All dollar amounts are presented in millions except share, per share and per day amounts.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") is written to help the reader understand our company. The MD&A is provided as a supplement to, and should be read in conjunction with, the Consolidated Financial Statements and the accompanying financial statement notes of the Company appearing elsewhere in this Quarterly Report on Form 10-Q for the three month period ended June 30, 2012.

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. 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 "Risk Factors" on our Form 10-K filed with the Securities and Exchange Commission on June 8, 2012 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. ("Lower Lakes Towing"), a Canadian corporation which, with its subsidiary Lower Lakes Transportation Company ("Lower Lakes Transportation"), provides bulk freight shipping services throughout the Great Lakes region, and at the time of acquisition, and operated eight vessels. As part of the acquisition of Lower Lakes, we also acquired Lower Lakes' affiliate, Grand River Navigation Company, Inc. ("Grand River"). Prior to the acquisition, we did not conduct, or have any investment in, any operating business. Subsequent to the acquisition, we added ten vessels to our fleet through acquisition transactions and we retired two smaller vessels. During 2011 alone, we acquired three articulated tug and barge units and two bulk carriers. In this Quarterly Report on Form 10-Q, unless the context otherwise requires, references to Rand, we, us and the Company include Rand and its direct and indirect subsidiaries, and references to Lower Lakes' business or the business of Lower Lakes mean the combined businesses of Lower Lakes Towing, Lower Lakes Transportation, Grand River and our additional operating subsidiary, Black Creek Shipping Company, Inc. ("Black Creek").
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 sixteen cargo-carrying vessels. 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, which we define as vessels less than 650 feet in overall length. 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.
Lower Lakes' fleet consists of five self-unloading bulk carriers and four conventional bulk carriers in Canada and seven active self-unloading bulk carriers in the U.S., including one integrated tug and barge unit and three articulated tug and barge units. Lower Lakes Towing owns the nine Canadian vessels. Lower Lakes Transportation time charters the seven U.S. vessels, including the four tug and barge units, from Grand River. With the exception of one barge (which Grand River bareboat charters from an unrelated third party) and 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.

Results of Operations for the three month period ended June 30, 2012 compared to the three month period ended June 30, 2011 Selected Financial Information (Unaudited)

                                         Three months     Three months
                                        ended June 30,   ended June 30,
            (USD in 000's)                   2012             2011         $ Change      % Change
Revenue:
Freight and related revenue            $       36,327   $       30,694   $     5,633        18.4  %
Fuel and other surcharges              $       12,475   $       11,332   $     1,143        10.1  %
Outside voyage charter revenue         $          810   $          310   $       500       161.3  %
Total                                  $       49,612   $       42,336   $     7,276        17.2  %

Expenses:
Outside voyage charter fees            $          822   $          307   $       515       167.8  %
Vessel operating expenses              $       33,157   $       28,576   $     4,581        16.0  %
Repairs and maintenance                $          387   $          826   $      (439 )     (53.1 )%

Sailing days:                                   1,174            1,065           109        10.2  %

Per day in whole USD:
Revenue per sailing day:
Freight and related revenue            $       30,943   $       28,821   $     2,122         7.4  %
Fuel and other surcharges              $       10,626   $       10,640   $       (14 )      (0.1 )%

Expenses per sailing day:
Vessel operating expenses              $       28,243   $       26,832   $     1,411         5.3  %
Repairs and maintenance                $          330   $          776   $      (446 )     (57.5 )%

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 three month period ended June 30, 2012 compared to the three month period ended June 30, 2011:

                                    Freight and       Fuel and other      Outside voyage                     Vessel operating
 (USD in 000's)    Sailing Days   related revenue       surcharges           charter         Total revenue       expenses
Three month
period ended June        1,065   $      30,694      $      11,332      $          310       $      42,336   $      28,576
30, 2011
Changes in three
month period
ended June 30,
2012:
Change
attributable to                         (1,008 )             (316 )               (34 )            (1,358 )          (883 )
weaker Canadian
dollar
Net increase
attributable to
customer demand            109           6,641              1,459                                   8,100           5,464
and pricing
(excluding
currency impact)
Changes in
outside voyage
charter revenue                                                                   534                 534
(excluding
currency impact)
Sub-total                  109   $       5,633      $       1,143      $          500       $       7,276   $       4,581
Three month
period ended June
30, 2012                 1,174   $      36,327      $      12,475      $          810       $      49,612   $      33,157

Total revenue during the three month period ended June 30, 2012 was $49.6 million, an increase of $7.3 million, or 17.2%, compared to $42.3 million during the three month period ended June 30, 2011. This increase was primarily attributable to higher freight revenue, fuel surcharges and a modest increase in outside charter hire, partially offset by the weaker Canadian dollar. During the three month period ended June 30, 2012, U.S.-flagged vessels industry-wide experienced a 1.3% decrease in overall customer demand compared to the three month period ended June 30, 2011. Other than aggregates, for which U.S.-flagged shipments increased 13.6%, overall industry tonnage decreased for all of the major commodities during the three month period ended June 30, 2012 compared to the three month period ended June 30, 2011.
Freight and other related revenue generated from Company-operated vessels increased $5.6 million, or 18.4%, to $36.3 million during the three month period ended June 30, 2012 compared to $30.7 million during the three month period ended June 30, 2011. Excluding the impact of currency changes, freight revenue increased 21.6% during the three month period ended June 30, 2012 compared to the three month period ended June 30, 2011. This increase was attributable to 109 additional Sailing Days, resulting in a 18.7% increase in tonnage hauled by our operated vessels, and contractual price increases.
Management believes that each of our vessels should achieve approximately 91 Sailing Days in an average first fiscal quarter, assuming no major repairs or incidents and normal drydocking cycle times performed during the winter lay-up period. The Company's vessels sailed an average of approximately 78 Sailing Days during the three month period ended June 30, 2012 compared to an average of 82 Sailing Days during the three month period ended June 30, 2011. We operated fifteen vessels during the three month period ended June 30, 2012, including the bulker vessels acquired in the second and third quarters of the fiscal year ended March 31, 2012, compared to thirteen vessels during the three month period ended June 30, 2011. During the three month period ended June 30, 2012, the Company did not sail one vessel it acquired during the third quarter of the fiscal year ended March 31, 2012 as that vessel was undergoing structural modifications and upgrading.
Freight and related revenue per Sailing Day increased $2,122, or 7.4%, to $30,943 per Sailing Day in the three month period ended June 30, 2012 compared to $28,821 per Sailing Day during the three month period ended June 30, 2011. This increase was somewhat offset by slightly reduced backhauls and a weaker Canadian dollar.
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 $1.1 million, or 10.1%, to $12.5 million during the three month period ended June 30, 2012 compared to $11.3 million during the three month period ended June 30, 2011. This increase was attributable to an increased number of Sailing Days and was offset by a weaker Canadian dollar. Fuel and other surcharges per Sailing Day decreased negligibly by $14 to $10,626 per Sailing Day during the three month period ended June 30, 2012 compared to $10,640 per Sailing Day during the three month period ended June 30, 2011.
Vessel operating expenses increased $4.6 million, or 16.0%, to $33.2 million during the three month period ended June 30, 2012 compared to $28.6 million during the three month period ended June 30, 2011. This increase was primarily attributable to higher fuel costs, an increased number of Sailing Days and two additional vessels acquired in the fiscal year ended March 31, 2012 that we sailed during the three month period ended June 30, 2012, and was partially offset by a weaker Canadian dollar. Vessel operating expenses per Sailing Day increased $1,411, or 5.3%, to $28,243 per Sailing Day during the three month period ended June 30, 2012 from $26,832 per Sailing Day during the three month period ended June 30, 2011.
Repairs and maintenance expenses, which primarily consist of expensed winter work, decreased $0.4 million to $0.4 million during the three month period ended June 30, 2012 from $0.8 million during the three month period ended June 30, 2011. Repairs and maintenance per Sailing Day decreased $446 to $330 per Sailing Day during the three month period ended June 30, 2012 from $776 per Sailing Day during the three month period ended June 30, 2011. This decrease was primarily due to a reduced level of winter work carried into the 2012 sailing season. Our general and administrative expenses were $3.0 million during each of the three month periods ended June 30, 2012 and June 30, 2011. These costs were flat due to the weaker Canadian dollar, which offset increased compensation costs primarily related to higher engineering and IT headcount. Our general and administrative expenses represented 8.2% of freight revenues during the three month period ended June 30, 2012, a decrease from 9.7% of freight revenues during the three month period ended June 30, 2011. During the three month period ended June 30, 2012, $0.9 million of our general and administrative expenses was attributable to our parent company and $2.1 million was attributable to our operating companies.

Depreciation expense increased $0.7 million to $3.5 million during the three month period ended June 30, 2012 compared to $2.8 million during the three month period ended June 30, 2011. The increase in depreciation expense was primarily attributable to two bulker vessels acquired in the fiscal year ended March 31, 2012 that we sailed during the three month period ended June 30, 2012, other winter 2012 capital expenditures and the repowering of one vessel that was completed in June 2011, offset by a weaker Canadian dollar in the three month period ended June 30, 2012.
Amortization of drydock costs increased $0.1 million to $0.9 million during the three month period ended June 30, 2012 from $0.7 million during the three month period ended June 30, 2011 due to an increased number of vessels drydocked in the 2012 winter season, offset by a weaker Canadian dollar in the three month period ended June 30, 2012. During the three month period ended June 30, 2012, the Company amortized the deferred drydock costs of twelve of its fifteen operated vessels, compared to nine vessels during the three month period ended June 30, 2011.
As a result of the items described above, during the three month period ended June 30, 2012, the Company's operating income increased $1.8 million to $7.6 million compared to operating income of $5.8 million during the three month period ended June 30, 2011. Operating income plus depreciation, amortization of drydock costs and amortization of intangibles increased 26.8%, or $2.6 million, to $12.3 million during the three month period ended June 30, 2012 from $9.7 million during the three month period ended June 30, 2011.
Interest expense increased $0.7 million to $2.7 million during the three month period ended June 30, 2012 from $2.0 million during the three month period ended June 30, 2011. This increase in interest expense was primarily attributable to higher average debt balances due to 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, higher interest rate margins and higher amortization of deferred financing costs.
We recorded a gain on interest rate swap contracts of $0.3 million in the three month period ended June 30, 2012 compared to a minimal gain during the three month period ended June 30, 2011. Such gains were due to the recording of the fair value of our two interest rate swaps at the end of each such period. Our income before income taxes was $5.1 million during the three month period ended June 30, 2012 compared to income before income taxes of $3.9 million during the three month period ended June 30, 2011.
Our effective tax rate was 39.9% for the three month period ended June 30, 2012 compared to a tax expense of 13.8% for the three month period ended June 30, 2011. The tax rate for the three months ended June 30, 2011 was lower due to the tax benefit associated with the reduction of the valuation allowance related to the net U.S. Federal deferred tax assets, including net operating losses. The valuation allowance was reversed as of March 31, 2012 and accordingly for the three month period ended June 30, 2012 this reduction was not available.

The effective tax rate for the current period was higher than the statutory tax rate due to income recognized for tax but not reported for earnings, partially offset by foreign earnings being subject to a lower statutory tax rate. Our provision for income tax expense was $2.1 million for the three month period ended June 30, 2012 compared to a tax expense of $0.5 million for the three month period ended June 30, 2011. The increase in income tax expense and effective tax rate from the prior period was due to higher net income before tax and the absence of a tax benefit from a change in valuation allowance during the three month period ended June 30, 2012 as compared to the three month period ended June 30, 2011.

Our net income before preferred stock dividends was $3.1 million during the three month period ended June 30, 2012 compared to $3.3 million during the three month period ended June 30, 2011.

We accrued $0.8 million for cash dividends on our preferred stock during the three month period ended June 30, 2012 compared to $0.7 million during the three month period ended June 30, 2011. The dividends accrued at a rate of 12.0% during the three month period ended June 30, 2012 compared to a rate of 11.75% during the three month period ended June 30, 2011. The dividend rate increased to a cap of 12.0% effective July 1, 2011.
Our net income applicable to common stockholders was $2.3 million during the three month period ended June 30, 2012 compared to net income of $2.7 million during the three month period ended June 30, 2011.

During the three month period ended June 30, 2012, the Company operated an average of approximately six vessels in the US and nine vessels in Canada. The percentage of our total freight and other revenue, fuel and other surcharge revenue, vessel operating expenses, repairs and maintenance costs and combined depreciation and amortization costs approximate the percentage of vessels operated by country. 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 50% of our interest expense is incurred in Canada, and approximately half 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.

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 three month periods ended June 30, 2012 and June 30, 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 facilities will provide sufficient cash availability to cover our anticipated working capital needs, capital expenditures and debt service requirements for the next twelve months. However, if the Company experiences a material shortfall to its financial forecasts or if the Company's customers materially delay their receivable payments 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 used by operating activities for the three month period ended June 30, 2012 was $7.5 million, a decrease of $0.6 million used compared to $8.2 million used during the three month period ended June 30, 2011. This decrease in net cash used was primarily due to higher cash earnings and reduced working capital investment, offset by higher deferred drydock costs in the three month period ended June 30, 2012. The Company did not incur any significant bad-debt write-offs or material slowdowns in receivable collections during the three month period ended June 30, 2012.
Net cash used in investing activities increased by $4.4 million to net cash used of $14.7 million during the three month period ended June 30, 2012 from net cash used of $10.3 million during the three month period ended June 30, 2011. This increase was due to higher capital spending, including upgrades to the vessels we acquired in the fiscal year ended March 31, 2012.
Net cash provided in financing activities increased $2.3 million to $21.0 million provided during the three month period ended June 30, 2012 compared to $18.7 million provided in the three month period ended June 30, 2011. During the three month period ended June 30, 2012, the Company received proceeds of $24.0 million from its revolving credit facility and made principal payments on its term debt of $2.8 million; whereas the Company received revolving credit facility proceeds of $22.0 million, made principal payments on its term debt of $1.2 million and paid debt financing costs of $2.0 million during the three month period ended June 30, 2011.
During the three month period ended June 30, 2012, long-term debt, including the current portion, decreased $4.0 million to $129.6 million from $133.6 million during the three month period ending June 30, 2012. Such reduction was comprised of a $2.8 million decrease due to principal payments and a $1.2 million decrease due to the weaker Canadian dollar.
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 amount of the Canadian term loan shall be payable upon the Canadian term loan facility's maturity on April 1, 2015. The outstanding principal amount of the US term loan borrowings will be repayable as follows: (i) quarterly payments of US $0.4 million commencing December 1, 2011 and ending on March 1, 2015 and (iii) a final payment in the outstanding principal amount of the US term loan shall be payable upon the US term loan facility's maturity on April 1, 2015. The outstanding principal amount of the Canadian "Engine" term loan borrowings will be repayable as follows: (i) quarterly payments of CDN $0.1 million commencing . . .