6-K 1 d1411736_6-k.htm d1411736_6-k.htm
 
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 6-K

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13A-16 OR 15D-16 OF THE SECURITIES EXCHANGE ACT OF 1934

For the month of September 2013

Commission File Number: 001-33655

Paragon Shipping Inc.
(Translation of registrant's name into English)
 
15 Karamanli Ave., GR 166 73, Voula, Greece
(Address of principal executive office)


Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F.

Form 20-F [X]       Form 40-F [  ]

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1): ___

Note: Regulation S-T Rule 101(b)(1) only permits the submission in paper of a Form 6-K if submitted solely to provide an attached annual report to security holders.

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)7: ___

Note: Regulation S-T Rule 101(b)(7) only permits the submission in paper of a Form 6-K if submitted to furnish a report or other document that the registrant foreign private issuer must furnish and make public under the laws of the jurisdiction in which the registrant is incorporated, domiciled or legally organized (the registrant's "home country"), or under the rules of the home country exchange on which the registrant's securities are traded, as long as the report or other document is not a press release, is not required to be and has not been distributed to the registrant's security holders, and, if discussing a material event, has already been the subject of a Form 6-K submission or other Commission filing on EDGAR.

 
 
 

INFORMATION CONTAINED IN THIS REPORT ON FORM 6-K

Attached as Exhibit 1 to this Report on Form 6-K is the Management's Discussion and Analysis of Financial Condition and Results of Operations for the six-month periods ended June 30, 2013 and 2012 of Paragon Shipping Inc. (the "Company") and unaudited interim condensed consolidated financial statements of the Company for the six-month periods ended June 30, 2013 and 2012, and the accompanying notes thereto. All share and per share amounts disclosed in this report give retroactive effect for all periods presented to the 10-for-1 reverse stock split that the Company effectuated on November 5, 2012.

Attached as Exhibit 101 to this Report on Form 6-K is the Interactive Data File relating to the following materials from this Report on Form 6-K, formatted in Extensible Business Reporting Language (XBRL): (i) Unaudited Interim Condensed Consolidated Balance Sheets as of December 31, 2012 and June 30, 2013; (ii) Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss for the six-month periods ended June 30, 2012 and 2013; (iii) Unaudited Interim Condensed Consolidated Statements of Shareholders' Equity for the six-month periods ended June 30, 2012 and 2013; (iv) Unaudited Interim Condensed Consolidated Statements of Cash Flows for the six-month periods ended June 30, 2012 and 2013; and (v) Notes to Unaudited Interim Condensed Consolidated Financial Statements.



 
 
 

Exhibit 1
 


MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following is a discussion of our financial condition and results of operations for the six-month periods ended June 30, 2013 and 2012. Unless otherwise specified herein, references to the "Company" or "we" shall include Paragon Shipping Inc. and its subsidiaries. You should read the following discussion and analysis together with the financial statements and related notes included elsewhere in this report. For additional information relating to our management's discussion and analysis of financial condition and results of operation, please see our annual report on Form 20-F for the year ended December 31, 2012 filed with the U.S. Securities and Exchange Commission on April 3, 2013, as amended on April 18, 2013 (the "Annual Report"). This discussion includes forward-looking statements which, although based on assumptions that we consider reasonable, are subject to risks and uncertainties which could cause actual events or conditions to differ materially from those currently anticipated and expressed or implied by such forward-looking statements.

Overview
 
We are Paragon Shipping Inc., a company incorporated in the Republic of the Marshall Islands in April 2006 to provide ocean going transportation services worldwide. We are a provider of international seaborne transportation services, carrying various drybulk cargoes including iron ore, coal, grain, bauxite, phosphate and fertilizers. We commenced operations in December 2006 and completed our initial public offering in August 2007. Our current fleet consists of eight Panamax drybulk carriers, two Supramax drybulk carriers and three Handysize drybulk carriers. Furthermore, our current newbuilding program consists of one Handysize drybulk vessel, scheduled to be delivered in the fourth quarter of 2013, and two 4,800 TEU containerships, scheduled to be delivered in the third quarter of 2014.

Currently, we own 13.8% of the outstanding common stock of Box Ships Inc. (NYSE: TEU) ("Box Ships").

Vessel Management
 
Allseas Marine S.A. ("Allseas") is responsible for all commercial and technical management functions for our fleet, pursuant to long-term management agreements between Allseas and each of our vessel-owning subsidiaries. Allseas also provides commercial and technical management services for Box Ships' fleet. Allseas is controlled by our Chairman, President and Chief Executive Officer, Mr. Michael Bodouroglou.

We primarily employ our vessels on period time charters, or on trip time charters. From time to time, we also employ our vessels in the spot charter market, on voyage charters, which generally last from ten days to three months. All of our vessels are currently employed on fixed-rate time charters with expirations ranging from September 2013 to November 2015.

Results of Operations
 
Our revenues consist of earnings under the charters on which we employ our vessels. We believe that the important measures for analyzing trends in the results of our operations consist of the following:

·
Calendar days. We define calendar days as the total number of days in a period during which each vessel in our fleet was owned. Calendar days are an indicator of the size of the fleet over a period and affect both the amount of revenues and the amount of expenses that are recorded during that period.
 
·
Available days. We define available days as the number of calendar days in a period less any off-hire days associated with scheduled dry-dockings or special or intermediate surveys. The shipping industry uses available days to measure the number of days in a period during which vessels should be capable of generating revenues.
 

 
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·
Operating days. We define operating days as the total available days in a period less any off-hire days due to any reason, other than scheduled dry-dockings or special or intermediate surveys, including unforeseen circumstances. Any idle days relating to the days a vessel remains unemployed are included in operating days. The shipping industry uses operating days to measure the number of days in a period during which vessels actually generate revenues.
 
·
Fleet utilization. We calculate fleet utilization by dividing the number of operating days during a period by the number of available days during that period. The shipping industry uses fleet utilization to measure a company's efficiency in finding suitable employment for its vessels and minimizing the amount of days that its vessels are off-hire for reasons other than scheduled repairs, vessel upgrades, vessel positioning, dry-dockings or special or intermediate surveys.
 
·
Charter contracts. A period time charter and a trip time charter are generally contracts to charter a vessel for a specific period of time at a set daily rate. Under trip time charters and period time charters, the charterer pays substantially all of the voyage expenses, including port and canal charges, and bunkers (fuel) expenses, but the vessel owner pays the vessel operating expenses and commissions on gross time charter revenues. A spot market voyage charter is generally a contract to carry a specific cargo from a load port to a discharge port for an agreed upon total amount. In the case of a spot market voyage charter, the vessel owner pays voyage expenses (less specified amounts, if any, covered by the voyage charterer), commissions on gross revenues and vessel operating expenses. Whether our vessels are employed on time charters or in the spot market, we pay for vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs. We are also responsible for each vessel's intermediate and special survey costs. Time charter rates are usually fixed during the term of the charter. Prevailing time charter rates fluctuate on a seasonal and year to year basis and may be substantially higher or lower from a prior time charter contract when the subject vessel is seeking to renew that prior charter or enter into a new charter with another charterer. Fluctuations in charter rates are caused by imbalances in the availability of cargoes for shipment and the number of vessels available at any given time to transport these cargoes. Fluctuations in time charter rates are influenced by changes in spot market rates.

Charter Revenues
 
Charter revenues are driven primarily by the number of vessels in our fleet, the number of operating days during which our vessels generate revenues and the amount of daily charter hire that our vessels earn under time charters. These, in turn, are affected by a number of factors, including our decisions relating to vessel acquisitions and disposals, the amount of time that we spend positioning our vessels, the amount of time that our vessels spend in dry-dock undergoing repairs, maintenance and upgrade work, the age, condition and specifications of our vessels, levels of supply and demand in the shipping market and other factors affecting the charter rates for our vessels.

Vessels operating on period time charters provide more predictable cash flows, but can yield lower profit margins than vessels operating in the spot charter market during periods characterized by favorable market conditions. Vessels operating in the spot charter market generate revenues that are less predictable but may enable us to capture increased profit margins during periods of improvements in charter rates although we are exposed to the risk of declining charter rates, which may have a materially adverse impact on our financial performance. Future spot market rates may be higher or lower than the rates at which we have employed our vessels on period time charters.

Voyage Expenses

Our voyage expenses exclude commissions and consist of all costs that are unique to a particular voyage, primarily including port expenses, canal dues, war risk insurances and fuel costs, net of gains or losses from the sale of bunkers to charterers and bunkers consumed during off-hire periods and while traveling to and from dry-docking.

 
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Vessel Operating Expenses
 
Our vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the costs of spares and consumable stores, tonnage taxes and other miscellaneous expenses. We anticipate that our vessel operating expenses, which generally represent fixed costs, will fluctuate based primarily upon the size of our fleet. Other factors beyond our control, some of which may affect the shipping industry in general, including, for instance, developments relating to market prices for insurance and difficulty in obtaining crew, may also cause these expenses to increase.

Dry-docking Expenses

Dry-docking costs relate to the regularly scheduled intermediate survey or special survey dry-docking necessary to preserve the quality of our vessels as well as to comply with the regulations, the environmental laws and the international shipping standards. Dry-docking costs can vary according to the age of the vessel, the location where the dry-dock takes place, the shipyard availability, the local availability of manpower and material and the billing currency of the yard. We expense dry-docking costs as incurred.

Management Fees - Related Party

Management fees represent fees paid to Allseas in accordance with our management agreements and accounting agreement, which are discussed in "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements with Allseas—Management Agreements" and "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreements with Allseas—Accounting Agreement" of our Annual Report for the year ended December 31, 2012.

Furthermore, in order to incentivize Allseas' continued services to us, on November 10, 2009, we entered into a tripartite agreement with Allseas and Loretto, a wholly-owned subsidiary of Allseas, pursuant to which in the event of a capital increase, an equity offering or the issuance of common shares to a third party or third parties in the future, other than the common shares issued pursuant to our equity incentive plan, we have agreed to issue, at no cost to Loretto, additional common shares in an amount equal to 2% of the total number of common shares issued pursuant to such capital increase, equity offering or third party issuance, as applicable. The fair value of the shares issued to Loretto is deemed share-based compensation for management services and is charged to earnings and recognized in paid-in-capital on the date we become liable to issue the shares. See "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Agreement with Loretto" of our Annual Report for the year ended December 31, 2012.

Depreciation

We depreciate our vessels on a straight-line basis over their estimated useful lives. The estimated useful life is determined to be 25 years for drybulk carriers and 30 years for containerships from the date of their initial delivery from the shipyard. Depreciation is based on cost less estimated residual value. Refer to "Item 5. Operating and Financial Review and Prospects–A. Operating Results–Critical Accounting Policies–Vessel Depreciation" of our Annual Report for the year ended December 31, 2012.

General and Administrative Expenses

General and administrative expenses include fees payable under our administrative and executive services agreements with Allseas, which are discussed in "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Administrative Services Agreement" and "Item 7. Major Shareholders and Related Party Transactions—B. Related Party Transactions—Executive Services Agreement" of our Annual Report for the year ended December 31, 2012. In addition, general and administrative expenses include directors' fees, office rent, traveling expenses, communications, directors and officers insurance, legal, auditing, investor relations and other professional expenses and reflect the costs associated with running a public company.

Furthermore, our general and administrative expenses include share-based compensation. For more information on the non-vested share awards issued as incentive compensation under our Equity Incentive Plan, please see "Item 6. Directors, Senior Management and Employees—E. Share Ownership—Equity Incentive Plan" of our Annual Report for the year ended December 31, 2012.
 
Interest and Finance Costs

We have incurred interest expense and financing costs in connection with vessel-specific debt relating to the acquisition of our vessels. We also expect to incur financing costs and interest expenses under our current and future credit facilities in connection with debt incurred to finance future acquisitions, as market conditions warrant.

 
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Selected Information

The following tables present selected unaudited consolidated financial and other data of the Company for the six months ended June 30, 2012 and 2013 and as of December 31, 2012 and June 30, 2013, derived from our unaudited interim condensed consolidated financial statements and notes thereto, included elsewhere herein. All amounts are expressed in United States Dollars, except for fleet data.

STATEMENTS OF COMPREHENSIVE LOSS
  
Six Months Ended
June 30,
  
   
2012
    
2013
  
       
Net revenue
     24,426,712       27,331,630  
Operating income / (loss)
     2,785,962       (791,916 )
Net income / (loss)
     899,191       (3,494,070 )
Earnings / (loss) per Class A common share, basic and diluted
     0.15       (0.31 )
CASH FLOW DATA
                
Net cash from operating activities
     7,386,684       1,947,671  
Net cash used in investing activities
     (21,974,810 )     (41,292 )
Net cash from / (used in) financing activities
     7,708,147       (7,886,606 )
Net decrease in cash and cash equivalents
     (6,879,979 )     (5,980,227 )
 
             
   
December 31,
    
June 30,
  
   
2012
    
2013
  
BALANCE SHEET DATA
      
       
Total assets
     419,974,902       410,633,571  
Total liabilities
     204,454,389       197,304,568  
Total shareholders' equity
     215,520,513       213,329,003  

   
Six Months Ended
June 30,
  
   
2012
    
2013
  
FLEET DATA
            
             
Calendar days for fleet
     1,891       2,325  
Available days for fleet
     1,891       2,260  
Operating days for fleet
     1,882       2,258  
                 
Average number of vessels (1)
     10.4       12.8  
Number of vessels at end of period
     12       13  
                 
Fleet utilization (2)
     99.5 %     99.9 %
AVERAGE DAILY RESULTS
                
Vessel operating expenses (3)
     4,667       4,557  
Dry-docking expenses (4)
     -       730  
Management fees - related party (5)
     1,016       1,154  
General and administrative expenses (6)
     2,229       2,246  


(1)
Average number of vessels is the number of vessels that constituted our fleet for the relevant period, as measured by the sum of the number of calendar days each vessel was a part of our fleet during the period divided by the number of days in the period.

 
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(2)
Fleet utilization is the percentage of time that our vessels were available for generating revenue and is determined by dividing operating days by available days of our fleet for the relevant period.
(3)
Daily vessel operating expenses, which include crew costs, provisions, deck and engine stores, lubricating oil, insurance, maintenance and repairs, is calculated by dividing vessel operating expenses by fleet calendar days for the relevant time period.
(4)
Daily dry-docking expenses are calculated by dividing dry-docking expenses by fleet calendar days for the relevant time period.
(5)
Daily management fees - related party are calculated by dividing management fees - related party by fleet calendar days for the relevant time period.
(6)
Daily general and administrative expenses are calculated by dividing general and administrative expenses by fleet calendar days for the relevant time period.

Results of Operations

Six months ended June 30, 2013 and 2012
 
The average number of vessels in our fleet was 12.8 for the six months ended June 30, 2013, compared to 10.4 for the six months ended June 30, 2012. The following analysis discusses the primary drivers of the differences between these periods.

 
·
Charter revenue—Charter revenue for the six months ended June 30, 2013 was $28.9 million, compared to $25.9 million for the six months ended June 30, 2012. The increase in charter revenue reflects principally the increase in the average number of vessels in our fleet and the corresponding increase in the number of operating days of our fleet from 1,882 for the six months ended June 30, 2012, to 2,258 for the six months ended June 30, 2013, partially offset by the decrease in the charter rates earned by the vessels period over period, as a result of the lower contracted rates and the continued weakness in the drybulk market. After deducting commissions of $1.6 million, we had net revenue of $27.3 million for the six months ended June 30, 2013, compared to $24.4 million net revenue, after deducting commissions of $1.4 million, for the six months ended June 30, 2012. The increase in commissions is mainly due to the increase in charter revenue.

 
·
Voyage expenses—For the six months ended June 30, 2013, our voyage expenses amounted to $2.7 million, compared to $0.1 million for the six months ended June 30, 2012. The increase in our voyage expenses mainly reflects an increase of $2.3 million in the bunkers consumed during off-hire periods, vessel positioning and traveling to and from dry-docking (there were three dry-dockings during the first six months of 2013 compared to none during the same period in 2012), net of gains or losses from the sale of bunkers to charterers.
 
 
·
Vessel operating expenses—Vessel operating expenses amounted to $10.6 million, or $4,557 per vessel per day for the six months ended June 30, 2013, compared to $8.8 million, or $4,667 per vessel per day for the six months ended June 30, 2012. The increase in the operating expenses reflects mainly the increase in the average number of our vessels from 10.4 vessels for the six months ended June 30, 2012, to 12.8 for the six months ended June 30, 2013. The decrease in the daily vessel operating expenses is due to the Company's cost control efficiency.
 
 
·
Dry-docking expenses—We incurred an aggregate of $1.7 million in dry-docking expenses for the six months ended June 30, 2013. Three of our vessels underwent dry-docking during the first six months of 2013, while none of our vessels were dry-docked during the same period in 2012.
 
 
·
Management fees - related party—We incurred an aggregate of $2.7 million, or $1,154 per vessel per day in management fees for the six months ended June 30, 2013, compared to an aggregate of $1.9 million, or $1,016 per vessel per day in management fees for the six months ended June 30, 2012. The increase in management fees mainly reflects the share based compensation of $0.3 million recorded in the six months ended June 30, 2013, relating to the award of shares to Allseas, in line with the agreement with Loretto, as described in "Item 7. Major Shareholders and Related Party Transactions–B. Related Party Transactions–Agreement with Loretto" of our Annual Report for the year ended December 31, 2012, while there were no such awards for the six months ended June 30, 2012. It also reflects the increase in the average number of vessels in our fleet period over period and the corresponding increase in the number of calendar days of our fleet.

 
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·
Depreciation—Depreciation of vessels for the six months ended June 30, 2013 amounted to $8.4 million, compared to $7.9 million for the six months ended June 30, 2012, reflecting the increase in the average number of vessels in our fleet for the six months ended June 30, 2013, compared to the six months ended June 30, 2012, partially offset by the increase in the estimated scrap rate used to calculate the vessels' salvage value from $150 to $300 per lightweight ton, effective from October 1, 2012, as discussed in "Item 5. Operating and Financial Review and Prospects–A. Operating Results–Critical Accounting Policies–Vessel Depreciation" of our Annual Report for the year ended December 31, 2012.

 
·
General and administrative expenses—General and administrative expenses for the six months ended June 30, 2013 were $5.2 million, compared to $4.2 million in general and administrative expenses for the six months ended June 30, 2012. The $1.0 million increase in general and administrative expenses relates mainly to expenses incurred in relation to our debt restructuring, which include an incentive compensation of $2.0 million (refer to Note 3 of our consolidated financial statements included in our Annual Report for the year ended December 31, 2012), partially offset by a $1.3 million decrease in share based compensation due to the lower amortization effect of the granted share awards.

 
·
Gain from marketable securities, net—Gain from marketable securities, net, for the six months ended June 30, 2013 of $3.1 million relates to the valuation of the 58,483 additional shares of Korea Line Corporation ("KLC") that were issued to us on May 9, 2013, pursuant to the amended KLC rehabilitation plan that was approved by the Seoul Central District Court on March 28, 2013. Gain from marketable securities, net, for the six months ended June 30, 2012 of $1.4 million relates to the valuation of the 7,413 shares of KLC, as adjusted to reflect the 15-for-1 reverse stock split effectuated on May 9, 2013, that were issued to us on May 24, 2012 as part of the settlement agreement we had entered into with KLC in 2011.

 
·
Interest and finance costs—Interest and finance costs for the six months ended June 30, 2013 and 2012, were $3.8 million and $3.1 million, respectively. The increase in the interest and finance costs was mainly due to the increase in the interest rate margin of several of our loan and credit facilities following the completion of our debt restructuring as discussed in Note 9 of our consolidated financial statements included in our Annual Report for the year ended December 31, 2012, offset by the decrease in the average outstanding indebtedness.

 
·
(Loss) / gain on derivatives, net—Gain on derivatives for the six months ended June 30, 2013 of $20,126 consists of an unrealized gain of $0.5 million, representing a gain to record at fair value our interest rate swaps for the first six months of 2013, and realized expenses of $0.5 million incurred from interest rate swaps during the same period. Loss on derivatives for the six months ended June 30, 2012 of $0.5 million consisted of an unrealized gain of $0.9 million, representing a gain to record at fair value our interest rate swaps for the first six months of 2012, and realized expenses of $1.4 million incurred during the same period.

 
·
Equity in net income of affiliate—Equity in net income of affiliate for the six months ended June 30, 2013 was $1.0 million, compared to $1.4 million for the same period in 2012. The decrease in equity in net income of affiliate is mainly associated with the decrease in our ownership of Box Ships' common stock from 21.1% as of June 30, 2012, to 13.8% as of June 30, 2013, as a result of the dilution effect due to our non-participation in the Box Ships' public offerings of 4,285,715 shares and 4,000,000 shares, completed on July 18, 2012 and March 18, 2013, respectively.

 
·
Loss on investment in affiliate—Loss on investment in affiliate of $0.4 million for the six months ended June 30, 2013 relates to the dilution effect from the Company's non-participation in the public offering of 4,000,000 common shares of Box Ships, which was completed on March 18, 2013. There was no such loss recognized in the six months ended June 30, 2012.

 
·
Net income / (loss)—As a result of the above factors, net loss for the six months ended June 30, 2013, was $3.5 million, compared to net income of $0.9 million for the six months ended June 30, 2012.

 
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Cash Flows
 
Our principal sources of funds for the six months ended June 30, 2013 have been our operating cash flows and the loan repayments from affiliate relating to the unsecure loan we have granted to Box Ships. Our principal uses of funds have been (i) capital expenditures for vessel acquisitions and advance payments for vessels under construction, (ii) working capital requirements and (iii) principal and interest payments on our existing indebtedness. Cash and cash equivalents totaled $11.7 million at June 30, 2013, compared to $17.7 million at December 31, 2012. We define working capital as current assets minus current liabilities. We had a working capital deficit of $148.5 million as of June 30, 2013, compared to the working capital surplus of $9.4 million as of December 31, 2012. The decrease in our working capital of $157.9 million is mainly due to the increase in the current portion of long-term debt, less the increase in the current portion of our restricted cash, by $166.3 million in the aggregate, due to the classification of our long-term debt as current as of June 30, 2013 (refer to Note 3 and Note 8 to our unaudited interim condensed consolidated financial statements included elsewhere herein). The decrease was also due to the decrease from December 31, 2012 in cash and cash equivalents of $6.0 million, offset by the increase in loan to affiliates of $8.0 million, as the loan to Box Ships was due within the next 12 months as of June 30, 2013, and by other fluctuations in the remaining current assets and current liabilities. The overall cash position in the future may be negatively impacted by a further decline in drybulk market rates if the current economic environment persists or worsens.

Operating Activities

·
Net cash from operating activities was $1.9 million for the six months ended June 30, 2013, compared to $7.4 million for the six months ended June 30, 2012, mainly due to an increase in expenses, including voyage expenses, vessel operating expenses, dry-docking expenses, management fees - related party and general and administrative expenses, that in the aggregate amounted to $8.7 million, partially offset by the higher charter revenue net of commissions by $2.9 million.
 
Investing Activities

·
Net cash used in investing activities was $41,292 for the six months ended June 30, 2013. This mainly reflects the cash outflows of $2.2 million relating to the delivery of the M/V Priceless Seas, offset by a repayment from affiliate of $2.0 million in relation to our loan agreement with Box Ships and a return of our investment in Box Ships of $0.2 million. Net cash used in investing activities for the six months ended June 30, 2012 was $22.0 million, which mainly reflects the cash outflows of $30.8 million relating to the delivery of the M/V Prosperous Seas and the M/V Precious Seas and the acquisition of other fixed assets of $0.1 million, offset by a release of restricted cash of $9.0 million.

Financing Activities

·
Net cash used in financing activities was $7.9 million for the six months ended June 30, 2013, which mainly reflects the long-term debt repayments of $7.2 million and the payment of financing costs of $0.6 million. Net cash from financing activities for the six months ended June 30, 2012 was $7.7 million, which mainly reflects the proceeds from long-term debt of $28.9 million, offset by the long-term debt repayments of $21.1 million and the payment of financing costs of $0.1 million.

Loan Facilities

For information relating to our secured loans and credit facilities, please see Note 9 to our financial statements included in our Annual Report for the year ended December 31, 2012 and Note 8 to our unaudited interim condensed consolidated financial statements included elsewhere herein.

 
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Liquidity and Capital Resources

Our principal sources of funds are our operating cash flows, borrowings under our credit facilities and equity provided by our shareholders. Our principal uses of funds are capital expenditures to grow our fleet, maintenance costs to ensure the quality of our vessels, their compliance with international shipping standards and environmental laws and regulations, the funding of working capital requirements, principal repayments on loan facilities, and, with the discretion of our Board of Directors and subject to the consent of our lenders, the payment of dividends to our shareholders. Beginning with the first quarter of 2011, our Board of Directors suspended the payment of our quarterly dividend in light of the continued decline of charter rates and the related decline in asset values in the drybulk market. This suspension allows us to retain cash and increase our liquidity. Until market conditions improve, it is unlikely that we will reinstate the payment of dividends. In addition, restrictions under our loan and credit facilities, including our loan agreement with the Bank of Scotland, under which we are prohibited from paying any dividends until the maturity of the loan agreement in July 2015, and other external factors, limit our ability to pay dividends. See "Item 8. Financial Information—Dividend Policy" of our Annual Report for the year ended December 31, 2012.

Furthermore, we have entered into contracts for the construction of Handysize drybulk vessels and 4,800 TEU containerships. On January 29, 2013, we took delivery of our third Handysize drybulk vessel, the M/V Priceless Seas. Our current newbuilding program consists of one Handysize drybulk vessel (Hull no. 625) with an expected delivery in the fourth quarter of 2013 and two 4,800 TEU containerships (Hull no. 656 and Hull no. 657) with expected deliveries in the third quarter of 2014. Our current newbuilding program has an aggregate cost of $138.3 million, of which $112.9 million remains outstanding as of June 30, 2013. We intend to finance the remaining construction costs of these vessels with cash on hand, operating cash flows, borrowings under our syndicated secured loan facility led by Nordea Bank Finland Plc ("Nordea"), as discussed below, additional bank debt that we intend to arrange and proceeds from future equity offerings. Upon the delivery of the M/V Priceless Seas in January 2013, no additional loan amount was drawn under the syndicated loan facility led by Nordea, which we entered into to partially finance the acquisition of our newbuilding Handysize drybulk vessels, and the respective vessel is not subject to any mortgage. We expect to finance our final contractual installment payment relating to Hull no. 625 of $21.7 million, due upon delivery of the vessel, with borrowings under our syndicated secured loan facility led by Nordea, which will also include the mortgaging of the M/V Priceless Seas.

In the first quarter of 2013, we finalized the documentation with all of our lenders and completed our debt restructuring as discussed in Note 9 of our consolidated financial statements included in our Annual Report for the year ended December 31, 2012.

As of June 30, 2013, we had $188.3 million of outstanding indebtedness to banks and we were in compliance with all of the covenants contained in our loan and credit facilities. On January 1, 2014, several of the waivers obtained following the completion of the Company's debt restructuring expire (refer to Note 9 of our consolidated financial statements included in our Annual Report for the year ended December 31, 2012). Given the current drybulk market, it is probable that we will not be in compliance with the EBITDA coverage ratio contained in one of our loan and credit facilities, as of March 31, 2014 and June 30, 2014, unless the chartering market experiences a significant improvement between now and then. As a result of the cross default provisions included in our loan agreements, actual breaches existing under our credit facilities could result in defaults under all of our debt and the acceleration of such debt by our lenders. We are currently in negotiations with our respective lender to extend the waiver period of the aforementioned covenant. Although there can be no assurance that a successful resolution will be reached with our lender, we believe that the negotiations will be successful and that our lenders will not demand payment of the loans before their maturity. Failure to obtain such extension to our already existing waivers may result in our inability to maintain compliance with the aforementioned covenants as of March 31, 2014 and June 30, 2014. If this event occurs, we may experience a material adverse effect on our business, financial condition, results of operations and cash flows, and as a result of which, we have presented all our borrowings as current.

We believe that our forecasted operating cash flows, together with our existing cash and cash equivalents, will be sufficient to meet our liquidity needs for the next 12 months, assuming the charter market does not further deteriorate and that we will successfully extend our existing waiver for the EBITDA coverage ratio covenant as discussed above.

 
8
 


On May 17, 2013, we signed an agreement with China Development Bank ("CDB") for a $69.0 million credit facility to partially finance our two 4,800 TEU containerships currently under construction, that are expected to be delivered in the third quarter of 2014. The CDB credit facility, which is available for drawdown upon the delivery of the vessels subject to certain contingencies and conditions, will be used to finance the lower of 60% of the construction cost of the vessels, or 80% of the vessels' market value at delivery. The facility matures ten years after the drawdown date. Under the terms of the credit facility, amounts borrowed will bear interest at LIBOR, plus a margin of 4.00%. In relation to the option we have granted to Box Ships to acquire the two 4,800 TEU containerships, the facility can be freely transferred to Box Ships in the event such option is declared.

On June 18, 2013, we signed an amending agreement with the syndicate led by Nordea, in relation to the secured loan facility dated May 5, 2011. The amending agreement removed the condition precedent relating to the full repayment of the outstanding loan due from Box Ships before the drawdown of the undrawn portion of the facility. In addition, the undrawn portion of the facility relating to the M/V Priceless Seas and Hull no. 625 was amended to be the lower of $25.4 million (decreased from $33.8 million) and an amount equal to 65% of the aggregate fair value of the respective vessels and the already mortgaged vessels, the M/V Prosperous Seas and the M/V Precious Seas, less the outstanding loan amount prior to the proposed drawdown date.

On August 21, 2013, we agreed with HSBC Bank Plc to extend the existing waivers relating to the financial covenants of EBITDA coverage ratio and interest coverage ratio for two quarters. More specifically, the expiration date of the respective waivers was extended from January 1, 2014 to July 1, 2014.

Currently, we have no unused facility in respect of our secured loan and credit facilities other than the undrawn portion of the syndicated secured loan facility led by Nordea and the CDB credit facility discussed above.

Our business is capital intensive and its future success will depend on our ability to maintain a high-quality fleet through the acquisition of newer vessels and, depending on the prevailing market conditions, the potential selective sale of older vessels. These acquisitions will be principally subject to management's expectation of future market conditions, as well as our ability to acquire vessels on favorable terms. Our dividend policy will also impact our future liquidity position.

We regularly monitor our currency exposure and, from time to time, may enter into currency derivative contracts to hedge this exposure if we believe fluctuations in exchange rates would have a negative impact on our liquidity. As of June 30, 2013, the Company had no currency derivative contracts.

We have limited our exposure to interest rate fluctuations that will impact our future liquidity position through swap agreements. For information relating to our swap agreements, please see Note 10 to our consolidated financial statements included in our Annual Report for the year ended December 31, 2012 and Notes 9 and 10 to our unaudited interim condensed consolidated financial statements included elsewhere herein.

Recent Developments

Fleet Employment

In July 2013, we agreed with the charterer of the M/V Coral Seas and the M/V Deep Seas, on the early termination of the respective time charter agreements for a total cash compensation of $2.3 million. Under the terms of the original time charter agreements, the vessels were expected to be redelivered to us in December 2013 and July 2014, respectively. Based on the early termination agreement, both vessels will be redelivered to us by the end of August 2013. The total cash compensation of $2.3 million, which was collected in July 2013, was agreed based on the difference between the vessels' gross time charter rates under the respective time charter agreements, and the existing equivalent market time charter rates. The total cash compensation, net of commissions, will be recorded as gain from vessel early redelivery in the third quarter of 2013.

Loan to Affiliate

On August 5, 2013, Box Ships prepaid an amount of $5.0 million of the unsecured loan that was granted on May 27, 2011. As of the date of this report, the outstanding balance of the respective loan is $6.0 million.

 
9
 

Updated Fleet List

Drybulk Fleet

The following tables represent our drybulk fleet and the drybulk newbuilding vessels that we have agreed to acquire as of September 6, 2013.

Operating Drybulk Fleet
 
Name
  
Type
    
Dwt
    
Year Built
  
Panamax
  
Dream Seas
  
Panamax
       75,151       2009  
Coral Seas
  
Panamax
       74,477       2006  
Golden Seas
  
Panamax
       74,475       2006  
Pearl Seas
  
Panamax
       74,483       2006  
Diamond Seas
  
Panamax
       74,274       2001  
Deep Seas
  
Panamax
       72,891       1999  
Calm Seas
  
Panamax
       74,047       1999  
Kind Seas
  
Panamax
       72,493       1999  
Total Panamax
     8       592,291          
Supramax
                        
Friendly Seas
  
Supramax
       58,779       2008  
Sapphire Seas
  
Supramax
       53,702       2005  
Total Supramax
     2       112,481          
Handysize
                        
Prosperous Seas
  
Handysize
       37,293       2012  
Precious Seas
  
Handysize
       37,205       2012  
Priceless Seas
  
Handysize
       37,202       2013  
Total Handysize
     3       111,700          
Grand Total
     13       816,472          

Drybulk Newbuildings that we have agreed to acquire
 
Hull no.
  
Type
    
Dwt
    
Expected Delivery
  
Handysize
  
Hull no. 625
  
Handysize
       37,200       Q4 2013  
Total Handysize
     1       37,200          

Containership Fleet

The following tables represent the containership newbuilding vessels that we have agreed to acquire as of September 6, 2013.

Containership Newbuildings that we have agreed to acquire
 
Hull no.
  
TEU
    
Dwt
    
Expected Delivery
  
Hull no. 656 (1)
     4,800       56,500       Q3 2014  
Hull no. 657 (1)
     4,800       56,500       Q3 2014  
Total
     9,600       113,000          

 (1) The Company has granted to Box Ships an option to purchase.


 
10
 






INDEX TO UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


 
Page
   
Unaudited interim condensed consolidated Balance Sheets as of December 31, 2012 and June 30, 2013
F-2
Unaudited interim condensed consolidated Statements of Comprehensive Loss for the six months ended June 30, 2012 and 2013
F-3
Unaudited interim condensed consolidated Statements of Shareholders' Equity for the six months ended June 30, 2012 and 2013
F-4
Unaudited interim condensed consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2013
F-5
Notes to the unaudited interim condensed consolidated Financial Statements
F-6


 
F-1
 

 
 
Paragon Shipping Inc.
  
Unaudited Interim Condensed Consolidated Balance Sheets
  
As of December 31, 2012 and June 30, 2013
  
(Expressed in United States Dollars - except for share data)
  
 
Notes
  
December 31, 2012
    
June 30, 2013
  
Assets
              
Current assets
              
Cash and cash equivalents
       17,676,885       11,696,658  
Restricted cash
Note 3
     2,425,000       10,000,000  
Trade receivables, net
       2,060,453       3,021,138  
Other receivables
       729,766       612,029  
Prepaid expenses
       445,604       327,816  
Due from related parties
Note 4
     2,508,195       2,444,938  
Inventories
       920,013       1,838,721  
Interest rate swaps
Notes 3, 9, 10
     -       196,991  
Other assets
Note 3
     -       2,957,092  
Loan to affiliate
Note 4
     4,000,000       12,000,000  
Marketable securities
Note 10
     567,288       3,669,672  
Total current assets
       31,333,204       48,765,055  
Fixed assets
                  
Vessels, net
Note 6
     298,376,440       314,649,549  
Advances for vessel acquisitions and vessels under construction
Note 5
     49,592,684       27,249,315  
Other fixed assets, net
       497,619       446,069  
Total fixed assets, net
       348,466,743       342,344,933  
Investment in affiliate
Note 7
     19,987,743       19,513,583  
Loan to affiliate
Note 4
     10,000,000       -  
Other assets
Note 3
     2,602,212       -  
Restricted cash
Note 3
     7,585,000       10,000  
Total Assets
       419,974,902       410,633,571  
Liabilities and Shareholders' Equity
                  
Current liabilities
                  
Trade accounts payable
       2,597,253       3,459,020  
Accrued expenses
       2,109,952       2,257,437  
Due to related parties
Note 4
     84,705       542,830  
Interest rate swaps
Notes 3, 9, 10
     1,185,719       1,683,124  
Deferred income
       1,567,007       1,033,606  
Current portion of long-term debt
Notes 3, 8
     14,427,250       188,328,551  
Total current liabilities
       21,971,886       197,304,568  
Long-term liabilities
                  
Long-term debt
Notes 3, 8
     181,114,926       -  
Interest rate swaps
Notes 3, 9, 10
     1,367,577       -  
Total long-term liabilities
       182,482,503       -  
Total Liabilities
       204,454,389       197,304,568  
Commitments and Contingencies
                  
Shareholders' Equity
                  
Preferred shares, $0.001 par value; 25,000,000 authorized; none issued
                  
and outstanding
       -       -  
Class A common shares, $0.001 par value; 750,000,000 authorized;
                  
11,001,403 and 11,321,442 issued and outstanding at
                  
December 31, 2012 and June 30, 2013, respectively
Note 11
     11,001       11,321  
Class B common shares, $0.001 par value; 5,000,000 authorized;
                  
none issued and outstanding
       -       -  
Additional paid-in capital
       460,094,256       460,742,362  
Accumulated other comprehensive (loss) / income
Note 10
     (627,104 )     27,030  
Accumulated deficit
       (243,957,640 )     (247,451,710 )
Total Shareholders' Equity
       215,520,513       213,329,003  
Total Liabilities and Shareholders' Equity
       419,974,902       410,633,571  
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

 
F-2
 

 
Paragon Shipping Inc.
  
Unaudited Interim Condensed Consolidated Statements of Comprehensive Loss
  
For the six months ended June 30, 2012 and 2013
  
(Expressed in United States Dollars - except for share data)
  
 
Notes
  
Six Months Ended
    
Six Months Ended
  
   
June 30, 2012
    
June 30, 2013
  
Revenue
              
Charter revenue
       25,856,283       28,909,224  
Commissions (including related party of $310,835 and
                  
$352,539 for the six months ended June 30, 2012
                  
and 2013, respectively)
Note 4
     (1,429,571 )     (1,577,594 )
Net Revenue
       24,426,712       27,331,630  
Expenses / (Income)
                  
Voyage expenses, net
       129,941       2,652,799  
Vessels operating expenses (including related party of $320,618 and
                  
$421,712 for the six months ended June 30, 2012
                  
and 2013, respectively)
Note 4
     8,824,891       10,594,953  
Dry-docking expenses (including related party of $0 and
                  
$109,248 for the six months ended June 30, 2012
                  
and 2013, respectively)
Note 4
     -       1,698,217  
Management fees - related party
Note 4
     1,922,177       2,683,090  
Depreciation
Note 6
     7,942,617       8,385,305  
General and administrative expenses (including related party
                  
of $1,665,555 and $3,770,111 for the six months ended
                  
June 30, 2012 and 2013, respectively)
Note 4
     4,215,789       5,222,488  
Gain from marketable securities, net
       (1,394,665 )     (3,113,306 )
Operating Income / (Loss)
       2,785,962       (791,916 )
Other Income / (Expenses)
                  
Interest and finance costs
       (3,133,987 )     (3,761,112 )
(Loss) / gain on derivatives, net
Notes 9, 10
     (481,590 )     20,126  
Interest income (including related party of $341,096 and
                  
$381,326 for the six months ended June 30, 2012
                  
and 2013, respectively)
Note 4
     377,461       393,543  
Equity in net income of affiliate
Note 7
     1,356,501       978,702  
Loss on investment in affiliate
Note 7
     -       (390,821 )
Foreign currency (loss) / gain
       (5,156 )     57,408  
Total Other Expenses, net
       (1,886,771 )     (2,702,154 )
Net Income / (Loss)
       899,191       (3,494,070 )
                   
Other Comprehensive (Loss) / Income
                  
Unrealized (loss) / gain on cash flow hedges
Note 10
     (440,917 )     403,710  
Transfer of realized loss on cash flow hedges to "Interest and finance costs"
Note 10
     36,118       154,637  
Equity in other comprehensive income of affiliate
Note 10
     -       106,709  
Unrealized loss on change in fair value of marketable securities
Note 10
     (707,304 )     (10,922 )
Total Other Comprehensive (Loss) / Income
       (1,112,103 )     654,134  
                   
Comprehensive Loss
       (212,912 )     (2,839,936 )
                   
Earnings / (Loss) per Class A common share, basic and diluted
Note 13
   $ 0.15     $ (0.31 )
Weighted average number of Class A common shares, basic and diluted
Note 13
     5,913,195       11,016,733  
 
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

 
F-3
 
 
 
 
Paragon Shipping Inc.
      
Unaudited Interim Condensed Consolidated Statements of Shareholders' Equity
For the six months June 30, 2012 and 2013
  
(Expressed in United States Dollars - except for share data)
 
     Class A Shares            
Accumulated
              
               
Additional
    
Other
              
   
Number of
    
Par
    
Paid-in
    
Comprehensive
    
Accumulated
        
   
Shares
    
Value
    
Capital
    
(Loss) / Income
    
Deficit
    
Total
  
Balance January 1, 2012
     6,089,826       6,090       447,618,572       -       (226,400,515 )     221,224,147  
Issuance of non-vested Class A
common share awards
     9,800       10       (19,568 )     -       -       (19,558 )
Cancellation of non-vested Class A
common share awards
     (184 )     (1 )     1       -       -       -  
Share based compensation
     -       -       1,593,999       -       -       1,593,999  
Net Income
     -       -       -       -       899,191       899,191  
Other comprehensive loss
     -       -       -       (1,112,103 )     -       (1,112,103 )
Balance June 30, 2012
     6,099,442       6,099       449,193,004       (1,112,103 )     (225,501,324 )     222,585,676  
 
Balance January 1, 2013
     11,001,403       11,001       460,094,256       (627,104 )     (243,957,640 )     215,520,513  
Issuance of Class A common shares
     98,039       98       (98 )     -       -       -  
Issuance of non-vested Class A
common share awards
     222,000       222       (222 )     -       -       -  
Class A common shares issuance costs
     -       -       (23,529 )     -       -       (23,529 )
Share based compensation
     -       -       671,955       -       -       671,955  
Net Loss
     -       -       -       -       (3,494,070 )     (3,494,070 )
Other comprehensive income
     -       -       -       654,134       -       654,134  
Balance June 30, 2013
     11,321,442       11,321       460,742,362       27,030       (247,451,710 )     213,329,003  
 
The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

 
F-4
 

 
Paragon Shipping Inc.
  
Unaudited Interim Condensed Consolidated Statements of Cash Flows
  
For the six months ended June 30, 2012 and 2013
  
(Expressed in United States Dollars - except for share data)
  
   
Six Months Ended
    
Six Months Ended
  
   
June 30, 2012
    
June 30, 2013
  
             
Cash flows from operating activities
            
Net Income / (Loss)
     899,191       (3,494,070 )
Adjustments to reconcile net income / (loss) to net cash provided by
                
operating activities
                
Depreciation
     7,942,617       8,385,305  
Loss on investment in affiliate
     -       390,821  
Amortization and write off of financing costs
     207,627       227,728  
Share based compensation
     1,593,999       671,955  
Gain from marketable securities, net
     (1,394,665 )     (3,113,306 )
Unrealized gain on interest rate swaps
     (891,635 )     (508,816 )
Equity in net income of affiliate net of dividends received
     705,999       -  
Changes in assets and liabilities:
                
Trade receivables, net
     (1,416,270 )     (960,685 )
Other receivables
     155,503       117,737  
Prepaid expenses
     (37,394 )     117,788  
Inventories
     (496,403 )     (472,062 )
Due from related parties
     (733,843 )     (40,489 )
Trade accounts payable
     961,893       309,486  
Accrued expenses
     (655,666 )     391,555  
Due to related parties
     -       458,125  
Deferred income
     545,731       (533,401 )
Net cash from operating activities
     7,386,684       1,947,671  
Cash flow from investing activities
                
Acquisition of vessels and capital expenditures
     (30,837,401 )     (2,192,451 )
Repayment from affiliate
     -       2,000,000  
Return of investment in affiliate
     -       190,048  
Other fixed assets
     (117,409 )     (38,889 )
Release of restricted cash
     8,980,000       -  
Net cash used in investing activities
     (21,974,810 )     (41,292 )
Cash flows from financing activities
                
Proceeds from long-term debt
     28,908,750       -  
Repayment of long-term debt
     (21,113,813 )     (7,213,625 )
Payment of financing costs
     (67,232 )     (631,264 )
Issuance of Class A common shares, net
     (19,558 )     (41,717 )
Net cash from / (used in) financing activities
     7,708,147       (7,886,606 )
Net decrease in cash and cash equivalents
     (6,879,979 )     (5,980,227 )
Cash and cash equivalents at the beginning of the period
     14,563,517       17,676,885  
Cash and cash equivalents at the end of the period
     7,683,538       11,696,658  

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements

 
F-5
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

1. Basis of Presentation and General Information

Basis of Presentation: Paragon Shipping Inc. ("Paragon") is a public company incorporated in the Republic of the Marshall Islands on April 26, 2006 and is engaged in the ocean transportation of drybulk cargoes worldwide through the ownership and operation of drybulk carriers. In December 2006, Paragon established a branch in Greece under the provision of Law 89 of 1967, as amended.

The accompanying unaudited interim condensed consolidated financial statements include the accounts of Paragon Shipping Inc. and its wholly-owned subsidiaries (collectively the "Company") as discussed below as of December 31, 2012 and June 30, 2013 and for the six months ended June 30, 2012 and 2013.

Drybulk Vessel Owning Subsidiaries:

Vessel Owning Company
Date of
Incorporation
Country of
Incorporation
Vessel's Name
Delivery Date
Built
  
DWT
  
Trade Force Shipping S.A.
November 15, 2006
Marshall Islands
Deep Seas
December 2006
1999
     72,891  
Frontline Marine Co.
November 15, 2006
Marshall Islands
Calm Seas
December 2006
1999
     74,047  
Fairplay Maritime Ltd.
November 15, 2006
Marshall Islands
Kind Seas
December 2006
1999
     72,493  
Donna Marine Co.
July 4, 2007
Marshall Islands
Pearl Seas
August 2007
2006
     74,483  
Protea International Inc.
July 17, 2007
Liberia
Sapphire Seas
August 2007
2005
     53,702  
Reading Navigation Co.
July 17, 2007
Liberia
Diamond Seas
September 2007
2001
     74,274  
Imperator I Maritime Company
September 27, 2007
Marshall Islands
Coral Seas
November 2007
2006
     74,477  
Canyon I Navigation Corp.
September 27, 2007
Marshall Islands
Golden Seas
December 2007
2006
     74,475  
Paloma Marine S.A.
June 19, 2008
Liberia
Friendly Seas
August 2008
2008
     58,779  
Eris Shipping S.A.
April 8, 2010
Liberia
Dream Seas
July 2010
2009
     75,151  
Coral Ventures Inc.
August 5, 2009
Liberia
Prosperous Seas
May 2012
2012
     37,293  
Winselet Shipping & Trading Co.
April 6, 2010
Liberia
Precious Seas
June 2012
2012
     37,205  
Aminta International S.A.
May 5, 2010
Liberia
Priceless Seas (1)
January 2013
2013
     37,202  

(1) Refer to Note 5

 
F-6
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

1. Basis of Presentation and General Information – Continued

Vessel Under Construction Owning Subsidiaries:

Vessel Owning Company
Date of
Incorporation
Country of
Incorporation
  
Hull Number
  
Type
  
Expected Delivery
  
DWT / TEU
Irises Shipping Ltd.
October 6, 2009
Marshall Islands
     656  
Containership
     2014  
4,800 TEU  
Nereus Navigation Ltd.
May 4, 2010
Marshall Islands
     657  
Containership
     2014  
4,800 TEU  
Adonia Enterprises S.A.
May 5, 2010
Liberia
     625  
Drybulk Carrier
     2013  
37,200 Dwt  

Non-Vessel Owning Subsidiaries:

Non-Vessel Owning Company
Date of Incorporation
Country of Incorporation
Camelia Navigation S.A.
November 15, 2006
Marshall Islands
Explorer Shipholding Limited
November 15, 2006
Marshall Islands
Epic Investments Inc.
December 21, 2006
Marshall Islands
Opera Navigation Co.
December 21, 2006
Marshall Islands
Ovation Services Inc.
September 16, 2009
Marshall Islands
Letitia Shipping Limited
May 4, 2010
Marshall Islands
Ardelia Navigation Ltd.
June 15, 2010
Liberia
Eridanus Trading Co.
July 1, 2010
Liberia
Delphis Shipping S.A.
February 7, 2011
Liberia

Effective November 5, 2012, the Company effectuated a 10-for-1 reverse stock split on its issued and outstanding common stock (refer to Note 12 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report on Form 20-F filed with the Securities and Exchange Commission on April 3, 2013, as amended on April 18, 2013, or "Annual Report"). All share and per share amounts disclosed in the accompanying unaudited interim condensed consolidated financial statements give effect to the respective stock split retroactively, for all the periods presented.

The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ("U.S. GAAP") for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete financial statements. In the opinion of the management of the Company, all adjustments (consisting of normal recurring adjustments) necessary for a fair presentation of financial position, operating results and cash flows have been included in the accompanying unaudited interim condensed consolidated financial statements. Interim results are not necessarily indicative of results that may be expected for the year ending December 31, 2013. These financial statements should be read in conjunction with the consolidated financial statements and footnotes for the year ended December 31, 2012 included in the Company's Annual Report.

The Company outsources the technical and commercial management of its vessels to Allseas Marine S.A. ("Allseas"), a related party wholly owned by Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer (refer to Note 4).

As of June 30, 2013, Mr. Michael Bodouroglou beneficially owned 56.5% of the Company's common stock. Accordingly, Mr. Michael Bodouroglou, can control the outcome of matters on which shareholders are entitled to vote, including the election of the entire Board of Directors and other significant corporate actions.


 
F-7
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

2. Significant Accounting Policies

The same accounting policies have been followed in these unaudited interim condensed consolidated financial statements as were applied in the preparation of the Company's financial statements for the year ended December 31, 2012. See Note 2 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report.

Recent Accounting Pronouncements: There are no recent accounting pronouncements the adoption of which would have a material effect on the Company's unaudited condensed consolidated financial statements in the current period or expected to have an impact on future periods.

3. Going Concern

As of June 30, 2013, the Company was in compliance with the financial and security ratio covenants contained in its loan agreements, as discussed in Note 8.

On January 1, 2014, several of the waivers obtained following the completion of the Company's debt restructuring expire (refer to Note 9 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report).

Given the current drybulk market, it is probable that the Company will not be in compliance with the EBITDA coverage ratio contained in one of its loan and credit facilities, as of March 31, 2014 and June 30, 2014, unless the chartering market experiences a significant improvement between now and then. As a result of the cross default provisions included in the Company's loan agreements, actual breaches existing under its credit facilities could result in defaults under all of the Company's debt and the acceleration of such debt by its lenders, thus, as of June 30, 2013, the Company has classified as current its long-term debt and the associated restricted cash, deferred financing fees and interest rate swap assets and liabilities as discussed in Note 8.

The Company is currently in negotiations with its respective lender to extend the waiver period of the aforementioned covenant. As management believes that the negotiations will be successful and that the Company's lenders will not demand payment of the loans before their maturity, the accompanying interim condensed consolidated financial statements were prepared assuming that the Company will continue as a going concern. Therefore, the accompanying unaudited interim condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and liabilities, or any other adjustments that might result in the event the Company is unable to continue as a going concern.

 
F-8
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

4. Transactions with Related Parties

The following transactions with related parties occurred during the six months ended June 30, 2012 and 2013.

(a)
Granitis Glyfada Real Estate Ltd. ("Granitis") - Leasing: Rent expense under this lease amounted to $18,604 and $24,398 for the six months ended June 30, 2012 and 2013, respectively, and is included in General and administrative expenses in the accompanying unaudited interim condensed consolidated statements of comprehensive loss.

(b)
Allseas: The following amounts charged by Allseas are included in the accompanying unaudited interim condensed consolidated statements of comprehensive loss:

   
Six Months Ended June 30,
  
   
2012
    
2013
  
Charter hire commissions
   $ 310,835     $ 352,539  
Total Allseas commissions
   $ 310,835     $ 352,539  
                 
Included in Vessel operating expenses
                
Superintendent fees
   $ 162,268     $ 231,520  
                 
Included in Dry-docking expenses
                
Superintendent fees
   $ -     $ 109,248  
                 
Management fees - related party
                
Management fees (1)
   $ 1,600,339     $ 1,994,204  
Financial accounting and reporting services
     321,838       353,102  
Loretto agreement
     -       335,784  
Total Management fees
   $ 1,922,177     $ 2,683,090  
                 
Included in General and administrative expenses
                
Administrative fees
   $ 17,826     $ 18,866  
Executive services agreement (2)
   $ 1,629,125     $ 3,726,847  
 

(1) The daily management fee per vessel is subject to adjustment on June 1 of each year based on the official Eurozone inflation rate. Effective June 1, 2013, Allseas management fee was adjusted from €652.02 to €661.15 per vessel per day (or $860.16 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.3010 as of June 30, 2013).

(2) Includes incentive compensation of $0 and $1,960,500 for the six months ended June 30, 2012 and 2013 (refer to Note 3 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report.)

 
F-9
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

4. Transactions with Related Parties – Continued

(b)
Allseas - Continued

The following amounts charged by Allseas are capitalized and are included in vessels cost and advances for vessels under construction in the accompanying unaudited interim condensed consolidated balance sheets: Technical management and superintendent fees relating to newbuilding vessels, pre-delivery services and vessel purchase commissions, which in the aggregate amounted to $952,344 and $404,820 for the six months ended June 30, 2012 and 2013, respectively.

Each month, the Company funds a payment to Allseas to cover working capital equal to one month of estimated operating expenses. At each balance sheet date, the excess of the amount funded to Allseas over payments made by Allseas for operating expenses is reflected as Due from related parties. In addition, in 2012, an amount of $1,280,000 was remitted to Allseas for the issuance of a letter of guarantee relating to one of the Company's vessels, and is reflected as Due from related parties. As of December 31, 2012 and June 30, 2013, the amount due from Allseas was $2,508,195 and $2,444,938, respectively.

In connection with the private placement to Innovation Holdings S.A. ("Innovation Holdings") that closed in December 2012 and upon the finalization of the Company's debt restructuring (refer to Note 9 and 12 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report), effective February 15, 2013, 98,039 Class A common shares, representing the 2.0% of the 4,901,961 Class A common shares sold to Innovation Holdings in the private placement, were granted to Loretto Finance Inc. ("Loretto"), a wholly owned subsidiary of Allseas, pursuant to the tripartite agreement between the Company, Allseas and Loretto. The fair value of such shares based on the average of the high-low trading price of the shares on February 15, 2013, was $335,784, which was recorded as share based compensation and is included in Management fees - related party in the accompanying unaudited interim condensed consolidated statements of comprehensive loss for the six months ended June 30, 2013.

(c)
Crewcare Inc. ("Crewcare") - Manning Agency Agreements: The expenses incurred amounted to $158,350 and $190,192 for the six months ended June 30, 2012 and 2013, respectively, and are included in Vessel operating expenses. The balances due to Crewcare Inc. amounted to $84,705 and $542,830 as of December 31, 2012 and June 30, 2013, respectively.

(d)
Box Ships Inc. (NYSE: TEU) ("Box Ships"): As of December 31, 2012 and June 30, 2013, the Company held 16.4% and 13.8% of Box Ships' common stock, respectively. The decrease in the percentage of Box Ships' common stock held by the Company is due to the Company's non-participation in the public offering of 4,000,000 common shares of Box Ships, which was completed on March 18, 2013 (refer to Note 7).

 
On February 28, 2013, Box Ships prepaid an amount of $1,000,000 and reduced the outstanding balance of the unsecured loan the Company has granted to Box Ships to $13,000,000. In addition, on March 11, 2013, the Company agreed to amend the terms of the loan agreement. Pursuant to the amended agreement, the Company agreed to extend the maturity of the loan for one year, from April 19, 2013 to April 19, 2014. During the remaining term of the loan, Box Ships is required to make quarterly principal installment payments in the amount of $1,000,000 each, with a final balloon payment of $9,000,000 due on the maturity date. In consideration for the amendment of the loan agreement, Box Ships agreed to pay an amendment fee of $65,000, which is included in Interest income in the accompanying unaudited interim condensed consolidated statements of comprehensive loss for the six months ended June 30, 2013, and to increase the margin from 4.0% to 5.0%. In April 2013, Box Ships paid the amendment fee of $65,000. For the six months ended June 30, 2012 and 2013, interest charged on the respective loan amounted to $341,096 and $316,326, respectively. Pursuant to the amended loan agreement, on April 19, 2013 and on July 19, 2013, Box Ships proceeded with the first two quarterly principal installment payments of $1,000,000 each. In addition, on August 5, 2013, Box Ships prepaid an amount of $5,000,000 and reduced the outstanding balance of the respective loan to $6,000,000.


 
F-10
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

5. Advances for Vessel Acquisitions and Vessels under Construction

Advances for vessels under construction relate to the installments paid that were due to the respective shipyard including capitalized expenses.

On January 29, 2013, the Company took delivery of the M/V Priceless Seas. In January 2013, an amount of $1,419,475 was paid to the shipyard representing the final installment of the respective vessel which was financed from the Company's own funds. Upon the delivery of the M/V Priceless Seas, no loan amount was drawn and the respective vessel is not subject to any mortgage (refer to Note 9 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report).

As of June 30, 2013, the Company's newbuilding program consisted of one Handysize drybulk vessel (Hull no. 625) with expected delivery in the fourth quarter of 2013 and two 4,800 TEU containerships with expected delivery in the third quarter of 2014.
 
6. Vessels, Net
 
   
Vessel
    
Accumulated
    
Net Book
  
   
Cost
    
Depreciation
    
Value
  
Balance December 31, 2012
   $ 351,611,923     $ (53,235,483 )   $ 298,376,440  
Newbuilding deliveries
     24,581,533       -       24,581,533  
Depreciation for the period
     -       (8,308,424 )     (8,308,424 )
Balance June 30, 2013
   $ 376,193,456     $ (61,543,907 )   $ 314,649,549  

All Company's vessels were first-priority mortgaged as collateral to the loans and credit facilities and related interest rate swaps outstanding as at June 30, 2013, except for the M/V Priceless Seas as discussed in Note 5.


 
F-11
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

7. Investment in Affiliate

The following table is a reconciliation of the Company's investment in affiliate as presented on the accompanying unaudited interim condensed consolidated balance sheet:

Balance, December 31, 2012
   $ 19,987,743  
Equity in net income of affiliate
     978,702  
Equity in other comprehensive income of affiliate
     106,709  
Dividends received
     (1,168,750 )
Loss on investment in affiliate
     (390,821 )
Balance, June 30, 2013
   $ 19,513,583  

The loss on investment in affiliate of $390,821 for the six months ended June 30, 2013, relates to the dilution effect from the Company's non-participation in the public offering of 4,000,000 common shares of Box Ships, which was completed on March 18, 2013.

As of December 31, 2012 and June 30, 2013, the Company held 3,437,500 shares or 16.4% and 13.8% of Box Ships' common stock, respectively. Following such decrease, the Company has reassessed the accounting for the investment in Box Ships and concluded that the application of the equity method is still appropriate.

Based on the closing price of Box Ships' common share as of June 30, 2013, of $3.80, the fair value of the investment in Box Ships, which is considered to be determined through Level 1 inputs of the fair value hierarchy, was $13,062,500. As of June 30, 2013, the Company did not consider the difference between the fair value and the book value of the investment in Box Ships as other than temporary and therefore the investment was not impaired.

8. Long-Term Debt

Debt
  
December 31, 2012
    
June 30, 2013
  
Current portion of long-term debt
   $ 14,427,250     $ 188,328,551  
Long-term debt
     181,114,926       -  
Total long-term debt
   $ 195,542,176     $ 188,328,551  

The loan and credit facilities are secured by first-priority mortgages on all the vessels described in Note 1, other than the M/V Priceless Seas as discussed in Note 5.

Details of the loan and credit facilities as of December 31, 2012 are discussed in Note 9 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report.

 
F-12
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

8. Long-Term Debt – Continued

In the first quarter of 2013, the Company finalized the documentation with all of its lenders and completed its debt restructuring as discussed in Note 9 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report.

On May 17, 2013, the Company signed an agreement with China Development Bank ("CDB") for a $69,000,000 credit facility to partially finance the two 4,800 TEU containerships currently under construction, that are expected to be delivered in the third quarter of 2014. The CDB credit facility is available for drawdown upon the delivery of the vessels subject to certain contingencies and conditions, among which is the approval of Box Ships' shareholders to act jointly and severally as guarantor, along with the Company. The CDB credit facility will be used to finance the lower of 60% of the construction cost of the vessels, or 80% of the vessels' market value at delivery. The facility matures ten years after the drawdown date. Under the terms of the credit facility, amounts borrowed will bear interest at LIBOR, plus a margin of 4.00%. In relation to the option the Company has granted to Box Ships to acquire the two 4,800 TEU containerships, the facility can be freely transferred to Box Ships in the event such option is declared.

On June 18, 2013, the Company signed an amending agreement with the syndicate led by Nordea Bank Finland Plc ("Nordea"), in relation to the secured loan facility dated May 5, 2011. The amending agreement removed the condition precedent relating to the full repayment of the outstanding loan due from Box Ships before the drawdown of the undrawn portion of the facility. In addition, the undrawn portion of the facility relating to the M/V Priceless Seas and Hull no. 625 was amended to be the lower of $25,394,427 (decreased from $33,802,880) and an amount equal to 65% of the aggregate fair value of the respective vessels and the already mortgaged vessels, the M/V Prosperous Seas and the M/V Precious, less the outstanding loan amount prior to the proposed drawdown date. Under the facility, the Company is only permitted to drawdown the undrawn portion of the facility if no event of default has occurred or would result from the borrowing of the loan.

On August 21, 2013, the Company agreed with HSBC Bank Plc to extend the existing waivers relating to the financial covenants of EBITDA coverage ratio and interest coverage ratio for two quarters. More specifically, the expiration date of the respective waivers was extended from January 1, 2014 to July 1, 2014.

As of June 30, 2013, the Company has no unused facility in respect of its secured loans and credit facilities other than the undrawn portion of the syndicated secured loan facility led by Nordea and the CDB credit facility discussed above.

As of June 30, 2013, the Company was in compliance with all of its debt covenants. On January 1, 2014, several of the waivers obtained following the completion of the Company's debt restructuring expire. Given the current drybulk market, it is probable that the Company will not be in compliance with the EBITDA coverage ratio contained in one of its loan and credit facilities, as of March 31, 2014 and June 30, 2014, unless the chartering market experiences a significant improvement between now and then. Thus, as of June 30, 2013, the Company has classified its long-term debt as current, along with the associated restricted cash, deferred financing fees and interest rate swap assets and liabilities, as discussed in Note 3. The Company is currently in negotiations with its respective lender to extend the waiver period of the aforementioned covenant.

 
F-13
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

9. Interest Rate Swaps

The Company enters into interest rate swap transactions to manage interest costs and the risk associated with changing interest rates with respect to its variable interest rate loan and credit facilities. These interest rate swap transactions fix the interest rates as described below.

As of June 30, 2013, the Company's outstanding interest rate swaps had a combined notional amount of $75,361,094. Details of the interest rate swap agreements, as of June 30, 2013, are outlined below:

Interest rate swaps that did not qualify for hedge accounting:

   
Counterparty
Effective
date
Termination
date
  
Notional
amount
As of December 31, 2012
    
Notional
amount
As of June 30, 2013
    
Fixed rate
  
Floating
rate
  A  
Unicredit Bank AG (1)
August 27, 2010
August 27, 2015
   $ 45,900,000     $ 40,800,000       2.465%  
3-month LIBOR
TOTAL
   $ 45,900,000     $ 40,800,000            

(1) The notional amount reduces by $2,550,000 on a quarterly basis up until the expiration of the interest rate swap.

Interest rate swaps that qualified for hedge accounting:

   
Counterparty
Effective
date
Termination
date
  
Notional
amount
As of December 31, 2012
    
Notional
amount
As of June 30, 2013
    
Fixed rate
  
Floating
rate
  A  
HSBC Bank Plc (1)
April 10, 2012
April 10, 2017
   $ 5,520,000     $ 5,280,000       1.485%  
3-month LIBOR
  B  
HSH Nordbank AG (2)
May 8, 2012
May 5, 2017
   $ 11,062,500     $ 10,687,500       1.220%  
3-month LIBOR
  C  
Nordea Bank Finland Plc (3)
May 4, 2012
March 31, 2017
   $ 6,885,125     $ 6,643,542       1.140%  
3-month LIBOR
  D  
Nordea Bank Finland Plc (4)
June 18, 2012
May 4, 2017
   $ 6,846,531     $ 6,606,302       1.010%  
3-month LIBOR
  E  
HSH Nordbank AG (5)
August 6, 2012
May 5, 2017
   $ 5,531,250     $ 5,343,750       0.980%  
3-month LIBOR
TOTAL
   $ 35,845,406     $ 34,561,094            

(1) The notional amount reduces by $120,000 on a quarterly basis up until the expiration of the interest rate swap.
(2) The notional amount reduces by $187,500 on a quarterly basis up until the expiration of the interest rate swap.
(3) The notional amount reduces by $120,792 on a quarterly basis up until the expiration of the interest rate swap.
(4) The notional amount reduces by $120,115 on a quarterly basis up until the expiration of the interest rate swap.
(5) The notional amount reduces by $93,750 on a quarterly basis up until the expiration of the interest rate swap.

The estimated net amount of cash flow hedge losses at June 30, 2013 that is estimated to be reclassified into statement of comprehensive income / (loss) within the next twelve months is $295,730.

 
F-14
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

10. Financial Instruments and Fair Value Disclosures

The carrying values of cash and cash equivalents, restricted cash, trade receivables and accounts payable are reasonable estimates of their fair value due to the short-term nature of these financial instruments. The fair values of the credit and loan facilities approximate their carrying value, predominantly due to the variable interest rate nature thereof. Derivative financial instruments are stated at fair values.

When the interest rate swap contracts qualify for hedge accounting, the Company recognizes the effective portion of the gain / (loss) on the hedging instruments directly in other comprehensive income / (loss) in the statement of shareholders' equity, while any ineffective portion, if any, is recognized immediately in current period statement of comprehensive income / (loss). When the interest rate swap contracts do not qualify for hedge accounting, the Company recognizes their fair value changes in current period statement of comprehensive income / (loss).

Information on the location and amounts of derivative fair values in the accompanying unaudited interim condensed consolidated balance sheets and derivative gains / (losses) in the accompanying unaudited interim condensed consolidated statements of comprehensive loss and shareholders' equity are shown below:

Derivative Instruments – Balance Sheet Location

     
December 31, 2012
    
June 30, 2013
  
 
Balance Sheet Location
  
Fair Value
    
Fair Value
  
Derivatives designated as hedging instruments
            
Interest rate swaps
Current assets – Interest rate swaps
   $ -     $ (196,991 )
Interest rate swaps
Current liabilities – Interest rate swaps
     297,908       311,718  
Interest rate swaps
Long-Term Liabilities – Interest rate swaps
     375,166       -  
 
Subtotal
   $ 673,074     $ 114,727  
                   
Derivatives not designated as hedging instruments
                
Interest rate swaps
Current liabilities – Interest rate swaps
   $ 887,811     $ 1,371,406  
Interest rate swaps
Long-Term Liabilities – Interest rate swaps
     992,411       -  
 
Subtotal
   $ 1,880,222     $ 1,371,406  
                   
Total derivatives
     $ 2,553,296     $ 1,486,133  

 
F-15
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

10. Financial Instruments and Fair Value Disclosures – Continued

Effect of Derivative Instruments designated as hedging instruments

Gain / (Loss) Recognized in Accumulated Other Comprehensive Income / (Loss) – Effective Portion

   
Six Months Ended June 30,
  
   
2012
    
2013
  
Interest rate swaps
   $ (440,917 )   $ 403,710  
Total
   $ (440,917 )   $ 403,710  

Location of Gain / (Loss) Transferred from Accumulated Other Comprehensive Income / (Loss) in Statement of Comprehensive Income / (Loss) – Effective Portion

     
Six Months Ended June 30,
  
 
Location
  
2012
    
2013
  
Interest rate swaps – Realized Loss
Interest and finance costs
   $ (36,118 )   $ (154,637 )
Total
     $ (36,118 )   $ (154,637 )

There was no ineffective portion of the gain / (loss) on the hedging instruments for the six months ended June 30, 2012 and 2013.

Effect of Derivative Instruments not designated as hedging instruments

     
Six Months Ended June 30,
  
 
Location of Gain / (Loss) Recognized
  
2012
    
2013
  
Interest rate swaps – Fair value
(Loss)  / gain on derivatives, net
   $ 891,635     $ 508,816  
Interest rate swaps – Realized Loss
(Loss)  / gain on derivatives, net
     (1,373,225 )     (488,690 )
Net loss on derivatives
     $ (481,590 )   $ 20,126  

 
F-16
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

10. Financial Instruments and Fair Value Disclosures – Continued

Financial Instruments and Assets that are measured at fair value on a recurring basis

Interest rate swaps

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 yield rates. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swaps and therefore are considered Level 2 items in accordance with the fair value hierarchy.

The following table summarizes the valuation of the Company's interest rate swaps as of December 31, 2012 and June 30, 2013.
 
 
   
Significant Other Observable Inputs (Level 2)
  
 Financial Instruments            
   
December 31, 2012
    
June 30, 2013
  
Interest rate swaps – asset
   $ -     $ (196,991 )
Interest rate swaps – liability
     2,553,296       1,683,124  
Total
   $ 2,553,296     $ 1,486,133  
 

 
 

Marketable securities – shares of Korea Line Corporation ("KLC"):

On March 28, 2013, the Seoul Central District Court approved an amended KLC rehabilitation plan, under which nine-tenths of the remaining cash payments due to the Company under the agreement will be paid in shares of KLC rather than in cash, reducing the outstanding amount of cash the Company is entitled to receive from KLC from $5,798,363 to $579,836, which will be payable to the Company in nine annual installments of varying amounts. In addition, a 15-for-1 reverse stock split over the outstanding shares of KLC was approved.

On May 9, 2013, the 15-for-1 reverse stock split was effectuated. Accordingly, the reverse stock split adjusted the number of KLC shares held by the Company from 111,201 to 7,413. In addition, pursuant to the amended KLC rehabilitation plan, on May 9, 2013, 58,483 additional shares of KLC were issued to the Company, which will be secured at the Korean Securities Depository until November 10, 2013, increasing the total number of KLC shares held by the Company to 65,896 on a reverse stock split adjusted basis. Based on the closing price of KLC shares as of May 9, 2013, the fair value of the 58,483 additional KLC shares was $3,113,306, which was recognized as gain from marketable securities and is included in the accompanying unaudited interim condensed consolidated statements of comprehensive loss for the six months ended June 30, 2013.

The fair value of the total 65,896 KLC shares as of June 30, 2013, based on the respective latest publicly available information, was $3,669,672. The corresponding loss on change in the fair value of $10,922 was recognized in accumulated other comprehensive income / (loss).

The fair value of the KLC shares is based on quoted prices of KLC share of stock (Korea SE: KS) and is considered to be determined through Level 1 inputs of the fair value hierarchy.

The following table summarizes the valuation of the KLC shares as of December 31, 2012 and June 30, 2013.
 
   
Quoted Prices in Active Markets (Level I)
  
 Financial Assets      
   
December 31, 2012
    
June 30, 2013
  
KLC Shares – Marketable Securities
   $ 567,288     $ 3,669,672  
 
As of December 31, 2012 and June 30, 2013, the Company did not have any assets or liabilities measured at fair value on a recurring or non-recurring basis, other than the ones discussed above.

 
F-17
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

11.  Capital Structure

Registration Statement filed on December 13, 2012

On December 13, 2012, the Company had filed a Registration Statement on Form F-1, including a prospectus contained therein, for the issuance of common shares upon exercise of subscription rights in connection with a potential future equity increase. On April 18, 2013, the Company applied for the withdrawal of the respective Registration Statement, which was accepted by the Securities and Exchange Commission on the same date.

Registration Statement filed on April 18, 2013

On April 18, 2013, the Company filed a Registration Statement on Form F-1, including a prospectus contained therein, for the public offering and issuance of common shares in connection with a potential future equity increase. As of the date of this report, such Registration Statement has not been declared effective by the Securities and Exchange Commission.

As of December 31, 2012 and June 30, 2013, the Company has a total of 11,001,403 and 11,321,442 Class A common shares outstanding, respectively, and no other class of shares outstanding.


 
F-18
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

12. Share Based Payments - Equity incentive plan – Non-vested share awards

A summary of the activity for non-vested share awards for the six months ended June 30, 2013, is as follows:

   
Number
of Shares
    
Weighted
Average
Fair Value
  
Non vested, December 31, 2012
     58,335     $ 10.08  
Granted
     222,000       2.71  
Non vested,  June 30, 2013
     280,335     $ 5.93  

The remaining unrecognized compensation cost amounting to $718,360 as of June 30, 2013, is expected to be recognized over the remaining weighted average period of 0.9 years, according to the contractual terms of those non-vested share awards.

13. Earnings per Share ("EPS")

The following table sets forth the computation of basic and diluted net income / (loss) per share for the six months ended June 30, 2012 and 2013, adjusted to give effect to the 10-for-1 reverse stock split that became effective on November 5, 2012, as discussed in Note 12 of the Company's consolidated financial statements for the year ended December 31, 2012 included in the Company's Annual Report:

Basic and diluted EPS – Class A common shares – The two class method EPS is calculated as follows:

   
Six Months Ended June 30,
  
Numerators
  
2012
    
2013
  
Net income / (loss)
   $ 899,191     $ (3,494,070 )
Less: Net (income) / loss attributable to non-vested share awards
     (27,295 )     66,236  
Net income / (loss) attributable to common shareholders
   $ 871,896     $ (3,427,834 )
                 
Denominators
                
Weighted average common shares outstanding, basic and diluted
     5,913,195       11,016,733  
                 
Net income / (loss) per common share, basic and diluted:
   $ 0.15     $ (0.31 )

Weighted Average Shares – Basic - In calculating basic EPS, the Company includes the effect of vested share awards and Class A common shares issued for exercised stock option awards from the date they are issued or vested.

Weighted Average Shares – Diluted - In calculating diluted EPS, the Company includes the potential dilution that could occur if securities or other contracts to issue common stock were exercised. In calculating diluted EPS, the following dilutive securities are included in the shares outstanding unless their effect is anti-dilutive:

·           Unvested share awards outstanding under the Company's Stock Incentive Plan

·           Class A common shares issuable upon exercise of the Company's outstanding options

The Company excluded the dilutive effect of 2,800 (June 30, 2012: 2,800) stock option awards and 280,335 non-vested share awards (June 30, 2012: 139,063) in calculating dilutive EPS for its Class A common shares as they were anti-dilutive.


 
F-19
 

Paragon Shipping Inc.
Notes to Unaudited Interim Condensed Consolidated Financial Statements
(Expressed in United States Dollars - except for share data)

14. Commitments and Contingencies

From time to time the Company is subject to legal proceedings and claims in the ordinary course of business, principally personal injury and property casualty claims. Such claims, even if lacking in merit, could result in the expenditure of significant financial and managerial resources. As of June 30, 2013, the Company is not aware of any claim or contingent liability, which should be disclosed, or for which a provision should be established in the accompanying financial statements.

Newbuilding Commitments:

Future newbuilding installments based on the non-cancelable newbuilding contracts, as amended (refer to Note 5) required to be made after June 30, 2013 are as follows:

To June 30,
      
2014
   $ 21,662,200  
2015
     91,203,619  
Total
   $ 112,865,819  

15. Subsequent Events

Fleet Employment

In July 2013, the Company agreed with the charterer of the M/V Coral Seas and the M/V Deep Seas, on the early termination of the respective time charter agreements for a total cash compensation of $2,250,000. Under the terms of the original time charter agreements, the vessels were expected to be redelivered to the Company in December 2013 and July 2014, respectively. Based on the early termination agreement, both vessels will be redelivered to the Company by the end of August 2013. The total cash compensation of $2,250,000, which was collected in July 2013, was agreed based on the difference between the vessels' gross time charter rates under the respective time charter agreements, and the existing equivalent market time charter rates. The total cash compensation, net of commissions, will be recorded as gain from vessel early redelivery in the third quarter of 2013.

Loan to Affiliate

On August 5, 2013, Box Ships prepaid an amount of $5,000,000 of the unsecured loan that was granted on May 27, 2011, and reduced the outstanding balance of the respective loan to $6,000,000, as discussed in Note 4.


 
F-20
 

SIGNATURES
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
Paragon Shipping Inc.
  
     
     
Dated:  September 6, 2013
By:
/s/ Robert Perri
  
 
Name:
Robert Perri
  
 
Title:
Chief Financial Officer