Derivatives and Fair Value Disclosures

12 Months Ended

Dec. 31, 2020

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 six

floating-to-fixed

interest rate swaps with various major financial institutions at December 31, 2020 (2019: nine swaps) covering notional amounts aggregating to $81,072,250 at December 31, 2020 (2019: $111,789,084) pursuant to which it pays fixed rates and receives floating rates based on the London Interbank Offered Rate (“LIBOR”). These agreements contain no leverage features. As of December 31, 2020 six derivative contracts (2019: six contracts) qualify for hedge accounting since their inception.

The following table presents information relating to the Company’s interest rate swap arrangements as of December 31, 2019 and 2020.


	Effective Date	Termination Date	Fixed Rate (Company pays)			Floating Rate (Company Receives)	Fair Value Asset/ (Liability) December 31, 2019			Notional Amount December 31, 2019		Fair Value Asset/ (Liability) December 31, 2020			Notional Amount December 31, 2020
Swap 1	September 30, 2015	September 30, 2020		2.60	%	3 month U.S. dollar LIBOR	$	(37,567	)	$	6,816,917		—			—
Swap 2	September 30, 2015	September 30, 2020		1.69	%	3 month U.S. dollar LIBOR	$	4,938		$	6,816,917		—			—
Swap 3	October 2, 2015	October 2, 2020		1.54	%	3 month U.S. dollar LIBOR	$	25,443		$	8,600,000		—			—
Swap 4	November 4, 2015	August 4, 2021		1.52	%	3 month U.S. dollar LIBOR	$	22,838		$	7,921,875	$	(69,821	)	$	7,109,375
Swap 5	December 3, 2015	September 3, 2021		1.55	%	3 month U.S. dollar LIBOR	$	16,906		$	7,921,875	$	(71,626	)	$	7,109,375
Swap 6	August 16, 2017	May 16, 2025		2.12	%	3 month U.S. dollar LIBOR	$	(249,020	)	$	13,711,250	$	(857,234	)	$	12,695,750
Swap 7	March 12, 2018	December 11, 2022		2.74	%	3 month U.S. dollar LIBOR	$	(419,160	)	$	16,765,000	$	(598,572	)	$	14,010,000
Swap 8	April 10, 2018	December 11, 2025		2.74	%	3 month U.S. dollar LIBOR	$	(1,369,934	)	$	29,524,000	$	(2,682,391	)	$	27,452,000
Swap 9	February 16, 2019	February 16, 2024		2.89	%	3 month U.S. dollar LIBOR	$	(580,136	)	$	13,711,250	$	(961,267	)	$	12,695,750
Total							$	(2,585,692	)	$	111,789,084	$	(5,240,911	)	$	81,072,250

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 loss.

Tabular disclosure of financial instruments is as follows:


Derivatives designated as hedging instruments	Balance Sheet Location	December 31,
		2019				2020
		Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
Interest Rate Swap Agreements	Non current assets — Fair value of derivatives		39,744		—		—		—
Interest Rate Swap Agreements	Current liabilities — Fair value of derivatives		—		—		—		141,447
Interest Rate Swap Agreements	Non current liabilities — Fair value of derivatives		—		2,618,250		—		5,099,464

Total derivatives designated as hedging instruments			39,744		2,618,250		—		5,240,911


Derivatives not designated as hedging instruments	Balance Sheet Location	December 31,
		2019				2020
		Asset Derivatives		Liability Derivatives		Asset Derivatives		Liability Derivatives
Interest Rate Swap Agreements	Current assets — Fair value of derivatives		30,381		—		—		—
Interest Rate Swap Agreements	Current liabilities — Fair value of derivatives		—		37,567		—		—

Total derivatives not designated as hedging instruments			30,381		37,567		—		—

The effect of derivative instruments on the consolidated statements of operations for the years ended December 31, 2018, 2019 and 2020 is as follows:


Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized	Year Ended December 31,
Derivatives not designated as hedging instruments	Location of Gain/(Loss) Recognized	2018		2019			2020
Interest Rate Swap — Reclassification from OCI	Loss on derivatives		—		84,966			60,954
Interest Rate Swap — Change in Fair Value	Loss on derivatives		—		(327,147	)		7,186
Interest Rate Swap — Realized income/(expense)	Loss on derivatives		—		134,631			(119,116	)

Total loss on derivatives			—		(107,550	)		(50,976	)


Derivatives designated as hedging instruments	Location of (Loss)/Gain Recognized	Year Ended December 31,
Derivatives designated as hedging instruments	Location of (Loss)/Gain Recognized	2018			2019		2020
Interest Rate Swap — Loss reclassified from OCI (Effective portion)	Loss on derivatives		(11,982	)		—		—
Interest Rate Swap — Income/(Loss) reclassified from OCI (Effective portion)	Interest and finance costs		—			67,424		(1,190,400	)

Total loss on derivatives			(11,982	)		67,424		(1,190,400	)

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, 2018		617,895
Effective portion of changes in fair value of interest swap contracts		56,084

Balance, December 31, 2018		673,979
Effective portion of changes in fair value of interest swap contracts		(2,848,056	)
Reclassification adjustment		(84,966	)

Balance, December 31, 2019		(2,259,043	)
Effective portion of changes in fair value of interest swap contracts		(2,632,826	)
Reclassification adjustment		(60,954	)

Balance, December 31, 2020		(4,952,823	)

The estimated net amount of existing gains at December 31, 2020, that will be reclassified into earnings within the next twelve months relating to previously designated cash flow hedges is $60,787.

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, trade and other receivables, claims receivable, payable to related parties, 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, trade and other receivables, claims receivable, payable to related parties, 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, 2019:


	Fair Value as of December 31, 2019			Fair Value Measurements Using
Description	Fair Value as of December 31, 2019			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		70,125			—		70,125			—
Interest Rate Swap Agreements		(2,655,817	)		—		(2,655,817	)		—

Total		(2,585,692	)		—		(2,585,692	)		—


	Fair Value as of December 31, 2020			Fair Value Measurements Using
Description	Fair Value as of December 31, 2020			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		(5,240,911	)		—		(5,240,911	)		—

Total		(5,240,911	)		—		(5,240,911	)		—

The following tables present the fair values for assets measured on a

non-recurring

basis categorized into a Level based upon the lowest level of significant input to the valuations:


	Fair Value as of December 31, 2019		Fair Value Measurements Using
Description	Fair Value as of December 31, 2019		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		6,000,000		—		6,000,000		—		(993,916	)

Total		6,000,000		—		6,000,000		—		(993,916)

As a result of the impairment analyses performed as of December 31, 2019, two of the Company’s vessels (held and used) were written down to their estimated fair value as determined by the Company based on vessel valuations, obtained from independent third party shipbrokers, which are mainly based on recent sales and purchase transactions of similar vessels, resulting in an impairment charge of $993,916.


	Fair Value as of June 30, 2020		Fair Value Measurements Using
Description	Fair Value as of June 30, 2020		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		3,000,000		—		3,000,000		—		(305,607	)

Total		3,000,000		—		3,000,000		—		(305,607)


	Fair Value as of December 31, 2020		Fair Value Measurements Using
Description	Fair Value as of December 31, 2020		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		3,500,000		—		3,500,000		—		(714,895	)

Total		3,500,000		—		3,500,000		—		(714,895)

As a result of the impairment analysis performed as of December 31, 2020, one of the Company’s vessels (held and used) was written down to its estimated fair value as determined by the Company based on vessel valuations, obtained from independent third party shipbrokers, which are mainly based on recent sales and purchase transactions of similar vessels, resulting in an impairment charge of $714,895.

- 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.

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