10.

Financial Instruments

The principal financial assets of the Company consist of cash at banks, other investment and accounts receivable due from charterers. The principal financial liabilities of the Company consist of long-term loans, derivatives including interest rate swaps, and accounts payable due to suppliers.

Interest rate risk

The Company enters into interest rate swap contracts as economic hedges to manage some of its exposure to variability in its floating rate long term debt. Under the terms of the interest rate swaps the Company and the bank agreed to exchange, at specified intervals the difference between a paying fixed rate and floating rate interest amount calculated by reference to the agreed principal amounts and maturities. Interest rate swaps allow the Company to convert long-term borrowings issued at floating rates into equivalent fixed rates. Even though the interest rate swaps were entered into for economic hedging purposes, the derivatives described below in this note do

not

qualify for accounting purposes as fair value hedges, under guidance relating to

Derivatives and Hedging

, as the Company does

not

have currently written contemporaneous documentation identifying the risk being hedged and, both on a prospective and retrospective basis, performing an effectiveness test to support that the hedging relationship is highly effective. Consequently, the Company recognizes the change in fair value of these derivatives in“Loss in derivatives, net” in the unaudited condensed consolidated statements of operations. As of

December 31, 2016

and

June 30, 2017,

the Company had

one

open swap contract of a notional amount of

$10

million.

Concentration of credit risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk consist primarily of cash and trade accounts receivable. The Company places its temporary cash investments, consisting mostly of deposits, with high credit qualified financial institutions. The Company performs periodic evaluation of the relative credit standing of these 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.

Fair value of financial instruments

The estimated fair values of the Company's financial instruments such as trade receivables, trade accounts payable, cash and cash equivalents and restricted cash approximate their individual carrying amounts as of

December 31, 2016

and

June 30, 2017,

due to their short-term maturity. Cash and cash equivalents and restricted cash are considered Level

items as they represent liquid assets with short-term maturities. The fair value of the Company’s long term borrowings approximates

$61.4

million as of

June 30, 2017

or approximately

$1.5

million less than its carrying value of

$62.9

million (excluding the unamortized deferred charges). The fair value of the long term borrowing is estimated based on current interest rates offered to the Company for similar loans. LIBOR rates are observable at commonly quoted intervals for the full terms of the loans and hence fair value of the long-term bank loans are considered Level

items in accordance with the fair value hierarchy due to their variable interest rate, being the LIBOR. The fair value of the Company’s interest rate swaps was the estimated amount the Company would pay to terminate the swap agreements at the reporting date, taking into account current interest rates and the current creditworthiness of the Company and its counter parties.

The Company follows guidance relating to “Fair value measurements”, which establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosure about fair value measurements. This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in

one

of the following

three

categories:

Level

Quoted market prices in active markets for identical assets or liabilities;

Level

Observable market based inputs or unobservable inputs that are corroborated by market data;

Level

Unobservable inputs that are

not

corroborated by market data.

The fair value of the Company’s interest rate swap agreements is determined using a discounted cash flow approach based on market-based LIBOR swap rates. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swaps and therefore are considered Level

items. The fair values of the interest rate swap determined through Level

of the fair value hierarchy as defined in guidance relating to “Fair value measurements” are derived principally from or corroborated by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparables, interest rates, yield curves and other items that allow value to be determined.

Recurring Fair Value Measurements

	Fair Value Measurement at Reporting Date

	Total, December 31, 2016		(Level 1)		(Level 2)		(Level 3)

Liabilities
Interest rate swap contracts, long-term portion	$	240,181		-	$	240,181		-

	Fair Value Measurement at Reporting Date

	Total, June 30, 2017		(Level 1)		(Level 2)		Significant Other Unobservable Inputs (Level 3)

Liabilities
Interest rate swap contracts, current and long-term portion	$	271,532		-	$	271,532		-

Derivatives not designated as hedging instruments	Balance Sheet Location	December 31, 2016	June 30, 2017
Interest rate contracts	Current liabilities - Derivatives	-	88,176
Interest rate contracts	Long-term liabilities - Derivatives	240,181	183,356
Total derivative liabilities		240,181	271,532

Derivatives not designated as hedging instruments	Location of gain (loss) recognized	Six Months Ended June 30, 2016		Six Months Ended June 30, 2017
Interest rate – Fair value	Loss on derivatives, net	(181,707	)	2,298
Interest rate contracts - Realized loss	Loss on derivatives net	(83,180	)	(31,351	)
Total loss on derivatives		(264,887	)	(29,053	)