FORM 10-Q

 

Item 1.

Financial Statements.

 

DAKOTA PLAINS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF JUNE 30, 2015 AND DECEMBER 31, 2014

ASSETS
		June 30, 2015			December 31, 2014
CURRENT ASSETS
Cash and Cash Equivalents		$	5,221,381		$	4,690,706
Trade Receivables, Net			6,959,661			3,268,386
Income Tax Receivable			14,803			14,803
Other Current Assets			656,256			99,776
Other Receivables			527,277			781,135
Deferred Tax Asset			912,000			2,266,000
Total Current Assets			14,291,378			11,120,806
PROPERTY AND EQUIPMENT
Land			3,191,521			3,191,521
Site Development			5,829,640			5,829,640
Terminal			21,505,220			21,383,972
Machinery			18,208,136			18,133,754
Construction in Progress			5,388,163			1,886,470
Other Property and Equipment			12,234,176			11,910,987
Total Property and Equipment			66,356,856			62,336,344
Less – Accumulated Depreciation			8,391,499			6,143,159
Total Property and Equipment, Net			57,965,357			56,193,185
FINANCE COSTS, NET			1,057,111			1,537,795
RESTRICTED CASH			3,000,293			3,000,000
DEFERRED TAX ASSET			28,327,000			26,762,000
OTHER ASSETS			542,902			512,901
Total Assets		$	105,184,041		$	99,126,687
LIABILITIES AND STOCKHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts Payable		$	10,319,666		$	7,387,612
Accrued Expenses			1,776,197			1,696,358
Promissory Notes, SunTrust			23,625,000			23,250,000
Operational Override Liability			646,702			715,497
Notes Payable – Vehicles			56,745			—
Total Current Liabilities			36,424,310			33,049,467
LONG-TERM LIABILITIES
Promissory Notes, SunTrust			27,500,000			25,250,000
Operational Override Liability			44,136,636			44,595,370
Notes Payable – Vehicles			198,688			—
Other Non-Current Liabilities			6,417			9,917
Total Long-Term Liabilities			71,841,741			69,855,287
Total Liabilities			108,266,051			102,904,754
COMMITMENTS AND CONTINGENCIES (NOTE 12)
STOCKHOLDERS’ DEFICIT
Preferred Stock – Par Value $.001; 10,000,000 Shares Authorized; None Issued or Outstanding			—			—
Common Stock – Par Value $.001; 100,000,000 Shares Authorized; 55,095,810 and 55,044,829 Issued and Outstanding, Respectively			55,095			55,044
Additional Paid-In Capital			7,330,751			6,267,788
Accumulated Deficit			(10,467,856	)		(10,100,899	)
Total Stockholders’ Deficit			(3,082,010	)		(3,778,067	)
Total Liabilities and Stockholders’ Deficit		$	105,184,041		$	99,126,687

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

DAKOTA PLAINS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2015 AND 2014

		Three Months Ended June 30,						Six Months Ended June 30,
		2015			2014			2015			2014
REVENUES
Transloading Revenue		$	5,804,272		$	7,298,561		$	14,283,533		$	12,754,019
Sand Revenue			1,560,055			176,187			2,438,428			176,187
Rental Income			30,000			30,000			60,000			60,000
Other			1,316,700			—			1,316,700			—
Total Revenues			8,711,027			7,504,748			18,098,661			12,990,206
COST OF REVENUES
(exclusive of items shown separately below)			2,075,834			1,757,462			4,290,496			3,856,161
OPERATING EXPENSES
Transloading Operating Expenses			1,280,374			516,150			2,404,246			978,385
General and Administrative Expenses			2,625,458			1,939,107			4,544,647			4,494,650
Depreciation and Amortization			1,140,326			1,086,271			2,248,340			2,121,486
Total Operating Expenses			5,046,158			3,541,528			9,197,233			7,594,521
INCOME FROM OPERATIONS			1,589,035			2,205,758			4,610,932			1,539,524
OTHER INCOME (EXPENSE)
Loss from Investment in DPTS Marketing LLC			—			(1,669,846	)		—			(1,583,214	)
Income from Investment in Dakota Plains Services, LLC			—			303,226			—			424,680
Interest Expense, Net of Interest Income			(2,012,040	)		(504,244	)		(3,958,782	)		(1,006,380	)
Other Expense			(457,945	)		—			(1,222,607	)		—
Total Other Income (Expense)			(2,469,985	)		(1,870,864	)		(5,181,389	)		(2,164,914	)
INCOME (LOSS) BEFORE TAXES			(880,950	)		334,894			(570,457	)		(625,390	)
INCOME TAX BENEFIT			(331,000	)		(647,000	)		(203,500	)		(1,161,885	)
NET INCOME (LOSS)			(549,950	)		981,894			(366,957	)		536,495
NET INCOME ATTRIBUTABLE TO NON- CONTROLLING INTERESTS			—			2,018,943			—			2,909,807
NET LOSS ATTRIBUTABLE TO SHAREHOLDERS OF DAKOTA PLAINS HOLDINGS, INC.		$	(549,950	)	$	(1,037,049	)	$	(366,957	)	$	(2,373,312	)
Net Loss Per Common Share – Basic and Diluted		$	(0.01	)	$	(0.02	)	$	(0.01	)	$	(0.04	)
Weighted Average Shares Outstanding – Basic and Diluted			54,184,792			53,781,435			54,135,531			53,690,564

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

DAKOTA PLAINS HOLDINGS, INC. AND SUBSIDIARIES
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2015 AND 2014

		Six Months Ended June 30,
		2015			2014
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (Loss)		$	(366,957	)	$	536,495
Adjustments to Reconcile Net Income (Loss) to Net Cash
Provided by (Used in) Operating Activities
Depreciation and Amortization			2,248,340			2,121,486
Amortization of Debt Discount			—			174,813
Amortization of Finance Costs			480,684			36,586
Deferred Income Taxes			(211,000	)		(1,170,000	)
Loss from Investment in DPTS Marketing LLC			—			1,583,214
Income from Investment in Dakota Plains Services, LLC			—			(424,680	)
Non-Cash Rental Expense			—			9,790
Amortization of Deferred Rent			(3,500	)		(3,500	)
Share-Based Compensation			1,259,951			1,504,293
Changes in Working Capital and Other Items:
Increase in Trade Receivables			(3,691,275	)		(1,321,269	)
Decrease (Increase) in Other Receivables			253,858			(116,775	)
Decrease (Increase) in Other Current Assets			(406,481	)		153,068
Decrease in Due from Related Party			—			1,514,475
Increase in Accounts Payable			428,160			122,509
Decrease in Accrued Expenses			(46,048	)		(1,317,679	)
Decrease in Accounts Payable – Related Party			—			(722	)
Increase in Restricted Cash			(293	)		—
Decrease in Operational Override Liability			(481,011	)		—
Decrease in Other Assets			—			1,802
Net Cash Provided By (Used In) Operating Activities			(535,572	)		3,403,906
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment			(1,516,618	)		(8,481,863	)
Cash Paid for Deposits			(30,000	)		—
Net Cash Used In Investing Activities			(1,546,618	)		(8,481,863	)
CASH FLOWS FROM FINANCING ACTIVITIES
Common Shares Surrendered			(221,050	)		(645,679	)
Principal Payments on Promissory Note, Pioneer Terminal			—			(287,703	)
Cash Distributions Paid to Non-Controlling Interests			—			(1,954,941	)
Advances on Promissory Notes, SunTrust			3,000,000			—
Payments on Promissory Notes, SunTrust			(375,000	)		—
Proceeds from Notes Payable – Vehicles			270,165			—
Payments on Notes Payable – Vehicles			(14,732	)		—
Payment on Operational Override Liability			(46,518	)		—
Net Cash Provided By (Used In) Financing Activities			2,612,865			(2,888,323	)
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			530,675			(7,966,280	)
CASH AND CASH EQUIVALENTS – BEGINNING OF PERIOD			4,690,706			13,011,608
CASH AND CASH EQUIVALENTS – END OF PERIOD		$	5,221,381		$	5,045,328
Supplemental Disclosure of Cash Flow Information
Cash Paid During the Period for Interest		$	2,681,241		$	866,041
Cash Paid During the Period for Income Taxes		$	7,500		$	8,115
Non-Cash Financing and Investing Activities:
Purchase of Property and Equipment Paid Subsequent to Period End		$	3,258,527		$	1,382,639
Change in Preferred Dividend Receivable		$	—		$	247,942

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

 

Notes to Unaudited Condensed Consolidated Financial Statements 

June 30, 2015

 

1.	Organization and Nature of Business

 

Dakota Plains Holdings, Inc. (the “Company,” “our,” and words of similar import) is an integrated midstream energy company, principally focused on developing and owning transloading facilities and transloading crude oil and related products within the Williston Basin.

 

Dakota Plains Transloading, LLC (“DPT”), a wholly owned subsidiary of the Company, was formed in August 2011 primarily to participate in the ownership and operation of 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.

 

Dakota Plains Marketing, LLC (“DPM”), a wholly owned subsidiary of the Company, was formed in April 2011 primarily 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. Effective November 30, 2014, the Company ceased the purchase and sale of crude oil.

 

Dakota Plains Sand, LLC, a wholly owned subsidiary of the Company, was formed in May 2014 primarily to participate in the ownership and operation of a sand transloading facility near New Town, North Dakota.

 

The Company is governed by its 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, 2014, which has been derived from the Company’s audited consolidated financial statements for the year ended December 31, 2014. However, such information includes all adjustments (consisting of normal recurring adjustments and changes 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 period. 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, 2014.

 

New Accounting Pronouncements

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“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 Company’s consolidated financial statements upon adoption.

 

In May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, “Revenue from Contracts with Customers.” The standard’s core principle is that an entity shall recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard generally requires an entity to identify performance obligations in its contracts, estimate the amount of variable consideration to be received in the transaction price, allocate the transaction price to each separate performance obligation, and recognize revenue as obligations are satisfied. The standard will be effective for annual and interim periods beginning after December 15, 2017. The standard allows for either full retrospective adoption, meaning the standard is applied to all periods presented in the financial statements, or modified retrospective adoption, meaning the standard is applied only to the most current period presented. The Company is currently evaluating the impact of the provisions of ASU 2014-09; however, the standard is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

In June 2014, the FASB issued ASU 2014-12, “Compensation - Stock Compensation” effective for annual periods and interim periods within those periods beginning after December 15, 2015. The amendments require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. The Company is currently evaluating the impact of the provisions of ASU 2014-12; however, the standard is not expected to have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

 

 

In April 2015, the FASB issued ASU 2015-03, “Interest – Imputation of Interest” effective for annual periods and interim periods within those periods beginning after December 31, 2015. The new guidance requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. This new guidance will be effective for us beginning January 1, 2016. We are currently evaluating the impact of this standard on our consolidated financial statements.

 

Liquidity

 

As of June 30, 2015, we had cash and cash equivalents and trade receivables of approximately $12.2 million and our accounts payable and accrued expenses were approximately $12.1 million. In addition, we have $24.3 million aggregate principal amount of promissory notes and Operational Override liability payments due prior to June 30, 2016 (See Note 11, Membership Purchase Agreement).

 

Under the Revolving Credit Facility with SunTrust Bank (“SunTrust”), the Company has $6 million of available borrowings at June 30, 2015 that could be utilized to fund the payment of accounts payable and accrued expenses in excess of cash and cash equivalents and trade receivables. The Company is currently focused on increasing the throughput and reducing the expenses at the transloading facility and expects cash flows from operations to increase due to the fact that it currently owns 100% of Dakota Petroleum Transport Solutions, LLC (“DPTS”) and DPTS Sand, LLC. The Company believes that the cash flows from operations and the availability under the Revolving Credit Facility will allow it to meet its current obligations in the ordinary course of business. The Company has also been in ongoing discussions with SunTrust about restructuring the Tranche B portion of the Revolving Credit Facility and recently received a revised term sheet. It is the Company’s expectation that the restructuring will be completed in the third quarter of 2015. The Company may also need to secure financing through the capital markets, or otherwise, in order to fund future operations and satisfy obligations due. There is no guarantee that any such required financing will be available on terms satisfactory to the Company, if at all, or that the Company will be able to successfully refinance or restructure the Tranche B portion of the Revolving Credit Facility.

 

Joint Venture Equity Investment

 

The Company used the equity method to account for investments in joint ventures where it had significant influence, representing equity ownership of not more than 50%. Effective November 24, 2014, the Company sold its 50% ownership in Dakota Plains Services, LLC (“DPS”). In addition, effective November 30, 2014, the Company purchased the remaining ownership interests in DPTS, DPTS Marketing LLC (“DPTSM”) and DPTS Sand, LLC from its joint venture partner (See Note 11, Membership Purchase Agreement). Prior to the aforementioned transactions, the Company accounted for its investments in DPS and DPTSM using the equity method. All of the Company’s equity investments had December 31 fiscal year-ends, and the Company recorded its 50% share of the joint ventures’ net income or loss based on their most recent interim financial statements, during the period the investments were accounted for using the equity method. The Company’s share of the joint ventures’ operating results for each period was adjusted for its share of intercompany transactions. Any significant unrealized intercompany profits or losses were eliminated in applying the equity method of accounting.

 

At June 30, 2015 and December 31, 2014, the Company had no investments in joint ventures where it had significant influence, representing equity ownership of not more than 50%, and was not accounting for any investments using the equity method.

 

 

 

Cash and Cash Equivalents

 

The Company considers highly liquid investments with insignificant interest rate risk and original maturities of three months or less to be cash equivalents. Cash equivalents consist primarily of interest-bearing bank accounts and money market funds. The Company’s 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.

 

Segments

 

The Company has two principal operating segments, which are the crude oil and frac sand transloading operations. These operating segments were determined based on the nature of the products and services offered. Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The Company’s chief executive officer and chief operating officer have been identified as the chief operating decision makers. The Company’s chief operating decision makers direct the allocation of resources to operating segments based on the profitability and cash flows of each respective segment.

 

The Company has determined that there is only one reportable segment as the two segments discussed above have similar processes and purposes, customers, geographic locations and economic characteristics.

 

 

Accounts Receivable

 

Accounts receivable are carried on a gross basis, with no discounting. The Company regularly reviews all aged accounts receivable for collectability and establishes an allowance as necessary for individual customer balances. At June 30, 2015 and December 31, 2014 there was no allowance for doubtful accounts.

 

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
Terminal			13 years
Machinery			5-13 years
Tanks			13 years
Other Property and Equipment			3-5 years
Land			—

Expenditures for replacements, renewals, and betterments are capitalized. Maintenance and repairs are charged to operations as incurred. Depreciation expense was $1,140,326 and $2,248,340 for the three and six months ended June 30, 2015, respectively, and $1,086,271 and $2,121,486 for the three and six months ended June 30, 2014, respectively. The Company had fixed assets related to in-progress construction of $5,388,163 and $1,886,470 at June 30, 2015 and December 31, 2014, respectively. The Company has estimated the cost to complete construction to be approximately $0.7 million.

 

Impairment

 

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. The determination of impairment is based upon expectations of undiscounted future cash flows, before interest, of the related asset. If the carrying value of the asset exceeds the undiscounted future cash flows, the impairment would be computed as the difference between the carrying value of the asset and the fair value. There was no impairment identified during the six months ended June 30, 2015 and 2014.

 

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 June 30, 2015 and December 31, 2014.

 

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.

 

The Company records Goodwill for income tax purposes for the amount that the purchase price paid for an asset or group of assets exceeds the fair value of the assets acquired. Goodwill is amortized over fifteen years.

 

 

Stock-Based Compensation

 

The Company records expenses associated with the fair value of stock-based compensation. For fully vested, restricted stock and restricted stock unit 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.

 

Revenue Recognition

 

DPTS and DPTS Sand, LLC recognize revenues when the related services are performed, the sales price is fixed or determinable and collectability is reasonably assured. DPTS records transloading revenues for fuel-related services when the transloading of petroleum-related products is complete and records other revenues related to the Pioneer Terminal as they are earned based on agreements with customers. DPTS Sand, LLC records the gross sale of sale transloading services when the transloading of sand-related products is complete.

 

Earnings Per Share

 

Basic earnings per share (“EPS”) excludes dilution and is computed by dividing net income (loss) attributable to Company stockholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if common stock equivalents were exercised or converted to common stock. The dilutive effect of common stock equivalents is calculated using the treasury stock method. When a loss from continuing operations exists, all potentially dilutive securities are anti-dilutive and therefore excluded from the computation of diluted EPS. As the Company had a loss for the three- and six-month periods ended June 30, 2015 and 2014, the potentially dilutive shares are anti-dilutive and thus not added into the diluted EPS calculation.

 

The following warrants, restricted stock and restricted stock units represent potentially dilutive shares as of June 30, 2015 and 2014:

 

		June 30,
		2015				2014
Restricted Stock			781,149				1,016,150
Restricted Stock Units			1,624,121				—
Stock Warrants			2,771,000				2,771,000
Total Potentially Dilutive Shares			5,176,270				3,787,150

 

Fair Value Measures

 

The Company measures fair value using a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, essentially an exit price, based on the highest and best use of the asset or liability. The levels of the fair value hierarchy are as follows:

 

	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; and
	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 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, depreciable lives for property and equipment, fair value of the Operational Override liability, inputs in the valuation of certain equity transactions, and accounting for income taxes. Actual results may differ from those estimates.

 

Non-Controlling Interest

 

FASB ASC 810 “Consolidation” requires that a non-controlling interest, previously referred to as a minority interest, be reported as part of equity in the consolidated financial statements and that losses be allocated to the non-controlling interest even when such allocation might result in a deficit balance, reducing the losses attributable to the controlling interest. The Company’s non-controlling interest during the three and six months ended June 30, 2014 was due to the non-controlling member of DPTS and DPTS Sand, LLC prior to the Company’s purchase of the 50% interest owned by the non-controlling member.

 

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

 

DPTS Marketing LLC

 

The Company, through its wholly owned subsidiary Dakota Plains Marketing, LLC, entered into a joint venture with Petroleum Transport Solutions, LLC (“PTS”). The Company and PTS each owned 50% of the outstanding member units of DPTSM until the Company purchased the 50% ownership interest of PTS, effective November 30, 2014. 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.

 

The Company accounted for this joint venture using the equity method of accounting until the date it purchased the 50% ownership interest of PTS. The Company’s share of the income or loss from the joint venture was included in other income on the condensed consolidated statement of operations for the three and six months ended June 30, 2014.

 

Summarized unaudited financial statements of DPTSM when accounted for as an equity method investment are as follows: 

		June 30, 2014
		Three Months Ended				Six Months Ended
Sales		$	11,370,689			$	26,363,804
Net Losses			(3,339,691	)			(3,166,427	)
Company’s Share of Equity in Net Losses			(1,669,846	)			(1,583,214	)

 

Pro Forma Information

 

The Company accounted for this joint venture using the equity method of accounting until the date it purchased the 50% ownership interest of PTS. The Company’s share of the equity method income or loss from the joint venture was included in other income on the condensed consolidated statement of operations for the three and six months ended June 30, 2014.

 

These pro forma amounts have been calculated after adjusting for intercompany amounts. In addition, the equity earnings from the Company’s former non-controlling interest in DPTSM have been removed.

 

		June 30, 2014
		Three Months Ended				Six Months Ended
Revenues		$	14,597,334			$	30,476,722
Net Loss			(687,950	)			(1,046,718	)
Net Income Attributable to Non-Controlling Interest			349,099				1,326,594
Net Loss Attributable to Shareholders of Dakota Plains Holdings, Inc.			(1,037,049	)			(2,373,312	)

 

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 owned 50% of the outstanding member units of DPS until the Company sold its 50% ownership to JPND on November 24, 2014. 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 determined from time to time.

 

Prior to selling its ownership interest, the Company accounted 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 statement of operations for the three and six months ended June 30, 2014.

 

Summarized unaudited financial statements of DPS are as follows:

 

		June 30, 2014
		Three Months Ended				Six Months Ended
Sales		$	5,202,300			$	9,788,249
Net Earnings			606,452				849,360
Company’s Share of Equity in Net Earnings			303,226				424,680

 

4.	Lease Agreement

 

In July 2013, the Company entered into an operating lease agreement with UNIMIN Corporation to lease certain land owned by the Company in New Town, North Dakota. The Company began receiving monthly lease payments of $10,000 in January 2014 and will continue to do so through December 2023, with annual increases of 3% starting January 2016. The lease agreement includes a provision that allows UNIMIN Corporation the option to renew and extend the term of the lease for four additional periods of five years each. In addition, all improvements to the land, including rail tracks and the sand facility, revert to the Company upon termination of the lease.

 

5.	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 June 30, 2015 and December 31, 2014.

 

In May 2015, the Company issued an aggregate of 33,558 shares of common stock to its former non-employee directors pursuant to its 2011 Equity Incentive Plan, as amended (the “2011 Plan”), for service to the Company. These shares were valued at $50,000 or $1.49 per share, the market value of the shares of common stock on the date of issuance, and have been expensed as general and administrative expenses.

 

In June 2015, the Company issued an aggregate of 234,376 shares of common stock to its non-employee directors pursuant to its 2011 Plan for prior and future service to the Company. These shares were valued at $300,000 or $1.28 per share, the market value of the shares of common stock on the date of issuance. The Company recorded general and administrative expenses of $150,000 for the six and three months ended June 30, 2015 related to this stock issuance.

 

During the six months ended June 30, 2015, 216,953 shares of common stock were surrendered by certain executives, employees, and directors of the Company to satisfy tax obligations in connection with the stock grants and vesting of restricted stock awards. The total value of these shares was $346,937, which was based on the closing market price on the date of surrender.

 

6.	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. Changes in these assumptions can materially affect the fair value estimate. The fair value of the warrants is recognized as compensation or interest expense over the vesting term.

 

 

Warrants

 

The following table reflects the status of warrants outstanding at June 30, 2015:

 

				Warrants				Exercise Price				Expiration Date
	February 1, 2011				1,000,000			$	0.285			January 31, 2021
	February 22, 2011				600,000				2.50			February 22, 2016
	April 5, 2011				100,000				2.50			April 5, 2016
	November 1, 2012				50,000				3.28			November 1, 2016
	November 2, 2012				921,000				4.00			October 31, 2017
	January 1, 2013				100,000				3.25			February 15, 2018
	Outstanding at June 30, 2015				2,771,000
	Exercisable at June 30, 2015				2,771,000

 

Outstanding Warrants

 

		No warrants were forfeited, expired, or exercised during the six months ended June 30, 2015.

The Company recorded no general and administrative expense for the three and six months ended June 30, 2015 and 2014, related to these warrants. There is no further general and administrative expense that will be recognized in future periods related to any warrants that have been granted as of June 30, 2015, as the Company recognized the entire fair value upon vesting.

 

Restricted Stock Awards and Restricted Stock Unit Awards

 

The Company issued an aggregate of 1,624,121 shares of restricted stock and restricted stock units as compensation to officers and employees of the Company during the six months ended June 30, 2015. The restricted stock shares and restricted stock units vest over various terms with all restricted stock shares and restricted stock units vesting no later than March 2018. As of June 30, 2015, there was $3.5 million of total unrecognized compensation expense related to unvested shares of restricted stock and restricted stock units. The Company has assumed a zero percent forfeiture rate on all grants. The Company recorded general and administrative expense, related to restricted stock, of $550,420 and $1,059,951 for the three and six months ended June 30, 2015, respectively, and $325,364 and $712,051 for the three and six months ended June 30, 2014, respectively.

 

The following table reflects the outstanding restricted stock and restricted stock unit awards and activity related thereto for the six months ended June 30, 2015: 

		Six Months Ended June 30, 2015
		Number of Shares				Weighted Average  Grant Price
Restricted Stock Awards and Restricted Stock Unit Awards:
Outstanding at the Beginning of Period			1,031,150			$	2.89
Granted			1,624,121				1.64
Lapse of Restrictions			(250,001	)			3.61
Restricted Stock and Restricted Stock Units Outstanding at June 30, 2015			2,405,270				1.97

 

7.	Promissory Notes

 

On December 5, 2014, the Company and its wholly owned subsidiaries (“Borrowers”) entered into a $57.5 million Revolving Credit and Term Loan Agreement (“Credit Agreement”) with SunTrust Bank (“Administrative Agent”). The Credit Agreement provides for a revolving credit facility of $20 million (the “Revolving Loan Facility”) and one or more tranches of term loans in the aggregate amount of $37.5 million (the “Term Loans” and together with the Revolving Loan Facility, the “Credit Facility”). There was $51.1 million outstanding under the Credit Facility at June 30, 2015. The Company is currently in the process of refinancing the outstanding promissory notes and expects to complete the process in the third quarter of 2015.

 

 

All borrowings under the Revolving Loan Facility must be repaid in full upon maturity, December 5, 2017. Outstanding borrowings under the Revolving Loan Facility may be reborrowed and repaid without penalty. The first tranche of Term Loans (“Tranche A”) in the amount of $15.0 million is payable in quarterly installments and matures on December 5, 2017. Repayment of the second tranche of Term Loans (“Tranche B”) in the amount of $22.5 million is due on December 5, 2015. Under the terms of the Credit Agreement, the Borrowers have the right to increase the commitments to the Revolving Loan Facility and/or the Term Loans in an aggregate amount not to exceed (x) $25,000,000 (such increased commitments, “Tranche B Replacement Commitments”) plus (y) solely after the full amount of all Tranche B Replacement Commitments have been made, $40,000,000, at any time on or before the final maturity date of the relevant facility.

 

At the Borrowers’ option, borrowings under the Credit Facility may be either (i) the “Base Rate” loans, which bear interest at the highest of (a) the rate which the Administrative Agent announces from time to time as its prime lending rate, as in effect from time to time, (b) 1/2 of 1% in excess of the federal funds rate and (c) Adjusted LIBOR (as defined in the Credit Agreement) determined on a daily basis with a one (1) month interest period, plus one percent (1.00%) or (ii) “Eurodollar” loans, which bear interest at Adjusted LIBOR, as determined by reference to the rate for deposits in dollars appearing on the Reuters Screen LIBOR01 Page for the respective interest period.

 

The Credit Agreement requires the Company to maintain a minimum fixed charge coverage ratio and a maximum total debt to EBITDA (earnings before interest, income taxes, depreciation expense and amortization), or leverage ratio. The method of calculating all of the components used in the covenants is included in the Credit Agreement. The Company was in compliance with all required covenants as of June 30, 2015.

 

The Credit Agreement contains customary events of default, including nonpayment of principal when due; nonpayment of interest after stated grace period; fees or other amounts after stated grace period; material inaccuracy of representations and warranties; violations of covenants; certain bankruptcies and liquidations; any cross-default to material indebtedness; certain material judgments; certain events related to the Employee Retirement Income Security Act of 1974, as amended, or “ERISA,” actual or asserted invalidity of any guarantee, security document or subordination provision or non-perfection of security interest, and a change in control (as defined in the Credit Agreement).

 

Pursuant to a Guaranty and Security Agreement, dated December 5, 2014 (the “Guaranty and Security Agreement”), made by the Borrowers, the Company, and certain subsidiaries of the Borrowers in favor of the Administrative Agent, the obligations of the Borrowers are guaranteed by the Company, each other Borrower and the guaranteeing subsidiaries of the Borrowers and are secured by all of the assets of such parties.

 

The Company incurred finance costs of $1,617,909 related to the Credit Agreement. These costs were capitalized and are being amortized over the term of the Credit Agreement using the straight-line method, which approximates the effective interest method. For the three and six months ended June 30, 2015, the Company recognized interest expense of $240,342 and $480,684, respectively, related to these finance costs.

 

8.	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 following table presents the income tax benefit for the three and six months ended June 30, 2015 and 2014:

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Current Income Taxes		$	—			$	—			$	7,500			$	8,115
Deferred Income Taxes:
Federal			(305,000	)			(588,000	)			(194,000	)			(1,062,000	)
State			(26,000	)			(59,000	)			(17,000	)			(108,000	)
Total Benefit		$	(331,000	)		$	(647,000	)		$	(203,500	)		$	(1,161,885	)

 

The Company has no liabilities for unrecognized tax benefits.

 

  

The Company’s policy is to recognize potential interest and penalties accrued related to unrecognized tax benefits within income tax benefit. For the six months ended June 30, 2015 and 2014, the Company did not recognize any interest or penalties in the condensed consolidated statements of operations, nor did it have any interest or penalties accrued in the condensed consolidated balance sheets at June 30, 2015 and December 31, 2014.

 

As part of the transaction to purchase the membership units owned by PTS, the Company recorded goodwill for income tax purposes for the amount that the purchase price exceeded the fair value of the assets acquired. The Company has recorded a deferred tax asset for the tax goodwill in the amount of $6.0 million at June 30, 2015. This deferred tax asset will be reduced as the Company amortizes the goodwill. In addition, the Company has recorded a deferred tax asset of $16.7 million for the Operational Override liability (See Note 11, Membership Purchase Agreement). The liability will be reduced for book purposes when paid and recorded as a taxable deduction at the time of payment. The deferred tax asset will be reduced as these payments are made.

 

The Company reported a net deferred tax asset of $29.2 million on its condensed consolidated balance sheet as of June 30, 2015. GAAP requires the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all of the benefits of deferred tax assets will not be realized. The Company reported a valuation allowance of $306,000 at June 30, 2015 related to state net operating loss carry forwards. The Company accumulated net operating losses in states other than North Dakota due to the operations of DPTSM. The Company will no longer file tax returns in these states now that the operations of DPTSM have been discontinued.

 

The 2013, 2012 and 2011 tax years remain open to examination for federal income tax purposes and by the other major taxing jurisdictions to which the Company is subject.

 

9.	Financial Instruments

 

The Company’s financial instruments include cash and cash equivalents, trade receivables, other receivables, accounts payable, and promissory notes. The carrying amount of cash and cash equivalents, trade receivables, other receivables and accounts payable approximate fair value due to their immediate or short-term maturities. The carrying amounts of the Company’s promissory notes outstanding approximate fair value because its current borrowing rates do not materially differ from market rates for similar borrowings.

 

 

 

10.	Fair Value

 

FASB ASC 820-10-55 defines fair value, establishes a framework for measuring fair value under GAAP and enhances disclosures about fair value measurements. Fair value is defined under FASB ASC 820-10-55 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under FASB ASC 820-10-55 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value.

 

The following table summarizes the valuation of financial instruments measured at fair value on a recurring basis in the condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014: 

		Quoted Prices In Active Markets for Identical Assets (Level 1)				Significant Other Observable Inputs (Level 2)				Significant Unobservable Inputs (Level 3)
June 30, 2015:
Operational Override Liability – Current Liability		$	—			$	—			$	(646,702	)
Operational Override Liability – Non-Current Liability			—				—				(44,136,636	)
Total Operational Override Liability		$	—			$	—			$	(44,783,338	)
December 31, 2014:
Operational Override Liability – Current Liability		$	—			$	—			$	(715,497	)
Operational Override Liability – Non-Current Liability			—				—				(44,595,370	)
Total Operational Override Liability		$	—			$	—			$	(45,310,867	)

 

The level 3 liability consists of the liability related to the Operational Override (See Note 11, Membership Purchase Agreement). There were no transfers between fair value levels during the six months ended June 30, 2015 and 2014. Level 2 liabilities consist of promissory notes (see Note 7, Promissory Notes).

 

  

The following table presents changes for the liability measured at fair value using significant unobservable inputs (Level 3) during the six months ended June 30, 2015:

 

			Level 3 Financial Liabilities
Balance at December 31, 2014		$	(45,310,867	)
Decrease for Lower than Estimated Volumes			481,011
Principal Payment on Operational Override			46,518
Balance at June 30, 2015		$	(44,783,338	)

 

The Company has recorded accretion of $1,010,803 and $2,025,846 for the three and six months ended June 30, 2015, respectively, related to the Operational Override. This accretion has been included in interest expense on the condensed consolidated statements of operations. As of June 30, 2015, the Company has paid $1,240,320 related to accretion of the Operational Override, and the accreted but unpaid interest expense has been included in accrued expenses on the condensed consolidated balance sheet.

 

11.

Membership Purchase Agreement

 

On December 5, 2014, the Company entered into a Membership Interest Purchase Agreement with DPT, Dakota Plains Sand, LLC, DPM and PTS. Pursuant to the Membership Interest Purchase Agreement, in exchange for $43 million in cash and an Operational Override (as defined below), DPT acquired all of the limited liability company membership interests of DPTS owned by PTS, Dakota Plains Sand, LLC acquired all of the limited liability company membership interests of DPTS Sand, LLC owned by PTS, and DPM acquired all of the limited liability company membership interests of DPTSM owned by PTS. As a result of the transactions, through ownership of its wholly owned subsidiaries, the Company became the sole member of DPTS, DPTS Sand, LLC and DPTSM.

 

In addition to $43 million in cash paid to PTS at closing, the Company agreed to pay PTS an amount equal to $0.225 per barrel of crude oil arriving at the current transloading facility located in New Town, North Dakota, up to a maximum of 80,000 barrels of crude oil per day through December 31, 2026 (the “Operational Override”). In the event such Operational Override payments, in the aggregate, are less than $10 million, then the Company is obligated to pay PTS the difference on or before January 31, 2027.

 

At any time the Company may pay PTS an amount equal to the then-present value (using a nine percent (9%) discount rate) of the maximum remaining Operational Override payments assuming maximum volume for the period between the pre-payment date and December 31, 2026. If such early payment is made, the Company will have no further obligations related to the Operational Override.

 

The Membership Interest Purchase Agreement contains certain representations, warranties, covenants and indemnification obligations of the parties.

 

In connection with the Membership Interest Purchase Agreement, the Company entered into an Indemnification and Release Agreement dated December 5, 2014 with World Fuel Services Corporation (“WFS”) (the “Indemnification and Release Agreement”). Pursuant to the Indemnification and Release Agreement, WFS, on behalf of itself and its direct and indirect subsidiaries, agreed to indemnify the Company, DPTS, DPTSM, and each of their respective officers, managers, directors, employees, affiliates, members, and stockholders, for third party claims in connection with, relating to, or otherwise arising from the train car derailment that occurred in Lac-Mégantic, Quebec, on July 6, 2013 (the “Derailment”). In addition, the Company, DPT and DPM, on behalf of itself and each such entity’s direct and indirect subsidiaries, agreed to indemnify WFS and WFS’s officers, managers, directors, employees, affiliates, members, and stockholders for (i) fifty percent (50%) of the documented out-of-pocket costs and expenses incurred by any WFS party as a result of or arising out of certain obligations to railcar lessors; and (ii) fifty percent (50%) of the documented out-of-pocket defense costs and legal expenses incurred by any WFS party in connection with the Derailment. The Company and its affiliates’ total exposure under the indemnification is limited to $10 million in the aggregate. The indemnification obligations are net of any insurance proceeds received. To support its indemnification obligations, the Company placed $3 million of cash in escrow, which is recorded as restricted cash on the condensed consolidated balance sheets as of June 30, 2015 and December 31, 2014.

 

In connection with the indemnification, each of the Company and WFS, on its behalf and on behalf of its affiliates, released the other party and its affiliates from any claims arising in connection with the Derailment, other than those for which indemnification is provided under the Indemnification and Release Agreement.

 

Pursuant to a Guaranty and Security Agreement, dated December 5, 2014 (the “Seller Guaranty and Security Agreement”), made by DPT, Dakota Plains Sand, LLC, DPM, the Company and certain subsidiaries of the Company, the Company’s obligations under Section 2.2(b) of the Membership Interest Purchase Agreement in respect of the Operational Override, the Company’s obligations in the Indemnification and Release Agreement and the obligations of DPTSM under five Amended and Restated Railcar Sublease Agreements between DPTSM and Western Petroleum Company are guaranteed by DPT, Dakota Plains Sand, LLC, DPM, the Company and certain subsidiaries of the Company, and are secured by a second priority lien on all of the assets of such parties.

 

 

In connection with the Membership Interest Purchase Agreement, the following agreements were terminated: (a) that certain Member Control Agreement of DPTS Sand, LLC, effective as of June 1, 2014, by and among Dakota Plains Sand, LLC, PTS, and DPTS Sand, LLC; (b) that certain Second Amended and Restated Member Control Agreement of DPTS effective as of December 31, 2013, by and among DPT, PTS and DPTS; and (c) that certain Second Amended and Restated Member Control Agreement of DPTSM, effective as of December 31, 2013, by and among DPM, PTS, and DPTSM; provided DPM and its affiliates remained subject to the restrictions against purchasing, selling, storing, transporting or marketing crude oil originating from production fields anywhere in North Dakota, or conducting any trading activities related thereto, until June 5, 2015, but were permitted to sublease and lease-for-trip railcars to transport crude oil, and transport any other materials (including crude oil) by road.

 

Railcar Sublease Agreements

 

As part of the Membership Interest Purchase Agreement, the Company, through DPTSM, entered into five Amended and Restated Railcar Sublease Agreements with Western Petroleum Company (“Amended Sublease Agreements”). Under the Amended Sublease Agreements, DPTSM will sublease a total of 872 railcars from Western Petroleum Company subject to the terms, covenants, provisions, conditions, and agreements contained in the master railcar leases between the original lessors and Western Petroleum Company. The term of the Amended Sublease Agreements shall be from December 5, 2014 (the “Effective Date”) until the end of the term of the applicable schedule to the respective master railcar lease. The last of the master railcar leases expires in August 2021.

 

Within thirty 30 days after the Effective Date, Western Petroleum Company delivered to DPTSM a certain set of railcars as identified in a schedule included with the Amended Sublease Agreements. For the period (the “Suspension Period”) beginning on the Effective Date and ending on June 1, 2015 (the “Suspension Termination Date”), the Amended Sublease Agreements as they relate to certain other railcars identified in an additional schedule (the “Suspended Cars”) shall be temporarily suspended to permit Western Petroleum Company to retain the Suspended Cars. No later than 30 days after the Suspension Termination Date, Western Petroleum Company will deliver the Suspended Cars to DPTSM at the Company’s transloading facility located in New Town, North Dakota, unless an alternate location is agreed to. The Amended Sublease Agreements are being accounted for as operating leases.

 

DPTSM assumes and accepts the responsibility for any charges incurred between the time of delivery of the railcars to DPTSM under the Amended Sublease Agreements and redelivery of the railcars to Western Petroleum Company at the conclusion of the term, including, but not limited to, charges resulting from demurrage, track storage, switching, detention, freight or empty movements made by the railcars upon each railroad over which the railcars shall move during the term of the Amended Sublease Agreements, as well as any other charges set forth in the master railcar leases.

 

12.

Commitments and Contingencies

 

Lac-Mégantic, Quebec

 

We and certain of our subsidiaries, including DPTS and DPTSM, are among the many defendants named in various lawsuits relating to the derailment of a Montreal Main & Atlantic Railroad, Ltd. (“MM&A”) train in Lac-Mégantic, Quebec. We believe all claims asserted against us and our subsidiaries are without merit and we intend to vigorously defend against such claims.

 

On July 6, 2013, an unmanned freight train operated by MM&A with 72 tank cars carrying approximately 50,000 barrels of crude oil rolled downhill and derailed in Lac-Mégantic, Quebec. The derailment resulted in significant loss of life, damage to the environment from spilled crude oil and extensive property damage. DPTSM, a crude oil marketing joint venture in which, at the time of the derailment, we indirectly owned a 50% membership interest, and currently own 100% of the membership interest, subleased the tank cars involved in the incident from an affiliate of our former joint venture partner. An affiliate of our former joint venture partner owned title to the crude oil being carried in the derailed tank cars. DPTS, a crude oil transloading joint venture in which, at the time of the derailment, we also indirectly owned a 50% membership interest, and currently own 100% of the membership interest, arranged for the transloading of the crude oil for DPTSM into tank cars at DPTS’s facility in New Town, North Dakota. A different affiliate of our former joint venture partner contracted with Canadian Pacific Railway (“CPR”) for the transportation of the tank cars and the crude oil from New Town, North Dakota to a customer in New Brunswick, Canada. CPR subcontracted a portion of that route to MM&A.

 

 

On July 15, 2013, four named parties filed a petition in the Canadian Province of Quebec seeking permission from the court to pursue a class action seeking to recover compensatory and punitive damages along with costs. On June 18, 2014 the petitioners sought permission from the Quebec Superior Court to discontinue the proceedings without prejudice against us and our two subsidiaries Dakota Plains Marketing LLC and Dakota Plains Transloading LLC. The Court granted permission for the discontinuance, and consequently those companies have been removed from the proceeding; however, the most recent iteration of the petition, filed on July 7, 2014, still includes DPTS and DPTSM, along with over 30 third parties, including CPR, MM&A and certain of its affiliates, several manufacturers and lessors of tank cars, as well as the intended purchaser and certain suppliers of the crude oil. The petition generally alleges wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil. On February 24, 2015, the Superior Court of Quebec issued an order staying the class action proceedings in light of settlement agreements reached by several defendants with the Trustee and the monitor in MMA’s Canadian bankruptcy (the “Monitor”). On March 20, 2015, by terms of the order dated February 24, 2015, the stay was lifted in respect of all non-settling defendants, including DPTS and DPTSM. We believe these claims against DPTS and DPTSM are without merit and intend to vigorously defend against such claims and pursue any and all defenses available.

 

Around July 29, 2013, twenty individuals filed lawsuits in Cook County, Illinois seeking unspecified damages for their injuries from the accident. The lawsuits assert claims for negligence against the eight defendants noted above. On August 7, 2013, MM&A filed a Chapter 11 voluntary petition in the bankruptcy court in Maine. On August 29, 2013, the defendants jointly removed the cases from state court in Cook County to the United States District Court in the Northern District of Illinois. On September 13, 2013, the bankruptcy trustee for MM&A, and WFS and Petroleum Transport Solutions, LLC filed motions seeking to transfer the nineteen personal injury cases from federal court in Illinois to the United States District Court for the District of Maine (the “ME District Court”). On March 21, 2014, the ME District Court granted the transfer motion. On April 4, 2014, the plaintiffs filed a motion for reconsideration of the order granting the transfer motion and a motion requesting the ME District Court abstain from exercising jurisdiction over the cases. The motion for reconsideration was denied and the motion for abstention remains pending. On May 1, 2014, the plaintiffs appealed the ME District Court’s order granting the transfer motion to the First Circuit Court of Appeals. On June 17, 2014, the ME District Court entered a consent order staying proceedings in the transferred cases pending the appeal. On November 11, 2014, the Trustee for MMA’s U.S. bankruptcy estate (the “Trustee”) and plaintiffs moved to amend the consent order staying proceedings in the transferred cases to allow plaintiffs to file additional cases in other jurisdictions. On March 23, 2015, the ME District Court entered an amended consent order staying proceedings in the transferred cases pending the appeal and allowing plaintiffs to file additional cases. On March 23, 2015, the ME District Court entered an amended consent order staying proceedings in the transferred cases pending the appeal but allowing plaintiffs to file additional cases.  As a result, in June 2015, we, certain of our subsidiaries, including DPTS and DPTSM, along with numerous third parties were named as defendants in seventeen new complaints filed in the Circuit Court of Cook County, Illinois.  The allegations, claims and damages sought against us in these new actions are substantially the same as in the transferred cases.  Additionally, in June 2015, we, certain of our subsidiaries, including DPTS and DPTSM, along with numerous third parties were named as defendants in two class actions filed in the District Court of Dallas County, Texas.  The class action complaints generally allege wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil and seek economic, compensatory and punitive damages, as well as costs.  As discussed in greater detail below, we expect these new actions will be stayed in conjunction with the Settlement Agreement (as defined below).

 

Additional claims, lawsuits, proceedings, investigations and orders may be filed, commenced or issued with respect to the incident, which may involve civil claims for damages or governmental investigative, regulatory or enforcement actions against us.

 

On December 5, 2014, we entered into an Indemnification and Release Agreement with WFS. Under this agreement, WFS, on behalf of itself and its direct and indirect subsidiaries, has agreed to indemnify us, each of our subsidiaries, including DPTS and DPTSM, for third party claims for bodily injury, death, property damage, economic loss, loss of consortium, loss of income and similar claims in connection with, relating to, or otherwise arising from the derailment, in each case solely to the extent not covered by insurance or otherwise paid for by third parties. In addition, we agreed to indemnify WFS for (i) fifty percent (50%) of the documented out-of-pocket costs and expenses incurred by any WFS party as a result of or arising out of certain obligations to railcar lessors; and (ii) fifty percent (50%) of the documented out-of-pocket defense costs and legal expenses incurred by any WFS party in connection with the derailment not otherwise covered by insurance. However, our total exposure under this indemnification is limited to $10 million in the aggregate. All of the indemnification obligations are net of any insurance proceeds received.

 

On June 8, 2015, we entered into a settlement agreement (the “Settlement Agreement”) with the Trustee, Montreal, Maine and Atlantic Canada Co. (“MMAC”), and the monitor (the “Monitor”) in MMAC’s Canadian bankruptcy (collectively, the “MMA Parties”) to resolve all claims arising out of the derailment.  Under the terms of the Settlement Agreement, WFS will contribute $110 million (the “Settlement Payment”) to a compensation fund established to compensate parties who suffered losses as a result of the derailment. As part of the settlement, we will also assign to the Trustee and MMAC certain claims we have against third parties arising out of the derailment.

 

 

In consideration of the Settlement Payment and the assignment of claims to the Trustee and MMAC, we and certain of our subsidiaries, including DPTS and DPTSM (collectively, the “DAKP Parties”), will receive the benefit of the global releases and injunctions set forth in the respective bankruptcy plans filed by the Trustee in the U.S. and by MMAC in Canada (the “U.S. Bankruptcy Plan” and the “CCAA Plan” respectively, each a “Plan” and collectively the “Plans”). The effect of these global releases and injunctions will be to bar all claims which may exist now or in the future against the DAKP Parties arising out of the derailment, other than criminal claims which by law may not be released.

 

Neither the global releases and injunctions set forth in the Plans nor our obligations will be effective unless and until the Plans are approved by creditors in both the U.S. and Canadian bankruptcies, an order sanctioning the CCAA Plan and confirming the U.S. Bankruptcy Plan is issued by the Canadian and U.S. bankruptcy courts, respectively, and each order becomes final and non-appealable (“Final Approval”). 

 

On June 9, 2015, MMAC’s creditors voted to approve the CCAA Plan.  In connection with CCAA Plan sanction process, CPR objected to the jurisdiction of the Canadian court and the sanctioning of the CCAA Plan.  On July 13, 2015, the bankruptcy court in Canada issued orders overruling CPR’s objections and sanctioning the CCAA Plan, both of which remain subject to appeal.  On July 15, 2015, the U.S. bankruptcy court held a hearing to consider approval of the Trustee’s disclosure statement related to the U.S. Bankruptcy Plan.  In connection with that hearing, certain parties objected to approval of the disclosure statement, including CPR.  At the hearing, the bankruptcy court in the U.S. overruled all of the objections, approved the disclosure statement and established certain dates for the process of confirming the U.S. Bankruptcy Plan, which dates are subject to change.  Creditors in the U.S. bankruptcy have not yet voted on the U.S. Bankruptcy Plan and the U.S. bankruptcy court has not yet issued a ruling on the U.S. Bankruptcy Plan, which remains subject to challenge by third parties objecting to the Plan.  If an order is issued by the U.S. bankruptcy court confirming the Plan, such order would be subject to appeal.  As a result, Final Approval of the Plans and the related timing remain uncertain.

 

Under the terms of Settlement Agreement, the Trustee and MMAC agreed to move to stay, pursuant to relevant sections of U.S. or Canadian bankruptcy codes, any and all claims or proceedings that are currently pending or subsequently filed against the DAKP Parties prior to Final Approval of the Plans. In conjunction with the Settlement Agreement, plaintiffs’ counsel in the Quebec class action and plaintiffs’ counsel in the U.S. personal injury cases agreed, upon execution of the Settlement Agreement by the DAKP Parties, to stay the Quebec Class Action and the U.S. personal injury cases. Consistent with the Settlement Agreement, we expect that the actions pending against us in Maine, Illinois and Texas, and the Quebec class action, will all be stayed as to the DAKP Parties in due course.

 

We believe the claims against us in the Quebec class action and the cases pending against us in Maine, Illinois and Texas are without merit. To the extent these actions are not stayed, or if the Plans do not receive Final Approval, we intend to vigorously defend against such claims and pursue any and all defenses available.  If and when the Plans receive Final Approval, the global releases and injunctions set forth in the Plans will act to bar all of these claims.

 

We are currently unable to determine the probability of loss or reasonably estimate a range of potential losses related to the aforementioned proceedings. Accordingly, we have not made any provisions for these potential losses in our consolidated financial statements.

 

Dakota Petroleum Transport Solutions, LLC

 

TJMD, LLP v. Dakota Petroleum Transport Solutions, LLC

 

Since October 2012, DPTS has been involved in litigation with TJMD, LLP, a North Dakota limited liability partnership (“TJMD”) arising out of the termination of TJMD as operator of the transloading facility, which DPTS leases for the use and benefit of their business. TJMD alleges that a wrongful termination without cause on 90-day’s written notice occurred in June 2012 under the implied covenant of good faith and fair dealing, and a second wrongful termination occurred in September 2012, when DPTS finally terminated the contract before the end of the 90-day period. TJMD is seeking payment for work performed prior to the final, September termination, as well as, monetary damages for future losses, and other relief. Because the outcome of litigation is inherently uncertain, DPTS cannot estimate the possible loss or range of loss for this matter. DPTS intends to vigorously defend against this claim. As of June 30, 2015, DPTS has not recorded any accruals associated with this legal claim.

 

 

Dakota Petroleum Transport Solutions, LLC v. TJMD, LLP, et al.

 

Since April 2013, DPTS has been involved in litigation with TJMD, Rugged West Services, LLC, a foreign limited liability company (“Rugged West”), and JT Trucking, a foreign limited liability company (“JT”), arising out of crude oil spills that occurred at DPTS’s transloading facility while TJMD was operating the facility. DPTS leases the facility for the use and benefit of their business. Trucks haul crude oil to the transloading facility where crude is moved onto railcars and shipped to various locations across the country. DPTS has asserted a claim against TJMD for contractual liability because TJMD must indemnify DPTS for cleanup and remediation expenses incurred as the result of the crude oil spills, based on Service Agreements TJMD entered into with DPTS which provide for contractor indemnification. DPTS has asserted claims against TJMD, Enterprise Crude and JT for negligence in causing or allowing the spills to occur which proximately caused damages to DPTS, entitling DPTS to recovery. DPTS has also asserted claims against TJMD, Enterprise Crude and JT for trespass and nuisance, claiming the defendants exceeded the consent to be on the property, entitling DPTS to recovery.

 

TJMD has filed third-party complaints against several trucking companies for indemnification and contribution. Many of these third-party defendants have settled out of the case.

 

DPTS continues to actively attempt to recover cleanup and remediation costs on a spill-by-spill basis from each of the trucking companies involved in the specific spills, and also from TJMD. Trial is scheduled to begin November 2, 2015. Because the outcome of litigation is inherently uncertain, we cannot estimate the possible recovery for this matter at this time. DPTS is vigorously pursuing its claims.

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations.

 

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and related notes thereto included in this quarterly report and in our audited consolidated financial statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) contained in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 filed with the United States Securities and Exchange Commission (SEC).

 

Forward-Looking Statements

 

This report contains “forward-looking statements” within the meaning of the federal securities laws. Statements included in this quarterly report that are not historical facts (including any statements regarding plans and objectives of management for future operations or economic performance, or assumptions), including, without limitation, the information set forth in Management’s Discussion and Analysis of Financial Condition and Results of Operations, are forward-looking statements. These statements can be identified by the use of forward-looking terminology including “may,” “will,” “should,” “believe,” “expect,” “intend,” “anticipate,” “estimate,” “continue,” “targeting,” or other similar words.

 

Such forward-looking statements are subject to various risks and uncertainties that could cause actual results to differ materially from those anticipated as of the date of the filing of this report. Although we believe that the expectations reflected in these forward-looking statements are based on reasonable assumptions, no assurance can be given that these expectations will prove to be correct. Important factors that could cause our actual results to differ materially from the expectations reflected in these forward-looking statements include, among other things, those set forth in “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements contained throughout this report.

 

Overview

 

We are an integrated midstream energy company operating the Pioneer Terminal, with services that include outbound crude oil storage, logistics and rail transportation and inbound fracturing (“frac”) sand logistics. The Pioneer Terminal is located in Mountrail County, North Dakota, where it is uniquely positioned to exploit opportunities in the heart of the Bakken and Three Forks plays of the Williston Basin. The Williston Basin of North Dakota and Montana is the largest onshore crude oil production source in North America where the lack of available pipeline capacity provides a long-term and increasing surplus of crude oil available for the core business of our Company. Our frac sand business provides services for UNIMIN Corporation (“UNIMIN”), a leading producer of quartz proppant and the largest supplier of frac sand to exploration and production operating companies in the Williston Basin.

 

Because current crude oil production in North Dakota exceeds existing pipeline takeaway capacity, we have adopted a crude by rail model. According to the North Dakota Pipeline Authority, as of May 2015, the crude by rail industry was transporting approximately 52% of the total crude oil takeaway. Current pipeline constraints are limiting the amount of crude oil takeaway from the Bakken oil fields. As such, rail transloading facilities are necessary to efficiently capture an increasing demand for transportation of supplies and products to and from the oil fields. The Pioneer Terminal has given us the ability to support the expected increases in demand for the loading and transporting of crude oil and related products to and from the Bakken oil fields.

 

In June 2014, we commenced operations of a frac sand transloading facility within the Pioneer Terminal.

 

On November 24, 2014, we sold our 50% ownership interest in the trucking joint venture, Dakota Plains Services, LLC (“DPS”) to our former trucking joint venture partner, JPND II, LLC (“JPND”). In addition, on December 5, 2014, we acquired from our then-joint venture partner, Petroleum Transport Solutions, LLC (“PTS”), all of the remaining ownership interests in the transloading joint venture, Dakota Petroleum Transport Solutions, LLC (“DPTS”), the frac sand transloading joint venture, DPTS Sand, LLC (“DPTSS”), and the crude oil marketing joint venture, DPTS Marketing LLC (“DPTSM”).

 

 

New Town Facility

 

New Town, North Dakota is located at the entrance to a large peninsula in the heart of the Parshall Oil Field, and our facility straddles the only road providing access to and from the peninsula. One of the geographic advantages to our site is the Four Bears Bridge, which represents the only means to cross Lake Sakakawea for approximately 90 miles in either direction. The peninsula is approximately 150 square miles of land with 168 spacing units due to their water access to Lake Sakakawea. One spacing unit is the equivalent of one square mile and has the expectation for 12 to 16 wells. 168 spacing units would equate to over 2,000 wells.

 

Our facility currently includes the following features:

 

·

Private spur connecting the property to the Canadian Pacific Railway;

 

·

Approximately 192 acre site with two 8,300 foot loop tracks each capable of 120 car unit trains, 180,000 barrels of crude oil storage, a high-speed loading facility that can accommodate 10 rail cars simultaneously, two active gathering system pipelines and transfer stations to receive crude oil from 10 trucks simultaneously;

 

·

Fire suppression system, spill remediation and backup power generation solutions;

 

·

Automated terminal metering and accounting systems;

 

·

Four fully operational ladder tracks that can be utilized for inbound delivery and storage for commodities such as frac sand, aggregate, chemicals, diesel and pipe;

 

·

Fully enclosed electrical system between the existing tracks to provide maximum flexibility when powering transloading equipment; and

 

·

72 acres of industrial zoned land within the double loop tracks that provide the option to add storage or various industrial uses to the facility at any time.

 

We continue to develop our inbound oilfield products business at the Pioneer Terminal. Construction was completed in mid-2014 on the $15.0 million frac sand terminal funded by UNIMIN. The frac sand terminal has a throughput capacity of approximately 750,000 tons per year and is composed of 8,000 tons of fixed frac sand storage, an enclosed transloading facility, twin high-speed truck loadouts, and four ladder tracks. The frac sand terminal supplies energy service companies with hydraulic frac sands sourced directly from UNIMIN’s newest and largest proppant production facility, in Tunnel City, Wisconsin. The frac sands are being transported on Canadian Pacific Railway’s rail network. Under terms of the agreements between the parties, UNIMIN provides a direct marketing service to oilfield service companies and funded the construction of the four new ladder tracks, frac sand storage and transloading facility. We provided a land lease to UNIMIN for up to 30 years and receive monthly lease payments of $10,000 through December 2023, with an annual increase of 3.0% starting January 2016. DPTS has provided fee-based transloading services at the frac sand terminal since the operations began in June 2014.

 

In August 2014, we announced the execution of an interconnection agreement with Hiland Crude, LLC, a wholly owned subsidiary of Hiland Partners, LP (“Hiland”), that would link the Pioneer Terminal with Hiland’s Market Center Gathering System crude oil pipeline network (the “gathering system”). Construction for the final link was completed on November 4, 2014, and the gathering system was commissioned on November 5, 2014. Hiland’s gathering system is the largest in the Bakken oil fields, traversing through the heart of the oil field in Divide, Dunn, Mountrail, McKenzie and Williams counties in North Dakota, as well as Richland and Roosevelt counties in Montana. It has multiple connection points into pipeline outlets and crude by rail terminals with the Pioneer Terminal being the only Canadian Pacific Railway origin. The connection to the Pioneer Terminal is expected to have an initial capacity of greater than 15,000 barrels of crude oil per day and can be easily expanded to supply up to approximately 60,000 barrels of crude oil per day.

 

In September 2014, we announced the expansion of our on-site crude oil storage at the Pioneer Terminal, and the construction of a third 90,000 barrel crude oil storage tank began almost immediately. The construction of the third storage tank was completed in July 2015. The addition of a third storage tank, the connection to Hiland’s gathering system, and the anticipated expanded rail service will facilitate increasing the sustainable throughput rate to a unit train per day, which is equivalent to 80,000 barrels of crude oil per day.

 

Our facility also can accommodate significant storage of tanker-trucks, drilling equipment and other crude oil exploration equipment. We continue to conceptualize future stages of expansion of the facility, which will be designed to increase on-site rail car traffic.

 

 

Oil well operators are currently hauling crude oil via semi-truck as far as 100 miles one way from New Town to various crude by rail facilities to load crude oil produced from wells located in the Parshall Oil Field onto railway systems at significant additional cost compared to the services offered by our facility. In April 2015, North Dakota produced 1.2 million barrels of crude oil per day. We estimate crude oil production within approximately a 75 mile radius of our facility to represent 80% of the volume, or over 981,000 barrels of crude oil per day.

 

Current Business Drivers

 

As reported by the U.S. Geological Survey (“USGS”), the North Dakota Industrial Commission currently predicts that the Bakken’s production will increase for many years. A common date per the USGS website for a production plateau is between the years of 2022 to 2024. The USGS estimated parts of North Dakota may contain as much as 7.4 billion barrels of crude oil. As of May 2015, North Dakota ranks second behind Texas in terms of production of natural resources in the United States.

 

The price at which crude oil trades in the open market has experienced significant volatility and will likely continue to fluctuate in the foreseeable future due to a variety of influences including, but not limited to, the following:

 

·

domestic and foreign demand for crude oil by both refineries and end users;

 

·

the introduction of alternative forms of fuel to replace or compete with crude oil;

 

·

domestic and foreign reserves and supply of crude oil;

 

·

competitive measures implemented by our competitors and domestic and foreign governmental bodies;

 

·

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;

 

·

weather conditions; and

 

·

domestic and foreign economic volatility and stability.

 

Lack of capacity within the trunk pipelines and lack of flexibility and geographic reach to serve many potential markets is driving competition within the crude oil transloading and storage industry. This competition is expected to become increasingly intense as the demand to transport crude oil in North Dakota has risen in recent years. Beyond providing transportation capacity, railroads offer energy market participants the ability to shift deliveries quickly to different markets, enabling producers to sell their product to the market offering the most attractive price. In the Williston Basin, 52% of crude oil production was being shipped via rail in May 2015 compared to 59% via rail in May 2014, according to data from the North Dakota Pipeline Authority Monthly Updates published on July 10, 2015 and July 14, 2014, respectively.

 

Results of Operations

 

The following tables illustrate the statements of operations by operating segment for the three and six months ended June 30, 2015 and 2014:

 

		June 30, 2015
			Dakota Plains Holdings, Inc.				Dakota Petroleum Transport Solutions, LLC				DPTS Sand, LLC				Eliminations				Consolidated
Three Months Ended:
REVENUES
Transloading Revenue		$	—			$	5,804,272			$	—			$	—			$	5,804,272
Sand Revenue			—				—				1,560,055				—				1,560,055
Rental Income			150,795				—				—				(120,795	)			30,000
Other			—				1,316,700				—				—				1,316,700
Total Revenues			150,795				7,120,972				1,560,055				(120,795	)			8,711,027
COST OF REVENUES (exclusive of items shown separately below)			—				1,662,338				527,982				(114,486	)			2,075,834
OPERATING EXPENSES
Transloading Operating Expenses			—				1,285,405				1,278				(6,309	)			1,280,374
General and Administrative Expenses			2,625,458				—				—				—				2,625,458
Depreciation and Amortization			49,825				1,090,501				—				—				1,140,326
Total Operating Expenses			2,675,283				2,375,906				1,278				(6,309	)			5,046,158
INCOME (LOSS) FROM OPERATIONS		$	(2,524,488	)		$	3,082,728			$	1,030,795			$	—			$	1,589,035
Six Months Ended:
REVENUES
Transloading Revenue		$	—			$	14,283,533			$	—			$	—			$	14,283,533
Sand Revenue			—				—				2,438,428				—				2,438,428
Rental Income			301,590				—				—				(241,590	)			60,000
Other			—				1,316,700				—				—				1,316,700
Total Revenues			301,590				15,600,233				2,438,428				(241,590	)			18,098,661
COST OF REVENUES (exclusive of items shown separately below)			—				3,579,677				939,791				(228,972	)			4,290,496
OPERATING EXPENSES
Transloading Operating Expenses			—				2,413,651				3,213				(12,618	)			2,404,246
General and Administrative Expenses			4,544,647				—				—				—				4,544,647
Depreciation and Amortization			99,625				2,148,715				—				—				2,248,340
Total Operating Expenses			4,644,272				4,562,366				3,213				(12,618	)			9,197,233
INCOME (LOSS) FROM OPERATIONS		$	(4,342,682	)		$	7,458,190			$	1,495,424			$	—			$	4,610,932

 

 

		June 30, 2014
		Dakota Plains Holdings, Inc.				Dakota Petroleum Transport Solutions, LLC				DPTS Sand, LLC				Eliminations				Consolidated
Three Months Ended:
REVENUES
Transloading Revenue		$	—			$	7,298,561			$	—			$	—			$	7,298,561
Sand Revenue			—				—				176,187				—				176,187
Rental Income			155,690				—				—				(125,690	)			30,000
Total Revenues			155,690				7,298,561				176,187				(125,690	)			7,504,748
COST OF REVENUES (exclusive of items shown separately below)			—				1,794,256				82,587				(119,381	)			1,757,462
OPERATING EXPENSES
Transloading Operating Expenses			—				522,459				—				(6,309	)			516,150
General and Administrative Expenses			1,939,107				—				—				—				1,939,107
Depreciation and Amortization			48,710				1,037,561				—				—				1,086,271
Total Operating Expenses			1,987,817				1,560,020				—				(6,309	)			3,541,528
INCOME (LOSS) FROM OPERATIONS		$	(1,832,127	)		$	3,944,285			$	93,600			$	—			$	2,205,758
Six Months Ended:
REVENUES
Transloading Revenue		$	—			$	12,754,019			$	—			$	—			$	12,754,019
Sand Revenue			—				—				176,187				—				176,187
Rental Income			311,380				—				—				(251,380	)			60,000
Total Revenues			311,380				12,754,019				176,187				(251,380	)			12,990,206
COST OF REVENUES (exclusive of items shown separately below)			—				4,012,336				82,587				(238,762	)			3,856,161
OPERATING EXPENSES
Transloading Operating Expenses			—				991,003				—				(12,618	)			978,385
General and Administrative Expenses			4,494,650				—				—				—				4,494,650
Depreciation and Amortization			96,820				2,024,666				—				—				2,121,486
Total Operating Expenses			4,591,470				3,015,669				—				(12,618	)			7,594,521
INCOME (LOSS) FROM OPERATIONS		$	(4,280,090	)		$	5,726,014			$	93,600			$	—			$	1,539,524

 

Three Months Ended June 30, 2015 vs. Three Months Ended June 30, 2014

 

We experienced a net loss of approximately $550,000 for the three months ended June 30, 2015 compared to a net loss attributable to shareholders of our Company of approximately $1.0 million for the three months ended June 30, 2014. The net loss for the second quarter of 2015 was driven by a decrease in revenue from the transloading of crude oil due to the decrease in barrels transloaded, higher interest expense related to the Operational Override (See Note 11, Membership Purchase Agreement) and additional debt resulting from the joint venture interest purchase in December 2014, and the expense associated with subleasing and maintaining the current fleet of rail cars. The net loss for the second quarter of 2014 was driven by the loss from our indirect ownership interest in the marketing joint venture, which was primarily the result of competitive margin pressure.

 

General and administrative expenses were $2.6 million for the three months ended June 30, 2015 compared to $1.9 million for the three months ended June 30, 2014. The increase in general and administrative expenses for the three months ended June 30, 2015 was due to an increase of $0.4 million in non-cash general and administrative expenses and $0.3 million in travel and other general and administrative expenses.

 

Revenue from crude oil transloading was $5.8 million for the three months ended June 30, 2015 compared to $7.3 million for the three months ended June 30, 2014. The decrease was partially driven by volume as we transloaded 3.6 million barrels of crude oil during the second quarter of 2015 compared to 3.9 million barrels of crude oil transloaded during the second quarter of 2014. It was also driven by an increase in competition for volume, which lead to fewer long term contracts and more fluctuation in the transload fee. Cost of revenue was $1.7 million for the three months ended June 30, 2015 compared to $1.8 million for the three months ended June 30, 2014 due to the decrease in volume. We expect to maintain a lower cost of revenue going forward as we realize the cost savings from bringing the transloading of crude oil in-house effective June 1, 2015.

 

Revenue from frac sand transloading was $1.6 million for the three months ended June 30, 2015 compared to $0.2 million for the three months ended June 30, 2014. The increase in revenue was due to the fact that the frac sand transloading operations did not commence until June 2014, and we transloaded 195,000 short tons of frac sand during the three months ended June 30, 2015, which was the highest quarterly throughput to date. We also successfully brought the frac sand transloading services in-house effective June 1, 2015.

 

 

As previously noted, effective November 30, 2014 we acquired the remaining ownership interest in DPTSM from PTS and immediately discontinued the purchase and sale of crude oil. We plan to maintain the current fleet of rail cars with the intent to sublease and/or utilize them in our operations if the need arises. We had $0.8 million in expenses related to our inventory of tank cars for the three months ended June 30, 2015. We accounted for these expenses as Other Income (Expense) on our statement of operations as we do not consider the tank cars to be a core business. The $0.8 million was offset by $0.3 million in income reported related to the decrease in the Operational Override liability after adjusting for actual barrels of crude oil transloaded during the second quarter of 2015.

 

Interest expense was $2.0 million for the three months ended June 30, 2015 compared to $0.5 million for the three months ended June 30, 2014. The increase was primarily driven by the interest expense related to the Operational Override liability and the additional debt with SunTrust resulting from the acquisition of 50% of the outstanding interest of the transloading, sand and marketing joint ventures in the fourth quarter of 2014.

 

The loss from our indirect investment in the marketing joint venture was $1.7 million for the three months ended June 30, 2014. The marketing joint venture sold 2.2 million barrels of crude oil during this time period but continued to experience competitive margin pressure resulting in a net loss per barrel of $(0.76) for the three months ended June 30, 2014.

 

On November 24, 2014, we sold our 50% ownership interest in the trucking joint venture to our then trucking partner. Income from our indirect investment in the trucking joint venture was $303,000 for the three months ended June 30, 2014.

 

The benefit from income taxes was $331,000 for the three months ended June 30, 2015 compared to a benefit from income taxes of $647,000 for the three months ended June 30, 2014.  The effective tax rate for the three months ended June 30, 2015 was 37.6% compared to an effective tax rate of 38.4% for the three months ended June 30, 2014.  The decrease in the effective tax rate for the three months ended June 30, 2015 was primarily due to the effect of permanent differences. The effective tax rate was different than the federal statutory rate of 35% primarily due to permanent differences and state tax rates.

 

Six Months Ended June 30, 2015 vs. Six Months Ended June 30, 2014

 

We experienced a net loss of approximately $367,000 for the six months ended June 30, 2015 compared to a net loss attributable to shareholders of our Company of approximately $2.4 million for the six months ended June 30, 2014. The net loss for the six months ended June 30, 2015 was driven by the interest expense related to the Operational Override and additional debt resulting from the joint venture interest purchase in December 2014 and the expense associated with subleasing and maintaining the current fleet of rail cars. These losses were partially offset by income from operations of $4.6 million resulting from healthy crude oil transloading throughput (7.8 million barrels of crude oil), record high frac sand throughput (305,000 short tons transloaded), the recognition of revenues from storing clients’ rail cars at our facility, and successfully bringing the transloading services in-house effective June 1, 2015. The net loss for the six months ended June 30, 2014 was driven by the loss from our indirect ownership interest in the marketing joint venture, which was primarily due to continued competitive margin pressure. General and administrative expenses were flat year over year at $4.5 million.

 

Revenue from crude oil transloading was $14.3 million for the six months ended June 30, 2015 compared to $12.8 million for the six months ended June 30, 2014. The increase was driven by volume as we transloaded 7.8 million barrels of crude oil during the six months ended June 30, 2015 compared to 6.8 million barrels of crude oil transloaded during the six months ended June 30, 2014. Transloading cost of revenue was $3.6 million for the six months ended June 30, 2015 compared to $4.0 million for the six months ended June 30, 2014, primarily due to bringing the transloading of crude oil in-house during the second quarter of 2015.

 

Revenue from frac sand transloading was $2.4 million for the six months ended June 30, 2015 compared to $0.2 million for the six months ended June 30, 2014. The increase in revenue was due to the fact that the frac sand transloading operations did not commence until June 2014, and we transloaded 305,000 short tons of frac sand during the six months ended June 30, 2015, which included the two highest throughput months to date (81,000 and 70,000 short tons in May and June 2015, respectively). We also successfully brought the frac sand transloading services in-house effective June 1, 2015, effectively reducing our cost of revenues per short ton.

 

As previously noted, effective November 30, 2014 we acquired the remaining ownership interest in DPTSM from PTS and immediately discontinued the purchase and sale of crude oil. We plan to maintain the current fleet of rail cars with the intent to sublease and/or utilize them in our operations if the need arises. We had $1.7 million in expenses related to our inventory of tank cars for the six months ended June 30, 2015. We accounted for these expenses as Other Income (Expense) on our statement of operations as we do not consider the tank cars to be a core business. The $1.7 million was offset by $0.5 million in income reported related to the decrease in the Operational Override liability after adjusting for actual barrels of crude oil transloaded during the six months ending June 30, 2015.

 

 

Interest expense was $4.0 million for the six months ended June 30, 2015 compared to $1.0 million for the six months ended June 30, 2014. The increase was primarily driven by the interest expense related to the Operational Override liability and the additional debt with SunTrust resulting from the acquisition of 50% of the outstanding interest of the transloading, sand and marketing joint ventures in the fourth quarter of 2014.

 

The loss from our indirect investment in the marketing joint venture was $1.6 million for the six months ended June 30, 2014. The marketing joint venture sold 4.4 million barrels of crude oil during this time period but experienced competitive margin pressure resulting in a net loss per barrel of $(0.36) for the six months ended June 30, 2014.

 

On November 24, 2014, we sold our 50% ownership interest in the trucking joint venture to our then trucking partner. Income from our indirect investment in the trucking joint venture was $425,000 for the six months ended June 30, 2014.

 

The benefit from income taxes was $203,500 for the six months ended June 30, 2015 compared to a benefit from income taxes of $1.2 million for the six months ended June 30, 2014. The effective tax rate for the six months ended June 30, 2015 was 35.7% compared to an effective tax rate of 32.9% for the six months ended June 30, 2014. The increase in the effective tax rate for the six months ended June 30, 2015 was primarily due to the effect of permanent differences. The effective tax rate was different than the federal statutory rate of 35% primarily due to permanent differences and state tax rates.

 

Non-GAAP Financial Measures

 

We define Adjusted EBITDA Attributable to Shareholders of Dakota Plains Holdings, Inc. as net income (loss) before (i) interest expense, (ii) income taxes, (iii) depreciation and amortization, (iv) non-cash expenses relating to share based amounts recognized under ASC Topic 718 and (v) Adjusted EBITDA Attributable to Non-Controlling Interests. Adjusted EBITDA was $3.0 million and $6.9 million for the three and six months ended June 30, 2015, respectively, compared to $(0.2) million and $0.1 million for the three and six months ended June 30, 2014, respectively. The difference was primarily driven by the increase in income from our crude oil and frac sand transloading operations as a result of healthy crude oil transloading throughput, record high frac sand throughput, and the recognition of revenues from storing clients’ rail cars at our facility. This was partially offset by the increase in transloading operating expenses as a result of assuming the entire cost associated with insuring our Pioneer Terminal facility.

 

		Three Months Ended								Six Months Ended
		June 30,								June 30,
		2015				2014				2015				2014
Net Income (Loss)		$	(549,950	)		$	981,894			$	(366,957	)		$	536,495
Add Back
Income Tax Benefit			(331,000	)			(647,000	)			(203,500	)			(1,161,885	)
Depreciation and Amortization			1,140,326				1,086,271				2,248,340				2,121,486
Share Based Compensation			750,420				375,361				1,259,951				1,504,293
Interest Expense			2,012,040				504,244				3,958,782				1,006,380
Adjusted EBITDA		$	3,021,836			$	2,300,770			$	6,896,616			$	4,006,769
Adjusted EBITDA Attributable to Non-Controlling Interests			—				2,537,723				—				3,922,140
Adjusted EBITDA Attributable to Shareholders of Dakota Plains Holdings, Inc.		$	3,021,836			$	(236,953	)			6,896,616			$	84,629

 

 

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 our investors in order to gain an overall understanding of our current financial performance. Specifically, management believes the non-GAAP financial measure included herein provides useful information to investors by excluding certain expenses that are not indicative of our operating results. In addition, management uses Adjusted EBITDA for budgeting and forecasting as well as subsequently measuring its performance and believes it is providing investors with a financial measure that most closely align with its internal measurement processes.

 

Liquidity and Capital Resources

 

Our principal sources of liquidity are cash and cash equivalents, a $57.5 million revolving credit and term loan agreement with SunTrust Bank, and our additional financing capacity, which is dependent upon capital and credit market conditions and our financial performance. Our cash and cash equivalents were $5.2 million at June 30, 2015.

 

 

Under the Revolving Credit Facility with SunTrust, we have $6 million of available borrowings at June 30, 2015 that could be utilized to fund the payment of accounts payable and accrued expenses in excess of cash and cash equivalents. We are currently focused on increasing the throughput and reducing the expenses at the transloading facility and expect cash flows from operations to increase due to the fact that we currently own 100% of DPTS and DPTS Sand, LLC. We believe that the cash flows from operations and the availability under the revolving credit facility will allow us to meet the current obligations of the Company in ordinary course of business. We have also been in ongoing discussions with SunTrust about restructuring the Tranche B portion of the Revolving Credit Facility and recently received a revised term sheet. It is our expectation that the restructuring will be completed in the third quarter of 2015. We may also need to secure financing through the capital markets, or otherwise, in order to fund future operations and satisfy obligations due. There is no guarantee that any such required financing will be available on terms satisfactory to us, if at all, or if we will be able to successfully refinance or restructure the Tranche B portion of the Revolving Credit Facility.

 

Cash Flows

 

Our cash flows depend, to a large degree, on the level of spending by oil companies on development and production activities. Sustained increases or decreases in the price of crude oil could have a material impact on these activities and could also materially affect our cash flows. Certain sources and uses of cash, such as the level of discretionary capital expenditures, purchases and sales of investments, issuances and repurchases of debt and of common shares are within our control and are adjusted as necessary, based on market conditions.

 

Cash Flows Provided by (Used in) Operating Activities

 

Net cash used in operating activities totaled $0.5 million and net cash provided by operating activities totaled $3.4 million for the six months ended June 30, 2015, and 2014, respectively, or an increase in cash used of approximately $3.9 million. The primary reason for the increase in cash used in operating activities was due to the increase in trade receivables.

 

Cash Flows Used In Investing Activities

 

Net cash used in investing activities totaled $1.5 million and $8.5 million for the six months ended June 30, 2015 and 2014, respectively. The decrease of $7.0 million was due to a decrease in cash paid for property and equipment during the six months ended June 30, 2015 mainly driven by a large balance in accounts payable related to capital projects at December 31, 2013 that was paid in the six months ended June 30, 2014 and the fact that a significant portion of the fixed asset additions in the six months ended June 30, 2015 are include in accounts payable at June 30, 2015.

 

Cash Flows Provided By (Used in) Financing Activities

 

Cash flows provided by financing activities totaled $2.6 million for the six months ended June 30, 2015 compared to cash flows used in financing activities of $2.9 million for the six months ended June 30, 2014. The increase in cash provided of $5.5 million relates to the $3.0 million drawdown of the SunTrust credit facility, a reduction of $0.4 million paid to surrender common shares of the Company’s stock, and the transloading joint venture’s $2.0 million of priority cash distributions made to the non-controlling interests in 2014.

 

Off Balance Sheet Arrangements

 

We have no off-balance sheet arrangements.

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

  

There have been no material changes to our interest rates or foreign currency risk since December 31, 2014. Please refer to our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 for a discussion of those risks.

 

 

Item 4.

Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this report, we conducted an evaluation, under the supervision and with the participation of our management, including our chief executive officer and chief financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were effective. Disclosure controls and procedures are defined by Rules 13a-15(e) and 15d-15(e) of the Exchange Act as controls and other procedures that are designed to ensure that information required to be disclosed by us in reports filed with the Securities and Exchange Commission under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in applicable rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed by us in reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.

 

Changes in Internal Control Over Financial Reporting

 

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15 or 15d-15 of the Exchange Act that occurred during the period covered by this report that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

 

 

PART II – OTHER INFORMATION

 

Item 1.

Legal Proceedings.

 

Lac-Mégantic, Quebec

 

We and certain of our subsidiaries, including DPTS and DPTSM, are among the many defendants named in various lawsuits relating to the derailment of a Montreal Main & Atlantic Railroad, Ltd. (“MM&A”) train in Lac-Mégantic, Quebec. We believe all claims asserted against us and our subsidiaries are without merit and we intend to vigorously defend against such claims.

 

On July 6, 2013, an unmanned freight train operated by MM&A with 72 tank cars carrying approximately 50,000 barrels of crude oil rolled downhill and derailed in Lac-Mégantic, Quebec. The derailment resulted in significant loss of life, damage to the environment from spilled crude oil and extensive property damage. DPTSM, a crude oil marketing joint venture in which, at the time of the derailment, we indirectly owned a 50% membership interest, and currently own 100% of the membership interest, subleased the tank cars involved in the incident from an affiliate of our former joint venture partner. An affiliate of our former joint venture partner owned title to the crude oil being carried in the derailed tank cars. DPTS, a crude oil transloading joint venture in which, at the time of the derailment, we also indirectly owned a 50% membership interest, and currently own 100% of the membership interest, arranged for the transloading of the crude oil for DPTSM into tank cars at DPTS’s facility in New Town, North Dakota. A different affiliate of our former joint venture partner contracted with Canadian Pacific Railway (“CPR”) for the transportation of the tank cars and the crude oil from New Town, North Dakota to a customer in New Brunswick, Canada. CPR subcontracted a portion of that route to MM&A.

 

On July 15, 2013, four named parties filed a petition in the Canadian Province of Quebec seeking permission from the court to pursue a class action seeking to recover compensatory and punitive damages along with costs. On June 18, 2014 the petitioners sought permission from the Quebec Superior Court to discontinue the proceedings without prejudice against us and our two subsidiaries Dakota Plains Marketing LLC and Dakota Plains Transloading LLC. The Court granted permission for the discontinuance, and consequently those companies have been removed from the proceeding; however, the most recent iteration of the petition, filed on July 7, 2014, still includes DPTS and DPTSM, along with over 30 third parties, including CPR, MM&A and certain of its affiliates, several manufacturers and lessors of tank cars, as well as the intended purchaser and certain suppliers of the crude oil. The petition generally alleges wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil. On February 24, 2015, the Superior Court of Quebec issued an order staying the class action proceedings in light of settlement agreements reached by several defendants with the Trustee and the monitor in MMA’s Canadian bankruptcy (the “Monitor”). On March 20, 2015, by terms of the order dated February 24, 2015, the stay was lifted in respect of all non-settling defendants, including DPTS and DPTSM. We believe these claims against DPTS and DPTSM are without merit and intend to vigorously defend against such claims and pursue any and all defenses available.

 

Around July 29, 2013, twenty individuals filed lawsuits in Cook County, Illinois seeking unspecified damages for their injuries from the accident. The lawsuits assert claims for negligence against the eight defendants noted above. On August 7, 2013, MM&A filed a Chapter 11 voluntary petition in the bankruptcy court in Maine. On August 29, 2013, the defendants jointly removed the cases from state court in Cook County to the United States District Court in the Northern District of Illinois. On September 13, 2013, the bankruptcy trustee for MM&A, and WFS and Petroleum Transport Solutions, LLC filed motions seeking to transfer the nineteen personal injury cases from federal court in Illinois to the United States District Court for the District of Maine (the “ME District Court”). On March 21, 2014, the ME District Court granted the transfer motion. On April 4, 2014, the plaintiffs filed a motion for reconsideration of the order granting the transfer motion and a motion requesting the ME District Court abstain from exercising jurisdiction over the cases. The motion for reconsideration was denied and the motion for abstention remains pending. On May 1, 2014, the plaintiffs appealed the ME District Court’s order granting the transfer motion to the First Circuit Court of Appeals. On June 17, 2014, the ME District Court entered a consent order staying proceedings in the transferred cases pending the appeal. On November 11, 2014, the Trustee for MMA’s U.S. bankruptcy estate (the “Trustee”) and plaintiffs moved to amend the consent order staying proceedings in the transferred cases to allow plaintiffs to file additional cases in other jurisdictions. On March 23, 2015, the ME District Court entered an amended consent order staying proceedings in the transferred cases pending the appeal and allowing plaintiffs to file additional cases. On March 23, 2015, the ME District Court entered an amended consent order staying proceedings in the transferred cases pending the appeal but allowing plaintiffs to file additional cases.  As a result, in June 2015, we, certain of our subsidiaries, including DPTS and DPTSM, along with numerous third parties were named as defendants in seventeen new complaints filed in the Circuit Court of Cook County, Illinois.  The allegations, claims and damages sought against us in these new actions are substantially the same as in the transferred cases.  Additionally, in June 2015, we, certain of our subsidiaries, including DPTS and DPTSM, along with numerous third parties were named as defendants in two class actions filed in the District Court of Dallas County, Texas.  The class action complaints generally allege wrongful death and negligence in the failure to provide for the proper and safe transportation of crude oil and seek economic, compensatory and punitive damages, as well as costs.  As discussed in greater detail below, we expect these new actions will be stayed in conjunction with the Settlement Agreement (as defined below).

 

 

Additional claims, lawsuits, proceedings, investigations and orders may be filed, commenced or issued with respect to the incident, which may involve civil claims for damages or governmental investigative, regulatory or enforcement actions against us.

 

On December 5, 2014, we entered into an Indemnification and Release Agreement with WFS. Under this agreement, WFS, on behalf of itself and its direct and indirect subsidiaries, has agreed to indemnify us, each of our subsidiaries, including DPTS and DPTSM, for third party claims for bodily injury, death, property damage, economic loss, loss of consortium, loss of income and similar claims in connection with, relating to, or otherwise arising from the derailment, in each case solely to the extent not covered by insurance or otherwise paid for by third parties. In addition, we agreed to indemnify WFS for (i) fifty percent (50%) of the documented out-of-pocket costs and expenses incurred by any WFS party as a result of or arising out of certain obligations to railcar lessors; and (ii) fifty percent (50%) of the documented out-of-pocket defense costs and legal expenses incurred by any WFS party in connection with the derailment not otherwise covered by insurance. However, our total exposure under this indemnification is limited to $10 million in the aggregate. All of the indemnification obligations are net of any insurance proceeds received.

 

On June 8, 2015, we entered into a settlement agreement (the “Settlement Agreement”) with the Trustee, Montreal, Maine and Atlantic Canada Co. (“MMAC”), and the monitor (the “Monitor”) in MMAC’s Canadian bankruptcy (collectively, the “MMA Parties”) to resolve all claims arising out of the derailment.  Under the terms of the Settlement Agreement, WFS will contribute $110 million (the “Settlement Payment”) to a compensation fund established to compensate parties who suffered losses as a result of the derailment. As part of the settlement, we will also assign to the Trustee and MMAC certain claims we have against third parties arising out of the derailment.

 

In consideration of the Settlement Payment and the assignment of claims to the Trustee and MMAC, we and certain of our subsidiaries, including DPTS and DPTSM (collectively, the “DAKP Parties”), will receive the benefit of the global releases and injunctions set forth in the respective bankruptcy plans filed by the Trustee in the U.S. and by MMAC in Canada (the “U.S. Bankruptcy Plan” and the “CCAA Plan” respectively, each a “Plan” and collectively the “Plans”). The effect of these global releases and injunctions will be to bar all claims which may exist now or in the future against the DAKP Parties arising out of the derailment, other than criminal claims which by law may not be released.

 

Neither the global releases and injunctions set forth in the Plans nor our obligations will be effective unless and until the Plans are approved by creditors in both the U.S. and Canadian bankruptcies, an order sanctioning the CCAA Plan and confirming the U.S. Bankruptcy Plan is issued by the Canadian and U.S. bankruptcy courts, respectively, and each order becomes final and non-appealable (“Final Approval”). 

 

On June 9, 2015, MMAC’s creditors voted to approve the CCAA Plan.  In connection with CCAA Plan sanction process, CPR objected to the jurisdiction of the Canadian court and the sanctioning of the CCAA Plan.  On July 13, 2015, the bankruptcy court in Canada issued orders overruling CPR’s objections and sanctioning the CCAA Plan, both of which remain subject to appeal.  On July 15, 2015, the U.S. bankruptcy court held a hearing to consider approval of the Trustee’s disclosure statement related to the U.S. Bankruptcy Plan.  In connection with that hearing, certain parties objected to approval of the disclosure statement, including CPR.  At the hearing, the bankruptcy court in the U.S. overruled all of the objections, approved the disclosure statement and established certain dates for the process of confirming the U.S. Bankruptcy Plan, which dates are subject to change.  Creditors in the U.S. bankruptcy have not yet voted on the U.S. Bankruptcy Plan and the U.S. bankruptcy court has not yet issued a ruling on the U.S. Bankruptcy Plan, which remains subject to challenge by third parties objecting to the Plan.  If an order is issued by the U.S. bankruptcy court confirming the Plan, such order would be subject to appeal.  As a result, Final Approval of the Plans and the related timing remain uncertain.

 

Under the terms of Settlement Agreement, the Trustee and MMAC agreed to move to stay, pursuant to relevant sections of U.S. or Canadian bankruptcy codes, any and all claims or proceedings that are currently pending or subsequently filed against the DAKP Parties prior to Final Approval of the Plans. In conjunction with the Settlement Agreement, plaintiffs’ counsel in the Quebec class action and plaintiffs’ counsel in the U.S. personal injury cases agreed, upon execution of the Settlement Agreement by the DAKP Parties, to stay the Quebec Class Action and the U.S. personal injury cases. Consistent with the Settlement Agreement, we expect that the actions pending against us in Maine, Illinois and Texas, and the Quebec class action, will all be stayed as to the DAKP Parties in due course.

 

We believe the claims against us in the Quebec class action and the cases pending against us in Maine, Illinois and Texas are without merit. To the extent these actions are not stayed, or if the Plans do not receive Final Approval, we intend to vigorously defend against such claims and pursue any and all defenses available.  If and when the Plans receive Final Approval, the global releases and injunctions set forth in the Plans will act to bar all of these claims.

 

We are currently unable to determine the probability of loss or reasonably estimate a range of potential losses related to the aforementioned proceedings. Accordingly, we have not made any provisions for these potential losses in our consolidated financial statements.

  

 

Dakota Petroleum Transport Solutions, LLC

 

TJMD, LLP v. Dakota Petroleum Transport Solutions, LLC

 

Since October 2012, DPTS has been involved in litigation with TJMD, LLP, a North Dakota limited liability partnership (“TJMD”) arising out of the termination of TJMD as operator of the transloading facility, which DPTS leases for the use and benefit of their business. TJMD alleges that a wrongful termination without cause on 90-day’s written notice occurred in June 2012 under the implied covenant of good faith and fair dealing, and a second wrongful termination occurred in September 2012, when DPTS finally terminated the contract before the end of the 90-day period. TJMD is seeking payment for work performed prior to the final, September termination, as well as, monetary damages for future losses, and other relief. Because the outcome of litigation is inherently uncertain, DPTS cannot estimate the possible loss or range of loss for this matter. DPTS intends to vigorously defend against this claim. As of June 30, 2015, DPTS has not recorded any accruals associated with this legal claim.

 

Dakota Petroleum Transport Solutions, LLC v. TJMD, LLP, et al.

  

Since April 2013, DPTS has been involved in litigation with TJMD, Rugged West Services, LLC, a foreign limited liability company (“Rugged West”), and JT Trucking, a foreign limited liability company (“JT”), arising out of crude oil spills that occurred at DPTS’s transloading facility while TJMD was operating the facility. DPTS leases the facility for the use and benefit of their business. Trucks haul crude oil to the transloading facility where crude is moved onto railcars and shipped to various locations across the country. DPTS has asserted a claim against TJMD for contractual liability because TJMD must indemnify DPTS for cleanup and remediation expenses incurred as the result of the crude oil spills, based on Service Agreements TJMD entered into with DPTS which provide for contractor indemnification. DPTS has asserted claims against TJMD, Enterprise Crude and JT for negligence in causing or allowing the spills to occur which proximately caused damages to DPTS, entitling DPTS to recovery. DPTS has also asserted claims against TJMD, Enterprise Crude and JT for trespass and nuisance, claiming the defendants exceeded the consent to be on the property, entitling DPTS to recovery.

  

TJMD has filed third-party complaints against several trucking companies for indemnification and contribution. Many of these third-party defendants have settled out of the case.

 

DPTS continues to actively attempt to recover cleanup and remediation costs on a spill-by-spill basis from each of the trucking companies involved in the specific spills, and also from TJMD. Trial is scheduled to begin November 2, 2015. Because the outcome of litigation is inherently uncertain, we cannot estimate the possible recovery for this matter at this time. DPTS is vigorously pursuing its claims.

 

Item 1A.

Risk Factors.

 

There have been no material changes in our risk factors from those disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds.

 

The table below provides information with respect to our purchases of shares of our common stock during the three months ended June 30, 2015.

 

Period			Total Number of Shares Purchased				Average Price Paid per Share				Total Number of Shares Purchased As Part of Publicly Announced Plan or Program				Maximum Number of Shares That May Yet Be Purchased under Such Plan or Program
April 1–31				—			$	—				—				—
May 1–31				—			$	—				—				—
June 1–30				98,351			$	1.28				—				—
Total				98,351			$	1.28

 

All of the shares reported in the table above represent shares surrendered to the Company by directors, officers and employees in accordance with the terms of the 2011 Plan, as amended, to satisfy tax payment obligations, including minimum tax withholding obligations for officers and employees, in connection with the grant or vesting of stock awards, restricted stock awards and restricted stock units. The purchases were not part of any publicly announced stock repurchase program.

 

 

 

 

Item 3.

Defaults Upon Senior Securities.

 

None.

 

Item 4.

Mine Safety Disclosures.

 

Not applicable.

 

Item 5.

Other Information.

 

None.

 

 

Item 6.

Exhibits.

 

Unless otherwise indicated, all documents incorporated herein by reference to a document filed with the SEC pursuant to the Exchange Act are located under SEC file number 001-36493.

	3.1	Amended and Restated Articles of Incorporation, as amended through March 23, 2012 (1)
	3.2	Composite Second Amended and Restated Bylaws, as amended through June 11, 2015 (2)
	10.1	2011 Equity Incentive Plan, as amended through June 18, 2015 (3)
	31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
	31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
	32	Section 1350 Certifications
	101.INS	XBRL Instance Document
	101.SCH	XBRL Taxonomy Extension Schema
	101.CAL	XBRL Extension Calculation Linkbase
	101.DEF	XBRL Taxonomy Extension Definition Linkbase
	101.LAB	XBRL Taxonomy Extension Label Linkbase
	101.PRE	XBRL Taxonomy Extension Presentation Linkbase

 

(1)	Management contract or compensatory plan or arrangement required to be filed as an exhibit to the quarterly report on form 10-Q. Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed March 23, 2012 (file no. 000-53390).
(2)	Incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed June 17, 2015.
(3)	Incorporated by reference to Exhibit 99.1 to the Company’s Registration Statement on Form S-8 filed July 8, 2015 (file no. 333-205557).

 

 

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.

	Date:	August 7, 2015		DAKOTA PLAINS HOLDINGS, INC.
				/s/ Timothy R. Brady
				Timothy R. Brady
				Chief Financial Officer and Treasurer

 

 

EXHIBIT INDEX

Exhibit No.		Description		Manner of Filing
3.1		Amended and Restated Articles of Incorporation, as amended through March 23, 2012		Incorporated by Reference
3.2		Composite Second Amended and Restated Bylaws, as amended through February 1, 2015		Incorporated by Reference
10.1		2011 Equity Incentive Plan, as amended through June 18, 2015		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