Note 5. Derivative Instruments and Fair Value Measurements

Forward freight agreements

The Company trades in forward freight agreements (“FFAs”), with the objective of utilizing this market as economic hedging instruments that reduce the risk of specific vessels to changes in the freight market. The Company’s FFAs have not qualified for hedge accounting treatment. As such, unrealized and realized gains are recognized as a component of other expense in the Condensed Consolidated Statement of Operations.

The effect of non-designated derivative instruments on the Condensed Consolidated Statements of Operations:

Derivatives not designated	Location of	Amount of Loss				Amount of Loss
as hedging instruments	Loss Recognized	Three Months Ended				Nine Months Ended
		September 30, 2016		September 30, 2015		September 30, 2016		September 30, 2015
FFAs	Other expense	$	163,499	$	-	$	464,284	$	-
Total		$	163,499	$	-	$	464,284	$	-

Cash Collateral Disclosures

The Company does not offset fair value amounts recognized for derivatives by the right to reclaim cash collateral or the obligation to return cash collateral. As of September 30, 2016, the Company posted cash collateral related to derivative instruments under its collateral security arrangements of $147,600, which is recorded as other current assets in the Condensed Consolidated Balance Sheet. The fair value of the FFAs recorded in current liabilities as of September 30, 2016 and December 31, 2015 was $15,150 and none, respectively.

Fair Value Measurements

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

Cash, cash equivalents and restricted cash—

the carrying amounts reported in the Condensed Consolidated Balance Sheets for interest-bearing deposits approximate their fair value due to their short-term nature thereof.

Debt

—the carrying amounts of borrowings under the revolving credit agreement approximate their fair value, due to the variable interest rate nature thereof.

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

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

Level 2 – Quoted prices for similar assets and liabilities in active markets or inputs that are observable. Our Level 2 non-derivatives include our term loan account, asset impairment and asset held for sale.

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

In the first quarter of 2016, as discussed in Note 3, the Company recorded a vessel impairment of $6,167,262 to its recorded vessel value as a result of a further reduction in asset value since December 31, 2015 coupled with management’s intention to divest of six of its vessels in the short-term period. Prior to the impairment, such vessels had a recorded value of $25,317,262. In the fourth quarter of 2015, the Company recorded an impairment of $50,872,734 on the above noted vessels. Prior to the impairment, such vessels had a recorded value of $76,332,734.