10-Q 1 rlog-20160930x10q.htm 10-Q Document


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

Form 10-Q


þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the Quarterly Period Ended September 30, 2016
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.)
 
 
 
333 Washington Street, Suite 201
 
 
Jersey City, NJ
 
07302
(Address of principal executive offices)
 
(Zip Code)

(212) 863-9427
(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 ¨
 
 
 
 
 
Non-accelerated filer ¨
 
Smaller reporting company ý
  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

18,569,186 shares of Common Stock, par value $.0001, were outstanding at November 9, 2016




RAND LOGISTICS, INC.

INDEX
 



2

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, 2016
 
March 31, 2016
ASSETS
 
 
 
CURRENT
 
 
 
Cash and cash equivalents
$
409

 
$
77

Accounts receivable, net (Note 4)
12,796

 
2,697

Income taxes receivable
38

 
47

Prepaid expenses and other current assets (Notes 5 and 8)
6,645

 
6,320

Total current assets
19,888

 
9,141

PROPERTY AND EQUIPMENT, NET (Note 7)
218,051

 
228,504

OTHER ASSETS (Note 8)
62

 
102

DEFERRED DRYDOCK COSTS, NET (Note 9)
6,330

 
6,660

INTANGIBLE ASSETS, NET (Note 10)
5,368

 
5,904

GOODWILL (Note 10)
10,193

 
10,193

 
Total assets 
$
259,892

 
$
260,504

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

CURRENT
 

 
 

Accounts payable
9,425

 
17,822

Accrued liabilities (Note 12)
11,906

 
8,144

Other current liability
115

 
776

Income taxes payable
15

 
34

Current portion of deferred payment liability
281

 
564

Total current liabilities
21,742

 
27,340

LONG-TERM DEBT  (Note 13)
117,065

 
112,426

SUBORDINATED DEBT (Note 14)
76,001

 
75,317

DEFERRED INCOME TAXES (Note 6)
5,642

 
5,825

 
 Total liabilities
220,450

 
220,908

COMMITMENTS AND CONTINGENCIES (Notes 15 and 16)


 


STOCKHOLDERS' EQUITY
 

 
 

Preferred stock, $.0001 par value, Authorized 1,000,000 shares, Issued and outstanding 295,480 shares at September 30, 2016 and at March 31, 2016 (Note 17)
14,674

 
14,674

Common stock, $.0001 par value, Authorized 50,000,000 shares, Issued and outstanding 18,569,186 shares at September 30, 2016 and 18,359,397 shares at March 31, 2016 (Note 17)
1

 
1

Additional paid-in capital
91,233

 
90,993

Accumulated deficit
(56,904
)
 
(56,537
)
Accumulated other comprehensive loss
(9,562
)
 
(9,535
)
 
 Total stockholders’ equity
39,442

 
39,596

Total liabilities and stockholders’ equity
$
259,892

 
$
260,504


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

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, 2016
 
Three months ended September 30, 2015
 
Six months ended September 30, 2016
 
Six months ended September 30, 2015
REVENUE
 
 
 
 
 
 
 
 
Freight and related revenue
 
$
37,518

 
$
43,835

 
$
70,623

 
$
82,803

Fuel and other surcharges
 
1,722

 
5,563

 
2,434

 
9,527

Outside voyage charter revenue (Note 18)
 

 
2,535

 

 
4,430

TOTAL REVENUE
 
39,240

 
51,933

 
73,057

 
96,760

EXPENSES
 
 
 
 
 
 
 
 
Outside voyage charter fees (Note 18)
 

 
2,652

 

 
4,493

Vessel operating expenses
 
22,028

 
30,030

 
40,870

 
56,586

Repairs and maintenance
 
100

 
57

 
1,085

 
897

General and administrative
 
3,855

 
3,099

 
7,730

 
6,399

Depreciation
 
5,203

 
4,603

 
10,501

 
9,310

Amortization of drydock costs
 
754

 
885

 
1,607

 
1,767

Amortization of intangibles
 
252

 
272

 
505

 
556

(Gain) loss on foreign exchange, net
 
(540
)
 
14

 
(1,663
)
 
305

Restructuring charges (Note 20)
 

 

 
2,375

 

Impairment charges on retired asset (Note 7)
 

 

 
1,872

 

TOTAL EXPENSES
 
31,652

 
41,612

 
64,882

 
80,313

OPERATING INCOME
 
7,588

 
10,321

 
8,175

 
16,447

OTHER INCOME AND EXPENSES
 
 
 
 
 
 
 
 
Interest expense (Note 19)
 
4,276

 
2,962

 
7,896

 
5,981

Interest income
 
(2
)
 

 
(4
)
 
(4
)
 
 
4,274

 
2,962

 
7,892

 
5,977

INCOME BEFORE INCOME TAXES
 
3,314

 
7,359

 
283

 
10,470

PROVISION (RECOVERY) FOR INCOME TAXES (Note 6)
 
 
 
 
 
 
 
 
Deferred
 
318

 
(4,508
)
 
(131
)
 
(4,328
)
 
 
318

 
(4,508
)
 
(131
)
 
(4,328
)
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
2,996

 
11,867

 
414

 
14,798

PREFERRED STOCK DIVIDENDS
 
395

 
328

 
781

 
649

NET INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
 
$
2,601

 
$
11,539

 
$
(367
)
 
$
14,149

Net income (loss) per share basic (Note 23)
 
$
0.14

 
$
0.64

 
$
(0.02
)
 
$
0.79

Net income (loss) per share diluted (Note 23)
 
0.14

 
0.58

 
(0.02
)
 
0.73

Weighted average shares basic
 
18,379,565

 
17,960,000

 
18,349,970

 
17,930,473

Weighted average shares diluted
 
20,762,468

 
20,379,355

 
18,349,970

 
20,349,828


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



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, 2016
 
Three months ended September 30, 2015
 
Six months ended September 30, 2016
 
Six months ended September 30, 2015
 
 
 
 
 
 
 
 
 
NET INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
2,996

 
11,867

 
414

 
14,798

Other comprehensive loss:
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
 
(175
)
 
(1,654
)
 
(27
)
 
(1,628
)
COMPREHENSIVE INCOME BEFORE PREFERRED STOCK DIVIDENDS
 
2,821

 
10,213

 
387

 
13,170


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


5

RAND LOGISTICS, INC.
Consolidated 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
 
Amount
 
Amount
 
Amount
 
Amount
Balances, March 31, 2015
 
300,000

 
$
14,900

 
18,035,427

 
$
1

 
$
90,130

 
$
(50,972
)
 
$
(7,812
)
 
$
46,247

Net loss
 

 

 

 

 

 
(4,232
)
 

 
(4,232
)
Preferred stock dividends
 

 

 

 

 

 
(1,333
)
 

 
(1,333
)
Restricted stock issued (Note 17)
 

 

 
13,801

 

 
25

 

 

 
25

Unrestricted stock issued (Note 17)
 

 

 
264,814

 

 
524

 

 

 
524

Restricted stock units granted
 

 

 
8,905

 

 
57

 

 

 
57

Preferred stock conversion to common stock
 
(4,520
)
 
(226
)
 
36,450

 


 
226

 

 

 

Stock options issued
 

 

 

 

 
31

 

 

 
31

Translation adjustment
 

 

 

 

 

 

 
(1,723
)
 
(1,723
)
Balances, March 31, 2016
 
295,480

 
$
14,674

 
18,359,397

 
$
1

 
$
90,993

 
$
(56,537
)
 
$
(9,535
)
 
$
39,596

Net loss
 

 

 

 

 

 
(2,582
)
 

 
(2,582
)
Preferred stock dividends
 

 

 

 

 

 
(386
)
 

 
(386
)
Restricted stock issued (Note 17)
 

 

 
103,301

 

 
96

 

 

 
96

Unrestricted stock issued (Note 17)
 

 

 
44,396

 

 
48

 

 

 
48

Restricted stock units granted
 

 

 

 

 
15

 

 

 
15

Stock options issued
 

 

 

 

 
12

 

 

 
12

Translation adjustment
 

 

 

 

 

 

 
148

 
148

Balances, June 30, 2016
 
295,480

 
$
14,674

 
18,507,094

 
$
1

 
$
91,164

 
$
(59,505
)
 
$
(9,387
)
 
$
36,947

Net income
 

 

 

 

 

 
2,996

 

 
2,996

Preferred stock dividends
 

 

 

 

 

 
(395
)
 

 
(395
)
Unrestricted stock issued (Note 17)
 

 

 
62,092

 

 
47

 

 

 
47

Restricted stock units granted
 

 

 

 

 
15

 

 

 
15

Stock options issued (Note 17)
 

 

 

 

 
7

 

 

 
7

Translation adjustment
 

 

 

 

 

 

 
(175
)
 
(175
)
Balances, September 30, 2016
 
295,480

 
$
14,674

 
18,569,186

 
$
1

 
$
91,233

 
$
(56,904
)
 
$
(9,562
)
 
$
39,442

 

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

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, 2016
Six months ended September 30, 2015
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
Net income
$
414

$
14,798

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

 

Depreciation and amortization of drydock costs
12,108

11,077

Amortization of intangibles and deferred financing costs
1,731

1,196

Deferred income taxes
(131
)
(4,328
)
                  Impairment charges on retired asset
1,872


Equity compensation granted
240

97

                  Unrealized foreign exchange loss
381

1,756

                  Restructuring charges
2,375


Deferred drydock costs paid
(2,821
)
(1,539
)
Changes in operating assets and liabilities:
 

 

Accounts receivable
(10,099
)
(19,561
)
Prepaid expenses and other current assets
(323
)
(646
)
Accounts payable and accrued liabilities
(234
)
9,011

Other assets and liabilities, net
(623
)
335

Income taxes payable, net
(12
)

NET CASH PROVIDED BY OPERATING ACTIVITIES
4,878

12,196

CASH FLOWS FROM INVESTING ACTIVITIES
 

 

Purchase of property and equipment
(9,095
)
(38,086
)
NET CASH USED IN INVESTING ACTIVITIES
(9,095
)
(38,086
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 

Deferred payment liability obligation
(283
)
(263
)
Proceeds from long-term debt
28,153

35,426

Long-term debt repayment
(23,190
)
(10,100
)
Debt financing cost
(284
)
(498
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
4,396

24,565

EFFECT OF FOREIGN EXCHANGE RATES ON CASH
153

285

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 
332

(1,040
)
CASH AND CASH EQUIVALENTS, BEGINNING OF THE YEAR
77

3,298

CASH AND CASH EQUIVALENTS, END OF THE PERIOD
$
409

$
2,258

SUPPLEMENTAL CASH FLOW DISCLOSURE
 

 
Payments for interest, net of amount capitalized
$
6,578

$
4,193

Unpaid purchases of property and equipment
$
901

$
1,679

Unpaid purchases of deferred drydock costs
$
54

$
2

Payment of income taxes
$

$
1

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

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 Towing"), 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 Towing.

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 consolidated 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 consolidated balance sheet amounts and the consolidated statement of stockholders' equity for the year ended March 31, 2016 are derived from the audited consolidated financial statements for the fiscal year ended March 31, 2016. As discussed in Note 3, the accompanying consolidated balance sheet as of March 31, 2016 has been retroactively reclassified in connection with a change in accounting principle related to the adoption of a new accounting standard in the first quarter of the fiscal year ended March 31, 2016. 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, 2016.


Cash and cash equivalents

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


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)

Accounts receivable
 
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.

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 for all periods presented.

Marine operating costs included in vessel 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 incremental expenditures 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 and are recognized in expenses as they are consumed.
 

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. On adoption of ASU 2015-03 for the first quarter of the 2017 fiscal year ended June 30, 2016 (as discussed in Note 3), this cost is classified as an offset against our long-term debt and subordinated debt.

Property and equipment

Property and equipment are recorded at cost.  Depreciation methods for property and equipment are as follows:
 
Vessels
5 - 30 years straight-line
Leasehold improvements  
7 - 11 years straight-line
Purchased software
3 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 relationships and contracts) 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, but are not limited to 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) 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 carrying amount of 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 carrying value of the asset(s) to its fair value less costs to sell. To the extent that the carrying value is greater than the fair value less costs to sell, an impairment loss is recognized for the difference. As of June 30, 2016, the Company determined that the smallest carrying capacity Canadian flag bulk carrier was unlikely to generate a sufficient long term return on capitalized expenses necessary to continue operating the vessel. As a result, the Company decided to retire this vessel. The Company has also determined that the carrying value of the vessel is greater than the fair value and hence impairment charges were recorded to write off the carrying value of the vessel. Other than this vessel, there were no adverse changes in our markets or other triggering events that could affect the valuation of our assets during the three and six month period ended September 30, 2016, and there are no other assets held for sale except as discussed above as of September 30, 2016.

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)

Evaluation of goodwill for impairment

The Company annually reviews the carrying value of goodwill residing in its reporting units, to determine whether impairment may exist. Accounting principles generally accepted in the United States ("GAAP") 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. Only 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 next two steps of the 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, 2016, 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 the Company's markets or other triggering events that indicated that it is more likely than not that the fair value of the Company's reporting units was less than the carrying value during the six month period ended September 30, 2016.

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 sixty (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 not engaged in affreightment activities.  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.
 

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 Accounting Standards Codification ("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. taxing authorities for the fiscal year ended March 31, 2012 was completed, with no adjustments warranted. Lower Lakes Towing is currently under examination by the Canadian taxing authority for the tax years 2014 and 2015. The Company's primary U.S. state income tax jurisdictions are Illinois, Indiana, Michigan, Minnesota, Pennsylvania, Wisconsin, New Jersey 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 (Fiscal Years)
Federal (U.S.A)
2013 – 2016
Various states
2012 – 2016
Federal (Canada)
2011 – 2016
Ontario
2011 – 2016


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.

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 GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Significant estimates used in the preparation of these consolidated 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” ("ASC 815"). 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 GAAP 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.



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 would have been effective for fiscal years, and interim periods within those years, beginning after December 15, 2016. In July 2015, the FASB voted to delay the effective date of the new standard by one year to annual periods beginning after December 15, 2017. ASU 2014-09, as subsequently amended, 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. In May 2016, the FASB issued ASU 2016-11, Revenue Recognition (Topic 605) and Derivatives and Hedging (Topic 815): Rescission of SEC Guidance Because of Accounting Standards Updates 2014-09 and 2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF Meeting ("ASU 2016-11"). ASU 2016-11 rescinds several SEC Staff Announcements that are codified in Topic 605, including, among other items, guidance relating to accounting for shipping and handling fees and freight services. In addition, in March 2016, the FASB issued ASU No. 2016-08 (Topic 606) Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net) (“ASU 2016-08”), which clarifies the principal-versus-agent guidance in Topic 606 and requires an entity to determine whether the nature of its promise to provide goods or services to a customer is performed in a principal or agent capacity and to recognize revenue in a gross or net manner based on its principal/agent designation. In April 2016, the FASB also issued ASU No. 2016-10 (Topic 606) Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing (“ASU 2016-10”), which amends the revenue guidance on identifying performance obligations and accounting for licenses of intellectual property. In May 2016, the FASB also issued ASU No. 2016-12 (Topic 606) Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients (“ASU 2016-12”), which amends the revenue guidance to clarify measurement and presentation as well as to include some practical expedients and policy elections. There are two transition methods available under the new standard, either cumulative effect or retrospective. ASU 2016-08, ASU 2016-10, and ASU 2016-12 must be adopted concurrently with the adoption of ASU 2014-09.The Company is evaluating the effect, if any, that adopting these new accounting standards will have on the Company's 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 provides 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. The Company is evaluating the effect, if any, this ASU 2014-15 will have when adopted.

    







14

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 (continued)
    
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 ("ASU 2015-03"). 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 and has been applied retrospectively to each period presented. The Company adopted the provisions of ASU 2015-03 for the first quarter of the 2017 fiscal year ended June 30, 2016. As a result of the adoption of this pronouncement, our unamortized deferred financing costs at March 31, 2016 of $4,903 were reclassified from intangible assets to an offset against our long-term debt and subordinated debt. The effect of the adoption did not result in a change to equity or net income (See Notes 10, 13 and 14).
Leases (Topic 842)

In February 2016, the FASB issued ASU 2016-02, Leases ("ASU 2016-02"). ASU 2016-02 revises the existing guidance related to leases by requiring lessees to recognize a lease liability and a right-of-use asset for all leases, as well as additional disclosure regarding leasing arrangements. This standard will be effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years, and requires a modified retrospective adoption, with earlier adoption permitted. The Company is currently evaluating the effects of the adoption of ASU 2016-02 on its consolidated financial statements.
    
Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting

In March 2016, the FASB issued ASU 2016-09, Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting ("ASU 2016-09"). ASU 2016-09 simplifies certain aspects of the accounting for share-based payment transactions, including tax consequences, classification of awards, the option to recognize stock compensation expense with actual forfeitures as they occur, and the classifications on the statement of cash flows. ASU 2016-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within each reporting period, with early adoption permitted. The Company is currently evaluating the effects of the adoption of ASU 2016-09 on its consolidated financial statements.
    
Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15 (Topic 230) Statement of Cash Flow: Classification of Certain Cash Receipts and Cash Payments. The pronouncement provides clarification guidance on certain cash flow presentation issues such as debt prepayment or debt extinguishment costs and contingent consideration payments made after a business combination. This pronouncement is effective for interim and annual reporting periods beginning after December 15, 2017. Early adoption is permitted. The Company is currently evaluating the impact that this standard will have on its Consolidated Statements of Cash Flows.
Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740) - Intra-Entity Transfers of Assets Other Than Inventory ("ASU No. 2016-16").  ASU No. 2016-16 provides guidance on recognition of current income tax consequences for intra-entity asset transfers (other than inventory) at the time of transfer.  This represents a change from current GAAP, where the consolidated tax consequences of intra-entity asset transfers are deferred from the time of transfer to a future period.  The guidance is effective for annual reporting periods beginning after December 15, 2017 and interim periods within those fiscal years.  Early adoption at the beginning of an annual period is permitted. The Company is currently assessing the potential impact that ASU No. 2016-16 will have on the financial statements and disclosures.



15

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


4.
ACCOUNTS RECEIVABLE, NET

Trade receivables are presented net of an allowance for doubtful accounts. The allowance was $114 as of September 30, 2016 and $116 as of March 31, 2016. 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 pays 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.


16

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, 2016
 
March 31, 2016
Prepaid insurance
$
527

 
$
1,012

Fuel and lubricant inventories
4,392

 
3,872

Deposits and other prepaids
1,726

 
1,436

 
$
6,645

 
$
6,320



6.
INCOME TAXES


The Company's effective tax rate for the six month period ended September 30, 2016 was a deferred tax benefit of 46.3% compared to a deferred tax benefit of 41.3% for the six month period ended September 30, 2015. The change in effective tax rate was primarily due to changes in permanent differences and discrete items compared to the prior year comparative period.

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, 2016. 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 the net operating loss carryforward. The Company recorded a small valuation allowance against the U.S. state net deferred tax assets as of September 30, 2016.

The effective tax rate for the six month period ended September 30, 2016 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 had no unrecognized tax benefits as of September 30, 2016. 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, 2016 and September 30, 2015.



17

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, 2016
 
March 31, 2016
Cost
 
 
 
Vessels
$
317,814

 
$
319,689

Leasehold improvements
98

 
88

Furniture and equipment
492

 
588

Vehicles
16

 
16

Computer, communication equipment and purchased software
3,201

 
3,185

 
$
321,621

 
$
323,566

Accumulated depreciation
 

 
 

Vessels
$
100,881

 
$
92,482

Leasehold improvements
63

 
58

Furniture and equipment
319

 
351

Vehicles
13

 
13

Computer, communication equipment  and purchased software
2,294

 
2,158

 
$
103,570

 
$
95,062

 Total Cost less Depreciation
$
218,051

 
$
228,504


Property and equipment as of September 30, 2016 includes capitalized interest during the three and six month periods ended September 30, 2016 of $Nil ($1,161 for the fiscal year ended March 31, 2016).

As of June 30, 2016, the Company determined that its smallest carrying capacity Canadian flag bulk carrier was unlikely to generate a sufficient long-term return on capitalized expenses necessary to continue operating the vessel. As a result, the Company decided to retire this vessel as of June 30, 2016. The Company has also determined that the carrying value of the vessel is greater than the fair value and hence impairment charges of $1,872 including write-off of unamortized drydock costs were recorded during the three month period ended June 30, 2016. The vessel did not sail during the three month period ended September 30, 2016. The operating loss of the vessel, included in the Consolidated Statement of Operations for the three month period ended September 30, 2016 was $Nil versus operating profit of $444 for the three month period ended September 30, 2015.




18

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



8.
OTHER ASSETS

Other assets classified as non-current 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, 2016
March 31, 2016
Customer contract costs
$
119

$
287

Prepaid expenses and other assets
6,588

6,135

Total
$
6,707

$
6,422

 
 
 
Current portion (Note 5)
6,645

6,320

 
 
 
Other long-term assets
$
62

$
102


9.
DEFERRED DRYDOCK COSTS, NET

Deferred drydock costs, net are comprised of the following:

 
September 30, 2016
 
March 31, 2016
Drydock expenditures
$
15,480

 
$
17,930

Accumulated amortization
(9,150
)
 
(11,270
)
 
$
6,330

 
$
6,660

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

Balance as of March 31, 2015
$
7,590

Drydock costs accrued and incurred
2,828

Amortization of drydock costs
(3,507
)
Foreign currency translation adjustment
(251
)
Balance as of March 31, 2016
6,660

Drydock costs accrued and incurred
1,494

Amortization of drydock costs
(1,607
)
Unamortized dry-dock cost write-off of a retired vessel
(138
)
Foreign currency translation adjustment
(79
)
Balance as of September 30, 2016
$
6,330


19

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, 2016
 
March 31, 2016
Intangible assets:
 
 
 
Customer relationships and contracts
$
15,022

 
$
15,122

Total identifiable intangibles
15,022

 
15,122

Accumulated amortization:
 

 
 

Customer relationships and contracts
9,654

 
9,218

Total accumulated amortization
9,654

 
9,218

Net intangible assets
$
5,368

 
$
5,904

Goodwill
$
10,193

 
$
10,193


As a result of the adoption of ASU 2015-03 "Imputation of Interest - Simplifying the Presentation of Debt Issuance Costs" (as discussed in Note 3), deferred financing costs at March 31, 2016 were reclassified from intangible assets to an offset against long-term debt and subordinated debt.
 
Intangible asset amortization over the next five years is estimated as follows:
    
Twelve month period ending:
September 30, 2017
$
1,001

September 30, 2018
1,002

September 30, 2019
1,001

September 30, 2020
1,002

September 30, 2021
616

 
$
4,622


 
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, pursuant to which Lower Lakes Towing purchased the Lalandia Swan 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 14. The vessel was converted to a self-unloading vessel. The Lalandia Swan was renamed the M.V. Manitoulin. The vessel was placed into service in November 2015.


20

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



12.
ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:
 
 
September 30, 2016
 
March 31, 2016
  Deferred financing and other transaction costs
$

 
$
4

Payroll compensation and benefits
1,179

 
786

Preferred stock dividends
2,701

 
1,920

Professional fees
430

 
488

Interest
2,401

 
2,305

Winter work, deferred drydock expenditures and capital expenditures
25

 
834

Capital and franchise taxes
26

 
12

Restructuring charges (Note 20)
1,398

 

Other
3,746

 
1,795

 
$
11,906

 
$
8,144

 

21

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


13.
LONG-TERM DEBT
    
    
 
 
September 30, 2016
 
March 31, 2016
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 contractual maturity date of September 30, 2019.
44,980

 
43,120

 
 
 
 
 
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 contractual maturity date of September 30, 2019.
73,900

 
71,400

 
 
$
118,880

 
$
114,520

 
Less unamortized debt issuance costs
(1,815
)
 
(2,094
)
 
 
117,065

 
112,426

 
Less amounts due within 12 months

 

 
 
$
117,065

 
$
112,426



The effective interest rates at September 30, 2016 were 3.64% (3.60% at March 31, 2016) on the Canadian Revolving Facility (defined below) and 3.48% (3.37% at March 31, 2016) on the U.S. Revolving Facility (defined below).

On March 27, 2015, the Company and certain of its subsidiaries entered into a Credit Agreement ( as amended from time to time, the “First Lien 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 First Lien Credit Agreement. Black Creek, Lower Lakes Transportation, Grand River, Black Creek Holdings, 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 First Lien Credit Agreement (collectively, the “U.S. Guarantors”). Lower Lakes (17) and Lower Lakes Ship Repair are guarantors of all Canadian obligations under the First Lien Credit Agreement and are direct or indirect wholly-owned subsidiaries of the Company (collectively, the “Canadian Guarantors”; and together with the U.S. Guarantors, the “Guarantors”). The proceeds of the First Lien Credit Agreement were used to extinguish certain then existing 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 party to the agreement, 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.


22

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


13.
LONG-TERM DEBT (continued)

The credit facilities (the “Credit Facilities”) under the First Lien Credit Agreement consist of:
A revolving credit facility under which Lower Lakes Towing may borrow up to US $80,000 (CDN or USD currency to be selected by Lower Lakes Towing ) 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 Towing may borrow up to the lesser of 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 the lesser of up to USD $9,000 and the maximum borrowing availability less the outstanding balance of the U.S.Revolving Facility 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 First Lien Credit Agreement) or, at the borrower’s option, the Canadian Prime Rate (as defined in the First Lien Credit Agreement) and if funded in U.S. Dollars, the Canadian Base Rate (as defined in the First Lien Credit Agreement) or, at the borrower’s option, the LIBOR Rate (as defined in the First Lien Credit Agreement);
U.S. Revolving Facility: the US Base Rate (as defined in the First Lien 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 First Lien 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, 2016.

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. On February 9, 2016, the Company and the lenders entered into an Amendment No. 1 and Waiver Agreement pursuant to which certain covenant breaches were waived by the lenders.


23

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


13.
LONG-TERM DEBT (continued)

As of June 30, 2016, the Company was not in compliance with certain covenants in the First Lien Credit Agreement. On August 26, 2016, the parties to the First Lien Credit Agreement entered into an Amendment No. 2 and Waiver Agreement (the “First Lien Waiver”) pursuant to which the lenders under the First Lien Credit Agreement waived the breach of certain financial and other covenants by the Company, including breach of the Maximum Senior Funded Debt to EBITDA covenant therein, calculated as of June 30, 2016. The First Lien Waiver also modifies the Maximum Fixed Charge Coverage Ratio and the Maximum Senior Funded Debt to EBITDA Ratio covenants, further limits the exceptions to the Restricted Payments (as defined in the First Lien Credit Agreement) allowed to be made by the Company, provides for additional fees, and incorporates new restrictions on certain Company activities.

As of September 30, 2016, the Company was in compliance with covenants set forth in the First Lien Credit Agreement as amended.

As of September 30, 2016, the Company had credit availability of USD $50,684 under the Credit Facilities based on eligible receivables and vessel collateral value.

14.    SUBORDINATED DEBT
 
 
September 30, 2016
 
March 31, 2016
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

 
$
39,826

 
 
 
 
 
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

 
78,126

 
Less unamortized debt issuance costs
(2,125
)
 
(2,809
)
 
 
76,001

 
75,317

 
Less amounts due within 12 months

 

 
 
$
76,001

 
$
75,317


The effective interest rates at September 30, 2016 were 10.75% (10.75% at March 31, 2016) on each of the Second Lien CDN Term Loan (defined below) and the Second Lien U.S. Term Loan (defined below).

On March 11, 2014, Lower Lakes Towing, Grand River and Black Creek, as borrowers, Rand LL Holdings, Rand Finance, Black Creek Holdings and the Company, as guarantors, Guggenheim Corporate Funding, LLC, as agent and Lender, and certain other lenders, entered into a Term Loan Credit Agreement (as amended from time to time, the “Second Lien Credit Agreement”). The Second Lien 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.

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 Amended Second Lien Credit Agreement) plus 9.50% per annum, or (ii) the U.S. Base Rate (as defined in the Amended Second Lien Credit Agreement), plus 8.50% per annum.




24

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


14.    SUBORDINATED DEBT (continued)

Obligations under the Second Lien 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 Second Lien 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 Second Lien 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 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 Second Lien 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 Second Lien Credit Agreement being accelerated. The obligations of the borrowers and the liens of the lenders under the Second Lien Credit Agreement are subject to the terms of an Intercreditor Agreement, which is further described below under the heading “Intercreditor Agreement”.

On April 11, 2014, the Company and certain of its subsidiaries entered into a First Amendment (the “First Amendment“) to the Second Lien Credit Agreement. The First Amendment extended the due date of certain post-closing deliverables. In connection with the First Lien Credit Agreement described above, on March 27, 2015 the Company and certain of its subsidiaries entered into a Second Amendment (the “Second Amendment”) to the Second Lien Credit Agreement. The Second Amendment conformed certain provisions of the Amended Second Lien Credit Agreement to the First Lien Credit Agreement, reduced the uncommitted incremental facility to $22,500, and also amended certain other covenants and terms thereof. On February 9, 2016, Rand and the lenders entered into a Third Amendment and Waiver Under Term Loan Credit Agreement pursuant to which certain covenant breaches were waived by the lenders.
As of June 30, 2016, the Company was not in compliance with certain covenants contained in the Second Lien Credit Agreement (formal notice of such noncompliance was received by the Company on August 24, 2016, but was later rescinded after a waiver from the lenders was obtained). On August 26, 2016, the parties to the Second Lien Credit Agreement entered into a Fourth Amendment and Waiver To Term Loan Credit Agreement (the “Second Lien Waiver”) pursuant to which the lenders under the Second Lien Credit Agreement waived the breach of certain financial and other covenants by the Company, including the Maximum Senior Funded Debt to EBITDA Ratio and the Maximum Total Funded Debt to EBITDA Ratio covenants therein, in each case calculated as of June 30, 2016. The Second Lien Waiver also modifies the Minimum Fixed Charge Coverage Ratio, the Maximum Senior Funded Debt to EBITDA Ratio and the Maximum Total Funded Debt to EBITDA Ratio covenants, further limits the exceptions to the Restricted Payments (as defined in the Second Lien Credit Agreement) allowed to be made by the Company, incorporates new restrictions on certain Company activities, provides for (1) additional fees, (2) additional pay-in-kind interest under certain circumstances, and (3) certain additional Events of Default (as defined in the Second Lien Credit Agreement), including the non-payment of certain current and potential future fees that will only become due and payable if certain milestones are not met related to the Company's progress towards a refinancing of the Second Lien Credit Agreement.

As of September 30, 2016, the Company was in compliance with the covenants set forth in the Second Lien Credit Agreement as amended.


    

25

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


14.    SUBORDINATED DEBT (continued)

Intercreditor Agreement

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

Under the Intercreditor Agreement, the Second Lien Lenders have 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 have 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 First Lien Credit Agreement, the Second Lien Lenders are permitted to receive regularly scheduled principal and interest payments under the Second Lien Credit Agreement.
 

15.
COMMITMENTS
 
The Company did not have any leases which met the criteria of a capital lease as of September 30, 2016. 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, 2016
 
Three months ended September 30, 2015
 
Six months ended September 30, 2016
 
Six months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Operating leases
 
$
161

 
$
142

 
$
292

 
$
269

Operating sublease
 

 
42

 

 
83

 
 
$
161

 
$
184

 
$
292

 
$
352


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

Twelve month period ending:
September 30, 2017
$
583

September 30, 2018
564

September 30, 2019
432

September 30, 2020
329

September 30, 2021
160

Thereafter
104

 
$
2,172

 

As of September 30, 2016, the Company had signed contractual commitments with several suppliers totaling $102 ($1,526 as of March 31, 2016) in connection with capital expenditures and drydock projects due in less than one year.



26

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


16.
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 collision, 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, 2016, an accrual of $255 ($247 as of March 31, 2016) 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, however the Company cannot assure that such reserves will be sufficient to cover all costs incurred, or that insurance will be available or sufficient, or that any defenses will be successful.  

27

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


17.
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 $5.175, the average high and low per share price on that day.

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 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 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 convertible 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. In March 2016, 4,520 shares of series A convertible preferred stock were converted into common stock at a conversion price of $6.20 per share.

The accrued preferred stock dividends payable at September 30, 2016 were $2,701 and at March 31, 2016 were $1,920. As of September 30, 2016 the effective dividend rate of the preferred stock was 9.25%. As of March 31, 2016, the effective dividend rate of the preferred stock was 8.75%.
 
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, 2016, a total of 79,263 shares (267,758 shares at March 31, 2016) were available under the LTIP for future awards.


28

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


17.
STOCKHOLDERS’ EQUITY (continued)

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 recognized during the period
Vesting terms
Three months ended September 30, 2016
Three months ended September 30, 2015
Six months ended September 30, 2016
Six months ended September 30, 2015
Jun 5, 2013
6
54,337
5.55
Restricted Share Award Agreement
25
7
51
Three years in equal installments on each anniversary date.
Jul 22, 2014
10
105,189
5.90
Restricted Share Award Agreement
16
71
65
134
Three years in equal installments on each anniversary date.
Oct 27, 2015
1
4,429
2.19
Restricted Share Award Agreement
1
2
Three years in equal installments on each anniversary date.
Oct 27, 2015
1
10,871
2.19
Restricted Share Award Agreement
2
7
Three years in equal installments on each of March 31.
May 31, 2016
1
102,301
0.92
Restricted Share Award Agreement
8
13
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.

29

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


17.    STOCKHOLDERS’ EQUITY (continued)

The general characteristics of share-based awards granted under the LTIP through September 30, 2016 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 the fiscal year ended March 31, 2016, the Company awarded 92,167 shares for services provided from April 1, 2015 through March 31, 2016. For the three month period ended June 30, 2016, the Company awarded 44,396 shares for services provided from April 1, 2016 through June 30, 2016. For the three month period ended September 30, 2016, the Company awarded 62,092 shares for services rendered from July 1, 2016 through September 30, 2016. Grant date fair 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, the Company issued 478,232 shares of common stock to such employee participants. On October 27, 2015, the Company issued 111,025 shares to two executives pursuant to the terms of their severance agreements.

Stock Options - Stock options granted to management employees vest over three years in equal annual installments. All options issued through September 30, 2016 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 exercise price and market prices at the date of grant and other assumptions. 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 and 0.80% to 1.60% for the fiscal 2016 grant. Expected volatility was 39.49% for the fiscal 2009 grant and 33.5% to 37.2%. for the fiscal 2016 grant. All of the stock options granted in February 2008 (243,199) and July 2008 (236,586), had vested as of September 30, 2016. During the twelve months ended March 31, 2016, 306,766 options expired. During the six month period ended September 30, 2016, 136,267 options expired. Options outstanding (341,752) at September 30, 2016 had a remaining weighted average contractual life of approximately four years and five months. 

The Company recorded compensation expenses related to such stock options of $7 for the three month period ended September 30, 2016 and $19 for the six month period ended September 30, 2016 and $Nil for the three and six month periods ended September 30, 2015. None of the outstanding stock options were in-the-money as of September 30, 2016 or September 30, 2015.



30

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


17.    STOCKHOLDERS’ EQUITY (continued)

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 three 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.

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. On December 8, 2015, the Company issued 61,622 shares to eligible Canadian and U.S. employees for incentive compensation at the average of the high and low trading prices of the Company’s common stock on the date of grant. On April 1, 2016, the Company issued 1,000 shares to an executive as a signing bonus. Grant date fair 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. 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 31st 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 periods ended September 30, 2016 and September 30, 2015 and $30 for the six month periods ended September 30, 2016 and September 30, 2015. On the first vesting date of March 31, 2015, 10,559 shares vested. On the second vesting date of March 31, 2016, 8,905 shares vested.


18.
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.



31

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


19.
INTEREST EXPENSE

Interest expense, net of interest capitalized is comprised of the following:
 
 
 
Three months ended September 30, 2016

 
Three months ended September 30, 2015

 
Six months ended September 30, 2016

 
Six months ended September 30, 2015

Amortization of deferred financing costs
 
901

 
316

 
1,226

 
640

Long-term debt-senior
 
1,210

 
989

 
2,384

 
2,014

Long-term debt-subordinated
 
2,158

 
2,020

 
4,270

 
4,001

Interest rate caps
 

 
3

 

 
5

Deferred payment liability
 
7

 
16

 
16

 
36

Interest capitalized
 

 
(382
)
 

 
(715
)
 
 
$
4,276

 
$
2,962

 
$
7,896

 
$
5,981





20.
RESTRUCTURING CHARGES


In connection with cost-reduction and operating efficiency initiatives, which primarily include the streamlining of certain functions, locations and the management structure to support the business, and implementing the necessary system changes to support these initiatives, the Company has recorded expenses of $2,375 during the three month period ended June 30, 2016 as restructuring costs that primarily include severance costs and related benefits. The Company follows guidance provided in ASC 420, "Exit or Disposal Cost Obligations". The Company recognized the liability incurred in the three month period ended June 30, 2016 and any future operating losses will be recognized in the period(s) they are incurred. The following table summarizes activities in the restructuring costs accrual balance during the periods:
 
September 30, 2016
September 30, 2015
Restructuring costs accrual
2,375


Restructuring costs paid
(977
)

Restructuring costs accrual balance
1,398



The restructuring costs accrual balance is included in accrued liabilities.



32

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 operating segment under ASC 280 “Segment Reporting”.

Information about geographic operations is as follows:

 
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Six months ended September 30, 2016
 
Six months ended September 30, 2015
 
 
 
 
 
 
 
 
 
Revenue by country:
 
 
 
 
 
 
 
 
Canada
 
$
22,895

 
$
28,126

 
$
42,295

 
$
53,266

United States
 
16,345

 
23,807

 
30,762

 
43,494

 
 
$
39,240

 
$
51,933

 
$
73,057

 
$
96,760


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, 2016
 
March 31, 2016
Property and equipment, net by country:
 
 
 
Canada
$
109,904

 
$
116,719

United States
108,147

 
111,785

 
$
218,051

 
$
228,504

Intangible assets, net by country:
 

 
 

Canada
$
3,283

 
$
3,652

United States
2,085

 
2,252

 
$
5,368

 
$
5,904

Goodwill by country:
 

 
 

Canada
$
8,284

 
$
8,284

United States
1,909

 
1,909

 
$
10,193

 
$
10,193

Total assets by country:
 

 
 

Canada
$
139,398

 
$
141,019

United States
120,494

 
119,485

 
$
259,892

 
$
260,504




33

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, senior and subordinated debts, a deferred payment liability and accrued liabilities.  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.

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, 2016 and March 31, 2016:
 
 
 
Fair value measurements at
 
Fair value measurements at
 
 
September 30, 2016
 
March 31, 2016
 
 
Carrying
value at
September 30, 2016
 
Quoted
prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
 
Carrying
value at
March 31,
2016
 
Quoted
prices in
active markets
(Level 1)
 
Significant other
observable
inputs
(Level 2)
Foreign currency hedge contracts
 
$(437)
 
$—
 
$(437)
 
$(268)
 
$—
 
$(268)
 
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. These 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 three month period ended September 30, 2016.
 
The Company recorded a payable of $437 as of September 30, 2016 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, 2016, the fair value adjustments of the foreign currency hedge contract resulted in a gain of $1,185 (gain of $2,215 for the three month period ended September 30, 2015) and a gain of $2,050 for the six month period ended September 30, 2016 (gain of $1,484 for the six month period ended September 30, 2015). These gains are included in the Company’s earnings, and the fair value of settlement costs to terminate the contract is included in current liabilities on the Company's consolidated balance sheet.

34

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, 2016
 
Fair Value as at
March 31, 2016
Foreign currency hedge contracts
 
Accrued liabilities
 
$(437)
 
$(268)

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) Recognized in
earnings
 
Three month period ended September 30, 2016
 
Three month period ended September 30, 2015
Six month period ended September 30, 2016
Six month period ended September 30, 2015
Foreign currency hedge contracts
 
(Gain) on foreign exchange
 
$(1,185)
 
$(2,215)
$(2,050)
$(1,484)
 
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 decreased with each scheduled principal payment of the term loan, notwithstanding the termination of such agreement. The interest rate cap contracts terminated on December 1, 2015 and were not renewed.

Credit risk

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


35

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)

Liquidity risk

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.
23.
EARNINGS PER SHARE ("EPS")

The Company had a total of 18,569,186 shares of common stock issued and outstanding as of September 30, 2016, out of an authorized total of 50,000,000 shares. The diluted calculation considers a total of 20,762,468 and 20,379,355 shares for the three month periods ended September 30, 2016 and 2015 respectively and 20,732,873 and 20,349,828 shares for the six month period ended September 30, 2016 and 2015, respectively. The Calculation for six month period September 30, 2016 is anti-dilutive, the basic and diluted weighted average shares outstanding are 18,349,970. The convertible preferred shares outstanding as of September 30, 2016 convert to an aggregate of 2,382,903 common shares based on a conversion price of $6.20 per share.

 
 
Three months ended September 30, 2016
 
Three months ended September 30, 2015
 
Six months ended September 30, 2016
 
Six months ended September 30, 2015
Numerator:
 
 
 
 
 
 
 
 
Net income before preferred dividends
 
$
2,996

 
$
11,867

 
$
414

 
$
14,798

Preferred stock dividends
 
(395
)
 
(328
)
 
(781
)
 
(649
)
Net income (loss) applicable to common stockholders
 
$
2,601

 
$
11,539

 
$
(367
)
 
$
14,149

Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares for basic EPS
 
18,379,565

 
17,960,000

 
18,349,970

 
17,930,473

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Average price during period
 
0.94

 
2.68

 
0.96

 
3.03

Long term incentive stock option plan
 
246,007

 
479,785

 
304,193

 
479,785

Average exercise price of stock options
 
3.85

 
5.66

 
3.85

 
5.66

Shares that could be acquired with the proceeds of options
 

 

 

 

Dilutive shares due to options
 

 

 

 

Restricted Stock Units (RSU)-unvested
 
10,586

 
19,491

 
10,586

 

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
 

 

 

 

Dilutive shares due to RSU
 

 

 

 

Incremental shares due to unvested restricted shares
 

 

 

 

Weighted average convertible preferred shares at $6.20
 
2,382,903

 
2,419,355

 
2,382,903

 
2,419,355

Weighted average common shares for diluted EPS
 
20,762,468

 
20,379,355

 
18,349,970

 
20,349,828

Basic EPS
 
$
0.14

 
$
0.64

 
$
(0.02
)
 
$
0.79

Diluted EPS
 
$
0.14

 
$
0.58

 
$
(0.02
)
 
$
0.73

 

 

36


Item 2.    Management's Discussion and Analysis of Financial Condition and Results of Operations.

The following Management's Discussion and Analysis of Financial Condition and Results of Operations (“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, 2016. The use of the term "GAAP" herein refers to Generally Accepted Accounting Principles in the United States of America. All dollar amounts are presented in millions except share, per share and per day amounts.

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, cost reduction and operating efficiency initiatives, and other similar statements of expectations or objectives;
our capital resources and the adequacy thereof, including our ability to refinance or 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, Nasdaq listing requirements, 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, 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 urge you to review our periodic filings with the Securities and Exchange Commission (the “SEC”) for any updates to our forward-looking statements.
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 listed risks under "Risk Factors" set forth in Part I, Item 1A of the Company's Annual Report on Form 10-K filed with the Securities and Exchange Commission on June 16, 2016 and an additional risk listed in Part II, Item 1A of this document may not be exhaustive. We operate in a continually changing business environment, and new risks emerge from time to time. We cannot predict these new risks, nor can we assess the impact, if any, of the new risks on our business or the extent to which any risk or combination of risks 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 in a timely manner, or at all. 


37


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 acquired eleven additional vessels and retired three 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 the business of Lower Lakes mean the combined business 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, was incorporated under the laws of Canada. Lower Lakes (17) owns the Manitoulin, a vessel placed in service in November 2015.
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 a 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 six self-unloading bulk carriers and three conventional bulk carriers in Canada (excluding a retired vessel) and six self-unloading bulk carriers in the U.S., including three articulated tug and barge units. Lower Lakes Towing owns ten Canadian vessels, including a retired vessel. 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.

38


Vessel Acquisitions and Retirement

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. The vessel was placed in service in November 2015.
As of June 30, 2016, we determined that our smallest carrying capacity Canadian flag bulk carrier was unlikely to generate a sufficient long term return on capital given the operating and capital expenses necessary to maintain the vessel. As a result, we retired this vessel as of June 30, 2016.
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, certain one-time equity-based severance costs 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, restructuring charges and impairment charges on retired asset 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.




39


Results of Operations for the three month period ended September 30, 2016 compared to the three month period ended September 30, 2015
Selected Financial and Operating Information
(USD in 000's)
September 30, 2016
September 30, 2015
$ Change
% Change
Revenue:
 
 
 
 
Freight and related revenue
$
37,518

$
43,835

$
(6,317
)
(14.4
)%
Fuel and other surcharges
1,722

5,563

(3,841
)
(69.0
)%
Outside voyage charter revenue

2,535

(2,535
)
(100.0
)%
Total
$
39,240

$
51,933

$
(12,693
)
(24.4
)%
Expenses:
 
 
 
 
Outside voyage charter fees

2,652

(2,652
)
(100.0
)%
Vessel operating expenses
22,028

30,030

(8,002
)
(26.6
)%
Repairs and maintenance
100

57

43

75.4
 %
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) loss on foreign exchanges
$
13,257

$
16,095

$
(2,838
)
(17.6
)%
OPERATING INCOME
$
7,588

$
10,321

$
(2,733
)
(26.5
)%
 
 
 
 
 
Sailing Days:
1,185

1,278

(93
)
(7.3
)%
Number of vessels operated: 
14

15

(1
)
(6.7
)%
Per day in whole USD:
 
 
 
 
Revenue per Sailing Day:
 
 
 
 
Freight and related revenue
$
31,661

$
34,300

$
(2,639
)
(7.7
)%
Fuel and other surcharges
$
1,453

$
4,353

$
(2,900
)
(66.6
)%
 
 
 
 
 
Expenses per Sailing Day:
 
 
 
 
Vessel operating expenses
$
18,589

$
23,498

$
(4,909
)
(20.9
)%
Repairs and maintenance
$
84

$
45

$
39

86.7
 %
The following table provides a reconciliation of operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) loss on foreign exchange during the three month periods ended September 30, 2016 and 2015 (USD in 000's):
 
Three months ended September 30, 2016
Three months ended September 30, 2015
Operating Income
$
7,588

$
10,321

Depreciation
5,203

4,603

Amortization of drydock costs
754

885

Amortization of intangibles
252

272

(Gain) loss on foreign exchange
(540
)
14

Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) loss on foreign exchange.
$
13,257

$
16,095

 

40


The following table summarizes the changes in the components of our revenue and certain expenses during the three month period ended September 30, 2016 compared to the three month period ended September 30, 2015:
(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 month period ended September 30, 2015
1,278

 
$
43,835

 
$
5,563

 
$
2,535

 
$
51,933

 
$
2,652

$
30,030

 
$
57

 
$
3,099

 
$
16,095

Changes in three month period ended September 30, 2016:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change attributable to Canadian dollar exchange rate
 
 
58

 
8

 

 
66

 

33

 
2

 
3

 
28

Net change on a constant currency basis
(93
)
 
(6,375
)
 
(3,849
)