10-Q 1 rlog-20170930x10q.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, 2017
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
 
 
 
 
 
 
 
Emerging Growth Company ¨
  
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨




Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No þ

18,633,149 shares of Common Stock, par value $.0001, were outstanding at November 14, 2017




RAND LOGISTICS, INC.

INDEX
 



3

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, 2017
 
March 31, 2017
ASSETS
 
 
 
CURRENT
 
 
 
Cash and cash equivalents
$
2,034

 
$
335

Accounts receivable, net (Note 5)
16,747

 
4,101

Income taxes receivable
46

 
46

Prepaid expenses and other current assets (Notes 6 and 9)
6,718

 
6,209

Total current assets
25,545

 
10,691

PROPERTY AND EQUIPMENT, NET (Note 8)
223,245

 
214,046

OTHER ASSETS (Note 9)
18

 
41

DEFERRED DRYDOCK COSTS, NET (Note 10)
12,217

 
8,802

INTANGIBLE ASSETS, NET (Note 11)
4,500

 
4,827

GOODWILL (Note 11)
10,193

 
10,193

 
Total assets 
$
275,718

 
$
248,600

LIABILITIES AND STOCKHOLDERS' EQUITY
 

 
 

CURRENT
 

 
 

Accounts payable
$
7,646

 
$
9,070

Accrued liabilities (Note 13)
11,802

 
15,220

Other current liability
424

 
404

Income taxes payable
115

 

Long-term debt, net, classified as current (Note 14)
149,828

 
119,702

Subordinated debt, net, classified as current (Note 15)
86,288

 
80,577

Total current liabilities
256,103

 
224,973

DEFERRED INCOME TAXES, NET (Note 7)
4,286

 
4,367

 
 Total liabilities
260,389

 
229,340

COMMITMENTS AND CONTINGENCIES (Notes 16 and 17)


 


STOCKHOLDERS' EQUITY
 

 
 

Preferred stock, $.0001 par value, Authorized 1,000,000 shares, Issued and outstanding 295,480 shares at September 30, 2017 and at March 31, 2017 (Note 18)
14,674

 
14,674

Common stock, $.0001 par value, Authorized 50,000,000 shares, Issued and outstanding 18,633,149 shares at September 30, 2017 and at March 31, 2017 (Note 18)
1

 
1

Additional paid-in capital
91,365

 
91,348

Accumulated deficit
(80,689
)
 
(76,408
)
Accumulated other comprehensive loss
(10,022
)
 
(10,355
)
 
 Total stockholders’ equity
15,329

 
19,260

Total liabilities and stockholders’ equity
$
275,718

 
$
248,600


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

4

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, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
REVENUE
 
 
 
 
 
 
 
 
Freight and related revenue
 
$
37,011

 
$
37,518

 
$
67,291

 
$
70,623

Fuel and other surcharges
 
2,456

 
1,722

 
4,518

 
2,434

TOTAL REVENUE
 
39,467

 
39,240

 
71,809

 
73,057

EXPENSES
 
 
 
 
 
 
 
 
Vessel operating expenses
 
21,565

 
22,028

 
40,550

 
40,870

Repairs and maintenance
 
490

 
100

 
1,202

 
1,085

General and administrative
 
4,212

 
3,855

 
8,915

 
7,730

Depreciation
 
6,200

 
5,203

 
11,534

 
10,501

Amortization of drydock costs
 
873

 
754

 
1,631

 
1,607

Amortization of intangibles
 
259

 
252

 
505

 
505

(Gain) on foreign exchange, net
 
(1,596
)
 
(540
)
 
(2,677
)
 
(1,663
)
Restructuring charges (Note 21)
 

 

 

 
2,375

Impairment charges on retired asset
 

 

 

 
1,872

TOTAL EXPENSES
 
32,003

 
31,652

 
61,660

 
64,882

OPERATING INCOME
 
7,464

 
7,588

 
10,149

 
8,175

OTHER INCOME AND EXPENSES
 
 
 
 
 
 
 
 
Interest expense (Note 20)
 
5,721

 
4,276

 
13,728

 
7,896

Interest and other income
 
(11
)
 
(2
)
 
(11
)
 
(4
)
Total Other Income and Expenses
 
5,710

 
4,274

 
13,717

 
7,892

INCOME (LOSS) BEFORE INCOME TAXES
 
1,754

 
3,314

 
(3,568
)
 
283

PROVISION (RECOVERY) OF INCOME TAXES (Note 7)
 
 
 
 
 
 
 
 
Current
 
120

 

 
120

 

Deferred
 
(150
)
 
318

 
(359
)
 
(131
)
(Recovery) provision for Income Taxes
 
(30
)
 
318

 
(239
)
 
(131
)
NET INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS
 
1,784

 
2,996

 
(3,329
)
 
414

PREFERRED STOCK DIVIDENDS
 
482

 
395

 
952

 
781

INCOME (LOSS) APPLICABLE TO COMMON STOCKHOLDERS
 
$
1,302

 
$
2,601

 
$
(4,281
)
 
$
(367
)
Net income (loss) per share - basic (Note 24)
 
$
0.07

 
$
0.14

 
$
(0.23
)
 
$
(0.02
)
Net income (loss) per share - diluted (Note 24)
 
0.07

 
0.14

 
(0.23
)
 
(0.02
)
Weighted average shares outstanding - basic
 
18,558,960

 
18,379,565

 
18,543,279

 
18,349,970

Weighted average shares outstanding - diluted
 
18,558,960

 
20,762,468

 
18,543,279

 
18,349,970



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



5

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


 
 
Three months ended September 30, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
 
 
 
 
 
 
 
 
 
NET INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS
 
1,784

 
2,996

 
$
(3,329
)
 
414

Other comprehensive income (loss):
 
 
 
 
 
 
 
 
Change in foreign currency translation adjustment
 
345

 
(175
)
 
333

 
(27
)
COMPREHENSIVE INCOME (LOSS) BEFORE PREFERRED STOCK DIVIDENDS
 
2,129

 
2,821

 
$
(2,996
)
 
$
387


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


6

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
 
Total Stockholders'
Equity
 
 
Shares
 
Amount
 
Shares
 
Amount
 
Amount
 
Amount
 
Amount
 
Amount
Balances, March 31, 2016
 
295,480

 
$
14,674

 
18,359,397

 
$
1

 
$
90,993

 
$
(56,537
)
 
$
(9,535
)
 
$
39,596

Net loss
 

 

 

 

 

 
(18,228
)
 

 
(18,228
)
Preferred stock dividends
 

 

 

 

 

 
(1,643
)
 

 
(1,643
)
Restricted stock issued (Note 18)
 

 

 
103,301

 

 
96

 

 

 
96

Unrestricted stock issued (Note 18)
 

 

 
161,733

 

 
143

 

 

 
143

Restricted stock units granted
 

 

 
8,718

 

 
60

 

 

 
60

Stock options issued
 

 

 

 

 
56

 

 

 
56

Translation adjustment
 

 

 

 

 

 

 
(820
)
 
(820
)
Balances, March 31, 2017
 
295,480

 
$
14,674

 
18,633,149

 
$
1

 
$
91,348

 
$
(76,408
)
 
$
(10,355
)
 
$
19,260

Net loss
 

 

 

 

 

 
(5,113
)
 

 
(5,113
)
Preferred stock dividends
 

 

 

 

 

 
(470
)
 

 
(470
)
Stock options issued
 

 

 

 

 
9

 

 

 
9

Translation adjustment
 

 

 

 

 

 

 
(12
)
 
(12
)
Balances, June 30, 2017
 
295,480

 
$
14,674

 
18,633,149

 
$
1

 
$
91,357

 
$
(81,991
)
 
$
(10,367
)
 
$
13,674

Net income
 

 

 

 

 

 
1,784

 

 
1,784

Preferred stock dividends
 

 

 

 

 

 
(482
)
 

 
(482
)
Stock options issued
 

 

 

 

 
8

 

 

 
8

Translation adjustment
 

 

 

 

 

 

 
345

 
345

Balances, September 30, 2017
 
295,480

 
$
14,674

 
18,633,149

 
$
1

 
$
91,365

 
$
(80,689
)
 
$
(10,022
)
 
$
15,329

 

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

7

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, 2017
Six months ended September 30, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
Net (loss) income
$
(3,329
)
$
414

Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities:
 

 

Depreciation and amortization of drydock costs
13,165

12,108

Amortization of intangibles and deferred financing costs
4,409

1,731

Deferred income taxes
(359
)
(131
)
Impairment charges on retired asset

1,872

Equity compensation granted
17

240

Unrealized foreign exchange gain
(2,806
)
381

Restructuring charges

2,375

Deferred drydock costs paid
(7,965
)
(2,821
)
Changes in operating assets and liabilities:
 

 

Accounts receivable
(12,646
)
(10,099
)
Prepaid expenses and other current assets
(509
)
(323
)
Accounts payable and accrued liabilities
1,442

(234
)
Other assets and liabilities, net
43

(623
)
Income taxes payable, net
115

(12
)
NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
(8,423
)
4,878

CASH FLOWS FROM INVESTING ACTIVITIES
 

 

Purchase of property and equipment
(17,776
)
(9,095
)
NET CASH USED IN INVESTING ACTIVITIES
(17,776
)
(9,095
)
CASH FLOWS FROM FINANCING ACTIVITIES
 

 

Deferred payment liability obligation

(283
)
Proceeds from long-term debt
30,996

28,153

Long-term debt repayment
(758
)
(23,190
)
Debt financing cost
(2,480
)
(284
)
NET CASH PROVIDED BY FINANCING ACTIVITIES
27,758

4,396

EFFECT OF FOREIGN EXCHANGE RATES ON CASH
140

153

NET INCREASE IN CASH AND CASH EQUIVALENTS 
1,699

332

CASH AND CASH EQUIVALENTS, BEGINNING OF THE PERIOD
335

77

CASH AND CASH EQUIVALENTS, END OF THE PERIOD
$
2,034

$
409

SUPPLEMENTAL CASH FLOW DISCLOSURE
 

 
Payments for interest
$
8,681

$
6,578

Unpaid purchases of property and equipment
$
975

$
901

Unpaid purchases of deferred drydock costs
$
402

$
54

Payment of income taxes
$
3

$

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

8

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.     GOING CONCERN

The accompanying unaudited interim consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America ("GAAP") and contemplate continuation of the Company as a going concern. As discussed under Notes 14 and 15, as of July 14, 2017, the waivers previously obtained from the respective lenders under the Company's First Lien Credit Agreement (as defined in Note 14) and Second Lien Credit Agreement (as defined in Note 15) expired, resulting in the reinstatement of the previously waived events of default under such credit facilities. To date, the Company has not been successful in obtaining further waivers from the lenders under its credit facilities or in refinancing its debt facilities, but continues to pursue a resolution with its lenders. The Company, in the interim, has been permitted to borrow funds at the discretion of the lenders under the First Lien Credit Agreement (the "First Lien Lenders"), however, there can be no assurance as to whether, or how long, the First Lien Lenders will continue to permit such discretionary borrowings by the Company. In this regard, the First Lien Lenders have reserved their rights relative to the pending defaults, have instituted a $15,000 availability reserve on the Company's borrowing ability, and have exercised their rights to control and apply company receipts against the outstanding indebtedness under the First Lien Credit Agreement.

Further, the Company incurred a net loss of $19,871 during the year ended March 31, 2017, and as of that date, the Company’s current liabilities exceeded its current assets by $214,282 (after the reclassification of debt from long-term to current in the amount of $200,279). The balances outstanding under our credit facilities have been classified as short-term obligations within the Company’s Consolidated Balance Sheet since March 31, 2017 due to the Company’s expectation of not being able to satisfy certain financial covenants under such credit facilities during the ensuing twelve-month period. Together, these factors raise substantial doubt about the Company’s ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amount and classification of liabilities, other than as previously discussed, or any other adjustment that might be necessary should the Company be unable to continue as a going concern. Assuming the First Lien Lenders continue to permit the Company to borrow funds during the pendency of the existing events of default, and that no additional availability reserves or other borrowing limitations are imposed, Company management believes that funds available to the Company for borrowing under the First Lien Credit Agreement will be sufficient for the Company to continue to operate its business in the ordinary course and to pay its ordinary and current expenses; provided, however, the Company may not have adequate funds available under the First Lien Credit Agreement to fund certain capital expenditure and dry-docking projects.
 

9

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


2.     GOING CONCERN (continued)

A significant factor in mitigating the substantial doubt about the Company's ability to continue as a going concern is the Company's ability to restructure or refinance its indebtedness, or to complete a recapitalization transaction with the lender under the Second Lien Credit Agreement (the “Second Lien Lender”). The Company's discussions with the Second Lien Lender with respect to a potential recapitalization transaction have continued, but the terms of a potential recapitalization transaction have not been agreed upon by the parties. The Company, with the assistance of its financial advisor, has also continued to evaluate other potential transactions that may be available to the Company that could potentially resolve the credit facility defaults. Notwithstanding the Company's efforts, there can be no assurance as to whether the Company will be able to reach an agreement with respect to a recapitalization or other transaction in a timely manner or at all, or as to whether the terms of any such transaction, if achieved, would provide any value to holders of the Company’s common and preferred stock. Moreover, the inability of the Company to complete a satisfactory recapitalization, refinancing or other transaction in a timely manner could result in the Company's need to voluntarily seek protection under applicable bankruptcy laws, which in turn could also result in a significant or complete loss of value to the holders of the Company's common and preferred stock. In addition, the terms of any recapitalization or other transaction agreed to by the Company may require that the transaction be implemented through a bankruptcy process.





10

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


3.     SIGNIFICANT ACCOUNTING POLICIES

Basis of presentation and consolidation

The consolidated financial statements are prepared in accordance with GAAP 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. As of November 7, 2016, Lower Lakes (17) was amalgamated with and into Lower Lakes Towing with Lower Lakes Towing continuing as the surviving entity.

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 unaudited 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 as of March 31, 2017 and the consolidated statement of stockholders' equity for the year ended March 31, 2017 are derived from the audited consolidated financial statements for the fiscal year ended March 31, 2017. 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 GAAP have been omitted pursuant to such rules and regulations. These unaudited interim financial statements should be read in conjunction with the financial statements that are included in the Company's Annual Report on Form 10-K for the fiscal year ended March 31, 2017.


Cash and cash equivalents

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

Accounts receivable
 
The majority of the Company’s accounts receivable are amounts due from customers and other accounts receivable, including insurance and Canadian harmonized sales tax refunds.  The majority of accounts receivable are due within 30 to 60 days and are stated as 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.



11

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


3.     SIGNIFICANT ACCOUNTING POLICIES (continued)


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.

From time to time, 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 by the Company.  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
 
Vessel acquisitions 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.

Intangible assets and goodwill

Intangible assets consist primarily of goodwill, deferred financing costs and customer relationships and contracts. Customer relationships and contracts are amortized over 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. This cost, net of amortization is classified as an offset against our debt.











12

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


3.     SIGNIFICANT ACCOUNTING POLICIES (continued)

Property and equipment

Property and equipment are recorded at cost.  Depreciation methods and periods 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 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. The Company has also determined that the carrying value of the vessel was greater than the fair value and hence impairment charges were recorded during the three months ended June 30, 2016 to write off the carrying value of the vessel. At March 31, 2017, the Company completed the step 1 test of undiscounted cash flows for one specific asset group and determined that the carrying value of the asset(s) was not less than the undiscounted cash flows. There were no adverse changes in our markets or other triggering events that could affect the valuation of our assets during the six month period ended September 30, 2017.

13

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


3.
SIGNIFICANT ACCOUNTING POLICIES (continued)

Evaluation of goodwill for impairment

The Company annually (or more frequently, if required) reviews the carrying value of goodwill residing in its reporting units as of March 31, to determine whether impairment may exist. 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 determine if the Company can 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, 2017, the Company conducted the quantitative assessment and determined that the fair values of its two reporting units were greater than their carrying amounts. 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 and as a result, an interim impairment test has not been required during the six month period ended September 30, 2017.

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 processes.
 
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 conducted in January, February, and March of each year when the vessels typically 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 lesser of the remaining useful life of the upgrade or the asset repaired.
 

14

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


3.
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.

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)
2014 – 2017
Various states
2013 – 2017
Federal (Canada)
2012 – 2017
Ontario
2012 – 2017


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.

15

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


3.    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 and assumptions used in the preparation of these consolidated financial statements include the assumptions used in the determination of whether there is substantial doubt about the Company's ability to continue as a going concern, 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 or the date of modification, if applicable.

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 any foreign currency hedge contracts are recorded in earnings and the fair value of settlement costs to terminate any foreign currency hedge contracts are included in current assets or current liabilities on the consolidated balance sheets.

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 815 and ASC 820 related to the Company’s financial assets and liabilities are presented in Note 23.



16

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


4.
RECENTLY ISSUED PRONOUNCEMENTS

Revenue from Contracts with Customers(Topic 606)

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. The Company has not elected to early adopt the new revenue guidance, and as a result, the Company will initially apply this new guidance during the first quarter of the fiscal year ending March 31, 2019.
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 Revenue from Contracts with Customers (Topic 606): 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 Revenue from Contracts with Customers (Topic 606): 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 Revenue from Contracts with Customers (Topic 606): 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. In December 2016, the FASB issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue From Contracts with Customers”. The update makes minor changes to ASU 2014-09. The technical corrections affect narrow aspects of the new revenue standard, including: loan guarantee fees, contract costs-impairment testing, contract costs - interaction of impairment testing with guidance in other topics, provisions for losses on construction-type and production-type contracts, scope of the new revenue standard, disclosure of remaining performance obligations, disclosure of prior-period performance obligations, a contract modification example, refund liability, advertising costs, fixed-odds wagering contracts in the casino industry, and cost capitalization for advisers to private and public funds. There are two transition methods available under the new standard, either cumulative effect or retrospective. ASU 2016-08, ASU 2016-10, ASU 2016-12 and ASU 2016-20 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. The Company does not expect these amendments to have a material effect on its financial statements.
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 has not elected to early adopt the new leasing guidance, and as a result, the Company will apply this new guidance during the first quarter of its fiscal year ending March 31, 2020. The Company is currently evaluating the effects of the adoption of ASU 2016-02 on its consolidated financial statements.



17

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


4.     RECENTLY ISSUED PRONOUNCEMENTS (continued)

Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): 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 2016-16").  ASU 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 2016-16 will have on the financial statements and disclosures.
Statement of Cash Flows (Topic 230): Restricted Cash
In November 2016, the FASB issued ASU No. 2016-18, "Statement of Cash Flows (Topic 230): Restricted Cash", which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. The Company does not expect these amendments to have a material effect on its financial statements.
Business Combinations (Topic 805)
In January 2017, the FASB issued ASU 2017-01, “Business Combinations (Topic 805): Clarifying the Definition of a Business” (“ASU 2017-01”), which adds guidance to assist companies in evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or of businesses, and provides for a screen to determine when a transaction should be accounted for as the acquisition or disposal of assets and not of a business, potentially reducing the number of transactions that need to be further evaluated. ASU 2017-01 is effective for annual periods beginning after December 15, 2017, including interim periods within those annual periods. No disclosures are required at transition and early adoption is permitted. The Company is currently evaluating the impact of adopting the new guidance on its consolidated financial statements.
Intangibles - Goodwill and Other (Topic 350)
In January 2017, the FASB issued ASU 2017-04, Intangibles - Goodwill and Other (Topic 350) ("ASU 2017-04"), which simplifies the subsequent measurement of goodwill by removing the second step of the two-step impairment test.  The amendment requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount.  An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit's fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit.  An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary.  The amendment should be applied on a prospective basis.  ASU 2017-04 is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years.  Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates on or after January 1, 2017.  The Company is currently evaluating the impact of adopting ASU 2017-04 on its consolidated financial statements.


18

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


4.     RECENTLY ISSUED PRONOUNCEMENTS (continued)

Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets
On February 22, 2017, the FASB issued ASU 2017-05, “Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial Assets”, to clarify the scope of asset derecognition guidance and provide new guidance on the accounting for partial sales of nonfinancial assets. This guidance provides greater detail on what types of transactions should be accounted for within the scope of ASC subtopic 610-20. The effective date for this update is for annual reporting periods beginning after December 15, 2017. The Company is evaluating the impact of the adoption of this ASU on its consolidated financial statements.

Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.

In May 2017, the FASB issued ASU No. 2017-09 “Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting”. ASU No. 2017-09 provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. ASU No. 2017-09 is effective for annual periods beginning after December 15, 2017 and interim periods within those years. The amendments in ASU No. 2017-09 are to be applied prospectively to an award modified on or after the adoption date, consequently the impact will be dependent on whether the Company modifies any of its share-based payment awards and the nature of such modifications.


5.     ACCOUNTS RECEIVABLE, NET

Trade receivables are presented net of an allowance for doubtful accounts. The allowance was $120 as of September 30, 2017 and $113 as of March 31, 2017. 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.


6.PREPAID EXPENSES AND OTHER CURRENT ASSETS

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

 
September 30, 2017
 
March 31, 2017
Prepaid insurance
$
311

 
$
302

Fuel and lubricant inventories
4,750

 
4,252

Deposits and other prepaids
1,657

 
1,655

 
$
6,718

 
$
6,209




19

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


7.
INCOME TAXES


The Company's effective tax rate for the six month period ended September 30, 2017 was a tax expense of 6.7% compared to a deferred tax benefit of 46.3% for the six month period ended September 30, 2016. 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 an overall net deferred tax asset position before the consideration of the valuation allowance at September 30, 2017. In certain separate state jurisdictions, a small net deferred tax liability exists before consideration of the valuation allowance. After the consideration of the reversing patterns of these liabilities on a separate jurisdiction basis, it is expected that a portion of these liabilities will reverse within the period of time available for existing deferred tax assets including net operating loss carryforward. The Company recorded a small valuation allowance against the U.S. state net deferred tax assets as of September 30, 2017.

The effective tax rate for the six month period ended September 30, 2017 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, 2017. The Company did not incur any income tax related interest expense or penalties related to uncertain tax positions during any of the three and six month periods ended September 30, 2017 and September 30, 2016.


20

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


8.
PROPERTY AND EQUIPMENT, NET

Property and equipment, net are comprised of the following:
 
September 30, 2017
 
March 31, 2017
Cost
 
 
 
Vessels
$
346,627

 
$
322,820

Leasehold improvements
186

 
146

Furniture and equipment
624

 
594

Vehicles
12

 
15

Computer, communication equipment and purchased software
4,266

 
3,727

 
$
351,715

 
$
327,302

Accumulated depreciation
 

 
 

Vessels
$
125,241

 
$
110,338

Leasehold improvements
79

 
61

Furniture and equipment
463

 
408

Vehicles
12

 
13

Computer, communication equipment  and purchased software
2,675

 
2,436

 
$
128,470

 
$
113,256

 Total Cost less Accumulated Depreciation
$
223,245

 
$
214,046






9.
OTHER ASSETS

Certain customer contract related expenditures included in other assets at March 31, 2017 were fully amortized as of September 30, 2017. The current portion of such costs represented the amounts expected to be recognized as expenses over the next twelve months.
 
September 30, 2017
March 31, 2017
Customer contract costs
$

$
72

Prepaid expenses and other assets
6,736

6,178

Total
$
6,736

$
6,250

 
 
 
Current portion (Note 6)
6,718

6,209

 
 
 
Other long-term assets
$
18

$
41



21

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


10.
DEFERRED DRYDOCK COSTS, NET

Deferred drydock costs, net are comprised of the following:

 
September 30, 2017
 
March 31, 2017
Drydock expenditures
$
18,929

 
$
19,395

Accumulated amortization
(6,712
)
 
(10,593
)
 
$
12,217

 
$
8,802

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

Balance as of March 31, 2016
$
6,660

Drydock costs accrued and incurred
5,531

Amortization of drydock costs
(3,104
)
Unamortized dry-dock cost write-off for a retired vessel
(138
)
Foreign currency translation adjustment
(147
)
Balance as of March 31, 2017
8,802

Drydock costs accrued and incurred
4,789

Amortization of drydock costs
(1,631
)
Foreign currency translation adjustment
257

Balance as of September 30, 2017
$
12,217


22

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


11.
INTANGIBLE ASSETS, NET AND GOODWILL

Intangibles, net are comprised of the following:

 
September 30, 2017
 
March 31, 2017
Intangible assets:
 
 
 
Customer relationships and contracts
$
15,531

 
$
14,886

Total identifiable intangibles
15,531

 
14,886

Accumulated amortization:
 

 
 

Customer relationships and contracts
11,031

 
10,059

Total accumulated amortization
11,031

 
10,059

Net intangible assets
$
4,500

 
$
4,827

Goodwill
$
10,193

 
$
10,193


 
Intangible asset amortization over the next five years is estimated as follows:
    
Twelve month period ending:
September 30, 2018
$
1,035

September 30, 2019
1,036

September 30, 2020
1,035

September 30, 2021
637

September 30, 2022
347

 
$
4,090



12.
VESSEL ACQUISITION AND CAPITAL EXPENDITURES

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 15. 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. Lower Lakes (17) was amalgamated with and into Lower Lakes Towing on November 7, 2016 with Lower Lakes Towing continuing as the surviving entity.
The Company incurred $18,507 on paid and unpaid capital expenditures and drydock projects for the six month period ended September 30, 2017 compared to $4,359 for the six month period ended September 30, 2016. The higher capital expenditures for the six month period ended September 30, 2017 were related to several required drydock certifications due during the winter of 2017.


23

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


13.
ACCRUED LIABILITIES

Accrued liabilities are comprised of the following:
 
September 30, 2017
 
March 31, 2017
Payroll compensation and benefits
1,670

 
753

Preferred stock dividends
4,515

 
3,563

Professional fees
325

 
394

Interest
2,784

 
2,393

Winter work, deferred drydock expenditures and capital expenditures
135

 
5,882

Capital and franchise taxes
50

 
52

Restructuring charges (Note 21)
338

 
654

Other
1,985

 
1,529

 
$
11,802

 
$
15,220


24

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


14.
LONG-TERM DEBT
    
 
 
September 30, 2017
 
March 31, 2017
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.
69,711

 
46,996

 
 
 
 
 
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.
81,357

 
74,200

 
 
$
151,068

 
$
121,196

 
Less unamortized debt issuance costs
(1,240
)
 
(1,494
)
 
 
149,828

 
119,702

 
Less amounts classified as current
149,828

 
119,702

 
 
$

 
$


As a result of the covenant violations and other matters described below, the Company has classified the entire balance of this debt as a current liability at September 30, 2017 and March 31, 2017.

The effective interest rates at September 30, 2017 were 6.27% (3.70% at March 31, 2017) on the Canadian Revolving Facility (defined below) and 6.24% (3.81% at March 31, 2017) 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 Ship Repair is a guarantor of all Canadian obligations under the First Lien Credit Agreement and is an indirect wholly-owned subsidiary of the Company (the “Canadian Guarantor”; 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.


25

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


14.
LONG-TERM DEBT (continued)

The credit facilities (the “Credit Facilities”) under the 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,” and collectively with the Canadian Revolving Facility, the "Revolving Facilities");
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 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, 2017.

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.


26

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


14.    LONG-TERM DEBT (continued)

On February 9, 2016, the parties to the First Lien Credit Agreement executed an Amendment No. 1 and Waiver Agreement pursuant to which the First Lien Lenders (i) waived breach of the Minimum Fixed Charge Coverage Ratio and Maximum Senior Funded Debt to EBITDA Ratio covenants contained in the First Lien Credit Agreement which existed as of December 31, 2015; and (ii) added a temporary minimum EBITDA covenant for the period from April 1, 2016 through May 31, 2016. On August 26, 2016, the parties to the First Lien Credit Agreement entered into an Amendment No. 2 and Waiver Agreement ("Amendment No. 2") pursuant to which the First Lien Lenders waived the breach of certain financial and other covenants by the Company, including breach of the Maximum Senior Funded Debt to EBITDA Ratio covenant therein, calculated as of June 30, 2016. Amendment No. 2 also modified the Maximum Fixed Charge Coverage Ratio and the Maximum Senior Funded Debt to EBITDA Ratio covenants, further limited the expectations to the Restricted Payments (as defined in the First Lien Credit Agreement) allowed to be made by the Company, provided for additional fees, and incorporated new restrictions on certain Company activities. On September 13, 2016, the parties to the First Lien Credit Agreement entered into Amendment No. 3 to Credit Agreement pursuant to which immaterial changes were made to certain definitions.

On June 1, 2017, the parties to the First Lien Credit Agreement entered into an Amendment No. 4 and Waiver to Credit Agreement (“Amendment No. 4”), pursuant to which the First Lien Lenders waived, until June 14, 2017, the Company’s failure to deliver its audited financial statements for the fiscal year ending March 31, 2017 by May 31, 2017 (the “Specified Default”). Amendment No. 4, among other things, further provided for (i) enhanced or new restrictions on certain Company activities not in the ordinary course of business, including with respect to consummating a merger or sale, making certain intercompany payments, or incurring new liens or indebtedness (other than under the First Lien Credit Agreement), (ii) continuation of certain rights of the agent under the First Lien Credit Agreement applicable during an Event of Default during the waiver period (notwithstanding waiver of the Specified Default), including with respect to (a) reimbursement of fees and expenses, (b) entitlement to default interest and (c) enhanced entitlement to Company access and reporting, and (iii) restrictions on the Company's right to designate a LIBOR based interest rate for new loans under the First Lien Credit Agreement. Finally, Amendment No. 4 provided for an Event of Default under the First Lien Credit Agreement if the Company did not agree to a recapitalization transaction with the Second Lien Lender by June 30, 2017, on terms reasonably satisfactory to the agent under the First Lien Credit Agreement.

As of June 14, 2017, the parties to the First Lien Credit Agreement entered into a First Amendment to Amendment No. 4, pursuant to which the waiver provided in the Fifth Amendment was extended to June 30, 2017, subject to the other terms and conditions of Amendment No. 4.

Effective as of June 30, 2017, the parties to the First Lien Credit Agreement entered into a Second Amendment to Amendment No. 4 pursuant to which (i) the waiver with respect to the Company's failure to deliver the Company's audited financial statements for the fiscal year ending March 31, 2017 without a qualified audit opinion was further extended to July 14, 2017, (ii) the date by which the Company shall have agreed to a recapitalization transaction with the Second Lien Lender was further extended to July 28, 2017, (iii) the date by which the Company shall have delivered its April and May 2017 monthly financial statements was extended to July 10, 2017, and (iv) the First Lien Lender waived a breach of (a) the Maximum Senior Funded Debt to EBITDA Ratio covenant for the fiscal quarter ended March 31, 2017, and (b) the requirement that the debt under the First Lien Credit Agreement and Second Lien Credit Agreement not cease to be classified as long-term debt in the Company's audited financial statements, and (c) certain events of default having occurred under the Second Lien Credit Agreement, as discussed below, in each case, (a) through (c), through July 14, 2017.


27

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


14.
LONG-TERM DEBT (continued)

As of September 30, 2017, the Company had credit availability of $3,473 under the Credit Facilities based on eligible receivables and vessel collateral value, the aggregate principal amount outstanding under the First Lien Credit Agreement was $151,068.

As of July 14, 2017, the waivers previously obtained from the First Lien Lenders and the Second Lien Lender expired, resulting in the reinstatement of the previously waived events of default under the First Lien Credit Agreement and Second Lien Credit Agreement, respectively. As of September 30, 2017, the Company was not in compliance with the covenants discussed above under either credit agreement. To date, the Company has not been successful in obtaining further waivers from the lenders under its credit facilities or in refinancing its debt facilities, but the Company continues to pursue a resolution with its lenders. The Company, in the interim, has been permitted to borrow funds at the discretion of the First Lien Lenders, however, there can be no assurance as to whether, or how long, the First Lien Lenders will continue to permit such discretionary borrowings by the Company. In this regard, the First Lien Lenders have reserved their rights relative to the pending defaults, have instituted a $15,000 availability reserve on the Company's borrowing ability, and have exercised their rights to control and apply company receipts against the outstanding indebtedness under the First Lien Credit Agreement.

The Company's discussions with the Second Lien Lender with respect to a potential recapitalization transaction have continued, but the terms of a potential recapitalization transaction have not been agreed upon by the parties. The Company, with the assistance of its financial advisor, has also continued to evaluate other possible transactions potentially available to the Company that could potentially resolve the credit facility defaults. Notwithstanding the Company's efforts, there can be no assurance as to whether the Company will be able to reach an agreement with respect to a recapitalization or other transaction in a timely manner or at all, or as to whether the terms of any such transaction, if achieved, would provide any value to holders of the Company's common and preferred stock. Moreover, the inability of the Company to complete a satisfactory recapitalization, refinancing or other transaction in a timely manner could result in the Company's need to voluntarily seek protection under applicable bankruptcy laws, which in turn could also result in a significant or complete loss of value to the holders of the Company's common and preferred stock. In addition, the terms of any recapitalization or other transaction agreed to by the Company may require that the transaction be implemented through a bankruptcy process.
 


28

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


15.    SUBORDINATED DEBT
 
 
September 30, 2017
 
March 31, 2017
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.
$
43,987

 
$
41,645

 
 
 
 
 
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.
42,301

 
40,049

 
 
86,288

 
81,694

 
Less unamortized debt issuance costs

 
(1,117
)
 
 
86,288

 
80,577

 
Less amounts classified as current
86,288

 
80,577

 
 
$

 
$


As a result of the covenant violations and other matters described below, the Company has classified the entire balance of this debt as a current liability at September 30, 2017 and March 31, 2017.

The effective interest rates at September 30, 2017 were 15.82% (13.75% at March 31, 2017) 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 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 Second Lien Credit Agreement) plus 9.50% per annum, or (ii) the U.S. Base Rate (as defined in the Second Lien Credit Agreement), plus 8.50% per annum.

Obligations under the Second Lien Credit Agreement are secured by the second-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).

29

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


15.    SUBORDINATED DEBT (continued)

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

On April 11, 2014, the parties under the Second Lien Credit Agreement entered into a First Amendment to the Second Lien Credit Agreement, which extended the due date of certain post-closing deliverables. On March 27, 2015, the parties to the Second Lien Credit Agreement entered into a Second Amendment (the “Second Amendment”) to the Second Lien Credit Agreement. The Second Amendment conformed certain provisions of the 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, the parties to the Second Lien Credit Agreement executed a Third Amendment and Waiver Under Term Loan Credit Agreement pursuant to which the Second Lien Lender (i) waived breach of the Minimum Fixed Charge Coverage Ratio, the Maximum Senior Funded Debt to EBITDA Ratio, and the Maximum Total Funded Debt to EBITDA Ratio covenants contained in the Second Lien Credit Agreement which existed as of December 31, 2015; and (ii) added a temporary minimum EBITDA covenant for the period from April 1, 2016 through May 31, 2016. 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 "Fourth Amendment") pursuant to which the Second Lien Lender 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 Fourth Amendment also modified 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, incorporated new restrictions on certain Company activities, provided 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.
    
On June 1, 2017, the parties under the Second Lien Credit Agreement entered in to a Fifth Amendment and Waiver to Credit Agreement (the “Fifth Amendment”), pursuant to which the Second Lien Lender waived, until June 14, 2017, the Company’s failure to deliver its audited financial statements for the fiscal year ending March 31, 2017 by May 31, 2017 (the “Specified Default”). The Fifth Amendment, among other things, further provided for (i) enhanced or new restrictions on certain Company activities not in the ordinary course of business, including with respect to consummating a merger or sale, making certain intercompany payments, or incurring new liens or indebtedness (other than under the First Lien Credit Agreement), (ii) extension of certain rights of the agent under the Second Lien Credit Agreement applicable during an Event of Default during the Second Lien Waiver Period to the Second Lien Lender and continuation of certain of such rights during the Second Lien Waiver Period (notwithstanding waiver of the Specified Default), including with respect to (a) reimbursement of fees and expenses, (b) entitlement to default interest and (c) enhanced entitlement to Company access and reporting, and (iii) restrictions on the Company's right to designate a LIBOR based interest rate for new loans under the Second Lien Credit Agreement. Finally, the Fifth Amendment provided for an Event of Default under the Second Lien Credit Agreement if the Company did not agree to a recapitalization transaction with the Second Lien Lender by June 30, 2017.

As of June 14, 2017, the parties to the Second Lien Credit Agreement entered into a First Amendment to Fifth Amendment pursuant to which the waiver provided in the Fifth Amendment was extended to June 30, 2017, subject to the other terms and conditions of the Fifth Amendment.

30

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


15.    SUBORDINATED DEBT (continued)

Effective as of June 30, 2017, the parties to the Second Lien Credit Agreement entered into a Second Amendment to the Fifth Amendment pursuant to which (i) the waiver with respect to the Company's failure to deliver the Company's audited financial statements for the fiscal year ending March 31, 2017 without a qualified audit opinion was further extended to July 14, 2017, (ii) the date by which the Company shall have agreed to a recapitalization transaction with the Second Lien Lender was further extended to July 28, 2017, (iii) the date by which the Company shall have delivered its April and May 2017 monthly financial statements was extended to July 10, 2017, and (iv) the Second Lien Lender waived a breach of (a) the Maximum Senior Funded Debt to EBITDA Ratio and the Maximum Total Funded Debt to EBITDA Ratio covenants for the fiscal quarter ended March 31, 2017, and (b) the requirement that the debt under the First Lien Credit Agreement and Second Lien Credit Agreement not cease to be classified as long-term debt in the Company's audited financial statements, in each case, (a) and (b), through July 14, 2017.

As of September 30, 2017, the aggregate principal outstanding under the Second Lien Credit Agreement was $86,288.

As of July 14, 2017, the waivers previously obtained from the First Lien Lenders and the Second Lien Lender expired, resulting in the reinstatement of the previously waived events of default under the First Lien Credit Agreement and Second Lien Credit Agreement, respectively. As of September 30, 2017, the Company was not in compliance with the covenants discussed above under either credit agreement. To date, the Company has not been successful in obtaining further waivers from the lenders under its credit facilities or in refinancing its debt facilities, but the Company continues to pursue a resolution with its lenders. The Company, in the interim, has been permitted to borrow funds at the discretion of the First Lien Lenders, however, there can be no assurance as to whether, or how long, the First Lien Lenders will continue to permit such discretionary borrowings by the Company. In this regard, the First Lien Lenders have reserved their rights relative to the pending defaults, have instituted a $15,000 availability reserve on the Company's borrowing ability, and have exercised their rights to control and apply company receipts against the outstanding indebtedness under the First Lien Credit Agreement.
 
The Company's discussions with the Second Lien Lender with respect to a potential recapitalization transaction have continued, but the terms of a potential recapitalization transaction have not been agreed upon by the parties. The Company, with the assistance of its financial advisor, has also continued to evaluate other possible transactions potentially available to the Company that could potentially resolve the credit facility defaults. Notwithstanding the Company's efforts, there can be no assurance as to whether the Company will be able to reach an agreement with respect to a recapitalization or other transaction in a timely manner or at all, or as to whether the terms of any such transaction, if achieved, would provide any value to holders of the Company's common and preferred stock. Moreover, the inability of the Company to complete a satisfactory recapitalization, refinancing or other transaction in a timely manner could result in the Company's need to voluntarily seek protection under applicable bankruptcy laws, which in turn could also result in a significant or complete loss of value to the holders of the Company's common and preferred stock. In addition, the terms of any recapitalization or other transaction agreed to by the Company may require that the transaction be implemented through a bankruptcy process.

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 First Lien Lenders and Guggenheim Corporate Funding, LLC, as agent for the Second Lien Lender.

Under the Intercreditor Agreement, the Second Lien Lender has 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 Lender is permitted to receive regularly scheduled principal and interest payments under the Second Lien Credit Agreement.
 


31

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


16.
COMMITMENTS

The Company did not have any leases that met the criteria of a capital lease as of September 30, 2017 and 2016. Leases that 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, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Operating leases
 
$
175

 
$
161

 
$
338

 
$
292

 
 
$
175

 
$
161

 
$
338

 
$
292


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

Twelve month period ending:
September 30, 2018
$
691

September 30, 2019
564

September 30, 2020
466

September 30, 2021
249

September 30, 2022
118

Thereafter
50

 
$
2,138


As of September 30, 2017, the Company had signed contractual commitments with several suppliers totaling $910 ($3,051 as of March 31, 2017) in connection with capital expenditures and drydock projects due in less than one year.


17.
CONTINGENCIES

The Company is not involved in any legal proceedings which management expects to have a material adverse effect on the Company's business, financial position, results of operations or liquidity, nor is the Company aware of any proceedings that are pending or threatened which management believes may have a material adverse effect on the Company’s business, financial position, results of operations or liquidity. From time to time, the Company may be subject to ordinary routine litigation and claims incidental to the business principally involving 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, 2017, an accrual of $168 ($365 as of March 31, 2017) 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 asserted by management will be successful.  

32

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


18.
STOCKHOLDERS’ EQUITY
 
On September 21, 2011, the Company completed a public underwritten offering of 2,800,000 shares of the Company’s common stock for $6.00 per share.  The Company’s proceeds from the offering, net of underwriter’s commissions and expenses, were $15,525.
 
On February 11, 2011, in connection with the Company's acquisition of two vessels, the Company issued 1,305,963 shares of the Company’s common stock to the seller of such vessels. Such shares were valued at $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, 2017 were $4,515 and at March 31, 2017 were $3,563. As of September 30, 2017, the effective dividend rate of the preferred stock was 10.25%. As of March 31, 2017, the effective dividend rate of the preferred stock was 9.75%.
 
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 reserved 2,500,000 shares for issuance under the Company’s 2007 Long Term Incentive Plan (the “LTIP”) to employees, officers, directors and consultants. The LTIP expired on July 26, 2017, except with respect to awards then outstanding, which will remain outstanding until exercised, cancelled or expired in accordance with their terms.  After July 26, 2017, no further awards may be granted under the LTIP.


33

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


18.
STOCKHOLDERS’ EQUITY (continued)

The 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, 2017
Three months ended September 30, 2016
Six months ended September 30, 2017
Six months ended September 30, 2016
Jun 5, 2013
6
54,337
5.55
Restricted Share Award Agreement
7
Three years in equal installments on each anniversary date.
Jul 22, 2014
10
105,189
5.90
Restricted Share Award Agreement
6
16
22
65
Three years in equal installments on each anniversary date.
Oct 27, 2015
1
4,429
2.19
Restricted Share Award Agreement
1
5
2
Three years in equal installments on each anniversary date.
Oct 27, 2015
1
10,871
2.19
Restricted Share Award Agreement
2
2
4
7
Three years in equal installments on each of March 31.
May 31, 2016
1
102,301
0.92
Restricted Share Award Agreement
8
8
16
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.

34

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


18.    STOCKHOLDERS’ EQUITY (continued)

The general characteristics of share-based awards granted under the LTIP through September 30, 2017 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 fiscal year ended March 31, 2017, the Company awarded 161,733 shares for services rendered from April 1, 2016 to March 31, 2017. No such shares were awarded during the three month and six month periods ended September 30, 2017. Grant date fair 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, 2017 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, 0.80% to 1.60% for the fiscal 2016 grant and 1.24% for the fiscal 2017 grant. Expected volatility was 39.49% for the fiscal 2009 grant, 33.5% to 37.2% for the fiscal 2016 grant and 42.46% for fiscal 2017 grant. All of the stock options granted in February 2008 (243,199) and July 2008 (236,586), had vested as of March 31, 2017. During the twelve months ended March 31, 2017, 136,267 options expired. During the twelve month period ended March 31, 2016, 306,766 options expired. Options outstanding (341,752) at September 30, 2017 had a remaining weighted average contractual life of approximately two years and nine months. 

The Company recorded compensation expenses related to such stock options of $8 for the three month period ended September 30, 2017 and $17 for the six month period ended September 30, 2017 ($7 for the three month period ended September 30, 2016 and $19 for the six month period ended September 30, 2016). None of the outstanding stock options were in-the-money as of September 30, 2017 or September 30, 2016.

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.





35

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


18.    STOCKHOLDERS’ EQUITY (continued)

On September 16, 2010, the Company issued 15,153 shares to a key executive for payment of the fiscal year 2010 bonus. 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. On April 1, 2016, the Company issued 1,000 shares to an executive as a signing bonus. Grant date fair value for all these share awards is the average of the high and low trading prices of the Company’s common stock on the date of grant. Each of these share grants 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 and are therefore fully vested as of March 31, 2017. 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 $Nil for the three month period ended September 30, 2017 and $15 for the three month period ended September 31, 2016. 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. On the third vesting date of March 31, 2017, 8,718 shares vested.


19.
OUTSIDE VOYAGE CHARTER FEES

Outside voyage charter fees relate to the subcontracting of external vessels chartered to service the Company’s customers and supplement the existing shipments made by the Company’s operated vessels. The Company was not part of any such arrangements during either of the three and six month periods ended September 30, 2017 and 2016, respectively.


20.
INTEREST EXPENSE

Interest expense, net of interest capitalized is comprised of the following:
 
 
Three months ended September 30, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
Amortization of deferred financing costs
 
149

 
901

 
$
3,905

 
$
1,226

Long-term debt-senior
 
1,961

 
1,210

 
3,305

 
2,384

Long-term debt-subordinated
 
3,611

 
2,158

 
6,518

 
4,270

Deferred payment liability
 

 
7

 

 
16

 
 
$
5,721

 
$
4,276

 
$
13,728

 
$
7,896


36

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


21.
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 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. For the three month period ended September 30, 2017 the Company recognized $Nil as expenses.

The following table summarizes activities in the restructuring costs accrual balance.

 
Restructuring Costs
Balance as of June 30, 2016
$
2,375

Payments
(1,721
)
Balance as at March 31, 2017
654

Payments
(156
)
Balance as at June 30, 2017
498

Payments
(160
)
Balance as at September 30, 2017
338



The restructuring costs accrual balance is included in accrued liabilities (see Note 13).



37

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


22.
SEGMENT INFORMATION

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

Information about geographic operations is as follows:

 
 
Three months ended September 30, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
 
 
 
 
 
 
 
 
 
Revenue by country:
 
 
 
 
 
 
 
 
Canada
 
$
21,876

 
$
22,895

 
$
43,022

 
$
42,295

United States
 
17,591

 
16,345

 
28,787

 
30,762

 
 
$
39,467

 
$
39,240

 
$
71,809

 
$
73,057


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, 2017
 
March 31, 2017
Property and equipment, net by country:
 
 
 
Canada
$
112,972

 
$
107,884

United States
110,273

 
106,162

 
$
223,245

 
$
214,046

Intangible assets, net by country:
 

 
 

Canada
$
2,751

 
$
2,910

United States
1,749

 
1,917

 
$
4,500

 
$
4,827

Goodwill by country:
 

 
 

Canada
$
8,284

 
$
8,284

United States
1,909

 
1,909

 
$
10,193

 
$
10,193

Total assets by country:
 

 
 

Canada
$
143,612

 
$
131,198

United States
132,106

 
117,402

 
$
275,718

 
$
248,600




38

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


23.    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 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 and six month periods ended September 30, 2017 or September 30, 2016.
 
The Company had no foreign currency hedge contracts open as of September 30, 2017 or March 31, 2017. For the three and six month periods ended September 30, 2017, the fair value adjustments of the foreign currency hedge contracts resulted in a loss of $189 for three and six month periods ended September 30, 2017 (gains of $1,185 for the three month period ended September 30, 2016 and $2,050 for the six month period ended September 30, 2016). These gains and losses are included in the Company’s earnings, and the fair value of settlement costs to terminate the contracts was included in current liabilities on the Company's consolidated balance sheets.

The Company has not designated these contracts as hedging instruments.
 
 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, as required. 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.

Credit risk

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

39

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


23.    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 borrowing arrangements during the first quarter of each fiscal year to fund working capital needed to commence the sailing season. The Company attempts to reduce the amounts outstanding under the related borrowing arrangements during the second half of each fiscal year.

40

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


24.
EARNINGS (LOSS) PER SHARE ("EPS")

The Company had a total of 18,633,149 shares of common stock issued and outstanding as of September 30, 2017, out of an authorized total of 50,000,000 shares. The diluted calculation considers a total of 20,941,863 and 20,762,468 shares for the three month periods ended September 30, 2017 and 2016, respectively and 20,926,182 and 20,732,873 shares for the six month periods ended September 30, 2017 and 2016, respectively . The calculations for the three month periods ended September 30, 2017 is anti-dilutive, therefore the basic and diluted weighted average shares outstanding are 18,558,960. The calculation for six month periods ended September 30, 2017 and September 30, 2016 are also anti-dilutive, therefore the basic and diluted weighted average shares outstanding are 18,543,279 and 18,349,970 respectively for the six month periods. The convertible preferred shares outstanding as of September 30, 2017 and 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, 2017
 
Three months ended September 30, 2016
 
Six months ended September 30, 2017
 
Six months ended September 30, 2016
Numerator:
 
 
 
 
 
 
 
 
Net income (loss) before preferred dividends
 
$
1,784

 
$
2,996

 
$
(3,329
)
 
$
414

Preferred stock dividends
 
(482
)
 
(395
)
 
(952
)
 
(781
)
Net income (loss) applicable to common stockholders
 
$
1,302

 
$
2,601

 
$
(4,281
)
 
$
(367
)
Denominator:
 
 
 
 
 
 
 
 
Weighted average common shares for basic EPS
 
18,558,960

 
18,379,565

 
18,543,279

 
18,349,970

Effect of dilutive securities:
 
 
 
 
 
 
 
 
Average price during period
 
0.29

 
0.94

 
0.44

 
0.96

Long term incentive stock option plan
 
341,752

 
246,007

 
341,752

 
304,193

Average exercise price of stock options
 
2.98

 
3.85

 
2.98

 
3.85

Shares that could be acquired with the proceeds of options
 

 

 

 

Dilutive shares due to options
 

 

 

 

Restricted Stock Units (RSU)-unvested
 

 
10,586

 

 
10,586

Average grant date fair value of unvested RSU
 

 
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

 
2,382,903

 
2,382,903

 
2,382,903

Weighted average common shares for diluted EPS
 
18,558,960

 
20,762,468

 
18,543,279

 
18,349,970

Basic EPS
 
$
0.07

 
$
0.14

 
$
(0.23
)
 
$
(0.02
)
Diluted EPS
 
$
0.07

 
$
0.14

 
$
(0.23
)
 
$
(0.02
)

41


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, 2017. 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 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 or regain compliance with applicable regulations, Nasdaq listing requirements and our debt covenants;
our ability to implement a recapitalization transaction or refinance or restructure our debt;
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 SEC on July 6, 2017, in Part II, Item 1A of the Company's Quarterly Report on Form 10-Q filed with the SEC on August 14, 2016 and in Part II, Item 1A of this Quarterly Report on Form 10-Q may not be exhaustive. We operate in a continually changing business environment, and new risk factors emerge from time to time. We cannot predict these new risk factors, nor can we assess the impact, if any, of the new risk factors on our business or the extent to which any factor or combination of factors may cause actual results to differ materially from those expressed or implied by any forward-looking statement. In light of these risks, uncertainties, and assumptions, the events anticipated by our forward-looking statements discussed in this report might not occur. 

42


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 four 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) owned the Manitoulin, a vessel placed in service in November 2015. Lower Lakes (17) was amalgamated with and into Lower Lakes Towing on November 7, 2016, with Lower Lakes Towing continuing as the surviving entity.
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 all nine Canadian vessels. Lower Lakes Transportation time charters the six U.S. vessels, including the three tug and barge units, from Grand River. With the exception of two of the articulated tug and barge units (which Grand River bareboat charters from Black Creek), Grand River owns the vessels that it time charters to Lower Lakes Transportation.
Vessel Acquisition 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. Lower Lakes (17) was amalgamated with and into Lower Lakes Towing on November 7, 2016, with Lower Lakes Towing continuing as the surviving entity.
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.

43


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, one-time equity based severance costs, restructuring charges, and impairment charges on retired assets, 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, one-time equity based severance costs, restructuring charges, and impairment charges on retired assets 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 net loss 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.

44


Results of Operations for the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016
Selected Financial and Operating Information
(USD in 000's)
September 30, 2017
 
September 30, 2016
$ Change
% Change
Revenue:
 
 
 
 
 
Freight and related revenue
$
37,011

 
$
37,518

$
(507
)
(1.4
)%
Fuel and other surcharges
2,456

 
1,722

734

42.6
 %
Total
$
39,467

 
$
39,240

$
227

0.6
 %
Expenses:
 
 
 
 
 
Vessel operating expenses
21,565

 
22,028

(463
)
(2.1
)%
Repairs and maintenance
490

 
100

390

390.0
 %
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) on foreign exchange.
$
13,200

 
$
13,257

$
(57
)
(0.4
)%
OPERATING INCOME
$
7,464

 
$
7,588

$
(124
)
(1.6
)%
 
 
 
 
 
 
Sailing Days:
1,099

 
1,185

(86
)
(7.3
)%
Number of vessels operated:
13

 
14

(1
)
(7.1
)%
Per day in whole USD:
 
 
 
 
 
Revenue per Sailing Day:
 
 
 
 
 
Freight and related revenue
$
33,677

 
$
31,661

$
2,016

6.4
 %
Fuel and other surcharges
$
2,235

 
$
1,453

$
782

53.8
 %
 
 
 
 
 
 
Expenses per Sailing Day:
 
 
 
 
 
Vessel operating expenses
$
19,622

 
$
18,589

$
1,033

5.6
 %
Repairs and maintenance
$
446

 
$
84

$
362

431.0
 %
The following table provides a reconciliation of operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) on foreign exchange during the three month periods ended September 30, 2017 and September 30, 2016 (USD in 000's):
 
Three months ended September 30, 2017
Three months ended September 30, 2016
Operating Income
$
7,464

$
7,588

Depreciation
6,200

5,203

Amortization of drydock costs
873

754

Amortization of intangibles
259

252

Gain on foreign exchange
(1,596
)
(540
)
Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) on foreign exchange.
$
13,200

$
13,257



45


The following table summarizes the changes in the components of our revenue and certain expenses during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016:
(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 June 30, 2016
1,185

 
$
37,518

 
$
1,722

 
$

 
$
39,240

 
$

 
$
22,028

 
$
100

 
$
3,855

 
$
13,257

Changes in the three month period ended September 30, 2017:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Change attributable to Canadian dollar exchange rate

 
774

 
88

 

 
862

 

 
477

 
16

 
36

 
333

Net change on a constant currency basis
(86
)
 
(1,281
)
 
646

 

 
(635
)
 

 
(940
)
 
374

 
321


(390
)
Total Change
(86
)
 
$
(507
)
 
$
734

 
$

 
$
227

 
$

 
$
(463
)
 
$
390

 
$
357

 
$
(57
)
Three month period ended September 30, 2017
1,099

 
$
37,011

 
$
2,456

 
$

 
$
39,467

 
$

 
$
21,565

 
$
490

 
$
4,212

 
$
13,200

*Operating income plus depreciation, amortization of drydock costs, amortization of intangibles and (gain) on foreign exchange.
Total revenue during the three month period ended September 30, 2017 was $39.5 million, an increase of 0.6%, compared to $39.2 million during the three month period ended September 30, 2016. This increase was primarily attributable to the higher tonnage carried by our ships, spot business opportunities from new and existing customers, contractual price increases, higher fuel surcharge recovery and a stronger Canadian dollar compared to three month period ended September 30, 2016. These factors were partially offset by revenue associated with 86 fewer sailing days during the second quarter of 2017 compared to the second quarter of 2016. On a constant currency basis, our total revenue decreased 1.6%, or $0.6 million, during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016.
Freight and other related revenue generated from Company-operated vessels decreased $0.5 million or 1.4%, to $37.0 million during the three month period ended September 30, 2017 compared to $37.5 million during the three month period ended September 30, 2016. The decline was primarily a result of the 86 fewer sailing days, offset by a stronger Canadian dollar. On a constant currency basis, freight and other related revenue decreased 3.4%, or $1.3 million, during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016.
According to the Lake Carriers' Association, during the three month period ended September 30, 2017, U.S.-flagged vessels on the Great Lakes experienced a 5.3% increase in overall customer shipments for the commodities that we carry compared to the 2016 sailing season. During the same time period, U.S.-flagged vessels experienced a 9.0% increase in iron ore tonnage carried and a 5.6% increase of aggregates tonnage carried. These commodities account for a significant share of the dry bulk commodities that are transported on the Great Lakes.
Total tons hauled by the Company during the three month period ended September 30, 2017 increased by 2.3% compared to the three month period ended September 30, 2016, mainly due to an increase in our construction aggregates tonnage and our iron ore tonnage hauled offset by a decrease in grain tonnage.  During the three month period ended September 30, 2017, our construction aggregates tonnage hauled increased 8.3%, compared to the three month period ended September 30, 2016 due to stronger demand for infrastructure projects during the second quarter of 2017. Our iron ore and coal tonnage increased 5.2% and 17.9% respectively during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016 due to stronger demand for steel for local and export markets during the second quarter of 2017. Salt tonnage increased by 5.6% during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016 due to higher demand in the Great Lakes region.


46


We operated thirteen vessels (the “Operated Vessels”) during the three month period ended September 30, 2017 and fourteen vessels during the three month period ended September 30, 2016. We operated a total of 1,099 Sailing Days in the three month period ended September 30, 2017, compared to 1,185 Sailing Days in the three month period ended September 30, 2016. Management believes that each of our Operated Vessels should achieve a theoretical maximum of 92 Sailing Days in the second fiscal quarter, assuming average weather conditions, no major repairs, incidents or vessel layups. Each of the Company’s Operated Vessels sailed an average of approximately 85 Sailing Days during each of the three month periods ended September 30, 2017 and September 30, 2016. The change in Sailing Days was due to the lay-up of one of our vessels for a scheduled drydock project. Our Operated Vessels operated for 91.9% of the theoretical maximum Sailing Days for the three month period ended September 30, 2017, compared to 92.0% of the theoretical maximum Sailing Days for the three month period ended September 30, 2016.

We also measure "Delay Days," which we define as the lost time incurred by our vessels while in operation, and includes delays caused by inclement weather, dock delays, traffic congestion, vessel mechanical issues and other varied events. We experienced 77 Delay Days during the three month period ended September 30, 2017 compared to 73 Delay Days during the three month period ended September 30, 2016. Such Delay Days represent a lost time factor, calculated as Delay Days as a percentage of Sailing Days, of 7.0% during the three month period ended September 30, 2017 compared to 6.2% during the three month period ended September 30, 2016.

Freight and related revenue per Sailing Day increased to $33,677 per Sailing Day during the three month period ended September 30, 2017 compared to $31,661 per Sailing Day during the three month period ended September 30, 2016. This revenue increase was primarily due to a change in the mix of cargos carried. On a constant currency basis, freight and related revenue per Sailing Day increased $704 per Sailing Day during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016.
Our customer contracts have fuel surcharge provisions whereby changes in our fuel costs are passed on to our customers. Fuel and other surcharges increased $0.7 million, or 42.6%, to $2.5 million during the three month period ended September 30, 2017 compared to $1.7 million during the three month period ended September 30, 2016. Fuel and other surcharges per Sailing Day increased by $782, or 53.8%, to $2,235 per Sailing Day during the three month period ended September 30, 2017 compared to $1,453 per Sailing Day during the three month period ended September 30, 2016. These increases were primarily attributable to increased fuel prices during the three month period ended September 30, 2017 compared to the three month period ended September 30, 2016. On a constant currency basis, fuel and other surcharges increased 37.5% or $0.6 million, during the three month period