Attached files

file filename
EX-32.1 - EXHIBIT 32.1 - Rand Logistics, Inc.rlog-20150930x10qex3211.htm
EX-31.2 - EXHIBIT 31.2 - Rand Logistics, Inc.rlog-20150930x10qex3121.htm
EX-31.1 - EXHIBIT 31.1 - Rand Logistics, Inc.rlog-20150930x10qex3111.htm
EX-32.2 - EXHIBIT 32.2 - Rand Logistics, Inc.rlog-20150930x10qex3221.htm


UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-Q/A (Amendment No. 1)


þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended September 30, 2015
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Transition Period from                    to

Commission File Number: 001-33345
___________________

RAND LOGISTICS, INC.
(Exact name of registrant as specified in its charter)


Delaware
 
No. 20-1195343
(State or other jurisdiction of
 
(I.R.S. Employer
incorporation or organization)
 
Identification No.)
 
 
 
500 Fifth Avenue, 50th Floor
 
 
New York, NY
 
10110
(Address of principal executive offices)
 
(Zip Code)

(212) 644-3450
(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the 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. Yes ý 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). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
 
Large accelerated filer ¨
 
Accelerated filer þ
 
 
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ¨
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

18,188,838 shares of Common Stock, par value $.0001, were outstanding at November 4, 2015




EXPLANATORY NOTE
               This Amendment No. 1 on Form 10-Q/A (“Amendment No. 1”) amends the Quarterly Report on Form 10-Q of Rand Logistics, Inc. (the “Company”) for the quarterly period ended September 30, 2015, originally filed with the Securities and Exchange Commission (the “SEC”) on November 5, 2015 (the “Original Filing”). The Company is filing this Amendment No. 1 solely to include as exhibits the corrected certifications of its Principal Executive Officer and Principal Financial Officer required by Section 906 of the Sarbanes-Oxley Act of 2002 (the "Section 906 Certifications").  Although the Section 906 Certifications were filed with the SEC along with the Original Filing, such certifications contained a typographical error, inadvertently referring to the Company's Quarterly Report on Form 10-Q for the period ended “June 30, 2015” instead of “September 30, 2015”, as now reflected in the Section 906 Certifications filed herewith. At the time of the filing of the Original Filing with the SEC, the Company was in possession of manually-signed Section 906 Certifications that correctly referred to the period ended September 30, 2015. 
               Items included in the Original Filing that are not amended by this Amendment No. 1 remain in effect as of the date of the Original Filing. This Amendment No. 1 does not reflect events occurring after the filing of the Original Filing, or modify or update those disclosures that may be affected by subsequent events, and no other changes are being made to any other disclosure contained in the Original Filing.


RAND LOGISTICS, INC.

INDEX
 




PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.

RAND LOGISTICS, INC.
Consolidated Balance Sheets (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)



 
September 30, 2015
 
March 31, 2015
ASSETS
 
 
 
CURRENT
 
 
 
Cash and cash equivalents
$
2,258

 
$
3,298

Accounts receivable, net (Note 4)
22,325

 
2,764

Income taxes receivable
91

 
91

Prepaid expenses and other current assets (Notes 5 and 8)
6,603

 
5,957

Deferred income taxes (Note 6)
329

 
347

Total current assets
31,606

 
12,457

PROPERTY AND EQUIPMENT, NET (Note 7)
222,392

 
206,276

OTHER ASSETS (Note 8)
202

 
569

DEFERRED DRYDOCK COSTS, NET (Note 9)
6,566

 
7,590

INTANGIBLE ASSETS, NET (Note 10)
11,797

 
13,205

GOODWILL (Note 10)
10,193

 
10,193

 
Total assets 
$
282,756

 
$
250,290

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

CURRENT
 

 
 

Accounts payable
17,000

 
15,350

Accrued liabilities (Note 13)
7,691

 
7,628

Other current liability
158

 
166

Current portion of deferred payment liability
556

 
536

Total current liabilities
25,405

 
23,680

LONG-TERM PORTION OF DEFERRED PAYMENT LIABILITY
281

 
564

LONG-TERM DEBT  (Note 14)
118,663

 
101,213

SUBORDINATED DEBT (Note 15)
78,126

 
72,500

OTHER LIABILITIES
455

 
479

DEFERRED INCOME TAXES (Note 6)
961

 
5,607

 
 Total liabilities
223,891

 
204,043

COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)


 


STOCKHOLDERS' EQUITY
 

 
 

Preferred stock, $.0001 par value, Authorized 1,000,000 shares, Issued and outstanding 300,000 shares (Note 18)
14,900

 
14,900

Common stock, $.0001 par value, Authorized 50,000,000 shares, Issued and outstanding 18,062,513 shares at September 30, 2015 and 18,035,427 shares at March 31, 2015 (Note 18)
1

 
1

Additional paid-in capital
90,227

 
90,130

Accumulated deficit
(36,823
)
 
(50,972
)
Accumulated other comprehensive loss
(9,440
)
 
(7,812
)
 
 Total stockholders’ equity
58,865

 
46,247

Total liabilities and stockholders’ equity
$
282,756

 
$
250,290


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

F- 3

RAND LOGISTICS, INC.
Consolidated Statements of Operations (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)

 
 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
REVENUE
 
 
 
 
 
 
 
 
Freight and related revenue
 
$
43,835

 
$
46,102

 
$
82,803

 
$
82,715

Fuel and other surcharges
 
5,563

 
8,168

 
9,527

 
14,864

Outside voyage charter revenue
 
2,535

 

 
4,430

 

TOTAL REVENUE
 
51,933

 
54,270

 
96,760

 
97,579

EXPENSES
 
 
 
 
 
 
 
 
Outside voyage charter fees (Note 19)
 
2,652

 

 
4,493

 

Vessel operating expenses
 
30,030

 
33,612

 
56,586

 
61,639

Repairs and maintenance
 
57

 
(5
)
 
897

 
1,177

General and administrative
 
3,099

 
3,299

 
6,399

 
6,199

Depreciation
 
4,603

 
4,693

 
9,310

 
9,370

Amortization of drydock costs
 
885

 
856

 
1,767

 
1,712

Amortization of intangibles
 
272

 
308

 
556

 
616

Loss on foreign exchange, net
 
14

 
1,261

 
305

 
463

 
 
41,612

 
44,024

 
80,313

 
81,176

OPERATING INCOME
 
10,321

 
10,246

 
16,447

 
16,403

OTHER (INCOME) AND EXPENSES
 
 
 
 
 
 
 
 
Interest expense (Note 20)
 
2,962

 
3,707

 
5,981

 
7,464

Interest income
 

 
(2
)
 
(4
)
 
(4
)
 
 
2,962

 
3,705

 
5,977

 
7,460

INCOME BEFORE INCOME TAXES
 
7,359

 
6,541

 
10,470

 
8,943

(BENEFIT FROM) PROVISION FOR INCOME TAXES (Note 6)
 
 
 
 
 
 
 
 
Deferred
 
(4,508
)
 
705

 
(4,328
)
 
1,048

 
 
(4,508
)
 
705

 
(4,328
)
 
1,048

NET INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
11,867

 
5,836

 
14,798

 
7,895

PREFERRED STOCK DIVIDENDS
 
328

 
290

 
649

 
581

NET INCOME APPLICABLE TO COMMON STOCKHOLDERS
 
$
11,539

 
$
5,546

 
$
14,149

 
$
7,314

Net income per share basic (Note 23)
 
$
0.64

 
$
0.31

 
$
0.79

 
$
0.41

Net income per share diluted (Note 23)
 
0.58

 
0.29

 
0.73

 
0.39

Weighted average shares basic
 
17,960,000

 
17,845,496

 
17,930,473

 
17,836,768

Weighted average shares diluted
 
20,379,355

 
20,298,940

 
20,349,828

 
20,295,799


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



F- 4

RAND LOGISTICS, INC.
Consolidated Statements of Comprehensive Income (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
 
 
 
 
 
 
 
 
 
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
11,867

 
5,836

 
14,798

 
7,895

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
 
(1,654
)
 
(1,584
)
 
(1,628
)
 
(182
)
COMPREHENSIVE INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
10,213

 
4,252

 
13,170

 
7,713


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


F- 5

RAND LOGISTICS, INC.
Statements of Stockholders' Equity (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


 
 
Preferred Stock
 
Common Stock
 
Additional Paid-In
Capital
 
Accumulated
Deficit
 
Accumulated Other Comprehensive
(Loss) Income
 
Total Stockholders'
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
 
 
 
Balances, March 31, 2014
 
300,000

 
$
14,900

 
17,933,859

 
$
1

 
$
89,486

 
$
(40,277
)
 
$
(3,363
)
 
$
60,747

Net loss
 

 

 

 

 

 
(9,420
)
 

 
(9,420
)
Preferred stock dividends
 

 

 

 

 

 
(1,168
)
 

 
(1,168
)
Restricted stock issued (Note 18)
 

 

 
103,315

 

 
610

 

 

 
610

Unrestricted stock issued (Note 18)
 

 

 
26,067

 

 
114

 

 

 
114

Stock repurchased and extinguished
 


 


 
(38,373
)
 


 
(143
)
 
(107
)
 

 
(250
)
Restricted stock units granted
 


 


 
10,559

 


 
63

 

 

 
63

Translation adjustment
 

 

 

 

 

 

 
(4,449
)
 
(4,449
)
Balances, March 31, 2015
 
300,000

 
$
14,900

 
18,035,427

 
$
1

 
$
90,130

 
$
(50,972
)
 
$
(7,812
)
 
$
46,247

Net income
 

 

 

 

 

 
2,931

 

 
2,931

Preferred stock dividends
 

 

 

 

 

 
(321
)
 

 
(321
)
Unrestricted stock issued (Note 18)
 

 

 
10,276

 

 
34

 

 

 
34

Restricted stock units granted
 

 

 

 

 
12

 

 

 
12

Translation adjustment
 

 

 

 

 

 

 
26

 
26

Balances, June 30, 2015
 
300,000

 
$
14,900

 
18,045,703

 
$
1

 
$
90,176

 
$
(48,362
)
 
$
(7,786
)
 
$
48,929

Net income
 

 
$

 

 
$

 
$

 
$
11,867

 
$

 
$
11,867

Preferred stock dividends
 

 
$

 

 
$

 
$

 
$
(328
)
 
$

 
$
(328
)
Unrestricted stock issued (Note 18)
 

 
$

 
16,810

 
$

 
$
36

 
$

 
$

 
$
36

Restricted stock units granted
 

 
$

 

 
$

 
$
15

 
$

 
$

 
$
15

Translation adjustment
 

 
$

 

 
$

 
$

 
$

 
$
(1,654
)
 
$
(1,654
)
Balances, September 30, 2015
 
300,000

 
$
14,900

 
18,062,513

 
$
1

 
$
90,227

 
$
(36,823
)
 
$
(9,440
)
 
$
58,865

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


F- 6

RAND LOGISTICS, INC.
Consolidated Statements of Cash Flows (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
 
Net income
$
14,798

 
$
7,895

 Adjustments to reconcile net income to net cash provided by operating activities:
 

 
 

Depreciation and amortization of drydock costs
11,077

 
11,082

Amortization of intangibles and deferred financing costs
1,196

 
1,282

Deferred income taxes
(4,328
)
 
1,048

Equity compensation granted
97

 
697

                  Unrealized foreign exchange loss
1,756

 
301

Deferred drydock costs paid
(1,539
)
 
(2,020
)
Changes in operating assets and liabilities:
 

 
 

Accounts receivable
(19,561
)
 
(14,762
)
Prepaid expenses and other current assets
(646
)
 
(650
)
Accounts payable and accrued liabilities
9,011

 
6,152

Other assets and liabilities, net
335

 
24

Income taxes payable (net)

 
(100
)
NET CASH PROVIDED BY OPERATING ACTIVITIES
12,196

 
10,949

CASH FLOWS FROM INVESTING ACTIVITIES
 

 
 

Purchase of property and equipment
(38,086
)
 
(17,610
)
NET CASH USED IN INVESTING ACTIVITIES
(38,086
)
 
(17,610
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 
 

Deferred payment liability obligation
(263
)
 
(245
)
Proceeds from long-term debt
35,426

 

Shares repurchased and extinguished

 
(250
)
Long-term debt repayment
(10,100
)
 
(261
)
Debt financing cost
(498
)
 
(277
)
Proceeds from bank indebtedness

 
19,767

Repayment of bank indebtedness

 
(11,000
)
Payment of preferred stock dividend

 
(291
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
24,565

 
7,443

EFFECT OF FOREIGN EXCHANGE RATES ON CASH
285

 
187

NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS 
(1,040
)
 
969

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD
3,298

 
2,602

CASH AND CASH EQUIVALENTS, END OF  PERIOD
$
2,258

 
$
3,571

SUPPLEMENTAL CASH FLOW DISCLOSURE
 

 
 
Payments for interest, net of amount capitalized
$
4,193

 
$
6,849

Unpaid purchases of property and equipment
$
1,679

 
$
903

Unpaid purchases of deferred drydock costs
$
2

 
$
9

Payment of income taxes
$
1

 
$
100

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

F- 7


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)



1.     DESCRIPTION OF BUSINESS

Rand Logistics, Inc. (the “Company”), a Delaware corporation, is a leading provider of bulk freight shipping services throughout the Great Lakes region. The Company believes that it is the only company providing significant domestic port-to-port services to both Canada and the United States in the Great Lakes region. The Company maintains this operating flexibility by operating both U.S. and Canadian flagged vessels in compliance with the Shipping Act, 1916, and the Merchant Marine Act, 1920, commonly referred to as the Jones Act in the U.S. and the Coasting Trade Act in Canada, respectively.



2.
SIGNIFICANT ACCOUNTING POLICIES

 Basis of presentation and consolidation

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include the accounts of Rand Finance Corp. (“Rand Finance”), Rand LL Holdings Corp. ("Rand LL Holdings") and Black Creek Shipping Holding Company, Inc. ("Black Creek Holdings"), wholly-owned subsidiaries of the Company, the accounts of Lower Lakes Towing Ltd. ("Lower Lakes"), Lower Lakes Transportation Company ("Lower Lakes Transportation") and Grand River Navigation Company, Inc. ("Grand River"), each of which is a wholly-owned subsidiary of Rand LL Holdings, Black Creek Shipping Company, Inc. ("Black Creek"), which is a wholly-owned subsidiary of Black Creek Holdings, and Lower Lakes Ship Repair Company Ltd. ("Lower Lakes Ship Repair") and Lower Lakes Towing (17) Ltd. ("Lower Lakes (17)"), each of which is a wholly-owned subsidiary of Lower Lakes.

The consolidated financial statements include the accounts of the Company and all of its wholly-owned subsidiaries. All significant intercompany transactions and balances have been eliminated. In the opinion of management, the interim financial statements contain all adjustments necessary (consisting of normal recurring accruals) to present fairly the financial information contained herein. Operating results for the interim periods presented are not necessarily indicative of the results to be expected for a full year, in part due to the seasonal nature of the business. The comparative balance sheet amounts and the Statement of Stockholder's equity for the year ended March 31, 2015 are derived from the audited consolidated financial statements for the fiscal year ended March 31, 2015. The statements and related notes have been prepared pursuant to the rules and regulations of the U.S. Securities and Exchange Commission. Accordingly, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the financial statements that were included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2015.


Cash and cash equivalents

The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
 

Accounts receivable and concentration of credit risk
 
The majority of the Company’s accounts receivable are amounts due from customers and other accounts receivable, including insurance and Harmonized Sales Tax refunds.  The majority of accounts receivable are due within 30 to 60 days and are stated at amounts due from customers net of an allowance for doubtful accounts. The Company extends credit to its customers based upon its assessment of their creditworthiness and past payment history. Accounts outstanding longer than the contractual payment terms are considered past due.

F- 8


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


2.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Revenue and operating expenses recognition

The Company generates revenues from freight billings under contracts of affreightment (voyage charters) generally on a rate per ton basis based on origin-destination and cargo carried. Voyage revenue is recognized ratably over the duration of a voyage, which average from 2 to 3 days, based on the relative transit time in each reporting period when the following conditions are met: the Company has a signed contract of affreightment, the contract price is fixed or determinable and collection is reasonably assured.  Included in freight billings are other fees such as fuel surcharges and other freight surcharges, which represent pass-through charges to customers for toll fees, lockage fees and ice breaking fees paid to other parties.  Fuel surcharges are recognized ratably over the duration of the voyage, while freight surcharges are recognized when the associated costs are incurred. Freight surcharges are less than 5% of total revenue.

Marine operating expenses such as crewing costs, fuel, tugs and insurance are recognized as incurred or consumed and thereby are recognized ratably in each reporting period. Repairs and maintenance and certain other insignificant costs are recognized as incurred.

The Company subcontracts excess customer demand to other freight providers.  Service to customers under such arrangements is transparent to the customer and no additional services are provided to customers.  Consequently, revenues recognized for customers serviced by freight subcontractors are recognized on the same basis as described above.  Costs for subcontracted freight providers, presented as “outside voyage charter fees” in the consolidated statements of operations, are recognized as incurred and therefore are recognized ratably over the voyage.

The Company accounts for sales taxes imposed on its services on a net basis in the consolidated statements of operations.
In addition, all revenues are presented on a gross basis.
 
Vessel acquisitions
 
Vessels are stated at cost, which consists of the purchase price and any material expenses incurred upon acquisition, such as initial repairs, improvements, delivery expenses and other expenditures to prepare the vessel for its initial voyage. Subsequent expenditures for conversions and major improvements are also capitalized when they appreciably extend the life, increase the earnings capacity or improve the efficiency or safety of the vessels. Significant financing costs incurred during the construction period of the vessels are also capitalized and included in the vessels' cost.

Fuel and lubricant inventories

Raw materials, fuel and certain operating supplies are accounted for on a first-in, first-out cost method (based on monthly averages). Raw materials and fuel are stated at the lower of actual cost (first-in, first-out method) or market and are included in prepaid expenses and other current assets in the accompanying consolidated balance sheets. Operating supplies are stated at actual cost or average cost.
 

F- 9


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


2.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Intangible assets and goodwill

Intangible assets consist primarily of goodwill, deferred financing costs, trademarks, trade names and customer relationships and contracts. Intangible assets are amortized as follows:
 
Trademarks and trade names 
10 years straight-line 
Customer relationships and contracts  
15 years straight-line 
  
Deferred financing costs are amortized on a straight-line basis over the term of the related debt, which approximates the effective interest method.

Property and equipment

Property and equipment are recorded at cost.  Depreciation methods for property and equipment are as follows:
 
Vessels
5 - 25 years straight-line
Leasehold improvements  
7 - 11 years straight-line
Vehicles 
20% declining-balance 
Furniture and equipment  
20% declining-balance 
Computer equipment  
45% declining-balance 
Communication equipment  
20% declining-balance 
 
Impairment of fixed assets and finite-lived intangible assets

Fixed assets (e.g. property and equipment) and finite-lived intangible assets (e.g. customer lists) are tested for impairment upon the occurrence of a triggering event that indicates the carrying value of such an asset or asset group (e.g. tugs and barges), might be no longer recoverable. Examples of such triggering events include a significant disposal of a portion of such assets, an adverse change in the market involving the business employing the related asset(s), a significant decrease in the benefits realized from an acquired business, difficulties or delays in integrating the business, and a significant change in the operations of an acquired business.

Once a triggering event has occurred, the recoverability test employed is based on whether the intent is to hold the asset(s) for continued use or to hold the asset(s) for sale. If the intent is to hold the asset(s) or group of asset(s) for continued use, the recoverability test involves a comparison of undiscounted cash flows excluding interest expense but including any proceeds from eventual disposition, against the carrying value of the asset(s) as an initial test. If the carrying value of such asset(s) exceeds the undiscounted cash flow, the asset(s) would be deemed to be impaired. Impairment would then be measured as the difference between the fair value of the fixed or amortizing intangible asset and the carrying value of such asset(s). The Company generally determines fair value by using the discounted cash flow method. If the intent is to hold the asset(s) for sale and certain other criteria are met (i.e. the asset(s) can be disposed of currently, appropriate levels of authority have approved the sale and there is an actively pursuing buyer), the impairment test is a comparison of the asset’s carrying value to its fair value less costs to sell. To the extent that the carrying value is greater than the asset’s fair value less costs to sell, an impairment loss is recognized for the difference. The Company has determined that there were no adverse changes in our markets or other triggering events that could affect the valuation of our assets during the six month period ended September 30, 2015.


F- 10


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


2.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Impairment of goodwill

The Company annually reviews the carrying value of goodwill residing in its reporting units, to determine whether impairment may exist. Accounting Standards Codification (“ASC”) 350 “Intangibles-Goodwill and Other” and Accounting Standards Update (“ASU”) 2011-08 Intangibles—Goodwill and Other (Topic 350) - Testing Goodwill for Impairment requires that goodwill and certain indefinite-lived intangible assets be assessed annually for impairment using fair value measurement techniques. Specifically, goodwill impairment is determined using a three-step process. The first step of the goodwill impairment test is to perform a qualitative assessment before calculating the fair value of the reporting unit when testing goodwill for impairment. If the fair value of the reporting unit is determined, based on qualitative factors, to be more likely than not less than the carrying amount of the reporting unit, then entities are required to perform the two-step goodwill impairment test. The second step of the goodwill impairment test is used to identify potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. The estimates of fair value of the Company’s two reporting units, which are the Company’s Canadian and U.S. operations (excluding the parent), are determined using various valuation techniques with the primary techniques being a discounted cash flow analysis and peer analysis. A discounted cash flow analysis requires various judgmental assumptions, including assumptions about future cash flows, growth rates, and discount rates. The assumptions about future cash flows and growth rates are based on the Company’s forecast and long-term estimates. Discount rate assumptions are based on an assessment of the risk inherent in the respective reporting units. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired and the third step of the impairment test is unnecessary. If the carrying amount of a reporting unit exceeds its fair value, the third step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The third step of the goodwill impairment test compares the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit’s goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the fair value of the reporting unit is allocated to all of the existing assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price paid to acquire the reporting unit.  As of March 31, 2015, the Company conducted the qualitative assessment and determined that the fair value of its two reporting units exceeded their carrying amounts and the remaining two-step impairment testing was therefore not necessary.  The Company has determined that there were no adverse changes in our markets or other triggering events that indicated that it is more likely than not that the fair value of our reporting units was less than the carrying value of our reporting units during the six month period ended September 30, 2015.
 
Drydock costs

Drydock costs incurred during statutory Canadian and United States certification processes are capitalized and amortized on a straight-line basis over the benefit period, which is generally 60 months. Drydock costs include costs of work performed by third party shipyards and subcontractors and other direct expenses to complete the mandatory certification process.
 
Repairs and maintenance

The Company’s vessels require repairs and maintenance each year to ensure the fleet is operating efficiently during the shipping season.  The majority of repairs and maintenance are completed in January, February, and March of each year when the vessels are inactive.  The Company expenses such routine repairs and maintenance costs as incurred.  Significant repairs to the Company’s vessels, such as major engine overhauls and major hull steel repairs, are capitalized and amortized over the remaining useful life of the upgrade or asset repaired.
 

F- 11


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


2.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Income taxes

The Company accounts for income taxes in accordance with ASC 740 “Income Taxes”, which requires the determination of deferred tax assets and liabilities based on the differences between the financial statement and income tax bases of tax assets and liabilities, using enacted tax rates in effect for the year in which the differences are expected to reverse.  A valuation allowance is recognized, if necessary, to measure tax benefits to the extent that, based on available evidence, it is more likely than not that they will be realized. Income tax expense (or benefit) for an interim period is based on income taxes computed for ordinary income or loss and income taxes computed for items or events that are not part of ordinary income or loss. At the end of each interim period, the Company applies an estimate of the effective tax rate expected to be applicable for the full fiscal year to the year-to-date ordinary income (or loss) at the end of the interim period.

The Company classifies interest expense related to income tax liabilities, when applicable, as part of the interest expense in its consolidated statements of operations rather than income tax expense.  To date, the Company has not incurred material interest expenses or penalties relating to assessed taxation amounts.

An examination by the U.S. federal taxing authority for the fiscal year ended March 31, 2012 was completed in 2014, with no adjustments warranted. Lower Lakes was examined by the Canadian taxing authority for the tax years 2009 and 2010 and such examination was completed in 2013.  This audit did not result in any material adjustments for such periods. The Company's primary U.S. state income tax jurisdictions are Illinois, Indiana, Michigan, Minnesota, Pennsylvania, Wisconsin and New York and its only international jurisdictions are Canada and its province of Ontario. The following table summarizes the open fiscal tax years for each major jurisdiction:

Jurisdiction
Open Tax Years
Federal (U.S.A)
2011 – 2014
Various states
2011 – 2014
Federal (Canada)
2010 – 2015
Ontario
2010 – 2015


Foreign currency translation

The Company uses the U.S. Dollar as its reporting currency.  The functional currency of the Company's Canadian subsidiaries is the Canadian Dollar.  The functional currency of the Company’s U.S. subsidiaries is the U.S. Dollar. Assets and liabilities denominated in foreign currencies are translated into U.S. Dollars at the rate of exchange at the balance sheet date, while revenue and expenses are translated at the average exchange rates prevailing during the respective month.  Components of stockholders’ equity are translated at historical exchange rates.  Exchange gains and losses resulting from translation are reflected in accumulated other comprehensive income or loss, except for financial assets and liabilities designated in foreign currency, which are reflected in the Company's consolidated statements of operations.


Advertising costs

The Company expenses all advertising costs as incurred. These costs are included in general and administrative expenses and were insignificant during the periods presented.

F- 12


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


2.    SIGNIFICANT ACCOUNTING POLICIES (continued)

Use of estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States 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 revenue and expenses during the reporting period. Significant estimates used in the preparation of these financial statements include the assumptions used in determining the useful lives of long-lived assets, the assumptions used in determining whether assets are impaired, the assumptions used in determining the valuation allowance for deferred income tax assets and the assumptions used in stock based compensation awards. Actual results could differ from those estimates.
        
Stock-based compensation

The Company recognizes compensation expense for all newly granted awards and awards modified, repurchased or cancelled based on fair value at the date of grant.

Financial instruments

The Company accounts for its foreign currency hedge contracts on its subordinated debt utilizing ASC 815 “Derivatives and Hedging”. All changes in the fair value of the contracts are recorded in earnings and the fair value of settlement costs to terminate the contract is included in current assets or current liabilities on the consolidated balance sheets. Disclosure requirements of ASC 815 are presented in Note 22.

Fair value of financial instruments

ASC 820 “Fair Value Measurements and Disclosures” ("ASC 820") defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles and establishes a hierarchy that categorizes and prioritizes the inputs to be used to estimate fair value. The three levels of inputs used are as follows:

Level 1 - Quoted prices in active markets for identical assets or liabilities.
Level 2 - Inputs other than Level 1 that are observable for the asset or liability, either directly or indirectly, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data by correlation or other means.
Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The disclosure requirements of ASC 820 related to the Company’s financial assets and liabilities are presented in Note 22.



F- 13


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


3.
RECENTLY ISSUED PRONOUNCEMENTS

Revenue from Contracts with Customers
    
In May 2014, the Financial Accounting Standard Board (the "FASB") issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) ("ASU 2014-09"), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In July 2015, the FASB voted to delay of the effective date of the new standard by one year to annual periods beginning after December 15, 2017 and shall be applied either retrospectively to each period presented or as a cumulative-effect adjustment as of the date of adoption. Early adoption is permitted as of the original effective date. We are evaluating the effect, if any, that adopting this new accounting standard will have on our consolidated financial statements and related disclosures.

Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern

In August 2014, the FASB issued Accounting Standards Update 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern ("ASU 2014-15"). ASU 2014-15 provide guidance on management's responsibility in evaluating whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity's ability to continue as a going concern within one year after the date that the financial statements are issued (or within one year after the date that the financial statements are available to be issued when applicable). ASU 2014-15 also provides guidance related to the required disclosures as a result of management's evaluation.
 
The amendments in ASU 2014-15 are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted.

Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs.

In April 2015, the FASB issued ASU 2015-03, “Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs.” This guidance requires that the debt issuance costs related to a recognized term debt liability be presented in the balance sheet as a direct deduction from the debt liability, consistent with the presentation of a debt discount. This amendment is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted.  The adoption of this standard is not expected to have a material effect on the Company’s consolidated financial statements.

4.
ACCOUNTS RECEIVABLE, NET

Trade receivables are presented net of an allowance for doubtful accounts. The allowance was $nil as of September 30, 2015 and $nil as of March 31, 2015. The Company manages and evaluates the collectability of its trade receivables as follows: management reviews aged accounts receivable listings and contact is made with customers that have extended beyond agreed upon credit terms. Senior management and operations are notified so that when they are contacted by such customers for a future delivery, they can request that the customer pay any past due amounts before any future cargo is booked for shipment. Customer credit risk is also managed by reviewing the history of payments by the customer, the size and credit quality of the customer, the period of time remaining within the shipping season and demand for future cargos.


F- 14


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)



5.PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets are comprised of the following:

 
September 30, 2015
 
March 31, 2015
Prepaid insurance
$
520

 
$
160

Fuel and lubricant inventories
4,315

 
4,018

Deposits and other prepaids
1,768

 
1,779

 
$
6,603

 
$
5,957



6.
INCOME TAXES


The Company's effective tax rate for the six month period ended September 30, 2015 was a deferred tax benefit of 41.3% compared to a deferred tax expense of 11.7% for the six month period ended September 30, 2014. The decrease in effective tax rate was primarily due to the implementation of a Federal valuation allowance against the Canadian net deferred tax assets relating to capital losses and implementation of a U.S. state valuation allowance against the U.S. state net deferred tax assets, which are primarily net operating losses. For state tax purposes, the Company is in a small net deferred tax liability position before the consideration of the valuation allowance at September 30, 2015. After the consideration of the reversing patterns of these liabilities on a separate jurisdiction basis, it is expected that a portion of these liabilities will reverse within the period of time available for existing deferred tax assets including net operating loss carry forwards. The Company recorded a small valuation allowance against the U.S. state net deferred tax assets as of September 30, 2015.
    
The effective tax rate for the six month period ended September 30, 2015 was lower than the statutory tax rate due to the implementation of the valuation allowance related to the net U.S. Federal and state deferred tax assets, which are primarily net operating losses. The Company did not incur any income tax related interest expense or penalties related to uncertain tax positions during each of the six month periods ended September 30, 2015 and September 30, 2014.


F- 15


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


7.
PROPERTY AND EQUIPMENT, NET

Property and equipment, net are comprised of the following:
    
 
September 30, 2015
 
March 31, 2015
Cost
 
 
 
Vessels
$
302,913

 
$
279,785

Leasehold improvements
98

 
102

Furniture and equipment
550

 
563

Vehicles
15

 
16

Computer, communication equipment and purchased software
2,929

 
2,901

 
$
306,505

 
$
283,367

Accumulated depreciation
 

 
 

Vessels
$
81,731

 
$
74,794

Leasehold improvements
82

 
78

Furniture and equipment
311

 
283

Vehicles
12

 
13

Computer, communication equipment  and purchased software
1,977

 
1,923

 
84,113

 
77,091

 
$
222,392

 
$
206,276


Depreciable assets as at September 30, 2015 includes capital expenditures related to a recently acquired vessel that had not been placed into service as of September 30, 2015. Depreciation on this asset will commence after the vessel becomes available for commercial sailing. Property and equipment as of September 30, 2015 includes capitalized interest during the six month period ended September 30, 2015 of $715 ($734 for the fiscal year ended March 31, 2015).


8.
OTHER ASSETS

Other assets include certain customer contract related expenditures, which are amortized over a five year period. The
current portion of such costs represents the amounts expected to be recognized as expenses during the next fiscal year.
 
September 30, 2015
March 31, 2015
Customer contract costs
$
333

$
533

Prepaid expenses and other assets
6,472

5,993

Total
$
6,805

$
6,526

 
 
 
Current portion (Note 5)
6,603

5,957

 
 
 
Other long term assets
$
202

$
569



F- 16


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


9.
DEFERRED DRYDOCK COSTS, NET

Deferred drydock costs, net are comprised of the following:

 
September 30, 2015
 
March 31, 2015
Drydock expenditures
$
15,907

 
$
16,607

Accumulated amortization
(9,341
)
 
(9,017
)
 
$
6,566

 
$
7,590

 
The following table shows periodic deferrals of drydock costs and amortization.

Balance as of March 31, 2014
$
9,321

Drydock costs accrued and incurred
2,239

Amortization of drydock costs
(3,343
)
Foreign currency translation adjustment
(627
)
Balance as of March 31, 2015
$
7,590

Drydock costs accrued and incurred
987

Amortization of drydock costs
(1,767
)
Foreign currency translation adjustment
(244
)
Balance as of September 30, 2015
$
6,566


F- 17


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


10.
INTANGIBLE ASSETS, NET AND GOODWILL

Intangibles, net are comprised of the following:

 
September 30, 2015
 
March 31, 2015
Intangible assets:
 
 
 
Deferred financing costs
$
6,754

 
$
6,787

Trademarks and trade names
836

 
866

Customer relationships and contracts
14,852

 
15,378

Total identifiable intangibles
$
22,442

 
$
23,031

Accumulated amortization:
 

 
 

Deferred financing costs
$
1,295

 
$
686

Trademarks and trade names
800

 
785

Customer relationships and contracts
8,550

 
8,355

Total accumulated amortization
10,645

 
9,826

Net intangible assets
$
11,797

 
$
13,205

Goodwill
$
10,193

 
$
10,193


 
Intangible asset amortization over the next five years is estimated as follows:
    
Twelve month period ending:
September 30, 2016
$
2,299

September 30, 2017
2,264

September 30, 2018
2,264

September 30, 2019
2,264

September 30, 2020
1,354

 
$
10,445


 
11.
VESSEL ACQUISITION

On March 11, 2014, Lower Lakes Towing entered into and consummated the transactions contemplated by a Memorandum of Agreement with Uni-Tankers M/T “Lalandia Swan” ApS (the "Seller"), pursuant to which Lower Lakes Towing purchased the Lalandia Swan from the Seller for a purchase price of $7,000. Lower Lakes Towing subsequently transferred the title of such vessel to Lower Lakes (17). This acquisition was funded with borrowings under the subordinated debt described in Note 15. The vessel was converted to a self-unloading vessel. The Lalandia Swan was renamed the M.V. Manitoulin.


F- 18


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


12.
BANK INDEBTEDNESS

As explained in Note 14, the outstanding amount under operating lines of credit under the Fourth Amended and Restated Credit Agreement as of March 27, 2015 were paid out of the proceeds of the Credit Agreement, as defined therein.

As discussed in detail in Note 14, on March 11, 2014, Lower Lakes Towing, Lower Lakes Transportation, Grand River and Black Creek, as borrowers, and Rand LL Holdings, Rand Finance, Black Creek Holdings, Lower Lakes Ship Repair and Lower Lakes (17), and the Company as guarantors, entered into a Fourth Amended and Restated Credit Agreement (the "Fourth Amended and Restated Credit Agreement"), with General Electric Capital Corporation, as agent and a lender, and certain other lenders, which amended and restated the Third Amended and Restated Credit Agreement (the “Third Amended and Restated Credit Agreement”) entered into on August 30, 2012, as the same was amended from time to time.

The Fourth Amended and Restated Credit Agreement provided that the line of credit bears interest, at the borrowers' option, at Canadian Prime Rate plus 3.00% or Canadian BA rate plus 4.00% on Canadian Dollar borrowings, and the U.S. Base rate plus 3.00% or LIBOR plus 4.00% on U.S. Dollar borrowings, compared to the Third Amended and Restated Credit Agreement, which bore interest at the Canadian Prime Rate plus 3.75% or Canadian BA rate plus 4.75% on Canadian Dollar borrowings, and the U.S. Base rate plus 3.75% or LIBOR plus 4.75% on U.S. Dollar borrowings. The Fourth Amended and Restated Credit Agreement was subject to the terms and conditions described in Note 14. Available collateral for borrowings and letters of credit were based on eligible accounts receivable, which were limited to 85% of those receivables that are not over 90 days old, not in excess of 20%-30% per customer in each line and certain other standard limitations.


13.
ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:
 
 
September 30, 2015
 
March 31, 2015
  Deferred financing and other transaction costs
$
42

 
$
396

Payroll compensation and benefits
1,942

 
1,575

Preferred stock dividends
1,236

 
587

Professional fees
346

 
340

Interest
2,204

 
1,771

Winter work, deferred drydock expenditures and capital expenditures
425

 
1,293

Capital and franchise taxes
26

 
30

Other
1,470

 
1,636

 
$
7,691

 
$
7,628

 

F- 19


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


14.
LONG-TERM DEBT
    

    
 
 
September 30, 2015
 
March 31, 2015
 
 
 
 
 
a)
Canadian Revolving Facility bearing interest at BA rate or at Borrower's option Canadian Prime rate, if funded in Canadian dollar or at BA rate or LIBOR rate, if funded in U.S. Dollar at the applicable margin as discussed below. The amount outstanding is due at maturity date of September 30, 2019.
41,963

 
44,213

 
 
 
 
 
b)
U. S. Revolving Facility bearing interest at US Base Rate or at Borrower's option LIBOR at the applicable margin as discussed below. The amount outstanding is due at maturity date of September 30, 2019.
76,700

 
57,000

 
 
$
118,663

 
$
101,213

 
Less amounts due within 12 months

 

 
 
$
118,663

 
$
101,213



The effective interest rates at September 30, 2015 were 3.75% (3.75% at March 31, 2015) on the Canadian Revolving Facility and 3.04% (3.03% at March 31, 2015) on the U.S. Revolving Facility.

On March 27, 2015, Rand Logistics, Inc. (“Rand”) and certain of its subsidiaries entered into a Credit Agreement (the “Credit Agreement”) with Bank of America, N.A., in its capacity as agent and lender, and certain other lenders party thereto. Lower Lakes Towing, Lower Lakes Transportation, Grand River, and Black Creek are borrowers (the “Borrowers”) under the Credit Agreement. Black Creek, Lower Lakes Transportation, Grand River, Black Creek Holding, Rand LL Holdings and Rand Finance, each of which is a direct or indirect wholly-owned subsidiary of the Company and the Company itself are guarantors of all United States and Canadian obligations under the Credit Agreement (collectively, the “US Guarantors”). Lower Lakes Towing (17) and Lower Lakes Ship Repair are guarantors of all Canadian obligations under the Credit Agreement and are direct or indirect wholly-owned subsidiaries of Rand (collectively, the “Canadian Guarantors”; and together with the US Guarantors, the “Guarantors”). The proceeds of the Credit Agreement were used to extinguish certain indebtedness and to provide working capital financing and funds for other general corporate and permitted purposes.

The obligations are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of the Borrowers and the Guarantors, including a pledge of all or a portion of the equity interests of the Borrowers and the Guarantors. The security interests are evidenced by pledge, security and guaranty agreements and other related agreements, including certain fleet mortgages.


F- 20


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


14.
LONG-TERM DEBT (continued)


The credit facilities (the “Credit Facilities”) under the Credit Agreement consist of:
A revolving credit facility under which Lower Lakes may borrow up to US $80,000 (CDN or USD currency
to be selected by Lower Lakes) with a final maturity date of September 30, 2019 (the “Canadian Revolving
Facility”);
A revolving credit facility under which Lower Lakes Transportation, Grand River and Black Creek may borrow
up to USD $90,000 with a final maturity date of September 30, 2019 (the “U.S. Revolving Facility”);
A swing line facility under which Lower Lakes may borrow lesser of up to CDN $8,000 and the CDN maximum
borrowing availability less the outstanding balance of the CDN revolving line at such time, with a final maturity date of September 30, 2019 (the “Canadian Swing Line Facility”); and
A swing line facility under which Lower Lakes Transportation, Grand River and Black Creek may borrow lesser
of up to USD $9,000 and the maximum borrowing availability less the outstanding balance of the U.S. revolving line at such time, with a final maturity date of September 30, 2019 (the “U.S. Swing Line Facility”).

Borrowings under the Credit Facilities will bear interest, in each case plus an applicable margin, as follows:
Canadian Revolving Facility: if funded in Canadian Dollars, the BA Rate (as defined in the Credit Agreement)
or, at the borrower’s option, the Canadian Prime Rate (as defined in the Credit Agreement) and if funded in U.S. Dollars, the Canadian Base Rate (as defined in the Credit Agreement) or, at the borrower’s option, the LIBOR Rate (as defined in the Credit Agreement);
U.S. Revolving Facility: the US Base Rate (as defined in the Credit Agreement) or, at the borrower’s option,
the LIBOR Rate;
Canadian Swing Line Facility: the Canadian Prime Rate or, at the borrower’s option, the Canadian Base Rate;
and
U.S. Swing Line Facility: the US Base Rate.

The applicable margin to the BA Rate, Canadian Prime Rate, Canadian Base Rate, US Base Rate and the LIBOR Rate is subject to specified changes depending on the Senior Funded Debt to EBITDA Ratio (as defined in the Credit Agreement). The Borrowers will also pay a monthly commitment fee at an annual rate of 0.25% on the undrawn committed amount available under the Canadian Revolving Facility and the U.S. Revolving Facility (the “Revolving Facilities”), which rate shall increase to 0.375% in the event the undrawn committed amount is greater than or equal to 50% of the aggregate committed amount under the Revolving Facilities.

Any amounts outstanding under the Credit Facilities are due at maturity. In addition, subject to certain exceptions, the Borrowers will be required to make principal repayments on amounts outstanding under the Credit Facilities from the net proceeds of specified types of asset sales, debt issuances and equity offerings. No such transactions have occurred as of September 30, 2015.

The Credit Agreement contains certain negative covenants, including those limiting the Guarantors’, the Borrowers’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their
businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Credit Agreement requires the Borrowers to maintain certain financial ratios. The Credit Agreement also contains affirmative covenants and events of default, including payment defaults, covenant defaults and cross defaults. If an event of default occurs, the agent would be entitled to take various actions, including the acceleration of amounts due under the outstanding Credit Facilities. As of September 30, 2015, the Company was in compliance with the covenants contained in the Credit Agreement.

As of September 30, 2015, the Company had credit availability of USD $30,890 on the credit facilities based on eligible receivables and vessel collateral value.





F- 21


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


14.    LONG-TERM DEBT (continued)

On March 11, 2014, Lower Lakes Towing, Lower Lakes Transportation, Grand River and Black Creek Shipping, as borrowers, Rand LL Holdings Corp. ("Rand LL Holdings"), Rand Finance, Black Creek Shipping Holdings Company, Inc. ("Black Creek Holdings"), Lower Lakes Ship Repair, Lower Lakes (17) and Rand, as guarantors, General Electric Capital Corporation, as agent and Lender, and certain other lenders, entered into a Fourth Amended and Restated Credit Agreement (the "Fourth Amended and Restated Credit Agreement"), which (i) amended and restated the existing Third Amended and Restated Credit Agreement to which the borrowers were a party, dated as of August 30, 2012, as the same has been amended from time to time, in its entirety, (ii) consolidated the existing U.S. term loans into a single term loan, (iii) provided for certain new loans and (iv) provided working capital financing, funds for other general corporate purposes and funds for other permitted purposes. The Fourth Amended and Restated Credit Agreement provided for (i) a revolving credit facility under which Lower Lakes Towing could borrow up to CDN $17,500 with a seasonal overadvance facility of the lesser of US $17,000 or CDN $17,500 less the principal amount outstanding under the seasonal overadvance facility for Lower Lakes Transportation, and a swing line facility of CDN $4,000, subject to limitations, (ii) a revolving credit facility under which Lower Lakes Transportation could borrow up to US $17,500 with a seasonal overadvance facility of US $17,000 less the principal amount outstanding under the seasonal overadvance facility for Lower Lakes Towing, and a swing line facility of US $50 subject to limitations, (iii) the continuation of an existing Canadian dollar denominated term loan facility under which Lower Lakes Towing was obligated to the lenders in the amount of CDN $54,882 as of the date of the Fourth Amended and Restated Credit Agreement (the “CDN Term Loan”) and (iv) the modification and continuation of a U.S. dollar denominated term loan facility under which Grand River and Black Creek were obligated to the lenders in the amount of $55,246 as of the date of the Fourth Amended and Restated Credit Agreement (the “U.S. Term Loan”).

Under the Fourth Amended and Restated Credit Agreement, the revolving credit facilities and swing line loans would expire on April 1, 2019. The outstanding principal amount of the CDN Term Loan borrowings was repayable as follows: (i) annual payments equal to one percent (1%) of the initial principal amount thereof paid quarterly commencing September 1, 2014 and (ii) a final payment in the outstanding principal amount of the CDN Term Loan upon the CDN Term Loan’s maturity on April 1, 2019. The outstanding principal amount of the U.S. Term Loan borrowings would have been repayable as follows: (i) annual payments equal to one percent (1%) of the initial principal amount thereof paid quarterly commencing September 1, 2014, and (iii) a final payment in the outstanding principal amount of the U.S. Term Loan upon the U.S. Term Loan’s maturity on April 1, 2019. Borrowings under the Canadian revolving credit facility, the Canadian swing line facility and the CDN Term Loan bore an interest rate per annum, at the borrowers' option, equal to (i) the Canadian Prime Rate (as defined in the Fourth Amended and Restated Credit Agreement), plus 3.00% per annum or (ii) the BA Rate (as defined in the Fourth Amended and Restated Credit Agreement) plus 4.00% per annum. Borrowings under the U.S. revolving credit facility, the U.S. swing line facility and the U.S. Term Loan bore interest, at the borrowers’ option, equal to (i) LIBOR (as defined in the Fourth Amended and Restated Credit Agreement) plus 4.00% per annum, or (ii) the U.S. Base Rate (as defined in the Fourth Amended and Restated Credit Agreement) plus 3.00% per annum.

Obligations under the Fourth Amended and Restated Credit Agreement were secured by (i) a first priority lien and security interest on all of the borrowers’ and guarantors’ assets, tangible or intangible, real, personal or mixed, existing and newly acquired, (ii) a pledge by Rand LL Holdings of all of the outstanding capital stock of the borrowers other than Black Creek and Lower Lakes Towing, and a pledge of 65% of the outstanding capital stock of Lower Lakes Towing, (iii) a pledge by Black Creek Holdings of all of the outstanding capital stock of Black Creek, (iv) a pledge by Lower Lakes Towing of all of the outstanding capital stock of Lower Lakes Ship Repair and Lower Lakes (17) and (v) a pledge by Rand of all of the outstanding capital stock of Rand LL Holdings, Rand Finance and Black Creek Holdings. The indebtedness of each domestic borrower under the Fourth Amended and Restated Credit Agreement was unconditionally guaranteed by each other domestic borrower and by the guarantors which are domestic subsidiaries, and such guaranty was secured by a lien on substantially all of the assets of each borrower and each guarantor. Each domestic borrower also guaranteed the obligations of the Canadian borrower and each Canadian guarantor guaranteed the obligations of the Canadian borrower. Under the Fourth Amended and Restated Credit Agreement, the borrowers were required to make mandatory prepayments of principal on term loan borrowings (i) if the outstanding balance of the term loans plus the outstanding balance of the seasonal facilities exceeded the sum of 85% of the orderly liquidation value of the vessels owned by the borrowers, less the amount of outstanding liens against the vessels with priority over the lenders’ liens, in an amount equal to such excess, (ii) in the event of certain dispositions of assets and insurance proceeds (all subject to certain exceptions), in an amount equal to 100% of the net proceeds received by the borrowers therefrom and (iii) in an amount

F- 22


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


14.
LONG-TERM DEBT (continued)

equal to 100% of the net proceeds to a borrower from any issuance of a borrower’s debt or equity securities (all subject to certain exceptions).

The Fourth Amended and Restated Credit Agreement contained certain covenants, including those limiting the guarantors’, the borrowers’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Fourth Amended and Restated Credit Agreement required the borrowers to maintain certain financial ratios. Failure of the borrowers or the guarantors to comply with any of these covenants or financial ratios could have resulted in the loans under the Fourth Amended and Restated Credit Agreement being accelerated.



F- 23


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


15.    SUBORDINATED DEBT

 
 
September 30, 2015
 
March 31, 2015
a)
U.S. Dollar denominated term loan (Second Lien CDN Term loan) bearing interest at LIBOR rate (as defined) plus 9.5% or U.S. base rate (as defined) plus 8.5% at the Company’s option. The loan is repayable upon maturity on March 11, 2020.
$
39,826

 
$
34,200

 
 
 
 
 
b)
U.S. Dollar denominated term loan (Second Lien U.S. Term loan) bearing interest at LIBOR rate (as defined) plus 9.5% or U.S. base rate (as defined) plus 8.5% at the Company’s option. The loan is repayable upon maturity on March 11, 2020.
38,300

 
38,300

 
 
$
78,126

 
$
72,500


On March 11, 2014, Lower Lakes Towing, Grand River and Black Creek, as borrowers, Rand LL Holdings, Rand Finance, Black Creek Holdings and Rand, as guarantors, Guggenheim Corporate Funding, LLC, as agent and Lender, and certain other lenders, entered into a Term Loan Credit Agreement (the “Term Loan Credit Agreement”), which provided term loans to (i) partially repay outstanding indebtedness of borrowers under the Third Amended and Restated Credit Agreement, (ii) partially pay the acquisition and conversion costs for a new vessel, (iii) pay accrued but unpaid dividends due on our series A convertible preferred stock and (iv) provide working capital financing, funds for other general corporate purposes and funds for other permitted purposes. The Term Loan Credit Agreement initially provided for (i) a U.S. Dollar denominated term loan facility under which Lower Lakes Towing was obligated to the lenders in the amount of $34,200 (the “Second Lien CDN Term Loan”), (ii) a U.S. dollar denominated term loan facility under which Grand River and Black Creek were obligated to the Lenders in the amount of $38,300 (the “Second Lien U.S. Term Loan”) and (iii) an uncommitted incremental term loan facility of up to $32,500. On September 28, 2015, the Company added $5,626 to the Second Lien CDN Term loan to fund certain shipyard payment in connection with the conversion of an acquired vessel to a self-unloader vessel.

The outstanding principal amount of the Second Lien CDN Term Loan borrowings and the Second Lien U.S. Term Loan borrowings will be repayable upon their maturity on March 11, 2020. The Second Lien CDN Term Loan and Second Lien U.S. Term Loan bear an interest rate per annum at borrowers’ option, equal to (i) LIBOR (as defined in the Term Loan Credit Agreement) plus 9.50% per annum, or (ii) the U.S. Base Rate (as defined in the Term Loan Credit Agreement), plus 8.50% per annum.

Obligations under the Term Loan Credit Agreement are secured by the first-priority liens and security interests in substantially all of the assets of the borrowers and the guarantors, including a pledge of all or a portion of the equity interests of the borrowers and the guarantors. The indebtedness of each domestic borrower under the Term Loan Credit Agreement is unconditionally guaranteed by each other domestic borrower and by the guarantors which are domestic subsidiaries, and such guaranty is secured by a lien on substantially all of the assets of each borrower and each guarantor. Each domestic borrower also guarantees the obligations of the Canadian borrower and each Canadian guarantor guarantees the obligations of the Canadian borrower. Under the Term Loan Credit Agreement and subject to the terms of the Intercreditor Agreement (as defined below), the borrowers will be required to make mandatory prepayments of principal on term loan borrowings (i) in the event of certain dispositions of assets and insurance proceeds (all subject to certain exceptions), in an amount equal to 100% of the net proceeds received by the borrowers therefrom, and (ii) in an amount equal to 100% of the net proceeds to a borrower from any issuance of a borrower’s debt or equity securities (all subject to certain exceptions). The Term Loan Credit Agreement contains certain covenants, including those limiting the guarantors, the borrowers, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Term Loan Credit Agreement requires the borrowers to maintain certain financial ratios. Failure of the borrowers or the guarantors to comply with any of these covenants or financial ratios could result in the loans under the Term Loan Credit Agreement being accelerated. The obligations of the borrowers and the liens of the lenders under the Term Loan Credit Agreement are subject to the terms of an Intercreditor Agreement, which is further described below under the heading “Intercreditor Agreement”.


F- 24


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


15.
SUBORDINATED-DEBT (continued)

On April 11, 2014, Rand and certain of its subsidiaries entered into a First Amendment (the "First Amendment") to the Term Loan Credit Agreement. The First Amendment extended the due date of certain post-closing deliverables. In connection with the Credit Agreement described above, on March 27, 2015 Rand and certain of its subsidiaries entered into a Second Amendment (the “Second Amendment”) to the Term Loan Credit Agreement (as amended, the “Amended Second Lien Credit Agreement”). The Second Amendment conformed certain provisions of the Amended Second Lien Credit Agreement to the Credit Agreement, reduced the uncommitted incremental facility to $22,500, and also amended certain other covenants and terms thereof.
As of September 30, 2015, the Company was in compliance with covenants contained in the Amended Second Lien Credit Agreement.

Intercreditor Agreement

Also on March 11, 2014, Lower Lakes Towing, Lower Lakes Transportation, Grand River, Black Creek, Lower Lakes Ship Repair, Rand, Rand LL Holdings, Rand Finance, Black Creek Holdings and Lower Lakes (17) (collectively, the “Credit Parties”), General Electric Capital Corporation, as agent for the lenders under the Fourth Amended and Restated Credit Agreement (the “First Lien Lenders”) and Guggenheim Corporate Funding, LLC, as agent for the lenders under the Term Loan Credit Agreement (the “Second Lien Lenders”), entered into an Intercreditor Agreement (the “GE Intercreditor Agreement”), pursuant to which the Second Lien Lenders agreed to subordinate the obligations of the Credit Parties to them to the repayment of the obligations of the Credit Parties to the First Lien Lenders and further agreed to subordinate their liens on the assets of the Credit Parties to the liens granted in favor of the First Lien Lenders. Absent the occurrence of an Event of Default under the Fourth Amended and Restated Credit Agreement, the Second Lien Lenders were permitted to receive regularly scheduled principal and interest payments under the Term Loan Credit Agreement.

In connection with the Credit Agreement and Amended Second Lien Credit Agreement described above, on March 27, 2015, Rand and certain of its subsidiaries (collectively, the "New Credit Parties") entered into an Intercreditor Agreement (the “Intercreditor Agreement”) with Bank of America, N.A., as agent for the lenders under the Credit Agreement (the “New First Lien Lenders”) and Guggenheim Corporate Funding, LLC, as agent for the lenders under the Amended Second Lien Credit Agreement (the “New Second Lien Lenders”).

Under the Intercreditor Agreement the New Second Lien Lenders have agreed to subordinate the obligations of the New Credit Parties to them to the repayment of the obligations of the New Credit Parties to the New First Lien Lenders and have further agreed to subordinate their liens on the assets of the New Credit Parties to the liens granted in favor of the New First Lien Lenders.  Absent the occurrence of an Event of Default under the Credit Agreement, the New Second Lien Lenders are permitted to receive regularly scheduled principal and interest payments under the Amended Second Lien Credit Agreement.
 


F- 25


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


16.
COMMITMENTS
 
The Company did not have any leases which met the criteria of a capital lease as of September 30, 2015. Leases which do not qualify as capital leases are classified as operating leases. Operating lease rental and sublease rental payments included in general and administrative expenses are as follows:

 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Operating leases
 
$
142

 
$
150

 
$
269

 
$
295

Operating sublease
 
42

 
41

 
83

 
81

 
 
$
184

 
$
191

 
$
352

 
$
376


The Company’s future minimum rental commitments under other operating leases are as follows.

Twelve month period ending:
September 30, 2016
$
498

September 30, 2017
425

September 30, 2018
384

September 30, 2019
282

September 30, 2020
211

Thereafter
211

 
$
2,011

 

As of September 30, 2015, the Company had signed contractual commitments with several suppliers totaling $569 ($19,707 as of March 31, 2015) in connection with capital expenditures and shipyard projects due in less than one year.


17.
CONTINGENCIES

The Company is not involved in any legal proceedings which management expects to have a material adverse effect on the Company's business, financial position, results of operations or liquidity, nor is the Company aware of any proceedings that are pending or threatened which management believes may have a material adverse effect on the Company’s business, financial position, results of operations or liquidity. From time to time, the Company may be subject to ordinary routine litigation and claim incidental to the business involving principally commercial charter party disputes, and claims for alleged property damages, personal injuries and other matters. Those claims, even if lacking merit, could result in the expenditure of significant financial and managerial resources.  It is expected that larger claims would be covered by insurance, subject to customary deductibles, if they involve liabilities that may arise from allision, other marine casualty, damage to cargoes, oil pollution, death or personal injuries to crew. The Company evaluates the need for loss accruals under the requirements of ASC 450 – Contingencies.  The Company records an estimated loss for any claim, lawsuit, investigation or proceeding when it is probable that a liability has been incurred and the amount of the loss can reasonably be estimated. If the reasonable estimate of a probable loss is a range, and no amount within the range is a better estimate, then the Company records the minimum amount in the range as the loss accrual. If a loss is not probable or a probable loss cannot be reasonably estimated, no liability is recorded. As of September 30, 2015, an accrual of $457 ($247 as of March 31, 2015) was recorded for various claims.  Management believes that it has recorded adequate reserves and believes that it has adequate insurance coverage or has meritorious defenses for these claims.
 


F- 26


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


18.
STOCKHOLDERS’ EQUITY
 
On September 21, 2011, the Company completed a public underwritten offering of 2,800,000 shares of the Company’s common stock for $6.00 per share.  The Company’s proceeds from the offering, net of underwriter’s commissions and expenses, were $15,525.
 
On February 11, 2011, in connection with the Company's acquisition of two vessels, the Company issued 1,305,963 shares of the Company’s common stock to the seller of such vessels. Such shares were valued at the average of high and low price on that day of $5.175.

The Company is authorized to issue 1,000,000 shares of preferred stock with such designations, voting and other rights and preferences that may be determined from time to time by the Board of Directors. On March 3, 2006, the Company issued 300,000 shares of series A convertible preferred stock. The shares of the Company's series A preferred stock: rank senior to the Company’s common stock with respect to liquidation and dividends; are entitled to receive a cash dividend at the annual rate of 7.75% (based on the $50 per share issue price) payable quarterly (subject to increases of 0.5% for each six month period in respect of which the dividend is not timely paid, up to a maximum of 12%, subject to reversion to 7.75% upon payment of all accrued and unpaid dividends); are convertible into shares of the Company’s common stock at any time at the option of the series A preferred stockholder at a conversion price of $6.20 per share (based on the $50 per share issue price and subject to adjustment) or 8.065 shares of common stock for each series A preferred share (subject to adjustment); are convertible into shares of the Company’s common stock (based on a conversion price of $6.20 per share, subject to adjustment) at the option of the Company if, after the third anniversary of the acquisition, the trading price of the Company’s common stock for 20 trading days within any 30 trading day period equals or exceeds $8.50 per share (subject to adjustment); may be redeemed by the Company in connection with certain change of control or acquisition transactions; will vote on an as-converted basis with the Company’s common stock; and have a separate vote over certain material transactions or changes involving the Company.

The accrued preferred stock dividends payable at September 30, 2015 were $1,236 and at March 31, 2015 were $587. As of September 30, 2015, the effective dividend rate of the preferred stock was 8.25%. As of March 31, 2015, the effective dividend rate of the preferred stock was 7.75%.
 

F- 27


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


18.
STOCKHOLDERS’ EQUITY (continued)

Since January 2007, share-based compensation has been granted to management and directors from time to time.  The Company had no surviving, outstanding share-based compensation agreements with employees or directors prior to that date except as described below.  The Company has reserved 2,500,000 shares for issuance under the Company’s 2007 Long Term Incentive Plan (the “LTIP”) to employees, officers, directors and consultants.  At September 30, 2015, a total of 402,548 shares (429,634 shares at March 31, 2015) were available under the LTIP for future awards.

The following table summarizes shares issued to officers under employment agreements and restricted stock agreements from time to time.

Date issued
No. of Officers Covered
No. of Shares
Share Price
Reference
Expense
Vesting
Three months ended September 30, 2015
Three months ended September 30, 2014
Six months ended September 30, 2015
Six months ended September 30, 2014
Apr 11, 2012
2
45,754
8.68
Restricted Share Award Agreement
33
66
Three years in equal installments on each anniversary date.
Feb 22, 2013
4
32,387
5.96
Restricted Share Award Agreement
23
46
Two years in equal installments on each anniversary date.
Jun 5, 2013
6
54,337
5.55
Restricted Share Award Agreement
25
25
51
50
Three years in equal installments on each anniversary date.
Jul 22, 2014
10
105,189
5.90
Restricted Share Award Agreement
71
34
134
34
Three years in equal installments on each anniversary date.

For all share-based compensation, as employees and directors render service over the vesting periods, expense is recorded in general and administrative expenses. Share capital and additional paid-in capital are increased on the grant date with an offset to prepaid assets. Grant date fair value for all non-option share-based compensation is the average of the high and low trading prices on the date of grant.

F- 28


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


18.    STOCKHOLDERS’ EQUITY (continued)

The general characteristics of share-based awards granted under the LTIP through September 30, 2015 are as follows:
 
Stock Awards - All of the shares issued to non-employee outside directors vest immediately.  The first award to non-employee outside directors in the amount of 12,909 shares was made on February 13, 2008 for services through March 31, 2008.  During the fiscal year ended March 31, 2009, the Company awarded 15,948 shares for services from April 1, 2008 through December 31, 2008. The Company awarded 37,144 shares during the fiscal year ended March 31, 2010 for services from January 1, 2009 through March 31, 2010. During the fiscal year ended March 31, 2011, the Company awarded 14,007 shares for services provided from April 1, 2010 through March 31, 2011. During the fiscal year ended March 31, 2012, the Company awarded 10,722 shares for services from April 1, 2011 to March 31, 2012. During the fiscal year ended March 31, 2013, the Company awarded 10,854 shares for services provided from April 1, 2012 to March 31, 2013. During the fiscal year ended March 31, 2014, the Company awarded 19,256 shares for services rendered from April 1, 2013 to March 31, 2014. During the fiscal year ended March 31, 2015, the Company awarded 26,067 shares for services rendered from April 1, 2014 to March 31, 2015. For six month period ended September 30, 2015, the Company awarded 27,086 shares for services provided from April 1, 2015 through September 30, 2015. Grant date market value for all these awards is the average of the high and low trading prices of the Company’s common stock on the date of grant.

On July 31, 2008, the Company’s Board of Directors authorized management to make payments effective as of that date to the participants in the management bonus program. Pursuant to the terms of the management bonus program, Rand issued 478,232 shares of common stock to such employee participants.

Stock Options - Stock options granted to management employees vest over three years in equal annual installments. All options issued through September 30, 2015 expire ten years from the date of grant. Stock option grant date fair values are determined at the date of grant using a Black-Scholes option pricing model, a closed-form fair value model based on market prices at the date of grant. At each grant date the Company has estimated a dividend yield of 0%.  The weighted average risk free interest rate within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of the grant, which was 4.14% for the fiscal 2009 (July 2008) grant. Expected volatility for the fiscal 2009 grants was based on the prior 26 week period, which reflected trading and volume after the Company made major announcements on acquisitions and capital investments. Expected volatility was 39.49% for the fiscal 2009 grant. Options outstanding (479,785) at September 30, 2015, had a remaining weighted average contractual life of approximately two years and seven months.  The Company recorded compensation expenses related to such stock options of $Nil for the three and six month periods ended September 30, 2015 and September 30, 2014. All of the stock options granted in February 2008 (243,199) and July 2008 (236,586), had vested as of September 30, 2015. None of the outstanding stock options were in-the money as of September 30, 2015 or March 31, 2015.

Shares issued under Employees’ Retirement Savings Plans - The Company issued an aggregate of 204,336 shares to the individual retirement plans of all eligible Canadian employees under the LTIP from July 1, 2009 through September 30, 2015.  The Canadian employees’ plans are managed by independent brokerages. These shares vested immediately but are subject to the Company’s Insider Trading Policy. The shares were issued using the fair value share price, as defined by the LTIP, as of the first trading day of each month for that previous period’s accrued expense. The Company granted $Nil of equity of such accrued compensation expense for each of the three and six month periods ended September 30, 2015 and 2014.

Shares issued in lieu of cash compensation - The Company experienced a decrease in customer demand at the beginning of the 2009 sailing season and in an effort to maximize the Company’s liquidity, the Compensation Committee of the Company’s Board of Directors requested that five of the Company’s executive officers and all of its outside directors receive common stock as compensation in lieu of cash until the Company had better visibility about its outlook. As of November 16, 2009, the Company issued 158,325 shares to such officers and all of its outside directors at the average of the high and low sale prices of the Company’s common stock on the date of grant. The shares were issued under the LTIP and vested immediately. Beginning the third quarter of the fiscal year ended March 31, 2010, such executives' and outside directors’ compensation reverted back to cash.



F- 29


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)




18.    STOCKHOLDERS’ EQUITY (continued)

On September 16, 2010, the Company issued 15,153 shares to a key executive for payment of the fiscal year 2010 bonus at the average of the high and low sale prices of the Company’s common stock on the date of grant. The shares were issued under the LTIP and vested immediately. On February 15, 2013, the Company issued 94,993 shares to eligible Canadian and U.S. employees for a bonus at the average of the high and low trading prices of the Company’s common stock on the date of grant. The shares were issued under the LTIP and vested immediately.


Restricted Stock Units - On June 27, 2014, the Company issued 30,050 Restricted Stock Units (“RSU”) to eligible U.S. and Canadian employees under the LTIP. Each RSU represents one share of the Company's common stock. The grant date fair value of each RSU was $5.99, which represents the average of the high and low sale prices of the Company’s common stock on the date of grant. One-third of the RSUs vest on March 31 of each year, beginning on March 31, 2015. RSUs are not entitled to dividends or voting rights, if any, until the underlying shares of common stock are delivered. The total compensation cost of this grant is $204, net of estimated forfeitures. The fair value of the RSU awards is recognized on a straight-line basis over the vesting period. The Company recorded expense of $15 for the three month period ended September 30, 2015 and $27 for the six month period ended September 30, 2015 compared to the $20 for both the three and six month periods ended September 30, 2014). On the first vesting date of March 31, 2015, 10,559 shares vested.




19.
OUTSIDE VOYAGE CHARTER FEES

Outside voyage charter fees relate to the subcontracting of external vessels chartered to service the Company’s customers and supplement the existing shipments made by the Company’s operated vessels.


20.
INTEREST EXPENSE

Interest expense, net of interest capitalized is comprised of the following:
 
 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
Bank indebtedness
 
$

 
$
155

 
$

 
$
334

Amortization of deferred financing costs
 
316

 
333

 
640

 
666

Long-term debt-senior
 
989

 
1,265

 
2,014

 
2,519

Long-term debt-subordinated
 
2,020

 
1,992

 
4,001

 
3,953

Interest rate caps
 
3

 
3

 
5

 
5

Deferred payment liability
 
16

 
27

 
36

 
55

Interest capitalized
 
(382
)
 
(68
)
 
(715
)
 
(68
)
 
 
$
2,962

 
$
3,707

 
$
5,981

 
$
7,464




F- 30


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


21.
SEGMENT INFORMATION

The Company has identified only one reportable segment under ASC 280 “Segment Reporting”.

Information about geographic operations is as follows:

 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
 
 
 
 
 
 
 
 
 
Revenue by country:
 
 
 
 
 
 
 
 
Canada
 
$
28,126

 
$
31,012

 
$
53,266

 
$
55,212

United States
 
23,807

 
23,258

 
43,494

 
42,367

 
 
$
51,933

 
$
54,270

 
$
96,760

 
$
97,579


Revenues from external customers are allocated based on the country of the legal entity of the Company in which the revenues were recognized.
 
September 30, 2015
 
March 31, 2015
Property and equipment, net by country:
 
 
 
Canada
$
111,348

 
$
92,436

United States
111,044

 
113,840

 
$
222,392

 
$
206,276

Intangible assets, net by country:
 

 
 

Canada
$
6,536

 
$
7,457

United States
5,261

 
5,748

 
$
11,797

 
$
13,205

Goodwill by country:
 

 
 

Canada
$
8,284

 
$
8,284

United States
1,909

 
1,909

 
$
10,193

 
$
10,193

Total assets by country:
 

 
 

Canada
$
148,970

 
$
122,395

United States
133,786

 
127,895

 
$
282,756

 
$
250,290




F- 31


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


22.    FINANCIAL INSTRUMENTS

Fair value of financial instruments

Financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, long-term debts, a deferred payment liability, accrued liabilities and bank indebtedness.  The estimated fair values of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities approximate book values because of the short-term maturities of these instruments.  The estimated fair value of senior and subordinated debt approximates the carrying value as the debt bears interest at variable interest rates, which are based on rates for similar debt with similar credit rates in the open market.  The deferred payment liabilities are valued based on the interest rate of similar debt in the open market.

Fair value guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. A financial asset's or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
Commencing August 2014, the Company entered into rolling foreign currency hedge contracts of various amounts to mitigate currency fluctuation risk on its subordinated U.S. dollar denominated debt owed by Lower Lakes Towing.
Fair value guidance establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability's classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The following table provides the fair value of the foreign currency hedge contracts measured on a recurring basis as of September 30, 2015 and March 31, 2015:
 

 
 
 
 
Fair value measurements at September 30, 2015
 
 
 
Fair value measurements at
March 31, 2015
 
 
Carrying
value at
September 30, 2015
 
Quoted
prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Carrying
value at
March 31,
2015
 
Quoted
prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
Foreign currency hedge contracts
 
$10
 
$—
 
$10
 
$573
 
$—
 
$573
 
The foreign currency hedge contracts are measured at fair value using available rates on the similar instruments and are classified within Level 2 of the valuation hierarchy. This contracts are accounted for using the mark-to-market accounting method as if they were terminated at the day of valuation. There were no transfers into or out of Levels 1 and 2 of the fair value hierarchy during the six month period ended September 30, 2015.
 
The Company recorded a receivable of $10 as of September 30, 2015 for the foreign currency hedge contract on the Company’s U.S. dollar denominated subordinated debt owed by Lower Lakes Towing. For the three month period ended September 30, 2015, the fair value adjustments of the foreign currency hedge contract resulted in a gain of $2,215 ($379 for three month period ended September 30, 2014) and $1,484 for the six month period ended September 30, 2015 ($379 for the six month period ended September 30, 2014). This gain is included in the Company’s earnings and the fair value of settlement costs to terminate the contract is included in current assets on the Company's consolidated balance sheet.

F- 32


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


22.    FINANCIAL INSTRUMENTS (continued)

 The following table sets forth the fair value of the foreign currency hedge instruments as of the dates set forth below:

Derivatives not designated as hedging instrument:
 
Balance Sheet location
 
Fair Value as at
September 30, 2015
 
Fair Value as at
March 31, 2015
Foreign currency hedge contracts
 
Accounts receivable
 
$10
 
$573

The Company has not designated this contract as a hedging instrument. The changes in fair value of the foreign currency hedge contracts are recorded in earnings as follows:
 
Derivatives not designated as hedging instrument:
 
Location of (gain) loss -Recognized in
earnings
 
Three months ended September 30, 2015
 
Six months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2014
Foreign currency hedge contracts
 
Gain on foreign exchange
 
$(2,215)
 
$(1,484)
 
$(379)
 
$(379)
 
Foreign exchange risk

Foreign currency exchange risk to the Company results primarily from changes in exchange rates between the Company’s reporting currency, the U.S. Dollar, and the Canadian dollar.  As discussed above, in August 2014, the Company commenced entering into rolling foreign currency hedge contracts to mitigate currency fluctuation risk on its U.S. dollar denominated subordinated debt owed by Lower Lakes Towing. The Company is exposed to fluctuations in foreign exchange as a significant portion of revenue and operating expenses are denominated in Canadian dollars.

Interest rate risk

The Company is exposed to fluctuations in interest rates as a result of its banking facilities and senior debt bearing variable interest rates.

In December 2012, the Company entered into two interest rate cap contracts covering 50% of its then outstanding term debt on the date of such contracts at a cap of three month LIBOR at 2.5% on its U.S. Term Debt borrowings and a cap of three month BA rates at 3.0% on its Canadian Term Debt borrowings. The notional amount on each of these instruments will decrease with each scheduled principal payment of the term loan under the Third Amended and Restated Credit Agreement, notwithstanding the termination of such agreement. The interest rate cap contracts will terminate on December 1, 2015. Such contracts cover approximately 50% of first lien loans as of September 30, 2015.

Credit risk

Accounts receivable credit risk is mitigated by the diversification of the Company’s customers among industries and the short shipping season.

Liquidity risk

A tightened credit in financial markets or an economic downturn in certain of our markets may adversely affect the ability of the Company’s customers and suppliers to obtain financing for significant operations and purchases and to perform their obligations under agreements with the Company.  A tightening of credit could (i) result in a decrease in, or cancellation of, existing business, (ii) limit new business, (iii) negatively impact the Company’s ability to collect accounts receivable on a timely basis and (iv) affect the eligible receivables that are collateral for the Company’s lines of credit.  Excluding vessel acquisitions or major vessel conversion contracts, the Company makes seasonal net incremental borrowings under its Credit Agreement during the first quarter of each fiscal year to fund working capital needed to commence the sailing season. Such borrowings are then reduced during the second half of each fiscal year.

F- 33


RAND LOGISTICS, INC.
Notes to the Consolidated Financial Statements (Unaudited)
(U.S. Dollars 000’s except for Shares and Per Share data)


23.
EARNINGS PER SHARE

The Company had a total of 18,062,513 shares of common stock issued and outstanding as of September 30, 2015, out of an authorized total of 50,000,000 shares. The fully diluted calculation utilizes a total of 20,379,355 and 20,349,828 shares for the three and six month periods ended September 30, 2015, respectively and 20,298,940 and 20,295,799 for the three and six month periods ended September 30, 2014, respectively. The convertible preferred shares convert to an aggregate of 2,419,355 common shares based on a conversion price of $6.20.


 
 
Three months ended September 30, 2015
 
Three months ended September 30, 2014
 
Six months ended September 30, 2015
 
Six months ended September 30, 2014
Numerator:
 
 
 
 
 
 
 
 
Net income before preferred dividends
 
$
11,867

 
$
5,836

 
$
14,798

 
$
7,895

Preferred stock dividends
 
(328
)
 
(290
)
 
(649
)
 
(581
)
Net income applicable to common stockholders
 
$
11,539

 
$
5,546

 
$
14,149

 
$
7,314

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares for basic EPS
 
17,960,000

 
17,845,496

 
17,930,473

 
17,836,768

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Average price during period
 
2.68

 
6.09

 
3.03

 
6.16

Long term incentive stock option plan
 
479,785

 
479,785

 
479,785

 
479,785

Average exercise price of stock options
 
5.66

 
5.66

 
5.66

 
5.66

Shares that could be acquired with the proceeds of options
 

 
446,172

 

 
440,554

Dilutive shares due to options
 

 
33,613

 

 
39,231

Restricted Stock Units (RSU)-unvested
 
19,491

 
30,050

 

 
15,764

Average grant date fair value of unvested RSU
 
5.99

 
5.99

 
5.99

 
5.99

Shares that could be acquired with the proceeds of RSU
 

 
29,574

 

 
15,319

Dilutive shares due to RSU
 

 
476

 

 
445

Incremental shares due to unvested restricted shares
 

 

 

 

Weighted average convertible preferred shares at $6.20
 
2,419,355

 
2,419,355

 
2,419,355

 
2,419,355

Weighted average common shares for diluted EPS
 
20,379,355

 
20,298,940

 
20,349,828

 
20,295,799

Basic EPS
 
$
0.64

 
$
0.31

 
$
0.79

 
$
0.41

Diluted EPS
 
$
0.58

 
$
0.29

 
$
0.73

 
$
0.39

 


F- 34


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.
All dollar amounts are presented in millions except share, per share and per day amounts.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the accompanying financial statement notes of the Company appearing elsewhere in this Quarterly Report on Form 10-Q for the three month period ended September 30, 2015. The use of the term "GAAP" herein refers to Generally Accepted Accounting Principles in the United States of America.

Cautionary Note Regarding Forward-Looking Statements
 
This Quarterly Report on Form 10-Q contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Forward-looking statements involve matters that are not historical facts. Because these statements involve anticipated events or conditions, forward-looking statements often include words such as “anticipate,” “believe,” “can,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “should,” “target,” “will,” “would,” or similar expressions. Forward-looking statements include, but are not limited to, statements regarding:
our future operating or financial results;
descriptions of anticipated plans, goals or objectives of our management for operations and services;
anticipated financial position and liquidity, growth opportunities and growth rates, acquisition and divestiture opportunities, business prospects, regulatory and competitive outlook, investment and expenditure plans, investment results, strategic alternatives, business strategies, and other similar statements of expectations or objectives;
our capital resources and the adequacy thereof, including our ability to obtain financing in the future;
our expectations of vessels’ useful lives and the estimated obligations, and the timing thereof, relating to vessel repair or maintenance work;
our expected capital spending or operating expenses, including drydocking and insurance costs;
our ability to remain in compliance with applicable regulations and our debt covenants;
changes in laws, regulations or tax rates, or the outcome of pending legislative or regulatory initiatives; and
assumptions regarding any of the foregoing.

 Do not unduly rely on forward-looking statements. They represent our expectations about the future and are not guarantees. Forward-looking statements are only as of the date of the filing of this report, and, except as required by law, might not be updated to reflect changes as they occur after the forward-looking statements are made. We urge you to review our periodic filings with the Securities and Exchange Commission (the “SEC”) for any updates to our forward-looking statements.
We undertake no obligation, other than as may be required by law, to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise. We do not assume responsibility for the accuracy and completeness of forward-looking statements. Although we believe that the expectations reflected in these forward-looking statements are reasonable, any or all of the forward-looking statements contained in this report and in any other of our public statements may prove to be incorrect. This may occur as a result of inaccurate assumptions as a consequence of known or unknown risks and uncertainties. We caution that our list of risks under "Risk Factors" set forth in Part I Item 1A of the Company's Annual Report on Form 10-K for the year ended March 31, 2015 filed with the Securities and Exchange Commission on June 11, 2015 may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. In light of these risks, uncertainties, and assumptions, the events anticipated by our forward-looking statements discussed in this report might not occur. 


1


Overview
Business
Rand was incorporated in the State of Delaware in 2004 as a blank check company. In 2006, we acquired all of the outstanding shares of capital stock of Lower Lakes Towing Ltd. ("Lower Lakes Towing") with its subsidiary Lower Lakes Transportation Company ("Lower Lakes Transportation") and its affiliate, Grand River Navigation Company, Inc. ("Grand River"). Subsequent to our acquisition of Lower Lakes Towing, Lower Lakes Transportation and Grand River, we have added ten vessels to our fleet through acquisition transactions and we retired three smaller vessels.
In this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to Rand, we, us and the Company include Rand and its direct and indirect subsidiaries, and references to Lower Lakes' business or the business of Lower Lakes mean the combined businesses of Lower Lakes Towing, Lower Lakes Transportation, Grand River and Black Creek Shipping Company, Inc. ("Black Creek").
On December 27, 2012, Lower Lakes Ship Repair Company Ltd. ("Lower Lakes Ship Repair"), a wholly-owned subsidiary of Lower Lakes Towing, was incorporated under the laws of Canada. Lower Lakes Ship Repair provides ship repair services exclusively to the Company. On March 11, 2014, Lower Lakes Towing (17) Ltd. ("Lower Lakes (17)"), a wholly-owned subsidiary of Lower Lakes Towing whose primary asset is the vessel converted for Great Lakes use at a shipyard, was incorporated under the laws of Canada.
Our shipping business is operated in Canada by Lower Lakes Towing and in the United States by Lower Lakes Transportation. Lower Lakes Towing was organized in March 1994 under the laws of Canada to provide marine transportation services to dry bulk goods suppliers and purchasers operating in ports on the Great Lakes. Lower Lakes has grown from its origin as a small tug and barge operator to a full service shipping company with a combined fleet of fifteen cargo-carrying vessels operating in Canada and the United States. We have grown to become one of the largest bulk shipping companies operating on the Great Lakes and the leading service provider in the River Class market segment. We transport construction aggregates, salt, grain, coal, iron ore and other dry bulk commodities for customers in the construction, electric utility, food and integrated steel industries.
We believe that Lower Lakes is the only company providing significant domestic port-to-port services to both Canada and the United States in the Great Lakes region. Lower Lakes maintains this operating flexibility by operating both U.S. and Canadian-flagged vessels in compliance with the Shipping Act, 1916, and the Merchant Marine Act, 1920, commonly referred to as the Jones Act in the U.S. and the Coasting Trade Act in Canada, respectively.
Lower Lakes' fleet consists of five self-unloading bulk carriers and four conventional bulk carriers in Canada and six self-unloading bulk carriers in the U.S., including three articulated tug and barge units. Lower Lakes Towing owns the nine Canadian vessels. Lower Lakes Transportation time charters the six U.S. vessels, including the three tug and barge units, from Grand River. With the exception of two of the articulated tug and barge units (which Grand River bareboat charters from Black Creek), Grand River owns the vessels that it time charters to Lower Lakes Transportation.
Recent Developments and Vessel Acquisitions

On March 11, 2014, Lower Lakes (17) acquired the Lalandia Swan from Uni-Tankers M/T "Lalandia Swan" for a purchase price of $7.0 million. The Lalandia Swan was a Danish flagged chemical tanker that was converted with a new forebody into a Canadian flagged river class self-unloader vessel. After conversion to a self-unloader vessel, the Lalandia Swan was renamed the M. V. Manitoulin. We currently plan to introduce this vessel into service in November 2015.


2


Use of Non-GAAP Measures

Our discussion of our Results of Operations contains references to certain Non-GAAP financial measures, including, when applicable, (1) operating income plus depreciation, amortization of drydock costs, amortization of intangibles, loss (gain) on foreign exchange and loss on termination of vessel lease, and (2) operating income plus depreciation, amortization of drydock costs and amortization of intangibles. Such measures are used internally when evaluating our operating performance and, we believe, allow investors to make a more meaningful comparison between our business operating results over different periods of time, as well as with those of other similar companies. Management believes that such measures, when viewed with the Company's results under GAAP and the accompanying reconciliations, provide useful information about our operating performance and period-over-period comparisons. Additionally, management believes that (1) operating income plus depreciation, amortization of drydock costs, amortization of intangibles, loss (gain) on foreign exchange and loss on termination of vessel lease and (2) operating income plus depreciation, amortization of drydock costs and amortization of intangibles permit investors to gain an understanding of the factors and trends affecting our ongoing cash earnings. However, the Company's definition of such measures may differ from other companies reporting similarly named measures, and such measures are not measures of financial performance or liquidity under GAAP and, accordingly, should not be considered as an alternative to net income or cash flow from operating activities as indicators of operating performance or liquidity.  Instead, such performance measures should be viewed in addition to, and not in lieu of, or superior to, our operating performance measures calculated in accordance with GAAP. Reconciliations of such non-GAAP measures to GAAP measures are provided below.
Our discussion of our Results of Operations also contains references to constant currency amounts. The constant currency information presented herein is calculated by translating current period results using prior period weighted average foreign currency exchange rates. Revenue from our Canadian operations has historically represented more than half of our total revenue. Consequently, our revenue has been impacted, and we expect will continue to be impacted, by fluctuations in foreign currency exchange rates. For example, if the Canadian dollar weakens, our consolidated results stated in U.S. dollars are negatively impacted. These rate fluctuations can have a significant effect on our reported results. As a supplement to our reported operating results, we present constant currency financial information, which is a non-GAAP financial measure. We use constant currency information to provide a framework to assess how our business performed excluding the effects of foreign currency fluctuations. We believe this information is useful to investors to facilitate comparisons of operating results and better identify trends in our business. The Company's definition of constant currency may differ from other companies reporting similarly named measures, and these constant currency performance measures should be viewed in addition to, and not in lieu of, or superior to, our operating performance measures calculated in accordance with GAAP.




3


Results of Operations for the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014
Selected Financial and Operating Information
(USD in 000's)
Three months ended September 30, 2015
Three months ended September 30, 2014
$ Change
% Change
Revenue:
 
 
 
 
Freight and related revenue
$
43,835

$
46,102

(2,267
)
(4.9
)%
Fuel and other surcharges
5,563

8,168

(2,605
)
(31.9
)%
Outside voyage charter revenue
2,535


2,535

 %
Total
$
51,933

$
54,270

(2,337
)
(4.3
)%
Expenses:
 
 
 
 
Outside voyage charter fees
2,652


2,652

 %
Vessel operating expenses
30,030

33,612

(3,582
)
(10.7
)%
Repairs and maintenance
57

(5
)
62

(1,240.0
)%
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange
$
16,095

$
17,364

(1,269
)
(7.3
)%
OPERATING INCOME
10,321

10,246

75

0.7
 %
 
 
 
 
 
Sailing Days:
1,278

1,351

(73
)
(5.4
)%
Number of vessels operated:
15

15


 %
Per day in whole USD:
 
 
 
 
Revenue per Sailing Day:
 
 
 
 
Freight and related revenue
$
34,300

$
34,124

$
176

0.5
 %
Fuel and other surcharges
$
4,353

$
6,046

$
(1,693
)
(28.0
)%
 
 
 
 
 
Expenses per Sailing Day:
 
 
 
 
Vessel operating expenses
$
23,498

$
24,879

$
(1,381
)
(5.6
)%
Repairs and maintenance
$
45

$
(4
)
$
49

(1,225.0
)%
The following table provides a reconciliation of operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange during the three month periods ended September 30, 2015 and 2014 (USD in 000's):
 
Three months ended September 30, 2015
Three months ended September 30, 2014
Operating Income
$
10,321

$
10,246

Depreciation
4,603

4,693

Amortization of drydock costs
885

856

Amortization of intangibles
272

308

Loss on foreign exchange
14

1,261

 
 
 
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange
$
16,095

$
17,364


 

4


The following table summarizes the changes in the components of our revenue and certain expenses during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014:
(USD in 000's)
Sailing Days
 
Freight and related revenue
Fuel and other surcharges
Outside voyage charter revenue
Total revenue
Outside voyage charter fees
Vessel operating expenses
Repairs and maintenance
General and administrative
*Subtotal
Three months ended September 30, 2014
1,351

 
$
46,102

 
$
8,168

 
$

 
$
54,270

 
$

$
33,612

 
$
(5
)
 
$
3,299

 
$
17,364

Changes in the three month period ended September 30, 2015
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change attributable to weaker Canadian dollar

 
(4,132
)
 
(1,041
)
 
(514
)
 
(5,687
)
 
(538
)
(3,264
)
 
(9
)
 
(265
)
 
(1,611
)
Net change on a constant currency basis
(73
)
 
1,865

 
(1,564
)
 

 
301

 

(318
)
 
71

 
65

 
483

Changes in outside voyage charter revenue on a constant currency basis

 

 

 
3,049

 
3,049

 
3,190


 

 

 
(141
)
Total Change
(73
)
 
$
(2,267
)
 
$
(2,605
)
 
$
2,535

 
$
(2,337
)
 
2,652

$
(3,582
)
 
62

 
(200
)
 
(1,269
)
Three months ended September 30, 2015
1,278

 
$
43,835

 
$
5,563

 
$
2,535

 
$
51,933

 
$
2,652

$
30,030

 
$
57

 
$
3,099

 
$
16,095

*Operating Income plus Depreciation, Amortization of Drydock Costs, Amortization of Intangibles and Loss (Gain) on Foreign Exchange.
Total revenue during the three month period ended September 30, 2015 was $51.9 million, a decrease of 4.3%, compared to $54.3 million during the three month period ended September 30, 2014. This decrease was primarily attributable to a weaker Canadian dollar, reduction in fuel surcharge and a decrease in Sailing Days (which we define as days a vessel is crewed and available for sailing) on time chartered vessels. These were partially offset by contractual price increases, higher water levels and a higher percentage of time spent in revenue loaded condition. On a constant currency basis, our total revenue increased 6.2%, or $3.4 million, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Freight and other related revenue generated from Company-operated vessels decreased $2.3 million, or 4.9%, to $43.8 million during the three month period ended September 30, 2015 compared to $46.1 million during the three month period ended September 30, 2014. On a constant currency basis, freight and other related revenue increased 4.0%, or $1.9 million, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Our tonnage carried during the three month period ended September 30, 2015 increased 1.2% compared to the three month period ended September 30, 2014. During the three month period ended September 30, 2015, we experienced increases in tonnage carried in aggregates of 15.6%, due to increase in demand. We also experienced increased tonnage in potash and slag due to expanded market share when compared to the three month period ended September 30, 2014. Including outside voyage charter, our tonnage carried during the three month period ended September 30, 2015 increased 6.3% compared to the three month period ended September 30, 2014. Coal and coke tonnages carried during the three month period ended September 30, 2015 trailed the three month period ended September 30, 2014, decreasing 24.7% and 63.6%, respectively. These decreases were primarily a result of changes in market condition and were not a result of a reduction in our market share.
We operated fifteen vessels (the “Operated Vessels”) and time chartered a sixteenth vessel during the three month period ended September 30, 2015 compared to operating 15 vessels during the three month period ended September 30, 2014. Management believes that each of our Operated Vessels should achieve a theoretical maximum of 92 Sailing Days in our second fiscal quarter,

5


assuming average weather conditions, no major repairs, incidents or vessel layups. The Company’s Operated Vessels sailed an average of approximately 85 Sailing Days during the three month period ended September 30, 2015 compared to an average of 90 Sailing Days during the three month period ended September 30, 2014. Our Operated Vessels operated on 92.6% of the theoretical maximum Sailing Days for the three month period ended September 30, 2015, compared to 97.9% of the theoretical maximum Sailing Days for the three month period ended September 30, 2014. All our lost days for the three month period ended September 30, 2015 were on our time chartered vessels. Time charter agreements allow our customers the certainty of supply and the chartering customer continues to pay a reduced daily charter rate if the vessel does not sail.

We also measure Delay Days, which we define as the lost time incurred by our vessels while in operation, and includes delays caused by inclement weather, dock delays, traffic congestion, vessel mechanical issues and other varied events. We experienced 68 Delay Days during the three month period ended September 30, 2015 compared to 72 Delay Days during the three month period ended September 30, 2014. Such Delay Days represent a Lost Time Factor, calculated as Delay Days as a percentage of Sailing Days, of 5.4% during the three month period ended September 30, 2015 compared to 5.3% during the three month period ended September 30, 2014.

Freight and related revenue per Sailing Day increased $176, or 0.5%, to $34,300 per Sailing Day during the three month period ended September 30, 2015 compared to $34,124 per Sailing Day during the three month period ended September 30, 2014. This revenue increase was primarily due to higher pricing, higher water levels and the efficiency of trade patterns partially offset by a lower Canadian dollar and lower revenue earned for time chartered vessels for non-sailing days. On a constant currency basis, freight and related revenue per Sailing Day increased 10.0% or $3,409 per Sailing Day during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Outside voyage charter revenue equaled $2.5 million during the three month period ended September 30, 2015 compared to $nil during the three month period ended September 30, 2014. Outside voyage charter fees equaled $2.7 million during the three month period ended September 30, 2015 compared to $nil during the three month period ended September 30, 2014. Including the use of the outside voyage charter, our total tonnage carried increased by 6.3%. At or near the introduction of our newest vessel into service we will terminate the third party vessel charter. At such time the tonnage that we carried on the third party vessel that we are chartering will be carried by our newest vessel at what we believe will be profitability levels more consistent with our Operated Vessels.
Our customer contracts have fuel surcharge provisions whereby changes in our fuel costs are passed on to our customers. Such increases and decreases in fuel surcharges impact margin percentages, but do not significantly impact our margin dollars. Fuel and other surcharges decreased $2.6 million, or 31.9%, to $5.6 million during the three month period ended September 30, 2015 compared to $8.2 million during the three month period ended September 30, 2014. Fuel and other surcharges per Sailing Day decreased by $1,693, or 28.0%, to $4,353 per Sailing Day during the three month period ended September 30, 2015 compared to $6,046 per Sailing Day during the three month period ended September 30, 2014. These decreases were primarily attributable to reduced fuel prices and a weaker Canadian dollar, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014. On a constant currency basis, fuel and other surcharges decreased 19.1%, or $1.6 million, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Vessel operating expenses decreased $3.6 million, or 10.7%, to $30.0 million during the three month period ended September 30, 2015 compared to $33.6 million during the three month period ended September 30, 2014. These decreases were primarily due to a weaker Canadian dollar and reduced fuel prices, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014. Vessel operating expenses per Sailing Day decreased $1,381, or 5.6%, to $23,498 per Sailing Day during the three month period ended September 30, 2015 from $24,879 per Sailing Day during the three month period ended September 30, 2014. On a constant currency basis, vessel operating expenses decreased 0.9%, or $0.3 million, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Repairs and maintenance expenses, which primarily consist of expensed winter work, increased $62 thousand to $57 thousand during the three month period ended September 30, 2015 primarily due to higher layup charges related to our time chartered vessels compared to the 2014 sailing season. Repairs and maintenance per Sailing Day increased $49 to $45 per Sailing Day during the three month period ended September 30, 2015. On a constant currency basis, repairs and maintenance expenses increased $71 thousand, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.

6


Our general and administrative expenses were $3.1 million during the three month period ended September 30, 2015 compared to $3.3 million during the three month period ended September 30, 2014. The decrease was primarily due to a weaker Canadian dollar, offset by changes in our management team, expenses associated with new hires and a modest increase in compensation and benefit expenses in the three month period ended September 30, 2015. Our general and administrative expenses represented 7.1% of freight and related revenues during the three month period ended September 30, 2015 and 7.2% of freight and related revenues during the three month period ended September 30, 2014.
Depreciation expense was $4.6 million during the three month period ended September 30, 2015 and $4.7 million for the same period in 2014. This decrease of $0.1 million in the current three month period was primarily attributable to a weaker Canadian dollar and offset by winter 2015 capital expenditures during the three month period ended September 30, 2015.
Amortization of drydock costs was $0.9 million during each of the three month periods ended September 30, 2015 and September 30, 2014. During each of these periods, the Company amortized the deferred drydock costs of thirteen of its vessels.
Loss on foreign exchange during the three month period ended September 30, 2015 was $14 thousand, as compared to a loss of $1.3 million during the three month period ended September 30, 2014. The [$1.3 million loss during the three month period ended September 30, 2014] was primarily related to a translation of $34.2 million USD denominated debt incurred in March 2014 and carried on the balance sheet of the Canadian subsidiary partially offset by a foreign currency hedge.
As a result of the items described above, operating income during the three month period ended September 30, 2015 was $10.3 million compared to $10.2 million during the three month period ended September 30, 2014.
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange decreased $1.3 million, or 7.3%, from $17.4 million during the three month period ended September 30, 2014 to $16.1 million during the three month period ended September 30, 2015. On a constant currency basis, operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange increased 2.0%, or $0.3 million, during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014.
Interest expense, which is net of $0.4 million of capitalized interest and includes $0.3 million of amortization of deferred financing costs, decreased by $0.7 million or 20.1% to $3.0 million during the three month period ended September 30, 2015 from $3.7 million during the three month period ended September 30, 2014. This decrease in interest expense was primarily attributable to a lower interest rate on a portion of our long term debt as a result of our refinancing completed in March 2015 and higher interest capitalization, partially offset by higher average debt balance compared to the three month period September 30, 2014.
Our income before income taxes was $7.4 million during the three month period ended September 30, 2015 compared to $6.5 million during the three month period ended September 30, 2014.

Our effective tax rate was (61.3)% on pre-tax income of $7.4 million during the three month period ended September 30, 2015 compared to 10.8% on pre-tax income of $6.5 million during the three month period ended September 30, 2014. Our provision for income tax expenses was a benefit of $4.5 million during the three month period ended September 30, 2015 compared to an income tax expense of $0.7 million during the three month period ended September 30, 2014. The decrease in income tax expense was due to a lower consolidated tax rate during the three month period ended September 30, 2015 compared to the three month period ended September 30, 2014. The effective tax rate for the three month period ended September 30, 2015 was lower than the statutory tax rate due to the implementation of the valuation allowance related to the net U.S. Federal and state deferred tax assets, which are primarily net operating losses.


Our net income before preferred stock dividends was $11.9 million during the three month period ended September 30, 2015 compared to $5.8 million during the three month period ended September 30, 2014.

We accrued $0.3 million for dividends on our preferred stock during the three month period ended September 30, 2015 and September 30, 2014. The dividends accrued at a rate of 8.25% during the three month period ended September 30, 2015 as compared to 7.75% during the three month period ended September 30, 2014.
Our net income applicable to common stockholders was $11.5 million during the three month period ended September 30, 2015 compared to $5.5 million during the three month period ended September 30, 2014.

7


The Canadian dollar weakened by 16.8% compared to the U.S. dollar during the three month period ended September 30, 2015 as compared to the three month period ended September 30, 2014, averaging approximately $0.764 USD per CDN during the three month period ended September 30, 2015 compared to approximately $0.918 USD per CDN during the three month period ended September 30, 2014. The Company's balance sheet translation rate decreased from $0.893 USD per CDN at September 30, 2014 to $0.749 USD per CDN at September 30, 2015.
During the three month period ended September 30, 2015, the Company operated an average of six vessels in the U.S. and nine vessels in Canada. The percentage of our total freight and other revenue, fuel and other surcharge revenue, vessel operating expenses, repairs and maintenance costs and combined depreciation and amortization costs approximate the percentage of vessels operated by country. Approximately half of our general and administrative costs and our interest expense is incurred in Canada. Approximately 40% of our interest expense is incurred in Canada, reflecting the approximate percentage of total debt. All of our preferred stock dividends are accrued in the U.S.


8


Results of Operations for the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014
Selected Financial and Operating Information
(USD in 000's)
Six months ended September 30, 2015
Six months ended September 30, 2014
$ Change
% Change
Revenue:
 
 
 
 
Freight and related revenue
$
82,803

$
82,715

88

0.1
 %
Fuel and other surcharges
9,527

14,864

(5,337
)
(35.9
)%
Outside voyage charter revenue
4,430


4,430

 %
Total
$
96,760

$
97,579

(819
)
(0.8
)%
Expenses:
 
 
 
 
Outside voyage charter fees
4,493


4,493

 %
Vessel operating expenses
56,586

61,639

(5,053
)
(8.2
)%
Repairs and maintenance
897

1,177

(280
)
(23.8
)%
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange
$
28,385

$
28,564

(179
)
(0.6
)%
OPERATING INCOME
16,447

16,403

44

0.3
 %
 
 
 
 
 
Sailing Days:
2,506

2,489

17

0.7
 %
Number of vessels operated:
15

15


 %
Per day in whole USD:
 
 
 
 
Revenue per Sailing Day:
 
 
 
 
Freight and related revenue
$
33,042

$
33,232

$
(190
)
(0.6
)%
Fuel and other surcharges
$
3,802

$
5,972

$
(2,170
)
(36.3
)%
 
 
 
 
 
Expenses per Sailing Day:
 
 
 
 
Vessel operating expenses
$
22,580

$
24,765

$
(2,185
)
(8.8
)%
Repairs and maintenance
$
358

$
473

$
(115
)
(24.3
)%
The following table provides a reconciliation of operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange during the six month periods ended September 30, 2015 and 2014 (USD in 000's):
 
Six months ended September 30, 2015
Six months ended September 30, 2014
Operating Income
$
16,447

$
16,403

Depreciation
9,310

9,370

Amortization of drydock costs
1,767

1,712

Amortization of intangibles
556

616

Loss on foreign exchange
305

463

 
 
 
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange
$
28,385

$
28,564


 

9


The following table summarizes the changes in the components of our revenue and certain expenses during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014:
(USD in 000's)
Sailing Days
 
Freight and related revenue
Fuel and other surcharges
Outside voyage charter revenue
Total revenue
Outside voyage charter fees
Vessel operating expenses
Repairs and maintenance
General and administrative
*Subtotal
Six months ended September 30, 2014
2,489

 
$
82,715

 
$
14,864

 
$

 
$
97,579

 
$

$
61,639

 
$
1,177

 
$
6,199

 
$
28,564

Changes in the six month period ended September 30, 2015
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
Change attributable to weaker Canadian dollar

 
(6,663
)
 
(1,493
)
 
(759
)
 
(8,915
)
 
(774
)
(5,218
)
 
(49
)
 
(450
)
 
(2,424
)
Net change on a constant currency basis
17

 
6,751

 
(3,844
)
 

 
2,907

 

165

 
(231
)
 
650

 
2,323

Changes in outside voyage charter revenue on a constant currency basis

 

 

 
5,189

 
5,189

 
5,267


 

 

 
(78
)
Total Change
17

 
$
88

 
$
(5,337
)
 
$
4,430

 
$
(819
)
 
4,493

$
(5,053
)
 
(280
)
 
200

 
(179
)
Six months ended September 30, 2015
2,506

 
$
82,803

 
$
9,527

 
$
4,430

 
$
96,760

 
$
4,493

$
56,586

 
$
897

 
$
6,399

 
$
28,385

*Operating Income plus Depreciation, Amortization of Drydock Costs, Amortization of Intangibles and Loss (Gain) on Foreign Exchange.
Total revenue during the six month period ended September 30, 2015 was $96.8 million, a decrease of 0.8%, compared to $97.6 million during the six month period ended September 30, 2014. This decrease was primarily attributable to a weakened Canadian dollar, reduction in fuel surcharge, partially offset by an increase in tonnage carried and an associated increase in freight and related revenue, an increase in Sailing Days, which we define as days a vessel is crewed and available for sailing, the use of an outside chartered vessel, contractual price increases, improvements in commodity mix and water levels and a higher percentage of time spent in revenue loaded condition. On a constant currency basis, our total revenue increased 8.3%, or $8.1 million, during the fiscal period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Freight and other related revenue generated from Company-operated vessels increased $0.1 million, or 0.1%, to $82.8 million during the six month period ended September 30, 2015 compared to $82.7 million during the six month period ended September 30, 2014. On a constant currency basis, freight and other related revenue increased 8.2%, or $6.8 million, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Our tonnage carried during the six month period ended September 30, 2015 increased 6.6% compared to the six month period ended September 30, 2014. We experienced delays in the start of the 2015 sailing season due to challenging weather conditions experienced in April 2015 albeit significantly less difficult than those experienced in the prior comparable period. During the six month period ended September 30, 2015, we experienced increases in tonnage carried in aggregates and grain of 18.0% and 6.0%, respectively, due to a return to more normal trade patterns at the start of the season, increase in demand of certain commodities and expanded market share for certain of the commodities that we carry, in each case when compared to the six month period ended September 30, 2014. Including outside voyage charter, our tonnage carried during the six month period ended September 30, 2015 increased 12.1% compared to the six month period ended September 30, 2014. Coal carried during the six month period ended September 30, 2015 trailed the six month period ended September 30, 2014, decreasing 19.8%. These decreases were primarily a result of changes in customer requirements and were not a result of a reduction in our market share.


10


We operated fifteen vessels (the “Operated Vessels”) and time chartered a sixteenth vessel during the six month period ended September 30, 2015 compared to operating 15 vessels during the six month period ended and September 30, 2014. Management believes that each of our Operated Vessels should achieve a theoretical maximum of 183 Sailing Days in the first two fiscals quarter, assuming average weather conditions, no major repairs, incidents or vessel layups and normal drydocking cycle times performed during the winter lay-up period. The Company’s Operated Vessels sailed an average of approximately 167 Sailing Days during the six month period ended September 30, 2015 compared to an average of 166 Sailing Days during the six month period ended September 30, 2014. Traditionally, Sailing Days in the month of April are more variable due to weather conditions at the start of the season. The Operated Vessels sailed for an average of 21 Sailing Days in April 2015 versus 15 Sailing Days in April 2014 out of a theoretical maximum of 30 Sailing Days. Our Operated Vessels operated at 91.3% of the theoretical maximum Sailing Days for the six month period ended September 30, 2015, primarily due to the delay in the start of the 2015 sailing season, compared to 90.7% of the theoretical maximum Sailing Days for the six month period ended September 30, 2014.

We also measure Delay Days, which we define as the lost time incurred by our vessels while in operation, and includes delays caused by inclement weather, dock delays, traffic congestion, vessel mechanical issues and other varied events. We experienced 177 Delay Days during the six month period ended September 30, 2015 compared to 203 Delay Days during the six month period ended September 30, 2014. Such Delay Days represent a Lost Time Factor, calculated as Delay Days as a percentage of Sailing Days, of 7.1% during the six month period ended September 30, 2015 compared to 8.1% during the six month period ended September 30, 2014.

Freight and related revenue per Sailing Day decreased $190, or 0.6%, to $33,042 per Sailing Day during the six month period ended September 30, 2015 compared to $33,232 per Sailing Day during the six month period ended September 30, 2014. This revenue decrease was primarily due to the lower Canadian dollar, as well as a change in the mix of cargos carried, lost days on our time chartered vessels offset by an earlier start to the sailing season, higher pricing, higher water levels and the efficiency of trade patterns. On a constant currency basis, freight and related revenue per Sailing Day increased 7.4%, or $2,468 per Sailing Day, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Outside voyage charter revenue equaled $4.4 million during the six month period ended September 30, 2015 compared to $nil during the six month period ended September 30, 2014. Outside voyage charter fees equaled $4.5 million during the six month period ended September 30, 2015 compared to $nil during the six month period ended September 30, 2014. Including the use of the outside voyage charter, our total tonnage carried increased by 12.1%. At or near the introduction of our newest vessel into service we will terminate the third party vessel charter. At such time the tonnage that we carried on the third party vessel that we are chartering will be carried by our newest vessel at what we believe will be profitability levels more consistent with our Operated Vessels.
Our customer contracts have fuel surcharge provisions whereby changes in our fuel costs are passed on to our customers. Such increases and decreases in fuel surcharges impact margin percentages, but do not significantly impact our margin dollars. Fuel and other surcharges decreased $5.3 million, or 35.9%, to $9.5 million during the six month period ended September 30, 2015 compared to $14.9 million during the six month period ended September 30, 2014. Fuel and other surcharges per Sailing Day decreased by $2,170, or 36.3%, to $3,802 per Sailing Day during the six month period ended September 30, 2015 compared to $5,972 per Sailing Day during the six month period ended September 30, 2014. These decreases were primarily attributable to reduced fuel prices and a weaker Canadian dollar, partially offset by an increase in Sailing Days during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014. On a constant currency basis, fuel and other surcharges decreased 25.9%, or $3.8 million, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Vessel operating expenses decreased $5.0 million, or 8.2%, to $56.6 million during the six month period ended September 30, 2015 compared to $61.6 million during the six month period ended September 30, 2014. These decreases were primarily due to a weaker Canadian dollar and reduced fuel prices, partially offset by an increase in Sailing Days during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014. Vessel operating expenses per Sailing Day decreased $2,185, or 8.8%, to $22,580 per Sailing Day during the six month period ended September 30, 2015 from $24,765 per Sailing Day during the six month period ended September 30, 2014. On a constant currency basis, vessel operating expenses increased 0.3%, or $0.2 million, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Repairs and maintenance expenses, which primarily consist of expensed winter work, decreased $0.3 million to $0.9 million during the six month period ended September 30, 2015 from $1.2 million during the six month period ended September 30, 2014 primarily due to lower fitout costs as more boats were ready for sailing at the start of the 2015 season as compared to the

11


2014 sailing season. Repairs and maintenance per Sailing Day decreased $115, or 24.3%, to $358 per Sailing Day during the six month period ended September 30, 2015 from $473 per Sailing Day during the six month period ended September 30, 2014. On a constant currency basis, repairs and maintenance expenses decreased 19.6%, or $0.2 million, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Our general and administrative expenses were $6.4 million during the six month period ended September 30, 2015 compared to $6.2 million during the six month period ended September 30, 2014. The increase was primarily due to non-recurring duplicative headcount costs resulting from changes in our management team, expenses associated with new hires, a modest increase in compensation and benefit expenses, and the payment of incentive compensation in the six month period ended September 30, 2015 and was offset by the weaker Canadian dollar. Our general and administrative expenses represented 7.7% of freight and related revenues during the six month period ended September 30, 2015 and 7.5% of freight and related revenues during the six month period ended September 30, 2014.
Depreciation expense was $9.3 million during the six month period ended September 30, 2015 and $9.4 million during the same period in 2014. This decrease was primarily attributable to a weaker Canadian dollar and was offset by winter 2015 capital expenditures during the six month period ended September 30, 2015.
Amortization of drydock costs was $1.8 million during the six month period ended September 30, 2015 and $1.7 million during the six month periods ended September 30, 2014. During the six month periods ended September 30, 2015 and September 30, 2014, the Company amortized the deferred drydock costs of thirteen and twelve vessels, respectively.
Loss on foreign exchange during the six month period ended September 30, 2015 was $0.3 million, as compared to a gain of $0.5 million during the six month period ended September 30, 2014. The losses was primarily related to a translation of $39.8 million USD denominated debt and carried on the balance sheet of the Canadian subsidiary.
As a result of the items described above, operating income during the six month periods ended September 30, 2015 and September 30, 2014 was $16.4 million.
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange decreased $0.2 million, or 0.6%, from $28.6 million during the six month period ended September 30, 2014 to $28.4 million during the six month period ended September 30, 2015. On a constant currency basis, operating income plus depreciation, amortization of drydock costs, amortization of intangibles and loss (gain) on foreign exchange increased 7.9%, or $2.2 million, during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Interest expense, which is net of $0.7 million of capitalized interest and includes $0.6 million of amortization of deferred financing costs, decreased by $1.5 million or 19.9% to $6.0 million during the six month period ended September 30, 2015 from $7.5 million during the six month period ended September 30, 2014. This decrease in interest expense was primarily attributable to a lower interest rate on a portion of our long term debt as a result of our refinancing completed in March 2015 and higher interest capitalization, partially offset by higher average debt balance compared to the six month period September 30, 2014.
Our income before income taxes was $10.5 million during the six month period ended September 30, 2015 compared to $8.9 million during the six month period ended September 30, 2014.

Our effective tax rate for the six month period ended September 30, 2015 was (41.3)% on pre-tax income of $10.5 million, resulting in an income tax benefit of $4.3 million.  Other than statutory minimum foreign federal tax, none of our federal or foreign income tax expense is payable in cash due to our net operating loss carry-forwards ("NOL"). Our effective tax rate for the six month period ended September 30, 2014 was 11.7% on pre-tax income of $8.9 million resulting in an income tax expense of $1.0 million.  The decrease in income tax expense was due to a lower consolidated tax rate during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.  The effective tax rate for the six month period ended September 30, 2015 was lower than the statutory tax rate due to the implementation of the valuation allowance related to the net U.S. Federal deferred tax assets, which are primarily net operating losses.

Our net income before preferred stock dividends was $14.8 million during the six month period ended September 30, 2015 compared to $7.9 million during the six month period ended September 30, 2014.


12


We accrued $0.6 million for dividends on our preferred stock during the six month period ended September 30, 2015 and September 30, 2014. The dividends accrued at a rate of 8.25% during the six month period ended September 30, 2015 as compared to 7.75% during the six month period ended September 30, 2014.
Our net income applicable to common stockholders was $14.1 million during the six month period ended September 30, 2015 compared to $7.3 million during the six month period ended September 30, 2014.
The Canadian dollar weakened by 14.1% compared to the U.S. dollar during the six month period ended September 30, 2015 as compared to the six month period ended September 30, 2014, averaging approximately $0.789 USD per CDN during the six month period ended September 30, 2015 compared to approximately $0.918 USD per CDN during the six month period ended September 30, 2014. The Company's balance sheet translation rate decreased from $0.893 USD per CDN at September 30, 2014 to $0.749 USD per CDN at September 30, 2015.
During the three month period ended September 30, 2015, the Company operated an average of six vessels in the U.S. and nine vessels in Canada. The percentage of our total freight and other revenue, fuel and other surcharge revenue, vessel operating expenses, repairs and maintenance costs and combined depreciation and amortization costs approximate the percentage of vessels operated by country. Approximately half of our general and administrative costs and our interest expense is incurred in Canada. Approximately 40% of our interest expense is incurred in Canada, reflecting the approximate percentage of total debt. All of our preferred stock dividends are accrued in the U.S.


13


Impact of Inflation and Changing Prices
During the six month periods ended September 30, 2015 and 2014, there were major fluctuations in our fuel costs. However, our contracts with our customers provide for recovery of these costs over specified rates through fuel surcharges. In addition, there was volatility in the exchange rate between the U.S. dollar and the Canadian dollar during the six month periods ended September 30, 2015 and September 30, 2014, which impacted the average of monthly translation rates for total revenue and costs to U.S. dollars by a decrease of approximately 14.1% during the six month period ended September 30, 2015 compared to the six month period ended September 30, 2014.
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, the proceeds of our credit facilities and proceeds from sales of our common stock. In March 2015, the Company refinanced its senior secured debt as discussed below. Our principal uses of cash are vessel acquisitions, capital expenditures, drydock expenditures, operations and interest and principal payments under our credit facilities. Information on our consolidated cash flow is presented in the consolidated statements of cash flows (categorized by operating, investing and financing activities), which is included in our consolidated financial statements for the six month period ended September 30, 2015 and September 30, 2014. We believe cash generated from our operations and availability of borrowings under our credit facilities will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months. However, if the Company experiences a material shortfall to its financial forecasts or if the Company's customers materially delay their receivable payments, the Company may breach its financial covenants and collateral thresholds and be strained for liquidity. The Company has maintained its focus on productivity gains and cost controls, and is closely monitoring customer credit and accounts receivable balances.
Net cash generated by operating activities during the six month period ended September 30, 2015 was $12.2 million, an increase of $1.2 million, from $10.9 million during the six month period ended September 30, 2014. The increase in cash generated was primarily attributable to higher net income compared to September 30, 2014.
The Company did not incur any significant bad-debt write-offs or material slowdowns in receivable collections during either of the six month periods ended September 30, 2015 or 2014.
Net cash used in investing activities increased by $20.5 million to $38.1 million during the six month period ended September 30, 2015 from net cash used of $17.6 million during the six month period ended September 30, 2014. This increase was primarily due to capital expenditures on the conversion of our newest vessel to a self-unloading vessel.
Net cash provided by financing activities increased $17.1 million to $24.6 million provided during the six month period ended September 30, 2015 compared to $7.4 million provided during the six month period ended September 30, 2014. The increase is attributable to borrowings under our senior and subordinated credit facilities related to the payments for our vessel conversion project.
Debt

We had total debt outstanding of $196.8 million at September 30, 2015 which is comprised of amounts outstanding under our First Lien Credit Agreement of $118.7 million and our Amended Second Lien Credit Agreement of $78.1 million.

First Lien Credit Agreement

The First Lien Credit Agreement consists of:
A revolving credit facility under which Lower Lakes may borrow up to US $80 million (CDN or USD currency to be selected by Lower Lakes) with a final maturity date of September 30, 2019;
A revolving credit facility under which Lower Lakes Transportation, Grand River and Black Creek may borrow up to USD $90 million with a final maturity date of September 30, 2019;
A swing line facility under which Lower Lakes may borrow up to CDN $8 million, less the outstanding balance of the Canadian Revolving Facility, with a final maturity date of September 30, 2019; and
A swing line facility under which Lower Lakes Transportation, Grand River and Black Creek may borrow up to USD $9 million, less the outstanding balance of the U.S. Revolving Facility, with a final maturity date of September 30, 2019.


14


The obligations under the First Lien Credit Agreement are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of the borrowers and the guarantors party to the agreement. Any amounts outstanding under the First Lien Credit Agreement are due at maturity.

The First Lien Credit Agreement contains certain negative covenants, including those limiting the guarantors’, the borrowers’, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the First Lien Credit Agreement requires the borrowers to maintain certain financial ratios. As of September 30, 2015, we were in compliance with these covenants.

Amended Second Lien Credit Agreement

The Amended Second Lien Credit Agreement consists of:
 A U.S. Dollar denominated term loan facility under which Lower Lakes Towing is obligated to the lenders in the amount of $34.2 million with a final maturity date of March 11, 2020;
A U.S. dollar denominated term loan facility under which Grand River and Black Creek are obligated to the lenders in the amount of $38.3 million with a final maturity date of March 11, 2020; and
An uncommitted incremental term loan facility of up to $22.5 million.

Subject to the terms of the Intercreditor Agreement, the obligations under the Amended Second Lien Credit Agreement are secured by first-priority liens on, and a first-priority security interest in, substantially all of the assets of the borrowers and the guarantors party to the agreement. Any amounts outstanding under the Amended Second Lien Credit Agreement are due at maturity.

The Amended Second Lien Credit Agreement contains certain covenants, including those limiting the guarantors, the borrowers, and their subsidiaries’ ability to incur indebtedness, incur liens, sell or acquire assets or businesses, change the nature of their businesses, engage in transactions with related parties, make certain investments or pay dividends. In addition, the Amended Second Lien Credit Agreement requires the borrowers to maintain certain financial ratios. As of September 30, 2015, we were in compliance with these covenants.

The Amended Second Lien Credit Agreement also contemplates a $5.6 million incremental loan that is required in connection with certain borrowings under the First Lien Credit Agreement.  This incremental loan was made on September 28, 2015.

Intercreditor Agreement

Under our Intercreditor Agreement with the agent for the lenders under the First Lien Credit Agreement (the "First Lien Lenders") and the agent for the lenders under the Amended Second Lien Credit Agreement (the "Second Lien Lenders"), the Second Lien Lenders have agreed to subordinate our obligations to them to the repayment of our obligations to the First Lien Lenders and have further agreed to subordinate their liens on our assets to the liens granted in favor of the First Lien Lenders.  

Preferred Stock and Preferred Stock Dividends
The shares of the Company's series A convertible preferred stock rank senior to the Company's common stock with respect to liquidation and dividends; are entitled to receive a cash dividend at the annual rate of 7.75% (based on the $50 per share issue price), payable quarterly (subject to increases of 0.5% for each six month period in respect of which the dividend is not paid in cash, up to a maximum of 12%, subject to reversion to 7.75% upon payment of all accrued and unpaid dividends); are convertible into shares of the Company's common stock at any time at the option of the series A preferred stockholder at a conversion price of $6.20 per share (based on the $50 per share issue price and subject to adjustment) or 8.065 shares of common stock for each series A preferred share (subject to adjustment); are convertible into shares of the Company's common stock (based on a conversion price of $6.20 per share, subject to adjustment) at the option of the Company if, after the third anniversary of our acquisition of Lower Lakes, the trading price of the Company's common stock for 20 trading days within any 30 trading day period equals or exceeds $8.50 per share (subject to adjustment); may be redeemed by the Company in connection with certain change of control or acquisition transactions; will vote on an as-converted basis with the Company's common stock; and have a separate vote over certain material transactions or changes involving the Company.

15


As of September 30, 2015, the Company had $1.2 million of unpaid accrued dividends on its preferred stock for the six month period ended at September 30, 2015 compared to $0.6 million at March 31, 2015. As of September 30, 2015, the effective rate of preferred dividends was 8.25% as compared to 7.75% at March 31, 2015.
Investments in Capital Expenditures and Drydockings
We incurred $32.0 million in paid and unpaid capital expenditures and drydock expenses during the six month period ended September 30, 2015, including $3.1 million of carryover from the 2015 winter season, compared to $10.8 million in paid and unpaid capital expenditures and drydock expenses during the six month period ended September 30, 2014, including $4.1 million of carryover from the 2014 winter season.
Vessel Acquisition
On March 11, 2014, Lower Lakes (17) acquired the Lalandia swan from Uni-Tankers M/T "Lalandia Swan" for a purchase price of $7.0 million. The Lalandia Swan was a Danish flagged chemical tanker that was converted with a new forebody into a Canadian flagged river class self-unloader vessel. After conversion to a self-unloader vessel, the Lalandia Swan was renamed the M. V. Manitoulin. We currently plan to introduce this vessel into service in November 2015.
Contractual Commitments
There have been no material changes outside the ordinary course of business to our contractual obligations and commitments as disclosed in our Annual Report on Form 10-K for the year ended March 31, 2015.
Off-Balance Sheet Arrangements
There are no off-balance sheet arrangements.

16


Lack of Historical Operating Data for Acquired Vessels
From time to time, as opportunities arise and depending on the availability of financing, we may acquire additional secondhand drybulk carriers. Information regarding the Lack of Historical Operating Data for Acquired Vessels can be found in our Annual Report on Form 10-K for the year ended March 31, 2015.

Critical Accounting Policies and Estimates
Rand's significant accounting policies are presented in Note 2 to our unaudited consolidated financial statements. The preparation of our financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that impact the amounts reported in our Consolidated Financial Statements and accompanying notes. Therefore, the reported amounts of assets, liabilities, revenues, expenses and associated disclosures of contingent liabilities are affected by these estimates. We evaluate these estimates on an ongoing basis, utilizing historical experience, consultation with experts and other methods considered reasonable in the particular circumstances. Nevertheless, actual results may differ significantly from our estimates. Any effects on our business, financial position or results of operations resulting from revisions to these estimates are recognized in the accounting period in which the facts that give rise to the revisions become known. For a discussion of how these and other factors may affect our business, see "Cautionary Note Regarding Forward-Looking Statements" above and "Risk Factors" in our Annual Report on Form 10-K for the year ended March 31, 2015.
Information regarding our critical accounting policies and estimates can be found in our Annual Report on Form 10-K for the year ended March 31, 2015. The critical accounting policies that we believe require us to make more significant judgments and estimates when we prepare our financial statements include those relating to revenue and operating expense recognition, income taxes, vessel acquisitions, intangible assets and goodwill, impairment of goodwill, fixed assets and finite-lived intangible assets and stock based compensation. There have been no material changes to our critical accounting policies or estimates from those set forth in our Annual Report on Form 10-K for the year ended March 31, 2015.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
 
There have been no material changes to the market risk disclosures set forth in Item 7A in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

Item 4. Controls and Procedures.
Disclosure Controls and Procedures.
Our senior management is responsible for establishing and maintaining disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d - 15(e) under the Securities Exchange Act of 1934), designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the issuer's management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Evaluation of Disclosure Controls and Procedures.
We have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report, with the participation of our Principal Executive Officer and Principal Financial Officer, as well as other members of our management. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2015.

17


Changes in Internal Control Over Financial Reporting
No change occurred in our internal control over financial reporting during the second quarter ended September 30, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.



18



PART II. OTHER INFORMATION

Item 1.   Legal Proceedings.
The nature of our business exposes us to the potential for legal proceedings related to labor and employment, personal injury, property damage, and environmental matters. Although the ultimate outcome of any legal matter cannot be predicted with certainty, based on present information, including our assessment of the merits of each particular matter, as well as our current reserves and insurance coverage, we do not expect that any known legal proceeding will in the foreseeable future have a material adverse impact on our financial condition, results of our operations or our cash flows.

Item 1A.   Risk Factors.
There has been no material change to our Risk Factors from those presented in our Annual Report on Form 10-K for the fiscal year ended March 31, 2015.

Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
 
None.

Item 3.
Defaults Upon Senior Securities.
 
None.

Item 4.
Mine Safety Disclosures.
 
Not applicable.

Item 5. Other Information.
None.


19


Item 6.
Exhibits.

 (a) Exhibits
31.1†
Chief Executive Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2†
Chief Financial Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1***
Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2***
Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS†
XBRL Instance Document
 
 
101.SCH†
XBRL Taxonomy Extension Schema Document
 
 
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
† Filed herewith.
*** Furnished herewith.




20



SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
RAND LOGISTICS, INC.
 
 
 
 
Date:
November 10, 2015
 
/s/ Edward Levy
 
 
 
Edward Levy
 
 
 
President and Chief Executive Officer
 
 
 
(Principal Executive Officer)
 
 
 
 
Date:
November 10, 2015
 
/s/ Mark S. Hiltwein
 
 
 
Mark S. Hiltwein
 
 
 
Chief Financial Officer
 
 
 
(Principal Financial Officer)


    


21


Exhibit Index
 

 
 
31.1†
Chief Executive Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
31.2†
Chief Financial Officer's Certificate, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
 
 
32.1***
Chief Executive Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
32.2***
Chief Financial Officer's Certificate, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
 
101.INS†
XBRL Instance Document
 
 
101.SCH†
XBRL Taxonomy Extension Schema Document
 
 
101.CAL†
XBRL Taxonomy Extension Calculation Linkbase Document
 
 
101.DEF†
XBRL Taxonomy Extension Definition Linkbase Document
 
 
101.LAB†
XBRL Taxonomy Extension Label Linkbase Document
 
 
101.PRE†
XBRL Taxonomy Extension Presentation Linkbase Document
 
 
† Filed herewith.
*** Furnished herewith.




22