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Note 12 - Derivatives and Fair Value Disclosures

12 Months Ended

Dec. 31, 2016

Notes to Financial Statements

Fair Value Disclosures [Text Block]

12. Derivatives and Fair Value Disclosures

The Company uses interest rate swaps for the management of interest rate risk exposure. The interest rate swaps effectively convert a portion of the Company’s debt from a floating to a fixed rate. The Company is a party to

five

floating-to-fixed interest rate swaps with various major financial institutions at

December

31,

2016

(2015:

seven

swaps) covering notional amounts aggregating approximately

$60,750,343

at

December

 

31,

2016

(2015:

$92,182,741)

pursuant to which it pays fixed rates ranging from

1.52%

to

2.60%

and receives floating rates based on the London Interbank Offered Rate (“LIBOR”) (approximately

1.05%

at

December

 

31,

2016).

These agreements contain no leverage features and have maturity dates ranging from

September

2020

to

September

2021.

As of

December

31,

2015

and

2016

five

derivative contracts qualify for hedge accounting since their inception.

On

April

10,

2014,

the Company as a condition of its term loan dated

September

23,

2013,

entered into an amortizing interest rate swap agreement for a notional amount of

$17,553,663.

The agreement is effective from

September

30,

2015

and expires on

September

30,

2020;

under this agreement the Company receives each quarter interest on the notional amount based on the

three

month LIBOR rate and pays interest based on a fixed interest rate of

2.60%.

On

July

6,

2015,

the Company as a condition of its term loan dated

September

23,

2013,

entered into an amortizing interest rate swap agreement for a notional amount of

$17,553,663.

The agreement is effective from

September

30,

2015

and expires on

September

30,

2020;

under this agreement the Company receives each quarter interest on the notional amount based on the

three

month LIBOR rate and pays interest based on a fixed interest rate of

1.69%.

On

September

22,

2015,

the Company as a condition of its term loan dated

June

12,

2014,

entered into an amortizing interest rate swap agreement for a notional amount of

$12,120,000.

The agreement is effective from

October

2,

2015

and expires on

October

2,

2020;

under this agreement the Company receives each quarter interest on the notional amount based on the

three

month LIBOR rate and pays interest based on a fixed interest rate of

1.54%.

On

October

13,

2015,

the Company as a condition of its term loan dated

July

4,

2014,

entered into

two

amortizing interest rate swap agreements for a notional amount of

$11,171,875

each. The

first

agreement is effective from

November

4,

2015

and expires on

August

4,

2021

and the

second

agreement is effective from

December

3,

2015

and expires on

September

3,

2021;

under these agreements the Company receives each quarter interest on the notional amounts based on the

three

month LIBOR rate and pays interest based on a fixed interest rate of

1.52%

and

1.55%,

respectively.

The Company enters into foreign currency forward contracts in order to manage risks associated with fluctuations in foreign currencies. During

2014,

the Company entered into a series of foreign currency forward contracts to hedge part of its exposure to fluctuations of its anticipated cash payments in Japanese Yen relating to certain vessels under construction. Under the contracts the Company converted U.S. dollars to approximately

JPY400

million of cash outflows in

2014

and to approximately

JPY500

million of cash outflows in

2015.No

such contracts were entered into during the years ended

December

31,

2015

and

2016.

The following tables present information on the location and amounts of derivatives’ fair values reflected in the consolidated balance sheets and with respect to gains and losses on derivative positions reflected in the consolidated statements of operations or in the consolidated balance sheets, as a component of accumulated other comprehensive income/(loss).

Tabular disclosure of financial instruments is as follows:

				December 31,
				2015								2016
Derivatives designated as hedging instruments		Balance Sheet Location		Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
Interest Rate Swap Agreements		Non current assets — Fair value of derivatives			127,555				—				263,635				—
Interest Rate Swap Agreements		Non current liabilities — Fair value of derivatives			—				681,197				—				364,823
Total derivatives designated as hedging instruments					127,555				681,197				263,635				364,823

				December 31,
				2015								2016
Derivatives designated as hedging instruments		Balance Sheet Location		Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
Interest Rate Swap Agreements ...		Current liabilities — Fair value of derivatives			—				297,656				—				—
Total derivatives not designated as hedging instruments					—				297,656				—				—

The effect of derivative instruments on the consolidated statements of operations for the years ended

December

 

31,

2014,

2015

and

2016

is as follows:

				Year Ended December 31,
Derivatives not designated as hedging instruments		Location of Gain/(Loss) Recognized		2014				2015				2016
Interest Rate Swap — Reclassification from OCI		Loss on derivatives			(49,471	)			—				—
Interest Rate Swap — Change in Fair Value		Loss on derivatives			1,652,692				1,191,050				297,656
Interest Rate Swap — Realized loss		Loss on derivatives			(1,857,362	)			(1,243,359	)			(297,954	)
Foreign Currency Contract — Change in Fair Value		Loss on derivatives			(583,368	)			583,368				—
Foreign Currency Contract — Realized loss..		Loss on derivatives			(510,875	)			(669,712	)			—
Total loss on derivatives					(1,348,384	)			(138,653	)			(298	)

				Year Ended December 31,
Derivatives designated as hedging instruments		Location of  Loss Recognized		2014				2015				2016
Interest Rate Swap — Loss reclassified from OCI (Effective portion)		Loss on derivatives			—				(231,931	)			(766,898	)
Total loss on derivatives					—				(231,931	)			(766,898	)

The components of accumulated other comprehensive income/ (loss) included in the accompanying consolidated balance sheets consist of unrealized gain / (loss) on cash flow hedges and are analyzed as follows:

		Unrealized Gain / (Loss) on cash flow hedges
Balance, January 1, 2014			(49,471	)
Effective portion of changes in fair value of interest swap contracts			(293,020	)
Reclassification adjustment			49,471
Balance, December 31, 2014			(293,020	)
Effective portion of changes in fair value of interest swap contracts			(100,268	)
Balance, December 31, 2015			(393,288	)
Effective portion of changes in fair value of interest swap contracts			418,723
Balance, December 31, 2016			25,435

During the year ended

December

 

31,

2014,

the loss transferred from accumulated other comprehensive income/(loss) to the statement of operations was

$49,471.

No transfer took place during the years ended

December

31,

2015

and

2016.

Fair Value of Financial Instruments and Concentration of Credit Risk:

 Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of cash and cash equivalents, restricted cash, receivables from related party, trade and other receivables, claims receivable, payable to related party, trade accounts payable and accrued liabilities. The Company limits its credit risk with respect to accounts receivable by performing ongoing credit evaluations of its customers’ financial condition and generally does not require collateral for its trade accounts receivable. The Company places its cash and cash equivalents, time deposits and other investments with high credit quality financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions. The Company is exposed to credit risk in the event of non-performance by its counterparties to derivative instruments; however, the Company limits its exposure by transacting with counterparties with high credit ratings. The carrying values of cash and cash equivalents, restricted cash, receivables from related party, trade and other receivables, claims receivable, payable to related party, trade accounts payable and accrued liabilities are reasonable estimates of their fair value due to the short term nature of these financial instruments. Cash and cash equivalents and restricted cash are considered Level

1

items as they represent liquid assets with short-term maturities. The fair value of long term bank loans is estimated based on current rates offered to the Company for similar debt of the same remaining maturities. Their carrying value approximates their fair market value due to their variable interest rate, being LIBOR. LIBOR rates are observable at commonly quoted intervals for the full terms of the loans and hence floating rate loans are considered Level

2

items in accordance with the fair value hierarchy. Additionally, the Company considers the creditworthiness of each counterparty when determining the fair value of the derivative instruments. The Company’s interest rate swap agreements are recorded at fair value. The fair value of the interest rate swaps is determined using a discounted cash flow method based on market-based LIBOR swap yield curves. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swap and therefore are considered Level

2

items.

Fair Value Disclosures:

 The Company has categorized assets and liabilities recorded at fair value based upon the fair value hierarchy specified by the guidance. The levels of fair value hierarchy are as follows:

Level 

1:

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

Level 

2:

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

Level 

3:

 Unobservable inputs that are not corroborated by market data.

The following table presents the fair values for assets and liabilities measured on a recurring basis categorized into a Level based upon the lowest level of significant input to the valuations as of

December

 

31,

2015:

						Fair Value Measurements Using
Description		Fair Value as of December 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets/(Liabilities):
Interest Rate Swap Agreements			127,555				—				127,555				—
Interest Rate Swap Agreements			(978,853	)			—				(978,853	)			—
Total			(851,298	)			—				(851,298	)			—

The following table presents the fair values for assets and liabilities measured on a recurring basis categorized into a Level based upon the lowest level of significant input to the valuations as of

December

 

31,

2016:

						Fair Value Measurements Using
Description		Fair Value as of December 31, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
Assets/(Liabilities):
Interest Rate Swap Agreements			263,635				—				263,635				—
Interest Rate Swap Agreements			(364,823	)			—				(364,823	)			—
Total			(101,188	)			—				(101,188	)			—

The following tables summarize the valuation of assets measured at fair value on a non-recurring basis as of the valuation date.

						Fair Value Measurements Using
Description		Fair Value as of June 30, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Impairment Loss
Long-lived assets held and used			748,780				—				748,780				—				(3,566,694	)
Total			748,780				—				748,780				—				(3,566,694	)

						Fair Value Measurements Using
Description		Fair Value as of December 31, 2015				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Impairment Loss
Long-lived assets held and used			6,841,141				—				6,841,141				—				(4,672,293	)
Total			6,841,141				—				6,841,141				—				(4,672,293	)

As a result of the impairment analysis performed for the year ended

December

31,

2015,

three

of the Company's vessels, with a carrying amount of

$15,828,908

were written down to their fair value as determined by the Company based on current demolition prices obtained from independent

third

party shipbrokers, for

two

of the vessels and based on vessel valuations for

one

of the vessels, obtained from independent

third

party shipbrokers as of

December

31,

2015,

which are mainly based on recent sales and purchase transactions of similar vessels, resulting in an impairment charge of

$8,238,987.

This impairment charge was included in the accompanying consolidated statement of operations under the caption “Impairment loss” for the year ended

December

31,

2015.

						Fair Value Measurements Using
Description		Fair Value as of December 31, 2016				Quoted Prices in Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)				Impairment Loss
Long-lived assets held and used			26,500,000				—				26,500,000				—				(5,735,086	)
Total			26,500,000				—				26,500,000				—				(5,735,086	)

As a result of the impairment analysis performed for the year ended

December

31,

2016,

six

of the Company's vessels, with a carrying amount of

$32,235,086

were written down to their fair value as determined by the Company based on vessel valuations for the vessels, obtained from independent

third

party shipbrokers as of

December

31,

2016,

which are mainly based on recent sales and purchase transactions of similar vessels, resulting in an impairment charge of

$5,735,086.

This impairment charge was included in the accompanying consolidated statement of operations under the caption “Impairment loss” for the year ended

December

31,

2016.

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- References

No definition available.

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- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

+ References

Reference 1: http://www.xbrl.org/2003/role/presentationRef
-Publisher FASB
-Name Accounting Standards Codification
-Topic 820
-URI http://asc.fasb.org/topic&trid=2155941

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