Derivative Instruments and Fair Value Measurements

Forward freight agreements and bunker swaps

The Company trades in forward freight agreements (“FFAs”) and bunker swaps, with the objective of utilizing these markets 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 and losses are recognized as a component of other expense in the Condensed 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 condensed consolidated statements of operations is as follows:



		Amount of (gain)/loss
Derivatives not designated as hedging instruments	Location of (gain)/loss recognized	For the Three Months Ended						For the For the Six Months Ended
		June 30, 2018			June 30, 2017			June 30, 2018			June 30, 2017
FFAs	Other income	$	36,625		$	(1,049,363	)	$	82,432		$	(788,715	)
Bunker Swaps	Other income	(776,981		)	(42,859		)	(722,409		)	3,052
Total		$	(740,356	)	$	(1,092,222	)	$	(639,977	)	$	(785,663	)



Derivatives not designated as hedging instruments	Balance Sheet location	Fair Value of Derivatives
		June 30, 2018		December 31, 2017
FFAs	Fair value of derivatives	$	461,993	$	73,170
FFAs	Other current assets	117,360		—
Bunker Swaps	Other current assets	635,258		128,845

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 June 30, 2018 and December 31, 2017, the Company posted cash collateral related to derivative instruments under its collateral security arrangements of $891,344 and $178,836, respectively, which is recorded within other current assets in the condensed 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 condensed consolidated balance sheets for interest-bearing deposits approximate their fair value due to the short-term nature thereof.

Debt—the carrying amounts of borrowings under the Norwegian Bond Debt, the New First Lien Facility and the Ultraco Debt Facility (prior to application of the discount and debt issuance costs) including the Revolving Loan 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, the New First Lien Facility and the Ultraco Debt Facility.

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



			Fair Value
	Carrying Value		Level 1		Level 2
June 30, 2018
Assets
Cash and cash equivalents ⁽¹⁾	$	76,956,034	$	76,956,034	$	—
Liabilities
Norwegian Bond Debt *	194,381,482		—		205,250,000
New First Lien Facility **	58,803,586		—		60,000,000
Ultraco Debt Facility **	68,626,510		—		69,800,000

* The fair value of the Bonds is based on the last trade on May 24, 2018 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 June 30, 2018.



			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 ⁽²⁾	193,950,329		—		200,990,000
New First Lien Facility	63,758,185		—		65,000,000
Ultraco Debt Facility	59,975,162		—		61,200,000

⁽¹⁾ Includes non-current restricted cash aggregating $74,917 at June 30, 2018 and December 31, 2017.

⁽²⁾The fair value of the Bonds is based on the last trade on December 21, 2017.