of our senior officers, and were vested immediately
upon issuance.
C.
Board Practices
Our
board of directors consists of four directors, three of whom, Robin P. Das, Basil G. Mavroleon and Aristides J. Pittas, have been
determined by our board of directors to be independent under the rules of NASDAQ and the rules and regulations of the SEC. Our
audit committee consists of three independent, non-executive directors: Robin Das, Basil Mavroleon and Aristides Pittas. We believe
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, among other things, reviews our external financial reporting, engages our external auditors,
and oversees our financial reporting procedures and the adequacy of our internal accounting controls. The nominating and corporate
governance committee consists of Basil G. Mavroleon, Aristides J. Pittas and Eddie Valentis. The nominating and corporate governance
committee is responsible for recommending to the board of directors nominees for director and directors for appointment to board
committees and advising the board with regard to corporate governance practices.
D.
Employees
We
have no direct employees. The services of our executive officers, internal auditors and secretary are provided by Maritime. We
have entered into a Head Management Agreement with Maritime, pursuant to which we pay approximately $1.6 million per year for
the services of these individuals, and for other administrative services associated with our being a public company and other
services to our subsidiaries. Please see “Item 7. Major Shareholders and Related Party Transactions – B. Related Party
Transactions.”
Indemnification
of Officers and Directors
We
have entered into agreements to indemnify our directors, executive officers and other employees as determined by the board of
directors. These agreements provide for indemnification for related expenses, including, among other things, attorneys’
fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding except as contained
in specified exceptions. We believe that the provisions in our bylaws and indemnification agreements described above are necessary
to attract and retain talented and experienced officers and directors.
E.
Share Ownership
With
respect to the total amount of common stock owned by all of our officers and directors as a group, please see “Item 7. Major
Shareholders and Related Party Transactions – A. Major Shareholders.”
ITEM
7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A.
Major Shareholders
The
following table sets forth information regarding the beneficial owners of more than five percent of shares of our common stock,
and the beneficial ownership of each of our directors and executive officers and of all of our directors and executive officers
as a group as of March 18, 2019. All of our stockholders, including the stockholders listed in this table, are entitled to one
vote for each share held.
Beneficial
ownership is determined in accordance with the SEC’s rules. In computing percentage ownership of each person, shares subject
to options held by that person that are currently exercisable or convertible, or exercisable or convertible within 60 days of
the date of this Annual Report, are deemed to be beneficially owned by that person. These shares, however, are not deemed outstanding
for the purpose of computing the percentage ownership of any other person.
|
|
Shares
Beneficially Owned
|
|
Identity
of person or group (1)
|
|
Number
|
|
|
Percentage
|
|
Eddie Valentis
(Maritime Investors Corp.) (2)
|
|
|
17,042,788
|
|
|
|
80.9
|
%
|
Henry P. Williams (3)
|
|
|
213,574
|
|
|
|
1
|
%
|
Konstantinos Lytras
(3)
|
|
|
36,074
|
|
|
|
*
|
|
Robin P. Das
|
|
|
—
|
|
|
|
—
|
|
Basil G. Mavroleon
|
|
|
—
|
|
|
|
—
|
|
Aristides J. Pittas
|
|
|
—
|
|
|
|
—
|
|
All directors and
executive officers as a group (8 person)
|
|
|
17,292,436
|
|
|
|
81.9
|
%
|
(1)
|
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 59 K. Karamanli Street, Maroussi, 15125, Greece.
|
(2)
|
Eddie
Valentis is a 100% stockholder of Maritime Investors and shares voting and investment power with Maritime Investors of the
17,042,788 shares of our common stock held by it.
|
(3)
|
Each
of Messrs Lytras and Williams received 11,074 restricted shares of our common stock in March 2016 as an award under our EIP.
In addition, Mr. Williams also received 200,000 restricted shares of our common stock in November 2017 as an award under our
EIP.
|
*
|
Less
than 1% of our outstanding shares of common stock.
|
As
of March 18, 2019, we had 1,210 shareholders of record, 114 of which were located in the United States and held an aggregate of
9,024,527 shares of our common stock, representing 43% of our outstanding shares of common stock. However, one of the U.S. shareholders
of record is CEDE & CO., a nominee of The Depository Trust Company, which held 9,022,776 shares of our common stock as of
March 18, 2019. Accordingly, we believe that the shares held by CEDE & CO. include shares of common stock beneficially owned
by both holders in the United States and non-U.S. beneficial owners.
B.
Related Party Transactions
Amended
and Restated Head Management Agreement with Maritime.
The
operations of our vessels are managed by Maritime, an affiliated ship management company, under our Head Management Agreement
dated August 5, 2015 and separate management agreements with each of our vessel-owning subsidiaries. Under the Head Management
Agreement, Maritime is either directly responsible for or oversees all aspects of ship management for us and our fleet. Under
that agreement, Maritime also provides administrative services to us, which include, among other things, the provision of the
services of our Chief Executive Officer, Chief Financial Officer, Chief Operating Officer and Secretary, 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 provides us and our 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 our vessels.
Maritime
also currently manages one vessel,
Pyxis Lamda
, owned by a party affiliated with Mr. Valentis, our 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 can be terminated by Maritime only for cause or under other limited circumstances, such as upon a sale of
us 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 90
th
day preceding the termination date.
Pursuant to the Head Management Agreement, each of our new subsidiaries 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, we pay Maritime a cost of $1.6 million annually for the services of our executive officers and other administrative
services, including use of office space in Maritime’s premises. In return for Maritime’s ship management services,
we pay to Maritime for each vessel while in operation, a fee per day of $325, and for each vessel under construction, a 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 1
st
for inflation in Greece or such other country where it is headquartered. On August
9, 2016, we amended the Head Management Agreement with Maritime to provide that in the event that the official inflation rate
for any calendar year is deflationary, no adjustment shall be made to the Ship-management Fees and the administration fees, which
will remain the same as per the previous calendar year. Effective January 1, 2019, the Ship-Management Fees and the Administration
Fees were increased by 0.62% in line with the average inflation rate in Greece in 2018. 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. In the event the agreement is terminated without cause and a change of control
(as defined therein) occurred within 12 months after such termination or the agreement is terminated due to a change of control,
we will pay Maritime an amount equal to 2.5 times the administrative fee.
The
following amounts were charged by Maritime to us during 2016, 2017 and 2018:
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|
Year
Ended December 31,
|
|
(In thousands
of U.S. dollars)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Charter hire commissions
|
|
$
|
316
|
|
|
$
|
368
|
|
|
$
|
354
|
|
Ship-Management Fees
|
|
|
631
|
|
|
|
712
|
|
|
|
720
|
|
Administration fees
|
|
|
1,600
|
|
|
|
1,600
|
|
|
|
1,618
|
|
Total
|
|
$
|
2,547
|
|
|
$
|
2,680
|
|
|
$
|
2,692
|
|
Promissory
Note issued to Maritime Investors
On
October 28, 2015, we issued a promissory note in the amount of $2.5 million in favor of Maritime Investors in connection with
its election to receive a portion of the merger true-up shares in the form of a promissory note. The promissory note also includes
amounts due to Maritime Investors for the payment of $0.6 million by Maritime Investors to LookSmart, representing the cash consideration
of the merger, and the amounts that allowed us to pay miscellaneous transactional costs. The promissory note had a maturity of
January 15, 2017 and an interest rate of 2.75% per annum. On August 9, 2016, we agreed with Maritime Investors to extend the maturity
of the promissory note for one year, from January 15, 2017 to January 15, 2018, at the same terms and at no additional cost to
us. In addition, on March 7, 2017, we agreed with Maritime Investors to further extend the maturity of the promissory note
for one additional year, from January 15, 2018 to January 15, 2019, at the same terms and at no additional costs to us. On December
29, 2017, we entered into a third amendment to the promissory note (“Amended & Restated Promissory Note”), pursuant
to which (i) the outstanding principal balance increased from $2.5 million to $5.0 million, (ii) the maturity date was extended
to June 15, 2019, and (iii) the fixed interest rate was increased to 4.00% per annum, payable only in cash. In exchange for entering
into the third amendment, we reduced the outstanding balance due to Maritime by $2.5 million. On June 29, 2018, we entered into
an amendment to the Amended & Restated Promissory Note pursuant to which (i) the maturity date was extended to March 31, 2020,
and (ii) the interest rate was increased to 4.5% per annum until repayment in full.
Under
the terms of the credit facility agreement of one of our subsidiaries, Eighthone Corp. with EntrustPermal, no repayment of principal
under the Amended & Restated Promissory Note may be made while any PIK interest or Principal Deficiency Amount is outstanding
under the credit facility.
Maritime
Advances
At
December 31, 2018, Maritime had extended $3.4 million of advances which we used to pay various operating costs, debt service and
other obligations. During the quarter ended September 30, 2018, such advances increased to a highpoint of $7.5 million.
Please
also see Item 7.B. Compensation of Directors, Executive Officers and Key Employees – Equity Incenitve Plan.
C.
Interests of Experts and Counsel
Not
applicable.
ITEM
8. FINANCIAL INFORMATION
A.
Consolidated Statements and Other Financial Information
Please
see Item 18.
Legal
Proceedings
We
may, from time to time, be involved in litigation and claims arising out of our operations in the normal course of business. At
this time, we are not aware of any proceedings against us or the vessels in our fleet or contemplated to be brought against us
or the vessels in our fleet which could have significant effects on our financial position or profitability. We maintain insurance
policies with insurers in amounts and with coverage and deductibles as our board of directors believes are reasonable and prudent.
We expect 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.
Dividend
Policy
We
do not intend to pay dividends in the near future and will make dividend payments to our stockholders in the future only if our
board of directors, acting in its sole discretion, determines that such payments would be in our best interest and in compliance
with relevant legal, fiduciary and contractual requirements, including our current and future loan agreements. 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.
B.
Significant Changes
Not
applicable.
ITEM
9. THE OFFER AND LISTING
A.
Offer and Listing Details
Our
shares of common stock were approved for listing on the NASDAQ Capital Market on October 28, 2015 under the symbol “PXS”
and the first reported trade on the NASDAQ Capital Market for our shares was in November 2015. Our shares continue to be listed
on the NASDAQ Capital Market.
On
September 6, 2018 we received a deficiency notice from The NASDAQ Stock Market, Inc. stating that, for a period of 30 consecutive
trading days, our shares of common stock closed below the minimum price of $1.00 per share as required for continued listing on
the NASDAQ Capital Market. In accordance with the notice, we had until March 5, 2019 or 180 calendar days from the date of the
notice, to regain compliance with NASDAQ’s continued listing minimum closing bid price requirements (Marketplace Rule 5550(a)(2)).
We received a written notification from the exchange on October 31, 2018 stating that the closing bid price of our shares had
been $1.00 per share or higher for 10 consecutive trading days, from October 15 to October 26, 2018, and, accordingly, we were
again in compliance with the exchange’s minimum closing bid price rule.
B.
Plan of Distribution
Not
applicable.
C.
Markets
Shares
of our common stock are trading on the NASDAQ Capital Market under the symbol “PXS”.
D.
Selling Shareholders
Not
applicable.
E.
Dilution
Not
applicable.
F.
Expenses of the Issue
Not
applicable.
ITEM
10. ADDITIONAL INFORMATION
A.
Share Capital
Not
applicable.
B.
Memorandum and Articles of Association
Our
Articles of Incorporation have been filed as Exhibit 3.1 to our Registration Statement on Form F-4 (File No. 333-203598) filed
with the SEC on April 23, 2015. Our Bylaws have been filed as Exhibit 3.2 to our Registration Statement on Form F-4 (File No.
333-203598) filed with the SEC on April 23, 2015. The information contained in these exhibits is incorporated by reference herein.
We
are a corporation organized under the laws of the Republic of the Marshall Islands and are subject to the provisions of Marshall
Islands law. Given below is a summary of the material features of our common shares. This summary is not a complete discussion
of our charter documents and other instruments that create the rights of our shareholders. You are urged to read carefully those
documents and instruments, which are included as exhibits to this annual report.
Our
authorized capital stock consists of 450,000,000 shares of common stock, par value $0.001 per share, of which 21,060,190
shares are currently issued and outstanding and 50,000,000 shares of preferred stock, par value $0.001 per share, none of which
are outstanding. All of our shares of stock are in registered form. There are no limitations on the rights to own securities,
including the rights of non-resident or foreign shareholders to hold or exercise voting rights on the securities, imposed by the
laws of the Republic of The Marshall Islands or by our Articles of Incorporation or Bylaws.
Common
Stock
Each
outstanding share of common stock entitles the holder to one vote on all matters submitted to a vote of shareholders. Subject
to preferences that may be applicable to any outstanding preferred shares, holders of our common stock are entitled to receive
ratably all dividends, if any, declared by our board of directors out of funds legally available for dividends. Upon our dissolution
or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid
to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of our common stock are
entitled to receive pro-rata the remaining assets available for distribution. Holders of our common stock do not have preemptive,
subscription or conversion rights or redemption or sinking fund provisions.
Preferred
Stock
Our
board of directors has the authority to authorize the issuance from time to time of one or more classes of preferred stock with
one or more series within any class thereof, with such voting powers, full or limited, or without voting powers and with such
designations, preferences and relative, participating, optional or special rights and qualifications, limitations or restrictions
thereon as shall be set forth in the resolution or resolutions adopted by our board of directors providing for the issuance of
such preferred stock. Issuances of preferred stock, while providing flexibility in connection with possible financings, acquisitions
and other corporate purposes, could, among other things, adversely affect the voting power of the holders of our common stock.
Directors
Our
directors are elected by a plurality of the votes cast at a meeting of stockholders entitled to vote. There is no provision for
cumulative voting.
Directors
are elected annually on a staggered basis. There are three classes of directors; each class serves a separate term length. Our
board of directors has the authority to, in its discretion, fix the amounts which shall be payable to members of the board of
directors and to members of any committee for attendance at the meetings of the board of directors or of such committee and for
services rendered to us.
Shareholders
Meetings
Under
our Bylaws, annual shareholder meetings will be held at a time and place selected by our board of directors. The meetings may
be held in or outside of the Marshall Islands. Special shareholder meetings may be called at any time by the majority of our board
of directors or the chairman of the board. No business may be conducted at the special meeting other than the business brought
before the special meeting by the majority of our board of directors or the chairman of the board. Our board of directors may
set a record date between 15 and 60 days before the date of any meeting to determine the shareholders that will be eligible to
receive notice and vote at the meeting. One or more shareholders representing at least one-third of the total voting rights of
our total issued and outstanding shares present in person or by proxy at a shareholder meeting shall constitute a quorum for the
purposes of the meeting.
Interested
Transactions
Our
Bylaws provide that no contract or transaction between us and one or more of our directors or officers, or between us and any
other corporation, partnership, association or other organization in which one or more of its directors or officers are our directors
or officers, or have a financial interest, will be void or voidable solely for this reason, or solely because the director or
officer is present at or participates in the meeting of the board of directors or committee thereof which authorizes the contract
or transaction or solely because his or her or their votes are counted for such purpose, if (i) the material facts as to the relationship
or interest and as to the contract or transaction are disclosed or are known to our board of directors or its committee and the
board of directors or the committee in good faith authorizes the contract or transaction by the affirmative vote of a majority
of disinterested directors, or, if the votes of the disinterested directors are insufficient to constitute an act of the board
of directors as provided in the BCA, by unanimous vote of the disinterested directors; (ii) the material facts as to the relationship
or interest are disclosed to the shareholders, and the contract or transaction is specifically approved in good faith by the vote
of the shareholders; or (iii) the contract or transaction is fair to us as of the time it is authorized, approved or ratified,
by the board of directors, its committee or the shareholders.
Certain
Provisions of Our Articles of Incorporation and Bylaws
Certain
provisions of Marshall Islands law and our articles of incorporation and bylaws could make the acquisition of the Company by means
of a tender offer, a proxy contest, or otherwise, and the removal of our incumbent officers and directors more difficult. These
provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and to encourage
persons seeking to acquire control of the Company to work with our management.
Our
articles of incorporation and bylaws include provisions that:
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allow
our board of directors to issue, without further action by the shareholders, up to 50,000,000 shares of undesignated preferred
stock;
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providing
for a classified board of directors with staggered, three year terms;
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prohibiting
cumulative voting in the election of directors;
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prohibiting
stockholder action by written consent unless consent is signed by all stockholders entitled to vote on the action;
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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 our common stock cast at an annual meeting of stockholders;
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require
that special meetings of our shareholders be called only by a majority of our board of directors or the chairman of the board;
and
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establish
an advance notice procedure for shareholder proposals to be brought before an annual meeting of shareholders.
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Our
articles of incorporation also prohibit us from engaging in any “Business Combination” with any “Interested
Shareholder” (as such terms are explained further below) for a period of three years following the date the shareholder
became an Interested Shareholder, unless:
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prior
to such time, our board of directors approved either the Business Combination or the transaction which resulted in the shareholder
becoming an Interested Shareholder;
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upon
consummation of the transaction which resulted in the shareholder becoming an Interested Shareholder, the Interested Shareholder
owned at least 85% of our voting stock outstanding at the time the transaction commenced, excluding for purposes of determining
the number of shares outstanding those shares owned (i) by persons who are directors and also officers and (ii) employee stock
plans in which employee participants do not have the right to determine confidentially whether shares held subject to the
plan will be tendered in a tender or exchange offer;
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at
or subsequent to such time, the Business Combination is approved by our board of directors and authorized at an annual or
special meeting of shareholders, and not by written consent, by the affirmative vote of at least two thirds of the outstanding
voting stock that is not owned by the Interested Shareholder; or
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●
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the
shareholder became an Interested Shareholder prior to March 23, 2015.
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These
restrictions shall not apply if:
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a
shareholder becomes an Interested Shareholder inadvertently and (i) as soon as practicable divests itself of ownership of
sufficient shares so that the shareholder ceases to be an Interested Shareholder; and (ii) would not, at any time within the
three-year period immediately prior to a Business Combination between the Company and such shareholder, have been an Interested
Shareholder but for the inadvertent acquisition of ownership; or
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●
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the
Business Combination is proposed prior to the consummation or abandonment of and subsequent to the earlier of the public announcement
or the notice required of a proposed transaction which (i) constitutes one of the transactions described in the following
sentence; (ii) is with or by a person who either was not an Interested Shareholder during the previous three years or who
became an Interested Shareholder with the approval of the Board; and (iii) is approved or not opposed by a majority of the
members of our board of directors then in office (but not less than one) who were directors prior to any person becoming an
Interested Shareholder during the previous three years or were recommended for election or elected to succeed such directors
by a majority of such directors. The proposed transactions referred to in the preceding sentence are limited to:
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(a)
a merger or consolidation of the Company (except for a merger in respect of which, pursuant to the BCA, no vote of our shareholders
is required);
(b)
a sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), whether
as part of a dissolution or otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary of the
Company (other than to any direct or indirect wholly-owned subsidiary or to the Company) having an aggregate market value equal
to 50% or more of either that aggregate market value of all of the assets of the Company determined on a consolidated basis or
the aggregate market value of all the outstanding shares; or
(c)
a proposed tender or exchange offer for 50% or more of our outstanding voting shares.
Our
articles of incorporation define a “Business Combination” to include:
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any
merger or consolidation of the Company or any direct or indirect majority-owned subsidiary of the Company with (i) the Interested
Shareholder or any of its affiliates, or (ii) with any other corporation, partnership, unincorporated association or other
entity if the merger or consolidation is caused by the Interested Shareholder;
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any
sale, lease, exchange, mortgage, pledge, transfer or other disposition (in one transaction or a series of transactions), except
proportionately as a shareholder of the Company, to or with the Interested Shareholder, whether as part of a dissolution or
otherwise, of assets of the Company or of any direct or indirect majority-owned subsidiary of the Company which assets have
an aggregate market value equal to 10% or more of either the aggregate market value of all the assets of the Company determined
on a consolidated basis or the aggregate market value of all the outstanding shares;
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any
transaction which results in the issuance or transfer by the Company or by any direct or indirect majority-owned subsidiary
of the Company of any shares, or any share of such subsidiary, to the Interested Shareholder, except: (A) pursuant to the
exercise, exchange or conversion of securities exercisable for, exchangeable for or convertible into shares, or shares of
any such subsidiary, which securities were outstanding prior to the time that the Interested Shareholder became such; (B)
pursuant to a merger with a direct or indirect wholly-owned subsidiary of the Company solely for purposes of forming a holding
company; (C) pursuant to a dividend or distribution paid or made, or the exercise, exchange or conversion of securities exercisable
for, exchangeable for or convertible into shares, or shares of any such subsidiary, which security is distributed, pro-rata
to all holders of a class or series of shares subsequent to the time the Interested Shareholder became such; (D) pursuant
to an exchange offer by the Company to purchase shares made on the same terms to all holders of said shares; or (E) any issuance
or transfer of shares by the Company; provided however, that in no case under items (C)-(E) of this subparagraph shall there
be an increase in the Interested Shareholder’s proportionate share of the any class or series of shares;
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any
transaction involving the Company or any direct or indirect majority-owned subsidiary of the Company which has the effect,
directly or indirectly, of increasing the proportionate share of any class or series of shares, or securities convertible
into any class or series of shares, or shares of any such subsidiary, or securities convertible into such shares, which is
owned by the Interested Shareholder, except as a result of immaterial changes due to fractional share adjustments or as a
result of any purchase or redemption of any shares not caused, directly or indirectly, by the Interested Shareholder; or
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any
receipt by the Interested Shareholder of the benefit, directly or indirectly (except proportionately as a shareholder of the
Company), of any loans, advances, guarantees, pledges or other financial benefits (other than those expressly permitted above)
provided by or through the Company or any direct or indirect majority-owned subsidiary.
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Our
articles of incorporation define an “Interested Shareholder” as any person (other than the Company, Maritime Investors
and any direct or indirect majority-owned subsidiary of the Company or Maritime Investors and its affiliates) that:
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is
the owner of 15% or more of our outstanding voting shares; or
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is
an affiliate or associate of the Company and was the owner of 15% or more of the outstanding voting shares of the Company
at any time within the three-year period immediately prior to the date on which it is sought to be determined whether such
person is an Interested Shareholder; and the affiliates and associates of such person; provided, however, that the term “Interested
Shareholder” shall not include any person whose ownership of shares in excess of the 15% limitation set forth herein
is the result of action taken solely by the Company; provided that such person shall be an Interested Shareholder if thereafter
such person acquires additional shares of voting shares of the Company, except as a result of further Company action not caused,
directly or indirectly, by such person.
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C.
Material Contracts
Attached
as exhibits to this annual report are the contracts we consider to be both material and not entered into in the ordinary course
of business. Descriptions of such contracts are included in “Item 4. Information on the Company”, “Item 5. Operating
and Financial Review and Prospects”, “Item 7. Major Shareholders and Related Party Transactions”, and in Notes
3 (Transactions with Related Parties) and 7 (Long-term Debt) to our consolidated financial statements included in this Annual
Report. Other than these contracts, we have not entered into any other material contracts in the two years immediately preceding
the date of this Annual Report, other than contracts entered into in the ordinary course of business.
D.
Exchange Controls
Under
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 our common shares.
E.
Taxation
Certain
U.S. Federal Income Tax Considerations
The
following is a summary of certain material U.S. federal income tax consequences of an investment in our common stock. The discussion
set forth below is based upon the Code, Treasury regulations and judicial and administrative rulings and decisions all as in effect
and available on the date hereof and all of which are subject to change, possibly with retroactive effect. In addition, the application
and interpretation of certain aspects of the PFIC rules, referred to below, and of new tax legislation enacted in December 2017
(commonly known as the “Tax Cuts and Jobs Act” or “TCJA”) require the issuance of regulations and other
guidance which in many instances have not been promulgated or provided and which may have retroactive effect. There can be no
assurance that any of these regulations or other guidance will be enacted, promulgated or provided, and if so, the form they will
take or the effect that they may have on this discussion. This discussion is not binding on the IRS or the courts and prospective
investors should note that no rulings have been or are expected to be sought from the IRS with respect to any of the U.S. 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 U.S. federal income tax consequences applicable to any given investor, nor does it
address the U.S. federal income tax considerations applicable to categories of investors subject to special taxing rules, such
as brokers, expatriates, banks, real estate investment trusts, regulated investment companies, insurance companies, tax-exempt
organizations, controlled foreign corporations, individual retirement or other tax-deferred accounts, dealers or traders in securities
or currencies, traders in securities that elects to use a mark-to-market method of accounting for their securities holdings, partners
and partnerships, S corporations, estates and trusts, investors required to recognize income for U.S. federal income tax purposes
no later than when such income is reported on an “applicable financial statement”, 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% or more of our stock by vote or value. Furthermore,
the discussion does not address alternative minimum tax consequences or estate or gift tax consequences or any state tax consequences,
and is generally limited to investors that hold our common stock as “capital assets” within the meaning of Section
1221 of the Code. Each investor is strongly urged to consult, and depend on, his or her own tax advisor in analyzing the U.S.
federal, state, local and non-U.S. tax consequences particular to him or her of an investment in our 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 OTHER TAX CONSEQUENCES ARISING UNDER THE LAWS OF ANY STATE,
LOCAL, FOREIGN OR OTHER TAXING JURISDICTION, THE EFFECT OF ANY CHANGES IN APPLICABLE TAX LAW, AND YOUR ENTITLEMENT TO BENEFITS
UNDER AN APPLICABLE INCOME TAX TREATY.
U.S.
Federal Income Taxation of the Company
Operating
Income
Unless
exempt from U.S. federal income taxation under Section 883 of the Code or under an applicable U.S. income tax treaty, a foreign
corporation that earns only shipping income is generally subject to U.S. federal income taxation under one of two alternative
tax regimes: (i) the 4% gross basis tax or (ii) the net basis tax and branch profits tax. For this purpose, shipping income includes
income from (i) the use of a vessel, (ii) hiring or leasing of a vessel for use on a time, operating or bareboat charter basis
or (iii) the performance of services directly related to the use of a vessel (and thus includes spot, time and bareboat charter
income). We anticipate that we will earn substantially all our shipping income from the chartering or employment of vessels for
use on a spot or time charter basis; we may also, in the future, place one or more of our vessels in pooling arrangements or on
bareboat charters.
The
U.S.-source portion of shipping income is 50% of the income attributable to voyages that begin or end, but not both begin and
end, in the United States. Generally, no amount of the income from voyages that begin and end outside the United States is treated
as U.S. source, and consequently none of the shipping income attributable to such voyages is subject to the 4% gross basis tax.
Although the entire amount of shipping income from voyages that both begin and end in the United States would be U.S. source,
we are not permitted by United States law to engage in voyages that both begin and end in the United States and therefore we do
not expect to have any U.S.-source shipping income.
The
Republic of Malta has an income tax treaty with the United States, but the Republic of the Marshall Islands does not have an income
tax treaty with the United States. Accordingly, income earned by our subsidiaries organized under the laws of the Republic of
Malta, but not by us or our subsidiaries organized under the laws of the Republic of the Marshall Islands, may qualify for a treaty-based
exemption.
The
4% Gross Basis Tax
The
United States imposes a 4% U.S. federal income tax on a foreign corporation’s gross U.S.- source shipping income to the
extent such income is not treated as effectively connected with the conduct of a U.S. trade or business. As a result of the 50%
sourcing rule discussed above, the effective tax is 2% of the gross income attributable to voyages beginning or ending in the
United States.
The
Net Basis Tax and Branch Profits Tax
We
do 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 we were to be treated as engaged in a U.S. trade or business, all or a portion
of our taxable income, including gain from the sale of vessels, could be treated as effectively connected with the conduct of
this U.S. trade or business (or “effectively connected income”). Any effectively connected income, net of allowable
deductions, would be subject to U.S. federal corporate income tax (with the statutory rate currently being 21%). In addition,
we also may be subject to a 30% “branch profits” tax on earnings effectively connected with the conduct of the U.S.
trade or business (as determined after allowance for certain adjustments), and on certain interest paid or deemed paid that is
attributable to the conduct of our U.S. trade or business. The 4% gross basis tax described above is inapplicable to income that
is treated as effectively connected income. Our U.S.-source shipping income would be considered to be effectively connected income
only if we have or are treated as having a fixed place of business in the United States involved in the earning of U.S.-source
shipping income and substantially all of our U.S.-source shipping income is attributable to regularly scheduled transportation
(such as the operation of a vessel that follows 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 our intended mode of shipping operations and other activities,
we do not expect to have any effectively connected income. In the absence of exemption from tax under Section 883 of the Code
(and/or, only in the case of income earned by our subsidiaries organized under the laws of the Republic of Malta, the applicable
exemption, under the income tax treaty between the United States and the Republic of Malta), our gross U.S. source shipping income
would be subject to the 4% U.S. federal income tax imposed, described above.
The
Section 883 Exemption
The
4% gross basis tax, the net basis tax and the branch profits tax described above are inapplicable to shipping income that qualifies
for exemption under Section 883 of the Code (the “Section 883 Exemption”). A foreign corporation will qualify for
the Section 883 Exemption if:
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it
is organized in a “qualified foreign country,” which is a country outside the United States that grants an equivalent
exemption from tax to corporations organized in the United States (an “equivalent exemption”);
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it
satisfies one of the following two ownership tests (discussed in more detail below): (A) more than 50% of the value of its
shares is beneficially owned, directly or indirectly, by “qualified shareholders” (the “50% Ownership Test”);
or (B) its shares are “primarily and regularly traded on an established securities market” in a qualified foreign
country or in the United States (the “Publicly-Traded Test.”); and
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it
meets certain substantiation, reporting and other requirements (which include the filing of U.S. income tax returns).
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For
our 2018 taxable year, we and three of our subsidiaries that earn shipping income were organized under the laws of the Republic
of the Marshall Islands. Effective March 1, 2018, three of our subsidiaries that earn shipping income domiciled to the Republic
of Malta.We and three of our subsidiaries that earn shipping income are organized under the laws of the Republic of the Marshall
Islands. The U.S. Treasury recognizes each of the Republic of the Marshall Islands and the Republic of Malta as a country that
grants an equivalent exemption and thus is a qualified foreign country. Therefore, if we and our subsidiaries satisfy the 50%
Ownership Test or Publicly-Traded Test for a taxable year, and otherwise comply with applicable substantiation and reporting requirements,
we will be exempt from U.S. federal income tax for that taxable year with respect to our U.S.-source shipping income.
In
respect of our subsidiaries organized under the laws of the Republic of Malta, we believe in any case that we may rely on the
applicable treaty exemption provided for in the tax treaty in place between the U.S. and the Republic of Malta and thus need not
satisfy the aforementioned criteria for exemption as set out in Section 883 of the Code
The
50% Ownership Test
For
purposes of the 50% Ownership Test, “qualified shareholders” include: (i) individuals who are “residents”
(as defined in the Treasury regulations promulgated under Section 883 of the Code (the “Section 883 Regulations”)
of qualified foreign countries, (ii) corporations organized in qualified foreign countries that meet the Publicly Traded Test
(discussed below), (iii) governments (or subdivisions thereof) of qualified foreign countries, (iv) non-profit organizations organized
in qualified foreign countries, and (v) certain beneficiaries of pension funds organized in qualified foreign countries, in each
case, that do not beneficially own the shares in the foreign corporation claiming the Section 883 Exemption, directly or indirectly
(at any point in the chain of ownership), in the form of bearer shares (as described in the Section 883 Regulations). For this
purpose, certain constructive ownership rules under the Section 883 Regulations require looking through the ownership of entities
to the owners of the interests in those entities. The foreign corporation claiming the Section 883 Exemption based on the 50%
Ownership Test must obtain all the facts necessary to satisfy the IRS that the 50% Ownership Test has been satisfied (as detailed
in the Section 883 Regulations) and must meet certain substantiation and reporting requirements.
The
Publicly Traded Test
The
Section 883 Regulations provide, in pertinent part, that shares of a foreign corporation will be considered to be “primarily
traded” on an established securities market in a country if the number of shares of each class of stock that are traded
during any taxable year on all established securities markets in that country exceeds the number of shares in each such class
that are traded during that year on established securities markets in any other single country. Our common shares, which constitute
our sole class of issued and outstanding stock, are “primarily traded” on the NASDAQ Capital Market, which is an established
market for these purposes.
Under
the Section 883 Regulations, our common shares would be considered to be “regularly traded” on an established securities
market if one or more classes of our shares representing more than 50% of our outstanding stock, by both total combined voting
power of all classes of stock entitled to vote and total value, are listed on such market, to which we refer as the “listing
threshold.” Our common shares, which constitutes our sole class of issued and outstanding stock, are listed on the NASDAQ
Capital Market. Accordingly, we will satisfy the listing threshold.
The
Section 883 Regulations also require that with respect to each class of stock relied upon to meet the listing threshold, (i) such
class of stock is traded on the market, other than in minimal quantities, on at least 60 days during the taxable year or one-sixth
of the days in a short taxable year (the “trading frequency test”); and (ii) the aggregate number of shares of such
class of stock traded on such market during the taxable year must be at least 10% 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 (the “trading volume
test”). Even if this were not the case, the Section 883 Regulations provide that the trading frequency and trading volume
tests will be deemed satisfied if such class of stock is traded on an established securities market in the United States and such
shares are regularly quoted by dealers making a market in such shares; for this purpose, a dealer makes a market in a stock only
if the dealer regularly and actively offers to, and in fact does, purchase the stock from, and sell the stock to, customers who
are not related to the dealer in the ordinary course.
Notwithstanding
the foregoing, the Section 883 Regulations also provide, in pertinent part, that a class of shares will not be considered to be
“regularly traded” on an established securities market for any taxable year in which 50% or more of the vote and value
of the outstanding shares of such class are owned, actually or constructively under specified share attribution rules, on more
than half the days during the taxable year by one or more persons who each own 5% or more of the vote and value of such class
of outstanding stock (the “5% Override Rule”).
For
purposes of being able to determine the persons who actually or constructively own 5% or more of the vote and value of our common
shares (or “5% shareholders”) the Section 883 Regulations permit us to rely on those persons that are identified on
Schedule 13G and Schedule 13D filings with the SEC, as owning 5% or more of our common shares. The Section 883 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% shareholder for such purposes. Consistent with the Schedule 13D/A filed with the SEC on January 2, 2018, Mr. Valentis
beneficially owned more than 5% of our common stock for all of the 2018 taxable year. Thus, we believe that the 5% Override Rule
is triggered for the 2018 taxable year.
However,
even if the 5% Override Rule is triggered, the Treasury regulations provide that the 5% Override Rule will nevertheless not apply
if we can establish that within the group of 5% shareholders, qualified shareholders (as defined generally under the Section 883
Regulations and discussed above) own sufficient number of shares to preclude non-qualified shareholders in such group from owning
50% or more of our common shares for more than half the number of days during the taxable year. In this case, Mr. Valentis was
the sole 5% shareholder for the 2018 taxable year and is a qualified shareholder for purposes of the Section 883 Regulations.
Thus, we believe that the 5% Override Rule would be inapplicable.
Based
on the foregoing, we intend to take the position that we and our subsidiaries satisfy both the 50% Ownership Test and the Publicly-Traded
Test for the 2018 taxable year and intend to comply with the substantiation and reporting requirements that are applicable under
Section 883 of the Code to claim the Section 883 Exemption. If in the 2019 or any future taxable year, the ownership of our shares
of common stock changes, because, among other things, we can give no assurance that such shareholders are qualified shareholders
or that a sufficient number of qualified shareholders will cooperate with us in respect of the applicable substantiation and reporting
requirements, there can be no assurance that we will satisfy either the 50% Ownership Test or the Publicly Traded Test, in which
case we and our subsidiaries would not qualify for the Section 883 Exemption for that taxable year and would be subject to U.S.
federal tax as set forth in the above discussion (subject to only in the case of income earned by our subsidiaries organized under
the laws of the Republic of Malta, the applicable exemption, , under the income tax treaty between the United States and the Republic
of Malta.
Gain
on Sale of Vessels
In
general, regardless of whether we qualify for the Section 883 Exemption, we will not be subject to U.S. federal income tax with
respect to gain realized on a sale of a vessel, provided the sale is considered to occur outside of the United States under U.S.
federal income tax principles. A sale of a vessel will generally be considered to occur outside of the U.S. 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, we will attempt to structure any sale of a vessel so that it is considered to occur outside of the United States.
U.S.
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 U.S. federal income tax purposes, a corporation (or other entity taxable as a corporation for U.S. federal income
tax purposes) 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 U.S. 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 U.S. 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 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
on Common Stock
Subject
to the discussion of PFICs below, any distributions made by us with respect to our shares of 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 our current or accumulated earnings and profits as determined under U.S. federal income
tax principles. Distributions in excess of our 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 us, except that certain U.S. Holders that are corporations and that directly, indirectly or constructively own
10% or more of our voting power or value may be entitled to a 100% dividends received deduction under certain circumstances. The
rules with respect to the dividends received deduction are complex and involve the application of rules that depend on a U.S.
Holder’s particular circumstances and on whether we are a PFIC, CFC or both, among other things. You should consult your
own tax advisor to determine the effect of the dividends received deduction on your ownership of our common stock.
Dividends
paid with respect to our common stock generally will be treated as non-U.S. source income and generally will constitute “passive
category income” for purposes of computing allowable foreign tax credits for U.S. federal foreign tax credit purposes. The
rules with respect to foreign tax credits are complex and involve the application of rules that depend on a U.S. Holder’s
particular circumstances. You should consult your own tax advisor to determine the foreign tax credit implications of owning our
common stock, including rules regarding the ability to utilize foreign tax credits against income recognized currently by a U.S.
Stockholder under the TCJA.
Dividends
paid on the shares of a non-U.S. corporation to an individual U.S. Holder generally will not be treated as qualified dividend
income that is taxable at preferential tax rates. However, dividends paid in respect of our common stock to an individual U.S.
Holder may qualify as qualified dividend income if: (i) our common stock is readily tradable on an established securities market
in the United States; (ii) we are not a PFIC for the taxable year during which the dividend is paid or in the immediately preceding
taxable year; (iii) the individual U.S. Holder has owned the common stock for more than 60 days in the 121-day period beginning
60 days before the “ex dividend date” and (iv) the individual U.S. Holder is not under an obligation to make related
payments with respect to positions in substantially similar or related property. Thus, we can give no assurance that any dividends
paid on our common shares will be eligible for these preferential rates in the hands of such individual U.S. Holders. Any dividends
paid by us which are not eligible for these preferential rates will be taxed as ordinary income to an individual U.S. Holder.
Further,
special rules may apply to any “extraordinary dividend”–generally, a dividend in an amount which is equal to
or in excess of 10% of a shareholder’s adjusted tax basis in a common share–paid by us to a U.S. Holder that is a
corporation for U.S. federal income tax purposes. If we pay an “extraordinary dividend” on our common shares that
is treated as “qualified dividend income,” then any loss derived by certain U.S. Holders that are corporations for
U.S. federal income tax purposes from the sale or exchange of such common shares will be treated as long-term capital loss to
the extent of such dividend.
Sale,
Exchange or Other Disposition of Common Stock
Subject
to the discussion of PFICs below, 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 we do 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.
3.8%
Tax on Net Investment Income
A
U.S. Holder that is an individual, estate, or, in certain cases, a trust, will generally be subject to a 3.8% tax on the lesser
of, in the case of a U.S. Holder that is an individual, (i) the U.S. Holder’s net investment income for the taxable year
and (ii) the excess of the U.S. Holder’s modified adjusted gross income for the taxable year over a certain threshold (which
in the case of individuals will be between $125,000 and $250,000). A U.S. Holder’s net investment income will generally
include distributions we make on the common stock which are treated as dividends for U.S. federal income tax purposes and capital
gains from the sale, exchange or other disposition of the common stock. This tax is in addition to any income taxes due on such
investment income.
PFIC
Status and Significant Tax Consequences
Special
U.S. federal income tax rules apply to a U.S. Holder that holds shares in a foreign corporation classified as a PFIC, for U.S.
federal income tax purposes. In general, we will be treated as a PFIC with respect to a U.S. Holder if, for any taxable year in
which such holder holds our common shares, either:
(i)
at least 75% of our gross income for such taxable year consists of passive income (e.g., dividends, interest, capital gains and
rents derived other than in the active conduct of a rental business), which we refer to as the income test; or
(ii)
at least 50% of the average value of our assets during such taxable year produce, or are held for the production of, passive income,
which we refer to as the asset test.
For
purposes of determining whether we are a PFIC, cash will be treated as an asset which is held for the production of passive income.
In addition, we will be treated as earning and owning our proportionate share of the income and assets, respectively, of any of
our subsidiary corporations in which we own at least 25% of the value of the subsidiary’s stock. Income earned, or deemed
earned, by us in connection with the performance of services would not constitute passive income. By contrast, rental income would
generally constitute “passive income” unless we were treated under specific rules as deriving our rental income in
the active conduct of a trade or business.
Based
on our current and projected operations, we do not believe that we (or any of our subsidiaries) were a PFIC in the 2017 taxable
year, nor do we expect (or any of our subsidiaries) to become a PFIC with respect to the 2018 or any later taxable year. In making
the determination as to whether we are a PFIC, we intend to treat the gross income that we derive or that are deemed to derive
from the spot and time chartering activities of us or any of our subsidiaries as services income, rather than rental income. Correspondingly,
such income should not constitute passive income, and the assets that we or our wholly-owned subsidiaries own and operate in connection
with the production of such income should not constitute passive assets for purposes of determining whether we are a PFIC. We
believe that there is substantial legal authority supporting our position consisting of case law and IRS pronouncements concerning
the characterization of income derived from spot and time charters as services income for other tax purposes. However, there is
also authority which characterizes time charter income as rental income rather than services income for other tax purposes. In
the absence of any legal authority specifically relating to the statutory provisions governing PFICs, the IRS or a court could
disagree with our position. In addition, although we intend to conduct our affairs in a manner to avoid being classified as a
PFIC with respect to any taxable year, we cannot assure you that the nature of our operations will not change in the future.
As
discussed more fully below, if we were to be treated as a PFIC for any taxable year, a U.S. Holder would be subject to different
taxation rules depending on whether the U.S. Holder makes an election to treat us as a “qualified electing fund” (a
“QEF election”). As an alternative to making a QEF election, a U.S. Holder should be able to make a “mark-to-market”
election with respect to our common shares, as discussed below. If we were treated as a PFIC, a U.S. Holder will generally be
required to file IRS Form 8621 with respect to its ownership of our common shares.
Taxation
of U.S. Holders Making a Timely QEF Election
If
a U.S. Holder makes a timely QEF election (an “electing holder”) the electing holder must report for U.S. federal
income tax purposes its pro-rata share of our ordinary earnings and net capital gain, if any, for each of our taxable years during
which we are a PFIC that ends with or within the taxable year of the electing holder, regardless of whether distributions were
received from us by the electing holder. No portion of any such inclusions of ordinary earnings will be treated as “qualified
dividend income.” Net capital gain inclusions of certain non-corporate U.S. Holders may be eligible for preferential capital
gains tax rates. The electing holder’s adjusted tax basis in the common shares will be increased to reflect any income included
under the QEF election. Distributions of previously taxed income will not be subject to tax upon distribution but will decrease
the electing holder’s tax basis in the common shares. An electing holder would not, however, be entitled to a deduction
for its pro-rata share of any losses that we incur with respect to any taxable year. An electing holder would generally recognize
capital gain or loss on the sale, exchange or other disposition of our shares of common stock. A U.S. Holder would make a timely
QEF election for our shares of common stock by filing IRS Form 8621 with his U.S. federal income tax return for the first year
in which he held such shares when we were a PFIC. If we determine that we are a PFIC for any taxable year, we intend to provide
each U.S. Holder with information necessary for the U.S. Holder to make the QEF election described above. If we were treated as
a PFIC for our 2019 taxable year, we anticipate that, based on our current projections, we would not have a significant amount
of taxable income or gain that would be required to be taken into account by U.S. Holders making a QEF election effective for
such taxable year.
Taxation
of U.S. Holders Making a “Mark-to-Market” Election
Alternatively,
if we were to be treated as a PFIC for any taxable year and, as we anticipate will be the case, our shares are treated as “marketable
stock,” a U.S. Holder would be allowed to make a “mark-to-market” election with respect to our shares of common
stock, provided the U.S. Holder completes and files IRS Form 8621 in accordance with the relevant instructions and related Treasury
regulations. If that election is made, the U.S. Holder generally would include as ordinary income in each taxable year the excess,
if any, of the fair market value of the shares at the end of the taxable year over such Holder’s adjusted tax basis in the
shares. The U.S. Holder would also be permitted an ordinary loss in respect of the excess, if any, of the U.S. Holder’s
adjusted tax basis in the shares over its 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. A U.S. Holder’s tax basis in his shares
of our common stock would be adjusted to reflect any such income or loss amount recognized. Any gain realized on the sale, exchange
or other disposition of our shares of common stock would be treated as ordinary income, and any loss realized on the sale, exchange
or other disposition of the shares would be treated as ordinary loss to the extent that such loss does not exceed the net mark-to-market
gains previously included by the U.S. Holder.
Taxation
of U.S. Holders Not Making a Timely QEF or Mark-to-Market Election
If
we were to be treated as a PFIC for any taxable year, a U.S. Holder who does not make either a QEF election or a “mark-to-market”
election for that year (a “non-electing holder”) would be subject to special rules with respect to (i) any excess
distribution (i.e., the portion of any distributions received by the non-electing holder on the shares in a taxable year in excess
of 125% of the average annual distributions received by the non-electing holder in the three preceding taxable years, or, if shorter,
the non-electing holder’s holding period for the shares), and (ii) any gain realized on the sale, exchange or other disposition
of our shares of common stock. Under these special rules:
(i)
the excess distribution or gain would be allocated rateably over the non-electing holder’s aggregate holding period for
the shares;
(ii)
the amount allocated to the current taxable year, and any taxable year prior to the first taxable year in which we were a PFIC,
would be taxed as ordinary income and would not be “qualified dividend income”; and
(iii)
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, and an interest charge for the deemed tax deferral benefit would be imposed with respect to the
resulting tax attributable to each such other taxable year.
U.S.
HOLDERS ARE URGED TO CONSULT THEIR TAX ADVISORS AS TO OUR STATUS AS A PFIC, AND, IF WE (AND/OR ONE OR MORE OF OUR SUBSIDIARIES)
ARE TREATED AS A PFIC, AS TO THE EFFECT ON THEM OF, AND THE REPORTING REQUIREMENTS WITH RESPECT TO, THE PFIC RULES AND THE DESIRABILITY
OF MAKING, AND THE AVAILABILITY OF, EITHER A QEF ELECTION OR A MARK-TO-MARKET ELECTION WITH RESPECT TO OUR SHARES OF COMMON STOCK.
WE PROVIDE NO ADVICE ON TAXATION MATTERS.
U.S.
Federal Income Taxation of Non-U.S. Holders
Dividends
on Common Stock
A
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on dividends received from us with respect
to our shares of common stock, unless that income is effectively connected with the Non-U.S. Holder’s conduct of a trade
or business in the United States. In general, if the Non-U.S. Holder is entitled to the benefits of an applicable U.S. income
tax treaty with respect to those dividends, that income is taxable only if it is attributable to a permanent establishment maintained
by the Non-U.S. Holder in the United States.
Sale,
Exchange or Other Disposition of Common Stock
A
Non-U.S. Holder generally will not be subject to U.S. federal income or withholding tax on any gain realized upon the sale, exchange
or other disposition of our shares of common stock, unless:
(i)
the gain is effectively connected with the Non-U.S. Holder’s conduct of a trade or business in the United States; or
(ii)
the Non-U.S. Holder is an individual who is present in the United States for 183 days or more during the taxable year of disposition
and who also meets other conditions.
Income
or Gains Effectively Connected with a U.S. Trade or Business
If
the Non-U.S. Holder is engaged in a U.S. trade or business for U.S. federal income tax purposes, dividends on the common shares
and gain from the sale, exchange or other disposition of our shares of common stock, that is effectively connected with the conduct
of that trade or business, will generally be subject to regular U.S. federal income tax in the same manner as discussed in the
previous section relating to the taxation of U.S. Holders. In addition, in the case of a corporate Non-U.S. Holder, its earnings
and profits that are attributable to the effectively connected income, which are subject to certain adjustments, may be subject
to an additional U.S. federal branch profits tax at a rate of 30%, or at a lower rate as may be specified by an applicable U.S.
income tax treaty.
Backup
Withholding and Information Reporting
Information
reporting to the IRS may be required with respect to payments on our shares of common stock and with respect to proceeds from
the sale of the shares of 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 (currently at a 24% rate) may also
apply to those payments if a non-corporate holder of the shares of 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.
Non-U.S.
Holders may be required to establish their exemption from information reporting and backup withholding by certifying under penalties
of perjury their status on IRS Form W-8BEN, W-8BEN-E, W-8ECI or W-8IMY, as applicable. A Non-U.S. Holder should consult his or
her own tax advisor as to the qualifications for exemption from backup withholding and the procedures for obtaining the exemption.
U.S.
Holders of our shares 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 us if (i) such person owns at least 10% of the total
value or 10% of the total combined voting power of all classes of shares entitled to vote or (ii) 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 is a Non-U.S. Holder and sells his or her shares of common stock to or through a U.S. office of a broker, the payment
of the proceeds is subject to both U.S. backup withholding and information reporting unless the shareholder certifies that he
or she is not a U.S. person, under penalty of perjury, or he or she otherwise establishes an exemption. If our shareholder is
a Non-U.S. Holder and sells his or her common stock through a non-U.S. office of a non-U.S. 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, U.S. 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 shares
of common stock through a non-U.S. office of a broker that is a U.S. 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 U.S. person and certain other conditions are met, or the shareholder otherwise establishes an exemption.
Backup
withholding is not an additional tax and may be refunded (or credited against the holder’s U.S. federal income tax liability,
if any), provided that appropriate returns are filed with and certain required information is furnished to the IRS in a timely
manner.
In
addition, individuals who are U.S. Holders (and to the extent specified in applicable Treasury regulations, Non-U.S. Holders and
certain U.S. entities) who hold “specified foreign financial assets” (as defined in Section 6038D of the Code) are
required to file IRS Form 8938 with information relating to the asset for each taxable year in which the aggregate value of all
such assets exceeds $75,000 at any time during the taxable year or $50,000 on the last day of the taxable year (or such higher
dollar amount as prescribed by applicable Treasury regulations). Specified foreign financial assets would include, among other
assets, our shares of common stock, unless the shares are held in an account maintained with a U.S. financial institution. Substantial
penalties apply to any failure to timely file IRS Form 8938, unless the failure is shown to be due to reasonable cause and not
due to willful neglect. Additionally, in the event an individual U.S. Holder (and to the extent specified in applicable Treasury
regulations, a Non-U.S. Holder or a U.S. entity) that is required to file IRS Form 8938 does not file such form, the statute of
limitations on the assessment and collection of U.S. federal income taxes of such holder for the related tax year may not close
until three years after the date that the required information is filed. U.S. Holders (including U.S. entities) and Non-U.S. Holders
are encouraged consult their own tax advisors regarding their reporting obligations in respect of our shares of common stock.
Material
Marshall Islands, Maltese and Greek Tax Law Considerations
The
following is a summary of certain material tax consequences of our activities to us and our shareholders.
We
are incorporated in the Marshall Islands and Malta and some of our operations are located in Greece.
Under
current Marshall Islands law, we are not subject to tax on income or capital gains, and no Marshall Islands withholding tax will
be imposed upon payments of dividends by us to our shareholder.
Under
Maltese law, the subsidiary companies Secondone Corporation Ltd., Thirdone Corporation Ltd. and Fourthone Corporation Ltd., being
Maltese registered companies, are deemed by the Income Tax Act to be resident in Malta for tax purposes. However such companies,
being the respective registered owners and operators of the Maltese registered vessels
Northsea Alpha
,
Northsea
Beta
and
Pyxis Malou
, are not subject to Malta income tax on any profits derived by them, including tax
on any gains of a capital nature as may be derived from the sale or other transfer of the vessels concerned, to the extent that
(1) such profits are derived from ‘shipping activities’ (being in particular the international carriage of goods or
passengers by sea in terms of the EU Maritime State Aid Guidelines and such other activities that have been approved or considered
as eligible for tonnage tax purposes by the European Commission) and (2) such vessels have been declared by the Minister responsible
for Shipping to be and continue to qualify as ‘tonnage tax ships’ under the Merchant Shipping (Taxation And Other
Matters Relating to Shipping Organisations) Regulations 2018; provided that for the year in respect of which exemption from tax
is applied (i) all applicable tonnage taxes have been paid and (ii) separate accounts were kept clearly distinguishing the payments
and receipts by the companies concerned in respect of shipping activities, including the ownership, operation, administration
or management of the vessels as tonnage tax ships, and payments and receipts in respect of any other business.
No
Maltese withholding tax will be imposed upon payment of dividends by any one of Secondone Corporation Ltd., Thirdone Corporation
Ltd. and Fourthone Corporation Ltd., being the three (3) Maltese registered companies concerned, to their shareholder.
The
subsidiary companies Seventhone Corp. and Eightone Corp., being companies registered under the laws of the Marshall Islands, are
not considered to be tax resident in Malta and are therefore not subject to any income tax in Malta, including tax on any gains
of a capital nature as may be derived from the sale or other transfer of the Maltese registered vessels
Pyxis Theta
and
Pyxis Epsilon
which are respectively owned by them. The appointment by these companies of a Resident Agent in
Malta in connection with their registration with the registrar of Shipping as ‘International Owners’ does not constitute
a permanent establishment in Malta for tax purposes.
Under
Greek Law, the shipmanagement companies which have established an office in Greece under the so called “Law 89” regime,
currently legislated by Law 27/1975 as in force, are not subject to any income tax. The same applies to the shipowning companies
of the vessels which are managed by such shipmanagement companies and to their holding companies, provided the latter are exclusively
holding companies of such shipowning companies, without other activities. There is, however, an annual tonnage levy over the vessels
managed by such companies, for which the respective shipowning company and shipmanagement company are jointly and severally liable
to pay to the Greek State; also, the tax residents of Greece who receive dividends from such shipowning or their holding companies,
(pursuant to a very recent agreement between the Union of Greek Shipowners and the Greek State, which is expected to come in force
shortly) are taxed at 10% on the dividends which they receive and which they import into Greece, not being liable to any other
taxation for these, which include those dividends which either remain with the holding company or are paid to the individual Greek
tax resident abroad.
F.
Dividends and Paying Agents
Not
applicable.
G.
Statement by Experts
Not
applicable.
H.
Documents on Display
We
file reports and other information with the SEC. These materials, including this Annual Report and the accompanying exhibits,
may be inspected and copied at the public facilities maintained by the SEC at 100 F Street, N.E., Washington, D.C. 20549, or from
the SEC’s website http://www.sec.gov. You may obtain information on the operation of the public reference room by calling
1 (800) SEC-0330 and you may obtain copies at prescribed rates.
I.
Subsidiary Information
Not
applicable.
ITEM
11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Please
see Note 10 “Risk Management and Fair Value Measurements” to our consolidated financial statements included in this
Annual Report for a further description of our risk management.
(a)
Quantitative Information about Market Risk
Interest
Rate Risk
The
shipping industry is a capital intensive industry, requiring significant amounts of investment. Much of this investment is provided
in the form of long-term debt. Our amortizing bank debt usually contains interest rates that fluctuate with the financial markets.
Increasing interest rates could adversely impact future earnings and our ability to service debt.
Our
interest expense is affected by changes in the general level of interest rates, particularly LIBOR. As an indication of the extent
of our sensitivity to interest rate changes, an increase of 100 basis points would have decreased our net income and cash flows
during the years ended December 31, 2017 and 2018 by approximately $0.7 million and $0.6 million, respectively, based upon our
average debt level during 2017 and 2018.
Foreign
Currency Exchange Risk
We
generate most of our revenue in U.S. dollars, but a portion of our expenses, are in currencies other than U.S. dollars (mainly
in Euro), and any gain or loss we incur as a result of the U.S. dollar fluctuating in value against those currencies is included
in vessel operating expenses and in general and administrative expenses. As of December 31, 2017 and 2018, approximately 9% and
6%, respectively, of our outstanding accounts payable were denominated in currencies other than the U.S. dollar (mainly in Euro).
We hold cash and cash equivalents mainly in U.S. dollars.
Inflation
We
do not consider inflation to be a significant risk to our business in the current environment and foreseeable future.
(b)
Qualitative Information about Market Risk
Interest
Rate Exposure
Our
debt obligations under each of our subsidiaries’ loan agreements bear interest at LIBOR plus a fixed margin. Increasing
interest rates could adversely affect our future profitability. Lower interest rates lower the returns on cash investments. We
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. However, there may be certain incremental costs incurred if
we enter into such arrangements. In order to hedge our variable interest rate exposure, on January 19, 2018, Seventhone entered
into an interest rate cap agreement with one of its lenders for a notional amount of $10.0 million and a cap rate of 3.5%. The
interest rate cap will terminate on July 18, 2022.
Operational
Risk
We
are exposed to operating costs risk arising from various vessel operations. The key areas of operating risk include dry-dock,
repair costs, insurance and piracy. Our risk management includes various strategies for technical management of dry-dock and repairs
coordinated with a focus on measuring cost and quality. Our 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,
we have established a set of countermeasures in order to minimize this risk of piracy attacks during voyages, which include hiring
third party security to protect the crew and make navigation safer for the vessels.
Foreign
Exchange Rate Exposure
Our
vessel-owning subsidiaries generate revenues in U.S. dollars but incur a portion of their vessel operating expenses, and we incur
a majority of our 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 our business conducted in other
currencies could increase in the future, which could expand our exposure to losses arising from currency fluctuations. We believe
these adverse effects to be immaterial and have 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 our amounts
are held across four banks. While we believe this risk of loss is low, we keep this under review and will revise our policy for
managing cash and cash equivalents if we consider it advantageous and prudent to do so. We limit our credit risk with trade accounts
receivable by performing ongoing credit evaluations of our customers’ financial condition. We generally do not acquire collateral
for trade accounts receivable.
We
may have a credit risk in relation to vessel employment and at times may have multiple vessels employed by one charterer. We consider
and evaluate concentration of credit risk regularly and perform on-going evaluations of these charterers for credit risk.
As of December 31, 2018 and March 26, 2019, two and four of our vessels, respectively, were employed with
the same charterer.
Commodity
Risk Exposure
The
price and supply of bunker is unpredictable and fluctuates as a result of events outside our 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 we do not hedge our bunker costs, an increase in the price of bunker beyond our expectations
may adversely affect our profitability and cash flows.
Liquidity
Risk
The
principal objective in relation to liquidity is to ensure that we have access at minimum cost to sufficient liquidity to enable
us to meet our obligations as they come due and to provide adequately for contingencies. Our policy is to manage our liquidity
by strict forecasting of cash flows arising from time charter revenue, vessel operating expenses, general and administrative overhead
and servicing of debt. We maintain limited cash balances in financial institutions operating in Greece.
Inflation
We
do not expect inflation to be a significant risk 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.
ITEM
12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A.
Debt Securities
Not
applicable.
B.
Warrants and Rights
Not
applicable.
C.
Other Securities
Not
applicable.
D.
American Depositary Shares
Not
applicable.
PYXIS
TANKERS INC.
Consolidated
Balance Sheets
As
at December 31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
|
|
Notes
|
|
|
2017
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
|
|
|
$
|
1,693
|
|
|
$
|
545
|
|
Restricted
cash, current portion
|
|
|
|
|
|
141
|
|
|
|
255
|
|
Inventories
|
|
4
|
|
|
|
1,016
|
|
|
|
807
|
|
Trade
accounts receivable, net
|
|
|
|
|
|
703
|
|
|
|
2,585
|
|
Prepayments
and other assets
|
|
|
|
|
|
342
|
|
|
|
115
|
|
Total
current assets
|
|
|
|
|
|
3,895
|
|
|
|
4,307
|
|
|
|
|
|
|
|
|
|
|
|
|
|
FIXED
ASSETS, NET:
|
|
|
|
|
|
|
|
|
|
|
|
Vessels,
net
|
|
5,
10
|
|
|
|
115,774
|
|
|
|
107,992
|
|
Total
fixed assets, net
|
|
|
|
|
|
115,774
|
|
|
|
107,992
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
cash, net of current portion
|
|
|
|
|
|
4,859
|
|
|
|
3,404
|
|
Financial
derivative instrument
|
|
|
|
|
|
—
|
|
|
|
28
|
|
Deferred
charges, net
|
|
6
|
|
|
|
285
|
|
|
|
740
|
|
Prepayments
and other assets
|
|
|
|
|
|
—
|
|
|
|
146
|
|
Total
other non-current assets
|
|
|
|
|
|
5,144
|
|
|
|
4,318
|
|
Total
assets
|
|
|
|
|
$
|
124,813
|
|
|
$
|
116,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Current
portion of long-term debt, net of deferred financing costs
|
|
7
|
|
|
$
|
7,304
|
|
|
$
|
4,333
|
|
Trade
accounts payable
|
|
|
|
|
|
2,293
|
|
|
|
4,746
|
|
Due
to related parties
|
|
3
|
|
|
|
2,125
|
|
|
|
3,402
|
|
Hire
collected in advance
|
|
|
|
|
|
—
|
|
|
|
422
|
|
Accrued
and other liabilities
|
|
|
|
|
|
809
|
|
|
|
642
|
|
Total
current liabilities
|
|
|
|
|
|
12,531
|
|
|
|
13,545
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net of current portion and deferred financing costs, non-current
|
|
7
|
|
|
|
59,126
|
|
|
|
58,129
|
|
Promissory
note
|
|
3
|
|
|
|
5,000
|
|
|
|
5,000
|
|
Total
non-current liabilities
|
|
|
|
|
|
64,126
|
|
|
|
63,129
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS
AND CONTINGENCIES
|
|
11
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred
stock ($0.001 par value; 50,000,000 shares authorized; none issued)
|
|
8
|
|
|
|
—
|
|
|
|
—
|
|
Common
stock ($0.001 par value; 450,000,000 shares authorized;
20,877,893
and 21,060,190 shares issued and outstanding
as of December 31, 2017 and 2018, respectively)
|
|
8
|
|
|
|
21
|
|
|
|
21
|
|
Additional
paid-in capital
|
|
8
|
|
|
|
74,766
|
|
|
|
74,767
|
|
Accumulated
deficit
|
|
|
|
|
|
(26,631
|
)
|
|
|
(34,845
|
)
|
Total
stockholders’ equity
|
|
|
|
|
|
48,156
|
|
|
|
39,943
|
|
Total
liabilities and stockholders’ equity
|
|
|
|
|
$
|
124,813
|
|
|
$
|
116,617
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PYXIS
TANKERS INC.
Consolidated
Statements of Comprehensive Loss
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
|
|
Notes
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Revenues,
net
|
|
2
|
|
|
$
|
30,387
|
|
|
$
|
29,579
|
|
|
$
|
28,457
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Voyage
related costs and commissions
|
|
3
|
|
|
|
(6,288
|
)
|
|
|
(8,463
|
)
|
|
|
(11,817
|
)
|
Vessel
operating expenses
|
|
|
|
|
|
(12,871
|
)
|
|
|
(12,761
|
)
|
|
|
(12,669
|
)
|
General
and administrative expenses
|
|
3,
8
|
|
|
|
(2,574
|
)
|
|
|
(3,188
|
)
|
|
|
(2,404
|
)
|
Management
fees, related parties
|
|
3
|
|
|
|
(631
|
)
|
|
|
(712
|
)
|
|
|
(720
|
)
|
Management
fees, other
|
|
|
|
|
|
(1,024
|
)
|
|
|
(930
|
)
|
|
|
(930
|
)
|
Amortization
of special survey costs
|
|
6
|
|
|
|
(236
|
)
|
|
|
(73
|
)
|
|
|
(133
|
)
|
Depreciation
|
|
5
|
|
|
|
(5,768
|
)
|
|
|
(5,567
|
)
|
|
|
(5,500
|
)
|
Vessel
impairment charge
|
|
5,
10
|
|
|
|
(3,998
|
)
|
|
|
—
|
|
|
|
(2,282
|
)
|
Bad
debt provisions
|
|
|
|
|
|
—
|
|
|
|
(231
|
)
|
|
|
(13
|
)
|
Operating
loss
|
|
|
|
|
|
(3,003
|
)
|
|
|
(2,346
|
)
|
|
|
(8,011
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
income / (expenses):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain
from debt extinguishment
|
|
7
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4,306
|
|
Loss
from financial derivative instrument
|
|
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(19
|
)
|
Interest
and finance costs, net
|
|
3,
12
|
|
|
|
(2,810
|
)
|
|
|
(2,897
|
)
|
|
|
(4,490
|
)
|
Total
other expenses, net
|
|
|
|
|
|
(2,810
|
)
|
|
|
(2,897
|
)
|
|
|
(203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share, basic and diluted
|
|
9
|
|
|
$
|
(0.32
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of shares, basic and diluted
|
|
9
|
|
|
|
18,277,893
|
|
|
|
18,461,455
|
|
|
|
20,894,202
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PYXIS
TANKERS INC.
Consolidated
Statements of Stockholders’ Equity
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
|
|
|
|
|
Additional
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
Stockholders’
|
|
|
|
#
of Shares
|
|
|
Par
value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
BALANCE,
January 1, 2016
|
|
|
18,244,671
|
|
|
$
|
18
|
|
|
$
|
70,123
|
|
|
$
|
(15,575
|
)
|
|
$
|
54,566
|
|
Issuance
of common stock - EIP
|
|
|
33,222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,813
|
)
|
|
|
(5,813
|
)
|
BALANCE,
December 31, 2016
|
|
|
18,277,893
|
|
|
$
|
18
|
|
|
$
|
70,123
|
|
|
$
|
(21,388
|
)
|
|
$
|
48,753
|
|
Issuance
of common stock
|
|
|
2,400,000
|
|
|
|
3
|
|
|
|
4,288
|
|
|
|
—
|
|
|
|
4,291
|
|
Issuance
of common stock - EIP
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Stock
compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
355
|
|
|
|
—
|
|
|
|
355
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,243
|
)
|
|
|
(5,243
|
)
|
BALANCE,
December 31, 2017
|
|
|
20,877,893
|
|
|
$
|
21
|
|
|
$
|
74,766
|
|
|
$
|
(26,631
|
)
|
|
$
|
48,156
|
|
Net
proceeds from the issuance of common stock
|
|
|
182,297
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,214
|
)
|
|
|
(8,214
|
)
|
BALANCE,
December 31, 2018
|
|
|
21,060,190
|
|
|
$
|
21
|
|
|
$
|
74,767
|
|
|
$
|
(34,845
|
)
|
|
$
|
39,943
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PYXIS
TANKERS INC.
Consolidated
Statements of Cash Flows
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. dollars)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
Adjustments
to reconcile net loss to net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
5,768
|
|
|
|
5,567
|
|
|
|
5,500
|
|
Amortization
of special survey costs
|
|
|
236
|
|
|
|
73
|
|
|
|
133
|
|
Amortization
and write-off of financing costs
|
|
|
164
|
|
|
|
153
|
|
|
|
386
|
|
Vessel
impairment charge
|
|
|
3,998
|
|
|
|
—
|
|
|
|
2,282
|
|
Gain
from debt extinguishment
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,306
|
)
|
Loss
from financial derivative instrument
|
|
|
—
|
|
|
|
—
|
|
|
|
19
|
|
Stock
compensation
|
|
|
—
|
|
|
|
355
|
|
|
|
—
|
|
Bad
debt provisions
|
|
|
—
|
|
|
|
231
|
|
|
|
13
|
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories
|
|
|
(590
|
)
|
|
|
157
|
|
|
|
209
|
|
Trade
accounts receivable, net
|
|
|
(1,226
|
)
|
|
|
747
|
|
|
|
(1,895
|
)
|
Prepayments
and other assets
|
|
|
321
|
|
|
|
62
|
|
|
|
227
|
|
Special
surveys cost
|
|
|
(364
|
)
|
|
|
—
|
|
|
|
(588
|
)
|
Trade
accounts payable
|
|
|
2,012
|
|
|
|
(858
|
)
|
|
|
2,499
|
|
Due
to related parties
|
|
|
1,832
|
|
|
|
2,672
|
|
|
|
1,277
|
|
Hire
collected in advance
|
|
|
(1,714
|
)
|
|
|
(415
|
)
|
|
|
422
|
|
Accrued
and other liabilities
|
|
|
(178
|
)
|
|
|
176
|
|
|
|
(167
|
)
|
Net
cash provided by / (used in) operating activities
|
|
$
|
4,446
|
|
|
$
|
3,677
|
|
|
$
|
(2,203
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Advances
for ballast water treatment system
|
|
|
—
|
|
|
|
—
|
|
|
|
(99
|
)
|
Net
cash used in investing activities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(99
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from long-term debt
|
|
|
—
|
|
|
|
—
|
|
|
|
44,500
|
|
Repayment
of long-term debt
|
|
|
(7,263
|
)
|
|
|
(6,963
|
)
|
|
|
(43,640
|
)
|
Gross
proceeds from issuance of common stock
|
|
|
—
|
|
|
|
4,800
|
|
|
|
315
|
|
Common
stock offerings costs
|
|
|
—
|
|
|
|
(414
|
)
|
|
|
(407
|
)
|
Payment
of financial derivative instrument
|
|
|
—
|
|
|
|
—
|
|
|
|
(47
|
)
|
Payment
of financing costs
|
|
|
(22
|
)
|
|
|
(190
|
)
|
|
|
(908
|
)
|
Net
cash used in financing activities
|
|
$
|
(7,285
|
)
|
|
$
|
(2,767
|
)
|
|
$
|
(187
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(decrease) / increase in cash and cash equivalents and restricted cash
|
|
|
(2,839
|
)
|
|
|
910
|
|
|
|
(2,489
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at the beginning of the year
|
|
|
8,622
|
|
|
|
5,783
|
|
|
|
6,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at end of the year
|
|
$
|
5,783
|
|
|
$
|
6,693
|
|
|
$
|
4,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
2,779
|
|
|
$
|
2,549
|
|
|
$
|
4,283
|
|
Non-cash
financing activities – increase in promissory note
|
|
|
—
|
|
|
|
2,500
|
|
|
|
—
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
1.
Basis of Presentation and General Information
PYXIS
TANKERS INC. (“Pyxis”) is a corporation incorporated in the Republic of the Marshall Islands on March 23, 2015. Pyxis
currently owns 100% ownership interest in the following six vessel-owning companies:
●
|
SECONDONE
CORPORATION LTD, established under the laws of the Republic of Malta (“Secondone”);
|
●
|
THIRDONE
CORPORATION LTD, established under the laws of the Republic of Malta (“Thirdone”);
|
●
|
FOURTHONE
CORPORATION LTD, established under the laws of the Republic of Malta (“Fourthone”);
|
●
|
SIXTHONE
CORP., established under the laws of the Republic of the Marshall Islands (“Sixthone”);
|
●
|
SEVENTHONE
CORP., established under the laws of the Republic of the Marshall Islands (“Seventhone”); and
|
●
|
EIGHTHONE
CORP., established under the laws of the Republic of the Marshall Islands (“Eighthone,” and collectively with
Secondone, Thirdone, Fourthone, Sixthone and Seventhone, the “Vessel-owning companies”).
|
All
of the Vessel-owning companies are engaged in the marine transportation of liquid cargoes through the ownership and operation
of tanker vessels, as listed below:
Vessel-owning
company
|
|
Incorporation
date
|
|
|
Vessel
|
|
|
DWT
|
|
|
Year
built
|
|
|
Acquisition
date
|
Secondone
|
|
|
05/23/2007
|
|
|
|
Northsea
Alpha
|
|
|
|
8,615
|
|
|
|
2010
|
|
|
05/28/2010
|
Thirdone
|
|
|
05/23/2007
|
|
|
|
Northsea
Beta
|
|
|
|
8,647
|
|
|
|
2010
|
|
|
05/25/2010
|
Fourthone
|
|
|
05/30/2007
|
|
|
|
Pyxis
Malou
|
|
|
|
50,667
|
|
|
|
2009
|
|
|
02/16/2009
|
Sixthone
|
|
|
01/15/2010
|
|
|
|
Pyxis
Delta
|
|
|
|
46,616
|
|
|
|
2006
|
|
|
03/04/2010
|
Seventhone
|
|
|
05/31/2011
|
|
|
|
Pyxis
Theta
|
|
|
|
51,795
|
|
|
|
2013
|
|
|
09/16/2013
|
Eighthone
|
|
|
02/08/2013
|
|
|
|
Pyxis
Epsilon
|
|
|
|
50,295
|
|
|
|
2015
|
|
|
01/14/2015
|
Secondone,
Thirdone and Fourthone were initially established under the laws of the Republic of the Marshall Islands, under the names SECONDONE
CORP., THIRDONE CORP. and FOURTHONE CORP., respectively. In March and April 2018, these vessel-owning companies completed their
re-domiciliation under the jurisdiction of the Republic of Malta and were renamed as mentioned above. For further information,
please refer to Note 7.
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and include the accounts of Pyxis and its wholly-owned subsidiaries
(collectively the “Company”), as of December 31, 2017 and 2018 and for the years ended December 31, 2016, 2017 and
2018.
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
Northsea Beta
are
smaller tanker sister ships and
Pyxis Malou
,
Pyxis Delta
,
Pyxis Theta
and
Pyxis Epsilon
, are medium-range
tankers.
Prior
to the consummation of the transactions discussed below, Mr. Valentios (“Eddie”) Valentis was the sole ultimate stockholder
of Pyxis and the Vessel-owning companies, holding all of their issued and outstanding share capital through MARITIME INVESTORS
CORP. (“Maritime Investors”). Maritime Investors owned directly 100% of Pyxis, Secondone and Thirdone, and owned indirectly
(through the intermediate holding company PYXIS HOLDINGS INC. (“Holdings”)) 100% of Fourthone, Sixthone, Seventhone
and Eighthone.
On
March 25, 2015, Pyxis caused MARITIME TECHNOLOGIES CORP., a Delaware corporation (“Merger Sub”), to be formed as its
wholly-owned subsidiary and to be a party to the agreement and plan of merger discussed below.
On
April 23, 2015, Pyxis and Merger Sub entered into an agreement and plan of merger (the “Agreement and Plan of Merger”)
(further amended on September 22, 2015) with among others, LOOKSMART LTD. (“LS”), a digital advertising solutions
company listed on NASDAQ. Merger Sub served as the entity into which LS was merged in accordance with the Agreement and Plan of
Merger (the “Merger”). Upon execution of the Agreement and Plan of Merger, Pyxis paid LS a cash consideration of $600.
Prior
to the Merger, on October 26, 2015, Holdings and Maritime Investors transferred all of their shares in the Vessel-owning companies
to Pyxis as a contribution in kind, at no consideration. Since there was no change in ultimate ownership or control of the business
of the Vessel-owning companies, the transaction constituted a reorganization of companies under common control and has been accounted
for in a manner similar to a pooling of interests. Accordingly, upon the transfer of the assets and liabilities of the Vessel-owning
companies, the financial statements of the Company were presented using combined historical carrying amounts of the assets and
liabilities of the Vessel-owning companies.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
1.
Basis of Presentation and General Information - Continued
On
October 28, 2015, in accordance with the terms of the Agreement and Plan of Merger, LS, after having divested of its business
and all of its assets and liabilities, merged with and into the Merger Sub, with Merger Sub surviving the Merger and continuing
to be a wholly-owned subsidiary of Pyxis.
On
October 28, 2015, the Merger was consummated and the Company’s shares commenced their listing on the NASDAQ Capital Markets
thereafter.
Pyxis
was both the legal and accounting acquirer of LS. The acquisition by Pyxis of LS was not an acquisition of an operating company
as the business, assets and liabilities of LS were spun-off prior to the Merger. As such, for accounting purposes, the Merger
between Merger Sub and LS was accounted for as a capital transaction rather than as a business combination.
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 Vessel-owning 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 ship-management agreement with ITM is in force until it is terminated by either party.
The ship-management agreements can be cancelled either by the Company or ITM for any reason at any time upon three months’
advance 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 provided chartering services to
Northsea
Alpha
and
Northsea Beta
. On March 16, 2016 and on June 28, 2016, the Company sent notices of termination of the commercial
management agreements between NST and Thirdone and Secondone, respectively. In June and November 2016, Maritime assumed full commercial
management of the
Northsea Beta
and the
Northsea Alpha
, respectively.
As
of December 31, 2018, Mr. Valentis beneficially owned approximately 80.9% of the Company’s common stock.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies:
(a)
Changes in accounting policies:
The same accounting policies have been followed in these consolidated financial statements
as were applied in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2017,
except as discussed below:
Revenues,
net:
The Company generates its revenues from charterers. The 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.
The
following table presents the Company’s revenue disaggregated by revenue source, net of commissions, for the years
ended December 31, 2016, 2017 and 2018:
|
|
December
31,
2016
|
|
|
December
31,
2017
|
|
|
December
31,
2018
|
|
Voyage
revenues derived from spot charters, net
|
|
$
|
9,295
|
|
|
$
|
16,668
|
|
|
$
|
16,990
|
|
Voyage
revenues derived from time charters
, net
|
|
|
21,092
|
|
|
|
12,911
|
|
|
|
11,467
|
|
Revenues,
net
|
|
$
|
30,387
|
|
|
$
|
29,579
|
|
|
$
|
28,457
|
|
As
of January 1, 2018, the Company adopted Accounting Standard Update (“ASU”) 2014-09 “
Revenue from Contracts
with Customers (Topic 606)
”. The core principle is that a company should recognize revenue when promised goods or services
are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled for those
goods or services. The Company analyzed its contracts with charterers at the adoption date and has determined that its spot charters
fall under the provisions of ASC 606, while its time charter agreements are lease agreements that contain certain non-lease components.
The
Company elected to adopt ASC 606 by applying the modified retrospective transition method, recognizing the cumulative effect of
adopting this guidance as an adjustment to the 2018 opening balance of accumulated deficit. As of December 31, 2017, there were
no vessels employed under spot charters and as a result, the Company has not included any adjustments to the 2018 opening balance
of accumulated deficit and prior periods were not retrospectively adjusted.
The
Company assessed its contracts with charterers for spot charters during the year ended December 31, 2018 and concluded that there
is one single performance obligation for its spot charter, which is to provide the charterer with a transportation service within
a specified time period. In addition, the Company has concluded that a spot charter meets the criteria to recognize revenue over
time as the charterer simultaneously receives and consumes the benefits of the Company’s performance. The adoption of this
standard resulted in a change whereby the Company’s method of revenue recognition changed from discharge-to-discharge
(assuming a new charter has been agreed before the completion of the previous spot charter) to load-to-discharge. This resulted
in no revenue being recognized from discharge of the prior spot charter to loading of the current spot charter and all revenue
being recognized from loading of the current spot charter to discharge of the current spot charter. This change results in revenue
being recognized later in the voyage, which may cause additional volatility in revenues and earnings between periods. Demurrage
income represents payments by a charterer to a vessel owner when loading or discharging time exceeds the stipulated time in the
spot charter. The Company has determined that demurrage represents a variable consideration and estimates demurrage at contract
inception. Demurrage income estimated, net of address commission, is recognized over the time of the charter
as the performance obligation is satisfied.
Under
a spot charter, the Company incurs and pays for certain voyage expenses, primarily consisting of brokerage commissions, port and
canal costs and bunker consumption, during the spot charter (load-to-discharge) and during the ballast voyage (date of previous
discharge to loading, assuming a new charter has been agreed before the completion of the previous spot charter). Before the adoption
of ASC 606, all voyage expenses were expensed as incurred, except for brokerage commissions. Brokerage 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. Under ASC 606 and after the implementation of ASC 340-40
“Other assets and
deferred costs”
for contract costs, incremental costs of obtaining a contract with a customer and contract fulfillment
costs, should be capitalized and amortized as the performance obligation is satisfied, if certain criteria are met. The Company
assessed the new guidance and concluded that voyage costs during the ballast voyage represented costs to fulfil a contract which
give rise to an asset and should be capitalized and amortized over the spot charter, consistent with the recognition of voyage
revenues from spot charter from load-to-discharge, while voyage costs incurred during the spot charter should be expensed as incurred.
With respect to incremental costs, the Company has selected to adopt the practical expedient in the guidance and any costs to
obtain a contract will be expensed as incurred, for the Company’s spot charters that do not exceed one year. Vessel operating
expenses are expensed as incurred. The Company’s adoption of the new revenue standard, did not have a material effect on
the consolidated statement of comprehensive loss for the year ended December 31, 2018 and the consolidated balance sheet as of
December 31, 2018, since only one vessel was under spot charter as of December 31, 2018.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(a)
Changes in accounting policies – Continued:
In
addition, pursuant to this standard and the new Leases standard (discussed below), as of January 1, 2018, the Company elected
to present Revenues net of address commissions. Address commissions represent a discount provided directly to the charterers based
on a fixed percentage of the agreed upon charter. Since address commissions represent a discount (sales incentive) on services
rendered by the Company and no identifiable benefit is received in exchange for the consideration provided to the charterer, these
commissions are presented as a reduction of revenue in the accompanying consolidated statements of comprehensive loss. In this
respect, for the year ended December 31, 2016 and 2017, Revenues, net and Voyage related costs and commissions each decreased
by $323 and $247, respectively. This reclassification has no impact on the Company’s consolidated financial position and
results of operations for any of the periods presented.
The
Company does not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one
year or less, in accordance with the optional exception in ASC 606.
Revenues
for the years ended December 31, 2016, 2017 and 2018, deriving from significant charterers individually accounting for 10% or
more of revenues (in percentages of total revenues), were as follows:
Charterer
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
A
|
|
|
—
|
|
|
|
15
|
%
|
|
|
—
|
|
B
|
|
|
12
|
%
|
|
|
—
|
|
|
|
—
|
|
C
|
|
|
20
|
%
|
|
|
16
|
%
|
|
|
—
|
|
D
|
|
|
14
|
%
|
|
|
—
|
|
|
|
—
|
|
E
|
|
|
10
|
%
|
|
|
—
|
|
|
|
—
|
|
F
|
|
|
—
|
|
|
|
18
|
%
|
|
|
—
|
|
G
|
|
|
—
|
|
|
|
—
|
|
|
|
23
|
%
|
H
|
|
|
—
|
|
|
|
—
|
|
|
|
15
|
%
|
|
|
|
56
|
%
|
|
|
49
|
%
|
|
|
38
|
%
|
Leases:
In February 2016, Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, “
Leases (Topic
842)
”
, which was amended and supplemented by ASU 2017-13, ASU 2018-01 and ASU
2018-11. The new lease standard does not substantially change lessor accounting
. ASC 842 is effective for fiscal years
beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted.
Lessees
and lessors will be required to apply the new standard at the beginning of the earliest period presented in the financial statements
in which they first apply the new guidance, using a modified retrospective transition method.
Entities are also provided
with practical expedients that allow entities to not (i) reassess whether any expired or existing contracts are considered or
contain leases; (ii) reassess the lease classification for any expired or existing leases; and (iii) reassess initial direct costs
for any existing leases. In addition, the new standard
(i) provides entities with an additional
(and optional) transition method to adopt the new leases standard, under which an entity initially applies the new leases standard
at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption consistent with preparers’ requests and (ii) provide lessors with a practical expedient, by class of underlying
asset, to not separate non-lease components from the associated lease component and, instead, to account for those components
as a single component if both of the following are met: (a) The timing and pattern of transfer of the non-lease component(s) and
associated lease component are the same and (b) The lease component, if accounted for separately, would be classified as an operating
lease. If the non-lease component or components associated with the lease component are the predominant component of the combined
component, an entity is required to account for the combined component in accordance with ASC 606. Otherwise, the entity should
account for the combined component as an operating lease in accordance with ASC 842.
The
Company elected to early adopt ASC 842 as of September 30, 2018 with adoption reflected as of January 1, 2018. The Company adopted
the standard by using the modified retrospective method and selected the additional optional transition method. The Company also
selected to apply all the practical expedients discussed above. In this respect no
cumulative-effect
adjustment was recognized
to the 2018 opening balance of accumulated deficit
.
The
Company assessed its new time charter contracts at the adoption date under the new guidance and concluded that these contracts
contain a lease with the related executory costs (insurance), as well as non-lease components to provide other services
related to the operation of the vessel, with the most substantial service being the crew cost to operate the vessel. The Company
concluded that the criteria for not separating the lease and non-lease components of its time charter contracts are met, since
(i) the time pattern of recognizing revenues for crew and other services for the operation of the vessels, is similar to the time
pattern of recognizing rental income, (ii)
the lease component of the time charter contracts,
if accounted for separately, would be classified as an operating lease, and
(iii) the predominant component in its time
charter agreements is the lease component. Brokerage and address commissions on time charter revenues are deferred and amortized
over the related voyage period, to the extent revenue has been deferred, since commissions are earned as revenues earned, and
are presented in voyage expenses and as a reduction to voyage revenues (see above), respectively. Vessel operating expenses are
expensed as incurred. By taking the practical expedients, existing time charters at January 1, 2018 continue to be accounted
for under ASC 840 while new time charters commenced in 2018 are accounted for under ASC 842. The early adoption of ASC 842 had
no effect on the Company’s consolidated financial position and results of operations for the year ended December 31, 2018.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(a)
Changes in accounting policies – Continued:
Restricted
Cash:
As of January 1, 2018, the Company adopted the ASU 2016-18 “
Statement of Cash Flows (Topic 230): Restricted
Cash
”, which requires that the statement of cash flows explain the change in the total of cash and cash equivalents
and restricted cash. ASU 2016-18 was adopted retrospectively for the years ended December 31, 2016, 2017 and 2018, and restricted
cash of $5,000, $5,000 and $3,659, respectively, has been aggregated with cash and cash equivalents in both the beginning-of-period
and end-of-period line items of the consolidated statements of cash flows for each of the periods presented. The implementation
of this update has no impact on the Company’s consolidated balance sheet and consolidated statement of comprehensive loss.
The
following table provides a reconciliation of cash and cash equivalents and restricted cash reported within the accompanying consolidated
balance sheets that are presented in the accompanying consolidated statement of cash flows for the years ended December 31, 2016,
2017 and 2018.
|
|
December
31,
2016
|
|
|
December
31,
2017
|
|
|
December
31,
2018
|
|
Cash
and cash equivalents
|
|
$
|
783
|
|
|
$
|
1,693
|
|
|
$
|
545
|
|
Restricted
cash, current portion
|
|
|
143
|
|
|
|
141
|
|
|
|
255
|
|
Restricted
cash, net of current portion
|
|
|
4,857
|
|
|
|
4,859
|
|
|
|
3,404
|
|
Total
cash and cash equivalents and restricted cash
|
|
$
|
5,783
|
|
|
$
|
6,693
|
|
|
$
|
4,204
|
|
Business
combinations:
As of January 1, 2018, the Company adopted the ASU No. 2017-01, “Business Combinations” (Topic
805) which clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether
transactions should be accounted for as acquisition (or disposals) of assets or businesses. Under current implementation guidance,
the existence of an integrated set of acquired activities (inputs and processes that generate outputs) constitutes an acquisition
of business. This ASU provides a screen to determine when a set of assets and activities does not constitute a business. The screen
requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single
identifiable asset or a group of similar identifiable assets, the set is not a business. The following assets are considered as
a single asset for the purposes of the evaluation: (i) a tangible asset that is attached to and cannot be physically removed and
used separately from another tangible assets (or an intangible asset representing the right to use a tangible asset) and (ii)
in place lease intangibles, including favorable and unfavorable intangible assets or liabilities, and the related leased assets.
The implementation of this update had no effect on the Company’s consolidated financial position and results of operations
for the year ended December 31, 2018.
(b)
Principles of Consolidation:
The accompanying consolidated financial statements have been prepared in accordance with
U.S. GAAP. The consolidated financial statements include the accounts of Pyxis and its wholly-owned subsidiaries (the Vessel-owning
companies and Merger Sub). All intercompany balances and transactions have been eliminated upon consolidation.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(b)
Principles of Consolidation – Continued:
Pyxis,
as the holding company, determines whether it has a controlling financial interest in an entity by first evaluating whether the
entity is a voting interest entity or a variable interest entity. Under Accounting Standards Codification (“ASC”)
810 “Consolidation” a voting interest entity is an entity in which the total equity investment at risk is sufficient
to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the
right to receive residual returns and the right to make financial and operating decisions. Pyxis consolidates voting interest
entities in which it owns all, or at least a majority (generally, greater than 50%), of the voting interest. Variable interest
entities (“VIE”) are entities as defined under ASC 810-10, that in general either do not have equity investors with
voting rights or that have equity investors that do not provide sufficient financial resources for the entity to support its activities.
A controlling financial interest in a VIE is present when a company absorbs a majority of an entity’s expected losses, receives
a majority of an entity’s expected residual returns, or both. The company with a controlling financial interest, known as
the primary beneficiary, is required to consolidate the VIE. Pyxis evaluates all arrangements that may include a variable interest
in an entity to determine if it may be the primary beneficiary, and would be required to include assets, liabilities and operations
of a VIE in its consolidated financial statements. As of December 31, 2018, no such interest existed.
(c)
Use of Estimates:
The preparation of consolidated 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 disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reported
period. Actual results could differ from these estimates.
(d)
Comprehensive Income / (Loss):
The Company follows the provisions of ASC 220 “Comprehensive Income”, which
requires separate presentation of certain transactions which are recorded directly as components of equity. The Company had no
transactions which affect comprehensive loss during the years ended December 31, 2016, 2017 and 2018 and, accordingly, comprehensive
loss was equal to net income loss.
(e)
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 accounting
records 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 included in Vessel operating expenses in the accompanying consolidated statements of comprehensive
loss. All amounts in the financial statements are presented in thousand U.S. dollars rounded at the nearest thousand.
(f)
Commitments and Contingencies:
Provisions are recognized when: the Company has a present legal or constructive obligation
as a result of past events; it is probable that an outflow of resources embodying economic benefits will be required to settle
the obligation; and a reliable estimate of the amount of the obligation can be made. Provisions are reviewed at each balance sheet
date.
(g)
Insurance Claims Receivable:
The Company records insurance claim recoveries for insured losses incurred on damage to fixed
assets and for insured crew medical expenses. Insurance claim recoveries are recorded, net of any deductible amounts, at the time
the Company’s fixed assets suffer insured damages or when crew medical expenses are incurred, recovery is probable under
the related insurance policies and the claim is not subject to litigation.
(h)
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 trade 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.
(i)
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 minimum liquidity requirements under the loan agreements
discussed in Note 7 and is presented separately in the accompanying consolidated balance sheets.
(j)
Income Taxation:
Under the laws of the Republic of the Marshall Islands, the country of incorporation of the Vessel-owning
companies, and/or the vessels’ registration, the Vessel-owning companies are not liable for any income tax on their income
derived from shipping operations. Instead, a tax is levied depending on the countries where the vessels trade based on their tonnage,
which is included in Vessel operating expenses in the accompanying consolidated statements of comprehensive 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. The Company 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.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(j)
Income Taxation – Continued:
Under
the laws of the Republic of Malta, the country of incorporation of the Vessel-owning companies, and/or the vessels’ registration,
the Vessel-owning companies are not liable for any income tax on their income derived from shipping operations. The Republic of
Malta is a country that has an income tax treaty with the United States. Accordingly, income earned by our subsidiaries organized
under the laws of Malta may qualify for a treaty-based exemption. In fact Article 8 (Shipping and Air Transport) of that Treaty
sets out the relevant rule to the effect that profits of an enterprise of a Contracting State from the operation of ships in international
traffic shall be taxable only in that State.
(k)
Inventories:
Inventories consist of lubricants and bunkers (where applicable) on board the vessels, which are stated at
the lower of cost and net realizable value. Cost is determined by the first-in, first-out (“FIFO”) method.
(l)
Trade Accounts Receivable, Net:
Under spot charters, the Company normally issues its invoices to charterers at the completion
of the voyage. Invoices are due upon issuance of the invoice. Since the Company satisfies its performance obligation over the
time of the spot charter, the Company recognizes its unconditional right to consideration in trade accounts receivable, net of
a provision for doubtful accounts, if any. Trade accounts receivable from spot charters as of December 31, 2017 and 2018 amounted
to $689 and $2,581, respectively. The allowance for doubtful accounts at December 31, 2017 and 2018, was $96 and nil, respectively.
Under time charter contracts, the Company normally issues invoices on a monthly basis 30 days in advance of providing its services.
Trade accounts receivable from time charters as of December 31, 2017 and 2018 amounted to $14 and $4, respectively. Hire collected
in advance includes cash received prior to the balance sheet date and is related to revenue earned after such date.
(m)
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 expensed as incurred.
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 $0.300 per ton. The Company estimates the useful life of
the Company’s vessels to be 25 years from the date of initial delivery from the shipyard. In the event that future regulations
place limitations over the ability of a vessel to trade on a worldwide basis, its remaining useful life will be adjusted at the
date such regulations are adopted.
(n)
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.
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 equivalent rates by vessel type, 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 days and an estimated daily time charter rate for the unfixed days (based on
recent market estimates for the first year and the most recent seven year historical average rates, where available thereafter,
over the remaining estimated useful life of the vessels), expected outflows for vessels’ operating expenses, planned dry-docking
and special survey expenditures, management fees expenditures which are adjusted every year, pursuant to the Company’s existing
group management agreement, and fleet utilization of 85.0% to 98.6% (depending on the type of the vessel) for the first year and
98.0% or 93.0%, including scheduled off-hire days for planned dry-dockings and vessel surveys, for the years thereafter, based
on historical experience. The residual value used in the impairment test is estimated to be approximately $0.3 per lightweight
ton in accordance with the vessels’ depreciation policy.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(n)
Impairment of Long Lived Assets – Continued:
As
of December 31, 2016, the Company obtained market valuations for all its vessels from reputable marine appraisers. Based on these
valuations, the Company identified impairment indications for all of its vessels, except for the
Pyxis Epsilon
. More specifically,
the market values of these vessels were, in aggregate, $15,751 lower than their carrying values, including any unamortized deferred
charges relating to special survey costs, as of December 31, 2016. In this respect, the Company performed an impairment analysis
to estimate the future undiscounted cash flows for each of these vessels. The analysis resulted in higher undiscounted cash flows
than each vessel’s carrying value as of December 31, 2016, except for the
Northsea Alpha
and the
Northsea Beta
for which a total Vessel impairment charge of $3,998 was recorded as of December 31, 2016, of which $3,392 was charged against
Vessels, net and $606 against Deferred charges, net (Notes 5, 6 and 10).
As
of December 31, 2017, the Company obtained market valuations for all its vessels from reputable marine appraisers. Based on these
valuations, the Company identified impairment indications for certain of its vessels. More specifically, the market values of
these vessels were, in aggregate, $8,299 lower than their carrying values, including any unamortized deferred charges relating
to special survey costs, as of that date. In this respect, the Company performed an impairment analysis to estimate the future
undiscounted cash flows for each of these vessels. The analysis resulted in higher undiscounted cash flows than each vessel’s
carrying value as of December 31, 2017 and, accordingly, no adjustment to the vessels’ carrying values was required.
As
of December 31, 2018, the Company obtained market valuations for all its vessels from reputable marine appraisers. Based on these
valuations, the Company identified impairment indications for all of its vessels, except for the
Pyxis Epsilon
. More specifically,
the market values of these vessels were, in aggregate, $9,987 lower than their carrying values, including any unamortized deferred
charges relating to special survey costs, as of that date. In this respect, the Company performed an impairment analysis to estimate
the future undiscounted cash flows for each of these vessels. The analysis resulted in higher undiscounted cash flows than each
vessel’s carrying value as of December 31, 2018, except for the
Northsea Alpha
and the
Northsea Beta,
for
which a total Vessel impairment charge of $2,282 was recorded as of December 31, 2018, against Vessels, net.
(o)
Financial Derivative Instruments:
The Company enters into interest rate derivatives to manage its exposure to fluctuations
of interest rate risk associated with its borrowings. All derivatives are recognized in the consolidated financial statements
at their fair value. The fair value of the interest rate derivatives is based on a discounted cash flow analysis. When such derivatives
do not qualify for hedge accounting, the Company recognizes their fair value changes in current period earnings. When the derivatives
qualify for hedge accounting, the Company recognizes the effective portion of the gain or loss on the hedging instrument directly
in other comprehensive income / (loss), while the ineffective portion, if any, is recognized immediately in current period earnings.
The Company, at the inception of the transaction, documents the relationship between the hedged item and the hedging instrument,
as well as its risk management objective and the strategy of undertaking various hedging transactions. The Company also assesses
at hedge inception whether the hedging instruments are highly effective in offsetting changes in the cash flows of the hedged
items.
The
Company discontinues cash flow hedge accounting if the hedging instrument expires and it no longer meets the criteria for hedge
accounting or its designation is revoked by the Company. At that time, any cumulative gain or loss on the hedging instrument recognized
in equity is kept in equity until the forecasted transaction occurs. When the forecasted transaction occurs, any cumulative gain
or loss on the hedging instrument is recognized in consolidated statement of comprehensive loss. If a hedged transaction is no
longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to current period consolidated statement
of comprehensive loss as financial income or expense.
(p)
Accounting for Special Survey and Dry-docking Costs:
The Company follows the deferral method of accounting for special
survey and dry-docking costs, whereby actual costs incurred at the yard and parts used in the dry-docking 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 dry-dock or a survey is performed prior to the scheduled date, any remaining unamortized balances of the previous dry-dock and
survey are immediately written-off. Unamortized dry-dock 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.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(q)
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
a direct deduction from the carrying amount of the debt liability. Such costs are deferred and amortized to Interest and finance
costs in the consolidated statements of comprehensive 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.
(r)
Fair Value Measurements:
The Company follows the provisions of Accounting Standard Update (“ASU”) 2015-07
“Fair Value Measurements and Disclosures”, Topic 820, 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).
(s)
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, 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.
(t)
Earnings / (loss) per Share:
Basic earnings / (loss) per share are computed by dividing net income / (loss) attributable
to common equity holders by the weighted average number of shares of common stock outstanding. The computation of diluted earnings
/ (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were
exercised and is performed using the treasury stock method.
(u)
Stock Compensation:
The Company has a stock based incentive plan that covers directors and officers of the Company and
its affiliates and its consultants and service providers. Awards granted are valued at fair value and compensation cost is recognized
on a straight line basis, net of estimated forfeitures, over the requisite service period of each award. The fair value of restricted
stock awarded to directors and officers of the Company at the grant date is equal to the closing stock price on that date and
is amortized over the applicable vesting period using the straight-line method. The fair value of restricted stock awarded to
non-employees is equal to the closing stock price at the grant date adjusted by the closing stock price at each reporting date
and is amortized over the applicable performance period.
(v)
Going Concern:
The Company performs on a regular basis cash flow projections to evaluate whether it will be in a position
to cover its liquidity needs for the next 12-month period and in compliance with the financial and security collateral cover ratio
covenants under its existing debt agreements. In developing estimates of future cash flows, the Company makes assumptions about
the vessels’ future performance, with significant assumptions relating to time charter equivalent rates by vessel type,
vessels’ operating expenses, vessels’ capital expenditures, fleet utilization, the Company’s management fees
and general and administrative expenses, and cash flow requirements for debt servicing. The assumptions used to develop estimates
of future cash flows are based on historical trends as well as future expectations.
As
of December 31, 2018 the Company had a working capital deficit of $9,238, defined as current assets minus current liabilities.
As of the filing date of the consolidated financial statements, the Company expects that it will be in a position to cover its
liquidity needs for the next 12-month period through cash generated from operations and by managing its working capital requirements.
In addition, the Company may consider the raising of capital including, debt, equity securities, joint ventures and / or sale
of assets. Furthermore, the Company expects to be in compliance with the financial covenants under its existing debt agreements
as discussed in Note 7 for the following 12-month period following the filing date if the consolidated financial statements.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
2.
Significant Accounting Policies – Continued:
(w)
New Accounting Pronouncements:
Financial
Instruments:
In June 2016, the FASB issued ASU No. 2016-13– Financial Instruments – Credit Losses (ASC 326): Measurement
of Credit Losses on Financial Instruments. ASU 2016-13 amends guidance on reporting credit losses for assets held at amortized
cost basis and available for sale debt securities. For public entities, the amendments of this update are effective for fiscal
years beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted.
The Company is in the process of assessing the impact of the provisions of this guidance on the Company’s consolidated financial
position and performance.
Fair
Value Measurement:
In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (ASC 820) - Disclosure Framework-
Changes to the Disclosure Requirements for Fair Value Measurement that eliminates certain disclosure requirements for fair value
measurements for all entities, requires public entities to disclose certain new information and modifies some disclosure requirements.
The guidance on fair value disclosures eliminates the following requirements for all entities: (i) the amount of and reasons for
transfers between Level 1 and Level 2 of the fair value hierarchy; (ii) the entity’s policy for the timing of transfers
between levels of the fair value hierarchy; and (iii) the entity’s valuation processes for Level 3 fair value measurements.
The following disclosure requirements were added to ASC 820 for public companies: (i) the changes in unrealized gains and losses
for the period included in other comprehensive income for recurring Level 3 fair value measurements of instruments held at the
end of the reporting period and (ii) for recurring and nonrecurring Level 3 fair value measurements, the range and weighted average
used to develop significant unobservable inputs and how the weighted average was calculated, with certain exceptions. For certain
unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu
of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method
to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements.
The
guidance makes the following modifications for public entities: (i) entities are required to provide information about the measurement
uncertainty of Level 3 fair value measurements as of the reporting date rather than a point in the future (the FASB also deleted
the word “sensitivity,” which it said had caused confusion about whether the disclosure is intended to convey changes
in unobservable inputs at a point in the future) and (ii) entities that use the practical expedient to measure the fair value
of certain investments at their net asset values are required to disclose (1) the timing of liquidation of an investee’s
assets and (2) the date when redemption restrictions will lapse, but only if the investee has communicated this information to
the entity or announced it publicly. The amendments in this Update are effective for all entities for fiscal years, and interim
periods within those fiscal years, beginning after December 15, 2019, although early adoption is permitted. The Company is in
the process of assessing the impact of the provisions of this guidance on the Company’s consolidated financial position
and performance.
3.
Transactions with Related Parties:
The
Company uses the services of Maritime, a ship management company with its principal office in Greece and an office in the U.S.A.
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, 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 fee payable by each subsidiary of $0.325 per day per vessel while the vessel is in operation including any pool arrangements
(or $0.160 per day for as long as the chartering services for the
Northsea Alpha
and the
Northsea Beta
were subcontracted
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 of the newbuilding (collectively
the “Ship-management Fees”). As discussed in Note 1, in June and November 2016, Maritime assumed full commercial management
of the
Northsea Beta
and the
Northsea Alpha
, respectively. In addition, Maritime charges the Company a commission
rate of 1.25% on all charter hire agreements arranged by Maritime.
The
management agreements for the vessels have an initial term of five years. For the
Northsea Alpha
,
Northsea
Beta
and
Pyxis Delta
the base term expired on December 31, 2015, for
Pyxis Theta
it expired
on December 31, 2017 and for the
Pyxis Epsilon
and the
Pyxis Malou
it expired on December 31, 2018.
Following their initial expiration dates, the management agreements will automatically be renewed for consecutive five year periods,
or until terminated by either party on three months’ notice.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
3.
Transactions with Related Parties - Continued:
Under
a Head Management Agreement (the “Head Management Agreement”) with Maritime that commenced on March 23, 2015 and will
continue until March 23, 2020 (unless terminated by either party on 90 days’ notice), Maritime provides administrative services
to the Company, which include, among other, the provision of the services of the Company’s Chief Executive Officer, Chief
Financial Officer, Senior Vice President of Corporate Development, General Counsel and Corporate Secretary, Chief Operating Officer,
one or more internal auditor(s) and a secretary, as well as the use of office space in Maritime’s premises. Following the
initial expiration date, the Head Management Agreement will automatically be renewed for a five year period. Under the Head Management
Agreement, the Company pays Maritime a fixed fee of $1,600 annually (the “Administration Fees”). In the event of a
change of control of the Company during the management period or within 12 months after the early termination of the Head Management
Agreement, then the Company will pay to Maritime an amount equal to 2.5 times the then annual Administration Fees.
The
Ship-management Fees and the Administration Fees are adjusted annually according to the official inflation rate in Greece or such
other country where Maritime was headquartered during the preceding year. On August 9, 2016, the Company amended the Head Management
Agreement with Maritime to provide that in the event that the official inflation rate for any calendar year is deflationary, no
adjustment shall be made to the Ship-management Fees and the Administration Fees, which will remain, for the particular calendar
year, as per the previous calendar year. Effective January 1, 2018 and 2019, the Ship-management Fees and the Administration Fees
were increased by 1.12% and 0.62%, respectively in line with the average inflation rate in Greece in 2017 and 2018, respectively.
The
following amounts were charged by Maritime pursuant to the head management and ship-management agreements with the Company, and
are included in the accompanying consolidated statements of comprehensive loss:
|
|
Year
Ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Included in Voyage
related costs and commissions
|
|
|
|
|
|
|
|
|
|
|
|
|
Charter hire commissions
|
|
$
|
316
|
|
|
$
|
368
|
|
|
$
|
354
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in Management
fees, related parties
|
|
|
|
|
|
|
|
|
|
|
|
|
Ship-management Fees
|
|
|
631
|
|
|
|
712
|
|
|
|
720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Included in General
and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Administration
Fees
|
|
|
1,600
|
|
|
|
1,600
|
|
|
|
1,618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,547
|
|
|
$
|
2,680
|
|
|
$
|
2,692
|
|
On
October 28, 2015, the Company issued a promissory note in the amount of $2.5 million in favor of Maritime Investors in connection
with its election to receive a portion of the merger true-up shares in the form of a promissory note. The promissory note also
includes amounts due to Maritime Investors for the payment of $0.6 million by Maritime Investors to LookSmart, representing the
cash consideration of the merger, and the amounts that allowed the Company to pay miscellaneous transactional costs. The promissory
note had a maturity of January 15, 2017 and an interest rate of 2.75% per annum. On August 9, 2016, the Company agreed with Maritime
Investors to extend the maturity of the promissory note for one year, from January 15, 2017 to January 15, 2018, at the same terms
and at no additional cost to us. In addition, on March 7, 2017, the Company agreed with Maritime Investors to further extend the
maturity of the promissory note for one additional year, from January 15, 2018 to January 15, 2019, at the same terms and at no
additional costs to the Company. On December 29, 2017, the Company entered into a third amendment to the promissory note (“Amended
& Restated Promissory Note”), pursuant to which (i) the outstanding principal balance increased from $2.5 million to
$5.0 million, (ii) the maturity date was extended to June 15, 2019, and (iii) the fixed interest rate was increased to 4.00% per
annum, payable only in cash. In exchange for entering into the third amendment, the Company reduced the outstanding balance due
to Maritime by $2.5 million. On June 29, 2018, the Company entered into an amendment to the Amended & Restated Promissory
Note pursuant to which (i) the maturity date was extended to March 31, 2020, and (ii) the interest rate was increased to 4.5%
per annum until repayment in full. Total interest expense on promissory note for the years ended December 31, 2016, 2017 and 2018,
amounted to $69, $70 and $213, respectively, and is included in Interest and finance costs, net (Note 12) in the accompanying
consolidated statements of comprehensive loss.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
3.
Transactions with Related Parties - Continued:
Under
the terms of the credit facility agreement of one of the Company’s subsidiaries, Eighthone Corp. with EntrustPermal, no
repayment of principal under the Amended & Restated Promissory Note may be made while any Paid In Kind (“PIK”)
interest or Principal Deficiency Amount (as defined in the credit facility agreement) is outstanding under the credit
facility.
As
of December 31, 2017 and 2018, the balances due to Maritime were $2,125 and $3,402, respectively and are reflected in Due to related
parties in the accompanying consolidated balance sheets. The balance with Maritime is interest free and with no specific repayment
terms.
4.
Inventories:
The
amounts in the accompanying consolidated balance sheets are analyzed as follows:
|
|
December
31, 2017
|
|
|
December
31, 2018
|
|
Lubricants
|
|
$
|
404
|
|
|
$
|
428
|
|
Bunkers
|
|
|
612
|
|
|
|
379
|
|
Total
|
|
$
|
1,016
|
|
|
$
|
807
|
|
5.
Vessels, net:
The
amounts in the accompanying consolidated balance sheets are analyzed as follows:
|
|
Vessel
|
|
|
Accumulated
|
|
|
Net
Book
|
|
|
|
Cost
|
|
|
Depreciation
|
|
|
Value
|
|
Balance January 1, 2016
|
|
$
|
147,789
|
|
|
$
|
(17,288
|
)
|
|
$
|
130,501
|
|
Depreciation
|
|
|
—
|
|
|
|
(5,768
|
)
|
|
|
(5,768
|
)
|
Vessel impairment
charge
|
|
|
(9,729
|
)
|
|
|
6,337
|
|
|
|
(3,392
|
)
|
Balance December 31, 2016
|
|
|
138,060
|
|
|
|
(16,719
|
)
|
|
|
121,341
|
|
Depreciation
|
|
|
—
|
|
|
|
(5,567
|
)
|
|
|
(5,567
|
)
|
Balance December 31, 2017
|
|
|
138,060
|
|
|
|
(22,286
|
)
|
|
|
115,774
|
|
Depreciation
|
|
|
—
|
|
|
|
(5,500
|
)
|
|
|
(5,500
|
)
|
Vessel impairment
charge
|
|
|
(3,750
|
)
|
|
|
1,468
|
|
|
|
(2,282
|
)
|
Balance December
31, 2018
|
|
$
|
134,310
|
|
|
$
|
(26,318
|
)
|
|
$
|
107,992
|
|
As
of December 31, 2016, 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 vessels
Northsea
Alpha
and
Northsea Beta
. Consequently the carrying value of these vessels was written down resulting in a total impairment
charge of $3,998, of which $3,392 was charged against Vessels, net, based on level 2 inputs of the fair value hierarchy, as discussed
in Notes 2 and 10 and $606 was charged against Deferred charges, net, as discussed in Note 6.
As
of December 31, 2018, 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 vessels
Northsea
Alpha
and
Northsea Beta
. Consequently the carrying value of these vessels was written down resulting in a total impairment
charge of $2,282 that was charged against Vessels, net, based on level 2 inputs of the fair value hierarchy, as discussed in Notes
2 and 10.
All
of the Company’s vessels have been pledged as collateral to secure the bank loans discussed in Note 7.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
6.
Deferred charges, net:
The
movement in the deferred charges, net in the accompanying consolidated balance sheets are as follows:
|
|
Dry
docking
|
|
|
|
costs
|
|
Balance, January 1, 2016
|
|
$
|
836
|
|
Additions
|
|
|
364
|
|
Amortization
|
|
|
(236
|
)
|
Impairment charge
|
|
|
(606
|
)
|
Balance, December 31, 2016
|
|
|
358
|
|
Amortization
|
|
|
(73
|
)
|
Balance, December 31, 2017
|
|
|
285
|
|
Additions
|
|
|
588
|
|
Amortization
|
|
|
(133
|
)
|
Balance, December
31, 2018
|
|
$
|
740
|
|
The
amortization of the dry docking costs is separately reflected in the accompanying consolidated statements of comprehensive loss.
The
impairment charge of $606 relates to the impairments of the
Northsea Alpha
and the
Northsea Beta
as of December
31, 2016, discussed in Notes 2, 5 and 10.
7.
Long-term Debt:
The
amounts shown in the accompanying consolidated balance sheets at December 31, 2017 and 2018, are analyzed as follows:
Vessel (Borrower)
|
|
December
31, 2017
|
|
|
December
31, 2018
|
|
(a)
Northsea Alpha (Secondone)
|
|
$
|
4,348
|
|
|
$
|
4,055
|
|
(a) Northsea Beta
(Thirdone)
|
|
|
4,348
|
|
|
|
4,055
|
|
(b) Pyxis Malou
(Fourthone)
|
|
|
18,210
|
|
|
|
11,190
|
|
(c) Pyxis Delta
(Sixthone)
|
|
|
7,087
|
|
|
|
5,400
|
|
(c) Pyxis Theta
(Seventhone)
|
|
|
15,975
|
|
|
|
14,722
|
|
(d)
Pyxis Epsilon (Eighthone)
|
|
|
16,900
|
|
|
|
24,000
|
|
Total
|
|
$
|
66,868
|
|
|
$
|
63,422
|
|
|
|
|
|
|
|
|
|
|
Current portion
|
|
$
|
7,440
|
|
|
$
|
4,503
|
|
Less: Current
portion of deferred financing costs
|
|
|
(136
|
)
|
|
|
(170
|
)
|
Current
portion of long-term debt, net of deferred financing costs, current
|
|
$
|
7,304
|
|
|
$
|
4,333
|
|
|
|
|
|
|
|
|
|
|
Long-term portion
|
|
$
|
59,428
|
|
|
$
|
58,919
|
|
Less: Non-current
portion of deferred financing costs
|
|
|
(302
|
)
|
|
|
(790
|
)
|
Long-term
debt, net of current portion and deferred financing costs, non-current
|
|
$
|
59,126
|
|
|
$
|
58,129
|
|
(a)
|
On
September 26, 2007, Secondone and Thirdone jointly entered into a loan agreement with a financial institution for an amount
of up to $24,560, in order to partly finance the acquisition cost of the vessels
Northsea Alpha
and
Northsea Beta
.
|
|
|
(b)
|
Based
on a loan agreement concluded on December 12, 2008, Fourthone borrowed $41,600 in February 2009 in order to partly finance
the acquisition cost of the
Pyxis Malou
.
|
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
7.
Long-term Debt - Continued:
On
February 28, 2018, the Company refinanced the then existing indebtedness of $26,906 under the Secondone, Thirdone and Fourthone
loan agreements with a new 5-year secured loan of $20,500 and cash of $2,100. The remaining balance of $4,306 was written-off
by the previous lender at closing, which was recorded as gain from debt extinguishment in the 2018 consolidated statement of comprehensive
loss.
Each
of Secondone’s and Thirdone’s outstanding loan balance at December 31, 2018, amounting to $4,055, is repayable in
17 remaining quarterly installments amounting to $1,665 in the aggregate, the first falling due in February 2019, and the last
installment accompanied by a balloon payment of $2,390 falling due in February 2023. The first installment, amounting to $65 each,
is followed by 16 amounting to $100 each.
As
of December 31, 2018, the outstanding balance of Fourthone loan of $11,190 is repayable in 17 remaining quarterly installments
amounting to $5,790, the first falling due in February 2019, and the last installment accompanied by a balloon payment of $5,400
falling due in February 2023. The first installment, amounting to $270, is followed by four amounting to $300 each, four amounting
to $330 each, four amounting to $360 each and four amounting to $390 each.
The
new loan bears interest at LIBOR plus a margin of 4.65% per annum.
As
a condition subsequent to the execution of this loan agreement, the borrowers, Secondone, Thirdone and Fourthone, were required
to re-domicile to the jurisdiction of the Republic of Malta. In March and April 2018, these vessel-owning companies completed
their re-domiciliation and were renamed to SECONDONE CORPORATION LTD., THIRDONE CORPORATION LTD. and FOURTHONE CORPORATION LTD.,
respectively.
Standard
loan covenants include, among others, a minimum liquidity and a minimum required Security Cover Ratio (“MSC”).
Covenants:
|
●
|
The
Company undertakes to maintain minimum deposits with the bank of $1,450 at all times, plus Maintenance Account of $145 per
quarter ($85 for Fourthone and $30 for each of Secondone and Thirdone) until next special survey.
|
|
|
|
|
●
|
MSC
is to be at least 140% of the respective outstanding loan balance until February 2020, at least 150% until February 2022 and
at least 155% thereafter.
|
(c)
|
On
October 12, 2012, Sixthone and Seventhone concluded as joint and several borrowers a loan agreement with a financial institution
in order to partly finance the acquisition and construction cost of the
Pyxis Delta
and the
Pyxis Theta
, respectively.
In February 2013, Sixthone drew down an amount of $13,500, while in September 2013, Seventhone drew down an amount of $21,300
(“Tranche A” and “Tranche B”, respectively). On September 29, 2016, the Company agreed with the lender
of Sixthone to extend the maturity of Tranche A from May 2017 to September 2018, under the same amortization schedule and
applicable margin. In addition, on June 6, 2017, the lender of Sixthone and Seventhone agreed to further extend the maturity
of its respective loans from September 2018 to September 2022 under the same applicable margin, but with an extended amortization
schedule.
|
The
outstanding balance of the loan under Tranche A at December 31, 2018, of $5,400, is repayable in 15 quarterly installments of
$338 each, the first falling due in March 2019, and the last installment accompanied by a balloon payment of $330 falling due
in September 2022. In addition, the outstanding balance of the loan under Tranche B at December 31, 2018, of $14,722, is repayable
in 15 quarterly installments of $313 each, the first falling due in March 2019, and the last installment accompanied by a balloon
payment of $10,027 falling due in September 2022.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
7.
Long-term Debt - Continued:
The
main terms and conditions of the loan agreement dated October 12, 2012, as subsequently amended, are as follows:
|
●
|
The
loan bears interest at LIBOR, plus a margin of 3.35% per annum.
|
Covenants:
|
●
|
The
Company undertakes to maintain minimum deposits with the bank of $1,000 at all times.
|
|
|
|
|
●
|
The
ratio of the Company’s total liabilities to market value adjusted total assets is not to exceed 65%. This requirement
is only applicable in order to assess whether the two Vessel-owning companies are entitled to distribute dividends to Pyxis.
As of December 31, 2017, the requirement was met as such ratio was marginally lower than 65%. As of December 31, 2018, the
relevant ratio was 68%, or 3% higher than the required threshold.
|
|
|
|
|
●
|
MSC
is to be at least 130% of the respective outstanding loan balance.
|
(d)
|
Based
on a loan agreement concluded on January 12, 2015, Eighthone borrowed $21,000 on the same date in order to partly finance
the construction cost of the
Pyxis Epsilon
. The outstanding balance of the loan at December 31, 2017, was $16,900.
|
On
September 27, 2018, Eighthone entered into a new $24,000 loan agreement, for the purpose of refinancing the outstanding indebtedness
of $16,000 under the previous loan facility and for general corporate purposes. The new facility matures in September 2023 and
is secured by a first priority mortgage over the vessel, general assignment covering earnings, insurances and requisition compensation,
an account pledge agreement and a share pledge agreement concerning the respective vessel-owning subsidiary and technical and
commercial managers’ undertakings.
The
new loan facility bears an interest rate of 11% of which 1.0% can be paid as PIK interest per annum for first two years, and 11.0%
per annum thereafter and incurs fees due upfront and upon early prepayment or final repayment of outstanding principal.
The
principal obligation amortizes in 18 quarterly installments starting in March 29, 2019, equal to the lower of $400 and excess
cash computed through a cash sweep mechanism, plus a balloon payment due at maturity. As of December 31, 2018, the Company has
assessed that no excess cash will be available to proceed with any debt repayment within the next twelve months, therefore no
principal amortization will occur through December 31, 2019.
The
facility also imposes certain customary covenants and restrictions with respect to, among other things, the borrower’s ability
to distribute dividends, incur additional indebtedness, create liens, change its share capital, engage in mergers, or sell the
vessel and a minimum collateral value to outstanding loan principal.
Covenants:
|
●
|
The
Company undertakes to maintain minimum deposits with the bank of $750 at all times, plus an additional Dry Docking and Special
Survey Reserve of $0.25 per day accumulated quarterly.
|
|
|
|
|
●
|
MSC
is to be at least 115% of the respective outstanding loan balance until September, 2020 and at least 125% thereafter.
|
Under
the facility, a deferred fee may be payable on the occurrence of certain events including, among others, the sale of the vessel
or on repayment or maturity of the loan. If payable, the amount due is calculated as the lesser of (a) 15% of the amount of
the loan borrowed under the facility agreement and (b) 15% of the difference between (i) the charter-free fair market value of
the vessel plus any dry dock reserve account balance and (ii) any outstanding loan amount at the time of the repayment or
maturity of the facility. In the event that the deferred fee and the prepayment fee become simultaneously payable, only the higher
of the prepayment fee or the deferred fee will be payable. Management has assessed this deferred fee as a contingent liability
under ASC 450 and concluded that such loss contingency shall not be accrued by a charge in the consolidated statements
of comprehensive loss, since information available does not indicate that is probable that the liability has been incurred as
of the balance sheet date at December 31, 2018 and cannot be estimated.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
7.
Long-term Debt - Continued:
Each
loan is secured by a first priority mortgage over the respective 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 and in dividend distributions when certain financial ratios are not met.
As
of December 31, 2018, the Company was in compliance with all of its financial and MSC covenants with respect to its loan agreements,
other than the ratio of total liabilities over the market value of the Company’s adjusted total assets with one of its lenders,
which only restricts the ability of two vessel-owning companies to distribute dividends to Pyxis as discussed above in 7(c). In
addition, as of December 31, 2018, there was no amount available to be drawn down by the Company under its existing loan agreements.
Assuming
no principal repayments under the new loan of Eighthone discussed above, the annual principal payments required to be made after
December 31, 2018, are as follows:
To December
31,
|
|
Amount
|
|
2019
|
|
$
|
4,503
|
|
2020
|
|
|
4,693
|
|
2021
|
|
|
4,813
|
|
2022
|
|
|
14,643
|
|
2023
|
|
|
34,770
|
|
2024 and thereafter
|
|
|
-
|
|
Total
|
|
$
|
63,422
|
|
Total
interest expense on long-term debt for the years ended December 31, 2016, 2017 and 2018, amounted to $2,577, $2,674 and $3,835,
respectively, and is included in Interest and finance costs, net (Note 12) in the accompanying consolidated statements of comprehensive
loss. The Company’s weighted average interest rate (including the margin) for the years ended December 31, 2016, 2017 and
2018, was 3.27%, 3.74% and 6.00% per annum, including the promissory note discussed in Note 3, respectively.
8.
Equity Capital Structure and Equity Incentive Plan:
The
Company’s authorized common and preferred stock consists of 450,000,000 common shares and 50,000,000 preferred shares with
a par value of USD 0.001 per share.
The
amounts shown in the accompanying consolidated balance sheets as Additional paid-in capital represent contributions made by the
stockholders 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 from re-imbursement of certain payments to shipyards in respect
to the construction of new-built vessels. There was no paid-in capital re-imbursement for the years ended December 31, 2017 and
2018.
On
October 28, 2015, the Company’s board of directors approved an equity incentive plan (the “EIP”), providing
for the granting of share-based awards to directors, officers and employees of the Company and its affiliates and to its consultants
and service providers. The maximum aggregate number of shares of common stock of the Company that may be delivered pursuant to
awards granted under the EIP, shall be equal to 15% of the then issued and outstanding number of shares of common stock. On the
same date the Company’s board of directors approved the issuance of 33,222 restricted shares of the Company’s common
stock to certain of its officers that were issued later in 2016. On November 15, 2017, 200,000 restricted shares of the Company’s
common stock were granted and issued to a senior officer of the Company, which were vested immediately upon issuance. The fair
value of such restricted shares based on the average of the high-low trading price of the shares on November 15, 2017, was $355,
which was recorded as a non-cash stock compensation and included in the consolidated statement of comprehensive loss under General
and administrative expenses for the year ended December 31, 2017. During the year ended December 31, 2018, no additional shares
were granted under the EIP and as of December 31, 2018, there was no unrecognized compensation cost.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
8.
Equity Capital Structure and Equity Incentive Plan - Continued:
On
December 6, 2017, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with certain
accredited investors (the “Investors”), pursuant to which the Company, in a private placement, agreed to issue and
sell to the Investors an aggregate of 2,400,000 shares of its common stock at a price per share of $2.00 (the “Private Placement”).
As a condition of the Purchase Agreement, the Company, Maritime Investors and each of the Company’s directors and executive
officers entered into lock-up agreements pursuant to which they could not, among other things, offer or sell shares of the Company’s
common stock until the earlier of i) 30 days after effective date (as defined therein) and ii) the disposition by the Investors
of all of the shares of common stock they received in the Private Placement. In connection with the Private Placement, the Company
also entered into a registration rights agreement with the Investors, pursuant to which the Company was obligated to prepare and
file with the Securities and Exchange Commission (“SEC”) a registration statement to register for resale the registrable
securities (as defined therein) on or prior to December 21, 2017. The Private Placement closed on December 8, 2017, resulting
in gross proceeds of $4,800, before deducting offering expenses of approximately $509, which were used for general corporate purposes,
including the repayment of outstanding indebtedness. On December 19, 2017, the Company filed with the SEC a registration statement
on Form F-3 to register for resale the shares of common stock issued under the Purchase Agreement, which was declared effective
on January 3, 2018.
On
February 2, 2018, the Company filed with the SEC a registration statement on Form F-3, under which it may sell from time to time
common stock, preferred stock, debt securities, warrants, purchase contracts and units, each as described therein, in any combination,
in one or more offerings up to an aggregate dollar amount of $100,000. In addition, the selling stockholders referred to in the
registration statement may sell in one of more offerings up to 5,233,222 shares of the Company’s common stock from time
to time as described therein. The registration statement was declared effective by the SEC on February 12, 2018.
As
of December 31, 2017 and following the issuance of the 200,000 shares of common stock under the EIP, as well as the issuance of
the 2,400,000 shares of common stock pursuant to the Private Placement, both discussed above, the Company’s outstanding
common shares increased from 18,277,893 to 20,877,893. As of December 31, 2018 following the issuance and sale of 182,297 shares
of common stock under the At The Market (“ATM”) Program, the Company’s outstanding common shares increased from
20,877,893 to 21,060,190.
9.
Loss per Common Share:
|
|
For
the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Net loss available to common
stockholders
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares, basic and diluted
|
|
|
18,277,893
|
|
|
|
18,461,455
|
|
|
|
20,894,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share,
basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.39
|
)
|
10.
Risk Management and Fair Value Measurements:
The
principal financial assets of the Company consist of cash and cash equivalents and trade accounts receivable due from charterers.
The principal financial liabilities of the Company consist of long-term bank loans, trade accounts payable, amounts due to related
parties and a promissory note.
Interest
rate risk
:
The Company’s interest rates are calculated at LIBOR plus a margin, as discussed in Note 7 and hence
the Company is exposed to movements in LIBOR. In order to hedge its variable interest rate exposure, on January 19, 2018, the
Company, via one of its vessel-ownings subsidiaries, entered into an interest rate cap agreement with one of its lenders for a
notional amount of $10,000 and a cap rate of 3.5%. The interest rate cap will terminate on July 18, 2022.
Credit
risk
:
Credit risk is minimized since trade 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 on the balance sheet.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
10.
Risk Management and Fair Value Measurements – Continued:
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 Management has determined that the fair values of the assets and liabilities as of December 31, 2018 are as
follows:
|
|
Carrying
Value
|
|
|
Fair
Value
|
|
Cash and cash equivalents
|
|
$
|
4,204
|
|
|
$
|
4,204
|
|
Trade accounts receivable, net
|
|
$
|
2,585
|
|
|
$
|
2,585
|
|
Trade accounts payable
|
|
$
|
4,746
|
|
|
$
|
4,746
|
|
Long-term debt with variable interest
rates, net
|
|
$
|
39,422
|
|
|
$
|
39,422
|
|
Long-term loans and promissory note
with non-variable interest rates, net
|
|
$
|
29,000
|
|
|
$
|
29,000
|
|
Assets
measured at fair value on a recurring basis: Interest rate cap
The
Company’s interest rate cap does not qualify for hedge accounting. The Company adjusts its interest rate cap contract to
fair market value at the end of every period and records the resulting gain or loss during the period in the consolidated statements
of comprehensive loss. Information on the classification, the derivative fair value and the loss from financial derivative instrument
included in the consolidated financial statements is shown below:
Consolidated
Balance Sheets – Location
|
|
December
31, 2017
|
|
|
December
31, 2018
|
|
Financial derivative instrument
– Other non-current assets
|
|
$
|
-
|
|
|
$
|
28
|
|
Consolidated
Statements of Comprehensive Loss - Location
|
|
December
31, 2017
|
|
|
December
31, 2018
|
|
Financial derivative instrument
– Initial cost
|
|
$
|
-
|
|
|
$
|
(47
|
)
|
Financial derivative
instrument – Fair value as at period end
|
|
|
-
|
|
|
|
28
|
|
Loss
from financial derivative instrument
|
|
$
|
-
|
|
|
$
|
(19
|
)
|
Assets
measured at fair value on a recurring basis: Interest rate cap
The
fair value of the Company’s interest rate cap agreement is determined based on market-based LIBOR rates. LIBOR rates are
observable at commonly quoted intervals for the full term of the cap and therefore, are considered Level 2 items in accordance
with the fair value hierarchy.
Assets
measured at fair value on a non-recurring basis: Long lived assets held and used
As
of December 31, 2016, 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 vessels
Northsea
Alpha
and
Northsea Beta
. Consequently, the carrying value of these vessels was written-down as presented in
the table below.
Vessel
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
|
Impairment
Loss
charged
against
Vessels, net
|
|
|
Impairment
Loss
charged
against
Deferred charges, net
|
|
|
Vessel
Impairment
Charge
|
|
Northsea
Alpha
|
|
$
|
8,000
|
|
|
$
|
1,770
|
|
|
$
|
292
|
|
|
$
|
2,062
|
|
Northsea
Beta
|
|
|
8,000
|
|
|
|
1,622
|
|
|
|
314
|
|
|
|
1,936
|
|
TOTAL
|
|
$
|
16,000
|
|
|
$
|
3,392
|
|
|
$
|
606
|
|
|
$
|
3,998
|
|
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
10.
Risk Management and Fair Value Measurements – Continued:
The
fair value is based on level 2 inputs of the fair value hierarchy and reflects the Company’s best estimate of the value
of each vessel on a time charter free basis, and is supported by a vessel valuation of an independent shipbroker as of December
31, 2016, which is mainly based on recent sales and purchase transactions of similar vessels.
The
Company recognized the total Vessel impairment charge of $3,998, which is included in the accompanying consolidated statements
of comprehensive loss for the year ended December 31, 2016.
No
impairment loss was recognized for the year ended December 31, 2017.
As
of December 31, 2018, 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 vessels
Northsea
Alpha
and
Northsea Beta
. Consequently the carrying value of these vessels was written-down to their respective fair
values as presented in the table below.
Vessel
|
|
Significant
Other
Observable Inputs
(Level 2)
|
|
|
Vessel
Impairment
Charge (charged against
Vessels, net)
|
|
Northsea
Alpha
|
|
$
|
6,125
|
|
|
$
|
1,142
|
|
Northsea
Beta
|
|
|
6,125
|
|
|
|
1,140
|
|
TOTAL
|
|
$
|
12,250
|
|
|
$
|
2,282
|
|
The
fair value is based on level 2 inputs of the fair value hierarchy and reflects the Company’s best estimate of the value
of each vessel on a time charter free basis, and is supported by a vessel valuation of an independent shipbroker as of March 31,
2018 and December 31, 2018, respectively, which is mainly based on recent sales and purchase transactions of similar vessels.
The
Company recognized the total Vessel impairment charge of $2,282 which is included in the accompanying consolidated statements
of comprehensive loss for the year ended December 31, 2018.
The
Company performs an impairment exercise whenever there are indicators of impairment. As of December 31, 2017 and 2018, the Company
did not have any other assets or liabilities measured at fair value on a non- recurring basis.
11.
Commitments and Contingencies:
Minimum
contractual charter revenues:
The
Company employs certain of its vessels under lease agreements. Time charters typically may provide for variable lease payments,
charterers’ options to extend the lease terms at higher rates and termination clauses. The Company’s contracted time
charters as of December 31, 2018, range from one to three months, with varying extension periods at the charterers’ option
and do not provide for variable lease payments. Our time charters contain customary termination clauses which protect either the
Company or the charterers from material adverse situations.
Future
minimum contractual charter revenues, gross of 1.25% address commission and 1.25% brokerage commissions to Maritime and of
any other brokerage commissions to third parties, based on the vessels’ committed, non-cancelable, long-term
time charter contracts as of December 31, 2018, are as follows:
Year
ending December 31,
|
|
Amount
|
|
2019
|
|
$
|
2,813
|
|
|
|
$
|
2,813
|
|
Make-Whole
and Put Right
:
The Make-Whole Right is defined in Section 4.12(a) of the Agreement and Plan of Merger, dated as of April
23, 2015 and as thereafter amended between the Company, Merger Sub, LS and LookSmart Group, Inc. (the “Merger Agreement”
and the transactions contemplated therein, the “Merger”). Pursuant to the Make-Whole Right, if Pyxis conducts an offering
of its common stock or a sale of Pyxis and/or substantially all of its assets (either, a “Future Pyxis Offering”)
at a price per share (the “New Offering Price”) that is less than $4.30 following the Merger, then a LS stockholder
of record on April 29, 2015, who on the date of the consummation of a Future Pyxis Offering continues to hold Pyxis common shares
that the LS stockholder received in connection with the Merger (the “MWR Holder”), is entitled to receive in Pyxis
common shares the difference between the New Offering Price and $4.30 (i.e., the Make-Whole Right) per Pyxis common share still
held by such MWR Holder. Under Section 4.12(d) of the Merger Agreement, the Make-Whole Right applies only to the first Future
Pyxis Offering following the closing of the Merger, provided that such Future Pyxis Offering results in gross proceeds to Pyxis
of at least $5 million (excluding the proceeds from any shares purchased by certain affiliates). In December 2017, Pyxis completed
a common stock offering (the “Offering”), which resulted in gross proceeds of $4.8 million. The Offering qualified
as Future Pyxis Offering and thus, the Make-Whole Right is no longer available. The Put Right is defined in Section 4.12(c) of
the Merger Agreement. Pursuant to the Put Right, if a Future Pyxis Offering has not occurred within three (3) years of the closing
date of the Merger (i.e., by October 28, 2018), each MWR Holder may, at its option following written notice to Pyxis, require
that Pyxis purchase a pro rata amount of Pyxis common stock from such MWR Holder (based on the total amount of shares of Pyxis
common stock held by all MWR Holders) that will result in, among other things, an amount of gross proceeds not to exceed an aggregate
of $2 million (i.e., the Put Right). As discussed above, in December 2017 Pyxis completed the Offering, which qualified as a Future
Pyxis Offering and accordingly, the Put Right is no longer available to MWR Holders.
PYXIS
TANKERS INC.
Notes
to the Consolidated Financial Statements
December
31, 2017 and 2018
(Expressed
in thousands of U.S. dollars, except for share and per share data)
11.
Commitments and Contingencies - Continued:
Other
:
Various claims, suits and complaints, including those involving government regulations and environmental 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 consolidated financial statements.
The
Company accrues for the cost of environmental and other 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 consolidated 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 Costs, net:
The
amounts in the accompanying consolidated statements of comprehensive loss are analyzed as follows:
|
|
For
the years ended December 31,
|
|
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Interest on long-term debt
(Note 7)
|
|
$
|
2,577
|
|
|
$
|
2,674
|
|
|
$
|
3,835
|
|
Interest on promissory note (Note 3)
|
|
|
69
|
|
|
|
70
|
|
|
|
213
|
|
Long-term debt prepayment fees
|
|
|
—
|
|
|
|
—
|
|
|
|
56
|
|
Amortization
and write-off of financing costs
|
|
|
164
|
|
|
|
153
|
|
|
|
386
|
|
Total
|
|
$
|
2,810
|
|
|
$
|
2,897
|
|
|
$
|
4,490
|
|
13.
Subsequent Events:
The
Company evaluated subsequent events up to March 29, 2019 and assessed that there are no subsequent events that should be
disclosed.
Schedule
I – Condensed Financial Information of PYXIS TANKERS INC. (Parent Company Only)
Balance
Sheets
As
at December 31, 2017 and 2018
(Expressed
in thousands of U.S. Dollars, except for share and per share data)
|
|
2017
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
—
|
|
|
$
|
17
|
|
Due from related parties
|
|
|
572
|
|
|
|
9,578
|
|
Prepayments and
other assets
|
|
|
42
|
|
|
|
29
|
|
Total
current assets
|
|
|
614
|
|
|
|
9,624
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
|
2,695
|
|
|
|
—
|
|
Investment in
subsidiaries*
|
|
|
50,082
|
|
|
|
35,598
|
|
Total
non-current assets
|
|
|
52,777
|
|
|
|
35,598
|
|
Total
assets
|
|
$
|
53,391
|
|
|
$
|
45,222
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
72
|
|
|
$
|
162
|
|
Accrued and other
liabilities
|
|
|
163
|
|
|
|
117
|
|
Total
current liabilities
|
|
|
235
|
|
|
|
279
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Promissory note
|
|
|
5,000
|
|
|
|
5,000
|
|
Total
non-current liabilities
|
|
|
5,000
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS’
EQUITY:
|
|
|
|
|
|
|
|
|
Preferred stock ($0.001 par value; 50,000,000
shares authorized; none issued)
|
|
|
—
|
|
|
|
—
|
|
Common stock ($0.001 par value; 450,000,000
shares authorized; 20,877,893 and 21,060,190 shares issued and outstanding as of December 31, 2017 and 2018, respectively)
|
|
|
21
|
|
|
|
21
|
|
Additional paid-in capital
|
|
|
74,766
|
|
|
|
74,767
|
|
Accumulated deficit
|
|
|
(26,631
|
)
|
|
|
(34,845
|
)
|
Total
stockholders’ equity
|
|
|
48,156
|
|
|
|
39,943
|
|
Total
liabilities and stockholders’ equity
|
|
$
|
53,391
|
|
|
$
|
45,222
|
|
*
Eliminated on consolidation
Schedule
I – Condensed Financial Information of PYXIS TANKERS INC. (Parent Company Only)
Statements
of Comprehensive Loss
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. Dollars, except for share and per share data)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General
and administrative expenses
|
|
$
|
(2,344
|
)
|
|
$
|
(3,121
|
)
|
|
$
|
(2,314
|
)
|
Operating
loss
|
|
|
(2,344
|
)
|
|
|
(3,121
|
)
|
|
|
(2,314
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and
finance costs, net
|
|
|
(72
|
)
|
|
|
(73
|
)
|
|
|
(215
|
)
|
Total
other expenses, net
|
|
|
(72
|
)
|
|
|
(73
|
)
|
|
|
(215
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity
in loss of subsidiaries*
|
|
|
(3,397
|
)
|
|
|
(2,049
|
)
|
|
|
(5,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share,
basic and diluted
|
|
$
|
(0.32
|
)
|
|
$
|
(0.28
|
)
|
|
$
|
(0.39
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of shares,
basic and diluted
|
|
|
18,277,893
|
|
|
|
18,461,455
|
|
|
|
20,894,202
|
|
*
Eliminated on consolidation
Schedule
I – Condensed Financial Information of PYXIS TANKERS INC. (Parent Company Only)
Statements
of Stockholders’ Equity
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. Dollars, except for share and per share data)
|
|
Common
Stock
|
|
|
Additional
Paid-in
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
#
of Shares
|
|
|
Par
value
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
BALANCE,
January 1, 2016
|
|
|
18,244,671
|
|
|
$
|
18
|
|
|
$
|
70,123
|
|
|
$
|
(15,575
|
)
|
|
$
|
54,566
|
|
Issuance of common stock –
EIP
|
|
|
33,222
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,813
|
)
|
|
|
(5,813
|
)
|
BALANCE, December
31, 2016
|
|
|
18,277,893
|
|
|
$
|
18
|
|
|
$
|
70,123
|
|
|
$
|
(21,388
|
)
|
|
$
|
48,753
|
|
Issuance of common stock
|
|
|
2,400,000
|
|
|
|
3
|
|
|
|
4,288
|
|
|
|
—
|
|
|
|
4,291
|
|
Issuance of common stock – EIP
|
|
|
200,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
-
|
|
Stock compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
355
|
|
|
|
—
|
|
|
|
355
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(5,243
|
)
|
|
|
(5,243
|
)
|
BALANCE, December
31, 2017
|
|
|
20,877,893
|
|
|
$
|
21
|
|
|
$
|
74,766
|
|
|
$
|
(26,631
|
)
|
|
|
48,156
|
|
Net proceeds from the issuance of common
stock
|
|
|
182,297
|
|
|
|
—
|
|
|
|
1
|
|
|
|
—
|
|
|
|
1
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(8,214
|
)
|
|
|
(8,214
|
)
|
BALANCE, December
31, 2018
|
|
|
21,060,190
|
|
|
$
|
21
|
|
|
$
|
74,767
|
|
|
$
|
(34,845
|
)
|
|
$
|
39,943
|
|
Schedule
I – Condensed Financial Information of PYXIS TANKERS INC. (Parent Company Only)
Statements
of Cash Flows
For
the years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. Dollars)
|
|
2016
|
|
|
2017
|
|
|
2018
|
|
Cash flows from operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(5,813
|
)
|
|
$
|
(5,243
|
)
|
|
$
|
(8,214
|
)
|
Adjustments to reconcile net loss to
net cash from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock compensation
|
|
|
—
|
|
|
|
355
|
|
|
|
—
|
|
Equity in loss of subsidiaries, net
of dividends received*
|
|
|
5,647
|
|
|
|
2,049
|
|
|
|
5,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in assets
and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Due from related parties
|
|
|
-
|
|
|
|
(572
|
)
|
|
|
(206
|
)
|
Prepayments and other assets
|
|
|
2
|
|
|
|
(77
|
)
|
|
|
13
|
|
Accounts payable
|
|
|
(121
|
)
|
|
|
(34
|
)
|
|
|
182
|
|
Due to related parties
|
|
|
(4,087
|
)
|
|
|
1,678
|
|
|
|
—
|
|
Accrued and other
liabilities
|
|
|
(71
|
)
|
|
|
22
|
|
|
|
(46
|
)
|
Net
cash used in operating activities
|
|
$
|
(4,443
|
)
|
|
$
|
(1,822
|
)
|
|
$
|
(2,586
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by investing activities
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross proceeds from issuance of common
stock
|
|
|
—
|
|
|
|
4,800
|
|
|
|
315
|
|
Common stock
offering costs
|
|
|
—
|
|
|
|
(414
|
)
|
|
|
(407
|
)
|
Net
cash provided by / (used in) financing activities
|
|
$
|
—
|
|
|
$
|
4,386
|
|
|
$
|
(92
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) /
increase in cash and cash equivalents and restricted cash
|
|
|
(4,443
|
)
|
|
|
2,564
|
|
|
|
(2,678
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at the beginning of the year
|
|
|
4,574
|
|
|
|
131
|
|
|
|
2,695
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents and restricted cash at the end of the year
|
|
$
|
131
|
|
|
$
|
2,695
|
|
|
$
|
17
|
|
*
Eliminated in consolidation
Schedule
I – Condensed Financial Information of PYXIS TANKERS INC. (Parent Company Only)
For
years ended December 31, 2016, 2017 and 2018
(Expressed
in thousands of U.S. Dollars, except for share and per share data)
In
the condensed financial information of Pyxis, Pyxis’ investment in subsidiaries is stated at cost plus equity in undistributed
earnings / losses of subsidiaries. In May 2016, Pyxis received dividend distributions from Sixthone and Seventhone amounting to
$2,250, in the aggregate, based on the respective vessel-owning companies’ financial position as of and for the year ended
December 31, 2015. During the years ended December 31, 2017 and 2018, Pyxis did not receive any dividend distributions from its
subsidiaries.
The
lender of Sixthone and Seventhone requires the ratio of the Company’s total liabilities to market value adjusted total assets
not to exceed 65%. This requirement is only applicable in order to assess whether the two Vessel-owning companies are entitled
to distribute dividends to Pyxis. As of December 31, 2017, the requirement was met as such ratio was marginally lower than 65%.
As of December 31, 2018, the relevant ratio was 68%, or 3% higher than the required threshold. As discussed in Note 7, until the
Company cures such non-compliance, neither Sixthone nor Seventhone will be permitted to make dividend distributions. Other than
the above, there are no legal or regulatory restrictions on Pyxis’ ability to obtain funds from its subsidiaries through
dividends, loans or advances.
The
condensed financial information of Pyxis, as parent company only, should be read in conjunction with the Company’s consolidated
financial statements.
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