Attached files
file | filename |
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EXCEL - IDEA: XBRL DOCUMENT - DAKOTA PLAINS HOLDINGS, INC. | Financial_Report.xls |
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - DAKOTA PLAINS HOLDINGS, INC. | dakota124450_ex31-1.htm |
EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - DAKOTA PLAINS HOLDINGS, INC. | dakota124450_ex31-2.htm |
EX-32 - CERTIFICATION OF CEO/CFO PURSUANT TO SECTION 906 - DAKOTA PLAINS HOLDINGS, INC. | dakota124450_ex32.htm |
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UNITED STATES |
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SECURITIES AND EXCHANGE COMMISSION |
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Washington D.C. 20549 |
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FORM 10-Q |
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(Mark One) |
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þ |
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended September 30, 2012 |
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or |
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o |
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from ________ to ________ |
Commission File Number 000-53390
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Dakota Plains Holdings, Inc. |
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(Exact Name of Registrant as Specified in its Charter) |
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Nevada |
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20-2543857 |
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(State or other
jurisdiction of |
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(I.R.S. Employer |
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294 Grove Lane East |
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55391 |
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(Address of principal executive offices) |
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(Zip Code) |
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(952) 473-9950 |
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(Registrants telephone number, including area code) |
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(Former name, former
address and former fiscal year, |
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. |
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Yes þ No o |
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.) |
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Yes þ No o |
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of large accelerated filer, accelerated filer, and smaller reporting company in Rule 12b-2 of the Exchange Act. |
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Large accelerated filer o |
Accelerated filer o |
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Non-accelerated filer o |
Smaller reporting company þ |
(Do not check if a smaller reporting company) |
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). |
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Yes o No þ |
As of November 13, 2012, the registrant had 41,815,996 shares of common stock issued and outstanding.
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Item 1. |
Financial Statements. |
DAKOTA
PLAINS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF SEPTEMBER 30, 2012 AND DECEMBER 31, 2011
ASSETS
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September 30, |
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December 31, |
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CURRENT ASSETS |
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Cash and Cash Equivalents |
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$ |
400,761 |
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$ |
1,753,665 |
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Prepaid Expenses |
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65,460 |
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16,756 |
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Other Current Assets |
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13,000 |
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Deferred Tax Asset |
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9,489,000 |
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2,307,000 |
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Total Current Assets |
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9,968,221 |
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4,077,421 |
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PROPERTY AND EQUIPMENT |
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Land |
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1,056,776 |
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1,053,576 |
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Site Development |
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2,329,660 |
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2,329,660 |
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Other Property and Equipment |
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45,292 |
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42,075 |
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Total Property and Equipment |
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3,431,728 |
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3,425,311 |
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Less - Accumulated Depreciation |
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383,455 |
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259,520 |
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Total Property and Equipment, Net |
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3,048,273 |
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3,165,791 |
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PREFERRED DIVIDEND RECEIVABLE |
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693,151 |
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317,808 |
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INVESTMENT IN DPTS MARKETING LLC |
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20,604,856 |
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11,996,571 |
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INVESTMENT IN DAKOTA PETROLEUM TRANSPORT SOLUTIONS, LLC |
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4,454,424 |
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2,890,280 |
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OTHER ASSETS |
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208,335 |
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Total Assets |
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$ |
38,977,260 |
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$ |
22,447,871 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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CURRENT LIABILITIES |
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Accounts Payable |
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$ |
430,578 |
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$ |
32,616 |
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Accrued Expenses |
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1,115,053 |
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80,661 |
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Derivative Liability |
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5,540,000 |
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Deferred Rental Income |
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20,679 |
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125,164 |
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Promissory Notes |
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16,198,650 |
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Total Current Liabilities |
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17,764,960 |
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5,778,441 |
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LONG-TERM LIABILITIES |
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Promissory Notes |
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20,465,300 |
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9,000,000 |
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Deferred Rental Income |
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170,603 |
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125,163 |
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Deferred Tax Liability |
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273,000 |
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460,000 |
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Total Long-Term Liabilities |
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20,908,903 |
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9,585,163 |
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Total Liabilities |
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38,673,863 |
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15,363,604 |
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STOCKHOLDERS EQUITY |
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Preferred Stock - Par Value $.001; 10,000,000 Shares Authorized; None Issued or Outstanding |
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Common Stock, Par Value $.001; 100,000,000 Authorized, 41,355,884 and 37,014,018 outstanding, respectively |
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41,355 |
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37,014 |
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Additional Paid-In Capital |
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15,715,512 |
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10,158,044 |
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Accumulated Deficit |
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(15,453,470 |
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(3,110,791 |
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Total Stockholders Equity |
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303,397 |
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7,084,267 |
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Total Liabilities and Stockholders Equity |
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$ |
38,977,260 |
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$ |
22,447,871 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
1
DAKOTA
PLAINS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
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Three
Months Ended |
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Nine
Months Ended |
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2012 |
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2011 |
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2012 |
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2011 |
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REVENUES |
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Rental Income - Related Party |
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$ |
51,407 |
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$ |
79,897 |
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$ |
209,619 |
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$ |
234,301 |
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OPERATING EXPENSES |
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General and Administrative Expense |
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804,043 |
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748,788 |
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2,148,578 |
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2,894,879 |
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Depreciation and Amortization |
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41,378 |
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40,708 |
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123,935 |
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118,145 |
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Total Operating Expenses |
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845,421 |
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789,496 |
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2,272,513 |
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3,013,024 |
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LOSS FROM OPERATIONS |
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(794,014 |
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(709,599 |
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(2,062,894 |
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(2,778,723 |
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OTHER INCOME (EXPENSE) |
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Income from Investment in Dakota Petroleum Transport Solutions, LLC |
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533,973 |
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1,284,311 |
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2,590,875 |
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2,688,733 |
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Income from Investment in DPTS Marketing LLC |
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1,431,064 |
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344,510 |
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8,983,628 |
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344,510 |
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Interest Expense (Net of Interest Income) |
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(893,891 |
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(608,911 |
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(29,219,829 |
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(1,483,157 |
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Other Expense |
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(2,776 |
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Total Other Income (Expense) |
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1,071,146 |
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1,019,910 |
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(17,645,326 |
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1,547,310 |
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INCOME (LOSS) BEFORE INCOME TAXES |
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277,132 |
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310,311 |
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(19,708,220 |
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(1,231,413 |
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INCOME TAX PROVISION (BENEFIT) |
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105,474 |
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121,000 |
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(7,365,541 |
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(484,000 |
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. |
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NET INCOME (LOSS) |
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$ |
171,658 |
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$ |
189,311 |
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$ |
(12,342,679 |
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$ |
(747,413 |
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Net Income (Loss) Per Common Share Basic |
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$ |
0.00 |
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$ |
0.01 |
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$ |
(0.31 |
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$ |
(0.02 |
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Net Income (Loss) Per Common Share Diluted |
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$ |
0.00 |
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$ |
0.00 |
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$ |
(0.31 |
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$ |
(0.02 |
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Weighted Average Shares Outstanding - Basic |
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40,809,389 |
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35,858,258 |
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39,350,940 |
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34,940,470 |
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Weighted Average Shares Outstanding - Diluted |
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42,478,827 |
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38,012,274 |
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39,350,940 |
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34,940,470 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
2
DAKOTA
PLAINS HOLDINGS, INC. AND SUBSIDARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND 2011
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Nine Months Ended |
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2012 |
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2011 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net Loss |
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$ |
(12,342,679 |
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$ |
(747,413 |
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Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities |
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Depreciation and Amortization |
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123,935 |
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118,145 |
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Amortization of Debt Discount |
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897,877 |
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Loss on Disposal of Property and Equipment |
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2,776 |
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Loss on Derivative Liability |
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27,311,800 |
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Deferred Income Taxes |
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(7,369,000 |
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(484,000 |
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Issuance of Common Stock for Consulting Fees |
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1,936,079 |
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Decrease (Increase) in Deferred Rental Income |
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45,440 |
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(69,254 |
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Income from Investment in Dakota Petroleum Transport Solutions, LLC |
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(2,590,875 |
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(2,688,733 |
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Income from Investment in DPTS Marketing LLC |
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(8,983,628 |
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(344,510 |
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Noncash Rental Income |
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(38,910 |
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(60,739 |
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Share-based Compensation |
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373,959 |
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387,504 |
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Changes in Working Capital and Other Items: |
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Increase in Prepaid Expenses |
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(48,704 |
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(92,595 |
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Increase in Other Current Assets |
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(13,000 |
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Increase in Accounts Payable |
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189,627 |
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34,445 |
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Decrease in Income Taxes Payable |
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(211,220 |
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Increase in Accrued Expenses |
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1,034,392 |
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3,316 |
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Decrease (Increase) in Deferred Rental Income |
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(104,485 |
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12,310 |
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Net Cash Used In Operating Activities |
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(2,412,128 |
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(1,306,012 |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchases of Property and Equipment |
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(6,417 |
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(108,261 |
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Cash Paid for Deposit |
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(100,000 |
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Cash Paid for Investment in DPTS Marketing LLC |
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(10,000,100 |
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Cash Received from Dakota Petroleum Transport Solutions, LLC |
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1,065,641 |
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795,473 |
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Net Cash Provided by (Used In) Investing Activities |
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1,059,224 |
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(9,412,888 |
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CASH FLOWS FROM FINANCING ACTIVITIES |
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Proceeds from Issuance of Common Stock |
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3,187,500 |
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Proceeds from Exercise of Warrants |
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14,250 |
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Cash Dividend Paid |
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(1,941,632 |
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Proceeds from Senior Promissory Note |
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3,500,000 |
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Proceeds from Junior Promissory Notes |
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5,500,000 |
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Net Cash Provided by Financing Activities |
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10,260,118 |
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NET DECREASE IN CASH AND CASH EQUIVALENTS |
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(1,352,904 |
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(458,782 |
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CASH AND CASH EQUIVALENTS BEGINNING OF PERIOD |
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1,753,665 |
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575,290 |
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CASH AND CASH EQUIVALENTS END OF PERIOD |
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$ |
400,761 |
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$ |
116,508 |
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Supplemental Disclosure of Cash Flow Information |
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Cash Paid During the Period for Interest |
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$ |
808,525 |
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$ |
585,863 |
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Cash Paid During the Period for Income Taxes |
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$ |
2,985 |
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$ |
211,220 |
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Non-Cash Financing and Investing Activities |
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Payment of Consulting Fees through Issuance of Common Stock |
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$ |
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$ |
2,128,000 |
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Preferred Dividend Receivable |
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$ |
375,343 |
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$ |
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Purchase of Property and Equipment Paid Subsequent to Period End |
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$ |
30,800 |
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$ |
59,800 |
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Purchase of Other Assets Paid Subsequent to Period End |
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$ |
208,335 |
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$ |
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Fair Value of Warrants Issued for Debt Issuance Costs |
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$ |
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$ |
1,346,816 |
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Satisfaction of Derivative Liability with Common Stock |
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$ |
5,187,850 |
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$ |
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Promissory Notes Issued to Satisfy Derivative Liability |
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$ |
27,663,950 |
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$ |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
3
DAKOTA
PLAINS HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2012 AND THE YEAR ENDED DECEMBER 31,
2011
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Retained |
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Additional |
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Stock |
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Earnings |
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Total |
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Common Stock |
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Paid-In |
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Subscriptions |
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(Accumulated |
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Stockholders |
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Shares |
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Amount |
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Capital |
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Receivable |
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Deficit) |
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Equity |
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Balance December 31, 2010 |
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30,592,744 |
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30,592 |
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2,238,763 |
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610,013 |
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2,879,368 |
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Sale of Common Shares at $2.125 Per Share |
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1,500,000 |
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1,500 |
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3,186,000 |
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3,187,500 |
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Sale of Common Shares at $4 Per Share |
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500,000 |
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500 |
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1,999,500 |
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2,000,000 |
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Issuance of Common Shares related to Consulting Agreement |
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2,282,000 |
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2,282 |
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2,165,718 |
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2,168,000 |
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|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Restricted Common Shares |
|
|
600,000 |
|
|
600 |
|
|
(600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Shares as a Stock Dividend |
|
|
1,441,774 |
|
|
1,442 |
|
|
(1,442 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Shares to Board of Directors |
|
|
40,000 |
|
|
40 |
|
|
84,960 |
|
|
|
|
|
|
|
|
85,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Shares for Finance Costs |
|
|
7,500 |
|
|
8 |
|
|
29,992 |
|
|
|
|
|
|
|
|
30,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Dividend Paid |
|
|
|
|
|
|
|
|
(1,331,619 |
) |
|
|
|
|
(610,013 |
) |
|
(1,941,632 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Based Compensation |
|
|
|
|
|
|
|
|
425,756 |
|
|
|
|
|
|
|
|
425,756 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Shares Related to Exercise of Warrants |
|
|
50,000 |
|
|
50 |
|
|
14,200 |
|
|
|
|
|
|
|
|
14,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants Issue Included in Debt Issuance Costs |
|
|
|
|
|
|
|
|
1,346,816 |
|
|
|
|
|
|
|
|
1,346,816 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,110,791 |
) |
|
(3,110,791 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - December 31, 2011 |
|
|
37,014,018 |
|
$ |
37,014 |
|
$ |
10,158,044 |
|
$ |
|
|
$ |
(3,110,791 |
) |
$ |
7,084,267 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition of MCT Holding Corporation |
|
|
640,200 |
|
|
640 |
|
|
(640 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued Pursuant to Exercise of Warrants |
|
|
2,386,578 |
|
|
2,387 |
|
|
(2,387 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share Based Compensation |
|
|
|
|
|
|
|
|
348,960 |
|
|
|
|
|
|
|
|
348,960 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Restricted Common Shares |
|
|
15,000 |
|
|
15 |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Pursant to Additional Payment Elections |
|
|
1,296,963 |
|
|
1,296 |
|
|
5,186,553 |
|
|
|
|
|
|
|
|
5,187,849 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of Common Shares to Board of Directors |
|
|
3,125 |
|
|
3 |
|
|
24,997 |
|
|
|
|
|
|
|
|
25,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(12,342,679 |
) |
|
(12,342,679 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance - September 30, 2012 |
|
|
41,355,884 |
|
$ |
41,355 |
|
$ |
15,715,512 |
|
$ |
|
|
$ |
(15,453,470 |
) |
$ |
303,397 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
4
Dakota Plains Holdings, Inc. and Subsidiaries
Unaudited Condensed Notes to Consolidated Financial Statements
September 30, 2012
|
|
1. |
Organization and Nature of Business |
On March 22, 2012, Dakota Plains Holdings, Inc., formerly known as MCT Holding Corporation (DP or our Company), Dakota Plains, Inc., a Minnesota corporation engaged in the crude oil transportation business (Dakota Plains), and DP Acquisition Corporation, a Minnesota corporation (Merger Subsidiary) entered into an Agreement and Plan of Merger (the Merger Agreement). Under the Merger Agreement, the Merger Subsidiary merged with and into Dakota Plains (the Initial Merger), the separate corporate existence of the Merger Subsidiary ceased, and Dakota Plains continued as the surviving corporation and as a wholly owned subsidiary of our Company. See Note 12 for details of the Initial Merger.
Dakota Plains, Inc. (formerly Dakota Plains Transport, Inc.) was formed in November 2008 for the purpose of owning and operating a 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.
The Company is governed by a board of directors and managed by its officers.
|
|
2. |
Summary of Significant Accounting Policies |
The financial information included herein is unaudited, except for the consolidated balance sheet as of December 31, 2011, which has been derived from the Companys audited consolidated financial statements for the year ended December 31, 2011. However, such information includes all adjustments (consisting of normal recurring adjustments and change in accounting principles), which are in the opinion of management, necessary for a fair presentation of the consolidated financial position, results of operations and cash flows for the interim periods. The results of operations for interim periods are not necessarily indicative of the results to be expected for an entire year.
Certain information, accounting policies, and footnote disclosures normally included in the consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP) have been omitted in this Form 10-Q pursuant to certain rules and regulations of the Securities and Exchange Commission (SEC). The consolidated financial statements should be read in conjunction with the audited consolidated financial statements for the year ended December 31, 2011.
New Accounting Pronouncements
From time to time, new accounting pronouncements are issued by FASB that are adopted by the Company as of the specified effective date. If not discussed, management believes that the impact of recently issued standards, which are not yet effective, will not have a material impact on the Companys financial statements upon adoption.
Presentation of Comprehensive Income
In June 2011, the FASB issued Comprehensive Income (Topic 220) Presentation of Comprehensive Income (ASU No. 2011-05). The guidance eliminates the option of presenting components of other comprehensive income as part of the statement of stockholders equity. The standard will allow the Company the option to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either a single continuous statement of comprehensive income or in two separate but consecutive statements. In December 2011, the FASB issued Comprehensive Income (Topic 220) Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-05 (ASU No. 2011-12). The FASB indefinitely deferred the effective date for the guidance related to the presentation of reclassifications of items out of accumulated other comprehensive income by component in both the statement in which net income is presented and the statement in which other comprehensive income is presented. The standard, except for the portion that was indefinitely deferred, is effective for the Company on January 1, 2012 and must be applied retrospectively. On January 1, 2012, the Company adopted this standard on disclosure, and it did not impact the Companys results of operations, financial position or cash flows.
5
Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS
In May 2011, the FASB issued Fair Value Measurement (Topic 820) Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS (ASU No. 2011-04). The standard generally clarifies the application of existing requirements on topics including the concepts of highest and best use and valuation premise and disclosing quantitative information about the unobservable inputs used in the measurement of instruments categorized within Level 3 of the fair value hierarchy. Additionally, the standard includes changes on topics such as measuring fair value of financial instruments that are managed within a portfolio and additional disclosure for fair value measurements categorized within Level 3 of the fair value hierarchy. This standard is effective for the Company on January 1, 2012. The standard will require additional disclosures, but it will not impact the Companys results of operations, financial position or cash flows. On January 1, 2012, the Company adopted this standard on disclosure, and it did not impact the Companys results of operations, financial position or cash flows.
Going Concern
As of September 30, 2012 the Company had cash and cash equivalents of approximately $401,000 and accounts payable and accrued expenses were approximately $1.55 million. In addition, the Company had $9.0 million aggregate principal amount of promissory notes due March 1, 2013 and $27.7 million aggregate principal amount of promissory notes due April 21, 2013 outstanding.
On November 2, 2012, the Company completed a private placement of debt, including an extension and reduction of a significant portion of its outstanding debt. The Company issued $22.0 million aggregate principal amount of 12.0% senior unsecured promissory notes due October 31, 2015 (3-Year Notes). In addition to $6.14 million aggregate principal amount of 3-Year Notes issued for cash, approximately $3.9 million aggregate principal amount of 3-Year Notes were issued in exchange for an equivalent principal amount of outstanding 12.0% promissory notes due March 1, 2013 (Notes due March 2013) and approximately $11.96 million aggregate principal amount of 3-Year Notes were issued for all promissory notes issued in satisfaction of the Reduced Payment (See Subsequent Events footnote). The recently completed private placement resulted in securing approximately $6.0 million in net cash proceeds which will be utilized for future capital expenditures and working capital.
In March 2012, the Company mutually agreed with its joint venture partner to suspend the monthly regular distributions by the transloading joint venture in order to retain cash for planned capital expenditures by the transloading joint venture, through the end of 2012. The Company also expects that the marketing joint venture will not provide priority cash distribution during 2012.
Joint Venture Equity Investment
The equity method is used to account for investments in joint ventures where the Company has significant influence, representing equity ownership of not more than 50%. As further described in Note 3, the Companys equity investments consist of 50% owned Dakota Petroleum Transport Solutions, LLC (DPTS) joint venture, 50% owned DPTS Marketing LLC (DPTSM) joint venture, and 50% owned Dakota Plains Services, LLC (DPS) joint venture. DPTS, DPTSM, and DPS have December 31 fiscal year ends, and the Company records its 50% share of the joint ventures net income or loss based on their most recent interim financial statements. The Companys share of the joint ventures operating results for each reporting period is adjusted for the Companys share of intercompany transactions. Such transactions primarily relate to rental agreements. Any significant unrealized intercompany profits or losses are eliminated in applying the equity method of accounting.
The Company follows applicable authoritative guidance whereby declines in estimated investment fair value below carrying value assessed as other than temporary are recognized as a charge to earnings to reduce carrying value to estimated fair value. The Company periodically evaluates its equity investments for possible declines in value and determines if declines are other than temporary based on, among other factors, the sufficiency and outcome of equity investee performed impairment assessments (which includes third party appraisals and other analyses), the amount and length of time that fair value may have been below carrying value, near-term and longer-term operating and financial prospects of equity investees, and the Companys intent and ability to hold the equity investments for a period of time sufficient to allow for any anticipated recovery.
Cash and Cash Equivalents
The Company considers highly liquid investments with insignificant interest rate risk and original maturities to the Company of three months or less to be cash equivalents. Cash equivalents consist primarily of interest-bearing bank accounts and money market funds. The Companys cash positions represent assets held in checking and money market accounts. These assets are generally available to the Company on a daily or weekly basis and are highly liquid in nature. Due to the balances being greater than $250,000, the Company does not have FDIC coverage on the entire amount of bank deposits. The Company believes this risk of loss is minimal.
Property and Equipment
Property and equipment are recorded at cost and depreciated using the straight-line method over their estimated useful lives.
|
|
|
|
|
Estimated useful lives are as follows: |
|
|
|
|
Site development |
|
|
15 years |
|
Other Property and Equipment |
|
|
3 - 5 years |
|
Land |
|
|
|
|
6
Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation expense was $123,935 and $41,378 for the nine and three months ended September 30, 2012, respectively, and $118,145 and $40,708 for the nine and three months ended September 30, 2011, respectively.
Impairment
Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 360-10-35-21 requires that long-lived assets to be held and used be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. There was no impairment identified at September 30, 2012 and December 31, 2011.
Environmental Accrual
Accruals for estimated costs for environmental obligations generally are recognized no later than the date when the Company identifies what cleanup measures, if any, are likely to be required to address the environmental conditions. Included in such obligations are the estimated direct costs to investigate and address the conditions, and the associated engineering, legal and consulting costs. In making these estimates, the Company considers information that is currently available, existing technology, enacted laws and regulations, and its estimates of the timing of the required remedial actions. Such accruals are initially measured on a discounted basis and are adjusted as further information becomes available or circumstances change and are accreted up over time. The Company has recorded no liability for environmental obligations as of September 30, 2012 and December 31, 2011.
Income Taxes
The Company accounts for income taxes under FASB ASC 740-10-30. Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require 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 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.
Stock-Based Compensation
The Company records expenses associated with the fair value of stock-based compensation. For 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.
Stock Issuance
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.
Earnings Per Share
Basic earnings per common share 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 earnings per common share reflect 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 earnings per share. As the Company had a loss for the nine month periods ended September 30, 2012 and 2011, the potentially dilutive shares are anti-dilutive and thus not added into the earnings per share calculation.
As of September 30, 2012, there were (i) 545,000 shares of restricted stock that were issued and vest in 2013 that represent potentially dilutive shares; (ii) 1,000,000 stock warrants that were issued and presently exercisable that represent potentially dilutive shares, which have an exercise price of $0.285 per share; (iii) 700,000 stock warrants that were granted but are not presently exercisable and represent potentially dilutive shares, which have an exercise price of $2.50 per share and vest in 2013; (iv) 250,000 stock options that were issued and presently exercisable and represent potentially dilutive shares, which have an exercise price of $2.50; (v) 15,625 stock options were issued and presently exercisable that represent potentially dilutive shares, which have an exercise price of $8.00.
7
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 and accounting for income taxes. Actual results may differ from those estimates.
Principles of Consolidation
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.
|
|
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 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 part of the joint venture agreement the Company will own the Transloading Facility and the 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 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.
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 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 PTS and Dakota Petroleum Transport Solutions, LLC. The amended and restated member control agreement, among other things, incorporates all previous amendments and supplements, extends the initial term until December 31, 2021, and the term will automatically extend in two-year renewal periods unless and until terminated.
8
The Company is accounting 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 $1,320,747. These costs have been capitalized as property and equipment on the Companys 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.
To reflect the economics of the $526,410 of costs incurred the Company recognized rental income of $6,749 per month through June 2012. In June 2012, the term of the joint venture agreement was extended and the monthly rental income recognized by the Company was decreased to $1,291 per month through December 31, 2021. The term of the agreement was amended effective June 1, 2012. In the three month period ended September 30, 2012 the Company recognized a true-up on the rental income recognized in June 2012 in the amount of $5,458. Rental income related to these costs incurred was $38,909 for the nine months ended September 30, 2012 and $60,741 for the nine months ended September 30, 2011 and ($1,584) for the three months ended September 30, 2012 and $20,247 for the three months ended September 30, 2011. No cash will be received related to this rental income; the rental income recorded is being treated as an increase in the Companys 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, 2012, the Company has been reimbursed the full $794,337 of additional expenditures related to the Supplemental Agreement.
The Company will report the $397,169, 50% of the costs incurred in excess of amounts incurred by PTS, as rental income over the life of the joint venture and $397,168 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 $59,045 and $5,170 for the nine and three months ended September 30, 2012, respectively, and $87,336 and $30,909 for the nine and three months ended September 30, 2011, respectively. As of September 30, 2012 and December 31, 2011, the Company has received $191,282 and $250,327 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 are no future lease payments receivable related to this agreement as of September 30, 2012.
The unaudited financial statements of Dakota Petroleum Transport Solutions, LLC are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
Nine Months Ended |
|
||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
||||
Sales |
|
$ |
4,162,436 |
|
$ |
3,632,106 |
|
$ |
11,591,616 |
|
$ |
7,544,646 |
|
Net Income |
|
|
965,134 |
|
|
2,408,825 |
|
|
4,762,514 |
|
|
4,908,861 |
|
Companys Share of Equity in Net Income |
|
|
482,567 |
|
|
1,204,413 |
|
|
2,381,257 |
|
|
2,454,431 |
|
9
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2012 |
|
2011 |
|
||
Total Assets |
|
$ |
11,817,395 |
|
$ |
6,820,137 |
|
Total Liabilities |
|
|
2,525,984 |
|
|
519,761 |
|
Share of Equity in Net Assets |
|
|
4,645,706 |
|
|
3,150,188 |
|
The differences between the Companys 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 Companys 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 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.
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.
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. The Company made its Member Preferred Contribution on May 11, 2011. 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, 2012 and December 31, 2011, the Company reported a preferred dividend receivable of $693,151 and $317,808, respectively, on its condensed consolidated balance sheet. The Company had received no payments from DPTS Marketing LLC as of September 30, 2012.
The operations of DPTS Marketing LLC commenced in May 2011. Under provisions of the member control agreement the profits and losses of DPTS Marketing LLC are split 50/50, pro rata based on 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.
On June 1, 2012, our wholly owned subsidiary Dakota Plains Marketing LLC, entered into an amended and restated member control agreement with PTS and DPTS Marketing LLC. The amended and restated member control agreement, among other things, incorporates all previous amendments, extends the initial term until December 31, 2021, and the term will automatically extend in two-year renewal periods unless and until terminated.
The Company is accounting for this joint venture using the equity method of accounting. The income or loss from the joint venture will be 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 |
|
Nine Months Ended |
|
||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
||||
Sales |
|
$ |
24,204,483 |
|
$ |
1,853,231 |
|
$ |
59,330,940 |
|
$ |
1,853,231 |
|
Net Income |
|
|
2,862,128 |
|
|
689,020 |
|
|
17,967,255 |
|
|
689,020 |
|
Companys Share of Equity in Net Income |
|
|
1,431,064 |
|
|
344,510 |
|
|
8,983,628 |
|
|
344,510 |
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2012 |
|
2011 |
|
||
Total Assets |
|
$ |
51,860,047 |
|
$ |
26,813,607 |
|
Total Liabilities |
|
|
10,650,336 |
|
|
2,820,465 |
|
Share of Equity in Net Assets |
|
|
20,604,856 |
|
|
11,996,571 |
|
10
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.
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 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 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 is accounting for this joint venture using the equity method of accounting. The income or loss from the joint venture will be included in other income on the condensed consolidated statements of operations, and the Company will record an investment in Dakota Plains Services, LLC on its condensed consolidated balance sheet. The Company did not recognize the loss from Dakota Plains Services, LLC for the three and nine month periods ended September 30, 2012 or decrease its investment in Dakota Plains Services, LLC below zero as of September 30, 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 |
|
Nine Months Ended |
|
||||||||
|
|
2012 |
|
2011 |
|
2012 |
|
2011 |
|
||||
Sales |
|
$ |
99,431 |
|
$ |
|
|
$ |
99,431 |
|
$ |
|
|
Net Loss |
|
|
(99,757 |
) |
|
|
|
|
(99,757 |
) |
|
|
|
Companys Share of Equity in Net Loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
|
|
2012 |
|
2011 |
|
||
Total Assets |
|
$ |
99,431 |
|
$ |
|
|
Total Liabilities |
|
|
199,188 |
|
|
|
|
Share of Equity in Net Assets |
|
|
|
|
|
|
|
|
|
4. |
Other Assets |
|
|
On September 27, 2012, the Company entered into an option to purchase real property agreement for approximately 32 acres of real estate adjacent to the Companys transloading operation. The purchase price of the land is $126,960 plus the Company has agreed to pay for dirt work required by the seller as part of the purchase price. As of September 30, 2012, the dirt work had been completed, and the Company incurred costs of $208,335. This amount is included in other assets in the condensed consolidated balance sheet. The Company plans to purchase the land in the fourth quarter of 2012. |
|
|
|
5. |
Lease Agreement |
|
|
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. 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. |
11
|
|
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, 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. 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. For the nine months ended September 30, 2011, $86,225 of the $172,450 in rent payments was recognized as rental income and $86,225 was included in income from investment in Dakota Petroleum Transport Solutions, LLC. For the three months ended September, 2011, $28,742 of the $57,483 in rent payments was recognized as rental income and $28,741 was included in income from investment in Dakota Petroleum Transport Solutions, LLC. |
|
|
|
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, 2012 and December 31, 2011. |
|
|
|
In August 2012, the Company issued 3,125 shares of common stock to a member of its Board of Directors pursuant to its 2011 Equity Incentive Plan. These shares were valued at $25,000 or $8.00 per share, the market value of the shares of common stock on the date of issuance, and expensed as general and administrative expenses. |
|
|
|
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 |
|
|
|
Prior to the Initial Merger described in Note 1, Dakota Plains had 3,450,000 outstanding warrants that were exercisable at $0.285 per share of common stock which we adopted through the Initial Merger. On March 26, 2012, 2,450,000 of these warrants were exercised. Those warrant holders elected to complete a cashless exercise of these warrants and to complete the cashless exercise the warrant holders surrendered 63,420 of the Companys common stock. |
|
|
|
The table below reflects the status of warrants outstanding at September 30, 2012: |
|
|
|
|
|
|
|
|
|
|
Issue Date |
|
Common |
|
Exercise |
|
Expiration |
|
||
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 |
|
Total |
|
|
1,700,000 |
|
|
|
|
|
|
Outstanding Warrants
|
|
|
|
|
No warrants were forfeited or expired during the nine month period ended September 30, 2012. |
|
|
|
|
|
The Company recorded general and administrative expense of $50,381 and $16,794 for the nine and three month periods ended September 30, 2012, respectively, and $35,944 and $16,794 for the nine and three month periods ended September 30, 2011, respectively, related to these warrants. The Company will recognize $31,000 of compensation expense in future periods relating to warrants that have been granted as of September 30, 2012. |
|
|
|
|
|
There are 1,000,000 warrants that are exercisable at September 30, 2012. |
|
|
|
|
|
2,450,000 warrants were exercised during the nine month period ended September 30, 2012. |
12
Stock Options
In August 2012, the Company granted 15,625 stock options under its 2011 Equity Incentive Plan to a member of the board. The options were granted at a price of $8.00 and were fully excercisable on the grant date. 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 Company recognized $24,047 of expense related to these options in the three and nine month periods ended September 30, 2012.
The following assumptions were used for the Black-Scholes model:
|
|
|
|
|
Risk free rates |
|
|
0.27 |
% |
Dividend yield |
|
|
0 |
% |
Expected volatility |
|
|
30.35 |
% |
Weighted average expected stock options life |
|
|
2.5 Years |
|
The fair market value at the date of grant for stock options granted is as follows:
|
|
|
|
|
Weighted average fair value per share |
|
$ |
1.54 |
|
Total stock options granted |
|
|
15,625 |
|
Total weighted average fair value of stock options granted |
|
$ |
24,047 |
|
The following summarizes activities concerning outstanding options to purchase shares of the Companys common stock as of and for the nine month period ended September 30, 2012:
|
|
|
|
|
No options were exercised or forfeited in the nine month period ended September 30, 2012. |
|
|
|
|
|
No options expired during the nine month period ended September 30, 2012. |
|
|
|
|
|
Options covering 265,625 shares are exercisable and outstanding at September 30, 2012. |
|
|
|
|
|
There is no further compensation expense that will be recognized in future periods relative to any options that had been granted as of September 30, 2012, because the Company recognized the entire fair value of such compensation upon vesting of the options. |
|
|
|
|
|
There were no unvested options at September 30, 2012. |
Restricted Stock Awards
During the nine months end September 30, 2012, the Company issued 15,000 shares of common stock under its 2011 Equity Incentive Plan as compensation to an employee of the Company. Unvested restricted shares vest over various terms with all restricted shares vesting no later than April 2013. As of September 30, 2012, there was approximately $215,000 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 $274,532 and $109,844 for the nine and three month periods ended September 30, 2012, respectively, and $183,856 and $83,855 for the nine and three month periods ended September 30, 2011, respectively, related to restricted share grants.
13
The following table reflects the outstanding restricted stock awards and activity related thereto for the nine month period ended September 30, 2012:
|
|
|
|
|
|
|
|
|
|
Nine Month Period Ended |
|
||||
|
|
Number of |
|
Weighted- |
|
||
Restricted Stock Awards: |
|
|
|
|
|
|
|
Restricted Shares Outstanding at the Beginning of Period |
|
|
550,000 |
|
$ |
1.02 |
|
Shares Granted |
|
|
15,000 |
|
$ |
12.00 |
|
Lapse of Restrictions |
|
|
20,000 |
|
$ |
2.13 |
|
Restricted Shares Outstanding at September 30, 2012 |
|
|
545,000 |
|
$ |
1.28 |
|
|
|
8. |
Promissory Notes |
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 new promissory notes bore interest at the rate of 12% per annum, with interest payable in arrears on the last day of each fiscal quarter beginning December 31, 2011. The promissory notes were unsecured and matured on March 1, 2013. The Company could have prepaid the promissory notes in whole or in part without penalty or premium and without prior written consent at any time due to the occurrence of a Public Listing, as defined in the Exchange and Loan Agreement, in March 2012.
Pursuant to the Exchange and Loan Agreement, the Company, at its discretion on or before November 1, 2012, could require certain holders of the new promissory notes to lend to the Company, in a single draw, up to an aggregate of $5.5 million in proportion to the principal amount of such holders existing new promissory notes. The supplemental notes, if issued, would bear 18% simple annual interest and would mature one year after the date of issuance. If supplemental notes are issued, each holder of the supplemental notes will also receive a warrant to purchase at the strike price (volume weighted average closing price of the Companys common stock over the twenty trading days after the supplemental notes are issued) a number of shares of the Companys common stock equal to the quotient of the 50% of the principal amount of the supplemental note divided by $1.00. The warrant would be exercisable at any time during the period that is ten years after the date the supplemental notes are issued at a per share exercise price equal to the volume-weighted average closing price of the Companys common stock over the twenty trading days after the date the supplemental notes are issued. The Company has not borrowed any additional amounts under this provision as of September 30, 2012.
The new promissory notes included an additional payment provision similar to the additional payment provision included in the promissory notes issued by Dakota Plains, Inc. in April 2011, which were exchanged for the new promissory notes. The additional payment provision 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 was 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 promissory notes could elect to receive the additional payment either (i) a number of shares of the Companys 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. The additional payment due to the holders of the notes under this provision was $32,851,800.
On April 21, 2012, the Company issued promissory notes in the aggregate principal amount of $27,663,950 related to the additional payment provision. These promissory notes matured on April 21, 2013.
As a result of the private placement of debt subsequent to the balance sheet date (see Note 13), the $20,465,300 of the promissory notes were classified as a long-term liability on the September 30, 2012 condensed consolidated balance sheet.
Derivative Liability
The additional payment provision in the new promissory notes was considered an embedded derivative until April 2012. This embedded derivative was reported as a current liability on the Companys condensed consolidated balance sheet at fair value at December 31, 2011. The fair value of the embedded derivative at December 31, 2011 was calculated using the Monte Carlo Simulation valuation model based on factors present at the date valued.
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 Companys 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 month period ended September 30, 2012, $27,311,800, was recorded as interest expense on the condensed consolidated statement of operations.
14
|
|
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 benefit for the nine month periods ended September 30, 2012, and 2011 consists of the following:
|
|
|
|
|
|
|
|
|
|
Nine Months Ended |
|
||||
|
|
2012 |
|
2011 |
|
||
Current Income Taxes |
|
$ |
3,459 |
|
$ |
|
|
|
|
|
|
|
|
|
|
Deferred Income Taxes |
|
|
|
|
|
|
|
Federal |
|
|
(6,699,000 |
) |
|
(440,000 |
) |
State |
|
|
(670,000 |
) |
|
(44,000 |
) |
|
|
|
|
|
|
|
|
Total Benefit |
|
$ |
(7,365,541 |
) |
$ |
(484,000 |
) |
The components of the Companys deferred tax asset were as follows:
|
|
|
|
|
|
|
|
|
|
September 30, |
|
December 31, |
|
||
Deferred Tax Assets (Liabilities) |
|
|
|
|
|
|
|
Current: |
|
|
|
|
|
|
|
Deferred Rent |
|
$ |
15,000 |
|
$ |
93,000 |
|
Prepaid Expenses |
|
|
(23,000 |
) |
|
(5,000 |
) |
Derivative Liability |
|
|
|
|
|
2,072,000 |
|
Net Operating Loss |
|
|
9,065,000 |
|
|
81,000 |
|
Accrued Interest |
|
|
411,000 |
|
|
|
|
Other |
|
|
21,000 |
|
|
66,000 |
|
Current |
|
|
9,489,000 |
|
|
2,307,000 |
|
|
|
|
|
|
|
|
|
Noncurrent: |
|
|
|
|
|
|
|
Fixed Assets |
|
|
(411,000 |
) |
|
(444,000 |
) |
Share based Compensation |
|
|
93,000 |
|
|
(17,000 |
) |
Investment in Dakota Petroleum Transport Solutions, LLC |
|
|
(83,000 |
) |
|
(93,000 |
) |
Deferred Rent |
|
|
128,000 |
|
|
94,000 |
|
Non-current |
|
|
(273,000 |
) |
|
(460,000 |
) |
|
|
|
|
|
|
|
|
Total deferred tax assets |
|
$ |
9,216,000 |
|
$ |
1,847,000 |
|
The Company has no liabilities for unrecognized tax benefits.
The Companys policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax expense. For the nine and three month periods ended September 30, 2012 and 2011, 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, 2012 and December 31, 2011 relating to unrecognized benefits.
The 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.
15
|
|
10. |
Financial Instruments |
The Companys financial instruments include cash and cash equivalents, trade receivables, accounts payable, and promissory notes. The carrying amount of cash and cash equivalents, trade receivables, accounts payable and promissory notes approximate fair value because of their immediate or short-term maturities.
|
|
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 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, 2012 and December 31, 2011 the Company had no financial instruments measured at fair value on a recurring basis in the condensed consolidated balance sheet.
The following table provides a reconciliation of the beginning and ending balances for the liability measured at fair value using significant unobservable inputs (Level 3):
|
|
|
|
|
|
|
Fair Value Measurements at |
|
|
Balance at December 31, 2011 |
|
$ |
(5,540,000 |
) |
Satisfied through the Issuance of Promissory Notes and Common Stock |
|
|
5,540,000 |
|
Balance at September 30, 2012 |
|
$ |
|
|
|
|
12. |
Merger Agreement |
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 our Companys common stock, all of which were restricted securities under Rule 144. Of those shares, 530,000 are restricted shares of our Companys 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 our Companys 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 our Companys common stock. The shareholders of our Company before the Initial Merger retained 640,200 shares of common stock, representing approximately 1.7% of our 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 our Company, merged with and into MCT Holding Corporation (the Second Merger). Pursuant to the plan of merger governing the Second Merger, our Company changed its name from MCT Holding Corporation to Dakota Plains Holdings, Inc.
|
|
13. |
Subsequent Events |
In October 2012, the Company entered into a purchase agreement to acquire 94 acres in New Town, North Dakota, which would provide over 191 contiguous acres for the transloading facility. In October the Company wired a down payment of $200,000 and anticipates closing on the purchase of the land in the fourth quarter of 2012. The total purchase price of the property is $1,750,000.
On November 2, 2012, the Company completed a private placement of debt, including an extension and reduction of a significant portion of its outstanding debt. The Company issued $22.0 million aggregate principal amount of 12.0% senior unsecured promissory notes due October 31, 2015 (3-Year Notes). In addition to $6.14 million aggregate principal amount of 3-Year Notes issued for cash, approximately $3.9 million aggregate principal amount of 3-Year Notes were issued in exchange for an equivalent principal amount of outstanding 12.0% promissory notes due March 1, 2013 (Notes due March 2013) and approximately $11.96 million aggregate principal amount of 3-Year Notes were issued for all promissory notes issued in satisfaction of the Reduced Payment.
16
All interest on the 3-Year Notes will be paid quarterly in arrears on each December 31st, March 31st, June 30th and September 30th, commencing on December 31, 2012, and all principal amounts and accrued but unpaid interest under the 3-Year Notes will be due and payable on October 31, 2015. The Company, in its sole discretion, may settle the 3-Year Notes any time after all of the Notes due March 2014 have been settled, by payment to the holders of the principal amount and all accrued but unpaid interest through the date of settlement. The 3-Year Notes provide for customary events of default and may be prepaid by the Company without penalty at any time after all amounts due under the Notes due March 2014 have been repaid.
Pursuant to subscription agreements between the Company and persons who purchased 3-Year Notes for cash, the Company issued warrants to purchase 921,000 shares of its common stock, exercisable for cash or pursuant to a cashless exercise feature at $4.00 per share from the date of issuance until October 31, 2017.
In connection with the private placement of the 3-Year Notes, the Company entered into an Amended Election, Exchange and Loan Agreements with each of the holders of the Companys outstanding Notes due March 2013 pursuant to which the Company agreed to reduce the additional payment due under those notes to reflect an initial trading price equal to $7.776 derived from the average closing price of the Companys common stock during the 150 trading days immediately following March 23, 2012. The revised calculation resulted in a reduced additional payment of approximately $19.0 million, a reduction of approximately $14 million, or 42%.
Pursuant to the Amended Election, Exchange and Loan Agreements all of the holders of the Companys Notes due March 2013 agreed to surrender and void approximately $27.7 million aggregate principal amount of 12.0% promissory notes due April 21, 2013 and 483,088 shares of its common stock, all of which were issued by the Company as satisfaction of the additional payments as originally calculated and paid on May 25, 2012 as previously announced in the Companys current report on Form 8-K filed June 1, 2012 (file no. 000-53390). As a result of revised elections by the holders, the Company issued in satisfaction of the Reduced Payment approximately $12.0 million aggregate principal amount of 3-Year Notes and 460,112 additional shares of its common stock based on an index price of $4.00 per share.
In addition, the holders of approximately $3.9 million of the $9.0 million outstanding aggregate principal amount of the Companys Notes due March 2013 tendered their notes in exchange for 3-Year Notes and the holders of an additional approximately $4.6 million aggregate principal amount of the Companys Notes due March 2013 tendered their notes in exchange for new 12.0% senior unsecured promissory notes due March 1, 2014.
As a part of the note exchanges, the Company paid to the holders of its outstanding promissory notes approximately $410,000, representing interest that would have accrued had the additional payment been reduced in advance of its original issuance in May 2012. In addition, the Company paid off $500,000 of the original $9.0 million note to one of its note holders.
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Item 2. |
Managements 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 Managements Discussion and Analysis of Financial Condition and Results of Operations (MD&A) contained in our Current Report on Form 8-K filed with the United States Securities and Exchange Commission (SEC) on March 23, 2012, as amended.
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 Managements 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, 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 the Current Report on Form 8-K filed with the SEC on March 23, 2012.
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.
17
Overview
The Company is principally focused on developing and owning crude oil and related product transloading facilities and the marketing and transporting of crude oil originating within the Williston Basin of North Dakota and Montana. The Company competes through its joint ventures by providing its customers with value-added benefits, including a full-service transloading facility, competitive pricing and an optimal geographic location that is centrally located in Mountrail County, North Dakota. Through its wholly owned subsidiaries, the Company participates in a joint venture that markets crude oil purchased at the wellhead, a joint venture that transloads crude oil into rail cars at our facility in New Town, North Dakota, and a joint venture that transports crude oil by road through its joint ventures trucking fleet. Each joint venture is organized in the form of a limited liability company, of which the Company holds a 50% membership interest.
In November 2009, the Company entered into an operating lease agreement with Dakota Petroleum Transport Solutions, LLC, the transloading joint venture in which its wholly owned subsidiary owns a 50% ownership interest. The lease will automatically terminate when the member control agreement governing Dakota Petroleum Transport Solutions, LLC 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.
Under the lease, our Company receives 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 transloading facility. The transloading joint venture generates income primarily from a per-barrel fee charged when crude oil is transloaded into a tank railcar located on the transloading facility that it leases from our Company. Currently, crude oil is transloaded from semi-trailer trucks owned and operated by third parties into tank railcars through a mobile transloader. Using this method, our site has the capacity to transload approximately 50,000 barrels per day.
DPTS Marketing LLC, the marketing joint venture in which our wholly owned subisdiary owns a 50% ownership interest, purchases barrels of crude oil from well operators at the wellhead and from first purchasers delivering to our crude by rail facility. We then coordinate 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. |
The marketing joint venture 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 third party trucking firms and Dakota Plains Services, LLC trucks to pick up the barrels from certain wellhead locations specified by the producer, or receives the barrels delivered in New Town. |
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3. |
As specified in the purchase and sale agreement, title to the oil transfers from the producer (seller) to DPTS Marketing (purchaser) at the time it passes through the trucks flange at the well or at our crude by rail site. |
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4. |
The oil is transported by truck to our transloading facility where it is transferred from the truck to a railcar. |
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5. |
Canadian Pacific then picks up the oil at our transloading facility in New Town, North Dakota and delivers it to several locations using arrangements with other class 1 and short line railroads; where DPTS Marketing sells the oil to its final customer. |
On June 1, 2012, our wholly owned subsidiary Dakota Plains Marketing LLC, entered into an amended and restated member control agreement with 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 early September, 2012, our wholly owned subsidiary Dakota Plains Trucking, LLC, formed a joint venture with JPND II, LLC (JPND). The Company and JPND each own 50% 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. 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.
18
Current Business Drivers
As reported by the USGS, the North Dakota Industrial Commission currently predicts that the Bakkens production will increase for many years. A common date for a production plateau is between the years of 2022 to 2024.
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 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 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.
Results of Operations
Three Months Ended September 30, 2012 vs. Three Months Ended September 30, 2011
The Company experienced net income of $171,658 for the three months ended September 30, 2012 compared to net income of $189,311 for the three months ended September 30, 2011. Net income for the third quarter was driven by an increase in the value of the Companys indirect ownership interest in the marketing joint venture, due primarily to an increase in barrels of crude oil sold. However, the increase was partially offset by a decrease in the income from the Companys indirect ownership interest in the transloading joint venture and an increase interest expense.
General and administrative expense was $804,043 for the three months ended September 30, 2012 compared to $748,788 for the three months ended September 30, 2011.
Income from our indirect investment in the transloading joint venture was $533,973 for the three months ended September 30, 2012 compared to $1,284,311 for the three months ended September 30, 2011. The decrease was primarily driven by the write-off of a former clients uncollectible balance in addition to an increase of accrued expenses. Income from the Companys indirect investment in the marketing joint venture was $1,431,064 for the three months ended September 30, 2012 compared to $344,510 for the three months ended September 30, 2011. The increase was primarily volume driven.
The Company recognized rental income of $51,407 for the three months ended September 30, 2012 compared to $79,897 for the three months ended September 30, 2011. The decrease in rental income is due to the June 2012 extension of the transloading Member Control Agreement, which caused the rental income recognized by the Company to decrease as the deferred rent is amortized over a longer time period.
Nine months Ended September 30, 2012 vs. Nine months Ended September 30, 2011
The Company experienced a net loss of $12,342,679 for nine months ended September 30, 2012 compared to a net loss of $747,413 for the nine months ended September 30, 2011. The increased net loss is primarily driven by the additional payment provision related to the promissory notes, which was partially offset by an increase in the income from the Companys indirect ownership interest in the marketing joint venture, in particular an increase in barrels of crude oil. As previously reported, the additional payment provision was settled through the April 21, 2012 issuance of promissory notes in the aggregate principal amount of $27,663,950 and 1,296,963 shares of the Companys common stock. The fair value of the embedded derivative was $32,851,800 as of April 21, 2012 compared to $5,540,000 at December 31, 2011. The $27,311,800 increase in the fair value of the embedded derivative was recorded as interest expense during the nine month period ended September 30, 2012.
19
General and administrative expense was $2,148,578 for the nine months ended September 30, 2012 compared to $2,894,879 for the nine months ended September 30, 2011. The decrease was primarily due to consulting related expenses in 2011 of approximately $1.6 million which was partially offset by an increase in compensation, legal and accounting related expenses in 2012.
Income from the Companys indirect investment in the transloading joint venture was $2,590,875 for the nine months ended September 30, 2012 compared to $2,688,733 for the nine months ended September 30, 2011. The transloading joint venture transloaded more barrels of oil as the facility only experienced one down day compared to 29 days through September 2011 but was impacted by the writing off of a former clients uncollectible balance, in addition to an increase of accrued expenses. Income from the Companys indirect investment in the marketing joint venture was $8,983,628 for the nine months ended September 30, 2012, which was primarily driven by an increase in volume and the fact that the joint venture began marketing crude oil in July 2011.
The Company recognized rental income of $209,619 for the nine months ended September 30, 2012 compared to $234,301 for the nine months ended September 30, 2011. The decrease was due to the June 2012 extension of the transloading agreement from December 31, 2013 to December 31, 2021, which caused rental income to decrease as the deferred rent is amortized over a longer time period.
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 $1,388,086 and $10,009,504 for the three and nine months ended September 30, 2012 compared to $1,421,981 and $2,693,472 for the three and nine months ended September 30, 2011. The increase in Adjusted EBITDA was primarily driven by an increase in income from the Companys indirect ownership interest in DPTS Marketing LLC.
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Reconciliation of Adjusted EBITDA |
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Dakota Plains Holdings, Inc. |
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Three Months Ended |
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Nine Months Ended |
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2012 |
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2011 |
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2012 |
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2011 |
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||||
Net Income (Loss) |
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$ |
171,658 |
|
$ |
189,311 |
|
$ |
(12,342,679 |
) |
$ |
(747,413 |
) |
Add Back: |
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|
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|
|
|
|
|
|
|
|
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Income Tax Provision (Benefit) |
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105,474 |
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121,000 |
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(7,365,541 |
) |
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(484,000 |
) |
Depreciation and Amortization |
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|
41,378 |
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|
40,708 |
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|
123,935 |
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|
118,145 |
|
Share Based Compensation - Employees and Directors |
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175,685 |
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268,788 |
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373,960 |
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387,504 |
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Share Based Compensation - Consultants |
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193,263 |
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|
1,936,079 |
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Interest Expense |
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|
893,891 |
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|
608,911 |
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|
29,219,829 |
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|
1,483,157 |
|
Adjusted EBITDA |
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$ |
1,388,086 |
|
$ |
1,421,981 |
|
$ |
10,009,504 |
|
$ |
2,693,472 |
|
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, the Company believes the non-GAAP financial measure included herein provides useful information to both management and investors by excluding certain expenses that its management believes are not indicative of its operating results. In addition, the non-GAAP financial measure is used by its management for budgeting and forecasting as well as subsequently measuring its performance, and the Company believes that it provides investors with a financial measure that most closely aligns to its internal measurement processes.
Liquidity and Capital Resources
The Companys 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 plans on expanding its existing transloading facility to meet the logistical and storage needs of future transloading arrangements. This will include, but is not limited to, the possible implementation of a central gathering system, which will feed into a storage facility. The recently completed private placement of debt resulted in securing approximately $6.0 million in net cash proceeds which will be utilized for capital expenditures and working capital.
20
Cash Flows
The Companys 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 Companys control and are adjusted as necessary, based on market conditions.
Cash Flows Used in Operating Activities
Net cash used in operating activities totaled $2.4 million and $1.3 million for the nine months ended September 30, 2012 and 2011, respectively, or an increase of cash used of $1.1 million. The primary reason for the increase in cash used in operating activities was the increase in cash general and administrative expenses of $1.2 million and cash paid for interest expense of $0.2 million in the nine months ended September 30, 2012. These increases in cash used for operating activities was partially offset as a result of a change in working capital related to an increase in accounts payable of $0.2 million for the nine months ended September 30, 2012.
Cash Flows Provided by (Used In) Investing Activities
Net cash provided by investing activities totaled $1.1 million for the nine months ended September 30, 2012 compared to net cash used in investing activities totaling $9.4 million for the nine months ended September 30, 2011. This change represented an increase equaling $10.5 million, which related to additional cash received from the Companys indirect investment in Dakota Petroleum Transport Solutions, LLC during 2012 and cash paid for its indirect investment in DPTS Marketing LLC during 2011.
Cash Flows Provided by Financing Activities
Cash flows provided by financing activities for the nine months ended September 30, 2012 were $0 compared to $10.3 million for the nine months ended September 30, 2011. In January 2011, the Company received $3.5 million in proceeds from the issuance of senior promissory notes and paid cash dividends of $1.9 million. In March 2011, the Company received $3.2 million from the issuance of common stock. In April 2011, the Company received $5.5 million in proceeds from the issuance of junior promissory notes.
As previously disclosed, in November 2011, the Companys predecessor entity, Dakota Plains, Inc., combined certain outstanding promissory notes by issuing $9.0 million aggregate principal amount of 12.0% promissory notes due March 1, 2013. All accrued but unpaid interest on the outstanding promissory notes was due and payable in arrears on the last day of each fiscal quarter. The Company may prepay amounts due under the promissory notes in whole or in part without penalty or premium at any time.
Pursuant to the Exchange and Loan Agreements executed in connection with the issuance of the new promissory notes, the Company may, at its discretion, on or before November 1, 2012, require certain holders of the promissory notes to lend to the Company, in a single draw, up to an aggregate of $5.5 million in proportion to the principal amount of such holders existing promissory notes. The supplemental notes, if issued, would bear 18% simple annual interest and would mature one year after the date of issuance. If supplemental notes are issued, each holder of the supplemental notes will also receive a warrant to purchase at the strike price (volume weighted average closing price of our common stock over the twenty trading days after the supplemental notes are issued) a number of shares of our common stock equal to the quotient of the 50% of the principal amount of the supplemental note divided by $1.00. The warrant would be exercisable at any time during the period that is ten years after the date the supplemental notes are issued at a per share exercise price equal to the volume-weighted average closing price of its common stock over the twenty trading days after the date the supplemental notes are issued. As part of the November 2, 2012 debt restructuring this provision was removed.
Under the terms of the outstanding promissory notes, an additional payment, which may be paid in shares or in the form of a subordinated promissory note, at the election of each holder, was triggered by the merger of Dakota Plains, Inc. with and into the Company. Because the average closing price of the Companys common stock over the twenty trading days immediately following that merger (the Initial Trading Price) exceeded $2.50, each note holder was entitled to receive from the Company an amount equal to the remainder, to the extent positive, of (x) the unpaid principal amount of their 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 promissory notes elected to receive the additional payment in the form of either (i) a number of shares of the Companys 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. On April 21, 2012 the Company issued an aggregate principal amount of $27,663,950 in promissory notes and 1,296,963 shares of the Companys common stock.
21
On November 2, 2012, the Company completed a private placement of debt, including an extension and reduction of a significant portion of its outstanding debt. The Company issued $22.0 million aggregate principal amount of 12.0% senior unsecured promissory notes due October 31, 2015 (3-Year Notes). In addition to $6.14 million aggregate principal amount of 3-Year Notes issued for cash, approximately $3.9 million aggregate principal amount of 3-Year Notes were issued in exchange for an equivalent principal amount of outstanding 12.0% promissory notes due March 1, 2013 (Notes due March 2013) and approximately $11.96 million aggregate principal amount of 3-Year Notes were issued for all promissory notes issued in satisfaction of the Reduced Payment.
Transloading Joint Venture Distributions
The transloading joint venture distributes a cash payment on a monthly basis using a calculation that considers the months 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. Dakota Plains Transloading, LLC received a regular cash distribution from the transloading joint venture in January and March 2012. However, beginning in April 2012, Dakota Plains Transloading, LLC has temporarily suspended regular distributions to conserve capital in order to fund general capital improvements and capacity expansion at our New Town, North Dakota transloading facility.
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 equaling of $20 million and the cash necessary to fund, the trading activities incurred during the current quarter as well as the following quarters forecasted operating expenses and trading activities. The net balance will be the priority cash available. The marketing joint venture has made no cash distributions since its inception in April 2011.
Trucking Joint Venture Distributions
The trucking joint venture determines a cash payment on a monthly basis using a calculation that considers the months 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, LLCs initial capital contribution is reimbursed. The trucking joint venture initiated its operations in early September 2012 and has made no cash distributions.
Off Balance Sheet Arrangements
We have no off-balance sheet arrangements.
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Item 3. |
Quantitative and Qualitative Disclosures About Market Risk. |
Not applicable.
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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 procedurees 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.
22
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. |
None.
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|
Item 1A. |
Risk Factors. |
Not Applicable.
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|
Item 2. |
Unregistered Sales of Equity Secuirities 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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|
Item 6. |
Exhibits. |
Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC purusant to the Exchange Act are located under SEC file number 000-53390.
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3.1 |
Amended and Restated Articles of Incorporation, effective March 23, 2012(1) |
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3.2 |
Amended and Restated Bylaws, effective March 23, 2012(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 companys Current Report on Form 8-K filed March 23, 2012. |
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(2) |
Incorporated by reference to Exhibit 3.2 to the companys Current Report on Form 8-K filed March 23, 2012. |
23
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 14, 2012 |
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DAKOTA PLAINS HOLDINGS, INC. |
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/s/ Timothy R. Brady |
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Timothy R. Brady |
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Chief Financial Officer and Treasurer |
24
EXHIBIT INDEX
|
|
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|
|
Exhibit No. |
|
Description |
|
Manner of Filing |
3.1 |
|
Amended and Restated Articles of Incorporation, effective March 23, 2012 |
|
Incorporated by Reference |
3.2 |
|
Amended and Restated Bylaws, effective March 23, 2012 |
|
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 |
25