The tax effects from an uncertain tax position can be recognized in the consolidated financial statements only if the position is more likely than not of being sustained if the position were to be challenged by a taxing authority. The Company has examined the tax positions taken in its tax returns and determined that there are no uncertain tax positions. As a result, the Company has recorded no uncertain tax liabilities in its condensed consolidated balance sheet.
The Company records expenses associated with the fair value of stock-based compensation. For fully vested and restricted stock grants, the Company calculates the stock-based compensation expense based upon estimated fair value on the date of grant. For stock warrants and options, 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 price volatility. Changes in these assumptions can materially affect the fair value estimate.
DPTS and DPTS Sand, LLC recognize revenues when the related services are performed, the sales price is fixed or determinable and collectability is reasonably assured. DPTS records the gross sale of fuel-related services when the transloading of petroleum-related products is complete. DPTS Sand, LLC records the gross sale of sand-related services when the transloading of sand-related products is complete.
The Company records the stock-based compensation awards issued to non-employees and other external entities for goods and services at either the fair market value of the goods received or services rendered or the instruments issued in exchange for such services, whichever is more readily determinable, using the measurement date guidelines enumerated in FASB ASC 505-50-30.
Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to Company stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if common stock equivalents were exercised or converted to common stock. The dilutive effect of common stock equivalents is calculated using the treasury stock method. When a loss from continuing operations exists, all potentially dilutive securities are anti-dilutive and therefore excluded from the computation of diluted EPS. As the Company had a loss for the three months ended September 30, 2013 and for the nine months ended September 30, 2014 and 2013, the potentially dilutive shares are anti-dilutive and thus not added into the EPS calculation.
The reconciliation of the denominators used to calculate basic EPS and diluted EPS for the three and nine months ended September 30, 2014 and 2013 are as follows:
The following stock warrants and restricted stock represent potentially dilutive shares as of September 30, 2014:
| | | | |
| | September 30, 2014 | |
Restricted Stock | | | 1,016,150 | |
Stock Warrants | | | 2,771,000 | |
Total Potentially Dilutive Shares | | | 3,787,150 | |
Fair Value Measures
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:
| |
| Level 1 – Quoted market prices in active markets that are accessible at measurement date for identical assets or liabilities; |
| |
| Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; |
| |
| Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities and less observable from objective sources |
Use of Estimates
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.
Non-Controlling Interest
ASC 810 “Consolidation” requires that a non-controlling interest be reported as part of equity in the consolidated financial statements and that losses be allocated to the non-controlling interest even when such allocation might result in a deficit balance, reducing the losses attributable to the controlling interest. The Company’s non-controlling interest at September 30, 2014 and December 31, 2013 is due to the non-controlling member of DPTS and DPTS Sand, LLC.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Dakota Plains Holdings, Inc. and its wholly owned subsidiaries. The accompanying condensed consolidated balance sheets as of September 30, 2014 and December 31, 2013 and the condensed consolidated statements of operations for the three and nine months ended September 30, 2014 also include the accounts of DPTS and DPTS Sand, LLC. All significant intercompany accounts and transactions have been eliminated. Effective at the end of business on December 31, 2013, DPT was appointed the Facility Management Member of DPTS, which resulted in the consolidation of the accounts of DPTS with and into the consolidated financial statements of the Company as of December 31, 2013. The operations of DPTS Sand, LLC commenced in June 2014.
8
3. Joint Ventures
Dakota Petroleum Transport Solutions, LLC
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 DPTS. 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 DPTS 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, 2014.
As part of the joint venture agreement, the Company owns the Transloading Facility and certain equipment acquired and leases the property to DPTS.
The operations of the Transloading Facility commenced in November 2009. Under provisions of the member control agreement the profits and losses of DPTS 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.
On June 1, 2012, DPT entered into an amended and restated member control agreement with DPTS and PTS. The amended and restated member control agreement, among other things, incorporated all previous amendments 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. On December 31, 2013, the parties entered into the Second Amended and Restated Member Control Agreement (“Revised MCA”) that, among other things, named DPT as the Facility Management Member.
As a result of the Revised MCA, the Company accounted for the joint venture using the equity method of accounting through the end of business on December 31, 2013, at which time it was consolidated. Accordingly, the Company’s share of income from the joint venture is included in other income on the condensed consolidated statement of operations for the three and nine months ended September 30, 2013. At September 30, 2014 and December 31, 2013, the Company reflected the assets and liabilities of DPTS at carryover basis.
On August 30, 2013, the Board of Governors of DPTSM authorized a distribution to each of its members simultaneously in the amount of $10 million, which was used by its members to fund capital contributions to DPTS in order to fund a portion of the Pioneer Terminal.
Supplemental Agreement
In September 2010, the Company entered into a Supplemental Agreement to the DPTS 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 in the accompanying condensed consolidated balance sheets.
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 $1,972 and $9,719 for the three and nine months ended September 30, 2013, respectively. No cash was received related to this rental income; the rental income recorded was treated as an increase in the Company’s investment in the joint venture.
9
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 DPTS until it 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, 2014, the Company had been fully reimbursed for the additional expenditures related to the Supplemental Agreement.
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.
Rental income related to the Supplemental Agreement was $2,542 and $8,156 for the three and nine months ended September 30, 2013, respectively. There were no future lease payments receivable related to this agreement as of September 30, 2014 and December 31, 2013.
The Revised MCA, among other things, named DPT as the Facility Management Member. This assumption of control of the day-to-day operations resulted in a change in the Company’s method of accounting for the joint venture. Effective December 31, 2013, the Company consolidated the accounts of DPTS into its consolidated balance sheet. Beginning January 1, 2014, the Company began including the operations of DPTS in its consolidated statements of operations. The operations of DPTS for the periods prior to January 1, 2014 are included in the pro forma financial statements below.
Pro Forma Information
The assumption of the control of day-to-day management of the operations was effective at the end of business December 31, 2013. Therefore, the operating results of DPTS have not been included in the Company’s condensed consolidated statements of operations for the three and nine months ended September 30, 2013. The following unaudited pro forma results of operations assume that the change in control of day-to-day management of the operations had been effective for the aforementioned periods. Such results are not necessarily indicative of the actual results of operations that would have been realized nor are they necessarily indicative of future results of operations.
These pro forma amounts have been calculated after adjusting for intercompany amounts. In addition, the equity earnings from the Company’s former non-controlling interest in DPTS have been removed.
| | | | | | | |
| | Three Months
Ended
September 30,
2013 | | Nine Months
Ended
September 30,
2013 | |
Revenues | | $ | 3,356,845 | | $ | 12,906,617 | |
Net Income (Loss) | | | (1,490,386 | ) | | 1,088,860 | |
Net Income Attributable to Non-Controlling Interest | | | 567,377 | | | 3,151,528 | |
Net Loss Attributable to Shareholders of Dakota Plains Holdings, Inc. | | | (2,057,763 | ) | | (2,062,668 | ) |
DPTS Marketing LLC
The Company, through DPM, entered into a joint venture with PTS. The Company and PTS each own 50% of the outstanding member units of DPTSM. 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 DPTSM 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, 2014.
Each of the members of DPTSM was also required to make an initial Member Preferred Contribution of $10 million 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 cash availability. At September 30, 2014 and December 31, 2013, the Company reported a preferred dividend receivable of $626,027 and $252,057, respectively, on its condensed consolidated balance sheets. In September 2013, the Company received a payment of $1.1 million related to the cumulative preferred return. This payment was for the cumulative preferred return from the date of the initial $10 million contribution through June 30, 2013. No additional payments related to the preferred return have been received since September 2013.
The operations of DPTSM commenced in May 2011. Under the member control agreement, the profits and losses of DPTSM are split 50/50, pro rata based on the number of member units outstanding. The cash payments from the joint venture are also paid pro rata based on the number of member units outstanding. The Company did not receive any priority cash distribution payments from DPTSM for the nine months ended September 30, 2014. The Company received its first priority cash distribution payments in April and June 2013.
On June 1, 2012, DPM entered into an amended and restated member control agreement with DPTSM 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. On December 31, 2013, the parties entered into the Second Amended and Restated Member Control Agreement that, among other things, increased the operating and accounting fees paid to the member who performs and is solely responsible for purchasing, selling, storing, transporting, marketing and transacting trades in North Dakota crude oil, and entering into related agreements and conducting related activities on behalf of DPTSM (“Trading Member”) and amended the limitations on its trading activities.
The Company accounts for this joint venture using the equity method of accounting. The Company’s share of 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 DPTSM on its condensed consolidated balance sheet.
The unaudited financial statements of DPTSM are summarized as follows:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2014 | | 2013 | | 2014 | | 2013 | |
Sales | | $ | 15,273,607 | | $ | 9,115,703 | | $ | 41,637,411 | | $ | 44,234,110 | |
Net Earnings (Losses) | | | 578,463 | | | (2,201,127 | ) | | (2,587,964 | ) | | 3,144,653 | |
Company’s Share of Equity in Net Earnings (Losses) | | | 289,232 | | | (1,100,564 | ) | | (1,293,982 | ) | | 1,572,326 | |
| | | | | | | |
| | September 30,
2014 | | December 31,
2013 | |
Total Assets | | $ | 31,054,796 | | $ | 33,523,175 | |
Total Liabilities | | | 11,473,028 | | | 10,605,497 | |
Share of Equity in Net Assets | | | 9,790,884 | | | 11,458,836 | |
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 DPS. 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 DPS. 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, 2014.
The member control agreement of DPS 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 no distributions for the nine months ended September 30, 2014. The Company received a tax distribution in June 2013.
The operations of DPS commenced in September 2012. Under provisions of the member control agreement the profits and losses of DPS 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 DPS on its condensed consolidated balance sheet. As required by GAAP, the Company recognized its pro rata share of the net income from DPS for the nine months ended September 30, 2013 less the unrecognized losses from the period ended December 31, 2012. The Company did not recognize the loss from DPS for the year ended December 31, 2012 or decrease its investment in DPS 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 DPS.
The unaudited financial statements of DPS are summarized as follows:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2014 | | 2013 | | 2014 | | 2013 | |
Sales | | $ | 4,780,797 | | $ | 3,805,769 | | $ | 14,569,046 | | $ | 10,902,636 | |
Net Earnings | | | 329,475 | | | 28,630 | | | 1,178,835 | | | 617,639 | |
Company’s Share of Equity in Net Earnings | | | 164,738 | | | 14,315 | | | 589,418 | | | 212,744 | |
| | | | | | | | | | | | | |
| | | | | | | | September 30,
2014 | | December 31,
2013 | |
Total Assets | | | | | | | | $ | 8,758,351 | | $ | 9,945,720 | |
Total Liabilities | | | | | | | | | 6,760,292 | | | 9,126,495 | |
Share of Equity in Net Assets | | | | | | | | | 659,817 | | | 70,399 | |
DPTS Sand, LLC
The Company, through its wholly owned subsidiary, Dakota Plains Sand, LLC, entered into a joint venture with PTS. The Company and PTS each own 50% of the outstanding member units of DPTS Sand, LLC. The joint venture was formed to engage in the operation of a sand transloading facility near New Town, North Dakota and any other lawful activities as the board of governors may determine from time to time.
12
Each of the members of DPTS Sand, LLC was required to make an initial capital contribution of $1,000. 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, 2014.
The operations of DPTS Sand, LLC commenced in June 2014. Under the member control agreement, the profits and losses of DPTS Sand, 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 initial term of the joint venture is until December 31, 2026, and the term will automatically extend in one-year renewal periods unless and until terminated.
As part of the member control agreement, the Company is the Facility Management Member of DPTS Sand, LLC. As the Facility Management Member, the Company is responsible for the day-to-day operations of DPTS Sand, LLC. Accordingly, the Company has consolidated the accounts of DPTS Sand, LLC with and into its consolidated financial statements since the inception of DPTS Sand, LLC.
4. Lease Agreement – Related Party
In November 2009, our predecessor entered into an operating lease agreement with DPTS (See Note 3).
Prior to January 1, 2014, in accordance with the equity method requirements described in Note 3, 50% of the rent payments received were recognized as rental income and 50% were included in income from investment in DPTS. Accordingly, 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 DPTS and 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 DPTS.
5. Lease Agreement
In July 2013, the Company entered into an operating lease agreement with UNIMIN Corporation to lease certain land owned by the Company in New Town, North Dakota. The Company began receiving monthly lease payments of $10,000 in January 2014 and will continue to do so through December 2023, with annual increases of 3% starting January 2016. The lease agreement includes a provision that allows UNIMIN Corporation 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 issued as of September 30, 2014 and December 31, 2013.
In January 2014, the Company issued 236,739 shares of common stock to its executives and an employee pursuant to its 2011 Equity Incentive Plan. These shares were valued at $532,663, or $2.25 per share, the market value of the shares of common stock on the date of issuance, and have been expensed as general and administrative expenses.
In March 2014, the Company issued 50,498 shares of common stock to an executive and an employee pursuant to its 2011 Equity Incentive Plan. These shares were valued at $109,581, or $2.17 per share, the market value of the shares of common stock on the date of issuance, and have been expensed as general and administrative expenses.
In June 2014, the Company issued an aggregate of 130,436 shares of common stock to its non-employee directors pursuant to its 2011 Equity Incentive Plan for prior and future service to the Company. These shares were valued at $300,000 or $2.30 per share, the market value of the shares of common stock on the date of issuance. The Company recorded general and administrative expenses of $75,000 and $225,000 for the three and nine months ended September 30, 2014, respectively, related to this stock issuance.
13
During the nine months ended September 30, 2014, 297,749 shares of common stock were surrendered by certain executives and employees of the Company to cover tax obligations in connection with their fully vested and restricted stock awards. The total value of these shares was $645,679, which was based on the market price on the date the shares were surrendered.
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 granted to employees and directors, the Company uses the simplified method to determine the expected term of the warrants 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 are recognized as compensation or interest expense over the vesting term.
Warrants
The table below reflects the status of warrants outstanding at September 30, 2014:
| | | | | | | | | | |
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 months ended September 30, 2014. |
| | |
| • | The Company recorded general and administrative expense of $15,697 and $217,868 for the three and nine months ended September 30, 2013, respectively, related to these warrants. The Company recorded no general and administrative expense for the three and nine months ended September 30, 2014, related to these warrants. There is no further general and administrative expense that will be recognized in future periods related to any warrants that have been granted as of September 30, 2014, as the Company recognized the entire fair value upon vesting. |
| | |
| • | There are 2,771,000 warrants that are exercisable at September 30, 2014. |
| | |
| • | No warrants were exercised during the nine months ended September 30, 2014. |
Stock Options
Effective January 16, 2014, certain executives and outside directors of the Company agreed to surrender the 415,625 stock options granted to them in prior periods. There are no options outstanding at September 30, 2014.
14
Restricted Stock Awards
During the nine months ended September 30, 2014, the Company issued 574,483 restricted shares of common stock as compensation to officers and employees of the Company. The restricted shares vest over various terms with all restricted shares vesting no later than March 2017. As of September 30, 2014, there was $2.2 million of total unrecognized compensation expense related to unvested restricted stock. This compensation expense will be recognized over the weighted average period of 1.8 years. The Company has assumed a zero percent forfeiture rate for restricted stock. The Company recorded general and administrative expense of $325,363 and $1,037,414 for the three and nine months ended September 30, 2014, respectively, and $465,076 and $1,094,919 for the three and nine months ended September 30, 2013, respectively, related to issuances of restricted shares.
The following table reflects the outstanding restricted stock awards and activity related thereto for the nine months ended September 30, 2014:
| | | | | | | |
| | Nine Months Ended
September 30, 2014 | |
| | Number of
Shares | | Weighted-Average
Grant Price | |
Restricted Stock Awards: | | | | | | | |
Restricted Shares Outstanding at the Beginning of Period | | | 769,063 | | $ | 3.82 | |
Shares Granted | | | 574,483 | | $ | 2.24 | |
Lapse of Restrictions | | | (327,396 | ) | $ | 3.88 | |
Restricted Shares Outstanding at September 30, 2014 | | | 1,016,150 | | $ | 2.91 | |
8. Promissory Notes
| | | | |
Principal Amount | | $ | 7,717,317 | |
Unamortized Debt Discount at September 30, 2014 | | | (378,764 | ) |
Promissory Notes, Net of Debt Discount | | $ | 7,338,553 | |
As of September 30, 2014, the Company has the following outstanding promissory notes:
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 and mature on October 31, 2015.
The Company incurred finance costs of $195,062 related to these promissory notes, which is being amortized over the term of the notes and is included in interest expense on the condensed consolidated statement of operations. The amortization recorded for each of the three and nine months ended September 30, 2014 and 2013 was $16,255 and $48,765, respectively.
Pioneer Terminal
In June 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 expired on September 30, 2014, and the 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 DPTS.
15
During the availability period, a loan under the Facility bore interest at a rate per annum equal to nine percent (9%). 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. There was $7.0 million and $7.5 million outstanding under the Facility at September 30, 2014 and December 31, 2013, respectively.
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 was amortized through June 2014 and was included in interest expense on the condensed consolidated statement of operations. The amortization recorded for the three and nine months ended September 30, 2014 was $0 and $4,076, respectively, and $2,446 and $3,261 for the three and nine months ended September 30, 2013, respectively.
9. Income Taxes
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 provision (benefit) for the three and nine months ended September 30, 2014 and 2013 consists of the following:
| | | | | | | | | | | | | |
| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2014 | | 2013 | | 2014 | | 2013 | |
Current Income Taxes | | $ | 3,737 | | $ | (391,000 | ) | $ | 11,852 | | $ | (1,042,000 | ) |
| | | | | | | | | | | | | |
Deferred Income Taxes | | | | | | | | | | | | | |
Federal | | | 14,000 | | | (793,000 | ) | | (1,048,000 | ) | | (207,000 | ) |
State | | | 2,000 | | | (82,000 | ) | | (106,000 | ) | | (33,000 | ) |
| | | | | | | | | | | | | |
Total Provision (Benefit) | | $ | 19,737 | | $ | (1,266,000 | ) | $ | (1,142,148 | ) | $ | (1,282,000 | ) |
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 provision (benefit). For the nine months ended September 30, 2014 and 2013, 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, 2014 and December 31, 2013, relating to unrecognized benefits.
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The Company reported a net deferred tax asset of $5,035,000 on its condensed consolidated balance sheet as of September 30, 2014. GAAP requires the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. The Company has determined that no valuation allowance is necessary related to the deferred tax assets at September 30, 2014. The net operating loss carry forward of $19.3 million that was generated in the year ended December 31, 2013 was caused by the tax expense related to the satisfaction of promissory notes with the issuance of the Company’s common stock and the Company’s pro rata share of the bonus depreciation that DPTS recorded related to the Pioneer Terminal for income tax purposes. The Company had taxable income in the year ended December 31, 2012 and anticipates taxable income for the year ending December 31, 2014.
The 2013, 2012, 2011 and 2010 tax years remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.
10. Financial Instruments
The Company’s financial instruments include cash and cash equivalents, trade receivables, other receivables, accounts payable, and promissory notes. The carrying amount of cash and cash equivalents, trade receivables, other receivables and accounts payable approximate fair value because of their immediate or short-term maturities. The carrying amounts of the Company’s promissory notes outstanding approximate fair value because its current borrowing rates do not materially differ from market rates for similar borrowings.
11. Fair Value
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 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, 2014 and December 31, 2013, 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).
12. Commitments and Contingencies
Lac-Mégantic, Quebec
As previously disclosed, various lawsuits have been filed against us, certain of our subsidiaries, DPTS, and DPTSM related to a July 2013 train derailment in Lac-Mégantic, Quebec. For additional information regarding the legal proceedings related to the train derailment, see our Annual Report on Form 10-K for the year ended December 31, 2013 and Part II – Item 1 of this Quarterly Report on Form 10-Q for the three months ended September 30, 2014.
We are currently unable to determine the probability of loss or reasonably estimate a range of potential losses related to the proceedings arising from the train derailment. Accordingly, we have not made any provision for these potential losses in our consolidated financial statements.
Dakota Petroleum Transport Solutions, LLC
Since October 2012, DPTS has been involved in litigation with TJMD, LLP, a North Dakota limited liability partnership (“TJMD”) arising out of the termination of TJMD as operator of the transloading facility, in which DPTS leases the facility for the use and benefit of their business. TJMD alleges that a wrongful termination without cause on 90 days written notice occurred in June 2012 under the implied covenant of good faith and fair dealing, and a second wrongful termination occurred in September 2012, when DPTS finally terminated the contract before the end of the 90 day period. TJMD is seeking payment for work performed prior to the final September termination, as well as, monetary damages for future losses and other relief. Because the outcome of litigation is inherently uncertain, DPTS cannot estimate the possible loss or range of loss for this matter. DPTS intends to vigorously defend against this claim. As of September 30, 2014 and December 31, 2013, DPTS has not recorded any accruals associated with this legal claim.
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At September 30, 2014, $13,720 of the other receivables balance was attributed to the net asset relating to the amount of cost that DPTS expects to recover from the third parties responsible for causing the incidents on its property in excess of the estimated amount of cost that it reasonably expects to pay for cleanup measures.
13. Subsequent Events
In November 2014, the Company entered into a purchase agreement to sell its membership units in DPS to its joint venture partner, JPND II, LLC. The total proceeds to be received in exchange for the membership units is $1.15 million, and the Company anticipates closing on the purchase agreement in November 2014.
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Item 2. | Management 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 Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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 we believe 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 our 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 our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake 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 us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.
Overview
We are an integrated midstream energy company, principally focused on developing and owning transloading facilities, and marketing and transporting crude oil and related products within the Williston Basin. We compete through our joint ventures by providing customers with value-added benefits, including a full-service transloading facility, competitive pricing and optimal geographical location that is centrally located in Mountrail County, North Dakota, which continues to experience the most drilling activity in the Williston Basin. Currently, we participate in a crude oil transloading joint venture, a sand 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 we hold a 50% membership interest.
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We are party to an operating lease agreement with Dakota Petroleum Transport Solutions, LLC (“DPTS” or the “transloading joint venture”) in which our 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. The initial term of the member control agreement is through December 31, 2026 and automatically extends in two-year intervals unless and until terminated. Under a lease, we receive monthly lease payments from the transloading joint venture. The lease agreement includes provisions that allow us to collect additional rents if we incur 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 our facility. Currently, semi-trailer trucks owned and operated by our trucking joint venture and third parties, deliver crude oil to our facility by releasing it into ten Leased Access Custody Transfer stations where it is piped into our storage tanks. Crude oil is also transferred into the storage tanks via gathering pipelines. The crude oil is then piped from one of our two storage tanks to our high speed loading facility that can accommodate ten railcars simultaneously where it is transloaded into those railcars. Using the aforementioned methods, our site has the capacity to transload approximately 50,000 barrels per day.
DPTS Marketing LLC (“DPTSM”) purchases barrels of crude oil from well operators at the wellhead and from first purchasers delivering to the Pioneer Terminal. DPTSM 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 DPTSM (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 DPTSM sends both trucks from our trucking joint venture and third parties to pick up the crude oil from certain wellhead locations specified by the producer, or receives the crude oil 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 the Pioneer Terminal unless otherwise specified in the contracts. |
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| 4. | The crude oil is transported by truck to the Pioneer Terminal where it is transferred from the truck to one of two storage tanks via the transfer station. Crude oil is also transferred into the storage tanks via gathering pipelines. |
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| 5. | Crude oil is transferred from one of the two storage tanks via pipeline to the Pioneer Terminal’s high speed loading facility, which can simultaneously load ten rail cars. A 120 unit tank car can be loaded with crude oil within a 24 hour period. |
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| 6. | Canadian Pacific Railway takes custody of the tank cars and crude oil at the Pioneer Terminal 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 the final destination. |
In June 2012, our wholly owned subsidiary, Dakota Plains Marketing, LLC (“DPM”), entered into an amended and restated member control agreement with PTS and DPTSM. The initial term of the member control agreement is through December 31, 2026 and automatically extends in two-year intervals unless and until terminated.
In September 2012, our wholly owned subsidiary, Dakota Plains Trucking, LLC (“DP Trucking”), formed a joint venture with JPND II, LLC. DP Trucking and JPND II, LLC each own 50% of the outstanding member units of Dakota Plains Services, LLC (“DPS” or 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 is until December 31, 2022. The term will automatically extend in two-year renewal periods unless and until terminated. Subsequent to the end of the third quarter, we signed a purchase agreement with JPND II, LLC to sell our membership interests in DPS to them for $1.15 million. The transaction, subject to customary closing conditions, is expected to close in November 2014.
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In June 2014, our wholly owned subsidiary, Dakota Plains Sand, LLC, entered into a joint venture with PTS. The Company and PTS each own 50% of the outstanding member units of DPTS Sand, LLC. The joint venture was formed to engage in the operation of a sand transloading facility near New Town, North Dakota and any other lawful activities as the board of governors may determine from time to time. The operations of DPTS Sand, LLC commenced in June 2014. The initial term of the joint venture is until December 31, 2026, and the term will automatically extend in one-year renewal periods unless and until terminated.
The Pioneer Terminal represents 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 Terminal provides two 8,300 foot loop tracks that can accommodate two 120 rail car unit trains and increases the throughput capacity from 30,000 barrels per day to up to 50,000 barrels per day, 180,000 barrels of crude oil on-site storage, a high-speed loading facility that accommodates 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 crude oil in late October 2013 to one of its 90,000 barrel storage tanks.
The Pioneer Terminal was commissioned in December 2013 and began loading cars and sending trains in January 2014. The Pioneer Terminal logged over 120,000 work hours without a lost time incident, and was completed on time and under budget. The total cost of the project was approximately $50 million and was funded equally by us and World Fuel Services Corporation. Our 50% share of the cost was funded with approximately $16.5 million cash on hand, $7.5 million credit facility draw-down, and the remaining $1.0 million balance will be paid for utilizing cash from the transloading joint venture. In January 2014 we began transloading third party crude oil. In February 2014 we began transloading crude oil for one of the large Exploration and Production (“E&P”) producers with a six month contract that reflected a set fee and minimum volume. The contract was not renewed after the six month period but was replaced with a new contract in August with the intermediary that was purchasing the E&P producer’s crude oil. The new contract reflects a set fee and minimum volume commitment. In April 2014, we began transloading for a marketer with a contract that reflects a set fee and minimum volume commitment.
In August 2014, we announced the execution of an interconnection agreement with Hiland Crude, LLC, a wholly owned subsidiary of Hiland Partners, LP (“Hiland”), that would link the Pioneer Terminal with Hiland’s Market Center Gathering System crude oil pipeline network (the “gathering system”). Construction for the final link was completed on November 4, 2014 and was commissioned on November 5, 2014. Hiland’s gathering system is the largest in the Bakken, traversing through the heart of the field in Divide, Dunn, Mountrail, McKenzie and Williams counties in North Dakota, as well as Richland and Roosevelt counties in Montana. Hiland’s gathering system has multiple connection points into pipeline outlets and crude by rail terminals, with the Pioneer Terminal being the only Canadian Pacific Railway origin. The connection to the Pioneer Terminal is expected to have an initial capacity of greater than 15,000 barrels a day and can be easily expanded to supply up to approximately 60,000 barrels of crude oil per day.
In September 2014, we announced the expansion of our crude oil on-site storage at the Pioneer Terminal, and the construction of a third 90,000 barrel storage tank began almost immediately. Regulatory permits and engineering designs were completed, and we expect the storage tank to be operational by the summer of 2015. The addition of a third storage tank, the connection to Hiland’s gathering system, and the anticipated expanded rail service will facilitate increasing the sustainable throughput rate to a unit train per day, which is equivalent to 80,000 barrels of crude oil per day.
The existing four ladder tracks will be utilized for inbound delivery, storage and trucking logistics services for commodities such as sand, aggregate, chemicals, diesel, and pipe.
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We continue to develop our inbound oilfield products business at the Pioneer Terminal. Construction was recently completed for the $15.0 million fracturing sand terminal (“Sand Terminal”). The Sand Terminal has a throughput capacity of approximately 750,000 tons per year, and is composed of 8,000 tons of fixed sand storage, an enclosed transloading facility, twin high-speed truck load outs, and four ladder tracks. The Sand Terminal supplies 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 are being transported on Canadian Pacific’s rail network. Under terms of the agreements between the parties, UNIMIN provides a direct marketing service to oilfield service companies and funded the construction of the four new ladder tracks, sand storage and transloading facility. We provided a land lease to UNIMIN for up to 30 years and receive monthly lease payments of $10,000 through December 2023, with an annual increase of 3.0% starting January 2016.
Current Business Drivers
As reported by the U.S. Geological Survey (“USGS”), the North Dakota Industrial Commission currently predicts that the Bakken’s production will increase for many years. A common date per the USGS website for a production plateau is between the years of 2022 to 2024. The USGS estimated parts of North Dakota may contain as much as 7.4 billion barrels of crude oil. As of November 2014, North Dakota ranks second behind Texas in terms of production of natural resources in the United States.
The price at which crude oil trades in the open market has 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 our 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 and lack of flexibility and geographic reach to serve many potential markets 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. Beyond providing transportation capacity, railroads offer energy market participants the ability to shift deliveries quickly to different markets, enabling producers to sell their product to the market offering the best price. In the Williston Basin, 60% of crude oil production was being shipped via rail as of August 2014 compared to 61% via rail in August 2013, according to data from the October 15, 2014 North Dakota Pipeline Authority Monthly Update.
Results of Operations
Three Months Ended September 30, 2014 vs. Three Months Ended September 30, 2013
Dakota Plains Holdings, Inc.
We experienced net income attributable to shareholders of Dakota Plains Holdings, Inc. of $13,400 for the three months ended September 30, 2014 compared to a net loss of $2.1 million for the three months ended September 30, 2013. For the three months ended September 30, 2014, net income was driven by an increase in income from our indirect ownership interest in the transloading and marketing joint ventures, decrease in general and administrative expenses and a decrease in interest expense as a result of the December 2013 debt restructuring and pay down. The net loss for the three months ended September 30, 2013 was driven by the loss from our indirect ownership interest in the marketing joint venture, primarily due to a lower per barrel margin resulting from a significant narrowing of the price spread between Brent and WTI and the legal and insurance expenses associated with the Lac-Mégantic train incident.
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General and administrative expenses were $2.3 million for the three months ended September 30, 2014 compared to $1.9 million for the three months ended September 30, 2013. The general and administrative expenses for the three months ended September 30, 2014 consisted of $1.6 million related to Dakota Plains Holdings, Inc. and $0.7 million related to the transloading joint venture. The $1.9 million of general and administrative expenses for the three months ended September 30, 2013 related to Dakota Plains Holdings, Inc. The decrease in general and administrative expenses for Dakota Plains Holdings, Inc. was primarily driven by a decrease in legal fees as a result of resolving the Canadian portion of the Lac Mégantic litigation and a reduction in non-cash related expenses (share based compensation).
Transloading Joint Venture
The results of the transloading joint venture are included in the consolidated statement of operations for the three months ended September 30, 2014 but are reflected as income from investment in Dakota Petroleum Transport Solutions, LLC in other income on the statement of operations for the three months ended September 30, 2013.
Net income for the three months ended September 30, 2014 was $2.8 million compared to $1.1 million for the three months ended September 30, 2013. The increase in net income was driven by a combination of an 89% increase in revenue and a 2% reduction in cost of revenue. Total revenue for the three months ended September 30, 2014 was $6.3 million compared to $3.4 million for the three months ended September 30, 2013. The increase was driven by volume, as the third quarter 2014 volume was 3.4 million barrels of crude oil transloaded (36,500 barrels per day) compared to 1.7 million barrels of crude oil transloaded (18,000 barrels per day) during the three months ended September 30, 2013; a 103% increase. The transloading joint venture began transloading third party barrels of crude oil in February 2014. Total cost of revenue was $1.8 million for the three months ended September 30, 2014 and 2013.
Sand Joint Venture
Net income for the three months ended September 30, 2014 was $0.3 million. The sand joint venture commenced operations in June 2014.
Marketing Joint Venture
Income from our indirect investment in the marketing joint venture was $0.3 million for the three months ended September 30, 2014 compared to a loss of $1.1 million for the three months ended September 30, 2013. The marketing joint venture sold 1.9 million barrels of crude oil (20,600 barrels per day) during the three months ended September 30, 2014 and 2013. The marketing joint venture continued to experience competitive margin pressure in July 2014, which resulted in a net loss per barrel to each member of $(0.53). However, due to the amount of domestic sweet crude available to US refiners as a result of increased production and the railroad’s under-performance, the marketing joint venture experienced net income per barrel to each member of $0.50 in August 2014 and $0.68 in September 2014 resulting in an average net income per barrel to each member of $0.15 for the three months ended September 30, 2014 compared to a net loss per barrel to each member of $(0.59) for the three months ended September 30, 2013.
Trucking Joint Venture
Income from our indirect investment in the trucking joint venture was $165,000 for the three months ended September 30, 2014 compared to $14,000 for the three months ended September 30, 2013. The trucking joint venture hauled 1.7 million barrels of crude oil during the third quarter of 2014 (18,100 barrels per day) compared to 1.5 million barrels of crude oil hauled during the third quarter of 2013 (16,200 barrels per day); a 12% increase.
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Nine months Ended September 30, 2014 vs. Nine months Ended September 30, 2013
Dakota Plains Holdings, Inc.
We experienced a net loss attributable to shareholders of Dakota Plains Holdings, Inc. of $2.4 million for the nine months ended September 30, 2014 compared to a net loss of $2.1 million for the nine months ended September 30, 2013. The net loss for the nine months ended September 30, 2014 was driven primarily by the loss from our indirect ownership interest in the marketing joint venture experienced during the second quarter and an increase in legal and professional fees. The loss was partially offset by an increase in income from our indirect ownership in the transloading joint venture due to increased volume and a reduction in cost of revenue. The net loss for the nine months ended September 30, 2013 was primarily driven by interest expense of $2.8 million.
General and administrative expenses were $7.8 million for the nine months ended September 30, 2014 compared to $5.9 million for the nine months ended September 30, 2013. The general and administrative expenses for the nine months ended September 30, 2014 consisted of $6.0 million related to Dakota Plains Holdings, Inc. and $1.8 million related to the transloading joint venture. General and administrative expenses related to Dakota Plains Holdings, Inc. were flat year over year as the entire general and administrative balance for the nine months ended September 30, 2013 related to Dakota Plains Holdings, Inc.
Transloading Joint Venture
The results of the transloading joint venture were included in the consolidated statement of operations for the nine months ended September 30, 2014 but reflected as income from investment in Dakota Petroleum Transport Solutions, LLC in other income on the statement of operations for the nine months ended September 30, 2013.
Net income for the nine months ended September 30, 2014 was $8.5 million compared to $6.3 million for the nine months ended September 30, 2013. The increase in net income was driven by a 48% increase in revenue but was offset by an increase in depreciation and other operating expenses due to the completion of the Pioneer Terminal. Total revenue for the nine months ended September 30, 2014 was $19.1 million compared to $12.9 million for the nine months ended September 30, 2013. The increase was driven by volume, as the joint venture transloaded 10.1 million barrels of crude oil (37,100 barrels per day) during the nine months ended September 30, 2014 compared to 6.4 million barrels of crude oil (23,300 barrels per day) during the nine months ended September 30, 2013; a 59% increase. The increase in barrels transloaded was primarily the result of securing third party transloading customers. Total cost of revenue for the nine months ended September 30, 2014 was $5.8 million compared to $5.6 million for the nine months ended September 30, 2013. The slight increase in cost of revenue was due to the addition of terminal management fees related to the Pioneer Terminal.
Sand Joint Venture
Net income for the nine months ended September 30, 2014 was $0.4 million. The sand joint venture commenced operations in June 2014.
Marketing Joint Venture
Loss from our indirect investment in the marketing joint venture was $1.3 million for the nine months ended September 30, 2014 compared to income of $1.6 million for the nine months ended September 30, 2013. The decrease was driven by a combination of lower volume sold and continued margin pressure. For the nine months ended September 30, 2014, the marketing joint venture sold 6.3 million barrels of crude oil (23,100 barrels per day) compared to 7.0 million barrels of crude oil sold (25,800 barrels per day) during the nine months ended September 30, 2013; a 10% decrease. The marketing joint venture continued to experience competitive margin pressure which resulted in a net loss per barrel of $(0.21) for the nine months ended September 30, 2014 compared to net income per barrel of $0.22 for the nine months ended September 30, 2013. Well head prices remained static as refiner buyers continued to be aggressive. Refiners came into the North Dakota lease and terminal markets paying in excess of market prices in order to fill their respective capacity and tank cars but have refused to pay equivalent prices on barrels delivered to them by marketers like the marketing joint venture. In addition, the slow rise in the WTI/Brent spread made domestic barrels less favorable on the east coast compared to available alternatives. The Gulf Coast was not a viable market as cheap barrels were being railed in from West Texas which made the LLS market unattractive. The Gulf Coast continued to be long on crude oil with barges and tankers moving sweet, light crude oil to the East Coast to compete with railed Bakken crude oil. The marketing joint venture continued to experience competitive margin pressure through July 2014. However, due to the amount of domestic sweet crude oil available to US refiners as a result of increased production and the railroad’s under-performance, the marketing joint venture began to experience a positive margin trend resulting in net income per barrel to each member of $0.50 and $0.68 in August and September 2014, respectively.
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Trucking Joint Venture
Income from our indirect investment in the trucking joint venture was $0.6 million for the nine months ended September 30, 2014 compared to $0.2 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, the joint venture hauled 4.9 million barrels of crude oil (17,900 barrels per day) compared to 3.9 million barrels of crude oil hauled (14,300 barrels per day) for the nine months ended September 30, 2013; a 26% increase. The trucking joint venture is expected to continue to haul crude oil for the marketing joint venture as well as for various third parties.
Non-GAAP Financial Measures
We define Adjusted EBITDA Attributable to Shareholders of Dakota Plains Holdings, Inc. as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) non-cash expenses relating to share based amounts recognized under ASC Topic 718 and (v) Adjusted EBITDA Attributable to Non-Controlling Interests. Adjusted EBITDA Attributable to Shareholders of Dakota Plains Holdings, Inc. was $1.5 million and $1.6 million for the three and nine months ended September 30, 2014, respectively, compared to $(1.7) million and $2.3 million for the three and nine months ended September 30, 2013, respectively. The increase in Adjusted EBITDA for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 is primarily driven by the increase in income from the marketing and transloading joint ventures in addition to a reduction in general and administrative expenses, primarily legal fees. The decrease in Adjusted EBITDA for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 was primarily driven by the decrease in income from the marketing joint venture which was partially offset by the increase in income from the transloading and trucking joint ventures.
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| | Three Months Ended
September 30, | | Nine Months Ended
September 30, | |
| | 2014 | | 2013 | | 2014 | | 2013 | |
Net Income (Loss) | | $ | 1,534,709 | | $ | (2,057,763 | ) | $ | 2,071,204 | | $ | (2,062,668 | ) |
Add Back: | | | | | | | | | | | | | |
Income Tax Provision (Benefit) | | | 19,737 | | | (1,266,000 | ) | | (1,142,148 | ) | | (1,282,000 | ) |
Depreciation and Amortization | | | 1,108,348 | | | 47,065 | | | 3,229,834 | | | 131,923 | |
Share Based Compensation - Employees and Directors | | | 400,365 | | | 571,398 | | | 1,904,658 | | | 2,430,665 | |
Share Based Compensation - Consultants | | | — | | | 55,722 | | | — | | | 280,714 | |
Interest Expense, net | | | 496,637 | | | 970,962 | | | 1,503,017 | | | 2,762,175 | |
Adjusted EBITDA | | $ | 3,559,796 | | $ | (1,678,616 | ) | $ | 7,566,565 | | $ | 2,260,809 | |
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Adjusted EBITDA Attributable to Non-Controlling Interests | | | 2,051,009 | | | — | | | 5,973,149 | | | — | |
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Adjusted EBITDA Attributable to Shareholders of Dakota Plains Holdings, Inc. | | $ | 1,508,787 | | $ | (1,678,616 | ) | $ | 1,593,416 | | $ | 2,260,809 | |
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. We believe presenting Adjusted EBITDA provides useful information to investors to gain an overall understanding of our current financial performance. Specifically, management believes the non-GAAP financial measure included herein provides useful information to investors by excluding certain expenses that are not indicative of our operating results. In addition, management uses Adjusted EBITDA for budgeting and forecasting as well as subsequently measuring its performance and believes it is providing investors with a financial measure that most closely align with its internal measurement processes.
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Liquidity and Capital Resources
Our principal sources of liquidity are cash and cash equivalents, cash distributions generated from our joint ventures and our additional financing capacity, which is dependent upon capital and credit market conditions and our financial performance. Our cash and cash equivalents were $6.5 million at September 30, 2014 ($4.7 million is reserved for use in the operations of DPTS and DPTS Sand, LLC and is only available to the Company through distributions). We have received monthly priority cash distributions from the transloading joint venture beginning in February 2014 through September 2014.
Cash Flows
Our 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 our 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 our control and are adjusted as necessary, based on market conditions.
Cash Flows Provided by (Used In) Operating Activities
Net cash provided by operating activities totaled $6.9 million and net cash used in operating activities totaled $5.8 million for the nine months ended September 30, 2014, and 2013, respectively, or an increase of cash provided of approximately $12.7 million. The primary reason for the increase in cash provided by operating activities was the consolidation of the DPTS financial statements with and into the consolidated financial statements of the Company for the nine months ended September 30, 2014.
Cash Flows Provided by (Used In) Investing Activities
Net cash used in investing activities totaled $9.7 million and net cash provided by investing activities totaled $4.5 million for the nine months ended September 30, 2014 and 2013, respectively, or an increase of cash used of approximately $14.2 million. The increase relates to the purchases of property and equipment related to the Pioneer Terminal during the nine months ended September 30, 2014 and the priority cash distribution received from the marketing joint venture during the nine months ended September 30, 2013.
Cash Flows Used In Financing Activities
Cash flows used in financing activities totaled $3.7 million and $0.6 million for the nine months ended September 30, 2014 and 2013, respectively. The increase of $3.1 million primarily relates to the transloading joint venture’s priority cash distributions to the non-controlling interest and principal payments related to the World Fuel Services Corporation credit facility.
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. We have received a priority cash distribution from the transloading joint venture for the months of February 2014 through September 2014.
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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 $20.0 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 $10.0 million, which was immediately invested as capital contributions to Dakota Petroleum Transport Solutions, LLC in order to increase the funds available for the Pioneer Terminal. No priority cash distributions have been made this year through September 30, 2014.
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. No priority cash distributions have been made this year through September 30, 2014.
Sand Joint Venture Distributions
The sand 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 its members. The sand joint venture initiated its operations in June 2014 and has made no priority cash distributions as of September 30, 2014.
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, 2013. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 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.
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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 stated in Note 12 to the Financial Statements, we, certain of our subsidiaries DPTS, and DPTSM are among the many defendants named in various lawsuits relating to the derailment of a Montreal Main & Atlantic Railroad, Ltd. (“MM&A”) train in Lac-Mégantic, Quebec. We believe all claims asserted against us, our subsidiaries, DPTS, and DPTSM are without merit and intend to vigorously defend against such claims.
On July 6, 2013, an unmanned freight train operated by MM&A with 72 tank cars carrying approximately 50,000 barrels of crude oil rolled downhill and 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. An 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. A different affiliate of our joint venture partner 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 MM&A.
On July 15, 2013, four named parties filed a petition in the Canadian Province of Quebec seeking permission from the court to pursue a class action seeking to recover compensatory and punitive damages along with costs. On June 18, 2014 the petitioners sought permission from the Quebec Superior Court to discontinue the proceedings without prejudice against Dakota Plains Holdings, Inc., Dakota Plains Marketing LLC and Dakota Plains Transloading LLC. The Court granted permission for the discontinuance, and consequently those companies have been removed from the proceeding. The most recent iteration of the petition, filed on July 7, 2014, removes us and certain of our subsidiaries pursuant to the discontinuance, but still includes DPTS and DPTSM, along with over 30 third parties, including CPR, MM&A and certain of its affiliates, several manufacturers and lessors of tank cars, as well as the intended purchaser and certain suppliers of the crude oil. The petition 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 DPTS and DPTSM are without merit and intend to vigorously defend against such claims and pursue any and all defenses available.
Around July 29, 2013, nineteen individuals filed lawsuits in Cook County, Illinois seeking unspecified damages for their injuries from the accident. The lawsuits assert claims for negligence against the eight defendants noted above. On August 7, 2013, MM&A filed a Chapter 11 voluntary petition in the bankruptcy court in Maine. On August 29, 2013, the defendants jointly removed the cases from state court in Cook County to the United States District Court in the Northern District of Illinois. On September 13, 2013, the bankruptcy trustee for MM&A, and World Fuel Services, Corporation and Petroleum Transport Solutions, LLC filed motions seeking to transfer the nineteen personal injury cases from federal court in Illinois to the United States District Court for the District of Maine (the “ME District Court”). On March 21, 2014, the ME District Court granted the transfer motion. On April 4, 2014, the plaintiffs filed a motion for reconsideration of the order granting the transfer motion and a motion requesting the ME District Court abstain from exercising jurisdiction over the cases. The motion for reconsideration was denied and the motion for abstention remains pending. On May 1, 2014, the plaintiffs appealed the ME District Court’s order granting the transfer motion to the First Circuit Court of Appeals. On June 17, 2014, the ME District Court entered a consent order staying proceedings in the transferred cases pending the appeal. On September 25, 2014, the First Circuit Court of Appeals ordered plaintiffs to voluntarily dismiss their appeal or show cause why their appeal should not be dismissed for lack of jurisdiction. The parties have responded to the First Circuit’s order to show cause, and its decision is pending.
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We believe these claims against us, certain of our subsidiaries, DPTS and DPTSM 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 is conducting an investigation 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.
We are currently unable to determine the probability of loss or reasonably estimate a range of potential losses related to the aforementioned proceedings. Accordingly, we have not made any provisions for these potential losses in our consolidated financial statements
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, 2013.
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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.
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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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* | Management contract or compensatory plan or arrangement required to be filed as an exhibit to this Quarterly Report on Form 10-Q. |
(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 10, 2014 | | DAKOTA PLAINS HOLDINGS, INC. |
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| | | | /s/ Timothy R. Brady |
| | | | Timothy R. Brady |
| | | | Chief Financial Officer and Treasurer |
| | | | (authorized officer and principal financial officer) |
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 |
