ESEA Euroseas Ltd

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

1. Basis of Presentation and General Information

Euroseas Ltd. was formed on  May 5, 2005 under the laws of the Republic of the Marshall Islands to consolidate the beneficial owners of certain ship-owning companies. Euroseas Ltd., through its wholly owned vessel owning subsidiaries (collectively the "Company" or “Euroseas”) is engaged in the ocean transportation of containers through ownership and operation of containerships. Euroseas’ common shares trade on the Nasdaq Capital Market under the ticker symbol “ESEA”.

The operations of the vessels are managed by Eurobulk Ltd. (“Eurobulk” or “Management Company” or “Manager”), a corporation controlled by members of the Pittas family. Eurobulk has an office in Greece located at 4 Messogiou & Evropis Street, Maroussi, Greece. The Manager provides the Company with a wide range of shipping services such as technical support and maintenance, insurance consulting, chartering, financial and accounting services and executive management services, in consideration for fixed and variable fees (see Note 6).

The Pittas family is the controlling shareholder of Friends Investment Company Inc., Containers Shareholders Trinity Ltd., Eurobulk Marine Holdings Inc. and Family United Navigation Co., which, in turn, collectively own 54.0% of the Company’s shares as of  June 30, 2022.

The accompanying unaudited condensed consolidated financial statements include the accounts of Euroseas Ltd., and its wholly owned vessel owning subsidiaries and should be read in conjunction with the audited consolidated financial statements for the year ended  December 31, 2021 as filed with the U.S. Securities and Exchange Commission ("SEC") on Form 20-F on  April 22, 2022.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) for interim financial information. Accordingly, they do not include all the information and notes required by US GAAP for complete financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments considered necessary for a fair presentation of the Company's financial position, results of operations and cash flows for the periods presented. Operating results for the six-month period ended  June 30, 2022 are not necessarily indicative of the results that might be expected for the fiscal year ending  December 31, 2022.

As of  June 30, 2022, the Company had a working capital deficit of $36.3 million, which includes balloon loan repayments of $6.2 million and $6 million due in February 2023 and May 2023, respectively. For the six-month period ended  June 30, 2022, the Company reported a net income and a net income attributable to common shareholders of $60.7 million and generated net cash from operating activities of $64.0 million. The Company’s cash balance amounted to $5.0 million, while cash in restricted and retention accounts amounted to $5.6 million as of  June 30, 2022. As noted in Note 3 below, the Company entered into agreements for the construction of nine container carriers vessels. For the construction of the above vessels an amount of $100.6 million is payable in the twelve-month period ending June 30, 2023. Another $157.9 million are payable until June 30, 2024, within a remaining amount of $56.7 million payable by the end of 2024. All the payments are guaranteed by the Company. In addition, on September 16, 2022, a loan of $19.25 million was drawn using as collateral the two vessels acquired in 2022 (see Note 14). The Company intends to fund its working capital requirements and capital commitments via cash on hand and cash flows from operations.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

In the event that these sources are not sufficient, the Company  may also use funds from new mortgage debt financing for the vessels under construction and the two unencumbered vessels that the Company owns (in addition to the two abovementioned vessels which were encumbered in September 2022), debt refinancing, debt balloon payment refinancing, proceeds from its on-going at-the-market offering and other equity offerings, if required, among other options. The Company believes it will have adequate funding through the sources described above and, accordingly, it believes it has the ability to continue as a going concern and finance its obligations as they come due over the next twelve months following the date of the issuance of these financial statements. Consequently, the interim condensed consolidated financial statements have been prepared on a going concern basis which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

2. Significant Accounting Policies

A summary of the Company's significant accounting policies is discussed in Note 2 of the Company’s consolidated financial statements, included in the Annual Report on Form 20-F for the fiscal year ended  December 31, 2021 (the “2021 Annual Report”). There have been no changes to the Company’s significant accounting policies.

3.  Advances for Vessels under Construction

On June 29, 2021, the Company entered into a contract with Hyundai Mipo Dockyard Co. in South Korea, for the construction of two eco-design fuel efficient feeder containerships. The vessels will have a carrying capacity of 2,800 teu each. The delivery of the vessels is scheduled for the first and the second quarter of 2023, respectively. The aggregate cost of the two newbuilding vessels is approximately $76.1 million.

On  January 28, 2022, the Company signed a contract for the construction of two eco-design fuel efficient feeder containerships. The vessels will have a carrying capacity of about 2,800 teu each and will be built at Hyundai Mipo Dockyard Co. in South Korea. The two newbuildings are scheduled to be delivered during the fourth quarter of 2023 and first quarter of 2024, respectively. The total consideration for these two newbuilding contracts is approximately $86.3 million.

On  March 18, 2022, the Company signed a contract for the construction of three 1,800 teu eco-design fuel efficient feeder containerships. The vessels will have a carrying capacity of about 1,800 teu each and will be built at Hyundai Mipo Dockyard Co. in South Kore. The three newbuildings are scheduled to be delivered during the first half of 2024, one in the first and two in the second quarter of 2024. The total consideration for the construction of the three vessels is approximately $103.8 million.

On May 20, 2022, the Company exercised its option to proceed with the construction of two additional eco-design fuel efficient feeder containerships. The vessels will have a carrying capacity of about 2,800 teu each and will be built at Hyundai Mipo Dockyard Co. in South Korea. The two newbuildings are scheduled to be delivered during the fourth quarter of 2024. The total consideration for these two newbuilding contracts is approximately $86.7 million.

As of June 30, 2022 the amount of the advances for vessels under construction amounts to $37,796,368 mainly representing progress payments according to the agreements entered into with the shipyard as well as legal and other costs related to the construction. The Company intends to finance the cost of all newbuilding contracts with a combination of debt and own cash.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

4. Vessels, net

The amounts in the accompanying unaudited condensed consolidated balance sheets are as follows:

Capitalized expenses for the six-month period ended  June 30, 2022 mainly refer to installation of Water Ballast Treatment (“WBT”) system on four of the Company’s vessels. All these installations qualified as vessel improvements and were therefore capitalized.

On  May 3, 2022, Emmanuel Shipping Ltd., signed a memorandum of agreement to purchase M/V “Seaspan Melbourne” a 50,796 DWT / 4,250 TEU, 2005-built intermediate container carrier and its attached time charter, for a purchase price of $17,500,000, from which $33,259,241 was allocated to the vessel plus costs to make the vessel available for use of $108,594, resulting in a total amount of $33,367,835 presented within “Vessels, net” in the unaudited condensed consolidated balance sheet. In addition, an amount of $15,759,241 was allocated to the in-place attached time charter on the date of the transfer and was recorded as liability within “Fair value of below market time charters acquired” in the unaudited condensed consolidated balance sheet (see Note 5). The vessel was delivered to the Company on  May 24, 2022 and was renamed to “Emmanuel P.”.

On  April 26, 2022, as amended on June 14, 2022, Rena Shipping Ltd., signed a memorandum of agreement to purchase M/V “Seaspan Manila” a 50,796 DWT / 4,250 TEU, 2007-built intermediate container carrier and its attached time charter, for a purchase price of $17,500,000, from which $30,040,206 was allocated to the vessel plus costs to make the vessel available for use of $995,823, resulting in a total amount of $31,036,029 presented within “Vessels, net” in the unaudited condensed consolidated balance sheet. In addition, an amount of $12,540,206 was allocated to the in-place attached time charter on the date of the transfer and was recorded as liability within “Fair value of below market time charters acquired” in the unaudited condensed consolidated balance sheet (see Note 5). The vessel was delivered to the Company on  June 27, 2022 and was renamed to “Rena P.”.

As of  June 30, 2022 fourteen vessels with a net book value of 158,369,761 are used as collateral under the Company’s loan agreements (see Note 8), while four of the Company’s vessels, M/V “Akinada Bridge”, M/V “Joanna”, M/V “Emmanuel P” and M/V “Rena P” are unencumbered. 

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

5. Fair Value of Below Market Time Charters Acquired

As part of the acquisition of M/V “Marcos V”, in  December 2021, which was acquired by the Company with time charter agreement attached, the Company recognized a liability of $17,691,698. Additionally, as part of the acquisitions of M/V “Emmanuel P” and M/V “Rena P” in 2022, which were acquired by the Company with time charter agreements attached, expiring on March 3, 2025 and February 6, 2025 respectively, the Company recognized a liability of $15,759,241 and $12,540,206 respectively. These amounts are included in “Fair value of below market time charters acquired” in the unaudited condensed consolidated balance sheets, since it was determined by reference to market data that the respective charter rates were below market rates on the date of the transfer (Level 2).

For the six month periods ended  June 30, 2021 and June 30, 2022, the amortization of fair value of the below market acquired time charters analyzed above was $nil and $3,063,787, respectively, and is included under “Time charter revenue” in the unaudited condensed consolidated statements of comprehensive income.

The unamortized balance of this intangible liability as of  June 30, 2022 of $42,697,246 will be amortized by the end of  July 2025 as per the table below.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

6. Related Party Transactions

Details of the Company’s transactions with related parties did not change in the six-month period ended  June 30, 2022 and are discussed in Note 8 of the Company’s consolidated financial statements for the year ended  December 31, 2021, included in the 2021 Annual Report.

The Company’s vessel owning companies are parties to management agreements with the Management Company, which is controlled by members of the Pittas family, whereby the Management Company provides technical and commercial vessel management for a fixed daily fee of Euro 685 and Euro 720 for the six-month periods ended  June 30, 2021 and 2022, respectively, under the Company’s Master Management Agreement (“MMA”) with Eurobulk. Vessel management fees paid to the Management Company amounted to $2,148,221 and $2,345,944 in the six-month periods ended  June 30, 2021 and 2022, respectively. The MMA was further renewed on  January 1, 2018 for an additional five-year term until  January 1, 2023 with the 5% volume discount permanently incorporated in the daily management fee. The daily management fee was adjusted for inflation at Euro 720 for the year 2022 from Euro 685 in the year 2021 and  may be adjusted annually for inflation in the Eurozone. These fees are recorded under "Related party management fees" in the unaudited condensed consolidated statements of comprehensive income.

In addition to the vessel management services, the Management Company provides the Company with the services of its executives, services associated with the Company being a public company and other services to the Company’s subsidiaries. For each of the six-month periods ended  June 30, 2021 and 2022, compensation paid to the Management Company for such additional services to the Company was $1,000,000. This amount is included in “General and administrative expenses” in the unaudited condensed consolidated statements of comprehensive income.

Amounts due to or from related company represent net disbursements and collections made on behalf of the vessel-owning companies by the Management Company during the normal course of operations for which a right of offset exists. As of  December 31, 2021 and  June 30, 2022, the amount due to related company was $309,970 and $100,564, respectively.

The Company uses brokers for various services, as is industry practice. Eurochart S.A., an affiliated company controlled by certain members of the Pittas family, provides vessel sale and purchase services, and chartering services to the Company whereby the Company pays commission of 1% of the vessel sales price and 1.25% of charter revenues. A commission of 1% of the purchase price is also paid to Eurochart by the seller of the vessel for acquisitions the Company makes using Eurochart's services. Commissions to Eurochart S.A. for chartering services were $338,985 and $1,218,107 for the six-month periods ended  June 30, 2021 and 2022, respectively, recorded in “Commissions” in the unaudited condensed consolidated statements of comprehensive income. In May and June 2022, the Company withheld the amount of $350,000 from the sellers of M/V “Rena P” and M/V “Emmanuel P”, on behalf of Eurochart, as a 1% commission in connection with the acquisition of the vessels.

Certain members of the Pittas family, together with another unrelated ship management company, have formed a joint venture with the insurance broker Sentinel Maritime Services Inc. (“Sentinel”). Technomar Crew Management Services Corp (“Technomar”), is a company owned by certain members of the Pittas family, together with two other unrelated ship management companies, which provides crewing services. Sentinel is paid a commission on insurance premiums not exceeding 5%; Technomar is paid a fee of about $50 per crew member per month. Total fees charged by Sentinel and Technomar were $42,998 and $65,997 in the first six months of 2021, respectively. In the first six months of 2022, total fees charged by Sentinel and Technomar were $59,834 and $121,600, respectively.  These amounts are recorded in “Vessel operating expenses” in the unaudited condensed consolidated statements of comprehensive income.

On  November 1, 2019, the Company entered into an agreement with a related party, Colby Trading Ltd., a company controlled by the Pittas family and affiliated with the Company’s Chief Executive Officer, to draw $2.5 million loan to finance working capital needs. The loan was fully repaid on  March 31, 2021. The interest rate applied on the agreement was 8% per annum and interest on the loan was payable quarterly. Within the first quarter of 2021 the Company paid $50,000 for interest.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

7. Other operating (income) / expenses

A subsidiary of the Company, Alterwall Business Inc., owner at that time of M/V “Ninos”, was involved in a dispute with a fuel oil supplier who claimed a maritime lien against the vessel after the company which had time-chartered the vessel from the Company went bankrupt in  October 2009 and failed to pay certain invoices. The vessel was arrested in Karachi in  November 2009 and released after a bank guarantee for an amount of $0.53 million was provided on behalf of the Company, for which the bank had restricted an equal amount of the Company's cash. The Company had made a provision of $0.15 million in prior years for any costs that  may be incurred from the case. In  June 2021 the Company reached an agreement with the claimants to pay $0.06 million in order for them to withdraw their claim. After accounting for the settlement amount and additional estimated costs of $0.01 million, the Company recognized other operating income of $0.08 million in the six-month period ended  June 30, 2021, against the provision of $0.15 million already booked in prior years.

In  February 2020, the Company entered into an agreement to sell for scrap M/V “Manolis P”. The vessel reached her destination port on  April 7, 2020, but the sale was not completed due to complications during its delivery to the buyers related to COVID-19 restrictions and port lockdowns in the territory of arrival (Alang, India). A dispute with the buyers was since in arbitration. The advance received from the buyers amounting to $1,133,817 was transferred from the Company’s bank account to an escrow account following this dispute. The court dismissed the opponents claim in  June 2021. The Company recognized other operating income of $1.0 million in the six-month period ended  June 30, 2021, after accounting for estimated expenses for the arbitration.

The Company also recorded other operating income amounting to $0.2 million in the six-month period ended  June 30, 2021 following the collection of amounts previously written off, relating to accounts with charterers of sold vessels.

For the six-month period ended June 30, 2022 the Company recorded other operating expenses of $0.35 million that relates to the settlement of accounts with charterers.

These amounts are recorded under “Other operating (income) / expenses” in the unaudited condensed consolidated statements of comprehensive income.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

8. Long-Term Bank Loans

These consist of bank loans of the ship-owning companies. Outstanding long-term bank loans as of December 31, 2021 and June 30, 2022 are as follows:

The future annual loan repayments are as follows:

Details of the loans are discussed in Note 9 of our consolidated financial statements for the year ended  December 31, 2021 included in the 2021 Annual Report.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated financial statements

(All amounts expressed in U.S. Dollars)

8. Long-Term Bank Loans - continued

The Company’s bank loans are secured with one or more of the following:

The loan agreements contain covenants such as minimum requirements regarding the security cover ratio  (the ratio of fair value of vessel to outstanding loan less cash in retention accounts ranging from 120% to 140%), restrictions as to changes in management and ownership of the ship-owning companies, distribution of profits or assets (i.e. not permitting dividend payment or other distributions in cases that an event of default has occurred), additional indebtedness and mortgage of vessels without the lender’s prior consent, sale of vessels, maximum fleet-wide leverage, sale of capital stock of the Company’s subsidiaries, ability to make investments and other capital expenditures, entering in mergers or acquisitions, minimum cash balance requirements and minimum cash retention accounts (restricted cash). The loan agreements also require the Company to make deposits in retention accounts with certain banks that can only be used to pay the current loan installments. Minimum cash balance requirements are in addition to cash held in retention accounts. These cash deposits amounted to $4,967,285 and $5,575,234 as of  December 31, 2021 and  June 30, 2022, respectively, and are included in "Restricted cash" under "Current assets" and "Long-term assets" in the unaudited condensed consolidated balance sheets. As of  June 30, 2022, the Company satisfied all its debt covenants.

Interest expense, including loan fee amortization for the six-month periods ended  June 30, 2021 and 2022 amounted to $1,381,667 and $2,146,602, respectively.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated financial statements

(All amounts expressed in U.S. Dollars)

9. Commitments and Contingencies

There are no material legal proceedings to which the Company is a party or to which any of its properties are subject, other than routine litigation incidental to the Company's business. In the opinion of the management, the disposition of these lawsuits should not have a material impact on the consolidated results of operations, financial position and cash flows.

As of  June 30, 2022, future gross minimum revenues under non-cancellable time charter agreements total $385.2 million, $176.4 million of which is due in the period ending  June 30, 2023, $131.2 million is due in period ending  June 30, 2024, $64.4 million is due in period ending  June 30, 2025 and $13.2 million is due in period ending  June 30, 2026. In arriving at the future gross minimum revenues, the Company has deducted an estimated one off-hire day per quarter. Such off-hire estimate  may not be reflective of the actual off-hire in the future. In addition, the actual revenues could be affected by early delivery of the vessel by the charterers or any exercise of the charterers’ options to extend the terms of the charters, which however cannot be estimated and hence not reflected above.

As of  June 30, 2022, the Company had under construction nine container carriers with a total contracted amount of $352.9 million. An amount of $100.6 million is payable in the period ending  June 30, 2023, $157.9 million is payable in the period ending  June 30, 2024 and an amount of $56.7 million payable in the period ending December 31, 2024. The Company intends to finance these commitments with bank financing and own cash.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated financial statements

(All amounts expressed in U.S. Dollars)

10. Stock Incentive Plan

A summary of the status of the Company’s unvested shares as of  January 1, 2022, and changes during the six-month period ended  June 30, 2022, are presented below:

As of  June 30, 2022, there was $833,863 of total unrecognized compensation cost related to unvested share-based compensation arrangements granted. That cost is expected to be recognized over a weighted-average period of 0.62 years. The share-based compensation recognized relating to the unvested shares was $57,850 and $431,502 for the six-month periods ended  June 30, 2021 and 2022, respectively, and is included within “General and administrative expenses” in the unaudited condensed consolidated statements of comprehensive income.

The unvested shares will accrue dividends as declared and paid which will be retained by the Company until the shares vest at which time they are payable to the grantee. As of June 30, 2022 the unvested restricted shares accrued dividends of $31,675. As unvested restricted share grantees accrue dividends on awards that are expected to vest, such dividends are charged to retained earnings.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

11. Earnings Per Share

Basic and diluted earnings per common share is computed as follows:

The Company excluded the effect of its Series B preferred shares on  June 30, 2021, as they were anti-dilutive.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

12. Preferred shares, Common shares and Additional paid-in capital

A summary of the Company's “Preferred shares” is discussed in Note 16 of our consolidated financial statements for the year ended  December 31, 2021 included in the 2021 Annual Report.

In  January 2021, the Company agreed to redeem 2,000 of the outstanding balance of its Series B Preferred Shares and paid $2,000,000 to the Series B Preferred Shares shareholders. In connection with the redemption, the Company agreed with its Series B Preferred Shares shareholders to set the dividend rate of its Series B Preferred Shares to 8% per annum if paid in cash and 9% if paid in-kind at the Company’s option until    January 29, 2023, after which date the dividend rate would increase to 14%, and would be payable only in cash.

In  June 2021, the Company converted the remaining amount of 6,365 Series B Preferred Shares into common shares. The difference between (1) the fair value of the consideration transferred to the holders of the Series B Preferred Shares (comprising the cash payment and the shares offered) and (2) the carrying amount of the Series B Preferred Shares before the redemption and the conversion (net of issuance costs) amounted to $345,423, and was recorded as preferred deemed dividend.

For the six-month period ended  June 30, 2021 the Company declared two consecutive dividends totaling $0.26 million, which were accrued and paid in  July 2021. 

On May 23, 2022, the Company announced that its Board of Directors has approved a share repurchase program (“the Share Repurchase Program”) for up to a total of $20 million of the Company's common stock. The Board will review the program after a period of 12 months. Share repurchases will be made from time to time for cash in open market transactions at prevailing market prices or in privately negotiated transactions. The timing and amount of purchases under the program will be determined by management based upon market conditions and other factors. The program does not require the Company to purchase any specific number or amount of shares and may be suspended or reinstated at any time at the Company's discretion and without notice.

During the six months ended June 30, 2022, the Company repurchased 14,602 common shares under the Share Repurchase Program in open market transactions for an aggregate consideration of approximately $0.35 million. The repurchased shares were cancelled and removed from the Company’s share capital.

Pursuant to the reinstitution of the Company’s common stock dividend plan, during the six month period ended June 30, 2022, the Company declared and paid a cash dividend of $3.65 million (or $0.50 per common share for the first quarter of 2022).

13. Financial Instruments

The principal financial assets of the Company consist of cash and cash equivalents, restricted cash, trade accounts receivable, other receivables and derivatives. The principal financial liabilities of the Company consist of long-term bank loans, derivatives, trade accounts payable, accrued expenses and amount due to related company.

Interest rate risk

The Company enters into interest rate swap contracts as economic hedges to manage some of its exposure to variability in its floating rate long-term bank loans. Under the terms of the interest rate swaps the Company and Eurobank agree to exchange, at specified intervals the difference between a paying fixed rate and receiving floating rate interest amount calculated by reference to the agreed principal amounts and maturities. Interest rate swaps allow the Company to convert long-term bank loans issued at floating rates into equivalent fixed rates. Even though the interest rate swaps were entered into for economic hedging purposes, they do not qualify for hedge accounting, under the guidance relating to Derivatives and Hedging, as the Company does not have currently written contemporaneous documentation identifying the risk being hedged and, both on a prospective and retrospective basis, performing an effectiveness test to support that the hedging relationship is highly effective. Consequently, the Company recognizes the change in fair value of these derivatives in the “Gain on derivatives, net” in the unaudited condensed consolidated statements of comprehensive income. As of  June 30, 2022, the Company had three open swap contracts for a notional amount of $60.0 million.

Concentration of credit risk

Financial instruments, which potentially subject the Company to significant concentration of credit risk consist primarily of cash, trade accounts receivable and derivatives. The Company places its temporary cash investments, consisting mostly of deposits, with high credit qualified financial institutions. The Company performs periodic evaluation of the relative credit standing of these financial institutions that are considered in the Company’s investment strategy. The Company limits its credit risk with trade accounts receivable by performing ongoing credit evaluations of its customers’ financial condition and generally does not require collateral for its trade accounts receivable. The Company may be exposed to credit risk in the event of non-performance by its counterparties to derivative instruments; however, the Company limits its exposure by transacting with counterparties with high credit ratings.

Fair value of financial instruments

The estimated fair values of the Company's financial instruments such as cash and cash equivalents, restricted cash, trade accounts payables, accrued expenses and amount due to related company approximate their individual carrying amounts as of December 31, 2021 and June 30, 2022, due to their short-term maturity.  Cash and cash equivalents and restricted cash are considered Level 1 items as they represent liquid assets with short-term maturities. The fair value of the Company’s long-term bank loans, bearing interest at variable interest rates approximates their recorded values as of June 30, 2022, due to the variable interest rate nature thereof. LIBOR rates are observable at commonly quoted intervals for the full terms of the loans and hence fair values of the long-term bank loans are considered Level 2 items in accordance with the fair value hierarchy due to their variable interest rate, being the LIBOR.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

13. Financial Instruments - continued

Fair value of financial instruments - continued

The Company follows guidance relating to “Fair value measurements”, which establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosure about fair value measurements.  This statement enables the reader of the financial statements to assess the inputs used to develop those measurements by establishing a hierarchy for ranking the quality and reliability of the information used to determine fair values. The statement requires that assets and liabilities carried at fair value will be classified and disclosed in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities;

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data;

Level 3: Unobservable inputs that are not corroborated by market data.

The fair value of the Company’s interest rate swap agreement is determined using a discounted cash flow approach based on market-based LIBOR swap rates. LIBOR swap rates are observable at commonly quoted intervals for the full terms of the swaps and therefore are considered Level 2 items. The fair value of the interest rate swap determined through Level 2 of the fair value hierarchy as defined in guidance relating to “Fair value measurements” is derived principally from or corroborated by observable market data. Inputs include quoted prices for similar assets, liabilities (risk adjusted) and market-corroborated inputs, such as market comparables, interest rates, yield curves and other items that allow value to be determined.

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

13. Financial Instruments - continued

Fair value of financial instruments - continued

The amount of Gain on derivatives, net recognized in the unaudited condensed consolidated statements of comprehensive income, is analyzed as follows:

Euroseas Ltd. and Subsidiaries

Notes to Unaudited Condensed Consolidated Financial Statements

(All amounts expressed in U.S. Dollars)

14. Subsequent Events

The following event occurred after  June 30, 2022: