Paragon Shipping (PRGNF) 20-F/A 2012 FY Annual report (foreign) (amended)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 20-F/A

 o REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934

OR

 x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2012

OR

 o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to

OR

 o SHELL COMPANY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Date of event requiring this shell company report. . . . . . . . . . . .

Commission file number 001-33655

PARAGON SHIPPING INC.

(Exact name of Registrant as specified in its charter)

Paragon Shipping Inc.

(Translation of Registrant's name into English)

Republic of the Marshall Islands

(Jurisdiction of incorporation or organization)

15 Karamanli Ave., GR 166 73, Voula, Greece

(Address of principal executive offices)

Robert Perri, +30 210 891 4600, r.perri@paragonshipping.gr

15 Karamanli Ave., GR 166 73, Voula, Greece

(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

Securities registered or to be registered pursuant to Section 12(b) of the Act:

Title of each class Registered	Name of each exchange on which
Common shares, $0.001 par value	New York Stock Exchange
Preferred stock purchase rights	New York Stock Exchange

Securities registered or to be registered pursuant to Section 12(g) of the Act: None

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act: None

Indicate the number of outstanding shares of each of the issuer's classes of capital or common stock as of the close of the period covered by the annual report: As of December 31, 2012, there were 11,001,403 shares of the registrant's Common Stock, par value $0.001 per share, outstanding.

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

o Yes x No

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

o Yes x No

Note-Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 x Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes o No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See the definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer   o Accelerated filer    o Non-accelerated filer  x

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

U.S. GAAP x International Financial Reporting Standards as issued by the International Accounting Standards    o Other   o

If "Other" has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

o Item 17 o Item 18

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

o Yes x No

EXPLANATORY NOTE

The purpose of this Amendment No. 1 (the “Amendment No. 1”) to the Annual Report on Form 20-F of Paragon Shipping Inc. (the “Company”) for the year ended December 31, 2012, filed with the Securities and Exchange Commission (the “SEC”) on April 3, 2013 (the “Form 20-F”), is solely to correct a typographical error contained in the Report of Independent Registered Public Accounting Firm ofDeloitte Hadjipavlou, Sofianos & Cambanis S.A., regarding the Company’s consolidated financial statements appearing in the Form 20-F. The report was inadvertently dated April 27, 2013 and should be dated April 27, 2012, as shown herein, consistent with the manually signed audit report. No other changes have been made in this Amendment No. 1 to the Form 20-F.

In order to comply with certain requirements of the SEC’s rules in connection with the filing of this Amendment No. 1, this Amendment No. 1 includes Item 18. Financial Statements. This Amendment No. 1 does not, and does not purport to, amend, modify, update, restate or change in any way the information contained or disclosures made in the Form 20-F, including the previously reported consolidated financial statements. This Amendment No. 1 speaks as of the original filing date of the Form 20-F, and does not reflect events that may have occurred subsequent to the date the Form 20-F was filed with the SEC.

Consistent with the rules of the SEC, the certifications of the Company’s principal executive officer and principal financial officer as of the date of this Amendment No. 1 are attached as exhibits to this Amendment No. 1. The only change in these certifications from the certifications of the Company’s principal executive officer and principal financial officer filed as exhibits to the Form 20-F is their date.  In addition, the Company is also attaching as Exhibit 101 hereto the Interactive Data File disclosure furnished as Exhibit 101 to the Form 20-F.  No changes have been made to the Interactive Data File disclosure furnished as Exhibit 101 to this Amendment No. 1 from the Interactive Data File disclosure furnished as Exhibit 101 to the Form 20-F.

PART III

Item 18.                      Financial Statements

The following financial statements beginning on page F-1 are filed as a part of this annual report.

Item 19.                      Exhibits

Exhibit Number	Description
1012.1 1312.2 1313.1 1313.2	Rule 13a-14(a)/15d-14(a) Certification of Principal Executive Officer Rule 13a-14(a)/15d-14(a) Certification of Principal Financial Officer Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	The following financial information from Paragon Shipping Inc.'s Annual Report on Form 20-F for the fiscal year ended December 31, 2012, formatted in Extensible Business Reporting Language (XBRL): (1) Consolidated Balance Sheets as of December 31, 2011 and 2012; (2) Consolidated Statements of Comprehensive Income / (Loss) for the years ended December 31, 2010, 2011, and 2012; (3) Consolidated Statements of Shareholders' Equity for the years ended December 31, 2010, 2011, and 2012; (4) Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011, and 2012; and (5) Notes to Consolidated Financial Statements.

SIGNATURES

The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F/A and that it has duly caused and authorized the undersigned to sign this annual report on its behalf.

PARAGON SHIPPING INC.
By:	/s/ Robert Perri
Name: Robert Perri
Title:   Chief Financial Officer

Dated: April 18, 2013

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

	Page
Report of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets as of December 31, 2011 and 2012	F-5
Consolidated Statements of Comprehensive Income / (Loss) for the years ended December 31, 2010, 2011, and 2012	F-6
Consolidated Statements of Shareholders' Equity for the years ended December 31, 2010, 2011, and 2012	F-7
Consolidated Statements of Cash Flows for the years ended December 31, 2010, 2011, and 2012	F-8
Notes to Consolidated Financial Statements	F-9

F-1

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Paragon Shipping Inc.

We have audited the accompanying consolidated balance sheet of Paragon Shipping Inc. (the "Company") as of December 31, 2012, and the related consolidated statements of comprehensive income / (loss), shareholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Paragon Shipping Inc. at December 31, 2012, and the consolidated results of its operations and its cash flows for the year then ended, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Paragon Shipping Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated April 03, 2013 expressed an unqualified opinion thereon.

/s/ Ernst & Young (Hellas) Certified Auditors Accountants S.A

Athens, Greece

April 03, 2013

F-2

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Board of Directors and Shareholders of Paragon Shipping Inc.

We have audited Paragon Shipping Inc.'s internal control over financial reporting as of December 31, 2012, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Paragon Shipping Inc.'s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over Financial Reporting for the year ended December 31, 2012. Our responsibility is to express an opinion on the company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, Paragon Shipping Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of Paragon Shipping Inc. as of December 31, 2012, and the related consolidated statements of comprehensive income / (loss), shareholders' equity, and cash flows for the year then ended and our report dated April 03, 2013, expressed an unqualified opinion thereon.

/s/ Ernst & Young (Hellas) Certified Auditors Accountants S.A

Athens, Greece

April 03, 2013

F-3

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders of Paragon Shipping Inc.

Majuro, Republic of The Marshall Islands

We have audited the accompanying consolidated balance sheet of Paragon Shipping Inc. and subsidiaries (the "Company") as of December 31, 2011, and the related consolidated statements of comprehensive income / (loss), shareholders' equity, and cash flows for each of the two years in the period ended December 31, 2011. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Paragon Shipping Inc. and subsidiaries as of December 31, 2011, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2011, in conformity with accounting principles generally accepted in the United States of America.

/s/ Deloitte Hadjipavlou, Sofianos & Cambanis S.A.

Athens, Greece

April 27, 2012 (April 3, 2013 as to the effects of the reverse stock split described in Notes 1 and 12 to the consolidated financial statements.)

F-4

Paragon Shipping Inc.
Consolidated Balance Sheets
As of December 31, 2011 and 2012
(Expressed in United States Dollars - except for share data)
	Notes	2011			2012
Assets
Current assets
Cash and cash equivalents			14,563,517			17,676,885
Restricted cash			18,865,000			2,425,000
Trade receivables, net			851,157			2,060,453
Other receivables			827,330			729,766
Prepaid expenses			603,106			445,604
Due from related parties	Note 3		923,695			2,508,195
Inventories			823,759			920,013
Loan to affiliate	Notes 3, 20		-			4,000,000
Marketable securities	Note 11		-			567,288
Total current assets			37,457,564			31,333,204
Fixed assets
Vessels, net	Note 5		268,608,363			298,376,440
Advances for vessel acquisitions and vessels under construction	Note 4		63,450,706			49,592,684
Other fixed assets, net	Note 2		510,042			497,619
Total fixed assets, net			332,569,111			348,466,743
Investment in affiliate	Note 8		38,805,802			19,987,743
Loan to affiliate	Notes 3, 20		15,000,000			10,000,000
Other assets	Note 6		2,106,460			2,602,212
Restricted cash			6,135,000			7,585,000
Total Assets			432,073,937			419,974,902
Liabilities and Shareholders' Equity
Current liabilities
Trade accounts payable			2,359,131			2,597,253
Accrued expenses	Note 7		2,227,143			2,109,952
Due to related parties	Note 3		-			84,705
Interest rate swaps	Notes 10, 11		2,630,574			1,185,719
Deferred income			1,080,997			1,567,007
Current portion of long-term debt	Note 9		32,189,000			14,427,250
Total current liabilities			40,486,845			21,971,886
Long-term liabilities
Long-term debt	Note 9		169,096,000			181,114,926
Interest rate swaps	Notes 10, 11		1,266,945			1,367,577
Total long-term liabilities			170,362,945			182,482,503
Total Liabilities			210,849,790			204,454,389
Commitments and Contingencies	Note 19
Shareholders' Equity
Preferred shares, $0.001 par value; 25,000,000 authorized; none issued and outstanding	Note 12		-			-
Class A common shares, $0.001 par value; 750,000,000 authorized; 6,089,826 and 11,001,403 issued and outstanding at December 31, 2011 and 2012, respectively	Note 12		6,090			11,001
Class B common shares, $0.001 par value; 5,000,000 authorized; none issued and outstanding	Note 12		-			-
Additional paid-in capital	Note 12		447,618,572			460,094,256
Accumulated other comprehensive loss	Note 11		-			(627,104	)
Accumulated deficit			(226,400,515	)		(243,957,640	)
Total Shareholders' Equity			221,224,147			215,520,513
Total Liabilities and Shareholders' Equity			432,073,937			419,974,902

The accompanying notes are an integral part of the consolidated financial statements.

F-5

Paragon Shipping Inc.
Consolidated Statements of Comprehensive Income / (Loss)
For the years ended December 31, 2010, 2011 and 2012
(Expressed in United States Dollars - except for share data)
	Notes	2010			2011			2012
Revenue
Time charter revenue			118,382,601			92,093,426			53,218,975
Commissions (including related party of $1,427,823, $1,119,611 and $646,987 in 2010, 2011 and 2012, respectively)	Note 3		(6,682,492	)		(5,185,459	)		(2,918,296	)
Net Revenue			111,700,109			86,907,967			50,300,679
Expenses / (Income)
Voyage expenses	Note 2		412,849			979,987			1,855,964
Vessels operating expenses (including related party of $616,388, $581,021 and $660,474 in 2010, 2011 and 2012, respectively)	Notes 2, 3, 14		19,974,806			18,018,016			18,808,084
Dry-docking expenses (including related party of $120,506, $122,481 and $0 in 2010, 2011 and 2012, respectively)	Note 3		2,632,479			2,924,046			-
Management fees - related party	Notes 3, 12		4,292,291			4,780,500			4,094,744
Depreciation	Note 5		33,719,712			32,544,199			16,386,426
General and administrative expenses (including related party of $2,337,289, $5,265,799 and $3,304,116 in 2010, 2011 and 2012, respectively)	Notes 3, 13, 15		17,723,987			12,315,054			7,901,762
Impairment loss	Notes 5, 11		-			277,327,148			-
Bad debt provisions			-			-			124,717
(Gain) / Loss on sale of assets / vessel acquisition option	Note 5		(1,064,023	)		15,192,704			-
Gain from vessel early redelivery			(113,338	)		(1,947,947	)		-
Gain from marketable securities, net	Note 11		-			-			(414,235	)
Other income	Note 16		-			-			(750,715	)
Operating Income / (Loss)			34,121,346			(275,225,740	)		2,293,932
Other Income / (Expenses)
Interest and finance costs			(10,234,928	)		(9,349,714	)		(6,744,917	)
Loss on derivatives, net	Notes 10, 11		(2,611,920	)		(2,340,418	)		(714,074	)
Interest income (including related party of $0, $508,019 and $675,856 in 2010, 2011 and 2012, respectively)	Note 3		321,120			620,861			728,503
Equity in net income of affiliate	Note 8		-			2,749,866			1,986,590
Gain from debt extinguishment	Note 9		-			-			1,893,254
Loss on investment in affiliate	Notes 8, 11		-			-			(16,985,066	)
Foreign currency gain / (loss)			1,299,662			46,386			(15,347	)
Total Other Expenses, net			(11,226,066	)		(8,273,019	)		(19,851,057	)
Net Income / (Loss)			22,895,280			(283,498,759	)		(17,557,125	)
Other Comprehensive Income / (Loss)
Unrealized loss on cash flow hedges	Note 11		-			-			(847,943	)
Transfer of realized loss on cash flow hedges to earnings	Note 11		-			-			174,869
Equity in other comprehensive loss of affiliate	Note 8		-			-			(107,083	)
Unrealized loss on change in fair value of marketable securities	Note 11		-			-			(827,377	)
Transfer of impairment of marketable securities to earnings	Note 11		-			-			980,430
Total Other Comprehensive Loss			-			-			(627,104	)
Comprehensive Income / (Loss)			22,895,280			(283,498,759	)		(18,184,229	)
Earnings / (Loss) per Class A common share, basic and diluted	Note 18	$	4.43		$	(47.61	)	$	(2.84	)
Weighted average number of Class A common shares, basic and diluted	Note 18		4,981,272			5,793,792			6,035,910

The accompanying notes are an integral part of the consolidated financial statements.

F-6

Paragon Shipping Inc.
Consolidated Statements of Shareholders' Equity
For the years ended December 31, 2010, 2011 and 2012
(Expressed in United States Dollars - except for share data)
	Class A Shares
												Retained
							Additional			Accumulated		Earnings /
	Number of			Par			Paid-in			Comprehensive		(Accumulated
	Shares			Value			Capital			Loss		Deficit)			Total
Balance January 1, 2010		5,118,899			5,119			408,665,080			-		47,595,619			456,265,818
Issuance of Class A common shares, net of issuance costs		310,570			311			11,037,051			-		-			11,037,362
Issuance of non-vested Class A common share awards		158,400			158			(158	)		-		-			-
Cancellation of non-vested Class A common share awards		(843	)		(1	)		1			-		-			-
Share based compensation		-			-			10,687,663			-		-			10,687,663
Dividends paid ($2.00 per share)		-			-			-			-		(10,414,456	)		(10,414,456	)
Net Income		-			-			-			-		22,895,280			22,895,280
Balance December 31, 2010		5,587,026			5,587			430,389,637			-		60,076,443			490,471,667

Issuance of Class A common shares, net of issuance costs	395,260		395	12,140,001		-	-		12,140,396
Issuance of non-vested Class A common share awards	108,000		108	(108	)	-	-		-
Cancellation of non-vested Class A common share awards	(460	)	-	-		-	-		-
Share based compensation	-		-	5,089,042		-	-		5,089,042
Dividends paid ($0.50 per share)	-		-	-		-	(2,978,199	)	(2,978,199	)
Net Loss	-		-	-		-	(283,498,759	)	(283,498,759	)
Balance December 31, 2011	6,089,826		6,090	447,618,572		-	(226,400,515	)	221,224,147

Issuance of Class A common shares, net of issuance costs	4,911,761		4,912		9,938,981	-		-		9,943,893
Cancellation of non-vested Class A common share awards	(184	)	(1	)	1	-		-		-
Share based compensation	-		-		2,536,702	-		-		2,536,702
Net Loss	-		-		-	-		(17,557,125	)	(17,557,125	)
Other comprehensive loss	-		-		-	(627,104	)	-		(627,104	)
Balance December 31, 2012	11,001,403		11,001		460,094,256	(627,104	)	(243,957,640	)	215,520,513

The accompanying notes are an integral part of the consolidated financial statements.

F-7

Paragon Shipping Inc.
Consolidated Statements of Cash Flows
For the years ended December 31, 2010, 2011 and 2012
(Expressed in United States Dollars - except for share data)
	2010			2011			2012
Cash flows from operating activities
Net Income / (Loss)		22,895,280			(283,498,759	)		(17,557,125	)
Adjustments to reconcile net income / (loss) to net cash provided by operating activities
Depreciation		33,719,712			32,544,199			16,386,426
Impairment loss		-			277,327,148			-
Loss on investment in affiliate		-			-			16,985,066
(Gain) / Loss on sale of assets / vessel acquisition option		(1,064,023	)		15,192,704			-
Amortization of below and above market acquired time charters		(5,272,801	)		-			-
Amortization and write off of financing costs		907,310			1,502,521			447,573
Bad debt provisions		-			-			124,717
Share based compensation		10,687,663			5,089,042			2,536,702
Gain from marketable securities, net		-			-			(414,235	)
Gain from debt extinguishment		-			-			(1,893,254	)
Unrealized gain on interest rate swaps		(2,872,337	)		(1,517,932	)		(2,017,297	)
Equity in net income of affiliate net of dividends received		-			(1,202,991	)		1,202,991
Changes in assets and liabilities:
Trade receivables, net		1,099,735			236,147			(1,334,013	)
Other receivables		769,758			503,068			97,564
Prepaid expenses		(63,671	)		(74,631	)		157,502
Inventories		(144,996	)		242,562			(9,444	)
Due from related parties		(347,313	)		1,080,639			(1,587,798	)
Other long-term receivables		968,560			-			-
Trade accounts payable		(12,010	)		349,780			148,323
Accrued expenses		122,423			(3,332	)		(467,604	)
Due to related parties		-			-			84,705
Deferred income		(779,489	)		(2,302,736	)		486,010
Net cash from operating activities		60,613,801			45,467,429			13,376,809
Cash flow from investing activities
Net proceeds from sale of assets / vessel acquisition option		41,556,934			117,032,943			-
Acquisition of vessels and capital expenditures		(146,551,672	)		(53,074,242	)		(32,042,752	)
Payments for vessels under construction		(58,460,129	)		(4,987,324	)		-
Loan to affiliate		-			(30,000,000	)		-
Repayment from affiliate		-			15,000,000			1,000,000
Return of investment in affiliate		-			-			522,918
Other fixed assets		(206,246	)		(297,584	)		(172,410	)
Release of restricted cash		23,010,000			-			14,990,000
Increase of restricted cash		(1,500,000	)		-			-
Net cash (used in) / from investing activities		(142,151,113	)		43,673,793			(15,702,244	)
Cash flows from financing activities
Proceeds from long-term debt		70,000,000			26,000,000			28,908,750
Repayment of long-term debt		(86,500,000	)		(142,550,000	)		(32,758,319	)
Payment of financing costs		(1,648,201	)		(2,111,492	)		(673,709	)
Proceeds from the issuance of Class A common shares		11,220,566			12,555,470			10,000,000
Class A common shares offering costs		(292,840	)		(281,419	)		(37,919	)
Dividends paid		(10,414,456	)		(2,978,199	)		-
Net cash (used in) / from financing activities		(17,634,931	)		(109,365,640	)		5,438,803
Net (decrease) / increase in cash and cash equivalents		(99,172,243	)		(20,224,418	)		3,113,368
Cash and cash equivalents at the beginning of the period		133,960,178			34,787,935			14,563,517
Cash and cash equivalents at the end of the period		34,787,935			14,563,517			17,676,885
Supplemental disclosure of cash flow information
Cash paid during the period for interest (excluding capitalized interest)		8,745,571			6,955,861			5,122,625
Non-cash investing activities - fair value consideration of shares received for vessel sales		-			37,602,811			-
Non-cash financing activities - unpaid financing costs		167,737			-			269,616

The accompanying notes are an integral part of the consolidated financial statements.

F-8

Paragon Shipping Inc.

Notes to 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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") and include the accounts of Paragon Shipping Inc. and its wholly-owned subsidiaries (collectively the "Company") as discussed below as of December 31, 2011 and 2012 and for the years ended December 31, 2010, 2011 and 2012.

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 Notes 4, 5 and 9

F-9

Paragon Shipping Inc.

Notes to 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
Box Ships Inc. (1)	May 19, 2010	Marshall Islands

(1) Refer to Notes 3 and 5

In April 2011, the Company's wholly-owned subsidiary, Box Ships Inc., or Box Ships, completed its initial public offering ("IPO") of 11,000,000 shares of its common stock, par value $0.01 per share, at $12.00 per share on the New York Stock Exchange ("NYSE"). Its shares are listed under the symbol "TEU". At the closing of the IPO, the Company surrendered the 100 shares of capital stock of Box Ships, which were then cancelled.

Upon the closing of the IPO, the Company entered into the transactions discussed in Notes 3 and 5 with Box Ships. As of December 31, 2012, the Company and Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer, beneficially owned approximately 16.4% and 11.4%, respectively, of Box Ships outstanding common stock.

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). All share and per share amounts disclosed in the accompanying consolidated financial statements give effect to the respective stock split retroactively, for all the periods presented.

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 3).

Following the private placement and the issuance of 4,901,961 Class A Common shares to Innovation Holdings S.A. ("Innovation Holdings"), an entity beneficially owned by the Company's Chairman, President and Chief Executive Officer, Mr. Michael Bodouroglou became the controlling shareholder of the Company. Currently, Mr. Michael Bodouroglou beneficially owns 56.5% of the Company's common stock. Accordingly, Mr. Michael Bodouroglou, can control the outcome of matters on which stockholders are entitled to vote, including the election of the entire Board of Directors and other significant corporate actions (refer to Note 12).

F-10

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

1.           Basis of Presentation and General Information - Continued

Major Charterers: The following charterers individually accounted for more than 10% of the Company's charter revenue for the years ended December 31, 2010, 2011 and 2012:

Charterer	Percentage of time charter revenue
	2010	2011	2012
Korea Line Corporation	16.2%	-	-
Deiulemar Shipping S.P.A.	28.2%	27.7%	-
Cosco Bulk Carriers Ltd	12.6%	-	-
Deiulemar Compagnia Di Navigazione S.P.A.	10.7%	13.0%	-
Intermare Transport GmbH	10.9%	19.9%	24.1%
Morgan Stanley Capital Group Inc.	-	-	15.7%
Mansel Ltd.	-	-	16.6%
Cargill International S.A.	-	-	19.2%

2.           Significant Accounting Policies

(a) Principles of Consolidation: The consolidated financial statements incorporate the financial statements of the Company. Income and expenses of subsidiaries acquired or disposed of during the period are included in the consolidated statements of comprehensive income / (loss) from the effective date of acquisition and up to the effective date of disposal, as appropriate. All intercompany balances and transactions have been eliminated. Paragon, as the holding company, determines whether it has a controlling financial interest in an entity by first evaluating whether the entity is a voting interest entity or a variable interest entity. Under ASC 810 "Consolidation" a voting interest entity is an entity in which the total equity investment at risk is sufficient to enable the entity to finance itself independently and provides the equity holders with the obligation to absorb losses, the right to receive residual returns and the right to make financial and operating decisions. The holding company consolidates voting interest entities in which it owns all, or at least a majority (generally, greater than 50%) of the voting interest. Variable interest entities ("VIE") are entities as defined under ASC 810 that in general either do not have equity investors with voting rights or that have equity investors that do not provide sufficient financial resources for the entity to support its activities. The determination of whether a reporting entity is required to consolidate another entity is based on, among other things, the other entity's design and purpose and the reporting entity's power, through voting or similar rights, to direct the activities of the other entity that most significantly impact the other entity's economic performance. A controlling financial interest in a VIE is present when a company has the obligation to absorb losses or the right to receive benefits that could potentially be significant to the VIE, or both. Only one reporting entity, known as the primary beneficiary, is expected to be identified as having a controlling financial interest and thus is required to consolidate the VIE. The Company evaluates all arrangements that may include a variable interest in an entity to determine if it may be the primary beneficiary, and would be required to include assets, liabilities and operations of a VIE in its consolidated financial statements. As of December 31, 2011 and 2012, no such interest existed.

(b) Use of Estimates: The preparation of the consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

F-11

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

2.           Significant Accounting Policies – Continued

(c) Other Comprehensive Income / (Loss): The Company follows the accounting guidance relating to "Comprehensive Income," which requires separate presentation of certain transactions that are recorded directly as components of stockholders' equity. The Company has elected to present net income / (loss) and other comprehensive income / (loss) in a single continuous statement of comprehensive income / (loss) in its consolidated financial statements.

(d) Foreign Currency Translation: The functional currency of the Company is the U.S. Dollar. For other than derivative instruments, each asset, liability, revenue, expense, gain or loss arising from a foreign currency transaction is measured and recorded in the functional currency using the exchange rate in effect at the date of the transaction. As of balance sheet date, monetary assets and liabilities that are denominated in a currency other than the functional currency are adjusted to reflect the exchange rate prevailing at the balance sheet date and any gains or losses are included in the statements of comprehensive income / (loss). As of December 31, 2011 and 2012, the Company had no foreign currency derivative instruments.

(e) Cash and Cash Equivalents: The Company considers highly liquid investments such as time deposits and certificates of deposit with an original maturity of three months or less to be cash equivalents.

(f) Restricted Cash: Restricted cash represents pledged cash deposits or minimum liquidity required to be maintained under the Company's borrowing arrangements or in relation to bank guarantees issued on behalf of the Company. In the event that the obligation to maintain such deposits is expected to be terminated within the next twelve months, or relates to general minimum liquidity requirements with no obligation to retain such funds in retention accounts, these deposits are classified as current assets. Otherwise they are classified as non-current assets.

(g) Trade Receivables (net):Trade receivables (net), reflect the receivables from time charters, net of an allowance for doubtful accounts. At each balance sheet date, all potentially uncollectible accounts are assessed individually for purposes of determining the appropriate provision for doubtful accounts. Provision for doubtful accounts for the years ended December 31, 2011 and 2012 was $325,434 and $734,983, respectively.

(h) Insurance Claims: The Company records insurance claim recoveries for insured losses incurred on damages to fixed assets and for insured crew medical expenses under Other receivables. Insurance claims are recorded, net of any deductible amounts, at the time the Company's fixed assets suffer insured damages or when crew medical expenses are incurred, recovery is probable under the related insurance policies and the Company can make an estimate of the amount to be reimbursed following submission of the insurance claim.

(i) Inventories: Inventories consist of lubricants and stores on board the vessels. When vessels are unemployed or are operating under voyage charters, bunkers on board are recorded in inventories. Inventories are stated at the lower of cost or market. Cost is determined by the first in, first out method.

(j) Vessel Cost: Vessels are stated at cost, which consists of the contract price, less discounts, plus any direct expenses incurred upon acquisition, including improvements, commission paid, delivery expenses and other expenditures to prepare the vessel for her initial voyage. Financing costs incurred during the construction period of the vessels are also capitalized and included in the vessels' cost. Subsequent expenditures for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earning capacity or improve the efficiency or safety of the vessels. Repairs and maintenance are expensed as incurred.

F-12

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

2.           Significant Accounting Policies – Continued

(k) Impairment of Long-Lived Assets: The Company reviews its long-lived assets "held and used" for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. When the estimate of future undiscounted cash flows, excluding interest charges, expected to be generated by the use of the asset is less than its carrying amount, the Company evaluates the asset for an impairment loss. The Company measures an impairment loss as the difference between the carrying value of the asset and its fair value. In this respect, management regularly reviews the carrying amount of the vessels in connection with the estimated recoverable amount for each of the Company's vessels.

The undiscounted projected net operating cash flows for each vessel are determined by considering the contracted charter revenues from existing time charters for the fixed vessel days and an estimated daily time charter equivalent for the unfixed days (based on the most recent ten year historical average of similar size vessels) over the remaining estimated life of the vessel, assumed to be 25 years for drybulk carriers and 30 years for containerships from the date of initial delivery from the shipyard, net of brokerage commissions, the salvage value of each vessel, which is estimated to be $300 per lightweight ton, expected outflows for vessels' future dry-docking expenses and estimated vessel operating expenses, assuming an average annual inflation rate where applicable. The Company uses the historical ten-year average as it is considered a reasonable estimation of expected future time charter rates over the remaining useful life of the Company's vessels since it represents a full shipping cycle that captures the highs and lows of the market.

Since 2008, when the Company had identified impairment indications for the first time, the ten-year simple average of the one-year time charter rate was used for the computation of an estimated daily time charter rate for the unfixed days for each vessel type. In the fourth quarter of 2011, the Company reassessed its initial methodology and since then, it utilizes the standard deviation in order to eliminate the outliers of the sample before computing the historic ten-year average of the one-year time charter rate. This reassessment was the result of the continued poor performance of the drybulk charter market in 2011, and in particular the prolonged weakness noticed in the last quarter of 2011, which exceeded the Company's original expectations.

As of December 31, 2011, the impairment analysis had indicated an impairment loss of $271,587,148 relating to the write down to fair value of the carrying amount of six of the Company's vessels. As of December 31, 2012, the impairment analysis indicated no impairment on any of the Company's vessels.

(l) Vessels Held for Sale:The Company classifies vessels as being held for sale when the following criteria are met: (i) management is committed to sell the asset; (ii) the asset is available for immediate sale in its present condition; (iii) an active program to locate a buyer and other actions required to complete the plan to sell the asset have been initiated; (iv) the sale of the asset is probable, and transfer of the asset is expected to qualify for recognition as a completed sale within one year; (v) the asset is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and (vi) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Vessels classified as held for sale are measured at the lower of their carrying amount or fair value less cost to sell. These vessels are no longer depreciated once they meet the criteria of being held for sale.

(m) Vessel Depreciation: Depreciation is computed using the straight-line method over the estimated useful life of the vessels, after considering the estimated salvage value. Each vessel's salvage value is equal to the product of its lightweight tonnage and estimated scrap rate, which up until September 30, 2012, was estimated to be $150 per lightweight ton. In order to align the scrap rate estimates with the current historical average scrap rate, effective from October 1, 2012, the Company adjusted the estimated scrap rate used to calculate the vessels' salvage value from $150 to $300 per lightweight ton. The impact of the increase in the estimated scrap rate is a decrease in depreciation expense going forward. The effect of this change in accounting estimate, which did not require retrospective adoption as per ASC 250 "Accounting Changes and Error Corrections," was to decrease net loss for the year ended December 31, 2012 by $294,414 or $0.05 per Class A Common share, basic and diluted.

Management estimates the useful life of the Company's vessels to be 25 years for drybulk carriers and 30 years for containerships from the date of initial delivery from the shipyard, including secondhand vessels. Secondhand vessels are depreciated from the date of their acquisition through their remaining estimated useful life.

F-13

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

2.           Significant Accounting Policies – Continued

(n) Other Fixed Assets: Other fixed assets consist of computer systems installed on board the vessels to improve their efficiency, software and a vehicle. Other fixed assets are stated at cost, less accumulated depreciation. Depreciation is calculated using the straight-line method over the useful life of the assets, which is estimated to be 5 years for the computer systems software, and 3 years for the Company's car. Depreciation charged in the years ended December 31, 2010, 2011 and 2012 amounted to $26,219, $83,407 and $135,095, respectively.

(o) Investments in Affiliate: Investments in the common stock of entities, in which the Company has significant influence over operating and financial policies, are accounted for using the equity method. Under this method, the investment in the affiliate is initially recorded at cost and is adjusted to recognize the Company's share of the earnings or losses of the investee after the acquisition date and is adjusted for impairment whenever facts and circumstances indicate that a decline in fair value below the cost basis is other than temporary. The amount of the adjustment is included in the determination of net income / (loss). Dividends received from an affiliate reduce the carrying amount of the investment. When the Company's share of losses in an affiliate equals or exceeds its interest in the affiliate, the Company does not recognize further losses, unless the Company has incurred obligations or made payments on behalf of the affiliate.

(p) Dry-docking and Special Survey Costs: Dry-docking and special survey costs are expensed in the period incurred.

(q) Above / Below Market Acquired Time Charters: When vessels are acquired with time charters attached and the charter rate on such charters is above or below the prevailing market rates at the time of acquisition, the Company allocates the purchase price of the vessel and the attached time charter on a relative fair value basis.

The fair value of the attached time charter is computed as the present value of the difference between the contractual amount to be received over the term of the time charter and management's estimate of the then current market charter rate for an equivalent vessel at the time of acquisition. The asset or liability recorded is amortized or accreted over the remaining period of the time charter as a reduction or addition, respectively, to time charter revenue. As of December 31, 2011 and 2012 the Company had no unamortized Above / Below Market Acquired Time Charters.

(r) Financing Costs:Financing fees incurred for obtaining new loans and credit facilities are deferred and amortized to interest expense over the respective loan or credit facility using the effective interest rate method. Any unamortized balance of costs relating to loans repaid or refinanced is expensed in the period the repayment or refinancing is made, subject to the accounting guidance regarding debt extinguishment. Any unamortized balance of costs related to credit facilities repaid is expensed in the period. Any unamortized balance of costs relating to credit facilities refinanced are deferred and amortized over the term of the respective credit facility in the period the refinancing occurs, subject to the provisions of the accounting guidance relating to Debt – Modifications and Extinguishments. The unamortized financing costs are reflected in Other assets in the accompanying balance sheets.

(s) Debt restructurings: The Company accounts for debt modifications or restructuring as troubled debt restructuring when a lender for economic or legal reasons related to the Company's financial situation grants a concession that it would not otherwise consider. These concessions may include a reduction in the interest rate, principal or accrued interest, extension of the maturity date or other actions intended to minimize potential losses. The Company considers a lender to have granted a concession if the Company's effective interest rate on the restructured debt is less than the effective interest rate of the old debt immediately before the restructuring. The Company considersthe total future cash flows (defined as principal plus interest) of the restructured debt in comparison with the carrying value of the original debt. If a debt modification or restructuring is determined to be a troubled debt restructuring, the Company reduces the carrying amount of the debt when the debt balance is greater than the total future cash flows under the new terms, in which case a gain is recognized. When the total future cash flows of the restructured debt are greater than the carrying value at the date of amendment, the carrying value of the original debt is not adjusted. In a troubled debt restructuring in which the Company agrees to transfer assets to fully settle the debt, the Company recognizes a gain on restructuring for the difference between the carrying amount of the debt and the more clearly evident of: (a) the fair value of the transferred assets or (b) the fair value of the settled debt.

F-14

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

2.           Significant Accounting Policies – Continued

(t) Pension and Retirement Benefit Obligations—Crew: The vessel owning companies employ the crew on board under short-term contracts (usually up to nine months) and, accordingly, they are not liable for any pension or post-retirement benefits.

(u) Revenue and Expenses:

Revenue is recognized when a charter agreement exists, the vessel is made available to the charterer and collection of the related revenue is reasonably assured.

Time Charter Revenue: Time charter revenues are recorded ratably over the term of the charter as service is provided, including the amortization / accretion of the above / below market acquired time charters, where applicable. When two or more time charter rates are involved during the life term of a charter agreement, the Company recognizes revenue on a straight-line basis, and income accrued or deferred as a result is included in Other receivables or Deferred income, respectively. Time charter revenues received in advance of the provision of charter service are recorded as deferred income, and recognized when the charter service is rendered.

Commissions: Charter hire commissions are deferred and amortized over the related charter period and are presented separately in the accompanying consolidated statements of comprehensive income / (loss).

Voyage Expenses: 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, fuel costs and losses from the sale of bunkers to charterers and bunkers consumed during off-hire periods and while traveling to and from dry-docking for 2012, that in the aggregate amounted to $502,596. The sale of bunkers to charterers and bunkers consumed during off-hire periods and while traveling to and from dry-docking for 2010 and 2011 resulted in gains of $476,269 and $472,351 respectively, which are presented under Vessel operating expenses.

Vessel Operating Expenses: Vessel operating expenses are accounted for as incurred on the accrual basis. Vessel operating expenses include crew wages and related costs, the cost of insurance, expenses relating to repairs and maintenance, the cost of spares and consumable stores, and other miscellaneous expenses.

(v) Share based Compensation: Share based payments to employees and directors, including grants of employee and directors stock options, are recognized in the statements of comprehensive income / (loss) based on their grant date fair values and amortized over the required service period.

(w) Segment Reporting: The Company reports financial information and evaluates its operations by charter revenues and not by the length of ship employment for its customers (i.e., spot vs. time charters) or by geographical region as the charterer is free to trade the vessel worldwide and, as a result, the disclosure of geographical information is impracticable. The Company does not have discrete financial information to evaluate the operating results for each type of charter. Although revenue can be identified for these types of charters, management cannot and does not identify expenses, profitability or other financial information for these charters. As a result, management, including the Chief Executive Officer being the chief operating decision maker, reviews operating results solely by revenue per day and operating results of the fleet, and thus the Company has determined that it operates under one reportable segment.

F-15

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

2.           Significant Accounting Policies – Continued

(x) Derivatives: The Company enters into interest rate swap agreements to manage its exposure to fluctuations of interest rate risk associated with its borrowings. All derivatives are recognized in the consolidated financial statements at their fair value. The fair value of the interest rate derivatives is based on a discounted cash flow analysis. When such derivatives do not qualify for hedge accounting, the Company recognizes their fair value changes in current period earnings. When the derivatives qualify for hedge accounting, the Company recognizes the effective portion of the gain or loss on the hedging instrument directly in other comprehensive income / (loss), while the ineffective portion, if any, is recognized immediately in current period earnings. The Company, at the inception of the transaction, documents the relationship between the hedged item and the hedging instrument, as well as its risk management objective and the strategy of undertaking various hedging transactions. The Company also assesses at hedge inception of whether the hedging instruments are highly effective in offsetting changes in the cash flows of the hedged items.

The Company discontinues cash flow hedge accounting if the hedging instrument expires and it no longer meets the criteria for hedge accounting or designation is revoked by the Company. At that time, any cumulative gain or loss on the hedging instrument recognized in equity is kept in equity until the forecasted transaction occurs. When the forecasted transaction occurs, any cumulative gain or loss on the hedging instrument is recognized in current period earnings. If a hedged transaction is no longer expected to occur, the net cumulative gain or loss recognized in equity is transferred to current period earnings as financial income or expense.

(y) Fair value of financial instruments: The fair value of the interest rate derivatives is based on a discounted cash flow analysis.

In accordance with the requirements of accounting guidance relating to Fair Value Measurements, the Company classifies and discloses its assets and liabilities carried at fair value 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.

(z) Earnings per Share (EPS): The computation of basic earnings per share is based on the weighted average number of common shares outstanding during the year determined using the two-class method of computing earnings per share. Non-vested share awards issued are included in the two-class method and income attributable to non-vested share awards is deducted from the net income reported for purposes of calculating net income available to common shareholders used in the computation of basic earnings per share. The computation of diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised. Such securities include non vested stock awards for which the assumed proceeds upon grant are deemed to be the amount of compensation cost attributable to future services and are not yet recognized and common shares issuable upon exercise of the Company's outstanding warrants, to the extent that they are dilutive, using the treasury method.

(aa) Subsequent Events: The Company evaluates subsequent events or transactions up to the date in which the financial statements are issued according to the requirements of ASC 855.

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

F-16

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties

(a) Granitis Glyfada Real Estate Ltd. ("Granitis") - Leasing: On September 13, 2007 and effective as of October 1, 2007, the Company entered into a rental agreement to lease office space in Athens, Greece, with Granitis, a company beneficially owned by the Company's Chairman, President and Chief Executive Officer. The term of the lease was for 5 years beginning October 1, 2007 and expired on September 30, 2012. The monthly rental for the first year was €2,000, plus 3.6% tax, and thereafter would be adjusted annually for inflation increases in accordance with the official Greek inflation rate. On October 1, 2012, the rental agreement was renewed for an additional term of 5 years, beginning October 1, 2012 and expiring September 30, 2017, pursuant to which the monthly rental for the first year is €3,000, plus 3.6% tax, and thereafter will be adjusted annually for inflation increases in accordance with the official Greek inflation rate. Rent expense under this lease amounted to $35,489, $38,947 and $39,593 for the years ended December 31, 2010, 2011 and 2012, respectively, and is included in General and administrative expenses in the accompanying consolidated statements of comprehensive income / (loss).

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

	2010		2011		2012
(1(i)) Charter hire commissions	$	1,427,823	$	1,119,611	$	646,987
(1(ii)) Vessel sale & purchase commissions		418,000		2,091,028		-
Total Allseas commissions	$	1,845,823	$	3,210,639	$	646,987
Included in Vessel operating expenses
(1(v)) Superintendent fees	$	292,327	$	259,054	$	338,826
Included in Dry-docking expenses
(1(v)) Superintendent fees	$	120,506	$	122,481	$	-
Management fees - related party
(1(iii)) Management fees	$	3,647,448	$	4,022,215	$	3,428,548
(2) Legal, accounting and finance fees		418,384		509,869		666,196
(3) Loretto agreement		226,459		248,416		-
Total Management fees	$	4,292,291	$	4,780,500	$	4,094,744
Included in General and administrative expenses
(4) Administrative fees	$	31,867	$	33,207	$	36,085
(7) Executive services agreement		-	$	5,193,645	$	3,228,438

The following amounts charged by Allseas are capitalized and are included in vessels cost and advances for vessels under construction in the accompanying consolidated balance sheets: Technical management and superintendent fees (refer to 1A(iv)), relating to newbuilding vessels, and vessel purchase commissions (refer to 1A(ii)), which in the aggregate amounted to $1,026,499 and $1,479,827 for the years ended December 31, 2011 and 2012, respectively.

F-17

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties – Continued

(b) Allseas - Continued

(1) Ship-Owning Company Management Agreements

(i) Charter Hire Commissions - The Company pays Allseas 1.25% of the gross freight, demurrage and charter hire collected from the employment of the vessels ("charter hire commission"), which are presented separately in the accompanying consolidated statements of comprehensive income / (loss).

(ii) Vessel Commissions- The Company also pays Allseas a fee equal to 1% of the purchase price of any vessel bought, constructed or sold on behalf of the Company, calculated in accordance with the relevant memorandum of agreement, ("vessel commission"). Vessel commissions relating to vessel sale is included in the determination of the gain / loss on sale of assets presented in the accompanying consolidated statements of comprehensive income / (loss). Vessel commissions relating to vessels bought or constructed are capitalized and included in vessels cost and advances for vessels under construction in the accompanying consolidated balance sheets.

(iii) Management Fees - Each of the ship-owning companies has a management agreement with Allseas, under which management services are provided in exchange for a fixed monthly fee per vessel. For the five-month period ended May 31, 2010, the Company paid Allseas a technical management fee of $650 per vessel per day on a monthly basis in advance, pro rata for the calendar days these vessels are owned by the Company, and the fee was adjusted quarterly based on the Euro/U.S. dollar exchange rate. The management fee was increased on an annual basis on January 1, each year, by reference to the official Greek inflation rate for the previous year, as published by the Greek National Statistical Office. Effective June 1, 2010, the Company amended the agreement with Allseas and it pays Allseas a management fee of €620 per day per vessel. This amount is subject to adjustment on June 1 of each year based on the official Eurozone inflation rate. Effective June 1, 2011, Allseas management fee was adjusted to €636.74 per vessel per day, while effective June 1, 2012, Allseas management fee was adjusted to €652.02.

(iv) Pre-Delivery Services – A lump sum fee of $15,000 is payable to Allseas for pre-delivery services provided during the period from the date of the Memorandum of Agreement for the purchase of the vessel, until the date of delivery.

(v) Superintendent Fees – Prior to June 1, 2010, Allseas was entitled to a Superintendent fee of $550 per day for each day in excess of 5 days per calendar year for which a Superintendent performed on site inspection. Effective June 1, 2010, the Company amended the Superintendent fee from $550 to €500 (or $659.70 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.3194 as of December 31, 2012).

(2) Accounting Agreement – An amount of $418,384 for the year ended December 31, 2010, was paid to Allseas for legal, accounting and finance services that were provided. The agreement was amended effective June 1, 2010, pursuant to which Allseas is entitled to a fee of €250,000 per year, payable quarterly, for the provision of financial accounting services and a fee of €120,000 per year, payable quarterly, for the provision of financial reporting services. Effective January 1, 2012, the agreement was renewed, pursuant to which the fee for the provision of financial reporting services was amended to $30,000 per vessel per annum, payable quarterly. These fees are included in Management fees - related party in the accompanying consolidated statements of comprehensive income / (loss). For the years ended December 31, 2011 and 2012, an amount of $509,869 and $666,196, respectively, was paid to Allseas for financial accounting and reporting services.

F-18

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties – Continued

(b) Allseas - Continued

(3) Tripartite Agreement between the Company, Allseas and Loretto Finance Inc. - On November 10, 2009, the Company, Allseas, and Loretto Finance Inc. ("Loretto"), a wholly owned subsidiary of Allseas, signed a tripartite agreement, as clarified and amended by a supplemental agreement, effective from December 1, 2012, whereby 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 common shares issued pursuant to the Company's equity incentive plan as discussed in Note 13 (as the same may be further amended, amended and restated, supplemented or otherwise modified) or any future equity incentive plans may be adopted, the Company will 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. In accordance with the terms of the agreement, any common shares to be issued to Loretto under the agreement may only be issued once the capital increase, equity offering or third party issuance giving rise to the obligation to issue shares to Loretto under the agreement has closed and any applicable contingencies, forfeiture rights or conditions precedent relating to such capital increase, equity offering or third party issuance have lapsed or expired or have been cancelled or terminated, unless otherwise agreed by the mutual agreement of the parties. The fair value of the shares issued for no consideration are accounted as share based payment and presented as Management fees - related party in the year granted in the statement of comprehensive income / (loss). Accordingly, as of December 31, 2012, the Company has granted and issued to Loretto a total of 116,219 Class A Common shares, all of which were issued prior to 2012. Furthermore, in connection with the private placement to Innovation Holdings that closed in December 2012 and upon the finalization of the Company's debt restructuring as discussed in Note 9, effective February 15, 2013, an additional 98,039 Class A Common shares, representing 2.0% of the 4,901,961 newly-issued Class A Common shares sold to Innovation Holdings in the private placement, were granted to Loretto (refer to Note 12). The fair value of such shares based on the average of the high-low trading price of the shares on February 15, 2013, is $335,784, which will be recorded as share based compensation in the first quarter of 2013.

(4) Administrative Service Agreement - The Company entered into an administrative service agreement with Allseas on November 12, 2008. Under the agreement, Allseas will provide telecommunication services, secretarial and reception personnel and equipment, security facilities, office cleaning services and information technology services. The agreement provides that all costs and expenses incurred in connection with the provision of the above services by Allseas to be reimbursed on a quarterly basis.

(5) Newbuildings Supervision Agreement - The Company has also entered into management agreements with Allseas relating to the supervision of each of the contracted newbuilding vessels, pursuant to which Allseas is entitled to: (1) a flat fee of $375,000 ("flat fee") per vessel for the first 12 month period commencing from the respective steel cutting date of each vessel and thereafter the flat fee will be paid on a pro rata basis until the vessel's delivery to the Company, (2) a daily fee of €115 per vessel commencing from the date of the vessel's shipbuilding contract until the Company accepts delivery of the respective vessel and (3) €500 per day for each day in excess of 5 days per calendar year for which a superintendent performed on site inspection.

(6) Compensation Agreement – The Company has also entered into a compensation agreement with Allseas whereby in the event that Allseas is involuntarily terminated as the manager of its fleet, it shall compensate Allseas with an amount equal to the sum of (i) three years of the most recent management fees and commissions, based on the fleet at the time of termination, and (ii) €3,000,000.

F-19

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties – Continued

(b) Allseas - Continued

(7) Executive Services Agreement – Effective January 1, 2011, the Company entered into an executive services agreement with Allseas, pursuant to which Allseas provides the services of the executive officers, which include strategy, business development, marketing, finance and other services, who report directly to the Company's Board of Directors. Under the agreement, prior to January 1, 2013, Allseas was entitled to an executive services fee of €2,500,000 per annum, payable in equal monthly installments, plus incentive compensation. Effective January 1, 2013, the executive services fee was adjusted to €2,700,000 per annum. The agreement has an initial term of five years and automatically renews for successive five year terms unless sooner terminated. On March 6, 2013, the Company amended the terms of the termination clause of the executive services agreement, whereby, if the respective agreement is terminated by Allseas either for "good reason" or as a result of "change of control", as such terms are defined in the agreement, or terminated by the Company without "cause", as defined in the agreement, Allseas will be entitled to receive (i) the amount of the executive services fee payable through the "termination date," as defined in the agreement; (ii) compensation equal to three years' annual executive services fee then applicable; and (iii) an amount of the Company's common shares equal to 5% of the then issued and outstanding shares of the Company. For the year ended December 31, 2011, an amount of $5,193,645 was paid to Allseas for the services of the executive officers, which includes incentive compensation of $1,695,590. For the year ended December 31, 2012, an amount of $3,228,438 was paid to Allseas for the services of the executive officers, while no incentive compensation was remitted. In connection with the completion of the Company's debt restructuring as discussed in Note 9, the Company's Board of Directors approved an incentive compensation of €1,500,000 payable to Allseas. The payment of the €1,500,000 (or $1,960,500 based on the Euro/U.S. dollar exchange rate of €1.0000:$1.3070) was executed on February 28, 2013.

Each month, the Company funds a payment to Allseas to cover working capital equal to one month's worth 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, 2011 and 2012, the amount due from Management Company was $6,155 and $2,508,195, respectively.

(c) Consulting Agreements: Prior to January 1, 2011, the Company had consulting agreements with companies beneficially owned by the Company's Executive Directors and Internal Legal Counsel. Under the terms of the agreements, these entities provided the services of the individuals who served in the positions of Chief Executive Officer, Chief Operating Officer, Chief Financial Officer, and Internal Legal Counsel. For the year ended December 31, 2010 total expense incurred under the consulting agreements was $2,269,933 and is recorded in General and administrative expenses (refer to Note 15).

 (d) Manning Agency Agreements: Each of the Company's ship-owning subsidiaries has a manning agency agreement with Crewcare Inc., a company beneficially owned by the Company's Chief Executive Officer, based in Manila, Philippines. Effective January 1, 2010 through April 30, 2011, manning services were provided under the agreements in exchange for a fixed monthly fee of $85 per seaman for all officers and crew who serve on board each vessel, plus a recruitment fee of $110 per seaman, payable on a one-off basis. Effective May 1, 2011, the monthly manning service fee increased to $95 per seaman and the one-off recruitment fee increased to $120 per seaman. In addition, the agreements also provide for a fee of $30 per seaman for in-house training, and a fee of $50 per seaman for extra in-house training. The expenses incurred amounted to $324,061, $321,967, and $321,648 for the years ended December 31, 2010, 2011 and 2012, respectively, and are included in Vessels operating expenses. Administrative services are also being provided which represent payment of crew wages and related costs on behalf of the Company. The balances due to Crewcare Inc. amounted to $903 and $84,705 as of December 31, 2011 and 2012, respectively.

F-20

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties – Continued

(e) Box Ships Inc.: Box Ships Inc. was formed by the Company on May 19, 2010, to specialize in the container shipping industry. The Company paid on behalf of Box Ships for the pre-offering costs relating to the listing of Box Ships' shares on NYSE in April 2011, along with other minor operating expenses relating to the sale of vessels to Box Ships, discussed in Note 5. As of December 31, 2011 and 2012, the Company held 21.1% and 16.4% 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 4,285,715 common shares of Box Ships, which was completed on July 18, 2012 (refer to Note 8). The amount due from Box Ships as of December 31, 2011 was $917,540, which is included in Due from related parties in the accompanying balance sheets, was fully repaid in July 2012 and no amount due from Box Ships existed as of December 31, 2012.

On May 27, 2011, the Company granted Box Ships an unsecured loan of $30,000,000. The loan was initially payable in one installment on the second anniversary of the Box Ships IPO in April 2013. The loan may be prepaid in whole or in part at any time during the life of the facility. The loan bears interest at LIBOR plus a margin of 4.00%. In August 2011 and November 2012, Box Ships prepaid an amount of $15,000,000 and $1,000,000, respectively. In addition, in February 2013, Box Ships prepaid an amount of $1,000,000 and reduced the outstanding balance of the respective loan to $13,000,000. For the years ended December 31, 2011 and 2012, interest charged on the respective loan amounted to $508,019 and $675,856, respectively. On March 11, 2013, the Company agreed to amend the terms of the unsecured loan granted to Box Ships, in relation to the respective loan agreement dated May 27, 2011, as discussed in Note 20.

On April 19, 2011, the Company entered into an agreement with Box Ships and Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer, reflecting, among others, for so long as (i) Mr. Bodouroglou is a director or executive officer of both the Company and Box Ships and (ii) the Company owns at least 5% of the total issued and outstanding common shares of Box Ships, the provisions described below:

Box Ships will not, directly or indirectly, acquire or charter any drybulk carrier without the Company's prior written consent, and the Company will not, directly or indirectly, acquire or charter any containership without the prior written consent of Box Ships. In addition, under the terms of the agreement, Box Ships is granted a right of first offer on any proposed sale, transfer or other disposition of any containership owned by the Company. Furthermore, the Company will also grant Box Ships a right of first refusal over any employment opportunity for a containership presented or available to the Company with respect to any vessel owned by the Company, other than the two 4,800 TEU containership newbuildings subject to the option agreement with Box Ships described below.

If the Company ceases to beneficially own at least 5% of the total issued and outstanding common shares of Box Ships or Mr. Michael Bodouroglou is no longer a director or executive officer of both the Company and Box Ships, the obligations under this agreement will terminate.

 On April 19, 2011, the Company entered into an agreement with Box Ships, pursuant to which Box Ships was granted the option to acquire the two 4,800 TEU containerships under construction, which are scheduled to be delivered to the Company during the second quarter of 2014, by way of a novation of the relevant construction contract from the Company at any time prior to the applicable vessel's delivery to the Company, or purchase of such vessel at any time after its delivery to the Company, so long as the vessel is owned by the Company at such time. Under the terms of the agreement, the purchase price payable by Box Ships for each of the vessels shall be the greater of (i) the actual carrying cost of the vessel at the date the option is exercised, together with any actual expenses incurred by the Company in connection with the construction contract or the vessel; and (ii) the fair market value of the construction contract or the vessel at the date the option is exercised, as determined by the average of two independent ship broker's valuations, one selected by the Company and one selected by Box Ships. To the extent Box Ships does not exercise its options to acquire one or both of these vessels, the Company will be permitted to operate, or sell the vessels pursuant to a waiver that Box Ships will grant to the Company under the non-competition agreement described above, provided that Box Ships will be granted a right of first offer on any proposed sale, transfer or other disposition of the vessels. The Company will also be entitled to charter the vessels on a period charter commencing not more than 45 days after the vessels' delivery.

F-21

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

3.           Transactions with Related Parties – Continued

 (f) Right of First Refusal: Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer, has entered into a letter agreement with the Company which includes a provision requiring Mr. Bodouroglou to use commercially reasonable efforts to cause each company controlled by Mr. Bodouroglou to allow the Company to exercise a right of first refusal to acquire any drybulk carrier, after Mr. Bodouroglou or an affiliated entity of his enters into an agreement that sets forth terms upon which he or it would acquire a drybulk carrier. Pursuant to this letter agreement, Mr. Bodouroglou will notify a committee of the Company's independent directors of any agreement that he or an affiliated entity has entered into to purchase a drybulk carrier and will provide the committee of the Company's independent directors a 7 calendar day period in respect of a single vessel transaction, or a 14 calendar day period in respect of a multi-vessel transaction, from the date that he delivers such notice to the Company's audit committee, within which to decide whether or not to accept the opportunity and nominate a Company's subsidiary to purchase the vessel or vessels, before Mr. Bodouroglou will accept the opportunity or offer it to any of his other affiliates. The opportunity offered to the Company will be on no less favorable terms than those offered to Mr. Bodouroglou and his affiliates. A committee of the Company's independent directors will require a simple majority vote to accept or reject this offer.

4.           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.

As of December 31, 2011, the Company's newbuilding program consisted of four Handysize drybulk vessels with expected delivery in 2012 and two 4,800 TEU containerships with expected delivery in the fourth quarter of 2013. Each contract provides for payment of one advance deposit and final payment on delivery of each vessel. An amount of $57,484,350 and $3,605,900 was paid to the shipyard in 2010 and 2011, respectively, representing the first installment which was financed from the Company's own funds.

On May 4 and on June 18, 2012, the Company took delivery of its first two Handysize drybulk vessels; the M/V Prosperous Seas and the M/V Precious Seas, respectively. An amount of $29,328,882 was paid to the shipyard in 2012, representing the final installment of the respective vessels which was financed from the syndicated secured loan facility led by Nordea Bank Finland Plc and the Company's own funds (refer to Notes 5 and 9).

On September 24, 2012, the Company and the shipyard agreed to postpone the delivery dates of the Company's remaining vessels under construction and to change the apportionment of the advances already paid among the vessels under construction. The outstanding newbuilding installments relating to the remaining vessels under construction as of December 31, 2012, were amounted to $115,391,544.

On January 29, 2013, the Company took delivery of its third Handysize drybulk vessel; 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 (refer to Notes 5 and 9).

Under the amended shipbuilding contracts and based on the latest shipbuilding update from the shipyard, the remaining Handysize drybulk vessel (Hull no. 625) is expected to be delivered in the fourth quarter of 2013 and the two 4,800 TEU containerships (Hull no. 656 and Hull no. 657) are expected to be delivered in the second quarter of 2014.

The decrease in Advances for vessel acquisitions and vessels under construction during the year ended December 31, 2012, is attributable to the acquisition of the M/V Prosperous Seas and M/V Precious Seas discussed above, partially offset by the payment of capitalized expenses relating to vessels under construction.

F-22

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

5.           Vessels, Net

	Vessel			Accumulated			Net Book
	Cost			Depreciation			Value
Balance January 1, 2011	$	800,368,624		$	(105,220,397	)	$	695,148,227
Vessel acquisitions		53,074,242			-			53,074,242
Impairment loss		(366,233,564	)		88,906,416			(277,327,148	)
Sale of Vessel		(181,616,787	)		11,790,621			(169,826,166	)
Depreciation for the period		-			(32,460,792	)		(32,460,792	)
Balance December 31, 2011	$	305,592,515		$	(36,984,152	)	$	268,608,363
Newbuilding deliveries		46,019,408			-			46,019,408
Depreciation for the period		-			(16,251,331	)		(16,251,331	)
Balance December 31, 2012	$	351,611,923		$	(53,235,483	)	$	298,376,440

All Company's vessels were first-priority mortgaged as collateral to the loans and credit facilities and related interest rate swaps outstanding as at December 31, 2012.

On January 22, 2011, Allseas entered into an agreement to acquire the CMA CGM Kingfish, a 5,095-TEU 2007-built containership, from CMA CGM for $52,500,000. Allseas nominated a Company's vessel owning subsidiary as the actual buyer of CMA CGM Kingfish and, on March 16, 2011, the Company's Board of Directors approved the respective acquisition. The vessel was delivered to the Company on April 29, 2011.

Upon the closing of the IPO of Box Ships, the Company entered into the following transactions.

1. On April 19, 2011, the Company entered into Memoranda of Agreement for the sale of the containerships Box Voyager and Box Trader to Box Ships, for a total consideration of $95,016,975, which consisted of 2,266,600 shares of Box Ships' common stock, valued at $11.375 per share, and $69,234,400 in cash. The sale was completed on April 29, 2011, with the delivery of the vessels to Box Ships. As a result of the consideration received by the Company, being based on the price of Box Ships' common stock on the delivery date of the vessels, a loss of $8,832,206 was incurred.

2. On April 19, 2011, the Company entered into a Memorandum of Agreement for the sale of the containership CMA CGM Kingfish to Box Ships, for a total consideration of $47,585,836, which consisted of 1,170,900 shares of Box Ships' common stock, valued at $10.095 per share, and $35,765,600 in cash. The Company completed the sale and delivery of the vessel to Box Ships on May 19, 2011. As a result of the consideration received by the Company, being based on the price of Box Ships' common stock on the delivery date of the vessel, a loss of $5,964,265 was incurred.

An impairment loss of $5,740,000 arose due to the Company's intention to sell the M/V Crystal Seas in June 2011. On October 13, 2011, the Company entered into a Memorandum of Agreement for the sale of M/V Crystal Seas to an unaffiliated third party for $14,000,000, less 3% commission. The vessel was delivered to her new owners on November 2, 2011, and a loss of $396,233 was incurred.

As of December 31, 2011, the Company reviewed the carrying amount in connection with the estimated recoverable amount for each of its vessels. The review indicated that such carrying amount was not recoverable for six of the Company's vessels; the M/V Coral Seas, the M/V Golden Seas, the M/V Diamond Seas, the M/V Pearl Seas, the M/V Sapphire Seas and the M/V Friendly Seas. Therefore, the Company recognized an impairment loss of $271,587,148, which was included in the consolidated statements of comprehensive income / (loss) for the period (refer to Note 11).

On May 4 and on June 18, 2012, the Company took delivery of its first two Handysize drybulk vessels; the M/V Prosperous Seas and the M/V Precious Seas, respectively, while on January 29, 2013, the Company took delivery of its third Handysize drybulk vessel; the M/V Priceless Seas (refer to Notes 4 and 9).

F-23

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

6.           Other Assets

Other assets of $2,106,460 and $2,602,212 as of December 31, 2011 and 2012, respectively, include deferred financing costs of $2,100,277 and $2,596,029, respectively, and utility deposits related to the leased office space of $6,183 at December 31, 2011 and 2012.

The deferred financing costs comprise:

January 1, 2011	$	1,491,306
Additions		2,111,492
Amortization		(1,502,521	)
December 31, 2011	$	2,100,277
Additions		943,325
Amortization		(447,573	)
December 31, 2012	$	2,596,029

7.           Accrued Expenses

Accrued expenses shown in the accompanying consolidated balance sheets are analyzed as follows:

	2011		2012
Loan and swap interest	$	502,930	$	479,024
Voyages expenses		370,877		246,183
Vessel operating expenses		754,946		766,332
Dry-docking expenses		70,611		20,927
Financing expenses		188,096		295,455
Professional fees		316,244		177,994
Other sundry liabilities and accruals		23,439		124,037
Total	$	2,227,143	$	2,109,952

F-24

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

8.           Investment in Affiliate

The following table is a reconciliation of the Company's investment in affiliate as presented on the 2012 accompanying consolidated balance sheet:

Balance, January 1, 2011	$	-
Investment in affiliate		37,602,811
Equity in net income of affiliate		2,749,866
Dividends received		(1,546,875	)
Balance, December 31, 2011	$	38,805,802
Equity in net income of affiliate		1,986,590
Equity in other comprehensive loss of affiliate		(107,083	)
Dividends received		(3,712,500	)
Dilution effect		(2,943,720	)
Impairment in investment in affiliate		(14,041,346	)
Balance, December 31, 2012	$	19,987,743

As of December 31, 2011 and 2012, the Company held 3,437,500 shares or 21.1% and 16.4% of Box Ships' common stock, respectively (refer to Notes 3 and 5). The Company, on the basis of significant influence exercised over Box Ships through its shareholdings, shared executive management and the outstanding unsecured loan dated May 27, 2011, accounted for its investment in Box Ships under the equity method and is separately reflected on Company's consolidated balance sheets.

Based on the closing price of Box Ships' common share as of September 30, 2012, of $5.95, 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 $20,453,125. As of September 30, 2012, the Company considered 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 impaired.

The loss on investment in affiliate of $16,985,066 for the year ended December 31, 2012, consists of $2,943,720, relating to the dilution effect from the Company's non-participation in the public offering of 4,285,715 common shares of Box Ships, which was completed on July 18, 2012, as well as $14,041,346, relating to the difference between the fair value and the book value of the Company's investment in Box Ships as of September 30, 2012.

Based on the closing price of Box Ship's common share as of December 31, 2012, of $4.10, the fair value of the investment in Box Ships was $14,093,750. As of December 31, 2012, the Company did not considered 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 further impaired.

F-25

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

8.           Investment in Affiliate - Continued

On March 18, 2013, Box Ships completed a public offering of 4,000,000 shares. Following the completion of this offering, the Company's ownership of Box Ships' common stock reduced to 13.8%. A loss representing the dilution effect due to the Company's non-participation in the offering will be recorded in the Company's financial statements in the first quarter of 2013. The dilution effect will be based on the equity position of Box Ships as of March 31, 2013, which is not currently available.

Summarized financial information in respect of Box Ships Inc. is set out below:

	Year ended December 31,
INCOME STATEMENT DATA	2011		2012
Net revenue		38,272,662		65,888,142
Operating income		17,467,824		21,697,724
Net income		12,953,386		13,176,164

	As of December 31,
BALANCE SHEET DATA	2011		2012
Total current assets		16,294,791		19,578,166
Total non-current assets		385,116,095		425,485,703
Total assets		401,410,886		445,063,869
Total current liabilities		22,357,768		42,659,883
Total long-term liabilities		196,692,041		181,624,703

F-26

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities

The table below presents the loans and credit facilities and the amounts outstanding as of December 31, 2011 and 2012:

	2011		2012
(a)Commerzbank AG	$	55,575,000	$	50,550,000
(b)Unicredit Bank AG (Bayerische Hypo-und Vereinsbank AG)		29,585,000		25,587,000
(c)Bank of Scotland Plc		55,000,000		36,616,864
(d)Bank of Ireland		17,500,000		14,800,000
(e)HSH Nordbank AG		23,625,000		22,125,000
(f)HSBC Bank Plc		20,000,000		18,400,000
(g)Nordea Bank Finland Plc		-		27,463,312
Total	$	201,285,000	$	195,542,176

Disclosed as follows in the Consolidated Balance Sheets
Current portion of long-term debt	$	32,189,000	$	14,427,250
Long-term debt		169,096,000		181,114,926
Total	$	201,285,000	$	195,542,176

The minimum annual principal payments, in accordance with the loans and credit facilities agreements, as amended, required to be made after December 31, 2012 are as follows:

To December 31,
2013	$	14,427,250
2014		18,257,750
2015		50,266,114
2016		30,036,750
2017		57,529,312
Thereafter		25,025,000
Total	$	195,542,176

F-27

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities - Continued

(a) Commerzbank AG: On November 29, 2007, Paragon Shipping Inc. (the "Borrower") entered into a senior secured revolving credit facility with Commerzbank AG that, subject to certain provisions, provided the Company with an amount of up to $250,000,000. On August 12, 2011, the Company entered into an agreement with Commerzbank AG to refinance up to $57,000,000 of the outstanding indebtedness related to this facility and prepaid $10,676,509. On February 8, 2013, the Company entered into an amending and restating agreement and agreed to amended terms with Commerzbank AG, including the deferral of a portion of seven of its scheduled quarterly installments.

The main terms and conditions of the loan agreement dated August 12, 2011, as subsequently amended, are as follows:

· The loan agreement is secured by a first priority mortgage on the vessels: M/V Sapphire Seas, M/V Pearl Seas and M/V Diamond Seas.

· The loan bears interest at LIBOR, plus any mandatory costs, plus a margin of (i) 3.00% at any time during the total deferred amount of the loan remains outstanding and (ii) at all other times 2.35%.

· After exercising the deferral option, the outstanding loan amount as of December 31, 2012 of $50,550,000 is required to be repaid in 6 consecutive quarterly installments of $750,000, followed by 1 consecutive quarterly installment of $1,250,000, followed by 12 consecutive quarterly installments of $1,425,000, plus a balloon repayment of $27,700,000 payable simultaneously with the final installment in the third quarter of 2017.

Covenants (as defined in the respective loan agreement):

· The ratio of EBITDA to net interest expenses shall be applicable and not be less than 2.50:1.00 from January 1, 2015 until December 31, 2015 and 3.00:1.00 thereafter.

· The market value adjusted net worth of the Company shall not be less than $75,000,000 until June 30, 2014 and $100,000,000 thereafter.

· Maintain liquid assets in an amount of no less than $650,000 per vessel at any time when the Borrower is not paying any dividends or making any other form of distribution, and an amount equal to six months debt service at any time when the Borrower decides to pay dividends or make any other form of distribution.

· The ratio of maximum net debt to total assets expressed as a percentage shall not exceed 80%.

· The aggregate fair market value of the mortgaged vessels to outstanding loan ratio shall exceed 65% until March 31, 2014, 85% until June 30, 2014, 110% until March 31, 2015, 118% until December 31, 2015 and 120% thereafter.

F-28

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loan and Credit Facilities - Continued

(b) Unicredit Bank AG (Bayerische Hypo-und Vereinsbank AG): On November 19, 2007, Paragon Shipping Inc. (the "Borrower") entered into a secured credit facility with Unicredit Bank AG that, subject to certain provisions, provided the Company with an amount of up to $100,000,000. On October 27, 2011, the Company entered into a loan supplemental agreement and agreed to amended terms with Unicredit Bank AG. The Company also agreed to prepay an amount of $7,000,000 that was prepaid on November 2, 2011. In addition, following the sale of M/V Crystal Seas on November 2, 2011, the then outstanding loan amount allocated to the M/V Crystal Seas was fully repaid and the mortgage of the vessel was released. On November 30, 2012, the Company entered into a loan supplemental agreement and agreed to amended terms with Unicredit Bank AG, including the deferral of a portion of eight of its scheduled quarterly installments.

The main terms and conditions of the loan agreement dated November 19, 2007, as subsequently amended, are as follows:

· The loan agreement is secured by a first priority mortgage on the vessels: M/V Calm Seas and M/V Deep Seas.

· The loan bears interest at LIBOR, plus a margin of (i) 2.75% on the outstanding amount of the loan, less any amounts that are deferred, and (ii) 5.00% on the amounts of the loan that have been deferred.

· After exercising the deferral option, the outstanding loan amount as of December 31, 2012 of $25,587,000 is required to be repaid in 7 consecutive quarterly installments of $500,000, followed by 8 consecutive quarterly installments of $1,355,500, plus a balloon repayment of $11,243,000 payable simultaneously with the final installment in the third quarter of 2016.

Covenants (as defined in the respective loan agreement):

· The ratio of total liabilities to EBITDA is waived until December 31, 2013 and thereafter, shall not be greater than 6.00:1.00.

· The minimum requirement of market value adjusted net worth of the Company is waived until December 31, 2013 and thereafter, shall not be less than $100,000,000.

· Maintain liquid assets in an amount of no less than $750,000 per vessel at all times.

· The leverage ratio is waived until December 31, 2013 and thereafter, shall not be greater than 0.75:1.00.

· The aggregate fair market value of the mortgaged vessels to outstanding loan ratio is waived until December 31, 2013 and thereafter, shall exceed 110%, subject to further conditions in the event of dividend payment.

F-29

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loan and Credit Facilities - Continued

(c) Bank of Scotland Plc: On December 4, 2007, Paragon Shipping Inc. (the "Borrower") entered into a secured revolving credit facility with Bank of Scotland Plc that, subject to certain conditions, provided the Company with an amount of up to $89,000,000. On April 26, 2012, the Company entered into a supplemental agreement and agreed to amended terms with Bank of Scotland Plc. Under the terms of the supplemental agreement, the bank agreed to extend the respective loan agreement from December 9, 2012 to July 9, 2013 and to defer payment of $40,100,000 of the lump sum payment due in December 2012 to 2013, provided the Company is in full compliance with the respective loan agreement as of December 9, 2012, to waive certain covenants for the period commencing on December 31, 2011 and ending on June 30, 2012 and to amend certain covenants. The Company also prepaid an amount of $9,900,000 on May 9, 2012. On November 30, 2012, the Company entered into a second amending and restating agreement and agreed to amended terms with Bank of Scotland Plc, including the extension of the facility to the third quarter of 2015. The Company also agreed to a payment of $2,839,882 in order to facilitate the full and final settlement of the portion of the loan of one of the syndicate members equal to $4,733,136. The advance payment of $2,839,882 was executed on December 10, 2012, resulting in a gain from debt extinguishment of $1,893,254, or $0.31 per basic and diluted common share, that was recorded in the fourth quarter of 2012 (refer to Note 2).

The main terms and conditions of the loan agreement dated December 4, 2007, as subsequently amended, are as follows:

· The loan agreement is secured by a first priority mortgage on the vessels: M/V Coral Seas and M/V Golden Seas.

· The loan bears interest at LIBOR, plus a margin of 2.75%.

· The outstanding loan amount as of December 31, 2012 of $36,616,864 is required to be repaid in 6 consecutive quarterly installments of $750,000, followed by 4 consecutive quarterly installments of $1,000,000, plus a balloon repayment of $28,116,864 payable in the third quarter of 2015.

Covenants (as defined in the respective loan agreement):

· The market value adjusted net worth of the Company shall not be less than $75,000,000.

· The leverage ratio shall not exceed 0.80:1.00 until December 31, 2014 and 0.75:1.00 thereafter.

· Maintain liquid assets in an amount of no less than $500,000 per vessel at all times.

· The aggregate fair market value of the mortgaged vessels to outstanding loan ratio shall be applicable and exceed 65% from March 31, 2013 until September 30, 2013, then 70% until December 31, 2013, 85% until June 30, 2014, 95% until December 31, 2014 and 100% thereafter.

F-30

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities – Continued

(d) Bank of Ireland: On March 30, 2009, Paragon Shipping Inc. (the "Borrower") entered into a secured revolving credit facility with Bank of Ireland that provided the Company an amount of up to $30,000,000 for the purpose of refinancing the then existing indebtedness with Bank of Ireland. On November 28, 2012, the Company entered into a loan supplemental agreement and agreed to amended terms with Bank of Ireland, including the extension of the facility to the second quarter of 2017.

The main terms and conditions of the loan agreement dated March 30, 2009, as subsequently amended, are as follows:

· The loan agreement is secured by a first priority mortgage on the vessel M/V Kind Seas.

· The loan bears interest at LIBOR, plus a margin of 2.50%.

· The outstanding loan amount as of December 31, 2012, of $14,800,000 is required to be repaid in 6 consecutive quarterly installments of $350,000, followed by 12 consecutive quarterly installments of $1,000,000, plus a balloon repayment of $700,000 payable in the second quarter of 2017.

Covenants (as defined in the respective loan agreement):

· The ratio of the aggregate financial indebtedness to EBITDA is waived until December 31, 2014 and thereafter, shall not exceed 5.00:1.00.

· The minimum requirement of market value adjusted net worth of the Company is waived until December 31, 2014 and thereafter, shall not be less than $50,000,000.

· The leverage ratio is waived until December 31, 2014 and thereafter, shall not be greater than 0.80:1.00.

· Minimum liquid assets requirement is waived until December 31, 2014 and thereafter, the Borrower shall maintain liquid assets in an amount of no less than $500,000 per vessel at all times.

· The fair market value of the mortgaged vessel to outstanding loan ratio is waived until December 31, 2014 and thereafter, shall exceed 110%.

(e) HSH Nordbank AG: On July 31, 2008, Paragon Shipping Inc. (the "Borrower") entered into loan with HSH Nordbank that, subject to certain conditions, provided the Company with an amount of up to $51,500,000. On September 1, 2011, the Company entered into a loan supplemental agreement and agreed to amended terms with HSH Nordbank. The Company also agreed to prepay an amount of $10,000,000 that was prepaid on September 6, 2011. On January 22, 2013, the Company entered into a loan supplemental agreement and agreed to amended terms with HSH Nordbank.

The main terms and conditions of the loan agreement dated July 31, 2008, as subsequently amended, are as follows:

· The loan is secured by a first priority mortgage on the vessel M/V Friendly Seas.

· The loan bears interest at LIBOR, plus a margin of 3.00%.

· The outstanding loan amount as of December 31, 2012, of $22,125,000 is required to be repaid in 23 consecutive quarterly installments of $375,000, plus a balloon repayment of $13,500,000 payable simultaneously with the final installment in the third quarter of 2018.

F-31

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loan and Credit Facilities - Continued

(e) HSH Nordbank AG - Continued

Covenants (as defined in the respective loan agreement):

· The market value adjusted net worth of the Company shall not be less than $75,000,000 until December 31, 2014 and $100,000,000 thereafter.

· The leverage ratio shall not exceed 0.80:1.00 until December 31, 2014 and 0.70:1.00 thereafter.

· Maintain liquid assets of an amount equal to at least $500,000 per vessel at all times.

· The fair market value of the mortgaged vessel to outstanding loan ratio shall be applicable and exceed 100% from January 1, 2014 until December 31, 2014 and 125% thereafter.

 (f) HSBC Bank Plc: On July 2, 2010, a secured loan facility was signed with HSBC Bank Plc that, subject to certain conditions, provided the Company with an amount of $22,000,000. On November 30, 2012, the Company entered into a loan supplemental agreement and agreed, subject to several conditions discussed at the end of this note, to amended terms with HSBC Bank Plc.

The main terms and conditions of the loan agreement dated July 2, 2010, as subsequently amended, are as follows:

· The loan is secured by a first priority mortgage on the vessel M/V Dream Seas.

· The loan bears interest at LIBOR, plus a margin of 3.00% until December 31, 2013 and 2.60% thereafter.

· The outstanding loan amount as of December 31, 2012, of $18,400,000 is required to be repaid in 31 consecutive quarterly installments of $400,000, plus a balloon repayment of $6,000,000 payable simultaneously with the final installment in the third quarter of 2020.

Covenants (as defined in the respective loan agreement):

· The ratio of total liabilities to EBITDA is waived until December 31, 2013 and thereafter, shall not exceed 7.00:1.00.

· The ratio of EBITDA to interest expense is waived until December 31, 2013 and thereafter, shall not be less than 2.50:1.00.

· The market value adjusted net worth of the Company shall be at least $50,000,000 until December 31, 2013 and $100,000,000 thereafter.

· The ratio of total liabilities to value adjusted total assets shall be applicable and not greater than 0.80:1.00 from January 1, 2014 until the final maturity of the facility.

· The fair market value of the mortgaged vessel to outstanding loan ratio shall exceed 105% until December 31, 2013, 110% until December 31, 2014 and 120% thereafter.

F-32

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities - Continued

(g) Nordea Bank Finland Plc: On May 5, 2011, a secured loan facility was signed with a syndicate of major European banks led by Nordea Bank Finland Plc for an amount of up to $89,515,100 to finance 65% of the purchase price of the Company's drybulk newbuilding vessels. Following the conversion of the Company's final Kamsarmax newbuilding contract in August 2011, the Company agreed to reduce the available amount under the respective secured loan facility to $66,911,500. The amended secured loan facility is comprised of four advances, one for each drybulk newbuilding vessel, available upon delivery of each vessel. On May 4 and on June 18, 2012, the Company took delivery of its first two Handysize drybulk vessels; the M/V Prosperous Seas and the M/V Precious Seas, respectively (refer to Notes 4 and 5). Upon the delivery of each of the respective vessels, the Company proceeded with the drawdown of the available loan amount that in the aggregate amounted to $28,908,750. On January 29, 2013, the Company took delivery of its third Handysize drybulk vessel; the M/V Priceless Seas (refer to Notes 4 and 5). Upon the delivery of the M/V Priceless Seas, no additional loan amount was drawn and the respective vessel is not subject to any mortgage.

On January 30, 2013, the Company entered into a loan supplemental agreement and agreed to amended terms with Nordea Bank Finland Plc, including the extension of the availability period of the undrawn portion of the facility from July 31, 2013 to April 28, 2014. In addition, the undrawn portion of the secured loan facility relating to the M/V Priceless Seas and the Hull no. 625, was amended to be the lower of $33,802,880 and an amount equal to (i) 65% of the aggregate fair market value of the respective vessels and the already mortgaged vessels, 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. In addition, the outstanding loan due from Box Ships must be repaid in full before the Company is permitted to draw the undrawn portion of the facility.

The main terms and conditions of the loan agreement dated May 5, 2011, as subsequently amended, are as follows:

· The loan is secured by a first priority mortgage on the vessels: M/V Prosperous Seas and M/V Precious Seas.

· The loan bears interest at LIBOR, plus any mandatory costs, plus a margin of 3.50% until December 31, 2014 and 2.75% thereafter.

· The outstanding loan amount as of December 31, 2012, of $27,463,312 is required to be repaid in 18 consecutive quarterly installments of $481,813, plus a balloon repayment of $18,790,678 payable simultaneously with the final installment in the second quarter of 2017.

Covenants (as defined in the respective loan agreement):

· The Company shall maintain a positive working capital at all times, excluding any balloon repayments of long-term loan facilities.

· There is available to the Borrower cash and cash equivalents (including restricted but unpledged cash representing minimum liquidity required to be maintained under any financial indebtedness) which are not subject to any security interest, in an amount of not less than the greater of (i) $10,000,000 or (ii) $750,000 per vessel owned on the last day of the relevant test period.

· The ratio of EBITDA to interest expense is waived until December 31, 2014 and thereafter, shall not be less than 2.50:1.00.

· The ratio of the aggregate financial indebtedness net of cash and cash equivalents (including restricted but unpledged cash representing minimum liquidity required to be maintained under any financial indebtedness) to EBITDA is waived until December 31, 2014 and thereafter, shall not be greater than 5.00:1.00.

F-33

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities - Continued

(g) Nordea Bank Finland Plc - Continued

· The ratio of the aggregate financial indebtedness net of cash and cash equivalents (including restricted but unpledged cash representing minimum liquidity required to be maintained under any financial indebtedness) to the market value adjusted total assets shall not exceed 0.80:1.00 until December 31, 2014 and 0.70:1.00 thereafter.

· The fair market value of the mortgaged vessels to outstanding loan ratio shall exceed 120% until December 31, 2014 and 130% thereafter.

Additional Covenants: Each of the above loan and credit facilities are secured by first priority mortgages on all vessels described in Note 1, other than the M/V Priceless Seas as discussed above, first assignments of all freights, earnings and insurances. They also contain covenants that require the Company to maintain adequate insurance coverage and to obtain the lender's consent before it changes the flag, class or management of the vessels, or enter into a new line of business. The facility includes customary events of default, including those relating to a failure to pay principal or interest, a breach of covenant, representation and warranty, a cross-default to other indebtedness and non-compliance with security documents, and prohibits the Company from paying dividends if the Company is in default on its facilities and if, after giving effect to the payment of the dividend, the Company is in breach of a covenant.

In addition, each of the above loan and credit facilities require a minimum balance of cash and cash equivalents to be maintained at all times with the respective lender, ranging from $375,000 to $750,000 per mortgaged vessel, in excess of any additional cash collateral to be maintained, as defined by the respective loan agreements.

Certain of the above loan and credit facilities restrict the amount of dividends the Company may pay to $0.50 per share per annum and limit the amount of quarterly dividends the Company may pay to 100% of its net income for the immediately preceding financial quarter. In addition, under the existing loan and credit facilities, the Company is required to maintain minimum liquidity after payment of dividends equal to the greater of the next six months' debt service, $25,000,000 or $1,250,000 per vessel. In addition, according to the supplemental agreement the Company entered into with Bank of Scotland Plc on November 30, 2012 as discussed above, the Company is not permitted to declare or pay any dividends until the maturity of the respective loan agreement.

F-34

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

9.           Secured Loans and Credit Facilities - Continued

Conditions Precedent / Subsequent: Several of the agreements mentioned above that have been entered into subsequent to September 30, 2012, were subject to a number of conditions, including (i) all documentation to be satisfactory completed, (ii) an equity increase of $10,000,000 within 90 days after the signing of the respective documentation and (iii) all lenders agreeing to similar restructuring terms and granting similar waivers and terms.

Subsequent to December 31, 2012, the Company finalized the documentation with all of its lenders. In addition, the $10,000,000 raised through the issuance of 4,901,961 newly-issued Class A Common shares to Innovation Holdings, an entity beneficially owned by Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer (refer to Note 12), fulfilled the requirement of $10,000,000 equity increase.

Based on the above, all conditions precedent and subsequent have been fulfilled and the Company's debt restructuring is finalized and effective from December 31, 2012.

Covenants Compliance: Following the finalization of the Company's debt restructuring discussed above and after giving effect to the respective supplemental and restating agreements, the Company regained compliance with all debt covenants with respect to its loan and credit facilities.

Other Information: As of December 31, 2012, the Company had no unused facility in respect of the above mentioned secured loans and credit facilities other than the undrawn portion of the syndicated secured loan facility let by Nordea Bank Finland Plc discussed above.

The interest cost charged for the years ended December 31, 2010, 2011 and 2012 amounted to $8,994,169, $7,105,730 and $5,673,906, respectively.

The capitalized interest for the years ended December 31, 2010, 2011 and 2012 amounted to $0, $260,118 and $611,655, respectively.

The weighted average interest rate for the years ended December 31, 2010, 2011 and 2012 was 2.50%, 2.64% and 2.76%, respectively.

F-35

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

10.           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 loans and credit facilities. These interest rate swap transactions fix the interest rates as described below.

On March 20, 2012, April 18, 2012, May 4, 2012, June 18, 2012 and July 3, 2012, the Company entered into additional interest rate swap agreements in order to hedge its variable interest rate exposure. As of December 31, 2011 and 2012, the Company's outstanding interest rate swaps had a combined notional amount of $106,100,000 and $81,745,406, respectively. Details of the interest rate swap agreements which were effective during 2012 are outlined below:

Interest rate swaps that did not qualify for hedge accounting:

		Counterparty	Effective date	Termination date	Notional amount As of December 31, 2011		Notional amount As of December 31, 2012		Fixed rate	Floating rate
	A	Bank of Scotland Plc	December 21, 2007	December 21, 2012	$	50,000,000	$	-	- 5.000%, if 3-month LIBOR is greater than 5.000% - 3-month LIBOR, if 3-month LIBOR is between 3.770% and 5.000% - 3.770%, if 3-month LIBOR is less than 3.770%	3-month LIBOR
	B	Unicredit Bank AG (1)	August 27, 2010	August 27, 2015	$	56,100,000	$	45,900,000	2.465%	3-month LIBOR
TOTAL					$	106,100,000	$	45,900,000

(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, 2011		Notional amount As of December 31, 2012		Fixed rate		Floating rate
	A	HSBC Bank Plc (1)	April 10, 2012	April 10, 2017	$	-	$	5,520,000		1.485%	3-month LIBOR
	B	HSH Nordbank AG (2)	May 8, 2012	May 5, 2017	$	-	$	11,062,500		1.220%	3-month LIBOR
	C	Nordea Bank Finland Plc (3)	May 4, 2012	March 31, 2017	$	-	$	6,885,125		1.140%	3-month LIBOR
	D	Nordea Bank Finland Plc (4)	June 18, 2012	May 4, 2017	$	-	$	6,846,531		1.010%	3-month LIBOR
	E	HSH Nordbank AG (5)	August 6, 2012	May 5, 2017	$	-	$	5,531,250		0.980%	3-month LIBOR
TOTAL					$	-	$	35,845,406

(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 December 31, 2012 that is expected to be reclassified into statement of comprehensive income / (loss) within the next twelve months is $297,908.

F-36

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

11.           Financial Instruments and Fair Value Disclosures

The principal financial assets of the Company consist of cash and cash equivalents, restricted cash, amounts due from related parties, a loan due from a related party, an investment in affiliate, marketable securities available for sale and trade accounts receivable. The principal financial liabilities of the Company consist of long-term bank loans, interest rate swaps, accounts payable, amounts due to related parties and accrued liabilities.

(a) Interest rate risk: The Company's long-term bank loans and loan due from a related party are based on LIBOR and hence the Company is exposed to movements in LIBOR. The Company entered into interest rate swap agreements, discussed in Note 10, in order to hedge its variable interest rate exposure.

(b) Concentration of credit risk: Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist principally of trade accounts receivable, amounts due from related parties and cash and cash equivalents. The Company limits its credit risk with accounts receivable by performing ongoing credit evaluations of its customers' financial condition and generally does not require collateral for its trade accounts receivable. In addition, the Company also limits its exposure by diversifying among customers. The amounts due from related parties mainly relate to advance payments to Allseas to cover working capital equal to one month's worth of estimated operating expenses. The Company places its cash and cash equivalents with high credit quality financial institutions. The Company performs periodic evaluations of the relative credit standing of those financial institutions. The Company is exposed to credit risk in the event of non-performance by counterparties to derivative instruments. However, the Company limits its exposure by diversifying among counterparties considering their credit ratings.

(c) Fair value: The carrying values of trade accounts receivable, due from related parties, cash and cash equivalents, restricted cash, accounts payable, amounts due to related parties and accrued liabilities are reasonable estimates of their fair value due to the short-term nature of these financial instruments. The fair value of long-term bank loan and loan due from a related party approximate the recorded value, due to their variable interest rate.

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 consolidated balance sheets and derivative gains / (losses) in the consolidated statements of comprehensive income / (loss) and shareholders' equity are shown below:

Derivative Instruments – Balance Sheet Location

		December 31, 2011		December 31, 2012
	Balance Sheet Location	Fair Value		Fair Value
Derivatives designated as hedging instruments
Interest rate swaps	Current liabilities – Interest rate swaps	$	-	$	297,908
Interest rate swaps	Long-Term Liabilities – Interest rate swaps		-		375,166
	Subtotal	$	-	$	673,074
Derivatives not designated as hedging instruments
Interest rate swaps	Current liabilities – Interest rate swaps	$	2,630,574	$	887,811
Interest rate swaps	Long-Term Liabilities – Interest rate swaps		1,266,945		992,411
	Subtotal	$	3,897,519	$	1,880,222
Total derivatives		$	3,897,519	$	2,553,296

F-37

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

11. Financial Instruments and Fair Value Disclosures - Continued

Effect of Derivative Instruments designated as hedging instruments

		Year Ended December 31,
	Gain / (Loss) Recognized in Accumulated Other Comprehensive Gain / (Loss) (Effective Portion)	2011		2012
Interest rate swaps		$	-	$	(847,943	)
Total		$	-	$	(847,943	)

		Year Ended December 31,
	Location of Gain / (Loss) Transferred from Accumulated Other Comprehensive Gain / (Loss) in Statement of Comprehensive Income / (Loss) (Effective Portion)	2011		2012
Interest rate swaps – Realized Loss	Interest and finance costs	$	-	$	(174,869	)
Total		$	-	$	(174,869	)

There was no ineffective portion of the gain / (loss) on the hedging instruments for the year ended December 31, 2012.

Effect of Derivative Instruments not designated as hedging instruments

		Year Ended December 31,
	Location of Gain / (Loss) Recognized	2011			2012
Interest rate swaps – Fair value	Loss on derivatives, net	$	1,517,932		$	2,017,297
Interest rate swaps – Realized Loss	Loss on derivatives, net		(3,858,350	)		(2,731,371	)
Net loss on derivatives		$	(2,340,418	)	$	(714,074	)

F-38

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

11. 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, 2011 and 2012.

	Significant Other Observable Inputs (Level 2)
Financial Instruments	December 31, 2011		December 31, 2012
Interest rate swaps – liability	$	3,897,519	$	2,553,296

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

On September 15, 2011, the Company entered into a Settlement Agreement ("Agreement") with KLC in relation to the early termination of the time charter dated March 17, 2008, as amended, in respect of the M/V Pearl Seas. The parties reached an agreement, where KLC admitted a liability, which would be settled in cash and in shares of KLC (refer to Note 19). On May 24, 2012, the Company received 111,201 shares of KLC as part of the Agreement. These marketable securities have readily determinable fair values and are classified as available for sale. Such marketable securities are measured subsequently at fair value in the accompanying consolidated balance sheets. Unrealized gains / (losses) from available for sale securities are excluded from the statement of comprehensive income / (loss) and are recognized in accumulated other comprehensive income / (loss) until realized.

From the initial measurement of the valuation of KLC shares, a gain from marketable securities of $1,394,665 was recognized in the accompanying consolidated statements of comprehensive income / (loss), with changes in the fair value of $980,430 recognized in accumulated other comprehensive income / (loss). The fair value of the KLC shares based on the respective closing price as of September 30, 2012, was $414,235. As of September 30, 2012, the Company recognized the change in the fair value of the KLC shares as other than temporary and therefore, a loss of $980,430 was recognized. The respective loss is included in gain from marketable securities in the accompanying consolidated statements of comprehensive income / (loss), after reclassifying same from the Company's other comprehensive income / (loss).

The fair value of the KLC shares based on the respective closing price as of December 31, 2012, was $567,288. The change in the fair value of $153,053 was recognized in accumulated other comprehensive income / (loss).

		Year Ended December 31,
	Location of Gain / (Loss) Recognized	2011 Gain / (Loss)		2012 Gain / (Loss)
Marketable securities – Initial measurement	Gain on marketable securities, net	$	-	$	1,394,665
Marketable securities – Realized Loss	Gain on marketable securities, net		-		(980,430	)
Net gain on marketable securities		$	-	$	414,235

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.

Financial Assets	Quoted Prices in Active Markets (Level 1)		Loss
KLC Shares – Marketable Securities	$	567,288	$	980,430

F-39

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

11. Financial Instruments and Fair Value Disclosures - Continued

Financial Assets that are measured at fair value on a non-recurring basis

Long-lived Assets:

During 2011, in accordance with accounting guidance relating to long lived assets held and used, the Company recognized an impairment loss on one of its vessels (the M/V Crystal Seas) prior to its sale in November 2011.

As of December 31, 2011, the Company reviewed the carrying amount in connection with the estimated recoverable amount for each of its vessels. Mainly due to the continued poor performance of the drybulk charter market in 2011, and in particular the prolonged weakness noticed in the last quarter of 2011, the review indicated that such carrying amount was not recoverable for six of the Company's vessels; the M/V Coral Seas, the M/V Golden Seas, the M/V Diamond Seas, the M/V Pearl Seas, the M/V Sapphire Seas and the M/V Friendly Seas. Details of the impairment charge for each vessel are noted in the table below.

Vessel	Significant Other Observable Inputs (Level 2)		Loss
M/V Crystal Seas	$	14,000,000	$	5,740,000
M/V Coral Seas	$	24,250,000	$	62,864,833
M/V Golden Seas	$	24,250,000	$	52,929,172
M/V Diamond Seas	$	21,125,000	$	43,513,624
M/V Pearl Seas	$	24,250,000	$	36,274,742
M/V Sapphire Seas	$	20,750,000	$	33,554,729
M/V Friendly Seas	$	26,625,000	$	42,450,048
TOTAL	$	155,250,000	$	277,327,148

The fair value is based on the Company's best estimate of the value of each vessel on a time charter free basis, and is supported by vessel valuations of two independent shipbroker's as of December 31, 2011, which are mainly based on recent sales and purchase transactions of similar vessels.

The Company recognized the total impairment losses of $277,327,148, which was included in the consolidated statements of comprehensive income / (loss) for the period. No such loss was recognized for the year ended December 31, 2012.

The Company did not have any other assets or liabilities measured at fair value on a nonrecurring basis during the years ended December 31, 2011 and 2012.

12.           Capital Structure

(a)           Common Stock:

Under the amended and restated articles of incorporation, the Company's authorized common stock consists of 755,000,000 shares of common stock, par value $0.001 per share, divided into 750,000,000 Class A Common Shares and 5,000,000 Class B Common Shares.

Each holder of Class A Common Shares is entitled to one vote on all matters submitted to a vote of shareholders. Subject to preferences that may be applicable to any outstanding shares of preferred stock, holders of Class A Common Shares are entitled to receive ratably all dividends, if any, declared by the Company's Board of Directors out of funds legally available for dividends. Upon dissolution, liquidation or sale of all or substantially all of the Company's assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, Class A Common Share holders are entitled to receive pro rata the Company's remaining assets available for distribution. Holders of Class A Common Shares do not have conversion, redemption or pre-emptive rights.

F-40

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

12.           Capital Structure - Continued

(a)           Common Stock - Continued

On October 12, 2010, the Company entered into a Controlled Equity Offering Sales Agreement with Cantor Fitzgerald & Co. as sales agent, and on the same date the Company filed a prospectus supplement to the shelf registration statement relating to the offer and sale up to 1,500,000 common shares, par value $0.001 per share, from time to time through Cantor Fitzgerald & Co., as agent for the offer and sale of the common shares. As of December 31, 2010, 307,100 common shares had been sold under the Controlled Equity Offering with proceeds net of commissions amounting to $11,102,990 and 2% of the shares sold or 6,142 shares with a fair value of $226,459 were granted to Loretto for no consideration. In 2011, a further 384,890 common shares were sold under the Controlled Equity Offering with proceeds net of commissions amounting to $12,173,380 and 2% of the shares sold or 7,697 with a fair value of $248,416 were granted to Loretto for no consideration (refer to Note 3).

Effective as of the close of trading on November 5, 2012, the Company effectuated a 10-for-1 reverse stock split of its issued and outstanding common shares. The common shares commenced trading on the New York Stock Exchange on a split-adjusted basis upon the open of trading on November 6, 2012. The reverse stock split was approved by shareholders at the Company's 2012 Annual General Meeting of Shareholders held on October 24, 2012 and by the Company's Board of Directors on October 24, 2012. The reverse stock split reduced the number of the Company's issued and outstanding common shares and affected all issued and outstanding common shares, as well as common shares underlying stock options outstanding immediately prior to the effectiveness of the reverse stock split. The number of the Company's authorized common shares was not affected by the reverse split. No fractional shares were issued in connection with the reverse stock split. Shareholders who would have otherwise held a fractional share of the Company's Common Stock as a result of the reverse stock split received a cash payment in lieu of such fractional share.

On December 13, 2012, the Company filed a prospectus for the issuance of shares upon exercise of subscription rights for potential future equity increase. As of December 31, 2012, the Company had not proceeded with any further actions to declare this prospectus effective.

On December 24, 2012, the Company entered into an agreement to sell 4,901,961 newly-issued Class A Common shares to Innovation Holdings, an entity beneficially owned by Mr. Michael Bodouroglou, the Company's Chairman, President and Chief Executive Officer, for a total consideration of $10,000,000. The transaction closed on December 24, 2012. In connection with the transaction, the Company was granted the right to repurchase the common shares issued to Innovation Holdings in the private placement, for the same price per share at which the shares were sold, which expired without being exercised upon the Company's execution of definitive documentation relating to the restructuring of the Company's debt, as discussed in Note 9. In addition, Innovation Holding also received customary registration rights in respect of the common shares it received in the private placement. The documentation entered into in connection with the private placement was approved by the independent member of the Company's Board of Directors.

Furthermore, in relation to the finalization of the Company's debt restructuring as discussed in Note 9, effective February 15, 2013, 98,039 Class A Common shares, representing the 2.0% of the 4,901,961 newly-issued Class A Common shares sold to Innovation Holdings discussed above, were granted to Loretto. The fair value of such shares based on the average of the high-low trading price of the shares on February 15, 2013, is $335,784, which will be recorded as share based compensation in the first quarter of 2013.

After giving effect to the 10-for-1 reverse stock split discussed above, as of December 31, 2011 and 2012, the Company had a total of 6,089,826 and 11,001,403 Class A Common Shares outstanding, respectively, and no other class of shares outstanding.

(b)           Preferred Stock:

Under the amended and restated articles of incorporation, the Company's authorized preferred stock consists of 25,000,000 shares of preferred stock, par value $0.001 per share, and there was none issued and outstanding at December 31, 2011 and 2012.

F-41

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

13.           Share Based Payments

Equity incentive plan

On October 11, 2006, the Company adopted an equity incentive plan, under which the officers, key employees and directors of the Company will be eligible to receive options to acquire shares of Class A Common Shares. The Board of Directors administers the plan. Under the terms of the plan, the Board of Directors are able to grant new options exercisable at a price per Class A Common Share to be determined by the Board of Directors but in no event less than fair market value as of the date of grant. The plan also permits the Board of Directors to award non-vested share units, non-qualified options, stock appreciation rights and non-vested shares.

On October 15, 2012, the Company increased the number of shares to be reserved for issuance under the plan from 5,500,000 to 9,966,733 Class A Common Shares, which, after the 10-for-1 reverse stock split discussed in Note 12, was adjusted to 996,673 Class A Common Shares.

(a)           Options

After giving effect to the 10-for-1 reverse stock split that became effective on November 5, 2012 as discussed in Note 12, as of December 31, 2011 and 2012, there were 2,800 options with an exercise price of $120.00 outstanding and exercisable, which vested in 2010. Their weighted average remaining contractual life was 3.89 years as of December 31, 2012.

There were no unvested share options as of December 31, 2011 and 2012.

(b)           Non-vested share awards

Until the forfeiture of any non-vested share award, all non-vested share awards regardless of whether vested, the grantee has the right to vote such non-vested share awards, to receive and retain all regular cash dividends paid on such non-vested share awards with no obligation to return the dividend if employment ceases and to exercise all other rights provided that the Company will retain custody of all distributions other than regular cash dividends made or declared with respect to the non-vested share awards. All share awards are conditioned upon the option holder's continued service as an employee of the Company, or a director through the applicable vesting date. The Company estimates the forfeitures of non-vested share awards to be immaterial. The Company will, however, re-evaluate the reasonableness of its assumption at each reporting period.

The accounting guidance relating to the Share based payments describes two generally accepted methods of accounting for non-vested share awards with a graded vesting schedule for financial reporting purposes: 1) the "accelerated method", which treats an award with multiple vesting dates as multiple awards and results in a front-loading of the costs of the award and 2) the "straight-line method" which treats such awards as a single award. Management has selected the straight-line method with respect to the non-vested share awards because it considers each non-vested share award to be a single award and not multiple awards, regardless of the vesting schedule. Additionally, the "front-loaded" recognition of compensation cost that results from the accelerated method implies that the related employee services become less valuable as time passes, which management does not believe to be the case. The grant date fair value is considered to be the average between the relevant highest and lowest price recorded on the grant date.

F-42

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

13.           Share Based Payments - Continued

Equity incentive plan - Continued

(b)           Non-vested share awards - Continued

After giving effect to the 10-for-1 reverse stock split that became effective on November 5, 2012 as discussed in Note 12, the details of the non-vested share awards are outlined as follows:

		Grant date	Final Vesting date	Total shares granted			Grant date fair value		Shares cancelled		Shares vested		Non-vested share awards
	A	November 21, 2006	December 31, 2010		4,000		$	91.10		112		3,888		-
	B	August 27, 2007	December 31, 2009		4,650		$	158.05		100		4,550		-
	C	December 28, 2007	December 31, 2010		2,000		$	189.70		467		1,533		-
	D	February 5, 2008	December 31, 2011		600		$	173.70		125		475		-
	E	May 13, 2008	June 30, 2011		400		$	199.00		-		400		-
	F	December 19, 2008	December 31, 2010		2,000		$	48.15		-		2,000		-
	G	December 19, 2008	December 31, 2011		1,200		$	48.15		267		933		-
	H	January 23, 2009	December 31, 2012		860		$	52.50		188		672		-
	I	August 18, 2009	December 31, 2011		100,000		$	40.25		-		100,000		-
	J	November 10, 2009	December 31, 2010		198,711	(1)	$	44.25		-		198,711		-
	K	November 10, 2009	December 31, 2011		2,000		$	44.25		-		2,000		-
	L	November 10, 2009	December 31, 2012		1,200		$	44.25		400		800		-
	M	February 1, 2010	December 31, 2013		1,200		$	44.45		215		762		223
	N	November 19, 2010	September 30, 2012		150,000		$	37.10		-		150,000		-
	O	November 19, 2010	December 31, 2012		4,000		$	37.10		-		4,000		-
	P	January 31, 2011	December 31, 2013		4,000		$	30.90		314		2,474		1,212
	Q	December 1, 2011	December 31, 2013		100,000		$	7.50		-		50,000		50,000
	R	December 1, 2011	December 31, 2013		4,000		$	7.50		-		2,000		2,000
	S	January 3, 2012	December 31, 2013		3,500		$	6.65		-		1,750		1,750
	T	February 3, 2012	December 31, 2013		6,300		$	6.10		-		3,150		3,150
TOTAL					590,621					2,188		530,098		58,335

(1) Not included under Company's equity incentive plan.

F-43

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

13.           Share Based Payments - Continued

Equity incentive plan - Continued

(b)           Non-vested share awards - Continued

After giving effect to the 10-for-1 reverse stock split that became effective on November 5, 2012 as discussed in Note 12, a summary of the activity for non-vested share awards is as follows:

	Number of Shares			Weighted Average Fair Value
Non-vested, December 31, 2011		184,447		$	30.90
Granted		9,800			6.31
Cancelled		(184	)		38.67
Vested		(135,728	)		33.37
Non-vested, December 31, 2012		58,335		$	10.08

The remaining unrecognized compensation cost amounting to $452,911 as of December 31, 2012, is expected to be recognized over the remaining weighted average period of 1.0 year, according to the contractual terms of those non-vested share awards.

On February 25, 2013, 200,000 non-vested Class A Common shares were granted to Innovation Holdings. In addition, an aggregate of 22,000 Class A Common shares were granted to the Company's non-executive directors and employees of Allseas. These shares have a grant date fair value of $2.71 per share and vest ratably over a two-year period commencing on December 31, 2013.

Share based compensation amounted to $10,461,204, $4,840,626 and $2,536,702 for the years ended December 31, 2010, 2011 and 2012, respectively and is included in general and administrative expenses.

14.           Vessel Operating Expenses

Vessel operating expenses, comprise the following:

	2010		2011		2012
Crew wages and related costs	$	8,987,311	$	8,604,570	$	8,881,037
Insurance		3,304,267		2,484,196		2,496,368
Repairs and maintenance		1,026,780		841,574		1,057,722
Spares and consumable stores		5,735,741		5,505,221		5,566,955
Miscellaneous expenses		920,707		582,455		806,002
Total	$	19,974,806	$	18,018,016	$	18,808,084

F-44

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

15.           General and Administrative Expenses

The details of general and administrative expenses, are as follows:

	2010		2011		2012
Share based compensation	$	10,461,204	$	4,840,626	$	2,536,702
Consulting fees		2,269,933		-		-
Executive services and incentive compensation		-		5,193,645		3,228,438
Salaries		160,713		88,849		90,091
Bonus awards		2,159,801		52,120		-
Non-executive directors' remuneration		234,431		247,338		234,585
Office rent		35,489		38,947		39,593
Telecommunication expenses		14,220		25,416		20,378
Fares and traveling expenses		337,841		217,609		106,264
Personnel and other expenses		47,998		43,510		45,731
Other professional services		1,223,276		844,166		783,514
Directors and officers insurance		166,726		134,515		128,862
Stock market annual Fees		79,379		203,072		166,336
Other expenses		532,976		385,241		521,268
Total general and administrative expenses	$	17,723,987	$	12,315,054	$	7,901,762

16.           Other Income

Other income for the year ended December 31, 2012, relates mainly to claim recoveries for damages that had been incurred in one of the Company's vessels of $703,422 and to a cash compensation of $29,137 received from KLC as the first annual installment in connection with the Settlement Agreement as discussed in Note 19. There was no such income recognized for the years ended December 31, 2010 and 2011.

17.           Income Taxes

The Company and its subsidiaries are incorporated either in the Marshall Islands or Liberia and under the laws of the Marshall Islands and Liberia, are not subject to income taxes.

The Company is also subject to United States federal income taxation in respect of income that is derived from the international operation of ships and the performance of services directly related thereto ("Shipping Income"), unless exempt from United States federal income taxation.

If the Company does not qualify for the exemption from tax under Section 883, it will be subject to a 4% tax on its "U.S. source shipping income," imposed without the allowance for any deductions. For these purposes, "U.S. source shipping income" means 50% of the shipping income that will be derived by the Company that is attributable to transportation that begins or ends, but that does not both begin and end, in the United States. For 2010, 2011 and 2012, the Company qualified for the benefits of Section 883.

F-45

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

18.           Earnings per Share ("EPS")

The following table sets forth the computation of basic and diluted net loss per share for the years ended December 31, 2010, 2011 and 2012, adjusted to give effect to the 10-for-1 reverse stock split that became effective on November 5, 2012, as discussed in Note 12:

Basic EPS – Class A Common Shares

The two class method EPS is calculated as follows:

	Years Ended December 31,
Numerators	2010			2011			2012
Net income / (loss)	$	22,895,280		$	(283,498,759	)	$	(17,557,125	)
Less: Net (income) / loss attributable to non-vested share awards		(849,650	)		7,644,949			444,326
Net income / (loss) attributable to common shareholders	$	22,045,630		$	(275,853,810	)	$	(17,112,799	)
Denominators
Weighted average common shares outstanding, basic and diluted		4,981,272			5,793,792			6,035,910
Net income / (loss) per common share, basic and diluted:	$	4.43		$	(47.61	)	$	(2.84	)

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 (2010 and 2011: 2,800) stock option awards, and 58,335 (2010: 191,316 and 2011: 184,447) non-vested share awards in calculating dilutive EPS for its Class A Common shares as their effect was anti-dilutive.

19.           Commitments and Contingencies

From time to time the Company expects to be 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. The Company is not aware of any claim or contingent liability, which is reasonably possible and should be disclosed, or probable and for which a provision should be established in the accompanying financial statements.

On September 15, 2011, the Company entered into a Settlement Agreement ("Agreement") with KLC in relation to the early termination of the charterparty dated March 17, 2008, as amended, in respect of the M/V Pearl Seas. The parties reached into an agreement, where KLC admitted a liability of $15,750,000, of which 37% would be settled in cash, amounting to $5,827,500, payable in ten annual installments of varying amounts, commencing in December 2012, and the remainder of the liability would be payable in shares of KLC. On May 24, 2012, the Company received 111,201 shares of KLC and on December 31, 2012, the Company received the first cash installment payment of $29,137 due to the Company under the Settlement Agreement. 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.

F-46

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

19.           Commitments and Contingencies - Continued

Rental Expense

In relation to the rental agreement with Granitis as discussed in Note 3, fixed future minimum non cancellable rent commitments as of December 31, 2012, based on a Euro/U.S. dollar exchange rate of €1.00:$1.32 amount to:

For the year ending	Amount
December 31, 2013	$	49,231
December 31, 2014	$	49,231
December 31, 2015	$	49,231
December 31, 2016	$	49,231
December 31, 2017	$	36,923
Total	$	233,847

Charter Hire

Future minimum charter hire receipts, based on vessels committed to non-cancelable time charter contracts (including fixture recaps) as of December 31, 2012, net of commissions are:

For the year ending	Amount
December 31, 2013	$	31,364,420
December 31, 2014		4,427,843
Total	$	35,792,263

Charter hires are not generally received when a vessel is off-hire, including time required for normal periodic maintenance of the vessel. In arriving at the minimum future charter revenues, an estimated off-hire time of 18 days to perform any scheduled dry-docking on each vessel has been deducted, and it has been assumed that no additional off-hire time is incurred, although there is no assurance that such estimate will be reflective of the actual off-hire in the future.

Newbuildings

Future newbuilding installments based on the non-cancelable newbuilding contracts as of December 31, 2012 are:

For the year ending	Amount
December 31, 2013	$	24,187,925
December 31, 2014		91,203,619
Total	$	115,391,544

F-47

Paragon Shipping Inc.

Notes to Consolidated Financial Statements

(Expressed in United States Dollars – except for share data)

20.           Subsequent Events

Newbuildings

On January 29, 2013, the Company took delivery of its third Handysize drybulk vessel; the M/V Priceless Seas as discussed in Notes 4, 5 and 9.

Credit Facilities

The Company finalized the documentation with all of its lenders and completed its debt restructuring as discussed in Note 9. Subsequent to December 31, 2012, upon the finalization of the documentation with all of the Company's lenders, the Company's right to repurchase the 4,901,961 newly-issued Class A Common shares in relation to the private placement dated December 24, 2012, was terminated (refer to Note 12).

Loan to Affiliate

In February 2013, Box Ships prepaid an amount of $1,000,000 of the unsecured loan that was granted on May 27, 2011, and reduced the outstanding balance of the respective loan 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, commencing on April 19, 2013, 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 and to increase the margin from 4.0% to 5.0%.

F-48