The following stock options, warrants and restricted stock represent potentially dilutive shares as of September 30, 2013 and 2012:
The Company measures fair value using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are:
The preparation of condensed 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 revenues and expenses during the reporting period. Such significant estimates include recoverability of property and equipment and equity investments, depreciable lives for property and equipment, inputs in the valuation of certain equity transactions, and accounting for income taxes. Actual results may differ from those estimates.
The accompanying condensed consolidated financial statements include the accounts of Dakota Plains Holdings, Inc. and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.
On November 9, 2009, the Company entered into a joint venture with Petroleum Transport Solutions, LLC (“PTS”). The Company and PTS each own 50% of the outstanding member units of Dakota Petroleum Transport Solutions, LLC. The joint venture was formed to engage in the acquisition, construction and operation of a petroleum transloading facility in New Town, North Dakota (“Transloading Facility”).
Each of the members of Dakota Petroleum Transport Solutions, LLC was required to make an initial capital contribution of $50,000. Each member received 1,000 member units for their initial capital contribution, for a total of 2,000 member units issued and outstanding as of September 30, 2013.
On August 30, 2013, the Board of Governors of DPTS Marketing LLC authorized a distribution to each member simultaneously in the amount of $10 million, which was used by its members to fund capital contributions to Dakota Petroleum Transport Solutions, LLC in order to increase the funds available for the Pioneer Project Facility Reserve.
As part of the joint venture agreement, the Company owns the transloading facility and certain equipment acquired and leases the property to Dakota Petroleum Transport Solutions, LLC.
The operations of the transloading facility commenced in November 2009. Under provisions of the member control agreement the profits and losses of Dakota Petroleum Transport Solutions, LLC are split 50/50, pro rata based on the number of member units outstanding. The cash payments from the joint venture also are paid pro rata based on the number of member units outstanding.
In December 2011, Dakota Plains transferred all of its assets and liabilities, excluding its equity interest in its wholly owned subsidiaries and its real property, to Dakota Plains Transloading, LLC (“DPT”). DPT is a wholly owned subsidiary of the Company that was formed in August 2011. The primary purpose of DPT is to participate in the ownership and operation of the transloading facility near New Town, North Dakota through which producers, transporters, and marketers may transload crude oil and related products from and onto the Canadian Pacific Railway.
On June 1, 2012, DPT entered into an amended and restated member control agreement with Dakota Petroleum Transport Solutions, LLC and PTS. The amended and restated member control agreement, among other things, incorporated all previous amendment and supplements, extended the initial term through December 31, 2021, and provided for the initial term to automatically extend in two-year intervals unless and until terminated. On August 30, 2012, the parties amended the amended and restated member control agreement to permit certain other ventures. On June 17, 2013, the parties further amended the amended and restated member control agreement to, among other things, extend the initial term through December 31, 2026.
The Company accounts for this joint venture using the equity method of accounting. The income or loss from the joint venture is included in other income on the condensed consolidated statements of operations, and the Company has recorded an investment in Dakota Petroleum Transport Solutions, LLC on its condensed consolidated balance sheet.
Supplemental Agreement
In September 2010, the Company entered into a Supplemental Agreement to the Dakota Petroleum Transport Solutions, LLC member control agreement (“Supplemental Agreement”). The purpose of the Supplemental Agreement was to obtain access to site improvements and certain additional transloading equipment necessary to fulfill certain transloading contracts. Under this Supplemental Agreement the Company agreed to provide funds for the site improvements. The total costs incurred for these site improvements were $1,299,201. These costs have been capitalized as property and equipment on the Company’s condensed consolidated balance sheet.
As part of the Supplemental Agreement, PTS was required to pay all costs for the acquisition of four new transloaders. The total cost of these transloaders was $658,012, with an estimated residual value of $131,602 at the end of the initial Agreement term for a net cost incurred of $526,410.
To reflect the economics of the $526,410 of costs incurred, the Company recognized rental income of $9,719 and $38,909 for the nine month periods ended September 30, 2013 and 2012, respectively, and $1,972 and $(1,584) for the three month periods ended September 30, 2013 and 2012, respectively. The remaining monthly rental income will be recognized by the Company through December 31, 2026. No cash will be received related to this rental income; the rental income recorded is being treated as an increase in the Company’s investment in the joint venture.
In order to render fair and equitable the leases for the additional expenditures by the members relating to the site improvements and new equipment, the Supplemental Agreement included a provision that the Company would receive 75% of the cash distributions from Dakota Petroleum Transport Solutions, LLC until the Company had been reimbursed. The additional expenditures would also incur interest at an interest rate of 7% per annum until paid in full. After the Company was reimbursed and received the required interest, the cash distributions reverted back to the 50/50 split as per the original agreement. Only the cash distributions were changed under the Supplemental Agreement, the profit and loss allocations remained the same as the original member control agreement. As of September 30, 2013 the Company had been reimbursed for the additional expenditures related to the Supplemental Agreement.
9
In the first quarter of 2013, the Company settled an outstanding invoice related to the costs incurred as part of the Supplemental Agreement. The invoice was settled for $21,546 less than the original invoice amount. Based on this the total additional expenditures incurred by the Company were $772,791.
The Company will report the $386,396, 50% of the costs incurred in excess of amounts incurred by PTS, as rental income over the life of the joint venture and $386,395 will be included as income from investment in Dakota Petroleum Transport Solutions, LLC as the related expense is recorded by DPTS. Rental income related to the Supplemental Agreement was $8,156 and $59,045 for the nine month periods ended September 30, 2013 and 2012, respectively, and $2,542 and $5,170 for the three month periods ended September 30, 2013 and 2012, respectively. As of September 30, 2013 and December 31, 2012, the Company has received $167,184 and $186,113, respectively, in lease payments in excess of the amount reported as revenue. This amount is included as deferred rental income on the condensed consolidated balance sheet with the amount to be earned in the next twelve months recorded as a current liability. There were no future lease payments receivable related to this agreement as of September 30, 2013 and December 31, 2012.
The unaudited financial statements of Dakota Petroleum Transport Solutions, LLC are summarized as follows:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Sales | | $ | 3,356,844 | | $ | 4,162,436 | | $ | 12,906,617 | | $ | 11,591,616 | |
Net Earnings | | | 1,134,752 | | | 965,134 | | | 6,303,055 | | | 4,762,514 | |
Company’s Share of Equity in Net Earnings | | | 567,376 | | | 482,567 | | | 3,151,527 | | | 2,381,257 | |
| | | | | | | |
| | September 30,
2013 | | December 31,
2012 | |
Total Assets | | $ | 41,237,144 | | $ | 13,652,679 | |
Total Liabilities | | | 4,739,791 | | | 2,617,257 | |
Share of Equity in Net Assets | | | 18,248,676 | | | 5,517,711 | |
The differences between the Company’s share of equity in the net assets of DPTS and the investment in DPTS as shown on the condensed consolidated balance sheet is due to 50% of the deferred rental income entered into with DPTS being eliminated through the investment in DPTS. Since 50% of the rental income received from DPTS is eliminated and reported through income from DPTS on the Company’s condensed consolidated statements of operations, 50% of the deferred rental income received under the terms of the lease agreements is eliminated against the investment in DPTS.
DPTS commenced construction on the Pioneer Project on March 25, 2013. The Pioneer Project will represent a significant expansion of the transloading facility. Completion of the Pioneer Project is expected in December 2013, and the total cost of the project is estimated to be $50 million, which will be funded equally by the members of DPTS. The Company contributed $10 million to DPTS in September 2013 and has secured financing for its remaining portion of the project (see Note 8).
DPTS Marketing LLC
The Company, through its wholly owned subsidiary Dakota Plains Marketing, LLC, entered into a joint venture with PTS. The Company and PTS each own 50% of the outstanding member units of DPTS Marketing LLC. The joint venture was formed to engage in the purchase, sale, storage, transport and marketing of hydrocarbons produced within North Dakota to or from refineries and other end-users or persons and to conduct trading activities.
10
Each of the members of DPTS Marketing LLC was required to make an initial capital contribution of $100. Each member received 1,000 member units for their initial capital contribution, for a total of 2,000 member units issued and outstanding as of September 30, 2013.
Each of the members of DPTS Marketing LLC was also required to make an initial Member Preferred Contribution of $10,000,000 to support the trading activities of the joint venture. Upon written agreement of all the members, the members will make such additional Member Preferred Contributions as are agreed upon. All Member Preferred Contributions made shall entitle the member to receive a cumulative preferred return of 5% per annum, which preferred return will be paid in cash on a quarterly basis subject to there being cash available. At September 30, 2013 and December 31, 2012, the Company reported a preferred dividend receivable of $126,029 and $819,178, respectively, on its condensed consolidated balance sheets. The Company received a payment of $1.1 million related to the cumulative preferred return from DPTS Marketing LLC in September 2013. This payment was for the cumulative preferred return from the date of the initial $10 million contribution through June 30, 2013.
The operations of DPTS Marketing LLC commenced in May 2011. Under the member control agreement, the profits and losses of DPTS Marketing LLC are split 50/50, pro rata based on the number of member units outstanding. The cash payments from the joint venture will also be paid pro rata based on the number of member units outstanding. The Company received priority cash distribution payments from DPTS Marketing LLC of $2.9 million during the nine month period ended September 30, 2013. The Company had received no priority cash distributions payments prior to 2013. On August 30, 2013 DPTS Marketing LLC made a distribution to each member simultaneously in the amount of $10 million.
On June 1, 2012, DPM entered into an amended and restated member control agreement with DPTS Marketing LLC and PTS. The amended and restated member control agreement, among other things, incorporated all previous amendment and supplements, extended the initial term through December 31, 2021, and provided for the initial term to automatically extend in two-year intervals unless and until terminated. On August 30, 2012, the parties amended the amended and restated member control agreement to permit certain other ventures. On June 17, 2013, the parties further amended the amended and restated member control agreement to extend the initial term through December 31, 2026.
The Company accounts for this joint venture using the equity method of accounting. The income or loss from the joint venture is included in other income on the condensed consolidated statements of operations and the Company has recorded an investment in DPTS Marketing LLC on its condensed consolidated balance sheet.
The unaudited financial statements of DPTS Marketing LLC are summarized as follows:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Sales | | $ | 9,115,703 | | $ | 24,204,483 | | $ | 44,234,110 | | $ | 59,330,940 | |
Net Earnings (Loss) | | | (2,201,127 | ) | | 2,862,128 | | | 3,144,653 | | | 17,967,255 | |
Company’s Share of Equity in Net Earnings (Loss) | | | (1,100,564 | ) | | 1,431,064 | | | 1,572,326 | | | 8,983,628 | |
| | | | | | | |
| | September 30,
2013 | | December 31,
2012 | |
Total Assets | | $ | 31,332,147 | | $ | 49,399,386 | |
Total Liabilities | | | 10,941,108 | | | 5,587,792 | |
Share of Equity in Net Assets | | | 10,195,519 | | | 21,905,797 | |
11
Dakota Plains Services, LLC
The Company, through its wholly owned subsidiary Dakota Plains Trucking, LLC, entered into a joint venture with JPND II, LLC (“JPND”). The Company and JPND each own 50% of the outstanding member units of Dakota Plains Services, LLC. The joint venture was formed to engage in the transportation by road of hydrocarbons and materials used or produced in the extraction of hydrocarbons to or from refineries and other end-users or persons, wherever located, and any other lawful activities as the board of governors may determine from time to time.
JPND made an initial capital contribution of $650,000 to Dakota Plains Services, LLC. The Company was not required to make a capital contribution. Each member received 1,000 member units, for a total of 2,000 member units issued and outstanding as of September 30, 2013.
The member control agreement of Dakota Plains Services, LLC includes a provision that JPND will receive all distributions from the joint venture until the aggregate amount of distributions received is equal to their initial capital contribution. The cash distributions will be split 50/50 after JPND has received distributions equal to its capital contribution. The Company received a tax distribution from Dakota Plains Services, LLC in June 2013.
The operations of Dakota Plains Services, LLC commenced in September 2012, under provisions of the member control agreement the profits and losses of Dakota Plains Services, LLC are split 50/50, pro rata based on the number of member units outstanding.
The initial term of the joint venture is until December 31, 2022, and the term will automatically extend in two-year renewal periods unless and until terminated.
The Company accounts for this joint venture using the equity method of accounting. The income or loss from the joint venture is included in other income on the condensed consolidated statements of operations, and the Company has recorded an investment in Dakota Plains Services, LLC on its condensed consolidated balance sheet. As required by GAAP, the Company recognized its pro rata share of the net income from Dakota Plains Services, LLC for the nine months ended September 30, 2013 less the unrecognized losses from the year ended December 31, 2012. The Company did not recognize the loss from Dakota Plains Services, LLC for the year ended December 31, 2012 or decrease its investment in Dakota Plains Services, LLC below zero as of December 31, 2012. GAAP prohibits the Company from reducing the investment below zero unless the Company is obligated to provide financial support to Dakota Plains Services, LLC.
The unaudited financial statements of Dakota Plains Services, LLC are summarized as follows:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Sales | | $ | 3,805,769 | | $ | 99,431 | | $ | 10,902,636 | | $ | 99,431 | |
Net Earnings (Loss) | | | 28,630 | | | (99,757 | ) | | 617,639 | | | (99,757 | ) |
Company’s Share of Equity in Net Earnings | | | 14,315 | | | — | | | 212,744 | | | — | |
| | | | | | | |
| | September 30,
2013 | | December 31,
2012 | |
Total Assets | | $ | 7,836,756 | | $ | 3,136,159 | |
Total Liabilities | | | 6,852,652 | | | 2,469,833 | |
Share of Equity in Net Assets | | | 152,838 | | | — | |
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| |
4. | Lease Agreement – Related Party |
In November 2009, our predecessor entered into an operating lease agreement with Dakota Petroleum Transport Solutions, LLC (See Note 3). Under the lease agreement, the Company received monthly lease payments of $19,161 through May 2012. Effective June 1, 2012, the operating lease agreement was amended to increase the monthly lease payment to $31,881 for the duration of the Dakota Petroleum Transport Solutions, LLC amended and restated member control agreement. Effective January 1, 2013, the Company and Dakota Petroleum Transport Solutions, LLC increased the monthly lease payment to $60,470 for the duration of the Dakota Petroleum Transport Solutions, LLC amended and restated member control agreement. Effective July 1, 2013, the Company and Dakota Petroleum Transport Solutions, LLC decreased the monthly lease payment to $48,162 for the duration of the Dakota Petroleum Transport Solutions, LLC amended and restated member control agreement. The lease agreement includes provisions which allow the Company to collect additional rents if the Company incurs certain additional costs related to the equipment and the transloading facility. Dakota Petroleum Transport Solutions, LLC is responsible for all personal property and real property taxes upon the alterations and trade fixtures on the premises and the property during the term of the lease. The lessee is responsible for all costs and expenses to perform all maintenance and repair of the premises, and to acquire expansion, improvements or additions to the premises. The lessee is also responsible for payment of all utilities and other miscellaneous expenses during the term of the lease agreement.
In accordance with equity method requirements described in Note 3, 50% is recognized as rental income and 50% is included in income from investment from Dakota Petroleum Transport Solutions, LLC. Accordingly, for the nine months ended September 30, 2013, $253,653 of the $507,306 in rent payments was recognized as rental income and $253,653 was included in income from investment in Dakota Petroleum Transport Solutions, LLC and for the three months ended September 30, 2013, $72,243 of the $144,486 in rent payments was recognized as rental income and $72,243 was included in income from investment in Dakota Petroleum Transport Solutions, LLC. For the nine months ended September 30, 2012, $111,665 of the $223,330 in rent payments was recognized as rental income and $111,665 was included in income from investment in Dakota Petroleum Transport Solutions, LLC and for the three months ended September 30, 2012, $47,822 of the $95,643 in rent payments was recognized as rental income and $47,821 was included in income from investment in Dakota Petroleum Transport Solutions, LLC.
In July 2013, the Company entered into a lease agreement with UNIMIN Corporation to lease certain land owned by the Company in New Town, North Dakota. Under the lease agreement, beginning in January 2014, the Company will receive monthly lease payments of $10,000 through December 2023, with annual increases of 3% starting January 2016. The lease agreement includes a provision that allows UNIMIN the option to renew and extend the term of the lease for four additional periods of five years each. In addition, all improvements to the land, including rail tracks and the sand facility, revert to the Company upon termination of the lease.
| |
6. | Preferred Stock and Common Stock |
The Company has authorized 10,000,000 shares of preferred stock with a par value of $0.001 per share. Shares of preferred stock may be issued in one or more series with rights and restrictions as may be determined by the Company. No shares of preferred stock have been designated or issued.
In February 2013, the Company issued 12,500 shares of common stock to an executive. These shares were valued at $50,000 or $4.00 per share, the market value of the shares of common stock on the date of issuance, and expensed as general and administrative expenses.
In June 2013, the Company issued 50,000 shares of common stock to an executive. These shares were valued at $185,000 or $3.70 per share, the market value of the shares of common stock on the date of issuance, and expensed as general and administrative expenses.
In June 2013, the Company issued an aggregate 308,108 shares of common stock to its non-employee directors for prior and future service to the Company. These shares were valued at $1,140,000 or $3.70 per share, the market value of the shares of common stock on the date of issuance. The Company recorded general and administrative expenses of $1,040,000 and $100,000 for the nine and three month periods ended September 30, 2013, respectively, related to this stock issuance.
13
| |
7. | Stock-Based Compensation and Warrants |
The Company accounts for stock-based compensation under the provisions of FASB ASC 718-10-55. This standard requires the Company to record an expense associated with the fair value of the stock-based compensation. The Company uses the Black-Scholes option valuation model to calculate stock-based compensation at the date of grant. Option pricing models require the input of highly subjective assumptions, including the expected volatility. For warrants and options granted to employees and directors, the Company uses the simplified method to determine the expected term of the warrants and options due to the lack of sufficient historical data. Changes in these assumptions can materially affect the fair value estimate. The fair value of the warrants and options are recognized as compensation or interest expense over the vesting term.
Warrants
Warrants Granted November 1, 2012
On November 1, 2012, the Company issued warrants to a consultant, pursuant to a consulting agreement, to purchase a total of 50,000 shares of common stock exercisable at $3.28 per share. The total fair value of the warrants was calculated using the Black-Scholes valuation model based on factors present at the time the warrants were issued. The warrants can be exercised at any time until the warrants expire on November 1, 2016. The consulting agreement terminates on November 1, 2013. The Company recorded general and administrative expense of $57,556 and $15,697 for the nine and three months ended September 30, 2013, respectively, related to these warrants.
The following assumptions were used for the Black-Scholes model:
| | |
Risk free rates | | 0.73% |
Dividend yield | | 0.00% |
Expected volatility | | 48.70% |
Weighted average expected warrant life | | 4 Years |
The “fair market value” at the date of issuance for the warrants issued using the formula relied upon for calculating the fair value of warrants is as follows:
| | | | |
Weighted average fair value per share | | $ | 1.26 | |
Total warrants granted | | | 50,000 | |
Total weighted average fair value of warrants granted | | $ | 62,788 | |
Warrants Granted January 1, 2013
On January 1, 2013, the Company issued warrants to a consultant, pursuant to a consulting agreement, to purchase a total of 100,000 shares of common stock exercisable at $3.25 per share. The total fair value of the warrants was calculated using the Black-Scholes valuation model based on factors present at the time the warrants were issued. The warrants can be exercised at any time until the warrants expire on February 15, 2018. The consulting agreement terminated on May 31, 2013. The Company recorded general and administrative expense of $145,875 and $0 for the nine and three months ended September 30, 2013, respectively, related to these warrants.
The following assumptions were used for the Black-Scholes model:
| | |
Risk free rates | | 0.72% |
Dividend yield | | 0.00% |
Expected volatility | | 51.97% |
Weighted average expected warrant life | | 5 Years |
The “fair market value” at the date of issuance for the warrants issued using the formula relied upon for calculating the fair value of warrants is as follows:
| | | | |
Weighted average fair value per share | | $ | 1.46 | |
Total warrants granted | | | 100,000 | |
Total weighted average fair value of warrants granted | | $ | 145,875 | |
14
The table below reflects the status of warrants outstanding at September 30, 2013:
| | | | | | | | | |
Issue Date | | Common
Shares | | Exercise
Price | | Expiration
Date | |
February 1, 2011 | | | 1,000,000 | | $ | 0.285 | | January 31, 2021 | |
February 22, 2011 | | | 600,000 | | | 2.50 | | February 22, 2016 | |
April 5, 2011 | | | 100,000 | | | 2.50 | | April 5, 2016 | |
November 1, 2012 | | | 50,000 | | | 3.28 | | November 1, 2016 | |
November 2, 2012 | | | 921,000 | | | 4.00 | | October 31, 2017 | |
January 1, 2013 | | | 100,000 | | | 3.25 | | February 15, 2018 | |
Total | | | 2,771,000 | | | | | | |
Outstanding Warrants
| | |
| • | No warrants were forfeited or expired during the nine month period ended September 30, 2013. |
| | |
| • | The Company recorded general and administrative expense of $217,868 and $15,697 for the nine and three month periods ended September 30, 2013, respectively, and $50,381 and $16,794 for the nine and three month periods ended September 30, 2012, respectively, related to these warrants. |
| | |
| • | There are 2,771,000 warrants that are exercisable at September 30, 2013. |
| | |
| • | No warrants were exercised during the nine months ended September 30, 2013. |
Stock Options
In February 2013, the Company granted stock options under its 2011 Equity Incentive Plan to its Chief Executive Officer to purchase a total of 200,000 shares of common stock exercisable at $4.07 per share. The total fair value of the options was calculated using the Black-Scholes valuation model based on factors present at the time the options were granted. The options vest over 36 months with 66,666 options vesting on February 8, 2014 and 66,667 vesting on February 8, 2015 and 2016. The Company recorded general and administrative expense of $123,592 and $46,347 for the nine and three months ended September 30, 2013, respectively, related to these options.
The following assumptions were used for the Black-Scholes model to value the options granted during the nine months ended September 30, 2013:
| | |
Risk free rates | | 0.84% |
Dividend yield | | 0.00% |
Expected volatility | | 39.14% to 52.43% |
Weighted average expected stock option life | | 4 to 5 Years |
The following summarizes activities concerning outstanding options to purchase shares of the Company’s common stock as of and for the nine month period ended September 30, 2013:
| | |
| • | No options were exercised or forfeited in the nine month period ended September 30, 2013. |
| | |
| • | No options expired during the nine month period ended September 30, 2013. |
| | |
| • | Options covering 215,625 shares are exercisable and outstanding at September 30, 2013. |
| | |
| • | There is $202,285 of compensation expense that will be recognized through February 2016 relative to the options that had been granted as of September 30, 2013. |
| | |
| • | There were 200,000 unvested options at September 30, 2013. |
15
Restricted Stock Awards
During the nine months ended September 30, 2013, the Company issued 794,063 restricted shares of common stock as compensation to officers, employees, and consultants of the Company. The restricted shares vest over various terms with all restricted shares vesting no later than February 2016. As of September 30, 2013, there was $2.1 million of total unrecognized compensation expense related to unvested restricted stock. This compensation expense will be recognized over the remaining vesting period of the grants. The Company has assumed a zero percent forfeiture rate for restricted stock. The Company recorded general and administrative expense of $1,094,919 and $465,076 for the nine and three month periods ended September 30, 2013, respectively, and $274,532 and $109,844 for the nine and three month periods ended September 30, 2012, respectively, related to restricted share grants.
The following table reflects the outstanding restricted stock awards and activity related thereto for the nine month period ended September 30, 2013:
| | | | | | | |
| | Nine Month Period Ended
September 30, 2013 | |
| | Number of
Shares | | Weighted-Average
Grant Price | |
Restricted Stock Awards: | | | | | | | |
Restricted Shares Outstanding at the Beginning of Period | | | 568,437 | | $ | 1.36 | |
Shares Granted | | | 794,063 | | | 3.81 | |
Lapse of Restrictions | | | (545,000 | ) | | 1.28 | |
Restricted Shares Outstanding at September 30, 2013 | | | 817,500 | | $ | 3.80 | |
On November 1, 2011, the Company entered into an Exchange and Loan Agreement with the holders of certain senior and junior promissory notes (“Old Notes”). As part of the Exchange and Loan Agreement the holders of the Old Notes agreed to exchange their notes for new promissory notes and extend the term of the promissory notes. The total value of these new notes was $9 million and all unpaid accrued interest and principal were payable on March 31, 2013 (the “New Notes”). The New Notes bore interest at the rate of 12% per annum, with interest payable in arrears on the last day of each fiscal quarter.
The New Notes included an additional payment provision that provided that upon public listing of the Company if the initial trading price, as defined in the Exchange and Loan Agreement, exceeds $2.50, then the holder would be entitled to receive an additional payment equal to the remainder, to the extent positive, of (x) the unpaid principal amount of the promissory note multiplied by the initial trading price and divided by $2.50 minus (y) the unpaid principal amount of the promissory note. The holders of the New Notes could elect to receive the additional payment either (i) a number of shares of the Company’s common stock equal to the additional payment divided by $4.00, or (ii) a subordinated promissory note having a principal amount equal to the additional payment, bearing no interest for three calendar months after issuance and 12% simple annual interest thereafter, due and payable on the one-year anniversary of the issue date of such promissory note. With the public listing of the Company in March 2012, the additional payment due to the holders of the notes under this provision was $32,851,800.
The additional payment provision in the New Notes was considered an embedded derivative, and was recorded as a derivative liability with a re-measurement as of each reporting date.
On April 21, 2012, the embedded derivative was satisfied with the issuance of promissory notes in the aggregate amount of $27,663,950 and 1,296,963 shares of the Company’s common stock. The fair value of the embedded derivative was $32,851,800 at April 21, 2012. The increase in the fair value of the embedded derivative during the nine months ended September 30, 2012, $27,311,800, was recorded as interest expense on the condensed consolidated statement of operations.
16
Private Placement of Debt
On November 2, 2012, the Company issued promissory notes in the amount of $6,140,000. The issuance of these promissory notes resulted in net proceeds to the Company of approximately $5,945,000, net of commissions and finance costs paid. The promissory notes bear interest at the rate of 12% per annum, with interest paid in arrears on the last day of each fiscal quarter. All principal and accrued interest are due and payable on October 31, 2015.
In conjunction with the issuance of the promissory notes the Company issued warrants to purchase 921,000 shares of our common stock, exercisable at $4.00 per share. The warrants expire on October 31, 2017.
The Company recorded $1,048,889 of debt discount against these promissory notes representing the allocation of the relative fair value to the warrants issued. The debt discount will be amortized over the term of the promissory notes using the straight-line method, which approximates the effective interest method. For the nine and three month periods ended September 30, 2013, the company recognized interest expense of $262,224 and $87,408, respectively, related to the amortization of this debt discount.
The Company incurred finance costs of $195,062 related to these notes, which will be amortized over the term of the notes and included in interest expense on the condensed consolidated statement of operations. The interest expense recorded for the nine and three month period ended September 30, 2013 was $48,765 and $16,255, respectively.
Amended Election, Exchange and Loan Agreements
In addition, on November 2, 2012, pursuant to the Amended Election, Exchange and Loan Agreements; the Company repaid the outstanding principal to a holder of the New Notes in the amount of $500,000. The term of the remaining $8.5 million in New Notes was extended using two different maturity dates. $4,605,300 of the New Notes was extended to March 1, 2014 and $3,894,700 was extended to October 31, 2015. All of the holders of the New Notes agreed to surrender and void the $27,663,950 of promissory notes and 1,296,963 shares of the Company’s common stock received April 21, 2012, related to the additional payment provision in the New Notes.
As a result of the revaluation of the additional payment provision and revised elections of the holders, the Company issued promissory notes in the aggregate of $11,965,300 and 1,757,075 shares of its common stock. These promissory notes bear interest at the rate of 12% per annum, with interest paid in arrears on the last day of each fiscal quarter. All principal and accrued interest are due and payable on October 31, 2015.
As of September 30, 2013, the Company had the following outstanding promissory notes:
| | | | |
Maturity Date | | Principal Amount | |
March 1, 2014 | | $ | 4,605,300 | |
October 31, 2015 | | | 22,000,000 | |
Total outstanding principal | | $ | 26,605,300 | |
Unamortized debt discount at September 30, 2013 | | | (728,393 | ) |
Promissory notes, net of debt discount | | $ | 25,876,907 | |
All promissory notes bear interest at the rate of 12% per annum, with interest paid in arrears on the last day of each fiscal quarter.
Pioneer Project
On June 17, 2013, Dakota Plains Transloading, LLC (“Borrower’), a wholly owned subsidiary of the Company, entered into a credit agreement (“Credit Agreement’) with World Fuel Services Corporation. The Credit Agreement provides the Borrower with a $20 million delayed draw term loan facility (the “Facility”) to finance the Borrower’s share of improvements to be made to the Pioneer Terminal in New Town, North Dakota. The availability period for draws under the Facility expires on September 30, 2014 and maturity date of the Facility is December 31, 2026. The Facility is secured by a mortgage on a majority of the land owned by the Company in New Town, North Dakota as well as a pledge of the equity owned by the Borrower in Dakota Petroleum Transport Solutions, LLC.
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During the availability period, a loan under the Facility bears interest at a rate per annum equal to either (i) nine percent (9%), at any time when the aggregate unpaid principal amounts of the loans outstanding is less than $10 million, or (ii) twelve percent (12%), at any time the aggregate unpaid principal amount of loans outstanding is greater than or equal to $10 million. After the expiration of the availability period, a loan under the Facility bears interest at a rate per annum equal to (i) six percent (6%), at any time when the aggregate unpaid principal amount of loans outstanding is less than $5 million, (ii) nine percent (9%), at any time when the aggregate unpaid principal amount of loans outstanding is less than $10 million, or (iii) twelve percent (12%), at any time the aggregate unpaid principal amounts of the loans outstanding is greater than or equal to $10 million. There were no borrowings under the Facility at September 30, 2013.
The Credit Agreement contains customary affirmative and negative covenants, including covenants that restrict the right of the Borrower to incur indebtedness, merge, lease, sell or otherwise dispose of assets, make investments and grant liens on their assets.
The Credit Agreement contains customary events of default, the occurrence of which would permit World Fuel Services Corporation to terminate its commitment and accelerate loans under the Facility, including failure to make payments under the Facility, failure to comply with covenants in the Credit Agreement and other loan documents, cross default to other material indebtedness of the Company, failure of the Company or Borrower to pay or discharge material judgments, bankruptcy of the Company or the Borrower, and a change in control of the Company or the Borrower.
The Company incurred finance costs of $9,783 related to the Credit Agreement, which will be amortized over the term of the notes and included in interest expense on the condensed consolidated statement of operations. The interest expense recorded for the nine and three months ended September 30, 2013 was $3,261 and 2,446, respectively.
The Company utilizes the asset and liability approach to measuring deferred tax assets and liabilities based on temporary differences existing at each balance sheet date using currently enacted tax rates in accordance with FASB ASC 740-10-30.Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
The income tax benefit for the nine month periods ended September 30, 2013 and 2012 consists of the following:
| | | | | | | |
| | Nine Months Ended
September 30, | |
| | 2013 | | 2012 | |
Current Income Taxes | | $ | (1,042,000 | ) | $ | 3,459 | |
| | | | | | | |
Deferred Income Taxes | | | | | | | |
Federal | | | (207,000 | ) | | (6,699,000 | ) |
State | | | (33,000 | ) | | (670,000 | ) |
| | | | | | | |
Total Benefit | | $ | (1,282,000 | ) | $ | (7,365,541 | ) |
The Company has no liabilities for unrecognized tax benefits.
The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the nine month periods ended September 30, 2013 and 2012, the Company did not recognize any interest or penalties in the condensed consolidated statement of operations, nor did the Company have any interest or penalties accrued in the condensed consolidated balance sheet at September 30, 2013 and December 31, 2012, relating to unrecognized benefits
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The 2012, 2011, 2010 and 2009 tax years remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.
The Company’s financial instruments include cash and cash equivalents, trade receivables, accounts payable, and promissory notes. The carrying amount of cash and cash equivalents, trade receivables, and accounts payable approximate fair value because of their immediate or short-term maturities.
FASB ASC 820-10-55 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under FASB ASC 820-10-55 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820-10-55 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value of hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.
As of September 30, 2013 and December 31, 2012, the Company has no financial instruments measured at fair value on a recurring basis in the condensed consolidated balance sheet. Level 2 liabilities consist of the promissory notes (see Note 8).
As of March 22, 2012, the issued and outstanding common stock of Dakota Plains before the Initial Merger was converted into the right to receive an aggregate of 37,014,018 shares of the Company’s common stock, all of which were “restricted securities” under Rule 144. Of those shares, 530,000 were restricted shares of the Company’s common stock issued under certain employment agreements in exchange for 530,000 shares of similarly restricted Dakota Plains’ common stock. In addition, the outstanding options issued by Dakota Plains before the Initial Merger were converted into options to purchase an aggregate of 250,000 shares of the Company’s common stock and the outstanding warrants issued by Dakota Plains before the Initial Merger were converted into warrants to purchase an aggregate of 4,150,000 shares of the Company’s common stock. The shareholders of the Company before the Initial Merger retained 640,200 shares of common stock, representing approximately 1.7% of its outstanding shares of common stock immediately after the Initial Merger.
In March 2012, Dakota Plains Holdings, Inc., the surviving corporation from the Initial Merger and then a wholly owned subsidiary of the Company, merged with and into MCT Holding Corporation (the “Second Merger”). Pursuant to the plan of merger governing the Second Merger, the Company changed its name from “MCT Holding Corporation” to “Dakota Plains Holdings, Inc.”
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13. | Commitments and Contingencies |
Lac-Mégantic, Quebec
On July 6, 2013, a freight train operated by Montreal, Maine and Atlantic Railway (“MMA”) with 72 tank cars carrying approximately 50,000 barrels of crude oil derailed in Lac-Mégantic, Quebec. The derailment resulted in significant loss of life, damage to the environment from spilled crude oil and extensive property damage. DPTSM (a crude oil marketing joint venture in which the Company indirectly owns a 50% membership interest) subleased the tank cars involved in the incident from an affiliate of the Company’s joint venture partner. A different affiliate of the Company’s joint venture partner owned title to the crude oil being carried in the derailed tank cars. DPTS (a crude oil transloading joint venture in which the Company indirectly owns a 50% membership interest) arranged for the transloading of the crude oil for DPM into tank cars at DPTS’s facility in New Town, North Dakota. An affiliate of the Company’s joint venture partner also contracted with Canadian Pacific Railway (“CPR”) for the transportation of the tank cars and the crude oil from New Town, North Dakota to a customer in New Brunswick, Canada. CPR subcontracted a portion of that route to MMA.
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In July and August 2013, certain of our subsidiaries, DPTSM and DPTS, along with a number of third parties, including MMA and certain of its affiliates, as well as several manufacturers and lessors of tank cars, were named as defendants in twenty complaints filed in Illinois. The complaints generally allege wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil and seek economic and compensatory damages, as well as costs. In addition, the Company, DPTSM and DPTS, along with a number of other third parties, including CPR, MMA and certain of its affiliates, as well as several manufacturers and lessors of tank cars, were named as defendants in a motion filed in Quebec Superior Court to authorize the bringing of a class-action lawsuit seeking economic, compensatory and punitive damages, as well as costs. The motion generally alleges wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil. Additional claims, lawsuits, proceedings, investigations and orders may be filed, commenced or issued with respect to the incident, which may involve civil claims for damages or governmental investigative, regulatory or enforcement actions against the Company.
While the Company and its joint ventures, DPTSM and DPTS, maintain insurance to mitigate the costs of environmental releases as well as other results of unexpected events, including loss of life, property damage and defense costs, there can be no guarantee that our insurance will be adequate to cover all liabilities that may be incurred as a result of this incident.
The Company is separately evaluating potential claims that may be asserted against third parties to recover costs and other liabilities that may be incurred as a result of this incident. The Company can provide no guarantee that any such claims, if brought by the Company, will be successful or, if successful, that the responsible parties will have the financial resources to address any such claims.
The Company is currently unable to determine the probability of loss, or reasonably estimate a range of potential losses related to the above proceedings. Accordingly, the Company has not made any provisions for these potential losses in our consolidated financial statements.
In connection with preparing the unaudited consolidated financial statements for the nine months ended September 30, 2013, the Company has evaluated subsequent events for potential recognition and disclosure through the date of this filing and determined that there were no subsequent events which required recognition or disclosure in the financial statements.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report and in our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2012 filed with the United States Securities and Exchange Commission (SEC).
Forward-Looking Statements
This report contains “forward-looking statements” within the meaning of the federal securities laws. Statements included in this quarterly report that are not historical facts (including any statements regarding plans and objectives of management for future operations or economic performance, or assumptions), including, without limitation, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “will,” “should,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “continue,” “targeting,” or other similar words.
Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of the filing of this report. Although the Company believes that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause the actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in “Part I, Item 1A. Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2012 and “Part II, Item 1A. Risk Factors” in this Current Report on form 10-Q, each as filed with the SEC.
All forward-looking statements included in this report are based on information available to the Company on the date of this report. It undertakes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to the Company or persons acting on its behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.
Overview
The Company is an integrated midstream energy company, principally focused on developing and owning transloading facilities, marketing and transporting crude oil and related products within the Williston Basin. It competes through its joint ventures by providing customers with value-added benefits, including a full-service transloading facility, competitive pricing and optimal geographic location that is centrally located in Mountrail County, North Dakota, which continues to experience the most drilling activity in the Williston Basin. Currently, the Company has a transloading joint venture, a marketing joint venture and a trucking joint venture, each of which is organized in the form of a limited liability company of which it holds a 50% membership interest.
In November 2009, the Company entered into an operating lease agreement with Dakota Petroleum Transport Solutions, LLC (“DPTS”) (the “transloading joint venture”) in which its wholly owned subsidiary, Dakota Plains Transloading, LLC (“DPT”), owns a 50% ownership interest. The lease will automatically terminate when the member control agreement governing DPTS is terminated. In June 2012, that member control agreement was amended to, among other things, extend the term of the agreement to December 31, 2021, which will automatically extend in two-year renewal periods until terminated. In August 2012, the parties amended the amended and restated member control agreement to permit certain other ventures. In June 2013, DPT entered into amendment No. 2 to the amended restated member control agreement which, among other things, extends the initial term of the joint venture until December 31, 2026.
Under the lease, the Company receives monthly lease payments from the transloading joint venture. The lease agreement includes provisions that allow the Company to collect additional rents if the Company incurs certain additional costs related to the equipment and facility. The transloading joint venture generates income primarily from a per-barrel fee charged when crude oil is transloaded into a tank railcar located at the facility leased from the Company. Currently, crude oil is transloaded from semi-trailer trucks owned and operated by the Company’s trucking joint venture and third parties into tank railcars. Using this method, the Company’s site has the capacity to transload approximately 50,000 barrels per day.
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DPTS Marketing LLC purchases barrels of crude oil from well operators at the wellhead and from first purchasers delivering to the transloading crude by rail facility. DPTS Marketing LLC then coordinates the transportation of the purchased crude oil to a purchaser at a location determined by the purchaser. Potential purchasers include; storage facilities, blending facilities, distributors and refineries. The following reflects a step-by-step process on how the marketing business operates:
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| 1. | A subsidiary of World Fuel Services Corporation, on behalf of the marketing joint venture (the “Initial Purchaser”) enters into a purchase and sale agreement with a producer or first purchaser. |
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| 2. | During the contracted month the marketing joint venture sends both Dakota Plains Services, LLC trucks and third party trucking firms to pick up the barrels from certain wellhead locations specified by the producer, or receives the barrels delivered in New Town, North Dakota. |
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| 3. | As specified in the purchase and sale agreement, title to the crude oil transfers from the producer (seller) to the Initial Purchaser at the time it passes through the truck’s flange at the well or at our crude transloading facility. |
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| 4. | The crude oil is transported by truck to the transloading facility where it is transferred from the truck into a railcar. |
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| 5. | Canadian Pacific takes custody of the tank cars and crude oil at the transloading facility in New Town, North Dakota for delivery to the final destination, where the Initial Purchaser sells the crude oil to its final customer. Canadian Pacific may deliver the crude oil directly if they serve the destination or Canadian Pacific will make arrangements with other Class I and short line railroads for the movement to final destination. |
In June 2012, the Company’s wholly owned subsidiary, Dakota Plains Marketing, LLC (“DPM”), entered into an amended and restated member control agreement with Petroleum Transport Solutions, LLC (“PTS”) and DPTS Marketing LLC. The amended and restated member control agreement, among other things, incorporates all previous amendments, extends the initial term of DPTS Marketing LLC until December 31, 2021, and the term will automatically extend in two-year renewal periods unless and until terminated. In August 2012, the parties amended the amended and restated member control agreement to permit certain other ventures. In June 2013, the amended and restated member control agreements for both the marketing joint venture and the transloading joint venture were amended to, in material part, extend the initial term of the respective joint venture until December 31, 2026.
In September 2012, the Company’s wholly owned subsidiary, Dakota Plains Trucking, LLC (“DPT”), formed a joint venture with JPND II, LLC (“JPND”). DPT and JPND each own 50% of Dakota Plains Services, LLC (the “trucking joint venture”). The trucking joint venture was formed to engage in the transportation by road of hydrocarbons and materials used or produced in the extraction of hydrocarbons to or from refineries and other end-users or persons, wherever located, and any other lawful activities as the board of governors may determine from time to time. The initial term of the trucking joint venture runs until December 31, 2022, the term will automatically extend in two-year renewal periods unless and until terminated.
In March 2013, the Company and its joint venture partner, PTS, an indirect wholly owned subsidiary of World Fuel Services Corporation, announced that construction on the Pioneer Project would commence on March 25, 2013. The Pioneer Project will represent a significant expansion of the New Town transloading facility located in the heart of the Williston Basin. Crude oil supplying the transloading facility is currently sourced primarily from the Bakken formation that underlies parts of Montana, North Dakota, and Saskatchewan. The Pioneer Project will provide a double loop track that will accommodate two 120 rail car unit trains and will increase the throughput capacity from 30,000 barrels per day to up to 80,000 barrels per day, 180,000 barrels of crude oil storage, a high-speed loading facility that can accommodate 10 rail cars simultaneously, and transfer stations to receive crude oil from local gathering pipelines and trucks. In early October 2013, the first gathering system pipeline was connected to the Pioneer Terminal and began transporting oil in late October 2013 to Pioneer’s 90,000 barrel storage tank.
Completion of the Pioneer Project is expected in December 2013. Total cost of the project is estimated to be approximately $50 million and will be funded equally by the Company and World Fuel Services Corporation. The existing four ladder tracks will be utilized for inbound delivery, storage and trucking logistics services for commodities such as sand, chemicals, diesel, and pipe. The Company contributed $10 million to DPTS in the third quarter of 2013 and debt financing has been provided for the Company’s remaining portion of the Pioneer Project cost.
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The Company continues to develop its inbound oilfield products business at the Pioneer Terminal. Construction is currently underway for the $15 million fracturing sand terminal announced with UNIMIN Corporation (“UNIMIN”) in August. Completion of the facility is scheduled for May 2014. The new facility will have a throughput capacity of approximately 750,000 tons per year. The fracturing sand terminal will be composed of 8,000 tons of fixed sand storage, an enclosed transloading facility, twin high-speed truck loadouts, and four ladder tracks. Interim fracturing sand transloading is expected to commence in January 2014, while construction of the permanent facility is underway. The new terminal will supply energy service companies with hydraulic fracturing sands sourced directly from UNIMIN’s newest and largest proppant production facility in Tunnel City, Wisconsin. The fracturing sands will be transported on Canadian Pacific’s rail network. Under the terms of the agreements between the parties, UNIMIN will provide a direct marketing service to oilfield service companies and fund the construction of the four new ladder tracks, sand storage and transloading facility. The Company will provide a land lease to UNIMIN for up to 30 years and will receive monthly lease payments of $10,000 through December 2033, with annual increases of 3% starting January 2016, and DPTS will provide fee-based transloading services.
Current Business Drivers
As reported by the USGS, the North Dakota Industrial Commission currently predicts that the Bakken’s production will increase for many years. A common date for a production plateau is between the years of 2022 to 2024. The U.S. Geological Survey estimated parts of North Dakota may contain as much as 7.4 billion barrels of oil. North Dakota ranks second behind Texas, in terms of production of natural resources, in the United States.
The prices at which crude oil trade in the open market have experienced significant volatility, and will likely continue to fluctuate in the foreseeable future due to a variety of influences including, but not limited to, the following:
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| • | domestic and foreign demand for crude oil by both refineries and end users; |
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| • | the introduction of alternative forms of fuel to replace or compete with crude oil; |
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| • | domestic and foreign reserves and supply of crude oil; |
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| • | competitive measures implemented by the Company’s competitors and domestic and foreign governmental bodies; |
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| • | political climates in nations that traditionally produce and export significant quantities of crude oil (including military and other conflicts in the Middle East and surrounding geographic region) and regulations and tariffs imposed by exporting and importing nations; |
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| • | weather conditions; and |
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| • | domestic and foreign economic volatility and stability. |
Lack of capacity within the trunk pipelines is driving competition within the transloading and storage industry. This competition is expected to become increasingly intense as the demand to transport crude oil in North Dakota has risen in recent years. In the Williston Basin, 61% of crude oil production was being shipped via rail as of August 2013 compared to 46% via rail in August 2012, according to data from the North Dakota Pipeline Authority.
Results of Operations
Three Months Ended September 30, 2013 vs. Three Months Ended September 30, 2012
The Company experienced a net loss of $2.1 million for the three months ended September 30, 2013 compared to a net income of $0.2 million for the three months ended September 30, 2012. The net loss for the three months ended September 30, 2013 was driven by the loss from the Company’s indirect ownership interest in the marketing joint venture, primarily due to a lower per barrel margin as a result of the significant narrowing of the price spread between Brent and WTI, legal fees and insurance expenses, including deductibles incurred, as a result of the Lac-Mégantic train incident. In addition, general and administrative expenses were higher during this three month period due to increased professional fees, directors’ fees and compensation and employee expenses related to increases in headcount. The Company did realize an increase in income from its indirect ownership interest in the transloading joint venture primarily due to a reduction in professional fees. Net income for the three months ended September 30, 2012 was mainly driven by the higher per barrel margins experienced within the marketing joint venture, as a result of the wider price spread between Brent and WTI.
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General and administrative expenses were $1.9 million for the three months ended September 30, 2013 compared to $0.8 million for the three months ended September 30, 2012. The increase was primarily related to professional fees and compensation and employment expenses, due to an increase in headcount.
Income from the Company’s indirect investment in the transloading joint venture was $0.6 million for the three months ended September 30, 2013 compared to $0.5 million for the three months ended September 30, 2012. The slight increase was primarily driven by a reduction in professional fees. The transloading joint venture experienced a 19% decrease in barrels transloaded (1.7 million barrels of oil during the three months ended September 30, 2013 compared to 2.1 million barrels of oil during the three months ended September 30, 2012). The narrowing of the spread between Brent and WTI resulted in an increase in oil directed to the pipelines. In addition, due to the narrowing of the spread and the increased competition for the remaining barrels of oil, it was decided to reduce volume until spreads begin to widen. Cost of revenue was higher the three months ended September 30, 2013 due to the decision to maintain current levels of contractor headcount even with decreased volumes. This decision was the result of increasing fourth quarter volumes and an anticipated widening of the spread between Brent and WTI.
Loss from the Company’s indirect investment in the marketing joint venture was $1.1 million for the three months ended September 30, 2013 compared to income of $1.4 million for the three months ended September 30, 2012. The loss was primarily driven by the significant reduction in the spread between Brent and WTI, competitive pressures, and the legal and insurance expenses associated with the Lac-Mégantic incident. The marketing joint venture experienced an 18% decrease in volume sold (1.9 million barrels of oil during the three months ended September 30, 2013 compared to 2.3 million barrels of oil during the three months ended September 30, 2012). The significant narrowing of the spread between Brent and WTI resulted in an increase of oil being redirected to the pipelines and a conscious decision was made to reduce volumes until spreads begin to widen.
Income from the Company’s indirect investment in the trucking joint venture was $14,000 for the three months ended September 30, 2013, during which it hauled 1.5 million barrels of oil. The trucking joint venture secured four additional clients in the second quarter, hauling oil to destinations other than New Town, North Dakota. The trucking joint venture commenced operations in September 2012 with 4 trucks and approximately 29,000 total barrels of crude oil hauled for the month.
The Company recognized rental income of $77,000 for the three months ended September 30, 2013 compared to $51,000 for the three months ended September 30, 2012. The increase in rental income is due to the renegotiations of the lease agreement with Dakota Petroleum Transport Solutions, LLC that stipulate the joint venture pay a higher amount of monthly rent to the Company, due to additional secured acreage.
Nine Months Ended September 30, 2013 vs. Nine Months Ended September 30, 2012
The Company experienced a net loss of $2.1 million for the nine months ended September 30, 2013 compared to a net loss of $12.3 million for the nine months ended September 30, 2012. The net loss for the nine months ended September 30, 2013 was driven primarily by the loss from the Company’s indirect ownership interest in the marketing joint venture, as a result of a lower per barrel margin due to the significant narrowing of the Brent to WTI price spread experienced within the second and third quarters of 2013 and the legal and insurance costs and deductibles associated with the Lac-Mégantic train incident. In addition, general and administrative expenses were higher due to the recognition of non-cash expenses related to share issuances to the board of directors and new employees, additional expenses related to employees hired in 2013, and an increase in professional fees. The Company did realize an increase in income from its indirect ownership interest in the transloading joint venture due to increased volume and reduction in professional fees. The net loss realized for the nine months ended September 30, 2012 was primarily driven by the settlement of the embedded derivative, which was recorded as interest expense.
General and administrative expense was $5.9 million for the nine months ended September 30, 2013 compared to $2.1 million for the nine months ended September 30, 2012. The increase was primarily due to the recognition of non-cash expense related to share issuances to the board of directors and to new employees. In addition, the increase was also driven by the incremental expenses related to employees hired in 2013.
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Income from the Company’s indirect investment in the transloading joint venture was $3.4 million for the nine months ended September 30, 2013 compared to $2.6 million for the nine months ended September 30, 2012. The increase was volume driven as year to date transloaded volume was 6.4 million barrels for the nine months ended September 30, 2013 compared to 5.5 million barrels transloaded for the nine months ended September 30, 2012; a 16% increase. Cost of revenue was also higher due to the increased volume and the higher fee per barrel charged by the new contractor. However, it was offset by the reduction in general and administrative expenses, in particular professional fees.
Income from the Company’s indirect investment in the marketing joint venture was $1.6 million for the nine months ended September 30, 2013 compared to $9.0 million for the nine months ended September 30, 2012. The marketing joint venture experienced a 24% increase in volume sold during the nine months ended September 30, 2013 (7.0 million barrels of oil) compared to volume sold during the nine months ended September 30, 2012 (5.7 million barrels of oil). The increase in volume sold was offset by lower per barrel margins as a result of significant contraction in the price spread between Brent and WTI during the second and third quarters, in addition to the legal and insurance expenses related to the Lac-Mégantic train incident.
Income from the Company’s indirect investment in the trucking joint venture was $213,000 for the nine months ended September 30, 2013. During this time period the joint venture hauled 3.9 million barrels of oil and increased its trucking fleet to 23 trucks. The trucking joint venture will continue to haul oil for the marketing joint venture as well as several third parties, which were secured in the second quarter of 2013. The trucking joint venture commenced operations in September 2012 with 4 trucks and approximately 29,000 barrels of crude oil hauled for the month.
The Company recognized rental income of $272,000 for the nine months ended September 30, 2013 compared to $210,000 for the nine months ended September 30, 2012. The increase in rental income is due to the renegotiations of the lease agreement with Dakota Petroleum Transport Solutions, LLC that stipulate the joint venture pay a higher amount of monthly rent to the Company as a result of additional secured acreage.
Non-GAAP Financial Measures
The Company defines Adjusted EBITDA as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, and (iv) non-cash expenses relating to share based payments recognized under ASC Topic 718. Adjusted EBITDA was $(1.7 million) and $2.3 million for the three and nine months ended September 30, 2013 compared to $1.4 million and $10.0 million for the three and nine months ended September 30, 2012. The decrease in Adjusted EBITDA was related to the reduction in marketing’s per barrel margin that was driven by the narrowing of the price spread between Brent and WTI during the second and third quarter of 2013. In addition, general and administrative expenses were higher primarily due to professional fees and the incremental expenses related to employees hired in 2013.
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| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2013 | | 2012 | | 2013 | | 2012 | |
Net Income (Loss) | | $ | (2,057,763 | ) | $ | 171,658 | | $ | (2,062,668 | ) | $ | (12,342,679 | ) |
Add Back: | | | | | | | | | | | | | |
Income Tax Provision (Benefit) | | | (1,266,000 | ) | | 105,474 | | | (1,282,000 | ) | | (7,365,541 | ) |
Depreciation and Amortization | | | 47,065 | | | 41,378 | | | 131,923 | | | 123,935 | |
Share Based Compensation - Employees and Directors | | | 571,398 | | | 175,685 | | | 2,430,665 | | | 373,960 | |
Share Based Compensation - Consultants | | | 55,722 | | | — | | | 280,714 | | | — | |
Interest Expense | | | 970,962 | | | 893,891 | | | 2,762,175 | | | 29,219,829 | |
Adjusted EBITDA | | $ | (1,678,616 | ) | $ | 1,388,086 | | $ | 2,260,809 | | $ | 10,009,504 | |
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Adjusted EBITDA is a non-GAAP financial measure as defined by the SEC and is derived from net income (loss), which is the most directly comparable financial measure calculated in accordance with GAAP. The Company believes presenting Adjusted EBITDA provides useful information to investors to gain an overall understanding of its current financial performance. Specifically, our management believes the non-GAAP financial measure included herein provides useful information to investors by excluding certain expenses that are not indicative of the Company’s operating results. In addition, Adjusted EBITDA is used by management for budgeting and forecasting as well as subsequently measuring of its performance, and believes that it is providing investors with a financial measure that most closely align to its internal measurement processes.
Liquidity and Capital Resources
The Company’s principal sources of liquidity are cash and cash equivalents, cash distributions generated from its joint ventures, and the Company’s additional financing capacity, which is dependent upon capital and credit market conditions and its financial performance. In April and June 2013, the Company received priority cash distributions from its marketing joint venture in the amounts of $1.8 million and $1.1 million, respectively. In September 2013, the Company received a $1.1 million distribution related to the marketing joint venture’s preferred dividend. The Company reactivated the monthly priority cash distribution from the transloading joint venture in September 2013, with the receipt of a $0.4 million distribution. The short and long-term future cash needs will involve supporting the loading, marketing and transporting of crude oil and related products from and into the Williston Basin fields. The Company is currently expanding the existing transloading facility to meet the logistical and storage needs of future transloading arrangements including the recently announced UNIMIN Corporation fracturing sand storage and transloading facility, which began construction in the third quarter, at the Company’s Pioneer Terminal in New Town, North Dakota. The Company has secured financing to fund its portion of the Pioneer Project.
Cash Flows
The Company’s cash flows depend, to a large degree, on the level of spending by oil companies on development and production activities. Sustained increases or decreases in the price of crude oil could have a material impact on these activities, and could also materially affect its cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures, purchases and sales of investments, issuances and repurchases of debt and of common shares are within the Company’s control and are adjusted as necessary, based on market conditions.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $5.8 million and $2.4 million for the nine months ended September 30, 2013, and 2012, respectively, or an increase of cash used of approximately $3.4 million. The primary reason for the increase in cash used in operating activities was the increase in cash general and administrative expenses of $1.3 million, cash paid for interest expense of $1.5 million, and an increase in working capital assets of $0.5 million in the nine months ended September 30, 2013.
Cash Flows Provided by Investing Activities
Net cash provided by investing activities totaled $4.5 million and $1.1 million for the nine months ended September 30, 2013 and 2012, respectively. The increase of $3.4 million primarily relates to the priority cash distributions and preferred dividend received from DPTS Marketing LLC, which were the first distributions received from the joint venture. The increase in cash received from the marketing joint venture was partially offset by a $0.5 million decrease in priority cash distributions received from the transloading joint venture. The Company also received a distribution from DPTS Marketing LLC in the amount of $10 million, which was immediately invested as a capital contribution to Dakota Petroleum Transport Solutions, LLC.
Cash Flows Used in Financing Activities
Cash flows used in financing activities for the nine months ended September 30, 2013 were $0.6 million compared to cash flows provided by financing activities totaling $0 for the nine months ended September 30, 2012. The $0.6 million were the cash outflows related to the Company’s issuance of net shares to the board of directors and an executive officer.
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Transloading Joint Venture Distributions
The transloading joint venture may distribute, and historically has distributed, a cash payment on a monthly basis using a calculation that considers the month’s ending cash balance less third party expenses, both current and due over the next 30 days. The ending amount is the priority cash available. Any joint venture member transaction payments due are then deducted from the priority cash available. The ending balance, which is the priority cash remaining is then multiplied by 50%, which is the required distribution amount. The distribution amount is then evenly distributed between Dakota Plains Transloading, LLC and PTS. Beginning in April 2012, the transloading joint venture temporarily suspended its regular distributions to conserve capital in order to fund the initial stages of the Pioneer Project. In June 2013 the transloading joint venture set a Pioneer Project Reserve of $10.7 million for the purpose of funding the Pioneer Project. In addition, $2.5 million would be retained at the end of each calendar month in order to pay third party expenses and/or member transaction payments. Any balance in excess of the $2.5 million would be equally paid to the joint venture members in the form of a monthly priority cash distribution. Monthly priority cash distributions restarted in the third quarter of 2013.
Marketing Joint Venture Distributions
The marketing joint venture determines if there will be a cash distribution on a quarterly basis. The distribution is based on the cash balance at quarter end, less the member preferred initial contribution of $20 million and the cash necessary to fund the trading activities incurred during the current quarter as well as the following quarter’s forecasted operating expenses and trading activities. The net balance will be the priority cash available. The marketing joint venture made its first cash distribution in April 2013. In August 2013, the marketing joint venture made a distribution to each of its members in the amount of $10 million, which was immediately invested as capital contributions to Dakota Petroleum Transport Solutions, LLC in order to increase the funds available for the Pioneer Project.
Trucking Joint Venture Distributions
The trucking joint venture determines a cash payment on a monthly basis using a calculation that considers the month’s ending cash balance less third party expenses, both current and due over the next 30 days and any reserve amounts which may be established by unanimous action of its board of governors. The ending amount is the priority cash available which is evenly distributed between Dakota Plains Trucking, LLC and JPND II, LLC after JPND II, LLC’s initial capital contribution has been reimbursed. The trucking joint venture initiated its operations in early September 2012 and has made a cash distribution related to tax, as of September 30, 2013.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
There have been no material changes to our interest rate or foreign currency risk since December 31, 2012. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2012 for a discussion of those risks.
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Item 4. | Controls and Procedures. |
Evaluation of Disclosure Controls and Procedures
As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting
There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
As described in Note 13 to the Financial Statements – Commitments and Contingencies – Lac-Mégantic, Quebec, various lawsuits have been filed against us and other third parties related to the Lac-Mégantic incident. In July and August 2013, certain of our subsidiaries, our joint ventures DPTSM and DPTS, along with a number of third parties, including Montreal, Maine and Atlantic Railway (“MMA”) and certain of its affiliates, as well as several manufacturers and lessors of tank cars, were named as defendants in twenty complaints filed in the Circuit Court of Cook County, Illinois. The complaints generally allege wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil and seek economic and compensatory damages, as well as costs. On August 29, 2013 and September 3, 2013, the actions were removed to the United States District Court for the Northern District of Illinois (the “IL District Court”). On September 18 and 19, 2013, orders were entered reassigning the actions (other than one action that was remanded to state court prior to reassignment and another that was voluntarily dismissed by the plaintiffs) before a single judge in the IL District Court. Plaintiffs subsequently filed a motion to have these actions remanded to state court, which motion is currently pending before the IL District Court. In addition, on September 11, 2013, a motion was filed in the United States District Court for the District of Maine (where MMA’s bankruptcy is pending) to transfer all of these actions to that court. This motion is currently pending. We believe these claims against certain of our subsidiaries, DPTSM and DPTS are without merit and intend to vigorously defend against such claims and pursue any and all defenses available.
In July and August 2013, we, DPTSM and DPTS, along with a number of other third parties, including Canadian Pacific Railway (“CPR”), MMA and certain of its affiliates, as well as several manufacturers and lessors of tank cars, were named as defendants in a motion filed in Quebec Superior Court to authorize the bringing of a class-action lawsuit seeking economic, compensatory and punitive damages, as well as costs. The motion generally alleges wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil. We believe these claims against us and our subsidiaries are without merit and intend to vigorously defend against such claims and pursue any and all defenses available.
As a result of the Lac-Mégantic derailment, the Canadian Transportation Safety Board and the Department of Justice Canada are conducting investigations into the cause of the derailment and the events surrounding it. In addition, the Quebec police are conducting a criminal investigation and are reported to be coordinating with Canadian and U.S. law enforcement authorities.
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Additional claims, lawsuits, proceedings, investigations and orders may be filed, commenced or issued with respect to the incident, which may involve civil claims for damages or governmental investigative, regulatory or enforcement actions against us.
Except as noted below, there have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2012.
We may be subject to claims, costs and liabilities as a result of events resulting from the transportation of crude oil by or on behalf of our subsidiaries.
Each of our joint ventures is involved in a portion of the transportation of crude oil from the wellhead to refineries. We and our subsidiaries may be subject to claims, costs and liabilities relating to events that may occur while the crude oil is en route to its destination. Such claims, costs and liabilities may result from actions of third parties outside our control and may include releases of crude oil and resulting environmental liabilities and damage to property, injury or loss of life resulting from exposure or ignition of crude oil in transit. For example, an affiliate of PTS purchases crude oil from various producers in the Bakken formation in North Dakota for the economic benefit of DPTS Marketing LLC. Strobel Starostka Transportation (“SST”) transloads crude oil into railcars under contract with DPTS, at our New Town, North Dakota facility. Prairie Field Services, an affiliate of JPND II, LLC, operates a truck fleet on behalf of Dakota Plains Services, LLC. In addition, we, our subsidiaries, and their affiliates contract from time to time with additional third parties in connection with the transportation of crude oil, including arrangements with third party rail carriers, road transportation providers, and railcar leasing companies.
On July 6, 2013, a freight train operated by Montreal, Maine and Atlantic Railway (“MMA”) with 72 tank cars carrying approximately 50,000 barrels of crude oil derailed in Lac-Mégantic, Quebec. The derailment resulted in significant loss of life, damage to the environment from spilled crude oil and extensive property damage. DPTSM, a crude oil marketing joint venture in which we indirectly own a 50% membership interest, subleased the tank cars involved in the incident from an affiliate of our joint venture partner. A different affiliate of our joint venture partner owned title to the crude oil being carried in the derailed tank cars. DPTS, a crude oil transloading joint venture in which we also indirectly own a 50% membership interest, arranged for the transloading of the crude oil for DPTSM into tank cars at DPTS’s facility in New Town, North Dakota. An affiliate of our joint venture partner also contracted with Canadian Pacific Railway (“CPR”) for the transportation of the tank cars and the crude oil from New Town, North Dakota to a customer in New Brunswick, Canada. CPR subcontracted a portion of that route to MMA.
We, certain of our subsidiaries, DPTSM and DPTS, along with a number of third parties, including CPR, MMA and certain of its affiliates, as well as several manufacturers and lessors of tank cars, were named as defendants in lawsuits and proceedings related to the incident. For a more detailed discussion of these proceedings, see “Legal Proceedings” under Part II - Item 1 of this Form 10-Q.
As a result of the Lac-Mégantic derailment, the Canadian Transportation Safety Board and the Department of Justice Canada are conducting investigations into the cause of the derailment and the events surrounding it. In addition, the Quebec police are conducting a criminal investigation and are reported to be coordinating with Canadian and U.S. law enforcement authorities.
Additional claims, lawsuits, proceedings, investigations and orders may be filed, commenced or issued with respect to the incident, which may involve civil claims for damages or governmental investigative, regulatory or enforcement actions against us. The adverse resolution of any proceedings related to these events could subject us and/or DPM or DPTS to monetary damages, fines and other costs, which could have a negative and material impact on our business, prospects, results of operations and financial condition.
While we and our joint ventures, DPTSM and DPTS, maintain insurance to mitigate the costs of environmental releases as well as other results of unexpected events, including loss of life, property damage and defense costs, there can be no guarantee that our insurance will be adequate to cover all liabilities that may be incurred as a result of this incident.
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We are also evaluating potential claims that we may assert against third parties to recover costs and other liabilities that may be incurred as a result of this incident. We can provide no guarantee that any such claims, if brought by us, will be successful or, if successful, that the responsible parties will have the financial resources to address any such claims. Any losses not covered by insurance or otherwise not recoverable from third parties, if significant, could have a material adverse effect on our business, financial condition, results of operations or cash flows.
The train derailment in Lac-Mégantic may result in increased governmental regulation of shipments of crude oil and other fuel products, which may lead to additional costs.
We rely in part on rail shipments to move crude oil and other fuel products in both the United States and Canada. The accident in Lac-Mégantic and its aftermath could lead to additional governmental regulation of rail shipments of crude oil and other fuel products in Canada and the United States and to increased safety standards for the tanker-cars that transport these products. We cannot predict with any certainty what form any additional regulation or limitations would take. Any increased regulation that arises out of this incident could result in higher operating costs, which could adversely affect our operating results.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
None.
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Item 3. | Defaults Upon Senior Securities. |
None.
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Item 4. | Mine Safety Disclosures. |
Not applicable.
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Item 5. | Other Information. |
None.
Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 000-53390.
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| 3.1 | Amended and Restated Articles of Incorporation, as amended through March 23, 2012(1) |
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| 3.2 | Amended and Restated Bylaws, as amended through April 25, 2013(2) |
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| 31.1 | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) |
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| 31.2 | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) |
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| 32 | Section 1350 Certifications |
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| 101.INS | XBRL Instance Document |
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| 101.SCH | XBRL Taxonomy Extension Schema |
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| 101.CAL | XBRL Extension Calculation Linkbase |
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| 101.DEF | XBRL Taxonomy Extension Definition Linkbase |
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| 101.LAB | XBRL Taxonomy Extension Label Linkbase |
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| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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(1) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 23, 2012. |
(2) | Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed April 30, 2013. |
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: | November 12, 2013 | | | DAKOTA PLAINS HOLDINGS, INC. |
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| | | /s/ Timothy R. Brady |
| | | Timothy R. Brady |
| | | Chief Financial Officer and Treasurer |
EXHIBIT INDEX
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Exhibit No. | | Description | | Manner of Filing |
3.1 | | Amended and Restated Articles of Incorporation, as amended through March 23, 2012 | | Incorporated by Reference |
3.2 | | Amended and Restated Bylaws, as amended through April 25, 2013 | | Incorporated by Reference |
31.1 | | Certification of Chief Executive Officer pursuant to Rule 13a-14(a) | | Filed Electronically |
31.2 | | Certification of Chief Financial Officer pursuant to Rule 13a-14(a) | | Filed Electronically |
32 | | Section 1350 Certifications | | Filed Electronically |
101.INS | | XBRL Instance Document | | Filed Electronically |
101.SCH | | XBRL Taxonomy Extension Schema | | Filed Electronically |
101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | Filed Electronically |
101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | Filed Electronically |
101.LAB | | XBRL Taxonomy Extension Label Linkbase | | Filed Electronically |
101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | Filed Electronically |
