Summary of RAND LOGISTICS, INC.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
All dollar amounts are presented in millions except share, per share and per day amounts. The following management's discussion and analysis ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the accompanying financial statement notes of the Company appearing elsewhere in this Annual Report on Form 10-K for the fiscal year ended March 31, 2012.
Cautionary Note Regarding Forward-Looking Statements This annual report on Form 10-K contains forward-looking statements, including those relating to our capital needs, business strategy, expectations and intentions. Statements that use the terms "believe", "anticipate", "expect", "plan", "estimate", "intend" and similar expressions of a future or forward-looking nature identify forward-looking statements for purposes of the U.S. federal securities laws or otherwise. For these statements and all other forward-looking statements, we claim the protection of the Safe Harbor for Forward-Looking Statements contained in the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted with accuracy or are otherwise beyond our control and some of which might not even be anticipated. Forward-looking statements reflect our current views with respect to future events and because our business is subject to such risks and uncertainties, actual results, our strategic plan, our financial position, results of operations and cash flows could differ materially from those described in or contemplated by the forward-looking statements contained in this report.
Important factors that contribute to such risks include, but are not limited to, those factors set forth under Item 1A of this Form 10-K as well as the following: the continuing effects of the economic downturn in our markets; the weather conditions on the Great Lakes; and our ability to maintain and replace our vessels as they age. The foregoing review of important factors should not be construed as exhaustive and should be read in conjunction with other cautionary statements that are included in this report. We undertake no obligation to publicly update or review any forward-looking statements, whether as a result of new information, future developments or otherwise. Overview
Business
Rand Logistics, Inc. (formerly Rand Acquisition Corporation) was incorporated in the State of Delaware on June 2, 2004 as a blank check company to effect a merger, capital stock exchange, asset acquisition or other similar business combination with an operating business.
On March 3, 2006, we acquired all of the outstanding shares of capital stock of Lower Lakes Towing Ltd., a Canadian corporation which, with its subsidiary Lower Lakes Transportation Company, provides bulk freight shipping services throughout the Great Lakes region. As part of the acquisition of Lower Lakes, we also acquired Lower Lakes' affiliate, Grand River Navigation Company, Inc. Prior to the acquisition, we did not conduct, or have any investment in, any operating business. Subsequent to the acquisition, we have added several additional vessels to our fleet through acquisition transactions, including in 2011 alone, the acquisition of three articulated tug and barge units and two bulk carriers. 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 that were restricted in their ability to receive larger vessels. Lower Lakes has grown from its origin as a small tug and barge operator to a full service shipping company

with a fleet of seventeen cargo-carrying vessels (one of which is no longer sailing). We have grown to become one of the largest bulk shipping companies operating on the Great Lakes and the leading service provider in the River Class market segment. We transport limestone, coal, iron ore, salt, grain and other dry bulk commodities for customers in the construction, electric utility, integrated steel and food 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.
Results of Operations for the fiscal year ended March 31, 2012 compared to the

fiscal year ended March 31, 2011
                         Selected Financial Information
                                       Fiscal year Fiscal year
                                       ended March ended March
            (USD in 000's)              31, 2012    31, 2011    $ Change     % Change
Revenue:
Freight and related revenue               $107,618     $90,433     $17,185      19.0  %
Fuel and other surcharges                  $38,886     $20,471     $18,415      90.0  %
Outside voyage charter revenue              $1,321      $7,074    $(5,753)     (81.3 )%
Total                                     $147,825    $117,978     $29,847      25.3  %
Expenses:
Outside voyage charter fees                 $1,312      $7,052    $(5,740)     (81.4 )%
Vessel operating expenses                  $97,274     $77,177     $20,097      26.0  %
Repairs and maintenance                     $7,179      $5,456      $1,723      31.6  %
Sailing days:                              3,721       3,338         383        11.5  %
Per day in whole USD:
Revenue per sailing day:
Freight and related revenue                $28,922     $27,092      $1,830       6.8  %
Fuel and other surcharges                  $10,450      $6,133      $4,317      70.4  %
Expenses per sailing day:
Vessel operating expenses                  $26,142     $23,121      $3,021      13.1  %
Repairs and maintenance                     $1,929      $1,635        $294      18.0  %

The following table summarizes the changes in the components of our revenue and vessel operating expenses as a result of changes in Sailing Days, which we define as days a vessel is crewed and available for sailing, during the fiscal year ended March 31, 2012 compared to the fiscal year ended March 31, 2011:

                                                                                                        Vessel
                                   Freight and    Fuel and other   Outside voyage                      operating
 (USD in 000's)    Sailing Days  related revenue    surcharges        charter       Total revenue      expenses
Fiscal year ended        3,338   $      90,433   $       20,471   $      7,074     $      117,978   $      77,177
March 31, 2011
Changes in fiscal
year ended March
31, 2012:
Increase
attributable to                          1,906              604             31              2,541           1,735
stronger Canadian
dollar
Net increase
attributable to
customer demand            383          15,279           17,811                            33,090          18,362
and pricing
(excluding
currency impact)
Changes in
outside voyage
charter revenue                                                         (5,784 )           (5,784 )
(excluding
currency impact)
Sub-total                  383           $17,185          $18,415 $     (5,753 )            $29,847         $20,097
Fiscal year ended
March 31, 2012           3,721          $107,618          $38,886           $1,321         $147,825         $97,274

Total revenue during the fiscal year ended March 31, 2012 was $147.8 million, an increase of $29.8 million, or 25.3%, compared to $118.0 million during the fiscal year ended March 31, 2011. This increase was primarily attributable to higher freight revenue and fuel surcharges and the stronger Canadian dollar, offset by substantially reduced outside charter revenue.
During the fiscal year ended March 31, 2012, U.S.- flagged vessels industry-wide experienced a 5.8% increase in overall customer demand compared to the fiscal year ended March 31, 2011. Other than coal, for which U.S.-flagged shipments decreased by 6.0%, overall industry tonnage increased for all of the major commodities during the fiscal year ended March 31, 2012 compared to the fiscal year ended March 31, 2011.
Freight and other related revenue generated from Company-operated vessels increased $17.2 million, or 19.0%, to $107.6 million during the fiscal year ended March 31, 2012 compared to $90.4 million during the fiscal year ended March 31, 2011. Excluding the impact of currency changes, freight revenue increased 16.9% during the fiscal year ended March 31, 2012 compared to the fiscal year ended March 31, 2011. This increase was attributable to 383 additional Sailing Days (resulting in an 18.2% increase in tonnage hauled by our operated vessels) and contractual price increases.
Management believes that each of our vessels should achieve approximately 270 Sailing Days in an average Great Lakes season assuming no major repairs or incidents and normal drydocking cycle times performed during the winter lay-up period. We operated fourteen vessels during the fiscal year ended March 31, 2012, including the two vessels acquired in February 2011 and the vessel acquired in July 2011, compared to twelve vessels during the fiscal year ended March 31, 2011. The Company did not sail the two vessels acquired in the third quarter of the fiscal year ended March 31, 2012.
The Company's vessels sailed an average of approximately 266 Sailing Days during the fiscal year ended March 31, 2012 compared to 278 Sailing Days during the fiscal year ended March 31, 2011.
Freight and related revenue per Sailing Day increased $1,830, or 6.8%, to $28,922 per Sailing Day in the fiscal year ended March 31, 2012 compared to $27,092 per Sailing Day during the fiscal year ended March 31, 2011. This increase was somewhat offset by inefficiencies experienced earlier in the year in matching fleet configuration with customer requirements, delays in completing required winter work (which delays caused us to begin the 2011 sailing season later than our typical April 1 start date) and one of our vessels being out of service for 61 days due to its repowering.
All of our customer contracts have fuel surcharge provisions whereby increases and decreases in our fuel costs are passed

on to our customers. Such increases and decreases in fuel surcharges impact margin percentages, but do not significantly impact our margin dollars. Fuel and other surcharges increased $18.4 million, or 90.0%, to $38.9 million during the fiscal year ended March 31, 2012 compared to $20.5 million during the fiscal year ended March 31, 2011. This increase was attributable to higher fuel costs, a stronger Canadian dollar and an increased number of Sailing Days. Fuel and other surcharges per Sailing Day increased $4,317 to $10,450 per Sailing Day in the fiscal year ended March 31, 2012 compared to $6,133 per Sailing Day in the fiscal year ended March 31, 2011.
Outside voyage charter revenues decreased $5.8 million, or 81.3%, to $1.3 million during the fiscal year ended March 31, 2012 compared to $7.1 million during the fiscal year ended March 31, 2011. The decrease in outside voyage charter revenues was due to our purchase in July 2011 of a vessel that we had previously operated under long term time charter.
Vessel operating expenses increased $20.1 million, or 26.0%, to $97.3 million in the fiscal year ended March 31, 2012 compared to $77.2 million in the fiscal year ended March 31, 2011. This increase was primarily attributable to higher fuel costs, an increased number of Sailing Days, two additional vessels acquired in February 2011, one additional vessel acquired in July 2011 and a stronger Canadian dollar, partially offset by a reduction of costs due to the long term lay-up of one of our vessels during the fiscal year ended March 31, 2012. Vessel operating expenses per Sailing Day increased $3,021, or 13.1%, to $26,142 per Sailing Day in the fiscal year ended March 31, 2012 from $23,121 per Sailing Day in the fiscal year ended March 31, 2011.
Repairs and maintenance expenses, which primarily consist of expensed winter work, increased $1.7 million to $7.2 million in the fiscal year ended March 31, 2012 from $5.5 million during the fiscal year ended March 31, 2011. Repairs and maintenance per Sailing Day increased $294 to $1,929 per Sailing Day in the fiscal year ended March 31, 2012 from $1,635 per Sailing Day in the fiscal year ended March 31, 2011. This increase was primarily due to the combined impact of the delays in completing winter work at the start of the 2011 sailing season and the normal winter work done during the fourth quarter of the fiscal year ended March 31, 2012.
Our general and administrative expenses increased $1.1 million to $11.0 million in the fiscal year ended March 31, 2012 from $9.9 million in the fiscal year ended March 31, 2011. This increase was a result of higher compensation costs, $0.2 million attributable to bank administrative fees due under the Black Creek loan, $0.1 million of audit costs associated with the implementation of compliance with section 404(b) of the Sarbanes-Oxley Act and the stronger Canadian dollar in the fiscal year ended March 31, 2012 compared to the fiscal year ended March 31, 2011. Our general and administrative expenses represented 10.2% of freight revenues during the fiscal year ended March 31, 2012, a decrease from 10.9% of freight revenues during the fiscal year ended March 31, 2011. During the fiscal year ended March 31, 2012, $3.1 million of our general and administrative expenses was attributable to our parent company and $7.9 million was attributable to our operating companies.
Depreciation expense increased $3.9 million to $11.6 million during the fiscal year ended March 31, 2012 compared to $7.7 million during the fiscal year ended March 31, 2011. The increase in depreciation expense was primarily attributable to (i) the two vessels acquired in February 2011 and the vessel acquired in July 2011, which collectively represented an increase of $2.6 million, (ii) a stronger Canadian dollar and (iii) increased depreciation from winter 2011 capital expenditures, including the repowering of one of our vessels that was completed in June 2011.
Amortization of drydock costs increased $0.2 million to $3.0 million during the fiscal year ended March 31, 2012 from $2.8 million during the fiscal year ended March 31, 2011 due to the stronger Canadian dollar in the fiscal year ended March 31, 2012. During the fiscal year ended March 31, 2012, the Company amortized the deferred drydock costs of nine of its fourteen operated vessels, compared to eight vessels during the fiscal year ended March 31, 2011. Amortization of intangibles increased $0.1 million to $1.3 million during the fiscal year ended March 31, 2012 from $1.2 million during the fiscal year ended March 31, 2011 primarily due to additional amortization related to the vessels acquired in February 2011 and, to a lesser extent, a stronger Canadian dollar. As a result of the items described above, during the fiscal year ended March 31, 2012, the Company's operating income increased $8.4 million to $15.2 million compared to operating income of $6.8 million during the fiscal year ended March 31, 2011. Operating income plus depreciation, amortization of drydock costs and amortization of intangibles increased 69.4%, or $12.8 million, to $31.2 million during the fiscal year ended March 31, 2012 from $18.4 million during the fiscal year ended March 31, 2011.
Interest expense increased $3.6 million to $9.3 million during the fiscal year ended March 31, 2012 from $5.7 million

during the fiscal year ended March 31, 2011. This increase in interest expense was primarily attributable to higher average debt balances due to the $20 million increase in the Canadian Term Loan in August 2010 (partially offset by a lower revolver debt balance), the $31 million Black Creek loan in February 2011, the CDN $4.0 million increase in the Canadian Term Loan in July 2011, the $25.0 million increase in the US Term Loan on December 1, 2011 and higher amortization of deferred financing costs, partially offset by interest expense capitalized with the capital expenditures of the repowering of the Michipicoten. We recorded a gain on interest rate swap contracts of $0.8 million in the fiscal year ended March 31, 2012 compared to a gain of $0.5 million recorded in the fiscal year ended March 31, 2011 due to the recording of the fair value of our two interest rate swaps at the end of each such periods.
Our income before income taxes was $6.7 million in the fiscal year ended March 31, 2012 compared to income before income taxes of $0.3 million in the fiscal year ended March 31, 2011.
Our effective tax rate was a benefit of 21.3% for the fiscal year ended March 31, 2012 compared to an expense of 54.9% for the fiscal year ended March 31, 2011. Our provision for income tax expense was a benefit of $1.4 million during the fiscal year ended March 31, 2012 compared to a provision for income tax expense of $0.1 million during the fiscal year ended March 31, 2011. This change was due to a combination of higher net income before taxes in the fiscal year ended March 31, 2012, a change in mix of income between the United States and Canada and the full reversal of the Federal valuation allowance. Our effective tax rate for the fiscal year ended March 31, 2012 was lower than the statutory tax rate due to the tax benefit associated with the reversal of the valuation allowance related to the net U.S. Federal deferred tax assets against current income before taxes. The Federal valuation allowance was reversed based on our improved profitability. Our effective tax rate for the fiscal year ended March 31, 2011 was higher than the statutory tax rate due to imputed interest income and state and foreign income taxes, which were offset substantially by the reduction in the federal valuation allowance. Our net income before preferred stock dividends was $8.1 million in the fiscal year ended March 31, 2012 compared to $0.1 million in the fiscal year ended March 31, 2011.
We accrued $2.8 million for cash dividends on our preferred stock during the fiscal year ended March 31, 2012 compared to $2.4 million during the fiscal year ended March 31, 2011. The dividends accrued at an average rate of 11.9% during the fiscal year ended March 31, 2012. The dividend rate increased to a cap of 12.0% effective July 1, 2011.
Our net income applicable to common stockholders was $5.3 million during the fiscal year ended March 31, 2012 compared to a loss of $2.2 million during the fiscal year ended March 31, 2011.
During the fiscal year ended March 31, 2012, the Company operated an average of approximately six vessels in the US and eight vessels in Canada. The percentage of our total freight and other revenue, fuel and other surcharge revenue, vessel operating expenses, repairs and maintenance costs, and combined depreciation and amortization costs, approximate the percentage of vessel ownership by country. Our outside voyage charter revenue and costs relate solely to our Canadian subsidiary and approximately 50% of our general and administrative costs are incurred in Canada. Approximately 52% of our interest expense is incurred in Canada, and approximately 48% of our gain on interest rate swap contracts was realized in Canada, consistent with our percentage of overall indebtedness by country. All of our preferred stock dividends are accrued in the US. Impact of Inflation and Changing Prices
During the fiscal year ended March 31, 2012, there were major fluctuations in our fuel costs. However, our contracts with our customers provide for recovery of these costs over specified rates through fuel surcharges. In addition, there was significant volatility in the exchange rate between the US dollar and the Canadian dollar during the past two fiscal years, which impacted our translation of revenue and costs to US dollars by an increase of approximately 2.2% during the fiscal year ended March 31, 2012.
Liquidity and Capital Resources
Our primary sources of liquidity are cash from operations, the proceeds of our credit facility and proceeds from sales of our common stock. Our principal uses of cash are vessel acquisitions, capital expenditures, drydock expenditures, operations and interest and principal payments under our credit facility. Information on our consolidated cash flow is presented in the consolidated

statements of cash flows (categorized by operating, investing and financing activities) which is included in our consolidated financial statements for the fiscal years ended March 31, 2012 and March 31, 2011. The Company makes seasonal net borrowings under its revolving credit facility during the first quarter of each fiscal year to fund working capital needed to commence the sailing season. Such borrowings are then paid down during the second half of each fiscal year. We believe cash generated from our operations and availability of borrowings under our credit facility will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months. However, if the Company experiences a material shortfall to its financial forecasts or if the Company's customers materially delay their receivable payments due to further deterioration of economic conditions, the Company may breach its financial covenants and collateral thresholds and be strained for liquidity. The Company has maintained its focus on productivity gains and cost controls, and is closely monitoring customer credit and accounts receivable balances.
Net cash provided by operating activities for the fiscal year ended March 31, 2012 was $19.1 million, an increase of $7.9 million compared to $11.2 million in the fiscal year ended March 31, 2011. This increase in net cash provided was primarily due to higher cash earnings, offset partially by substantially higher deferred drydock costs in the fiscal year ended March 31, 2012. The Company did not incur any significant bad-debt write-offs or material slowdowns in receivable collections during the fiscal year ended March 31, 2012. The timing of the end of the Company's fiscal year in relation to the sailing season allows most of a sailing season's receivables to be collected prior to the end of the Company's fiscal year. In addition, the earlier start of a sailing season prior to April 1, can increase the amount of accounts receivable and accounts payable in the Company's balance sheet at the end of our fiscal year.
Net cash used in investing activities decreased by $13.5 million to net cash used of $51.9 million during the fiscal year ended March 31, 2012 from net cash used of $65.4 million during the fiscal year ended March 31, 2011. This decrease was due primarily to the purchase of three vessels during the fiscal year ended March 31, 2012 at a lower combined acquisition cost than the vessels acquired in the fiscal year ended March 31, 2011, offset by higher capital spending primarily attributable to upgrades to the vessels we acquired in the fiscal year ended March 31, 2012.
Net cash provided in financing activities decreased $22.7 million to $33.9 million provided during the fiscal year ended March 31, 2012 compared to $56.6 million provided in the fiscal year ended March 31, 2011. During the fiscal year ended March 31, 2012, the Company received debt proceeds of $29.1 million, received proceeds from newly-issued shares of common stock of $15.5 million; and made principal payments on its term debt of $5.8 million. During the fiscal year ended March 31, 2011, the Company received debt proceeds of $54.1 million; received proceeds from shares issued of $6.8 million and made principal payments on its term debt of $4.1 million.
During the fiscal year ended March 31, 2012, long-term debt, including the current portion, increased $21.4 million to $133.6 million from $112.2 million in the fiscal year ending March 31, 2011, including $29.1 million of new loans offset by $5.8 million in scheduled principal payments, as well as a $1.9 million decrease due to the weaker Canadian dollar. In addition, the Company received a seller note and deferred payment liabilities valued at $4.4 million in connection with the acquisition of two vessels in the fiscal year ended March 31, 2011. The Company paid $1.9 million towards the seller's note and deferred payment liabilities during the year ended March 31, 2012.
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 legal and accounting costs, were $15.5 million. The Company used the net proceeds from the offering to partially fund the acquisition of a bulk carrier on October 14, 2011 and an articulated tug and barge on December 1, 2011.
On September 28, 2011, Lower Lakes Towing, Lower Lakes Transportation and Grand River, as borrowers, Rand LL Holdings Corp. and Rand Finance Corp., each of which is a wholly-owned subsidiary of Rand, and Rand, as guarantors, entered into a Second Amended and Restated Credit Agreement (the "Second Amended and Restated Credit Agreement") with General Electric Capital Corporation, as agent and a lender, and certain other lenders, which amended and restated the borrowers' prior credit agreement in its entirety.
The Second Amended and Restated Credit Agreement continued the tranches of loans provided for under the prior credit agreement, and provides working capital financing, funds for other general corporate purposes and funds for other permitted purposes. The Second Amended and Restated Credit Agreement provides for (i) a revolving credit facility under which Lower Lakes Towing may borrow up to CDN $13.5 million with a seasonal overadvance facility of CDN $10.0 million, less the principal amount outstanding under the seasonal overadvance facility for Lower Lakes Transportation and a swing line facility of CDN

$4.0 million, subject to limitations, (ii) a revolving credit facility under which Lower Lakes Transportation may borrow up to US $13.5 million with a seasonal over advance facility of US $10.0 million, less the principal amount outstanding under the seasonal overadvance facility for Lower Lakes Towing and a swing line facility of US $4.0 million, subject to limitations, (iii) a Canadian dollar denominated term loan facility under which Lower Lakes Towing is obligated to the lenders in the amount of CDN $56.1 million as of the date of the Second Amended and Restated Credit Agreement, (iv) the continuation of a US dollar denominated term loan facility under which Grand River is obligated to the lenders in the amount of US $17.2 million as of the date of the Second Amended and Restated Credit Agreement, and (v) the continuation of a Canadian Dollar denominated "Engine" term loan facility under which Lower Lakes Towing is obligated to the lenders in the amount of CDN $6.3 million as of the date of the Second Amended and Restated Credit Agreement.
Under the Second Amended and Restated Credit Agreement, the revolving credit facilities and swing line loans expire on April 1, 2015. The outstanding principal amount of the Canadian term loan borrowings will be repayable as follows: (i) quarterly payments of CDN $0.9 million commencing December 1, 2011 and ending March 1, 2015 and (ii) a final payment in the outstanding principal . . .