Derivative Instruments and Fair Value Measurements

Forward freight agreements, bunker swaps and freight derivatives

The Company trades in forward freight agreements (“FFAs”) and bunker swaps, with the objective of utilizing this market as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market. The Company’s FFAs and bunker swaps have not qualified for hedge accounting treatment. As such, unrealized and realized gains are recognized as a component of other expense in the Consolidated Statement of Operations and Other current assets and Fair value of derivatives in the Consolidated Balance Sheets. Derivatives are considered to be Level 2 instruments in the fair value hierarchy.

The effect of non-designated derivative instruments on the consolidated statements of operations:



		Amount of gain/(loss)
		For the Years Ended
Derivatives not designated as hedging instruments	Location of gain/(loss) recognized	December 31, 2017			December 31, 2016			December 31, 2015
FFAs	Other income/(expense)	$	(284,097	)	$	(541,677	)	$	—
Bunker swaps	Other income/(expense)	413,577			—			—
Commissions	Other income/(expense)	(91,575		)	(19,818		)	—
Total		$	37,905		$	(561,495	)	$	—



Derivatives not designated as hedging instruments	Balance Sheet Location	Fair value of derivatives
		December 31, 2017			December 31, 2016

FFAs - Unrealized loss	Fair value of Derivatives	$	(73,170	)	$	—
Bunker Swaps - Unrealized gain	Other current assets	128,845			—
		$	55,675		$	—

Cash Collateral Disclosures

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. The amount of collateral to be posted is defined in the terms of respective master agreement executed with counterparties or exchanges and is required when agreed upon threshold limits are exceeded. As of December 31, 2017 and December 31, 2016, the Company posted cash collateral related to derivative instruments under its collateral security arrangements of $178,836 and zero, respectively, which is recorded within other current assets in the consolidated balance sheets.

Fair Value Measurements

The following methods and assumptions were used to estimate the fair value of each class of financial instrument:

Cash, cash equivalents and restricted cash—the carrying amounts reported in the consolidated balance sheets for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

Debt—the carrying amounts of borrowings under the Norwegian Bond Debt, New First Lien Facility and Ultraco Debt Facility (prior to application of the discount and debt issuance costs) including the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

The Company defines fair value, establishes a framework for measuring fair value and provides disclosures about fair value measurements. The fair value hierarchy for disclosure of fair value measurements is as follows:

Level 1 – Quoted prices in active markets for identical assets or liabilities. Our Level 1 non-derivatives include cash, money-market accounts, certain short-term investments and restricted cash accounts.

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our short-term investments and debt balances under the Norwegian Bond Debt, New First Lien Facility and Ultraco Debt Facility.

Non recurring fair value measurements include vessel impairment assessments which is determined based on the average of two independent third party quotes which are Level 2 inputs. As of December 31, 2017, the Company performed an impairment test on 22 vessels for whom the vessel prices based on valuations received from third party brokers were lower than their carrying values. Based on our impairment analysis, we determined that as of December 31, 2017, the future cash flows expected to be earned by the 22 vessels on an undiscounted basis would exceed their carrying value and therefore no impairment charges were recorded in the consolidated financial statements. As of December 31, 2016, the Company determined that it intended to divest some of the older and less efficient vessels. As a result, the Company recorded an impairment charge of $122,860,600 in the fourth quarter of 2016. The carrying value of these vessels prior to impairment was $234,860,600. Additionally, the Company recorded an impairment charge of $6.2 million in the first quarter of 2016 on a group of six vessels which have all been sold subsequently.

Level 3 – Inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Assets and liabilities measured at fair value:



			Fair Value
	Carrying Value		Level 1		Level 2
December 31, 2017
Assets
Cash and cash equivalents (1)	$	56,325,961	$	56,325,961	—
Short-term investment	$	4,500,000	—		$	4,500,000
Liabilities
Norwegian Bond Debt *	$	189,950,329	—		$	200,990,000
New First Lien Facility **	$	63,758,185	—		$	65,000,000
Ultraco Debt Facility **	$	59,975,162	—		$	61,200,000

* The fair value of the bonds is based on the last trade on December 21, 2017 on Bloomberg.com.

** The fair value of the New First Lien Facility and the Ultraco Debt Facility is based on the required repayment to the lenders if the debt was discharged in full on December 31, 2017.



			Fair Value
	Carrying Value		Level 1	Level 2
December 31, 2016
Assets
Cash and cash equivalents (1)	$	76,591,027	76,591,027	—
Liabilities
First Lien Facility	$	204,352,318	—	$	209,099,000
Second Lien Facility	$	51,591,226	—	$	67,327,843

(1) Includes non-current restricted cash of 74,917 at December 31, 2017 and December 31, 2016.