BLUE DOLPHIN ENERGY CO (Form: 10-Q, Received: 08/14/2019 16:15:43)

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2019

☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-15905

BLUE DOLPHIN ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware		73-1268729
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

801 Travis Street, Suite 2100, Houston, Texas		77002
(Address of principal executive offices)		(Zip Code)

713-568-4725
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

Number of shares of common stock, par value $0.01 per share outstanding as of August 14, 2019: 10,975,514

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

TABLE OF CONTENTS

	Page
GLOSSARY OF SELECTED ENERGY, FINANCIAL, AND OTHER TERMS	4

PART I. FINANCIAL INFORMATION	5

ITEM 1. FINANCIAL STATEMENTS	5
Consolidated Balance Sheets (Unaudited)	5
Consolidated Statements of Operations (Unaudited)	6
Consolidated Statements of Cash Flows (Unaudited)	7
Notes to Consolidated Financial Statements	8

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	38
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
ITEM 4. CONTROLS AND PROCEDURES	50

PART II. OTHER INFORMATION	51
ITEM 1. LEGAL PROCEEDINGS	51
ITEM 1A. RISK FACTORS	51
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	51
ITEM 3. DEFAULTS UPON SENIOR SECURITIES	51
ITEM 4. MINE SAFETY DISCLOSURES	51
ITEM 5. OTHER INFORMATION	51
ITEM 6. EXHIBITS	51
	52
SIGNATURES	53

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

INTRODUCTION

This Quarterly Report for the period ended June 30, 2019 (this “Quarterly Report”) is a document that U.S. public companies file with the Securities and Exchange Commission (“SEC”) on a periodic basis. Part I, Item 1. of the Quarterly Report contains financial information, including consolidated financial statements and related notes. Part I, Item 2. of this Quarterly Report provides management’s discussion and analysis of our financial condition and results of operations. We hope investors will find it useful to have this information in a single document.

In this Quarterly Report, “Blue Dolphin,” “we,” “our,” and “us” are used interchangeably to refer to Blue Dolphin Energy Company individually or to Blue Dolphin Energy Company and its subsidiaries collectively, as appropriate to the context. Information in this Quarterly Report is current as of the filing date, unless otherwise specified.

CAUTION REGARDING FORWARD-LOOKING STATEMENTS

In this Quarterly Report, and from time to time throughout the year, we share our expectations for our future performance. These forward-looking statements include statements about our business plans; our expected financial performance, including the anticipated effect of strategic actions; economic, political and market conditions; and other factors that could affect our future results of operations or financial condition, including, without limitation, statements under the section entitled “Part I, Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Part II, Item 1. Legal Proceedings,” and “Part II, Item 1A. Risk Factors.” Any statements we make that are not matters of current reportage or historical fact should be considered forward-looking. Such statements often include words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “estimate,” “will,” and similar expressions. By their nature, these types of statements are uncertain and are not guarantees of our future performance. Our forward-looking statements represent our estimates and expectations at the time of disclosure. However, circumstances change constantly, often unpredictably, and investors should not place undue reliance on these statements. Many events beyond our control will determine whether our expectations will be realized. We disclaim any current intention or obligation to revise or update any forward-looking statements, or the factors that may affect their realization, whether considering new information, future events or otherwise, and investors should not rely on us to do so.

In accordance with the “safe harbor” provisions of the Private Securities Litigation Reform Act of 1995, “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”), and “Part II, Item 1A. Risk Factors” in our Quarterly Report on Form 10-Q for the period ended March 31, 2019 and this Quarterly Report explain some of the important factors that may cause actual results to be materially different from those that we anticipate.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

G LOSSARY OF SELECTED ENERGY, FINANCIAL, AND OTHER TERMS

Below are abbreviations and definitions of certain commonly used oil and gas industry terms, as well as key financial performance measures used by management, that are used in this Quarterly Report.

Regarding financial terms, m anagement uses U.S. generally accepted accounting principles (“GAAP”) and certain non-GAAP performance measures to assess our results of operations. Certain performance measures used by management to assess our operating results and the effectiveness of our business segment are considered non-GAAP performance measures. These performance measures may differ from similar calculations used by other companies within the petroleum industry, thereby limiting their usefulness as a comparative measure. We refer to certain refinery throughput and production data in the explanation of our period-over-period changes in results of operations. For our consolidated results, we refer to our consolidated statements of operations in the explanation of our period-over-period changes in results of operations.

Energy Terms

Atmospheric gas oil (“AGO”) . The heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.

Barrel (“bbl”) . A unit of volume equal to 42 U.S. gallons.

Barrels per Day (“bpd”) . A measure of the bbls of daily output produced in a refinery or transported through a pipeline.

Complexity . A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.

Condensate . Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.

Crude distillation tower . A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process turns crude oil and other inputs into intermediate and finished petroleum products. (Commonly referred to as a crude distillation unit or an atmospheric distillation unit.)

Crude oil . A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products.

Depropanizer unit . A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.

Distillates . The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and heavy oil-based mud blendstock (“HOBM”), reduced crude, and AGO).

Distillation . The first step in the refining process whereby crude oil and condensate is heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower per their densities, from lightest to heaviest. They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities.

Feedstocks . Crude oil and other hydrocarbons, such as condensate and/or intermediate products, that are used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products.

Finished petroleum products . Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.

Intermediate petroleum products . A petroleum product that might require further processing before it is saleable to the ultimate consumer. This further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company that will process it further.

Jet fuel . A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.

Leasehold interest . The interest of a lessee under an oil and gas lease.

Light crude . A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.

Naphtha . A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials it can make high-grade motor gasoline or jet fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions.

Petroleum . A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.

Product Slate . Represents type and quality of products produced. Propane . A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene and mixtures thereof. Refined petroleum products . Refined petroleum products are derived from crude oil and condensate that have been processed through various refining methods. The resulting products include gasoline, home heating oil, jet fuel, diesel, lubricants and the raw materials for fertilizer, chemicals, and pharmaceuticals. Refinery . Within the oil and gas industry, a refinery is an industrial processing plant where crude oil and condensate is separated and transformed into petroleum products. Sour crude . Crude oil containing sulfur content of more than 0.5%. Stabilizer unit . A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product. Sweet crude . Crude oil containing sulfur content of less than 0.5%.		Sulfur . Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized per their sulfur content, with lower sulfur fuels usually selling at a higher, or premium, price and higher sulfur fuels selling at a lower, or discounted, price. Topping unit . A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0. Throughput . The volume processed through a unit or a refinery or transported through a pipeline. Turnaround . Scheduled large-scale maintenance activity wherein an entire process unit is taken offline for a week or more for comprehensive revamp and renewal. Yield . The percentage of refined petroleum products that is produced from crude oil and other feedstocks.


Financial and Performance Measures

Capacity Utilization Rate . A percentage measure that indicates the amount of available capacity that is being used in a refinery or transported through a pipeline. With respect to the crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd). Cost of Goods Sold . Reflects the cost of crude oil and condensate, fuel use, and chemicals. Downtime . Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including bad weather, power failures, and preventive maintenance. Gross Margin . Calculated as gross profit divided by total revenue; reflected as a percentage (%). Gross Profit . Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount. Operating Days . Represents the number of days in a period in which the crude distillation tower operated. Operating days is calculated by subtracting downtime in a period from calendar days in the same period.		Other conversion costs . Represents the combination of direct labor costs and manufacturing overhead costs. These are the costs that are necessary to convert our raw materials into refined petroleum products. Other Operating Expenses . Represents costs associated with our pipeline assets and leasehold interests in oil and gas properties. Refining Gross Profit per Bbl . Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined petroleum products sold during the period; reflected as a dollar ($) amount per bbl. Total Refinery Production . Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO. Total Refinery Throughput . Refers to the volume processed as input through the crude distillation tower. Refinery throughput includes crude oil and condensate and other feedstocks.


Other Defined Terms

Final Arbitration Award. Damages and attorney fees and related expenses awarded to GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis Energy, L.P. (“Genesis”) by an arbitrator on August 11, 2017 (the “Final Arbitration Award”), in arbitration proceedings between LE and GEL (the “GEL Arbitration”) related to a contractual dispute involving a Crude Oil Supply and Throughput Services Agreement (the “Crude Supply Agreement”) and a Joint Marketing Agreement (the “Joint Marketing Agreement”), each between LE and GEL dated August 12, 2011.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

P ART I. FINANCIAL INFORMATION

I TEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheets (Unaudited)

	June 30,	December 31,
	2019	2018
	(in thousands except share amounts)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$ 372	$ 14
Restricted cash	49	49
Accounts receivable, net	170	379
Accounts receivable, related party	492	-
Prepaid expenses and other current assets	1,283	1,786
Deposits	194	194
Inventory	1,797	1,510
Refundable federal income tax	166	108
Total current assets	4,523	4,040

LONG-TERM ASSETS
Total property and equipment, net	64,080	64,697
Operating lease right-of-use assets	720	-
Restricted cash, noncurrent	1,546	1,602
Surety bonds	230	230
Deferred tax assets, net	50	108
Total long-term assets	66,626	66,637

TOTAL ASSETS	$ 71,149	$ 70,677

LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Long-term debt less unamortized debt issue costs, current portion, in default	$ 34,355	$ 34,863
Long-term debt, related party, current portion, in default	7,584	7,041
Line of credit payable	12,175	-
Interest payable	3,573	2,939
Interest payable, related party	1,854	1,534
Accounts payable	2,418	2,719
Accounts payable, related party	1,831	1,529
Current portion of lease liabilities	271	-
Asset retirement obligations, current portion	2,580	2,580
Accrued expenses and other current liabilities	2,105	1,571
Accrued arbitration award payable	9,528	21,128
Total current liabilities	78,274	75,904

LONG-TERM LIABILITIES
Long-term lease liabilities, net of current	654	-
Total long-term liabilities	654	-

TOTAL LIABILITIES	78,928	75,904

Commitments and contingencies (Note 18)

STOCKHOLDERS' DEFICIT
Common stock ($0.01 par value, 20,000,000 shares authorized; 10,975,514
shares issued at June 30, 2019 and December 31, 2018)	110	110
Additional paid-in capital	36,936	36,936
Accumulated deficit	(44,825 )	(42,273 )
TOTAL STOCKHOLDERS' DEFICIT	(7,779 )	(5,227 )

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT	$ 71,149	$ 70,677

See accompanying notes to consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Consolidated Statements of Operations (Unaudited)

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
	(in thousands, except share and per-share amounts)
REVENUE FROM OPERATIONS
Refinery operations	$ 77,257	$ 88,265	$ 145,115	$ 159,777
Tolling and terminaling	1,088	850	2,157	1,584
Total revenue from operations	78,345	89,115	147,272	161,361

COST OF GOODS SOLD
Crude oil, fuel use, and chemicals	76,364	82,992	139,551	151,078
Other conversion costs	2,192	2,098	4,521	4,504
Total cost of goods sold	78,556	85,090	144,072	155,582

Gross profit (loss)	(211 )	4,025	3,200	5,779

COST OF OPERATIONS
LEH operating fee	183	154	333	308
Other operating expenses	56	56	113	100
General and administrative expenses	579	688	1,249	1,348
Depletion, depreciation and amortization	633	463	1,223	918
Accretion of asset retirement obligations	-	78	-	144

Total cost of operations	1,451	1,439	2,918	2,818

Income (loss) from operations	(1,662 )	2,586	282	2,961

OTHER INCOME (EXPENSE)

Easement, interest and other income	1	1	1	2
Interest and other expense	(1,638 )	(751 )	(2,835 )	(1,495 )
Total other income (expense)	(1,637 )	(750 )	(2,834 )	(1,493 )

Income (loss) before income taxes	(3,299 )	1,836	(2,552 )	1,468

Income tax benefit	-	-	-	217

Net income (loss)	$ (3,299 )	$ 1,836	$ (2,552 )	$ 1,685


Income (loss) per common share:
Basic	$ (0.30 )	$ 0.17	$ (0.23 )	$ 0.15
Diluted	$ (0.30 )	$ 0.17	$ (0.23 )	$ 0.15

Weighted average number of common shares outstanding:
Basic	10,975,514	10,925,513	10,975,514	10,925,513
Diluted	10,975,514	10,925,513	10,975,514	10,925,513

See accompanying notes to consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Consolidated Statements of Cash Flows (Unaudited)

	Six Months Ended June 30,
	2019	2018

OPERATING ACTIVITIES
Net income (loss)	$ (2,552 )	$ 1,685
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization	1,223	918
Deferred income tax	-	(216 )
Amortization of debt issue costs	189	64
Accretion of asset retirement obligations	-	144
Changes in operating assets and liabilities
Accounts receivable	209	252
Accounts receivable, related party	(492 )	653
Prepaid expenses and other current assets	503	(1,110 )
Deposits and other assets	-	(66 )
Inventory	(287 )	(1,091 )
Accrued arbitration award	(11,600 )	(3,000 )
Accounts payable, accrued expenses and other liabilities	1,211	2,635
Accounts payable, related party	302	252
Net cash provided by (used in) operating activities	(11,294 )	1,120

INVESTING ACTIVITIES
Capital expenditures	(494 )	(1,231 )
Net cash used in investing activities	(494 )	(1,231 )

FINANCING ACTIVITIES
Proceeds from line of credit	12,402	-
Payments on debt	(541 )	(475 )
Net activity on related-party debt	229	452
Net cash provided by (used in) financing activities	12,090	(23 )
Net change in cash, cash equivalents, and restricted cash	302	(134 )

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	1,665	2,146
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$ 1,967	$ 2,012

Supplemental Information:
Non-cash investing and financing activities:
Financing of capital expenditures via accounts payable and finance lease	$ 86	$ 82
Financing of guaranty fees via long-term debt, related party	$ 315	$ 325
Line of credit closing costs included in principal balance	$ 398	-
Interest paid	$ 1,174	$ 1,290
Income taxes paid	$ -	$ -

See accompanying notes to consolidated financial statements.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19

Notes to Consolidated Financial Statements

(1)	Organization

Nature of Operations . Blue Dolphin Energy Company is a publicly traded Delaware corporation primarily engaged in the refining and marketing of petroleum products. We also provide tolling and storage terminaling services. Our assets, which are in Nixon, Texas, primarily include a 15,000-bpd crude distillation tower and more than 1.0 million bbls of petroleum storage tanks (collectively the “Nixon Facility”). Pipeline transportation and oil and gas operations are no longer active.

Structure and Management . Blue Dolphin is controlled by Lazarus Energy Holdings, LLC (“LEH”). LEH operates and manages all Blue Dolphin properties pursuant to an Amended and Restated Operating Agreement (the “Amended and Restated Operating Agreement”). Jonathan Carroll is Chairman of the Board of Directors (the “Board”), Chief Executive Officer, and President of Blue Dolphin, as well as a majority owner of LEH. Together, LEH and Jonathan Carroll owned 79.8% of our common stock, par value $0.01 per share (the “Common Stock”) at June 30, 2019. (See “Note (9) Related-Party Transactions,” “Note (11) Long-Term Debt and Accrued Interest” and “Note (18) Commitments and Contingencies – Financing Agreements” for additional disclosures related to LEH, the Amended and Restated Operating Agreement, and Jonathan Carroll.)

We have the following active subsidiaries:

●

Blue Dolphin Pipe Line Company, a Delaware corporation (“BDPL”);

●

Blue Dolphin Petroleum Company, a Delaware corporation;

●

Blue Dolphin Services Co., a Texas corporation (“BDSC”);

●

Lazarus Energy, LLC, a Delaware limited liability company (“LE”);

●

Lazarus Refining & Marketing, LLC, a Delaware limited liability company (“LRM”); and

●

Nixon Product Storage, LLC, a Delaware limited liability company (“NPS”).

In June 2018, Blue Dolphin acquired 100% of the issued and outstanding membership interests of NPS from Lazarus Midstream Partners, L.P. (Lazarus Midstream) , an affiliate of LEH, pursuant to an Assignment Agreement. The assignment was accounted for as a combination of entities under common control. See “Note (5) NPS Assignment” of this Quarterly Report for further information related to the NPS assignment. The transaction represents transfer of a vacant shell entity owned by Lazarus Midstream to Blue Dolphin for a nominal fee of $10.00.

See “Part I, Item 1. Business” and “Part I, Item 2. Properties” in our Annual Report for additional information regarding our operating subsidiaries, principal facilities, and assets.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Going Concern . Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include the following:

Final Arbitration Award and Settlement Agreement . As previously disclosed, LE was involved in arbitration proceedings (the “GEL Arbitration”) with GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis Energy, LP (“Genesis”), related to a contractual dispute involving a Crude Oil Supply and Throughput Services Agreement (the “Crude Supply Agreement”) and a Joint Marketing Agreement (the “Joint Marketing Agreement”), each between LE and GEL and dated August 12, 2011. On August 11, 2017, the arbitrator delivered the Final Arbitration Award. The Final Arbitration Award denied all of LE’s claims against GEL and granted substantially all the relief requested by GEL in its counterclaims. Among other matters, the Final Arbitration Award awarded damages and GEL’s attorneys’ fees and related expenses to GEL in the aggregate amount of $31.3 million.

A hearing on confirmation of the Final Arbitration Award was scheduled to occur on September 18, 2017 in state district court in Harris County, Texas. Prior to the scheduled hearing, LE and GEL jointly notified the court that the hearing would be continued for a period of no more than 90 days after September 18, 2017 (the “Continuance Period”), to facilitate settlement discussions between the parties. On September 26, 2017, LE and Blue Dolphin, together with LEH and Jonathan Carroll, entered into a Letter Agreement with GEL, effective September 18, 2017 (the “GEL Letter Agreement”), confirming the parties’ agreement to the continuation of the confirmation hearing during the Continuance Period, subject to the terms of the GEL Letter Agreement. The GEL Letter Agreement was subsequently amended nine times to extend the Continuance Period through July 2018.

LE, NPS, and Blue Dolphin, together with LEH, Carroll & Company Financial Holdings, L.P. (“C&C”), and Jonathan Carroll (collectively referred to herein as the “Lazarus Parties”), entered into that certain Settlement Agreement with GEL, dated as of July 20, 2018 (as may be further amended, restated, supplemented or otherwise modified from time to time, the “Settlement Agreement”), whereby GEL and the Lazarus Parties agreed to mutually release all claims against each other and to file a stipulation of dismissal with prejudice in connection with the GEL Arbitration (the “Settlement”), subject to the terms and conditions set forth in the Settlement Agreement. The Settlement is conditioned upon the Lazarus Parties paying GEL a lump sum cash payment of $10.0 million (the “Settlement Payment”) and $0.5 million in cash at the end of each calendar month (the “Interim Payments”).

The Settlement Agreement restricts the Lazarus Parties from taking certain actions without the prior written consent of GEL, including: (i) the incurrence of any debt not specifically excepted in the Settlement Agreement, (ii) the establishment of any liens not specifically excepted in the Settlement Agreement, (iii) the disposition of any assets other than certain ordinary course sales to unaffiliated third parties, payments to unaffiliated third-party trade creditors and scheduled debt payments, (iv) the entrance into any transactions with affiliates not specifically excepted in the Settlement Agreement, (v) the failure to pay debts generally as they become due, and (vi) the entrance into a bankruptcy, reorganization or similar proceeding. A violation of any of the restrictions in the Settlement Agreement or failure of the Lazarus Parties to make Interim Payments as they become due, will constitute an event of default under the Settlement Agreement which, subject to certain cure periods, would allow GEL to terminate the Settlement Agreement and enforce its rights under the Final Arbitration Award.

Simultaneously with the execution of the Settlement Agreement, Jonathan Carroll and C&C entered into a Security Agreement pursuant to which Jonathan Carroll and C&C agreed to secure up to $10.0 million of LE’s obligations under the Final Arbitration Award with a security interest in their equity in LEH.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

On May 6, 2019, the Lazarus Parties and GEL entered into a Fifth Amendment to the Settlement Agreement (the “Fifth Amendment”). The Fifth Amendment provided for, among other things:

●

GEL’s consent to the Lazarus Parties entering into a $12.8 million Line of Credit, Guarantee and Security Agreement between NPS and Pilot Travel Centers LLC; ("Pilot")

●

deferral of an April 30, 2019 Interim Payment under the Settlement Agreement, such deferred Interim Payment now being due in monthly installments of $0.1 million on the last day of each of the months June through October 2019 (the “Deferred Interim Installment Payments”);

●

Payment of the Settlement Payment to be paid in one or more installment payments, the sum total of such payments constituting the Settlement Payment; and

●

An extension to October 31, 2019 of the date on which the Deferred Interim Installment Payment and the Settlement Payment can be made (the “Settlement Date”).

During the period May 7, 2019 to May 10, 2019, the Lazarus Parties made multiple payments to GEL in the aggregate total amount of $10.0 million, which payments represent the Settlement Payment. Unless extended in writing by GEL, if the Lazarus Parties fail to either timely make a Deferred Interim Installment Payment ($0.1 million each) or pay all of the remaining Interim Installment Payments (totaling $0.3 million as of the filing date of this Quarterly Report) on or before the Settlement Date, GEL may terminate the Settlement Agreement. Blue Dolphin can provide no assurance that the Lazarus Parties will be able to timely make the remaining Deferred Interim Installment Payments or that the consummation of the Settlement will occur. If the Lazarus Parties do not timely make the remaining Deferred Interim Installment Payments or another event of default under the Settlement Agreement occurs and the Settlement Agreement is terminated, GEL may seek to enforce the Final Award against the Lazarus Parties, in which case, Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws.

As of the filing date of this Quarterly Report, GEL has received the following amounts from the Lazarus Parties toward reducing the outstanding balance of the Final Arbitration Award:

	(in millions)

Initial payment (September 2017)	$ 3.7
Interim Payments (July 2018 to April 2019)	8.0
Settlement Payment (May 2019)	10.0
Deferred Interim Installment Payments (June 2019 to July 2019)	0.2

	$ 21.9

The Interim Payments did not reduce the amount of the Settlement Payment, but such payments did reduce the Final Arbitration Award. At the time of the Settlement, the difference between the amounts paid to GEL by the Lazarus Parties and the amount we have accrued on our consolidated balance sheet for arbitration award payable will be recognized as a gain on our consolidated statement of operations. At June 30, 2019 and December 31, 2018, accrued arbitration award payable on our consolidated balance sheet was $9.5 million and $21.1 million, respectively.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Defaults Under Veritex Secured Loan Agreements . LE and LRM each have loans with Veritex Community Bank (“Veritex”), as successor in interest to Sovereign Bank (“Sovereign”) by merger, in the original aggregate amount of $35.0 million. These Veritex loans are guaranteed 100% by the United States Department of Agriculture (“USDA”).

●

Events of Default . Veritex delivered to obligors notices of default under secured loan agreements with Veritex, stating that the Final Arbitration Award constitutes an event of default under the secured loan agreements. The occurrence of an event of default permits Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Veritex has not accelerated or called due the secured loan agreements considering the Settlement Agreement. Instead, Veritex has expressly reserved all of its rights, privileges and remedies related to events of default under the secured loan agreements and informed obligors that it would consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements.

●

Financial Covenant Defaults . In addition to existing events of default related to the Final Arbitration Award, at June 30, 2019, LE and LRM were in violation of certain financial covenants in secured loan agreements with Veritex. Covenant defaults under the secured loan agreements would permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available.

The debt associated with these loans was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2019 and December 31, 2018 due to existing events of default related to the Final Arbitration Award as well as the uncertainty of LE and LRM’s ability to meet financial covenants in the secured loan agreements in the future.

Veritex has been working with LE and LRM and continues to be aware and party to all discussions and arrangements with GEL surrounding the executed settlement agreement and all amendments and extensions with GEL. In a notice to obligors dated April 30, 2019 (the "Veritex Consent'), Veritex agreed to waive certain covenant defaults and forbear from enforcing its remedies under the secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of a payment reserve account in the amount of $1.0 million as required by one of the secured loan agreements on or before August 31, 2019. Any exercise by Veritex of its rights and remedies under such secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further, Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws, and the trading prices of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. (See “Note (11) Long-Term Debt and Accrued Interest” for additional disclosures related to Veritex and the secured loan agreements.)

Consecutive Quarterly Net Losses and Working Capital Deficits . For the three months ended June 30, 2019, we reported a net loss of $3.3 million, or a loss of $0.30 per share. Comparatively, we reported income of $1.8 million, or income of $0.17 per share, for the three months ended June 30, 2018. For the six months ended June 30, 2019, we reported a net loss of $2.6 million, or a loss of $0.23 per share. Comparatively, we reported income of $1.7 million, or income of $0.15 per share, for the six months ended June 30, 2018.

We had a working capital deficit of $73.8 million and $71.9 million at June 30, 2019 and December 31, 2018, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $31.8 million and $30.0 at June 30, 2019 at December 31, 2018, respectively.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Operating Risks . Successful execution of our business strategy depends on several key factors, including the Settlement with GEL, having adequate working capital, obtaining credit to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon Facility, meeting contractual obligations, and having favorable margins on refined petroleum products. Management believes that it is continuing to take the appropriate steps to improve our operations and financial stability. However, there can be no assurance that our business strategy will be successful, that LEH and its affiliates will continue to fund our working capital needs, or that we will be able to obtain additional financing or meet financial assurance (bonding) requirements on commercially reasonable terms or at all. If Veritex exercises its rights and remedies under the secured loan agreements or if the Settlement Agreement with GEL is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected, and Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws.

For additional disclosures related to the Final Arbitration Award, the Settlement Agreement, defaults under secured loan agreements, our business strategy, and risk factors that could materially affect our future business, financial condition and results of operations, refer to the following section in this Quarterly Report:

●

Item 1. Financial Statements:

Note (9) Related-Party Transactions

Note (11) Long-Term Debt and Accrued Interest

Note (18) Commitments and Contingencies – Legal Matters

●

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations:

Final Arbitration Award and Settlement Agreement

Results of Operations

Liquidity and Capital Resources

Refer to the following sections in our Annual Report on Form 10-K for the period ended December 31, 2018 (the “Annual Report”):

●

Part I, Item 1. Business – Business Strategy

●

Part I, Item 1A. Risk Factors

●

Part I, Item 3. Legal Proceedings

(2)	Basis of Presentation

The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.

The consolidated balance sheet as of December 31, 2018 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report. Operating results for the three and six months ended June 30, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2019, or for any other period.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(3)	Significant Accounting Policies

The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.

Use of Estimates . We have made several estimates and assumptions related to the reporting of our consolidated assets and liabilities and to the disclosure of contingent assets and liabilities to prepare these consolidated financial statements in conformity with GAAP. We believe our current estimates are reasonable and appropriate; however, actual results could differ from those estimated.

Cash and Cash Equivalents . Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts.

Restricted Cash . Restricted cash, current portion primarily represents a payment reserve account held by Veritex as security for payments under a loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction related expenses to complete building new petroleum storage tanks.

Accounts Receivable and Allowance for Doubtful Accounts . Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management's judgment, deserve consideration in estimating bad debts. Management assesses collectability primarily based on the current aging status of the customer's account, our historical collection experience with the customer, and the customer's financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the accounts receivable portfolio as a whole. We had an allowance for doubtful accounts of $0.1 million at both June 30, 2019 and December 31, 2018.

Inventory . Our inventory primarily consists of refined petroleum products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net realizable value with cost being determined by the average cost method, and net realizable value being determined based on estimated selling prices less any associated delivery costs. If the net realizable value of our refined petroleum products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. (See “Note (7) Inventory” for additional disclosures related to our inventory.)

Property and Equipment .

Refinery and Facilities . Management expects to continue making improvements to the crude distillation tower based on operational needs and technological advances. Additions to refinery and facilities assets are capitalized. Expenditures for repairs and maintenance are expensed as incurred.

We record refinery and facilities at cost less any adjustments for depreciation or impairment. Adjustment of the asset and the related accumulated depreciation accounts are made for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, depreciation of refinery and facilities assets is computed using the straight-line method using an estimated useful life of 25 years beginning when the refinery and facilities assets are placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Pipelines and Facilities . Our pipelines and facilities are recorded at cost less any adjustments for depreciation or impairment. Depreciation is computed using the straight-line method over estimated useful lives ranging from 10 to 22 years. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) guidance on accounting for the impairment or disposal of long-lived assets, management performed periodic impairment testing of our pipeline and facilities assets in the fourth quarter of 2016. Upon completion of that testing, our pipeline assets were fully impaired. All pipeline transportation services to third parties have ceased, existing third-party wells along our pipeline corridor have been permanently abandoned, and no new third-party wells are being drilled near our pipelines.

Oil and Gas Properties . Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties were fully impaired in 2011.

Construction in Progress . Construction in progress expenditures, including capitalized interest, relate to construction and refurbishment activities at the Nixon Facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service.

(See “Note (8) Property, Plant and Equipment, Net” for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and construction in progress.)

Revenue Recognition . We adopted the provisions of FASB ASU (defined below) 2014-09, Revenue from Contracts with Customers (ASC 606) , on January 1, 2018, as described below in “New Pronouncements Adopted.” Accordingly, our revenue recognition accounting policy has been revised to reflect the adoption of this standard.

Refinery Operations Revenue . Revenue from the sale of refined petroleum products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined petroleum product is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are met when control is transferred to the customer. Control is transferred to the customer when the product has been lifted or, in cases where the product is not lifted immediately (bill and hold arrangements), when the product is added to the customer’s bulk inventory as stored at the Nixon Facility.

We consider a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the refined petroleum product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. Transportation, shipping, and handling costs incurred are included in cost of goods sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.

Tolling and Terminaling Revenue . Tolling and terminaling represents fees pursuant to: (i) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for use of the naphtha stabilizer unit and (ii) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over a period of time for the storage of products.

We typically satisfy performance obligations for tolling and terminaling operations with the passage of time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the term of the agreement. We allocate the transaction price to the single performance obligation that exists under the agreement, and we recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer, and the price we charge for such services is not included in the fixed cost under the customer’s tank storage agreement. Ancillary services are considered a separate performance obligation by us under the tank storage agreement. The performance obligation is satisfied when the requested service has been performed in the applicable period.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Income Taxes . We account for income taxes under FASB ASC guidance related to income taxes, which requires recognition of income taxes based on amounts payable with respect to the current reporting period and the effects of deferred taxes for the expected future tax consequences of events that have been included in our financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial accounting and tax basis of assets and liabilities, as well as for operating losses and tax credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to reverse.

As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management considers whether it is more likely than not that a portion or all of the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any net operating loss (“NOL”) carryforwards. When management determines that it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets. A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended December 31, 2018. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of June 30, 2019 and December 31, 2018. We expect to recover deferred tax assets related to the Alternative Minimum Tax (“AMT”) credit carryforwards. In addition, we have NOL carryforwards that remain available for future use.

The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At June 30, 2019 and December 31, 2018, there were no uncertain tax positions for which a reserve or liability was necessary. (See “Note (16) Income Taxes” for further information related to income taxes.)

Impairment or Disposal of Long-Lived Assets . In accordance with FASB ASC guidance on accounting for the impairment or disposal of long-lived assets, we periodically evaluate our long-lived assets for impairment. Additionally, we evaluate our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could be necessary. As a result of the Final Arbitration Award, which represents a significant adverse change that could affect the value of a long-lived asset, management performed potential impairment testing of our refinery and facilities assets in the fourth quarter of 2018. Upon completion of that testing, we determined that no impairment was necessary at December 31, 2018. We did not record any impairment of our refinery and facilities assets for the periods presented.

Asset Retirement Obligations . FASB ASC guidance related to asset retirement obligations (“AROs”) requires that a liability for the discounted fair value of an ARO be recorded in the period in which incurred, and the corresponding cost capitalized by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.

Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, management believes that these assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating, or disposing of our offshore platform, pipeline systems, and related onshore facilities, as well as for plugging and abandoning wells and restoring land and sea beds. The cost estimates for each of our assets were developed based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current retirement procedures, and construction and engineering consultations. Estimating future costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology, political, and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis. (See “Note (13) Asset Retirement Obligations” for additional information related to our AROs.)

Computation of Earnings Per Share . We apply the provisions of FASB ASC guidance for computing earnings per share (“EPS”). The guidance requires the presentation of basic EPS, which excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. The guidance requires dual presentation of basic EPS and diluted EPS on the face of our consolidated statements of operations and requires a reconciliation of the denominator of basic EPS and diluted EPS. Diluted EPS is computed by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding, which includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the earnings of the entity.

The number of shares related to options, warrants, restricted stock, and similar instruments included in diluted EPS is based on the “Treasury Stock Method” prescribed in FASB ASC guidance for computation of EPS. This method assumes theoretical repurchase of shares using proceeds of the respective stock option or warrant exercised, and, for restricted stock, the amount of compensation cost attributed to future services that has not yet been recognized and the amount of any current and deferred tax benefit that would be credited to additional paid-in-capital upon the vesting of the restricted stock, at a price equal to the issuer’s average stock price during the related earnings period. Accordingly, the number of shares includable in the calculation of EPS in respect of the stock options, warrants, restricted stock, and similar instruments is dependent on this average stock price and will increase as the average stock price increases. (See “Note (17) Earnings Per Share” for additional information related to EPS.)

New Pronouncements Adopted . The FASB issues an Accounting Standards Update (“ASU”) to communicate changes to the FASB ASC, including changes to non-authoritative SEC content. Recently adopted ASUs include:

ASUs 2019-01, 2018-20, 2018-11, 2018-10, and 2016-02, Leases (Topic 842) . In February 2016, FASB amended its accounting guidance for leases. Subsequently, FASB issued several clarifications and updates. The guidance requires a lessee to recognize assets and liabilities on the balance sheet arising from leases with terms greater than 12 months. While lessor guidance is relatively unchanged, certain amendments were made to confirm with changes made to lessee accounting and the amended revenue recognition guidance. The new guidance continues to classify leases as either finance or operating, with classification affecting the presentation and pattern of expense and income recognition, in the statement of operations. It also requires additional quantitative and qualitative disclosures about leasing arrangements. We adopted the new guidance on January 1, 2019 using the modified retrospective approach, which was applied beginning on the adoption date. Comparative information has not been restated and continues to be reported under the accounting guidance in effect for those periods. The adoption did not have a material effect on our consolidated statements of operations or cash flows. On the adoption date we recognized operating lease right-of-use assets, net of pre-existing deferred rent, and operating lease liabilities on our consolidated balance sheet of approximately $0.8 million and $0.9 million, respectively.

ASU 2018-09, Codification Improvements . In July 2018, FASB issued ASU 2018-09. This guidance affects a wide variety of topics in the codification and represents changes to clarify, correct errors in, or make minor improvements to the codification. The amendments make the codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The amendments apply to all reporting entities within the scope of the affected accounting guidance. Some of the amendments in ASU 2018-09 do not require transition guidance and will be effective upon issuance. However, many of the amendments do have transition guidance with effective dates for annual periods beginning after December 15, 2018, for public business entities. Adoption of this guidance did not have a significant impact on our consolidated financial statements.

ASU 2014-09, Revenue from Contracts with Customers (ASC 606) . We adopted this accounting pronouncement effective January 1, 2018, using a modified retrospective approach, which required us to apply the new revenue standard to: (i) all new revenue contracts entered into after January 1, 2018 and (ii) all existing revenue contracts as of January 1, 2018. In accordance with this approach, our consolidated revenues for the periods prior to January 1, 2018 were not revised. In November 2018, FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808) . ASU 2018-18 clarifies the interaction between ASC 808 and ASC 606. Our implementation activities related to ASC 606 are complete, and we did not have any material differences in the amount or timing of revenues as a result of the adoption of ASC 606. Our largest revenue streams consist of orders received from our customers for crude-oil derived specialty products based on market prices. These revenues are recognized at a point in time upon transfer of control of the product in accordance with contractual terms. With respect to ASC 808, we are not party to a collaborative agreement with a third party.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

New Pronouncements Issued, Not Yet Effective . The following are recently issued, but not yet effective, ASU’s that may influence our consolidated financial position, results of operations, or cash flows:

ASU 2019-07, Codification Updates to SEC Sections . In July 2019, FASB issued ASU 2019-07. This ASU amends certain SEC sections or paragraphs within the FASB ASC. The amendments are being made pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). The SEC Final Rule Releases, which also require improvements to the eXtensible Business Reporting Language (“ XBRL”) taxonomy, were made to improve, update, and simplify SEC regulations on financial reporting and disclosure. For public companies, the amendments in ASU 2019-07 are effective upon issuance. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

ASU 2018-17, Consolidation (Topic 810) . In October 2018, FASB issued ASU 2018-17. This ASU provides targeted improvements to related-party guidance for variable interest entities. In particular, indirect interests held through related parties in common control arrangements should be considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in ASU 2018-17 are effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

ASU 2018-05, Income Taxes (Topic 740) . In March 2018, FASB issued ASU 2018-05. This guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect Staff Accounting Bulletin No. 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment. This guidance also includes amendments to the XBRL Taxonomy. For public business entities, the amendments in ASU 2018-05 are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.

(4)	Revenue and Segment Information

We have two reportable business segments: (i) Refinery Operations and (ii) Tolling and Terminaling. Refinery operations relate to the refining and marketing of petroleum products at our 15,000-bpd crude distillation tower. Tolling and terminaling operations relate to tolling and storage terminaling services under related-party and third-party lease agreements. Both operations are conducted at the Nixon Facility.

Revenue from Contracts with Customers .

Disaggregation of Revenue . Revenue is presented in the table below under “Segment Information” disaggregated by business segment because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.

Receivables from Contracts with Customers . Our receivables from contracts with customers are presented as receivables, net on our consolidated balance sheets.

Remaining Performance Obligations . Most of our contracts with customers are spot contracts and therefore have no remaining performance obligations.

Segment Information . Business segment information for the periods indicated (and as of the dates indicated) was as follows:

	Three Months Ended June 30,
	2019				2018
	(in thousands)
	Segments				Segment
	Refinery	Tolling and	Corporate		Refinery	Tolling and	Corporate
	Operations	Terminaling	& Other	Total	Operations	Terminaling	& Other	Total

Net revenues (excluding intercompany fees and sales)	$ 77,257	$ 1,088	$ -	$ 78,345	$ 88,265	$ 850	$ -	$ 89,115
Intercompany fees and sales	(653 )	653	-	-	(875 )	875	-	-
Operation costs and expenses (1)	(78,376 )	(363 )	(56 )	(78,795 )	(85,197 )	(47 )	(134 )	(85,378 )
Segment contribution margin	$ (1,772 )	$ 1,378	$ (56 )	$ (450 )	$ 2,193	$ 1,678	$ (134 )	$ 3,737
General and administrative expenses	(274 )	(62 )	(243 )	(579 )	(314 )	(62 )	(312 )	(688 )
Depreciation and amortization	(483 )	(99 )	(51 )	(633 )	(417 )	(46 )	-	(463 )
Interest and other non-operating expenses, net				(1,637 )				(750 )

Income (loss) before income taxes				(3,299 )				1,836

Net income (loss)				$ (3,299 )				$ 1,836

Capital expenditures	$ 371	$ -	$ -	$ 371	$ 351	$ 340	$ -	$ 691

Identifiable assets	$ 50,463	$ 18,500	$ 2,186	$ 71,149	$ 54,966	$ 19,317	$ 964	$ 75,247

(1)

Operation costs within Refinery Operations includes the arbitration award and associated fees. Operation cost within Tolling and Terminaling includes terminal operating expenses, an allocation of other costs (e.g. insurance and maintenance), and associated refinery fuel use costs. Operation cost within Corporate and Other includes expenses associated with our pipeline assets and oil and gas leasehold interests (such as accretion).

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Notes to Consolidated Financial Statements (Continued)

	Six Months Ended June 30,
	2019				2018
	(in thousands)
	Segments				Segment
	Refinery	Tolling and	Corporate		Refinery	Tolling and	Corporate
	Operations	Terminaling	& Other	Total	Operations	Terminaling	& Other	Total

Net revenues (excluding intercompany fees and sales)	$ 145,115	$ 2,157	$ -	$ 147,272	$ 159,777	$ 1,584	$ -	$ 161,361
Intercompany fees and sales	(1,259 )	1,259	-	-	(1,546 )	1,546	-	-
Operation costs and expenses (1)	(143,678 )	(727 )	(113 )	(144,518 )	(155,348 )	(388 )	(244 )	(155,980 )
Segment contribution margin	$ 178	$ 2,689	$ (113 )	$ 2,754	$ 2,883	$ 2,742	$ (244 )	$ 5,381
General and administrative expenses	(606 )	(105 )	(538 )	(1,249 )	(708 )	(104 )	(690 )	(1,502 )
Depreciation and amortization	(948 )	(198 )	(77 )	(1,223 )	(826 )	(92 )	-	(918 )
Interest and other non-operating expenses, net				(2,834 )				(1,493 )

Income (loss) before income taxes				(2,552 )				1,468

Income tax benefit				-				217

Net income (loss)				$ (2,552 )				$ 1,685

Capital expenditures	$ 411	$ 83	$ -	$ 494	$ 687	$ 544	$ -	$ 1,231

Identifiable assets	$ 50,463	$ 18,500	$ 2,186	$ 71,149	$ 54,966	$ 19,317	$ 964	$ 75,247

(1)

(5)	NPS Assignment

In June 2018, Blue Dolphin obtained 100% of the issued and outstanding membership interest of NPS from Lazarus Midstream pursuant to an Assignment Agreement. The transaction represents transfer of a vacant shell entity owned by Lazarus Midstream to Blue Dolphin for the nominal fee of $10.00. The assignment of interest facilitated the Lazarus Parties obtaining the Settlement Financing under the Settlement Agreement.

The assignment was accounted for as a combination of entities under common control. Accordingly, the recognized assets and liabilities of NPS were transferred at their carrying amounts at the date of transfer and the results of operations are included for the three and six months ended June 30, 2019. NPS did not have significant assets, liabilities or results of operations for the three and six months ended June 30, 2018. NPS holds a leasehold interest in petroleum storage tanks at the Nixon Facility. NPS’ revenues and expenses are included in our Tolling and Terminaling business segment.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(6)	Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Prepaid insurance	$ 750	$ 437
Prepaid crude oil and condensate	350	1,166
Prepaid easement renewal fees	132	-
Other prepaids	51	183

	$ 1,283	$ 1,786

(7)

Inventory

Inventory as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Crude oil and condensate	$ 1,086	$ 861
AGO	463	276
Naphtha	141	143
Chemicals	84	106
Propane	18	17
LPG mix	5	5
HOBM	-	102

	$ 1,797	$ 1,510

(8)	Property, Plant and Equipment, Net

Property, plant and equipment, net, as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Refinery and facilities	$ 66,308	$ 63,058
Land	566	566
Other property and equipment	833	747
	67,707	64,371

Less: Accumulated depletion, depreciation, and amortization	(11,575 )	(10,429 )
	56,132	53,942

Construction in progress	7,948	10,755

	$ 64,080	$ 64,697

We capitalize interest cost incurred on funds used to construct property, plant, and equipment. Capitalized interest, which is recorded as part of the asset to which it relates, is depreciated over the asset’s useful life. Interest cost capitalized, which is currently included in construction in progress, was $0.7 million and $1.3 million at June 30, 2019 and December 31, 2018, respectively. Capital expenditures at the Nixon Facility are being funded by working capital derived from revenue from operations and LEH and its affiliates (including Jonathan Carroll), as well as from long-term debt from Veritex that was secured in 2015 for expansion of the Nixon Facility. Unused amounts under the Veritex loans are reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (11) Long-Term Debt and Accrued Interest” for additional disclosures related to borrowings for capital spending.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(9)	Related-Party Transactions

Related Parties . Blue Dolphin and certain of its subsidiaries are party to several agreements with LEH and its affiliates. Management believes that these related-party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. Related-party transactions consist of the following parties:

LEH . LEH is our controlling shareholder. Jonathan Carroll, Chairman of the Board, Chief Executive Officer, and President of Blue Dolphin, is the majority owner of LEH. Together, LEH and Jonathan Carroll owned 79.8% of our Common Stock at June 30, 2019. Related-party agreements with LEH include: (i) an Amended and Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan Agreement with BDPL, (iv) an Amended and Restated Promissory Note with Blue Dolphin, and (v) an office sublease-agreement with BDSC. Additionally, in June 2018, Blue Dolphin obtained 100% of the issued and outstanding membership interest of NPS from Lazarus Midstream for the nominal fee of $10.00 pursuant to an Assignment Agreement. (See “Note (5) NPS Assignment” for further discussion related to the NPS transaction.)

Ingleside Crude, LLC (“Ingleside”) . Ingleside is a related party of LEH and Jonathan Carroll. Blue Dolphin is party to an Amended and Restated Promissory Note with Ingleside.

Lazarus Marine Terminal I, LLC (“LMT”) . LMT is a related party of LEH and Jonathan Carroll. LE is party to a Dock Tolling Agreement with LMT.

Jonathan Carroll . Jonathan Carroll is Chairman of the Board, Chief Executive Officer, and President of Blue Dolphin. Related-party agreements with Jonathan Carroll include: (i) Amended and Restated Guaranty Fee Agreements with LE and LRM and (ii) an Amended and Restated Promissory Note with Blue Dolphin. The guaranty fee agreements and the promissory note relate to LE and LRM USDA-guaranteed loans.

Currently, we depend on LEH and its affiliates (including Jonathan Carroll and Ingleside) for financing when revenue from operations and borrowings under bank facilities are insufficient to meet our liquidity needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or long-term debt, related party.

Operations Related Agreements .

Amended and Restated Operating Agreement . LEH operates and manages all Blue Dolphin properties pursuant to the Amended and Restated Operating Agreement. The Amended and Restated Operating Agreement, which was restructured in 2017 following cessation of crude supply and marketing activities under the Crude Supply Agreement and Joint Marketing Agreement with GEL, expires: (i) April 1, 2020, (ii) upon written notice by either party to the Amended and Restated Operating Agreement of a material breach by the other party, or (iii) upon 90 days’ notice by the Board if the Board determines that the Amended and Restated Operating Agreement is not in our best interest. LEH receives a management fee calculated as 5% of certain of our direct operating expenses. During the fourth quarter of 2018, the management fee was changed to be calculated based on year to date operating expenses incurred, regardless of whether they were paid for by LEH or LE. The management fee was previously reflected within refinery operating expenses in our consolidated statements of operations. The management fee is currently reflected as the ‘LEH operating fee’ in our consolidated statements of operations.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Jet Fuel Sales Agreement . LE sells jet fuel to LEH pursuant to a Jet Fuel Sales Agreement. LEH resells the jet fuel purchased from LE to a government agency. LEH bids for jet fuel contracts are evaluated under preferential pricing terms due to its HUBZone certification. The Jet Fuel Sales Agreement terminates on the earliest to occur of: (a) a one-year term expiring March 31, 2020 plus a 30-day carryover or (b) delivery of a maximum quantity of jet fuel as defined therein. Sales to LEH under the Jet Fuel Sales Agreement are reflected within refinery operations revenue in our consolidated statements of operations.

Dock Tolling Agreement . In May 2016, LE entered a Dock Tolling Agreement with LMT to facilitate loading and unloading of petroleum products by barge at LMT’s dock facility in Ingleside, Texas. The Dock Tolling Agreement has a five-year term and may be terminated at any time by the agreement of both parties. LE pays LMT a flat reservation fee monthly. The reservation fee includes tolling volumes up to 84,000 gallons per day. Excess tolling volumes are subject to an increased per gallon rate. Amounts expensed as tolling fees under the Dock Tolling Agreement are reflected in cost of goods sold in our consolidated statements of operations.

Office Sub-Lease Agreement . In January 2018, BDSC entered into an Office Space Agreement with LEH to lease office space at our headquarters building in Houston, Texas. The Office Space Agreement has a term of sixty-eight (68) months expiring on August 31, 2023. Under the Office Space Agreement, LEH’s base rent is approximately $0.02 million per month. The Office Space Agreement includes rent abatement periods.

Financial Agreements . We currently rely on LEH and its affiliates (including Jonathan Carroll) to fund our working capital requirements. LEH and its affiliates (Ingleside and Jonathan Carroll) have provided working capital to Blue Dolphin in the form of a term loan and non-cash advances (such as conversion of accounts payable to debt under promissory notes). There can be no assurance that LEH and its affiliates will continue to fund our working capital requirements. Outstanding principal and accrued interest owed under these financial agreements are reflected in long-term debt, related party, current portion in our consolidated balance sheets.

BDPL Loan Agreement ( In Default ) . BDPL has a 2016 loan agreement and related security agreement with LEH as lender (the “BDPL Loan Agreement”). The BDPL Loan Agreement is currently in default due to non-payment. Key terms of the BDPL Loan Agreement are as follow:

Principal Amount:	$4.0 million
Maturity Date:	August 2018
Principal and Interest Payment:	$500,000 annually
Interest Rate:	16.00%

The proceeds of the BDPL Loan Agreement were used for working capital. There are no financial maintenance covenants associated with the BDPL Loan Agreement. The BDPL Loan Agreement is secured by certain property owned by BDPL. Outstanding principal owed to LEH under the BDPL Loan Agreement is reflected in long-term debt, related party, current portion in our consolidated balance sheets. Accrued interest under the BDPL Loan Agreement is reflected in interest payable, related party, current portion in our consolidated balance sheets.

Promissory Notes ( In Default ) . Working capital provided to Blue Dolphin in the form of non-cash advances whereby accounts payable, related party was converted to debt under promissory notes are reflected below. The promissory notes matured in January 2019. Interest, which is compounded annually, is still accruing at a rate of 8.00% and is reported as part of the outstanding balance. Promissory notes to LEH, Ingleside and Jonathan Carroll, which are reflected within long-term debt, related party, are currently in default.

●

June LEH Note . The June LEH Note reflects amounts owed to LEH at June 30, 2019 under the Amended and Restated Operating Agreement.

●

March Ingleside Note . The March Ingleside Note reflects amounts owed to Ingleside at June 30, 2019 under the Amended and Restated Tank Lease Agreement.

●

March Carroll Note . The March Carroll Note reflects amounts owed to Jonathan Carroll at June 30, 2019 under the guaranty fee agreements. See "Amended and Restated Guranty Fee Agreements" below for additional information.

Amended and Restated Guaranty Fee Agreements . Jonathan Carroll was required to provide a guarantee for repayment of funds borrowed and interest accrued under certain LE and LRM USDA-guaranteed loans. For his personal guarantee, LE and LRM each entered a Guaranty Fee Agreement with Jonathan Carroll whereby he earns a fee equal to 2.00% per annum of the outstanding principal balance owed under the loan agreements. Effective in April 2017, the Guaranty Fee Agreements were amended and restated (the “Amended and Restated Guaranty Fee Agreements”) to reflect payment 50% in cash and 50% in Blue Dolphin Common Stock. Amounts owed to Jonathan Carroll under Amended and Restated Guaranty Fee Agreements are reflected within long-term debt, related party, net of current portion in our consolidated balance sheets. Guaranty fees are recognized monthly as incurred and are included in interest and other expense in our consolidated statements of operations.

As previously disclosed, the GEL Letter Agreement (and its amendments) and the Settlement Agreement prohibited the Lazarus Parties from making payments to Jonathan Carroll pursuant to the Amended and Restated Guaranty Fee Agreements. Once the Settlement occurs, payment of outstanding amounts owed to Jonathan Carroll under the guaranty fee agreements will be made and regular payments will resume. Jonathan Carroll has received no payments under guaranty fee agreements, either in cash or common stock, since May 2017.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Financial Statements Impact .

Consolidated Balance Sheets . Accounts payable, related party to LMT associated with the Dock Tolling Agreement were $1.8 million and $1.5 million at June 30, 2019 and December 31, 2018, respectively.

Long-term debt, related party, current portion and interest payable, related party, as of the dates indicated was as follows:

	June 30,	December 31,
	2019	2018

	(in thousands, except percent amounts)
LEH
June LEH Note (in default)	$ 736	$ 611
BDPL Loan Agreement (in default)	5,854	5,534
LEH total	6,590	6,145
Ingleside
March Ingleside Note (in default)	1,333	1,283
Jonathan Carroll
March Carroll Note (in default)	1,515	1,147

	9,438	8,575

Less: Long-term debt, related party, current portion, in default	(7,584 )	(7,041 )
Less: Interest payable, related party (in default)	(1,854 )	(1,534 )

	$ -	$ -

Consolidated Statements of Operations . Revenue from related parties was as follows:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands, except percent amounts)
Refinery operations
LEH	$ 24,173	30.2 %	$ 25,549	28.6 %	$ 44,982	30.2 %	$ 46,116	28.6 %
Other customers	53,084	68.3 %	62,716	70.4 %	100,133	68.3 %	113,661	70.4 %
Tolling and terminaling
Other customers	1,088	1.5 %	850	1.0 %	2,157	1.5 %	1,584	1.0 %

	$ 78,345	100.0 %	$ 89,115	100.0 %	$ 147,272	100.0 %	$ 161,361	100.0 %

Fees associated with the Dock Tolling Agreement with LMT totaled $0.2 million for both three-month periods ended June 30, 2019 and 2018. Fees associated with the Dock Tolling Agreement with LMT totaled $0.4 million for both six-month periods ended June 30, 2019 and 2018.

Lease payments received under the office sub-lease agreement with LEH totaled $0.01 million for the three months ended June 30, 2019 and 2018. Lease payments received under the office sub-lease agreement with LEH totaled $0.02 million for the six months ended June 30, 2019 and 2018.

The LEH operating fee totaled approximately $0.2 million in both three-month periods ended June 30, 2019 and 2018. For both six-month periods ended June 30, 2019 and 2018, the LEH operating fee totaled approximately $0.3 million.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Interest expense associated with the BDPL Loan Agreement, Amended and Restated Guaranty Fee Agreements, and related-party promissory notes (the June LEH Note, the March Ingleside Note, and the March Carroll Note) for the periods indicated was as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
Jonathan Carroll
Guaranty Fee Agreements
First Term Loan Due 2034	$ 111	$ 115	$ 223	$ 230
Second Term Loan Due 2034
March Carroll Note (in default)	28	15	53	16
LEH
BDPL Loan Agreement (in default)	160	162	320	323
June LEH Note (in default)	16	1	23	-
Ingleside
March Ingleside Note (in default)	26	24	52	71

	$ 387	$ 364	$ 763	$ 734

(10)	Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Unearned revenue	$ 1,023	$ 434
Insurance	382	61
Board of director fees payable	338	273
Property taxes	121	48
Other payable	167	265
Excise and income taxes payable	64	47
Customer deposits	10	109
Easement payable	-	223
Accrued rent	-	111

	$ 2,105	$ 1,571

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(11)	Long-Term Debt and Accrued Interest

Outstanding Balances . Our Long-term debt consists of: (i) a LE $25.0 million loan with Veritex (the “First Term Loan Due 2034”), (ii) a LRM $10.0 million loan with Veritex (the “Second Term Loan Due 2034”), and (iii) a LE loan with Notre Dame Investors, Inc. as evidenced by a promissory note that is currently held by John Kissick (the “Notre Dame Debt”). As described within this “Note (11”) Long-Term Debt and Accrued Interest,” certain of our long-term debt is currently in default. See “Note (9) Related-Party Transactions” for additional disclosures regarding long-term debt, related party and interest payable, related party.

Long-term debt, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:

	June 30,	December 31,
	2019	2018
	(in thousands)

First Term Loan Due 2034 (in default)	$ 22,365	$ 22,593
Second Term Loan Due 2034 (in default)	9,184	9,353
Notre Dame Debt (in default)	8,219	7,821
Capital lease	-	41

	$ 39,768	$ 39,808

Less: Current portion of long-term debt, net	(34,355 )	(34,863 )
Less: Unamortized debt issue costs	(1,942 )	(2,006 )
Less: Interest payable (in default)	(3,471 )	(2,939 )

	$ -	$ -

Unamortized debt issue costs related to long-term debt as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

First Term Loan Due 2034 (in default)	$ 1,674	$ 1,674
Second Term Loan Due 2034 (in default)	768	768

Less: Accumulated amortization	(500 )	(436 )

	$ 1,942	$ 2,006

Amortization expense was $0.03 million for the three months ended June 30, 2019 and 2018. Amortization expense was $0.06 million for the six months ended June 30, 2019 and 2018.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Accrued interest related to long-term debt, which is reflected as interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Notre Dame Debt (in default)	$ 3,241	$ 2,843
First Term Loan Due 2034 (in default)	183	43
Second Term Loan Due 2034 (in default)	47	53

	3,471	2,939

Less: Interest payable (in default)	(3,471 )	(2,939 )

Long-term interest payable, net of current portion	$ -	$ -

USDA-Guaranteed Loans . The First Term Loan Due 2034 and Second Term Loan Due 2034 are guaranteed 100% by the USDA. The USDA, acting through its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes. Each USDA guarantee is a full faith and credit obligation of the United States with the USDA guaranteeing up to 100% of the principal amount of guaranteed loans. The lender on each USDA-guaranteed loan is required by regulation to retain the unguaranteed portion of the guaranteed loan, to service the entire underlying guaranteed loan, including the USDA-guaranteed portion and the unguaranteed portion, and to remain mortgage and/or secured party of record. The USDA-guaranteed portion and the unguaranteed portion of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.

Amended and Restated Guaranty Fee Agreements . As a condition of the First Term Loan Due 2034 and Second Term Loan Due 2034, Jonathan Carroll was required to provide a guarantee for r epayment of funds borrowed and interest accrued under the USDA-guaranteed loans. LEH, LRM and Blue Dolphin also cross-guaranteed the First Term Loan Due 2034 and Second Term Loan Due 2034. (See “Note (9) Related-Party Transactions” for additional disclosures related to LEH, Jonathan Carroll, and the Amended and Restated Guaranty Fee Agreements, as well as a breakdown of guaranty fee expenses incurred related to the First Term Loan Due 2034 and Second Term Loan Due 2034.)

Defaults in USDA-Guaranteed Loan Agreements . As described elsewhere in this Quarterly Report, Veritex notified LE and LRM that the Final Arbitration Award constitutes an event of default under the First Term Loan Due 2034 and the Second Term Loan Due 2034. In addition to existing events of default related to the Final Arbitration Award, at June 30, 2019, LE and LRM were in violation of the debt service coverage ratio, the current ratio, and debt-to-net worth ratio financial covenants related to the First Term Loan Due 2034 and Second Term Loan 2034. LE also failed to replenish a payment reserve account as required under the First Term Loan Due 2034. The occurrence of events of default under the First Term Loan Due 2034 and Second Term Loan Due 2034 permits Veritex to declare the amounts owed under the First Term Loan Due 2034 and Second Term Loan Due 2034 immediately due and payable, exercise its rights with respect to collateral securing LE and LRM’s obligations under the loan agreements, and/or exercise any other rights and remedies available. Veritex has not accelerated or called due the First Term Loan Due 2034 and Second Term Loan Due 2034 considering the Settlement Agreement. Instead, Veritex has expressly reserved all its rights, privileges and remedies related to events of default under the First Term Loan Due 2034 and Second Term Loan Due 2034 and informed LE and LRM that it would consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

In the Veritex Consent, Veritex agreed to waive certain covenant defaults and forbear from enforcing its remedies under the secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the $1.0 payment reserve account in the amount as required under the First Term Loan Due 2034 on or before August 31, 2019. Any exercise by Veritex of its rights and remedies under the First Term Loan Due 2034 and Second Term Loan Due 2034 would have a material adverse effect on our business, financial condition, and results of operations and would likely require Blue Dolphin to seek protection under bankruptcy laws. (See “Note (1) Organization – Going Concern” and “– Operating Risks” for additional disclosures related to the First Term Loan Due 2034 and Second Term Loan Due 2034, the Final Arbitration Award and financial covenant violations.)

Key Terms of Long-Term Debt .

First Term Loan Due 2034 (In Default) . Key terms of the First Term Loan Due 2034 are as follow:

Principal Amount:	$25.0 million
Maturity Date:	June 2034
Principal and Interest Payment:	$0.2 million monthly
Interest Rate:	Wall Street Journal Prime Rate plus 2.75%

A portion of the proceeds of the First Term Loan Due 2034 were used to refinance approximately $8.5 million of debt owed under a previous debt facility with American First National Bank. Remaining proceeds are being used primarily to construct new petroleum storage tanks at the Nixon Facility. The First Term Loan Due 2034, which is 100% USDA-guaranteed, is secured by: (i) a first lien on the Nixon Facility’s business assets (excluding accounts receivable and inventory), (ii) assignment of all Nixon Facility contracts, permits, and licenses, (iii) absolute assignment of Nixon Facility rents and leases, including tank rental income, (iv) a payment reserve account held by Veritex, and (v) a pledge of $5.0 million of a life insurance policy on Jonathan Carroll. The First Term Loan Due 2034 contains representations and warranties, affirmative, restrictive, and financial covenants, as well as events of default which are customary for bank facilities of this type.

Pursuant to a construction rider in the First Term Loan Due 2034, proceeds available for use were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected as restricted cash (current portion) and restricted cash, noncurrent in our consolidated balance sheets.

Second Term Loan Due 2034 (In Default) . Key terms of the Second Term Loan Due 2034 are as follow:

Principal Amount:	$10.0 million
Maturity Date:	December 2034
Principal and Interest Payment:	$0.1 million monthly
Interest Rate:	Wall Street Journal Prime Rate plus 2.75%

A portion of the proceeds of the Second Term Loan Due 2034 were used to refinance a previous bridge loan from Veritex in the amount of $3.0 million, the funds of which were used to purchase idle refinery equipment for refurbishment and use at the Nixon Facility. Remaining proceeds are being used primarily to construct additional new petroleum storage tanks at the Nixon Facility. The Second Term Loan Due 2034, which is 100% USDA-guaranteed, is secured by: (i) a second priority lien on the rights of LE in the crude distillation tower and the other collateral of LE pursuant to a security agreement; (ii) a first priority lien on the real property interests of LRM; (iii) a first priority lien on all of LRM’s fixtures, furniture, machinery and equipment; (iv) a first priority lien on all of LRM’s contractual rights, general intangibles and instruments, except with respect to LRM’s rights in its leases of certain specified tanks, with respect to which Veritex has a second priority lien in such leases subordinate to a prior lien granted by LRM to Veritex to secure obligations of LRM under a term loan that matured in 2017; and (v) all other collateral as described in the security documents. The Second Term Loan Due 2034 contains representations and warranties, affirmative, restrictive, and financial covenants, as well as events of default which are customary for bank facilities of this type.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Pursuant to a construction rider in the Second Term Loan Due 2034, proceeds available for use were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected as restricted cash (current portion) and restricted cash, noncurrent in our consolidated balance sheets.

Notre Dame Debt (In Default) . Key terms of the Notre Dame Debt are as follow:

Original Principal Amount:	$8.0 million
Additional Principal:	$3.7 million
Maturity Date:	January 2018
Principal and Interest Payment:	None; payment rights subordinated to senior lender
Default Interest Rate:	16.00%

Pursuant to a Sixth Amendment to the Notre Dame Debt, entered on November 14, 2017 and made effective September 18, 2017, the Notre Dame Debt was amended to increase the principal amount by $3.7 million (the “Additional Principal”). The Additional Principal was used to make payments to GEL to reduce the balance of the Final Arbitration Award in the amount of $3.6 million in accordance with the GEL Letter Agreement. Pursuant to a Subordination Agreement dated June 2015, the holder of the Notre Dame Debt agreed to subordinate its right to payments, as well as any security interest and liens on the Nixon Facility’s business assets, in favor of Veritex as holder of the First Term Loan Due 2034. To date, no payments have been made to Notre Dame Investors, Inc. under the Notre Dame Debt.

The Notre Dame Debt is secured by a Deed of Trust, Security Agreement and Financing Statements (the “Subordinated Deed of Trust”), which encumbers the crude distillation tower and general assets of LE. There are no financial maintenance covenants associated with the Notre Dame Debt.

(12)	Line of Credit Payable

Line of credit payable consists of a line of credit, guarantee and security agreement between NPS and Pilot (the “Pilot Line of Credit”). NPS and Pilot entered the Pilot Line of Credit on May 3, 2019. The parties to the Pilot Line of Credit subsequently entered into amendments to the Pilot Line of Credit on May 9, 2019 and May 10, 2019.

Line of credit payable, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:

	June 30,	December 31,
	2019	2018
	(in thousands)

Pilot Line of Credit	$ 12,902	$ -

Less: Unamortized debt issue costs	(625 )	-
Less: Interest payable	(102 )	-

	$ 12,175	$ -

Key terms of the Pilot Line of Credit are as follow:

Principal Amount:	Up to $12.8 million
Maturity Date:	May 2020
Interest Payment:	$0.2 million monthly
Interest Rate:	12.00% per annum

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

The Pilot Line of Credit was primarily used to fund the Settlement Payment to GEL. Remaining funds are being used to finance NPS' purchase of crude oil from Pilot pursuant to certain purchase and supply agreements and to provide working capital. The Pilot Line of Credit contains customary affirmative and negative covenants and events of default and is secured by (i) NPS receivables, (ii) NPS assets, including a tank lease (the “Tank Lease”), and (iii) LRM receivables. On May 3, 2019, as an inducement to Pilot’s entry into the Pilot Line of Credit, Blue Dolphin and Pilot entered into a Pledge Agreement (the “Pledge Agreement”) whereby Blue Dolphin pledged its equity interests in NPS to Pilot to secure NPS’ obligations under the Pilot Line of Credit. Blue Dolphin, LE, LRM, and LEH have each guaranteed NPS’ obligations under the Pilot Line of Credit. On May 10, 2019, LE, NPS, Pilot and Veritex entered into a Subordination and Attornment Agreement (the “Subordination Agreement”), providing that, if Veritex in its capacity as a secured lender of LE and LRM were to foreclose on LE property that NPS was leasing from LE pursuant to the Tank Lease, Veritex would permit the continued performance of obligations under the Tank Lease so long as certain conditions are met. The effectiveness of the Subordination Agreement is subject to certain conditions, including the agreement and concurrence of the USDA.

(13)	Asset Retirement Obligations

Refinery and Facilities . Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Management believes that the refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

Pipelines and Facilities and Oil and Gas Properties . We have AROs associated with the dismantlement and abandonment in place of our pipelines and facilities assets, as well as the plugging and abandonment of our oil and gas properties. We recorded a discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipment and recognized accretion expense relating to the discounted liability over the remaining life of the asset. At December 31, 2018, the liability was fully accreted.

Due to the length of inactivity of our pipelines and facilities assets, BDPL is required by the Bureau of Ocean Energy Management (“BOEM”) to abandon-in-place certain pipelines and remove an anchor platform in federal waters. BDPL has been in communications with BOEM and the Bureau of Safety and Environmental Enforcement (“BSEE”) related to abandonment operations and associated pipeline financial assurance requirements. Management anticipates performing certain abandonment operations during 2019, however, timing depends on several factors, including resource availability and weather. As of the date of this Quarterly Report, decommissioning work has not yet commenced.

Plugging and abandonment costs are recorded during the period incurred or as information becomes available to substantiate actual and/or probable costs.

Changes to our ARO liability for the periods indicated were as follows:

	June 30,	December 31,
	2019	2018
	(in thousands)

Asset retirement obligations, at the beginning of the period	$ 2,580	$ 2,315
Accretion expense	-	265
	2,580	2,580
Less: asset retirement obligations, current portion	(2,580 )	(2,580 )

Long-term asset retirement obligations, at the end of the period	$ -	$ -

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(14)	Concentration of Risk

Bank Accounts . Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain our cash balances at financial institutions located in Houston, Texas. In the U.S., the Federal Deposit Insurance Corporation (the “FDIC”) insures certain financial products up to a maximum of $250,000 per depositor. At June 30, 2019 and December 31, 2018, we had cash balances (including restricted cash) of more than the FDIC insurance limit per depositor in the amount of $1.5 million and $1.2 million, respectively.

Key Supplier . Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate, which is primarily dependent on our liquidity and access to capital. We currently have in place a month-to-month crude supply contract with Pilot. In connection with the crude supply agreement, Pilot stores its crude oil at the Nixon Facility pursuant to a terminal services agreement. Pilot currently provides us with adequate amounts of crude oil and condensate on favorable terms, and we expect Pilot to continue to do so for the foreseeable future. Our ability to purchase adequate amounts of crude oil and condensate could be adversely affected if the Settlement Agreement is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, as well as other factors, including net losses, working capital deficits, and financial covenant defaults in secured loan agreements.

Significant Customers . We routinely assess the financial strength of our customers and have not experienced significant write-downs in our accounts receivable balances. Therefore, we believe that our accounts receivable credit risk exposure is limited.

For the three months ended June 30, 2019, we had 4 customers that accounted for approximately 98.7% of our refined petroleum product sales. LEH, a related party, was 1 of these 4 significant customers and accounted for approximately 31.3% of our refined petroleum product sales. At June 30, 2019, these 4 customers represented approximately $0.6 million in accounts receivable. LEH represented approximately $0.5 million in accounts receivable. LEH purchases our jet fuel and resells the jet fuel to a government agency. LEH bids for jet fuel contracts are evaluated under preferential pricing terms due to its HUBZone certification. (See “Note (9) Related-Party Transactions,” “Note (11) Long-Term Debt and Accrued Interest,” and “Note (18) Commitments and Contingencies – Financing Agreements” for additional disclosures related to LEH.)

For the six months ended June 30, 2019, we had 4 customers that accounted for approximately 98.0% of our refined petroleum product sales. LEH was 1 of these 4 significant customers and accounted for approximately 31.0% of our refined petroleum product sales. At June 30, 2019, these 4 customers represented approximately $0.6 million in accounts receivable. LEH represented approximately $0.5 million in accounts receivable.

For the three months ended June 30, 2018, we had 5 customers that accounted for approximately 96.7% of refinery operations revenue. LEH was 1 of these 5 significant customers and accounted for approximately 28.9% of refinery operations revenue. At June 30, 2018, these 5 customers represented approximately $0.7 million in accounts receivable. LEH represented approximately $0 in accounts receivable.

For the six months ended June 30, 2018, we had 4 customers that accounted for approximately 86.8% of our refined petroleum product sales. LEH was 1 of these 4 significant customers and accounted for approximately 28.9% of our refined petroleum product sales. At June 30, 2018, these 4 customers represented approximately $0.7 million in accounts receivable. LEH represented approximately $0 in accounts receivable.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Refined Petroleum Product Sales . Our refined petroleum products are primarily sold in the U.S. However, with the opening of the Mexican diesel market to private companies, we occasionally sell low-sulfur diesel to customers that export to Mexico. Total refined petroleum product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

	Three Months Ended June 30,				Six Months Ended June 30,
	2019		2018		2019		2018
	(in thousands, except percent amounts)

LPG mix	$ 1	0.0 %	$ -	0.0 %	$ 9	0.0 %	$ 3	0.0 %
Naphtha	15,416	20.3 %	23,648	26.8 %	29,211	20.1 %	39,966	25.0 %
Jet fuel	24,173	30.7 %	25,549	28.9 %	44,982	31.0 %	46,116	28.9 %
HOBM	16,747	23.8 %	22,430	25.4 %	32,907	22.7 %	38,859	24.3 %
AGO	20,920	25.2 %	16,638	18.9 %	38,006	26.2 %	34,833	21.8 %

	$ 77,257	100.0 %	$ 88,265	100.0 %	$ 145,115	100.0 %	$ 159,777	100.0 %

(15)

Leases

We adopted the new lease accounting guidance using the modified retrospective method and applied it to all leases based on the contract terms in effect as of January 1, 2019. For existing contracts, we carried forward our historical assessment of: (i) whether contracts are or contain leases, (ii) lease classification, and (iii) initial direct costs.

As of June 30, 2019, leases were as follow:

●

Office Lease (Operating Lease) . BDSC has an office lease related to our principal office space in Houston, Texas. The 68-month operating lease expires in 2023. BDSC has the option to extend the lease term for one additional five (5) year period if notice of intent to extend is provided to the lessor at least twelve (12) months before the end of the current term. LEH subleases a portion of this leased office space (see “Note (9) Related-Party Transactions” related to the LEH office sub-lease agreement). Sublease income received from LEH totaled $0.01 million for both three-month periods ended June 30, 2019 and 2018. Sublease income received from LEH totaled $0.02 million for both six-month periods ended June 30, 2019 and 2018.

●

Crane (Finance Lease) . In January 2018, LE entered a 24-month lease for the purchase of a 20-ton crane for use at the Nixon Facility. The lease requires a negligible monthly payment and matures in January 2020.

●

Backhoe Rent-to-Own Agreement (Finance Lease). In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The backhoe is being used at the Nixon Facility.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

For leases with terms greater than 12 months, including renewal options when appropriate, we record the related right-of-use asset and lease liability as the present value of the fixed lease payments over the lease term. Since the leases do not provide a readily-determinable discount rate, we use the incremental borrowing rate to discount lease payments to present value. The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

	Classification on Consolidated Balance Sheet	June 30, 2019
		(in thousands)
Assets
Operating lease right-of-use assets	Operating lease right-of-use assets	$ 787
Less: Accumulated amortization on operating lease assets	Operating lease right-of-use assets	(67 )
		720

Finance lease assets	Property and equipment, net	180
Less: Accumulated amortization on finance lease assets	Property and equipment, net	(21 )
		159
Total lease assets		$ 879

Liabilities
Current
Operating lease	Current portion of lease liabilities	$ 167
Finance leases	Current portion of lease liabilities	104
		271
Noncurrent
Operating lease	Long-term lease liabilities, net of current	654
Total lease liabilities		$ 925

Weighted average remaining lease term in years
Operating lease	4.17
Finance leases	0.80
Weighted average discount rate
Operating lease	8.25%
Finance leases	8.25%

The following table presents information related to lease costs for finance and operating leases:

	Three Months Ended	Six Months Ended
	June 30,	June 30,
	2019	2019
	(in thousands)

Operating lese costs	$ 51	$ 77
Finance lease costs:
Depreciation of leased assets	4	8
Interest on lease liabilities	1	2
Total lease cost	56	$ 87

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

The table below presents supplemental cash flow information related to leases as follows:

	Three Months Ended	Six Months Ended
	June 30, 2019	June 30, 2019
	(in thousands)

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows for operating lease	$ 40	$ 96
Operating cash flows for finance leases	1	2
Financing cash flows for finance leases	10	21

As of June 30, 2019, maturities of lease liabilities for the periods indicated were as follows:

	Operating Lease	Financing Leases	Total
	(in thousands)

2019	$ 82	$ 31	$ 113
2020	175	73	248
2021	194	-	194
2022	215	-	215
2023	155	-	155

	$ 821	$ 104	$ 925

As of June 30, 2019, our future minimum annual lease commitments that are non-cancelable for the periods indicated are as follow:

	Operating
	Lease
	(in thousands)

2019	$ 114
2020	230
2021	233
2022	237
2023	161

	$ 975

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(16)	Income Taxes

The provision for income tax benefit for the periods indicated was as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018


Current
Federal	$ -	$ -	$ -	$ 108
State	-	-	-	-
Deferred
Change in valuation allowance	-	-	-	109

Total provision for income taxes	$ -	$ -	$ -	$ 217

The state of Texas has a Texas margins tax (“TMT”), which is a form of business tax imposed on gross margin. Although TMT is imposed on an entity’s gross profit rather than on its net income, certain aspects of TMT make it like an income tax. Accordingly, TMT is treated as an income tax for financial reporting purposes.

Effective Tax Rate . Beginning in 2018, our effective tax rate differed from the U.S. federal statutory rate primarily due to AMT credits made refundable by the Tax Cuts and Jobs Act. At the date of enactment of the Tax Cuts and Jobs Act, we re-measured our deferred tax assets and liabilities using a rate of 21%, which is the rate expected to be in place when such deferred assets and liabilities are expected to reverse in the future. The re-measurement was offset by a change in our valuation allowance, resulting in there being no impact on our net deferred tax assets.

Deferred income taxes as of the dates indicated consisted of the following:

	June 30,	December 31,
	2019	2018
	(in thousands)

Deferred tax assets:
Net operating loss and capital loss carryforwards	$ 13,365	$ 11,260
Accrued arbitration award payable	1,256	2,850
Business interest expense	1,299	704
Start-up costs (crude oil and condensate processing facility)	636	678
Asset retirement obligations liability/deferred revenue	541	542
AMT credit and other	50	108
Total deferred tax assets	17,147	16,142

Deferred tax liabilities:
Basis differences in property and equipment	(5,564 )	(5,153 )
Total deferred tax liabilities	(5,564 )	(5,153 )

	11,583	10,989

Valuation allowance	(11,533 )	(10,881 )

Deferred tax assets, net	$ 50	$ 108

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Deferred Income Taxes . Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, as well as from NOL carryforwards. We state those balances at the enacted tax rates we expect will be in effect when taxes are paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

NOL Carryforwards . Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than fifty (50) percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years). For income tax purposes, we experienced ownership changes in 2005, relating to a series of private placements, and in 2012, because of a reverse acquisition, that limit the use of pre-change NOL carryforwards to offset future taxable income. In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards that were generated prior to the ownership change to an annual use limitation of approximately $0.6 million per year. Unused portions of the annual use limitation amount may be used in subsequent years. Because of the annual use limitation, approximately $6.7 million in NOL carryforwards that were generated prior to the 2012 ownership change will expire unused. NOL carryforwards that were generated after the 2012 ownership change and prior to 2018 are not subject to an annual use limitation under IRC Section 382 and may be used for a period of 20 years in addition to available amounts of NOL carryforwards generated prior to the ownership change. NOL carryforwards that were generated after 2017 may only be used to offset 80% of taxable income and are carried forward indefinitely.

NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):

	Net Operating Loss Carryforward
	Pre-Ownership Change	Post-Ownership Change	Total
	(in thousands)

Balance at December 31, 2017	$ 9,614	$ 30,219	$ 39,833

Net operating losses	-	7,116	7,116

Balance at December 31, 2018	$ 9,614	$ 37,335	$ 46,949

Net operating losses	-	10,021	10,021

Balance at June 30, 2019	$ 9,614	$ 47,356	$ 56,970

Valuation Allowance . As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. At June 30, 2019 and December 31, 2018, management determined that cumulative losses incurred over the prior three-year period provided significant objective evidence that limited the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of June 30, 2019 and December 31, 2018.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

(17)	Earnings Per Share

A reconciliation between basic and diluted income per share for the periods indicated was as follows:

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
	(in thousands, except share and per share amounts)


Net income (loss)	$ (3,299 )	$ 1,836	$ (2,552 )	$ 1,685

Basic and diluted loss per share	$ (0.30 )	$ 0.17	$ (0.23 )	$ 0.15

Basic and Diluted
Weighted average number of shares of
common stock outstanding and potential
dilutive shares of common stock	10,975,514	10,925,513	10,975,514	10,925,513

Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS for three and six months ended June 30, 2019 and 2018 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.

(18)	Commitments and Contingencies

Legal Matters .

Final Arbitration Award and Settlement Agreement . See “Note (1) Organization – Going Concern – Final Arbitration Award and Settlement Agreement” and "Part II, Item 1. Legal Proceedings” for additional disclosures related to the Final Arbitration Award and the Settlement Agreement.

Veritex Secured Loan Agreement Events of Default . See “Note (1) Organization – Going Concern – Defaults under Secured Loan Agreements” and “Note (11) Long-Term Debt and Accrued Interest” for disclosures related to defaults under Veritex secured loan agreements.

Other Legal Matters . We are involved in lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens, contract-related disputes, administrative proceedings, and financial assurance (bonding) requirements with regulatory bodies. Management is in discussion with all concerned parties and does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that such discussions will result in a manageable outcome or that we will be able to meet financial assurance (bonding) requirements. If Veritex exercises its rights and remedies under the secured loan agreements or if the Settlement Agreement with GEL is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected, and Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws.

Amended and Restated Operating Agreement . See “Note (9) Related-Party Transactions” for additional disclosures related to the Amended and Restated Operating Agreement.

Financing Agreements . See “Note (11) Long-Term Debt and Accrued Interest” and “Note (12) Line of Credit Payable” for additional disclosures related to financing agreements.

Guarantees . LEH and Jonathan Carroll provided guarantees on certain Blue Dolphin-related long-term debt. The maximum amount of any guarantee is reduced as payments are made. See “Note (11) Long-Term Debt and Accrued Interest” for additional disclosures related to guarantees.

BLUE DOLPHIN ENERGY COMPANY		FORM 10-Q 6/30/19
Notes to Consolidated Financial Statements (Continued)

Health, Safety and Environmental Matters . Our operations are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. Our operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failure to obtain and comply with these permits or environmental, health, or safety laws generally could result in fines, penalties or other sanctions, or a revocation of our permits.

Nixon Facility Expansion . We have made and continue to make capital and efficiency improvements at the Nixon Facility. Therefore, we incurred and will continue to incur capital expenditures related to these improvements, which include, among other things, facility and land improvements and completion of a petroleum storage tank.

Supplemental Pipeline Bonds . In a letter dated March 30, 2018, the Bureau of Ocean Energy Management (“BOEM”) ordered BDPL to provide additional supplemental bonds or acceptable financial assurance of approximately $4.8 million (the “Separate Orders”) within sixty (60) calendar days of receipt of the letter. The Separate Orders relate to five (5) existing pipeline rights-of-way. BOEM issued an Incident of Noncompliance (“INC”) for each Separate Order dated June 8, 2018 (the “June 2018 INCs”) and received by BDPL on June 11, 2018. BOEM asserts that the June 2018 INCs authorize BOEM to impose financial penalties on BDPL if it does not comply with the Separate Orders within twenty (20) days. BOEM asserts that potential penalties accrue for each day BDPL failed to comply after June 28, 2018. BDPL appealed the June 2018 INCs on August 8, 2018. The Interior Board of Land Appeals (the “IBLA”) granted five extension requests that extended BDPL’s deadline for filing a Statement of Reasons with the IBLA until July 21, 2019. On July 21, 2019, BDPL filed an extension request with the IBLA to further extend the deadline. Since the IBLA did not act on BDPL’s extension request, the Statement of Reasons was due on August 9, 2019. On August 9, 2019, BDPL filed its Statement of Reasons with the IBLA as required. BDPL’s pending appeal of the June 2018 INCs does not relieve BDPL of its obligations to provide additional financial assurance in accordance with the Separate Orders, or of BOEM’s authority to impose financial penalties.

BDPL has been in discussions with BOEM to resolve the Separate Orders and the June 2018 INCs. There can be no assurance that BOEM will: (i) accept a proposal for a reduced amount of supplemental financial assurance, (ii) not require additional supplemental pipeline bonds related to BDPL’s existing pipeline rights-of-way, and/or (iii) not impose penalties under the June 2018 INCs. As a result, we are unable to predict the outcome of the Separate Orders, the settlement discussions with BOEM or their ultimate impact, if any, on our business, financial condition or results of operations. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2019. As of June 30, 2019 and December 31, 2018, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to the BOEM. If BDPL is required by BOEM to provide significant additional supplemental bonds or acceptable financial assurance or is assessed significant penalties under the June 2018 INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

Idle Iron . The Bureau of Safety and Enviromental Enforcement ("BSEE") requires operators to decommission wells and platforms that have not been used in the past five (5) years for exploration and development operations or as infrastructure to support such operations. BDPL’s Blue Dolphin Pipeline has been inactive since September 2012. Due to the length of inactivity, BSEE required BDPL to: (i) flush and fill the Blue Dolphin Pipeline, (ii) abandon-in-place a portion of the Blue Dolphin Pipeline’s 20” segment and certain smaller diameter connecting lateral lines that reside offshore in federal waters and (iii) remove from federal waters the GA-288C anchor platform. In April 2016, BDPL submitted decommissioning permit applications to BSEE for three (3) pipeline segments – Segments #13101, #9428, and #15635 – and the GA-288C anchor platform. In June 2016, BDPL also submitted a decommissioning permit application to the U.S. Army Corps of Engineers ("USCOE") for abandonment of Segment #9428. The permit applications were granted by BSEE at varying dates between August 2016 and April 2017. Work must typically be completed within 120 days from the date of permit approval. The USCOE withdrew BDPL’s decommissioning permit application in April 2018.

In a letter dated December 19, 2018, BSEE issued to BDPL an INC for its failure to flush and fill Segment #13101 (the “December 2018 INC”) pursuant to the pipeline decommissioning approval letter issued in March 2017. BSEE asserts that the December 2018 INC authorizes BSEE to impose financial penalties on BDPL if it does not comply with the December 2018 INC within ten (10) days. As of the date of this Quarterly Report, flushing of the pipeline segment has not yet commenced and decommission work has not yet begun. Management anticipates performing certain abandonment operations during 2019, however, timing depends several factors, including resource availability and weather.

BDPL has been in discussions with BSEE to resolve the December 2018 INC. There can be no assurance that BSEE will not impose penalties under the December 2018 INC. As a result, we are unable to predict BOEM’s response or the ultimate impact, if any, on our business, financial condition or results of operations. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2019. As of June 30, 2019, BDPL maintained $2.6 million in asset retirement obligations related to abandonment of these assets. If BDPL is assessed significant penalties under the December 2018 INC, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

I TEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In this Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2019 (the Quarterly Report”), references to “Blue Dolphin,” “we,” “us” and “our” are to Blue Dolphin Energy Company and its subsidiaries, unless otherwise indicated or the context otherwise requires. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the risk factors, financial statements, and related notes included thereto in our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2019 and our Annual Report on Form 10-K for the fiscal year ended December 31, 2018 (the “Annual Report”).

Forward Looking Statements

Certain statements included in this Quarterly Report, including in this “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1935. Forward-looking statements represent management’s beliefs and assumptions based on currently available information. Forward-looking statements relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources, access to supplies of crude oil and condensate, commitments and contingencies, and other financial and operating information. We have used the words “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will,” “future,” and similar terms and phrases to identify forward-looking statements.

Forward-looking statements reflect our current expectations regarding future events, results, or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized, or materially affect our financial condition, results of operations and cash flows. Actual events, results and outcomes may differ materially from our expectations due to a variety of factors. Although it is not possible to identify all these factors, they include, among others, the following and other factors described under the heading “Risk Factors” in the Annual Report and this Quarterly Report:

Risks Related to Our Business and Industry

●

Failure to meet the terms and conditions set forth in the Settlement Agreement could have a material adverse effect on our business, financial condition, and results of operations and could materially adversely affect the value of an investment in our common stock. (See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern – Final Arbitration Award and Settlement Agreement” for disclosures related to the Settlement Agreement).

●

Inadequate liquidity to sustain operations due to the unfavorable outcome in the arbitration of the contract-related dispute with GEL, net losses, working capital deficits, and other factors, including defaults under secured loan agreements, any of which could have a material adverse effect on us.

●

Defaults under our secured loan agreements could have a material adverse effect on our business, financial condition, and results of operations and materially adversely affect the value of an investment in our common stock.

●

Our substantial debt in the current portion of long-term debt, which is currently in default, could adversely affect our financial health and make us more vulnerable to adverse economic conditions.

●

Our business, financial condition and operating results may be adversely affected by increased costs of capital or a reduction in the availability of credit.

●

LEH holds a significant interest in us, and related-party transactions with LEH and its affiliates may cause conflicts of interest that may adversely affect us.

●

The dangers inherent in oil and gas operations could expose us to potentially significant losses, costs or liabilities and reduce our liquidity.

●

The geographic concentration of our assets creates a significant exposure to the risks of the regional economy and other regional adverse conditions.

●

Competition from companies having greater financial and other resources could materially and adversely affect our business and results of operations.

●

Environmental laws and regulations could require us to make substantial capital expenditures to remain in compliance or to remediate current or future contamination that could give rise to material liabilities.

●

We are subject to strict laws and regulations regarding personnel and process safety, and failure to comply with these laws and regulations could have a material adverse effect on our results of operations, financial condition and profitability.

●

Our insurance policies may be inadequate or expensive.

●

Our ability to use net operating loss (“NOL”) carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation.

●

Terrorist attacks, cyber-attacks, threats of war, or actual war may negatively affect our operations, financial condition, results of operations, and cash flows.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Risks Related to Our Operations

●

Management has determined that there is, and the report of our independent registered public accounting firm expresses, substantial doubt about our ability to continue as a going concern.

●

Refining margins are volatile, and a reduction in refining margins will adversely affect the amount of cash we will have available for working capital.

●

The price volatility of crude oil, other feedstocks, refined petroleum products, and fuel and utility services may have a material adverse effect on our earnings, cash flows and liquidity.

●

Our future success depends on our ability to acquire adequate crude oil levels on favorable terms to operate the Nixon refinery.

●

Downtime at the Nixon refinery could result in lost margin opportunity, increased maintenance expense, increased inventory, and a reduction in cash available for payment of our obligations.

●

We may have capital needs for which our internally generated cash flows and other sources of liquidity may not be adequate. Further, LEH and its affiliates (including Jonathan Carroll) may, but are not required to, fund our working capital requirements in the event our internally generated cash flows and other sources of liquidity are inadequate.

●

Our business may suffer if any of the executive officers or other key personnel discontinue employment with us. Furthermore, a shortage of skilled labor or disruptions in our labor force may make it difficult for us to maintain productivity.

●

Loss of market share by a key customer, one of which is LEH, or consolidation among our customer base could harm our operating results.

●

The sale of refined petroleum products to the wholesale market is our primary business, and if we fail to maintain and grow the market share of our refined petroleum products, our operating results could suffer.

●

We are dependent on third parties for the transportation of crude oil and condensate into and refined petroleum products out of our Nixon Facility, and if these third parties become unavailable to us, our ability to process crude oil and condensate and sell refined petroleum products to wholesale markets could be materially and adversely affected.

●

Our suppliers source a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale and may experience interruptions of supply from that region.

●

Our refining operations and customers are primarily located within the Eagle Ford Shale and changes in the supply/demand balance in this region could result in lower refining margins.

●

Regulation of GHG emissions could increase our operational costs and reduce demand for our products.

Risks Related to Our Pipelines and Oil and Gas Properties

●

Orders by BOEM to increase bonds or other sureties to maintain compliance with BOEM’s regulations, or the assessment of penalties for failure to do so, could significantly impact our operations, liquidity, and financial condition.

●

More stringent requirements imposed by BOEM and BSEE related to the decommissioning, plugging, and abandonment of wells, platforms, and pipelines could materially increase our estimate of future AROs.

Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements are not guarantees of future performance, and actual results and future performance may differ materially from those suggested in any forward-looking statements. We do not intend to update these statements unless we are required to do so.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Going Concern

See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern” regarding factors m anagement has determined raise substantial doubt about our ability to continue as a going concern.

Operating Risks

See “Part I, Item 1. Financial Statements – Note (1) Organization – Operating Risks” regarding factors that have negatively impacted execution of our business plan.

Company Overview

Blue Dolphin is a publicly traded Delaware corporation primarily engaged in the refining and marketing of petroleum products. We also provide tolling and storage terminaling services. Our assets, which are in Nixon, Texas, primarily include a 15,000-bpd crude distillation tower and approximately 1.1 million bbls of petroleum storage tanks (collectively the “Nixon Facility”). Pipeline transportation and oil and gas operations are no longer active. Blue Dolphin maintains a website at http://www.blue-dolphin-energy.com . Information on or accessible through Blue Dolphin’s website is not incorporated by reference in or otherwise made a part of this Quarterly Report.

Major Influences on Results of Operations

Refinery Operations

As a margin-based business, our refinery operations are primarily affected by gross profit per bbl, product slate, and refinery downtime.

Price Differentials per Bbl

Gross profit per bbl, which reflects the dollar per bbl price difference between crude oil and condensate (input) and refined petroleum products (output), is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. Our per bbl cost to acquire crude oil and condensate and the dollar per bbl price for which our refined petroleum products are ultimately sold depend on the economics of supply and demand. Supply and demand are affected by numerous factors, most, if not all, of which are beyond our control, including:

●

Domestic and foreign market conditions, political affairs, and economic developments;

●

Import supply levels and export opportunities;

●

Existing domestic inventory levels;

●

Operating and production levels of competing refineries;

●

Expansion and/or upgrades of competitors’ facilities;

●

Governmental regulations (e.g., mandated renewable fuels standards, proposed climate change laws and regulations, and increased mileage standards for vehicles);

●

Weather conditions;

●

Availability of and access to transportation infrastructure;

●

Availability of competing fuels (e.g., renewables); and

●

Seasonal fluctuations.

Product Slate

Management periodically determines whether to change the refinery’s product mix, as well as maintain, increase, or decrease inventory levels based on various factors. These factors include the crude oil pricing market in the U.S. Gulf Coast region, the refined petroleum products market in the same region, the relationship between these two markets, fulfilling contract demands, and other factors that may impact our operations, financial condition, and cash flows.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Refinery Downtime

The safe and reliable operation of the refinery is key to our financial performance and results of operations, and we are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Although operating at anticipated levels, the refinery is still in a recommissioning phase and may require unscheduled downtime for unanticipated reasons, including maintenance and repairs, voluntary regulatory compliance measures, or cessation or suspension by regulatory authorities.

Occasionally, the Nixon refinery experiences a temporary shutdown due to power outages from high winds and thunderstorms. In such cases, we must initiate a standard refinery start-up process, which can last several days. We are typically able to resume normal operations the next day. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense and a reduction of refined petroleum products inventory, which could reduce our ability to meet our payment obligations.

Tolling and Terminaling Operations

The Nixon Facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined petroleum products, such as naphtha, jet fuel, diesel and fuel oil. Our storage terminaling operations are primarily affected by:

●

price (in terms of storage fees) and available capacity;

●

industry factors including changes in the prices of petroleum products that affect demand for storage services; and

●

utilization rates of our competitors (local demand).

Key Relationships

Relationship with LEH

Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with LEH and its affiliates and a counter-party. Related-party agreements with LEH include: (i) an Amended and Restated Operating Agreement with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a Loan Agreement with BDPL, (iv) an Amended and Restated Promissory Note with Blue Dolphin, and (v) an office sub-lease agreement with BDSC. In addition, we currently rely on advances from LEH and its affiliates (including Jonathan Carroll) to fund our working capital requirements. There can be no assurances that LEH and its affiliates will continue to fund our working capital requirements. (See “Part I, Item 1. Financial Statements – Note (9) Related-Party Transactions” for additional disclosures related to agreements that we have in place with LEH and its affiliates.)

Relationship with Crude Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate, which is primarily dependent on our liquidity and access to capital. We currently have in place a month-to-month crude supply contract with Pilot Travel Centers LLC ("Pilot"). In connection with the crude supply agreement, Pilot stores its crude oil at the Nixon Facility pursuant to a terminal services agreement. Pilot currently provides us with adequate amounts of crude oil and condensate on favorable terms, and we expect Pilot to continue to do so for the foreseeable future. Our ability to purchase adequate amounts of crude oil and condensate could be adversely affected if the Settlement Agreement is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, as well as other factors, including net losses, working capital deficits, and financial covenant defaults in secured loan agreements.

Management believes that it is taking the appropriate steps to improve our operations and financial stability. If our business strategy is unsuccessful, it could affect our ability to acquire adequate supplies of crude oil and condensate under the existing contract or otherwise. Further, because our existing crude supply contract is a month-to-month arrangement, there can be no assurance that crude oil and condensate supplies will continue to be available under this contract in the future.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Results of Operations

Certain Prior Quarter amounts as defined herein have been reclassified in order to conform to the Current Quarter presentation. Specifically, certain changes to the presentation of prior period statements of operations have been made to conform to the current period presentation, primarily relating to: (i) a retitling from ‘cost of sales’ to ‘cost of goods sold,’ which includes all costs directly attributable to the generation of the related revenue, as defined by GAAP and (ii) a breakout of the ‘LEH operating fee’ under the Amended and Restated Operating Agreement, which was previously reported within ‘refinery operating expenses’. These changes had no effect on the reported results of operations.

Consolidated Results

Three Months Ended June 30, 2019 (the “Current Quarter”) Compared to June 30, 2018 (the “Prior Quarter”) .

Total Revenue from Operations . For the Current Quarter, we had total revenue from operations of $78.3 million compared to total revenue from operations of $89.1 million for the Prior Quarter, a decrease of 12%. Approximately 99% of our revenue is derived from refinery operations while 1% is derived from tolling and terminaling. Refinery operations revenue decreased approximately $11.0 million in the Current Quarter compared to the Prior Quarter. The decrease in refinery operations revenue was due to lower commodity pricing per bbl on refined petroleum products sold and lower sales volume in the Current Quarter compared to the Prior Quarter. For the same period, tolling and terminaling revenue increased approximately $0.2 million, or approximately 28%, as a result of increased storage fees under new and renewed customer agreements.

Total Cost of Goods Sold . Total cost of goods sold was $78.6 million for the Current Quarter compared to $85.1 million for the Prior Quarter. The nearly 8% decrease in total cost of goods sold in the Current Quarter compared to the Prior Quarter related to lower commodity prices per bbl for crude oil and chemicals and decreased throughput volume.

Gross Profit (Loss) / Gross Margin (Deficit) . For the Current Quarter, we had a gross loss of $0.2 million, or a gross deficit of less than 1%, compared to gross profit of $4.0 million, or gross margin of nearly 5%, for the Prior Quarter. The approximate $4.2 million decrease in gross profit between the periods primarily related to negative margins per bbl on certain of our refined petroleum products in the Current Quarter compared to the Prior Quarter.

LEH Operating Fee . The LEH operating fee under the Amended and Restated Operating Agreement totaled approximately $0.2 million in both the Current Quarter and the Prior Quarter. (See “Part I, Item 1. Financial Statements – Note (9) Related-Party Transactions” for additional disclosures related to the Amended and Restated Operating Agreement.)

General and Administrative Expenses . General and administrative expenses totaled $0.6 million in the Current Quarter compared to $0.7 million in the Prior Quarter, a decrease of nearly 16%. The decrease between the periods was primarily due to lower legal expenses related to the GEL matter.

Depreciation and Amortization . We recorded depreciation and amortization expenses of $0.6 million in the Current Quarter compared to $0.5 million in the Prior Quarter, an increase of nearly 37%. The increase related to placement in service of a new boiler and new petroleum storage tanks.

Other Expense. Total other expense was $1.6 million in the Current Quarter compared to $0.8 million in the Prior Quarter. Nearly all of other expense related to interest expense associated with the secured loan agreements with Veritex Community Bank (“Veritex”) and related-party debt. The increase in the Current Quarter compared to the Prior Quarter related to completion of certain construction in progress for which interest was no longer capitalized.

Net Income (Loss) . For the Current Quarter, we reported net loss of $3.3 million, or a loss of $0.30 per share, compared to net income of $1.8 million, or income of $0.17 per share, for the Prior Quarter. The increase in net loss between the periods was primarily attributable to less favorable margins per bbl and lower sales throughput volume, which was offset by slightly increased tank rental revenue in the Current Quarter compared to the Prior Quarter.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Six Months Ended June 30, 2019 (the “Current Six Months”) Compared to June 30, 2018 (the “Prior Six Months”) .

Total Revenue from Operations . For the Current Six Months, we had total revenue from operations of $147.3 million compared to total revenue from operations of $161.4 million for the Prior Six Months, a decrease of nearly 9%. Approximately 99% of our revenue is derived from refinery operations while 1% is derived from tolling and terminaling. Refinery operations revenue decreased approximately $14.7 million in the Current Six Months compared to the Prior Six Months. The decrease in refinery operations revenue was due to lower commodity pricing per bbl on refined petroleum products sold in the Current Six Months compared to the Prior Six Months. For the same period, tolling and terminaling revenue increased approximately $0.6 million, or approximately 36%, as a result of increased storage fees under new and renewed customer agreements.

Total Cost of Goods Sold . Total cost of goods sold was $144.1 million for the Current Six Months compared to $155.6 million for the Prior Six Months. The 7% decrease in total cost of goods sold in the Current Six Months compared to the Prior Six Months related to lower commodity prices per bbl for crude oil and chemicals.

Gross Profit / Gross Margin . For the Current Six Months, gross profit totaled $3.2 million, or gross margin of approximately 2%, compared to gross profit of $5.8 million, or gross margin of nearly 4%, for the Prior Six Months. The decrease in gross profit between the periods primarily related to less favorable margins per bbl in the Current Six Months compared to the Prior Six Months.

LEH Operating Fee . The LEH operating fee under the Amended and Restated Operating Agreement totaled approximately $0.3 million in both the Current Six Months and the Prior Six Months. (See “Part I, Item 1. Financial Statements – Note (9) Related-Party Transactions” for additional disclosures related to the Amended and Restated Operating Agreement.)

General and Administrative Expenses . General and administrative expenses totaled $1.2 million in the Current Six Months compared to $1.3 million in the Prior Six Months, a decrease of approximately 7%. The decrease between the periods was primarily due to lower legal expenses related to the GEL matter.

Depreciation and Amortization . We recorded depreciation and amortization expenses of $1.2 million in the Current Six Months compared to $0.9 million in the Prior Six Months, an increase of approximately 33%. The increase related to placement in service of a new boiler and new petroleum storage tanks.

Other Expense. Total other expense was $2.8 million in the Current Six Months compared to $1.5 million in the Prior Six Months. Nearly all of other expense related to interest expense associated with the secured loan agreements with Veritex and related-party debt. The increase in the Current Six Months compared to the Prior Six Months related to completion of certain construction in progress for which interest was no longer capitalized.

Income Tax Benefit . We recognized an income tax benefit of $0 in the Current Six Months compared to $0.2 million in the Prior Six Months. Income tax benefit in the Prior Six Months related to a refundable Alternative Minimum Tax that was paid in prior periods. (See “Part I, Item 1. Financial Statements – Note (16) Income Taxes” for additional disclosures related to income taxes.)

Net Income (Loss) . For the Current Six Months, we reported net loss of $2.6 million, or a loss of $0.23 per share, compared to net income of $1.7 million, or income of $0.15 per share, for the Prior Six Months. The increase in net loss between the periods was primarily attributable to less favorable margins per bbl, which was partially offset by slightly increased tank rental revenue in the Current Six Months compared to the Prior Six Months.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Non-GAAP Financial Measures

To supplement our consolidated results, management uses refining gross profit per bbl, a non-GAAP financial measure, to help investors evaluate our core operating results and allow for greater transparency in reviewing our overall financial, operational and economic performance. Refining gross profit per bbl is reconciled to GAAP-based results below. Refining gross profit per bbl should not be considered an alternative for GAAP results. Refining gross profit per bbl is provided to enhance an overall understanding of our core financial performance for the applicable periods and is an indicator that management believes is relevant and useful. Refining gross profit per bbl may differ from similar calculations used by other companies within the petroleum industry, thereby limiting its usefulness as a comparative measure. (See “Part I, Item 1. Financial Statements” for comparative GAAP results.)

Refining Gross Profit per Bbl – For the Current Quarter, we had a refining gross deficit of $1.18 per bbl compared to a refining gross profit of $2.79 per bbl for the Prior Quarter, reflecting a decrease of $3.97 per bbl. The decrease between the periods primarily related to negative margins per bbl on certain of our refined petroleum products in the Current Quarter compared to the Prior Quarter. (See “Glossary of Selected Energy and Financial Terms” in this Quarterly Report for the definition of gross margin per bbl.)

For the Current Six Months, we had refining gross profit of $0.49 per bbl compared to a refining gross profit of $1.97 per bbl for the Prior Six Months, reflecting a decrease of $1.48 per bbl. The decrease between the periods primarily related to less favorable refining margins per bbl in the Current Six Months compared to the Prior Six Months.

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018
	(in thousands except per bbl amounts)

Refinery operations revenue	$ 77,257	$ 88,265	$ 145,115	$ 159,777
Less: Total cost of goods sold	(78,556 )	(85,090 )	(144,072 )	(155,582 )
	(1,299 )	3,175	1,043	4,195

Sales (Bbls)	1,104	1,139	2,133	2,131

Gross Margin per Bbl	$ (1.18 )	$ 2.79	$ 0.49	$ 1.97

Remainder of Page Intentionally Left Blank

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Refinery Operations Throughput and Production Data

Operational metrics for the refinery for the periods indicated were as follow:

	Three Months Ended June 30,		Six Months Ended June 30,
	2019	2018	2019	2018

Calendar Days	91	91	181	181
Refinery downtime	(7 )	(5 )	(18 )	(21 )
Operating Days	84	86	163	160

Total refinery throughput (bbls)	1,134,105	1,182,491	2,181,164	2,190,934
Operating days:
bpd	13,501	13,750	13,381	13,693
Capacity utilization rate	90.0 %	91.7 %	89.2 %	91.3 %
Calendar days:
bpd	12,463	12,994	12,051	12,105
Capacity utilization rate	83.1 %	86.6 %	80.3 %	80.7 %

Total refinery production (bbls)	1,102,340	1,150,782	2,125,169	2,129,334
Operating days:
bpd	13,123	13,381	13,038	13,308
Capacity utilization rate	87.5 %	89.2 %	86.9 %	88.7 %
Calendar days:
bpd	12,114	12,646	11,741	11,764
Capacity utilization rate	80.8 %	84.3 %	78.3 %	78.4 %

Note:

The small difference between total refinery throughput (volume processed as input) and total refinery production (volume processed as output) represents a combination of multiple factors including refinery fuel use, elimination of some impurities originally present in the crude oil, loss, and other factors.

During the Current Quarter, the refinery experienced 7 days of downtime primarily related to equipment repairs. During the Prior Quarter, the refinery experienced 5 days of downtime primarily related to repair and maintenance of the naphtha stabilizer unit. During the Current Six Months, the refinery experienced 18 days of downtime primarily related to a maintenance turnaround and equipment repairs. During the Prior Six Months, the refinery experienced 21 days of downtime primarily related to repair and maintenance of the naphtha stabilizer unit and short maintenance turnarounds scheduled in January and March of 2018.

For the Current Quarter compared to the Prior Quarter, total refinery throughput bbls and total refinery production bbls decreased slightly as a result of increased downtime. For the Current Six Months compared to the Prior Six Months, total refinery throughput bbls and total refinery production bbls were relatively flat.

Refined Petroleum Product Sales Summary .

See “Part I, Item 1. Financial Statements – Note (14) Concentration of Risk” for a discussion of refined petroleum product sales.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Liquidity and Capital Resources

Overview .

We currently rely on revenue from operations, LEH and its affiliates (including Jonathan Carroll), and borrowings under bank facilities to meet our liquidity needs. Primary uses of cash include: (i) payment to LEH for our direct operating expenses under the Amended and Restated Operating Agreement, (ii) payments on long-term debt and the Final Arbitration Award, (iii) purchase of crude oil and condensate, and (iv) construction in progress.

As discussed elsewhere within this “Liquidity and Capital Resources” section, management has determined that there is substantial doubt about our ability to continue as a going concern due to consecutive quarterly net losses, inadequate working capital, the Final Arbitration Award, and defaults under secured loan agreements. See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern” for additional disclosures related to the Final Arbitration Award, the Settlement Agreement with GEL, defaults under secured loan agreements, and the going concern. Management believes that it is taking the appropriate steps to improve our operations and financial stability. If our business strategy is unsuccessful, it could affect our ability to acquire adequate supplies of crude oil and condensate under our existing contract or otherwise.

Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined petroleum products. T he dollar per bbl price difference between crude oil and condensate (input) and refined petroleum products (output), is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. There can be no assurance that margins for refined petroleum products will be favorable, LEH and its affiliates will continue to fund our working capital needs in periods of working capital deficits, or we will be able to obtain additional financing on commercially reasonable terms or at all. Further, if the Settlement Agreement with GEL is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected, and Blue Dolphin would likely be required to seek protection under bankruptcy laws.

Crude Oil and Condensate Supply .

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate, which is primarily dependent on our liquidity and access to capital. We currently have in place a month-to-month crude supply contract with Pilot. In connection with the crude supply agreement, Pilot stores its crude oil at the Nixon Facility pursuant to a terminal services agreement. Pilot currently provides us with adequate amounts of crude oil and condensate on favorable terms, and we expect Pilot to continue to do so for the foreseeable future. Our ability to purchase adequate amounts of crude oil and condensate could be adversely affected if the Settlement Agreement is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, as well as other factors, including net losses, working capital deficits, and financial covenant defaults in secured loan agreements.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Cash Flow .

Our cash flow from operations for the periods indicated was as follows:

	For Three Months Ended June 30,		For Six Months Ended June 30,
	2019	2018	2019	2018
	(in thousands)		(in thousands)

Beginning cash, cash equivalents, and restricted cash	$ 1,680	$ 2,384	$ 1,665	$ 2,146

Cash flow from operations
Adjusted profit from operations	(2,509 )	2,410	(1,140 )	2,595
Change in assets and current liabilities	(8,912 )	(2,091 )	(10,154 )	(1,475 )

Total cash flow from operations	(11,421 )	319	(11,294 )	1,120

Cash inflows (outflows)
Proceeds from issuance of debt	12,402	-	12,402	-
Payments on debt	(291 )	(235 )	(541 )	(475 )
Net activity on related-party debt	(32 )	235	229	452
Capital expenditures	(371 )	(691 )	(494 )	(1,231 )

Total cash inflows (outflows)	11,708	(691 )	11,596	(1,254 )

Total change in cash flows	287	(372 )	302	(134 )

Ending cash, cash equivalents, and restricted cash	$ 1,967	$ 2,012	$ 1,967	$ 2,012

For the Current Quarter, we experienced a cash flow deficit of $11.4 million compared to cash flow from operations of $0.3 million for the Prior Quarter. The $11.7 million decrease in cash flow from operations between the periods was primarily the result of payments toward the accrued arbitration award.

Working Capital .

As discussed elsewhere within this “Liquidity and Capital Resources” section, the Final Arbitration Award has affected our ability to obtain working capital through financing. If the Settlement Agreement with GEL is terminated and GEL seeks to confirm and enforce the Final Arbitration Award: (i) our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations will be materially affected, and (ii) Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws.

We currently rely on LEH and its affiliates (including Jonathan Carroll) to fund our working capital requirements. There can be no assurance that LEH and its affiliates (including Jonathan Carroll) will continue to fund our working capital requirements.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Capital Spending .

Since 2015, the Nixon Facility has been undergoing a capital improvement expansion project. Capital improvements have primarily related to construction of new petroleum storage tanks to significantly increase petroleum storage capacity. However, smaller efficiency improvements have been made as well. Increased petroleum storage capacity: (i) assists with de-bottlenecking the facility, (ii) supports increased refinery throughput up to approximately 30,000 bpd, and (iii) provides an opportunity to generate additional tolling and terminaling revenue. When the expansion project is complete, petroleum storage capacity at the Nixon Facility will exceed 1.2 million bbls, an increase of more than 0.9 million bbls.

For the next 12 to 18 months, we expect to continue to incur capital expenditures related to facility and land improvements and completion of an unfinished petroleum storage tank. Capital spending at the Nixon Facility is being funded by working capital derived from revenue from operations and LEH and its affiliates (including Jonathan Carroll), as well as from long-term debt from Veritex that was secured in 2015 for expansion of the Nixon Facility. Unused amounts under the Veritex loans are reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Part I, Item 1. Financial Statements – Note (11) Long-Term Debt and Accrued Interest” for additional disclosures related to borrowings for capital spending.

We account for our capital expenditures in accordance with GAAP. We also distinguish between capital expenditures that are for maintenance and those that are for expansion. We classify a capital expenditure as maintenance if it maintains capacity or throughput. A classification of expansion is used if the capital expenditure is expected to increase capacity or throughput. The distinction between maintenance and expansion is made consistent with our accounting policies and is generally a straightforward process. However, in certain circumstances the distinction can be a matter of management judgment and discretion.

Budgeting and approval of maintenance capital expenditures is done throughout the year on a project-by-project basis. We budget for and make maintenance capital expenditures that are necessary to maintain safe and efficient operations, meet customer needs and comply with operating policies and applicable law. We may budget for and make additional maintenance capital expenditures that we expect to produce economic benefits such as increasing efficiency and/or lowering future expenses. Budgeting and approval of expansion capital expenditures are generally made periodically on a project-by-project basis in response to specific investment opportunities identified by our business segments.

Contractual Obligations and Debt Agreements .

See the following notes under “Part I, Item 1. Financial Statements” regarding:

●

GEL . “Note (1) Organization – Going Concern – Final Arbitration Award and Settlement Agreement” for disclosures related to the Final Arbitration Award to GEL and Settlement Agreement with GEL.

●

Related-Party . “Note (9) Related-Party Transactions” for a summary of the agreements we have in place with related parties.

●

Long-Term Debt . “Note (11) Long-Term Debt and Accrued Interest” for a summary of our long-term debt.

●

Short-Term Debt . “Note (13) Line of Credit Payable” for a summary of our short-term debt.

●

Operating and Finance Leases . “Note (15) Leases” for disclosures related to our operating and finance leases.

●

Supplemental Pipeline Bonds and Abandonment Requirements . “Note (18) Commitments and Contingencies – Supplemental Pipeline Bonds” and “— Idle Iron” for a discussion of supplemental pipeline bonding and offshore pipeline and platform abandonment requirements.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

Indebtedness .

The principal balances outstanding plus accrued interest on our debt (including related-party) for the periods indicated were as follow:

	March 31,	December 31,
	2019	2018
	(in thousands)

First Term Loan Due 2034 (in default)	$ 22,365	$ 22,593
Pilot Line of Credit	12,902	-
Second Term Loan Due 2034 (in default)	9,184	9,353
Notre Dame Debt (in default)	8,219	7,821
BDPL Loan Agreement (in default)	5,854	5,534
March Carroll Note (in default)	1,515	1,147
March Ingleside Note (in default)	1,333	1,283
June LEH Note (in default)	736	611
Capital lease	-	41
	$ 62,108	$ 48,383

Less: Current portion of long-term debt	(54,114 )	(41,904 )
Less: Unamortized debt issue costs	(2,567 )	(2,006 )
Less: Interest payable and interest payable, related party	(5,427 )	(4,473 )

	$ -	$ -

Principal payments on long-term debt totaled $0.3 million in the Current Quarter compared to $0.2 million in the Prior Quarter. Principal payments on long-term debt totaled $0.5 million in the Current Six Months compared to $0.5 million in the Prior Six Months. As of the date of this Quarterly Report, LE and LRM were current on monthly payments under the First Term Loan Due 2034 and Second Term Loan Due 2034, as well as interest payments on the Pilot Line of Credit. There have been no payments under the Notre Dame Debt to date and no payments to Jonathan Carroll under the March Carroll Note since May 2017. See “Part I, Item 1. Financial Statements – Note (9) Related Party Transactions – Financial Agreements – March Carroll Note” and "– Amended and Restated Guaranty Fees" for additional disclosures related to payments to Jonathan Carroll.

As described elsewhere in this Quarterly Report, Veritex notified obligors that the Final Arbitration Award constitutes an event of default under the First Term Loan Due 2034 and Second Term Loan Due 2034. In addition to existing events of default related to the Final Arbitration Award, at June 30, 2019, LE and LRM were in violation of the debt service coverage ratio, the current ratio, and debt to net worth ratio financial covenants related to the secured loan agreements. LE also failed to replenish a payment reserve account as required. The occurrence of events of default under the secured loan agreements permits Veritex to declare the amounts owed under the secured loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under the loan agreements, and/or exercise any other rights and remedies available.

Veritex has not accelerated or called due the secured loan agreements considering the Settlement Agreement. Instead, Veritex has expressly reserved all its rights, privileges and remedies related to events of default under the secured loan agreements and informed obligors that it would consider a final confirmation of the Final Arbitration Award to be a material event of default under the loan agreements. Veritex has been working with LE and LRM and continues to be aware and party to all discussions and arrangements with GEL surrounding the executed settlement agreement and all amendments and extensions with GEL. In a notice to obligors dated April 30, 2019 (the "Veritex Consent'), Veritex agreed to waive certain covenant defaults and forbear from enforcing its remedies under the secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of a payment reserve account in the amount of $1.0 million as required by one of the secured loan agreements on or before August 31, 2019. Any exercise by Veritex of its rights and remedies under such secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further, Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws, and the trading prices of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern” and “– Operating Risks”, as well as “Note (11) Long-Term Debt and Accrued Interest” for additional disclosures related to long-term debt financial covenant violations and events of default.

See “Contractual Obligations and Debt Agreements – Related-Party” within the Liquidity and Capital Resources section for additional disclosures with respect to related-party indebtedness.

Off-Balance Sheet Arrangements

None.

Critical Accounting Policies

Long-Lived Assets . See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – Property and Equipment”.

Revenue Recognition . See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – Revenue Recognition”.

Inventory . See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – Inventory”.

Asset Retirement Obligations . See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – Asset Retirement Obligations,” “— Note (13) Asset Retirement Obligations,” and “— Note (18) Commitments and Contingencies – Idle Iron”.

Income Taxes . See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – Income Taxes” and “– Note (16) Income Taxes”.

Recently Adopted Accounting Guidance

See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – New Pronouncements Adopted”.

New Pronouncements Issued, Not Yet Effective

See “Part I, Item 1. Financial Statements – Note (3) Significant Accounting Policies – New Pronouncements Issued, Not Yet Effective”.

I TEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

I TEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this Quarterly Report. Based on our evaluation, our Chief Executive Officer (principal executive officer and principal financial officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.

Changes in Internal Control over Financial Reporting

In connection with the adoption on January 1, 2019 of new accounting guidance for leases, we implemented new processes and internal controls related to our leases.

Except as described above, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three months ended June 30, 2019 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. (See “Part I, Item 4. Controls and Procedures – Evaluation of Disclosure Controls and Procedures” of this Quarterly Report for a discussion related to controls and procedures.)

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

P ART II. OTHER INFORMATION

I TEM 1. LEGAL PROCEEDINGS

Final Arbitration Award

See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern – Final Arbitration Award and Settlement Agreement” of this Quarterly Report for disclosures related to the Final Arbitration Award to GEL and the Settlement Agreement between the Lazarus Parties and GEL.

Other Legal Matters

We are involved in lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens, contract-related disputes, administrative proceedings, and financial assurance (bonding) requirements with regulatory bodies. Management is in discussion with all concerned parties and does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that such discussions will result in a manageable outcome or that we will be able to meet financial assurance (bonding) requirements. If Veritex exercises its rights and remedies under the secured loan agreements or if the Settlement Agreement with GEL is terminated and GEL seeks to confirm and enforce the Final Arbitration Award, our business, financial condition, and results of operations will be materially adversely affected, and Blue Dolphin and its affiliates would likely be required to seek protection under bankruptcy laws. See "Part I, Item 1. Financial Statements – Note (18) Commitments and Contingencies" for additional information.

I TEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report. These risks and uncertainties could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. There have been no material changes in our assessment of our risk factors from those set forth in our Annual Report.

I TEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

I TEM 3. DEFAULTS UPON SENIOR SECURITIES

See “Part I, Item. 1. Financial Statements – Note (11) Long-Term Debt and Accrued Interest” for disclosures related to defaults on our debt.

I TEM 4. MINE SAFETY DISCLOSURES

Not applicable.

I TEM 5. OTHER INFORMATION

On May 6, 2019, the Lazarus Parties and GEL entered into the Fifth Amendment to the Settlement Agreement, See “Part I, Item 1. Financial Statements – Note (1) Organization – Going Concern – Final Arbitration Award and Settlement Agreement” for more information regarding the Fifth Amendment. On May 3, 2019, NPS and Pilot entered into the Pilot Line of Credit. See “Part I, Item 1. Financial Statements – Note (12) Line of Credit Payable” for more information on the Pilot Line of Credit.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

I TEM 6. EXHIBITS

Exhibits Index

No.	Description

10.1*	Fifth Amendment to the Settlement Agreement, dated as of May 6, 2019, by and among Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, Nixon Product Storage, LLC, Carroll & Company Financial Holdings, L.P., Jonathan Carroll and GEL Tex Marketing, LLC.
10.2*	Line of Credit, Guarantee and Security Agreement, dated as of May 3, 2019 (as amended and restated as of May 9, 2019 and May 10, 2019), among Pilot Travel Centers LLC, Nixon Product Storage, LLC and the other loan parties hereto.
10.3*	Pledge Agreement, dated as of May 3, 2019, between Pilot Travel Centers LLC and Blue Dolphin Energy Company
10.4*	Notice dated April 30, 2019 from Veritex Community Bank to Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Refining & Marketing, LLC, Lazarus Energy Holdings, LLC, Lazarus Marine Terminal I, LLC and Jonathan Pitts Carroll, Sr.
31.1*	Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Taxonomy Schema Document.
101.CAL*	XBRL Calculation Linkbase Document.
101.LAB*	XBRL Label Linkbase Document.
101.PRE*	XBRL Presentation Linkbase Document.
101.DEF*	XBRL Definition Linkbase Document.

Filed herewith.

BLUE DOLPHIN ENERGY COMPANY

FORM 10-Q 6/30/19

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BLUE DOLPHIN ENERGY COMPANY
	(Registrant)



August 14, 2019	By:	/s/ JONATHAN P. CARROLL
		Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)

Exhibit 10.1

FIFTH AMENDMENT TO THE SETTLEMENT AGREEMENT

This Fifth Amendment to the Settlement Agreement (this “Fifth Amendment”), dated as of May 6, 2019, is by and between Lazarus Energy, LLC, a Delaware limited liability company (“Lazarus”); Blue Dolphin Energy Company, a Delaware corporation (“BDEC”); Lazarus Energy Holdings, LLC, a Delaware limited liability company (“LEH”); Nixon Product Storage, LLC, a Delaware limited liability company (“Nixon”); Carroll & Company Financial Holdings, L.P. (“C&C”); Jonathan Carroll (“Carroll” and, together with Lazarus, BDEC, LEH, Nixon, and C&C the “Lazarus Parties”); and GEL Tex Marketing, LLC, a Delaware limited liability company (“GEL Tex”) (each, a “Party” and, collectively, the “Parties”).

RECITALS

WHEREAS, on July 20, 2018, the Parties executed the Settlement Agreement 1 in order to provide for a settlement between the Lazarus Parties and GEL Tex regarding the Final Award that resolves the Arbitration and the District Court Action contingent upon the Lazarus Parties obtaining the Settlement Financing to fund a settlement in accordance with the terms of the Settlement Agreement;

WHEREAS, paragraph 15(d) of the Settlement Agreement requires the Lazarus Parties to achieve certain milestones in connection with obtaining the Settlement Financing;

WHEREAS, paragraph 17(a) of the Settlement Agreement provides that the Settlement Agreement shall terminate automatically on December 31, 2018 unless otherwise extended in writing by GEL Tex;

WHEREAS, on October 17, 2018, the Parties executed the First Amendment to the Settlement Agreement (the “First Amendment”) to amend the Settlement Agreement;

WHEREAS, on November 15, 2018, the Parties executed the Second Amendment to the Settlement Agreement (the “Second Amendment”) to further amend the Settlement Agreement;

WHEREAS, on December 19, 2018, the Parties executed the Third Amendment to the Settlement Agreement (the “Third Amendment”) to further amend the Settlement Agreement;

WHEREAS, on March 19, 2019, the Parties executed the Fourth Amendment to the Settlement Agreement (the “Fourth Amendment”) to further amend the Settlement Agreement;

WHEREAS, on April 19, 2019, the Lazarus Parties provided GEL Tex with that certain letter from Pilot Travel Centers LLC d/b/a Pilot Flying J (“Pilot”) to Lazarus Energy Holdings LLC dated April 18, 2019, in compliance with the Settlement Financing Milestone detailed in Paragraph 15(d)(i) of the Settlement Agreement;

1 All capitalized terms used but not otherwise defined in this Fifth Amendment shall have the meanings given to such terms in the Settlement Agreement.

WHEREAS, Pilot, as Lender, and Nixon Product Storage, LLC, Lazarus Refining & Marketing, LLC, Lazarus Energy Holdings LLC, Lazarus Energy, LLC, Blue Dolphin Energy Company, as Loan Parties, intend to enter into that certain Line of Credit, Guarantee and Security Agreement in the form annexed hereto as Exhibit E (the “Pilot Settlement Financing”);

WHEREAS, in order to facilitate the Lazarus Parties’ entry into the Pilot Settlement Financing, GEL Tex and the Lazarus Parties hereby agree to further amend the Settlement Agreement;

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements set forth in the Settlement Agreement and this Fifth Amendment, and for good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Parties, intending to be legally bound, agree as follows:

AGREEMENT

1.A new Paragraph 2A is inserted in the Settlement Agreement immediately

following Paragraph 2 and immediately before Paragraph 3, which new Paragraph 2A shall state:

“2A. Pilot Settlement Financing. Notwithstanding anything to the contrary in this Settlement Agreement:

(a)

GEL Tex consents to the Lazarus Parties entering into and taking all actions expressly required by the Pilot Settlement Financing (as defined below) to consummate the Settlement Financing contemplated under that certain Line of Credit, Guarantee and Security Agreement between Pilot Travel Centers, LLC (“Pilot”), Lazarus, Lazarus Energy, BDEC, Nixon and Lazarus Refining & Marketing, LLC, in the form annexed hereto as Exhibit E (the “Pilot Settlement Financing”);

(b)

(i)The Lazarus Parties shall pay GEL Tex in cash the Interim Payment

of $500,000 due on the last business day of April 2019 ( i.e. , April 30, 2019) pursuant to Paragraph 2 of this Settlement Agreement (the “Deferred Interim Payment”) in one or more installments of no less than $100,000 (each, a “Deferred Interim Installment Payment,” and collectively, the “Deferred Interim Installment Payments”) as set forth in Section 2A(b)(ii) below.

(ii)The Deferred Interim Installment Payments shall be paid by the

Lazarus Parties to GEL Tex on or before the following dates (each, a “Deferred Interim Installment Payment Date”) and according to the following schedule:

Deferred Interim Installment Payment Date	Deferred Interim Installment Payment Amount Due
6/28/2019	$100,000
7/31/2019	$100,000

Deferred Interim Installment Payment Date	Deferred Interim Installment Payment Amount Due
8/30/2019	$100,000
9/30/2019	$100,000
10/31/2019	$100,000

;

(c)

(i) The Lazarus Parties shall pay GEL Tex one or more payments in cash in an aggregate amount of no less than $10,000,000 (each, a “Settlement Installment Payment,” and collectively, the “Settlement Installment Payments”). The sum of all Settlement Installment Payments shall constitute the “Settlement Payment.” For the avoidance of doubt, the Settlement Payment is exclusive of any Retained Payments, any Interim Payments, the Deferred Interim Payment, or any other amounts paid to GEL Tex by any Lazarus Party prior to May 6, 2019.

(ii)

The Lazarus Parties shall pay the Settlement Installment Payments to GEL Tex on or before the following dates (each, a “Settlement Installment Payment Date”) according to the following schedule:

Settlement Installment Payment Date	Settlement Installment Payment Amount Due
5/7/2019	$1,000,000
5/8/2019	$1,000,000
5/9/2019	$1,000,000
5/10/2019	$3,000,000
5/13/2019	$1,000,000
5/14/2019	$1,000,000
5/15/2019	$1,000,000
5/16/2019	$1,000,000

; and

(d)

at such time as the Lazarus Parties have paid the Settlement Payment to

GEL Tex as contemplated under Section 2A(c) above (and, for the avoidance of doubt, whether or not the Deferred Interim Payment has been paid in full at the time such Settlement Payment is made, so long as the Lazarus Parties have timely made each Settlement Installment Payment on the Settlement Installment Payment Date), no additional Interim Payments shall be due under Section 2 above, except that this Section 2A(d) shall not affect the obligations of the Lazarus Parties in respect of any Interim Payment representing a Deferred Interim Payment under Section 2A(b) above, which shall continue to be due and payable on the Deferred Interim Installment Payment Dates as provided in Section 2A(b)(ii); provided that , in the event the Lazarus Parties fail for any reason to make any of (i) a Deferred Interim Installment Payment by the applicable Deferred Interim Installment Payment Date or (ii) a Settlement Installment Payment by the

applicable Settlement Installment Payment Date, then (x) the Deferred Interim Payment for April 2019 and all Interim Payments that would have been due on the last business day of each month under Paragraph 2 of this Settlement Agreement but for the execution of this Fifth Amendment shall become immediately due and payable, and (y) the Lazarus Parties shall continue to make monthly Interim Payments until the earlier of (I) the Termination Date or (II) the date the Lazarus Parties pays to GEL Tex the entire Settlement Payment, the Deferred Interim Payment, and all accrued Interim Payments as contemplated under this Paragraph 2A(d)(x) that have arisen prior to such date of payment; provided further that the outstanding balance of the Final Award shall be reduced by all payments by the Lazarus Parties to GEL Tex, whether made with respect to an Interim Payment, the Deferred Interim Payment, the Deferred Interim Installment Payments, the Settlement Payment, or the Settlement Installment Payments.”

2. “Settlement Payment Date” as defined in Paragraph 3 of the Settlement Agreement shall be amended and replaced in its entirety and shall now state:

The “Settlement Payment Date” shall be the first date upon which the Lazarus Parties pay GEL Tex all of the following: (i) the Settlement Installment Payments totaling $10 million; (ii) the Deferred Interim Payments totaling $500,000; and (iii) all Interim Payments described in Paragraph 2A(d)(x) and (y).

3. Paragraph 15(a) of the Settlement Agreement shall be amended and replaced in its entirety and shall now state:

Payment Default. The failure, refusal or neglect of the Lazarus Parties to pay any Interim Payment when due to GEL Tex.

4. Paragraph 15(d)(ii) of the Settlement Agreement shall be amended and replaced in its entirety and shall now state:

Provide GEL Tex with copies of the fully executed loan documents for the Pilot Settlement Financing by no later than May 6, 2019, unless otherwise extended in writing by GEL Tex;

5. Paragraph 17(a) of the Settlement Agreement shall be amended and replaced in its entirety and shall now state:

October 31, 2019, unless otherwise extended in writing by GEL Tex, if the Settlement Payment Date has not occurred on or before such date; or

6. The following is inserted in the Settlement Agreement to Paragraph 15 “Events of Default” immediately following Paragraph 15(d) and immediately before Paragraph 16, which new Paragraphs 15(e) and 15(f) shall state:

“(e)

Failure to Pay the Deferred Interim Payment. The failure, refusal or neglect of the Lazarus Parties to pay any of the Deferred Interim Installment Payments by the respective Deferred Interim Installment Payment Date or the failure to pay the entire Deferred Interim Payment by October 31, 2019.

(f)

Failure to Pay the Settlement Installment Payments. The failure, refusal or neglect of the Lazarus Parties to pay any of the Settlement Installment Payments by the respective Settlement Installment Payment Date or the failure to pay the entire Settlement Payment by May 16, 2019.”

7. GEL Tex and the Lazarus Parties agree that this Fifth Amendment may be executed in separate parts delivered by electronic means that, taken together, will be deemed to be one instrument. GEL Tex and each Lazarus Party represent and warrant that this Fifth Amendment has been approved and authorized by all necessary action and the execution hereof does not violate any agreement to which it is a party.

8. Except as set forth in this Fifth Amendment, the Settlement Agreement, the First Amendment, the Second Amendment, the Third Amendment, and the Fourth Amendment are unaffected and shall continue in full force and effect in accordance with their terms. If there is a conflict between this Fifth Amendment, the Fourth Amendment, the Third Amendment, the Second Amendment, the First Amendment, and the Settlement Agreement, the terms of this Fifth Amendment will prevail.

[Signature Pages Follow]

IN WITNESS WHEREOF, the undersigned have caused this Fifth Amendment to the Settlement Agreement to be duly executed and delivered as of the date first set forth above.

	GEL TEX MARKETING, LLC

	By:	/s/ R.V. DEERE
	Name:	R.V. Deere
	Title:	CFO

	LAZARUS ENERGY, LLC

	By:	/s/ JONATHAN CARROLL
	Name:	Jonathan Carroll
	Title:	President

	BLUE DOLPHIN ENERGY COMPANY

	By:	/s/ JONATHAN CARROLL
	Name:	Jonathan Carroll
	Title:	President

	LAZARUS ENERGY HOLDINGS, LLC

	By:	/s/ JONATHAN CARROLL
	Name:	Jonathan Carroll
	Title:	President

	NIXON PRODUCT STORAGE, LLC

	By:	/s/ JONATHAN CARROLL
	Name:	Jonathan Carroll
	Title:	President

	CARROLL & COMPANY FINANCIAL HOLDINGS, L.P.

	By:	/s/ JONATHAN CARROLL
	Name:	Jonathan Carroll
	Title:	President

	By:	/s/ JONATHAN CARROLL
		Jonathan Carroll

[Signature Page to Fifth Amendment to Settlement Agreement]

Exhibit 10.2

Execution Version

____________________________________________________________________________________

Line of Credit, Guarantee and Security Agreement

Dated as of May 3, 2019 (As amended AND RESTATED as of May 9, 2019 and May 10, 2019)

among

PILOT TRAVEL CENTERS LLC

the Lender,

and

NIXON PRODUCT STORAGE, LLC,

the Borrower

and

THE OTHER LOAN PARTIES PARTY HERETO

____________________________________________________________________________________

TABLE OF CONTENTS

		Page
Section 1	DEFINITIONS.	1
1.1.	Definitions.	1
Section 2	LOANS.	11
2.1.	Line of Credit Commitment.	11
2.2.	Advances; Loans under Line of Credit.	11
2.3.	Borrowing Procedures.	12
2.4.	Funding.	12
2.5.	Repayment of Loans.	12
2.6.	Interest on Loans.	12
2.7.	Default Interest.	12
2.8.	Payment Procedures.	12
2.9.	Prepayments of the Loans.	13
2.10.	Commitment Fee.	13
2.11.	Recordkeeping.	13
2.12.	Costs and Expenses.	12
2.13.	Taxes.	14
2.14.	Maximum Interest.	15
2.15.	Change in Circumstances.	15
2.16.	Change in Legality.	15
Section 3	GUARANTY	15
3.1.	Guaranty of the Obligations.	15
3.2.	Payment by Guarantors.	16
3.3.	Liability of Guarantor Absolute.	16
3.4.	Waivers by Guarantor.	17
3.5.	Guarantors’ Right of Subrogation.	18
3.6.	Subordination of Other Obligations.	18
3.7.	Continuing Guaranty.	18
3.8.	Authority of Guarantors or the Borrower.	18
3.9.	Financial Condition of the Borrower.	18
3.10.	Bankruptcy, Etc.	19
3.11.	Maximum Liability.	19

Section 4	COLLATERAL GRANTED.	20
4.1.	Grant of Security Interest to Lender.	20
4.2.	Collection of Receivables.	20
4.3.	Other Security.	21
4.4.	Possessory Collateral.	21
4.5.	Electronic Chattel Paper.	21
4.6.	Preservation of Collateral and Perfection of Security Interests Therein.	21
Section 5	TERMINATION OF THIS AGREEMENT; TERMINATION OF LIENS.	22
Section 6	REPRESENTATIONS AND WARRANTIES.	22
6.1.	Financial Statements and Other Information.	22
6.2.	Locations.	22
6.3.	Loans by Loan Parties.	22
6.4.	Liens.	23
6.5.	Organization, Authority and No Conflict.	23
6.6.	Litigation.	23
6.7.	Compliance with Laws and Maintenance of Permits.	23
6.8.	Affiliate Transactions.	23
6.9.	Names and Trade Names.	23
6.10.	Equipment.	24
6.11.	Enforceability.	24
6.12.	Solvency.	24
6.13.	Indebtedness.	24
6.14.	Margin Security and Use of Proceeds.	24
6.15.	Parent, Subsidiaries and Affiliates.	24
6.16.	Contracts; No Defaults.	24
6.17.	Employee Matters.	25
6.18.	Intellectual Property.	25
6.19.	Environmental Matters.	25
6.20.	ERISA Matters.	25
6.21.	Investment Company Act.	25
6.22.	AML Laws, Anti-Corruption Laws, Anti-Terrorism Laws and Sanctions.	26
6.23.	Taxes.	26
6.24.	Collection Accounts.	26

Section 7	AFFIRMATIVE COVENANTS.	26
7.1.	Maintenance of Records.	26
7.2.	Notices.	27
7.3.	Compliance with Laws and Maintenance of Permits.	27
7.4.	Inspection and Audits.	28
7.5.	Insurance.	28
7.6.	Collateral.	28
7.7.	Use of Proceeds.	29
7.8.	Taxes.	29
7.9.	Intellectual Property.	29
7.10.	Deposit Accounts.	29
7.11.	AML Laws, Anti-Corruption Laws, Anti-Terrorism Laws and Sanctions.	29
7.12.	Financial Statements and Reports.	30
7.13.	Commitment Period Reports.	30
7.14.	GEL Tex Settlement Agreement.	30
7.15.	Veritex Lien Release.	36
7.16.	Green Bank Account.	31
Section 8	NEGATIVE COVENANTS.	31
8.1.	[Reserved.]	31
8.2.	Indebtedness.	31
8.3.	Liens.	31
8.4.	Mergers, Sales, Acquisitions, Subsidiaries and Other Transactions Outside the Ordinary Course of Business.	31
8.5.	Restricted Payments.	32
8.6.	Investments; Loans.	32
8.7.	Prepayment of Subordinated Debt.	32
8.8.	Sale Leasebacks.	32
8.9.	Fundamental Changes, Accounting Changes, Line of Business.	32
8.10.	Equipment.	32
8.11.	Affiliate Transactions.	33
8.12.	Settling of Accounts.	33
8.13.	Management Fees; Compensation.	33
8.14.	Restrictive Agreements.	33
8.15.	Dispositions.	34
8.16.	ERISA.	34

Section 9	DEFAULT.	34
9.1.	Payment.	34
9.2.	Breach of this Agreement and the other Loan Documents.	34
9.3.	Breaches of Other Obligations.	35
9.4.	Breach of Representations and Warranties.	35
9.5.	Loss of Collateral.	35
9.6.	Levy, Seizure or Attachment.	35
9.7.	Bankruptcy or Similar Proceedings.	35
9.8.	Appointment of Receiver.	35
9.9.	Judgment.	36
9.10.	Dissolution of Loan Party.	36
9.11.	Default or Revocation of Guaranty.	36
9.12.	Criminal Proceedings.	36
9.13.	Change of Control.	36
9.14.	Material Adverse Change.	36
Section 10	REMEDIES UPON AN EVENT OF DEFAULT.	36
10.1.	Acceleration.	36
10.2.	Other Remedies.	37
Section 11	CONDITIONS PRECEDENT.	37
11.1.	Conditions to Loans.	37
Section 12	MISCELLANEOUS.	40
12.1.	Assignments; Participations.	40
12.2.	Customer Identification - USA Patriot Act Notice.	42
12.3.	Indemnification by Borrower.	42
12.4.	Notice.	42
12.5.	Modification and Benefit of Agreement.	42
12.6.	Headings of Subdivisions.	42
12.7.	Power of Attorney.	42
12.8.	Counterparts.	42
12.9.	Refinancing Support.	42
12.10.	Waiver of Jury Trial: Other Waivers.	42
12.11.	Choice of Governing Laws; Construction; Forum Selection.	43
Section 13	LIABILITY.	44
Section 14	NONLIABILITY OF LENDER.	45

EXHIBIT A	–	FORM OF COMPLIANCE CERTIFICATE
EXHIBIT B	–	FORM OF NOTICE OF BORROWING
EXHIBIT C	–	COMMERCIAL TORT CLAIMS OF LOAN PARTIES
EXHIBIT D	–	FORM OF PLEDGE AGREEMENT
EXHIBIT E	–	FORM OF JOINDER AGREEMENT
SCHEDULE 1.01	–	EXISTING INDEBTEDNESS
SCHEDULE 1.03	–	COLLECTION ACCOUNTS OF GRANTORS
SCHEDULE 2.3	–	BORROWING SCHEDULE
SCHEDULE 6.2	–	BUSINESS AND COLLATERAL LOCATIONS OF LOAN PARTIES
SCHEDULE 6.4	–	PERMITTED LIENS
SCHEDULE 6.6	–	LITIGATION
SCHEDULE 6.8	–	AFFILIATE TRANSACTIONS
SCHEDULE 6.9	–	NAMES & TRADE NAMES
SCHEDULE 6.14	–	MARGIN SECURITIES OWNED BY LOAN PARTIES
SCHEDULE 6.15	–	PARENT, SUBSIDIARIES AND AFFILIATES
SCHEDULE 6.16	–	BORROWER’S CONTRACTS; MATERIAL CONTRACTS UNDER WHICH ANY LOAN PARTY HAS DEFAULTED
SCHEDULE 6.23	–	TAXES
SCHEDULE 8.14	–	RESTRICTIVE AGREEMENTS OF LOAN PARTIES
SCHEDULE 11.1(d)	–	LOAN PARTIES MATERIAL ADVERSE EFFECT EVENTS

- 1 -

LINE OF CREDIT, GUARANTEE AND SECURITY AGREEMENT

THIS LINE OF CREDIT, GUARANTEE AND SECURITY AGREEMENT (as amended, modified or supplemented from time to time, this “ Agreement ”) made as of May 3, 2019 (as amended as of May 9, 2019 and May 10, 2019) by and among Pilot Travel Centers LLC, a Delaware limited liability company (the “ Lender ”), Nixon Product Storage, LLC, a Delaware limited liability company (the “ Borrower ”), Lazarus Refining & Marketing, LLC, a Delaware limited liability company (“ LR&M ” and, together with the Borrower, the “ Grantors ”), Lazarus Energy Holdings LLC, a Delaware limited liability company (“ Lazarus ”), Lazarus Energy LLC, a Delaware limited liability company (“ Lazarus Energy ”), Blue Dolphin Energy Company, a Delaware corporation (“ Blue Dolphin ” or “ Pledgor ”) and any other Loan Parties (as defined below) from time to time a party hereto.

WHEREAS, Borrower may request advances from Lender under a line of credit, and the parties wish to provide for the terms and conditions upon which such advances, if made by Lender, shall be made; and

WHEREAS, the Guarantors (as defined below) desire to guarantee the Obligations (as defined below) of the Loan Parties (as defined below), and the Grantors desire to grant to the Lender a security interest in the Collateral (as defined below) to secure any and all Obligations.

NOW, THEREFORE, in consideration of any Loan (including any Loan by renewal or extension) hereafter made to Borrower by Lender and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged by Borrower, the parties agree as follows:

SECTION 1

DEFINITIONS.

1.1. Definitions.

When used herein the following terms shall have the following meanings:

“ Account ” has the meaning ascribed to such term in the UCC.

“ Account Debtor ” has the meaning ascribed to such term in the UCC.

“ Affiliate ” of any Person means (a) any other Person which directly or indirectly through one or more intermediaries controls, is controlled by, or is under common control with, such Person, (b) any other Person which beneficially owns or holds twenty percent (20%) or more of the voting control or Equity Interests of such Person, (c) any other Person of which twenty percent (20%) or more of the voting control or Equity Interest of which is beneficially owned or held by such Person, or (d) any officer or director of such Person.

“ Affiliate Funding Transactions ” means (a) any extension of credit by any Loan Party (other than Borrower) to, and any corresponding payment by any Loan Party (other than Borrower) in exchange for such credit on account of, any Affiliate (or the ordinary-course repayment of such credit to such Loan Party) to fund the ordinary course of business operations, or administrative or capital expenditures required in connection with ordinary course of business operations, of such Affiliate consistent with past practice or (b) otherwise expressly consented to by the Lender (which consent may be provided by email).

-1-

“ Agreement ” has the meaning assigned in the introductory paragraph hereof.

“ AML Laws ” means all laws, rules, and regulations of any jurisdiction applicable to any Loan Party or their Subsidiaries from time to time concerning or relating to anti-money laundering.

“ Anti-Corruption Laws ” means all laws, rules, and regulations of any jurisdiction applicable to any Loan Party or their Subsidiaries from time to time concerning or relating to bribery or corruption.

“ Anti-Terrorism Laws ” means any of the following: (a) the Anti-Terrorism Order; (b) the Terrorism Sanctions Regulations (Title 31 Part 595 of the U.S. Code of Federal Regulations); (c) the Terrorism List Governments Sanctions Regulations (Title 31 Part 596 of the U.S. Code of Federal Regulations); (d) the Foreign Terrorist Organizations Sanctions Regulations (Title 31 Part 597 of the U.S. Code of Federal Regulations); (e) the PATRIOT Act; and (f) any regulations promulgated pursuant thereto.

“ Anti-Terrorism Order ” means Section 1 of Executive Order 13224 of September 24, 2001, Blocking Property and Prohibiting Transactions With Persons Who Commit, Threaten to Commit, or Support Terrorism (Title 12, Part 595 of the U.S. Code of Federal Regulations).

“ Asset Sale ” means any sale, lease, transfer or other disposition of property or series of related sales, leases, transfers or other dispositions of property, in each case, constituting Collateral by any of the Loan Parties and their Subsidiaries that yields Net Cash Proceeds to any of the Loan Parties and their Subsidiaries.

“ Assignee ” has the meaning set forth in Section 12.1.1 hereof.

“ Blue Dolphin ” has the meaning assigned in the introductory paragraph hereof.

“ Blue Dolphin Parent Guarantee ” has the meaning assigned in Section 11.1 hereof.

“ Borrower ” has the meaning assigned in the introductory paragraph hereof.

“ Borrowing ” means a borrowing of an advance hereunder.

“ Business Day ” means any day other than Saturday, Sunday or a day on which banks in New York, New York, or Houston, Texas, are authorized or required to close.

“ Cadence Bank Account ” has the meaning set forth in Section 7.16 hereof.

“ Change in Law ” means the occurrence, after the date of this Agreement, of any of the following: (a) the adoption or taking effect of any law, rule, regulation or treaty, (b) any change in any law, rule, regulation or treaty or in the administration, interpretation, implementation or application thereof by any Governmental Authority, or (c) the making or issuance of any request, rule guideline or directive (whether or not having the force of law) by any Governmental Authority.

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“ Chattel Paper ” has the meaning ascribed to such term in the UCC.

“ Closing Date ” has the meaning set forth in Section 11.1 hereof.

“ Code ” means the Internal Revenue Code of 1986, as amended from time to time.

“ Collateral ” means (a) the “Pledged Collateral” as defined in the Pledge Agreement, (b) all of the property of the Grantors described in Section 4.1 hereof, and (c) all other real or personal property of any Loan Party or any other Person, now or hereafter pledged to Lender to secure, either directly or indirectly, repayment of any of the Obligations.

“ Collection Accounts ” means each deposit account or securities account maintained, in each case in the name of a Grantor at a bank or other financial institution pursuant to a control agreement in form and substance satisfactory to the Lender for the purpose of receiving Collections and each other deposit account or securities account maintained in Borrower’s name.

“ Collections ” means, with respect to any Receivable that is Collateral , all funds that are received by a Grantor in payment of any amounts owed in respect of such Receivable (including purchase price, finance charges, interest and all other charges and all proceeds of any drawing under any letter of credit with respect to such Receivable), or applied to amounts owed in respect of such Receivable (including insurance payments and net proceeds of the sale or other disposition of repossessed goods or other collateral or property of the related obligor or any other Person directly or indirectly liable for the payment of such Receivable and available to be applied thereon).

“ Commercial Tort Claims ” has the meaning ascribed to such term in the UCC.

“ Commitment Period ” means the period commencing on the date when the Lender has received a copy of a commitment executed by the Borrower and a proposed lender, subject only to customary and usual conditions, for a loan for the purpose of refinancing all of the Obligations, which commitment is in form and substance reasonably satisfactory to Lender and is provided by a proposed lender reasonably believed to be capable of providing such refinancing prior to the Maturity Date on the terms in the commitment letter and ending on the first to occur of (i) the termination, withdrawal, repudiation, or similar action of such commitment letter by either party thereto, (ii) termination of the commitment period set forth in such commitment letter, (iii) the failure by the Borrower to meet any condition set forth in such commitment letter, (iv) the one hundred and fifty (150th) day following the date of such commitment letter, (v) the Lender having a reasonable belief that the proposed loan will not be provided by the proposed lender in accordance with the terms of the commitment letter, or (vi) a failure by any Loan Parties to comply with Section 7.13 .

“ Commodity Transaction Documents ” means (a) the Crude Supply Agreement, (b) the Jet Fuel Master Agreement, (c) the Crude Storage Lease, (d) the Jet Storage Lease, (e) the Blue Dolphin Parent Guarantee, (f) the Jet Inventory Purchase and Sale Agreements, (g) the NPS Exclusivity Letter, and (h) the crude sale agreement (reference number NP519750001) dated April 30, 2019 by and among the Lender and the Borrower.

“ Connection Income Taxes ” means Other Connection Taxes that are imposed on or measured by net income (however denominated) or that are franchise Taxes or branch profits Taxes.

“ Consent and Assignment Agreement (Storage Tank Lease) ” has the meaning specified in Section 11.1 hereof.

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“ Consent and Assignment Agreement (Haltermann MSA) ” has the meaning specified in Section 11.1 hereof.

“ Covenant Party ” has the meaning specified in Section 8 hereof.

“ Crude Storage Lease ” has the meaning specified in Section 11.1 hereof.

“ Crude Supply Agreement ” has the meaning specified in Section 11.1 hereof.

“ Debt ” of any Person means, without duplication, (a) all indebtedness of such Person for borrowed money, (b) all indebtedness of such Person for the deferred purchase price of property or services, (c) all obligations of such Person evidenced by notes, bonds, debentures or other similar instruments, (d) all indebtedness of such Person created or arising under any conditional sale or other title retention agreement with respect to property acquired by such Person (even though the rights and remedies of the seller or lender under such agreement in the event of default are limited to repossession or sale of such property), (e) all obligations of such Person as lessee under capitalized leases, (f) all reimbursement obligations, whether contingent or otherwise, of such Person under acceptance, letter of credit or similar facilities, (g) all mandatory obligations of such Person to purchase, redeem, retire, defease or otherwise make any payment in cash in respect of any disqualified capital stock in such Person or any other Person or any warrants, rights or options to acquire such disqualified capital stock, valued at the greater of its voluntary or involuntary liquidation preference plus accrued and unpaid dividends, (h) all obligations of such Person in respect of hedge agreements, valued at the agreement value thereof, (i) all guarantee obligations of such Person, and (j) all indebtedness and other payment obligations referred to in clauses (a) through (i) above of another Person secured by (or for which the holder of such Debt has an existing right, contingent or otherwise, to be secured by) any lien on property (including, without limitation, accounts and contract rights) owned by such Person, even though such Person has not assumed or become liable for the payment of such indebtedness or other payment obligations.

“ Default ” means any event or condition which upon notice, lapse of time or both would constitute an Event of Default.

“ Deposit Account ” has the meaning ascribed to such term in the UCC.

“ Documents ” has the meaning ascribed to such term in the UCC.

“ Electronic Chattel Paper ” has the meaning ascribed to such term in the UCC.

“ Employee Benefit Plan ” means any employee benefit plan as defined in Section 3(3) of ERISA.

“ Environmental Laws ” means all federal, state, district, local and foreign laws, rules, regulations, ordinances, and consent decrees relating to health, safety, hazardous substances, pollution and environmental matters, as now or at any time hereafter in effect, applicable to a Loan Party’s business or facilities owned or operated by a Loan Party, including laws relating to emissions, discharges, releases or threatened releases of pollutants, contamination, chemicals, or hazardous, toxic or dangerous substances, materials or wastes into the environment (including, without limitation, ambient air, surface water, ground water, land surface or subsurface strata) or otherwise relating to the generation, manufacture, processing, distribution, use, treatment, storage, disposal, transport or handling of Hazardous Materials.

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“ Equipment ” has the meaning ascribed to such term in the UCC.

“ ERISA ” means the Employee Retirement Income Security Act of 1974, as amended, modified or restated from time to time.

“ ERISA Affiliate ” means any trade or business (whether or not incorporated) that together with any Loan Party or its Subsidiaries is or, at any relevant time, was treated as a single employer under Section 414 of the Code or Section 4001 of ERISA.

“ Event of Default ” has the meaning specified in Section 9 hereof.

“ Excluded Taxes ” means with respect to any payment under any Loan Document to Lender (a) taxes based upon, or measured by, Lender's overall net income (including franchise taxes imposed in lieu of such taxes), but only to the extent such taxes are imposed by a taxing authority (i) in a jurisdiction in which Lender is organized, (ii) in a jurisdiction which Lender's principal office is located, or (iii) in a jurisdiction in which Lender's lending office (or branch) in respect of which payments under this Agreement are made is located; (b) branch profits taxes (x) imposed by the United States and (y) that are Other Connection Taxes; (c) any United States federal withholding taxes that would not have been imposed but for the failure of the Lender to comply with Section 2.13(d) hereof; or (d) United States federal taxes imposed by FATCA.

“ Existing Indebtedness ” means the Debt described and listed on Schedule 1.01 , which shall describe whether such Debt is secured and the assets subject to a security interest in the benefit of Persons other than the Lender.

“ FATCA ” means (a) Sections 1471 through 1474 of the Code (or successor statutes that are substantially comparable and not materially more onerous to comply with) and any current or future regulations or official interpretations thereof, (b) any treaty, law, regulation or other official guidance enacted in any other jurisdiction which facilitates the implementation of the preceding clause (a), and (c) any applicable intergovernmental agreements with respect to clause (a) entered into with the United States Government or any governmental or taxation authority under any other jurisdiction.

“ Equity Interests ” means, as to any Person, all of the shares of capital stock of (or other ownership or profit interests in) such Person, all of the warrants, options or other rights for the purchase or acquisition from such Person of shares of capital stock of (or other ownership or profit interests in) such Person, all of the securities convertible into or exchangeable for shares of capital stock of (or other ownership or profit interests in) such Person or warrants, rights or options for the purchase or acquisition from such Person of such shares (or such other interests), and all of the other ownership or profit interests in such Person (including partnership, member or trust interests therein), whether voting or nonvoting, and whether or not such shares, warrants, options, rights or other interests are outstanding on any date of determination.

“ Fiscal Year ” means each twelve (12) month accounting period of Borrower, which ends on December 31 of each year.

“ Fixtures ” has the meaning ascribed to such term in the UCC.

“ GAAP ” means generally accepted accounting principles set forth from time to time in the opinions and pronouncements of the Accounting Principles Board and the American Institute of Certified Public Accountants and statements and pronouncements of the Financial Accounting Standards Board (or agencies with similar functions of comparable stature and authority within the U.S. accounting profession) and the Securities and Exchange Commission, which are applicable to the circumstances as of the date of determination.

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“ GEL Tex ” has the meaning specified in Section 11.1 hereof.

“ GEL Tex Settlement Agreement ” has the meaning specified in Section 11.1 hereof.

“ General Intangibles ” has the meaning ascribed to such term in the UCC.

“ Goods ” has the meaning ascribed to such term in the UCC.

“ Governmental Authority ” means any applicable federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body having jurisdiction over a Person.

“ Grantors ” has the meaning assigned in the introductory paragraph hereof.

“ Green Bank Account ” has the meaning set forth in Section 7.16 hereof.

“ Guaranteed Obligations ” has the meaning specified in Section 3.1 hereof.

“ Guarantors ” means Blue Dolphin, LR&M, Lazarus, Lazarus Energy, and all future Subsidiaries of the Borrower, Lazarus Energy and LR&M.

“ Guaranty Beneficiaries ” has the meaning specified in Section 3.1 hereof.

“ Hazardous Materials ” means any hazardous, toxic or dangerous substance, materials and wastes, including, without limitation, hydrocarbons (including naturally occurring or man-made petroleum and hydrocarbons), flammable explosives, asbestos, urea formaldehyde insulation, radioactive materials, biological substances, polychlorinated biphenyls, pesticides, herbicides and any other kind and/or type of pollutants or contaminants (including, without limitation, materials which include hazardous constituents), sewage, sludge, industrial slag, solvents and/or any other similar substances, materials, or wastes and including any other substances, materials or wastes that are or become regulated under any Environmental Law (including, without limitation any that are or become classified as hazardous or toxic under any Environmental Law).

“ Indemnified Liabilities ” has the meaning specified in Section 12.3 hereof.

“ Indemnified Taxes ” means (a) Taxes, other than Excluded Taxes, imposed on or with respect to any payment made by, or on account of, a Loan Party under a Loan Document, and (b) to the extent not otherwise described in (a), Other Taxes.

“ Instruments ” has the meaning ascribed to such term in the UCC.

“ Interest Payment Date ” means, (a) the second day of each calendar month, commencing with the first such date to occur at least fifteen days after the date hereof, (b) the Maturity Date, and (c) the date of any prepayment.

“ Inventory ” has the meaning ascribed to such term in the UCC.

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“ Investment Property ” has the meaning ascribed to such term in the UCC.

“ Jet Fuel Master Agreement ” has the meaning specified in Section 11.1 hereof.

“ Jet Inventory Purchase and Sale Agreements ” has the meaning specified in Section 11.1 hereof.

“ Jet Storage Lease ” has the meaning specified in Section 11.1 hereof.

“ Lazarus ” has the meaning assigned in the introductory paragraph hereof.

“ Lazarus Energy ” has the meaning assigned in the introductory paragraph hereof.

“ Lender ” has the meaning assigned in the introductory paragraph hereof.

“ Lender Party ” has the meaning set forth in Section 12.3 hereof.

“ Line of Credit ” has the meaning given to such term in Section 2.1 hereof.

“ Loan Documents ” means (a) this Agreement, (b) the Pledge Agreement, (c) the Consent and Assignment Agreement (Storage Tank Lease), (d) the Consent and Assignment Agreement (Haltermann MSA), and (e) each document, agreement or certificate executed by a Loan Party and delivered to the Lender in connection with or pursuant to any of the foregoing, as each of the same may be amended, modified or supplemented from time to time.

“ Loan Party ” means the Borrower, the Pledgor, each Grantor and each Guarantor.

“ Loans ” has the meaning given to such term in Section 2.2 hereof.

“ LR&M ” has the meaning assigned in the introductory paragraph hereof.

“ LR&M Receivables ” means Receivables owed to LR&M arising from or in connection with any lease of tank 66 (which tank, for the avoidance of doubt, is being leased by LR&M to Pilot Thomas Logistics LLC (f/k/a Western Petroleum LLC and Thomas Petroleum LLC) as of the date hereof).

“ Material Adverse Effect ” means (a) a material adverse change in, or a material adverse effect on, the business, property, assets, operations or prospects of any of (x) the Borrower, (y) the Refinery Assets taken as a whole, or (z) the Loan Parties taken as a whole, (b) a material impairment of the ability of either (x) the Borrower or (y) the Loan Parties taken as a whole to perform their obligations under this Agreement and the other Loan Documents, (c) a material adverse effect upon the Collateral, or (d) a material impairment of the enforceability or priority of Lender's liens upon the Collateral or the legality, validity, binding effect or enforceability of the Loan Documents. Except during a Commitment Period, the occurrence of a “Material Adverse Effect” shall be determined by the Lender in its sole discretion, exercised in good faith.

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“ Maturity Date ” means May 3, 2020, subject to the proviso in Section 11.1 .

“ Maximum Liability ” has the meaning set forth in Section 3.11 hereof.

“ Multiemployer Plan ” means a “multiemployer plan” as defined in Section 4001(a)(3) of ERISA.

“ Net Cash Proceeds ” means, with respect to any Asset Sale or Recovery Event, the excess, if any, of (i) the sum of cash and cash equivalents received in connection with such Asset Sale or Recovery Event (including any cash or cash equivalents received by way of deferred payment pursuant to, or by monetization of, a note receivable or otherwise, but only as and when so received) over (ii) the sum of (A) the reasonable and customary out-of-pocket costs, fees (including investment banking fees, attorneys’ fees and accountants’ fees), commissions, premiums and expenses incurred by any of the Loan Parties or their Subsidiaries and (B) the amount of any reasonable reserve established in accordance with GAAP against any adjustment to the sale price or any liabilities.

“ Notice of Borrowing ” has the meaning set forth in Section 2.3 hereof.

“ NPS Exclusivity Letter ” has the meaning specified in Section 11.1 hereof.

“ NPS Note ” means Intercompany Note made by Borrower in favor of Lazarus Energy, effective as of June 1, 2018.

“ Obligations ” means any and all obligations, liabilities and indebtedness of each Loan Party to Lender or to any Affiliate of Lender of any and every kind and nature, howsoever created, arising or evidenced and howsoever owned, held or acquired, whether now or hereafter existing, whether now due or to become due, whether primary, secondary, direct, indirect, absolute, contingent or otherwise, whether several, joint or joint and several, arising under any Loan Document.

“ Other Connection Taxes ” means Taxes imposed as a result of a present or former connection between the Lender and the jurisdiction imposing such Tax (other than connections arising from the Lender having executed, delivered, become a party to, performed its obligations under, received payments under, received or perfected a security interest under, engaged in any other transaction pursuant to or enforced any Loan Document, or sold or assigned an interest in any Loan or Loan Document).

“ Other Taxes ” means all present or future stamp, court or documentary, intangible, excise, value added, transfer, recording, filing or similar Taxes that arise from any payment made under, from the execution, delivery, performance, enforcement or registration of, from the receipt or perfection of a security interest under, or otherwise with respect to, any Loan Document.

“ Outside Date ” has the meaning set forth in Section 11.1 hereof.

“ Parent ” means any Person now or at any time or times hereafter owning or controlling (alone or with any other Person) at least a majority of the issued and outstanding equity of a Loan Party.

“ Participant ” has the meaning specified in Section 12.1.2 hereof.

“ Participant Register ” has the meaning specified in Section 12.1.2 hereof.

“ PATRIOT Act ” means the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Pub. L.107-56, signed into law October 26, 2001.

“ Pension Plan ” means any Employee Benefit Plan, other than a Multiemployer Plan, subject to the provisions of Section 302 or Title IV of ERISA or Section 412 of the Code.

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“ Permitted Liens ” means (a) statutory liens of landlords, carriers, warehousemen, processors, mechanics, materialmen or suppliers incurred in the ordinary course of business and securing amounts not yet due or declared to be due by the claimant thereunder or amounts which are being contested in good faith and by appropriate proceedings and for which the applicable Loan Party has maintained adequate reserves; (b) liens or security interests in favor of Lender; (c) liens for taxes, assessments and governmental charges not yet due and payable or which are being contested in good faith and by appropriate proceedings and the applicable Loan Party is in compliance with clauses (i) and (iii) of Section 7.8 hereof; (d) zoning restrictions and easements, licenses, covenants and other restrictions affecting the use of real property that do not individually or in the aggregate have a material and adverse effect on the applicable Loan Party’s ability to use such real property for its intended purpose in connection with such Loan Party’s business; (e) liens in connection with purchase money indebtedness and capitalized leases otherwise permitted under this Agreement, provided , that such liens attach only to the assets the purchase of which was financed by such purchase money indebtedness or which are the subject of such capitalized leases; (f) liens set forth on Schedule 6.4 ; and (g) liens specifically permitted by Lender in writing.

“ Permitted Tax Distribution ” means, for any taxable period or portion thereof in which Lazarus is a pass through entity for federal income tax purposes, payments and distributions which are distributed to the direct or indirect members of Lazarus on or prior to each estimated payment date as well as each other applicable due date to enable such holders to timely make payments of federal, state and local taxes for such taxable period that are imposed with respect to the income of Lazarus allocated to such holders not to exceed the product of (a) the net taxable income of Lazarus for such period, and (b) the highest applicable marginal U.S. federal, state and local tax rates applicable to an individual resident in Houston, Texas; provided that the amount of such distribution shall be decreased by (i) the amount of any taxable losses allocated to such direct or indirect members in prior taxable periods in respect of Lazarus, and (ii) to the extent the amount distributed to such direct or indirect members of Lazarus in any prior taxable period exceeded the actual tax liability for such member attributable to that taxable period.

“ Person ” means any individual, sole proprietorship, partnership, joint venture, trust, unincorporated organization, association, corporation, limited liability company, institution, entity, party or foreign or United States government (whether federal, state, county, city, municipal or otherwise), including, without limitation, any instrumentality, division, agency, body or department thereof.

“ Pledge Agreement ” means the Pledge Agreement, substantially in the form of Exhibit D , by Pledgor in favor of the Lender.

“ Pledgor ” has the meaning assigned in the introductory paragraph hereof.

“ Proceeds ” has the meaning ascribed to such term in the UCC.

“ Receivable ” means any right to payment from a Person, whether constituting an “account,” “chattel paper,” “payment intangible,” “instrument” or “general intangible” (each, as defined in the UCC), arising from the sale of goods and/or provision of services, and includes, without limitation, the obligation of the obligor thereon to pay any finance charges, fees and other charges with respect thereto, including, without limitation, with respect to any unbilled receivables, 100% of the amount to be or thereafter invoiced.

“ Recovery Event ” means any settlement of or payment in respect of any property or casualty insurance claim or any condemnation proceeding relating to any asset of a Loan Party or any of its Subsidiaries constituting Collateral.

“ Refinery Assets ” means a certain 15,000 BPD crude oil and condensate processing facility located in Nixon, TX, including associated real and personal property such as the pipeline infrastructure, crude oil, feedstock and refined product storage tanks and truck racks (or, in each case, contracts granting rights to use the same) and other assets and any other personal and real property owned by Lazarus that is appurtenant to or necessary for the commercial operation of such processing facility.

“ Register ” has the meaning set forth in Section 12.1.1 hereof .

“ Reinvestment Event ” shall mean any Asset Sale permitted under Section 8.4 or Recovery Event in respect of which a Loan Party has delivered a Reinvestment Notice.

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“ Reinvestment Notice ” shall mean a written notice to the Lender executed by an authorized officer of a Loan Party stating that no Event of Default has occurred and is continuing or would result therefrom and that such Loan Party (directly or indirectly through a Subsidiary) intends and expects to use all or a specified portion of the Net Cash Proceeds of a Reinvestment Event to acquire or repair assets (in the case of any Asset Sale pursuant to Section 8.4 hereof) or long-term assets (in the case of any Recovery Event), in each case useful in its business.

“ Related Party Agreements ” has the meaning specified in Section 11.1 hereof.

“ Related Security ” means, with respect to any Receivable that is Collateral , (a) any goods (including returned goods), and documentation of title evidencing the shipment or storage of any goods (including returned goods), the sale of which gave rise to such Receivable, (b) all instruments and chattel paper that may evidence such Receivable, (c) all other security interests or liens in favor of Grantor and property subject thereto from time to time purporting to secure payment of such Receivable, whether pursuant to a contract related to such Receivable or otherwise, together with all UCC financing statements or similar filings relating thereto, (d) to the extent applicable to such Receivable, all rights, interests and claims under the contracts relating to such Receivable, and all guaranties, indemnities, insurance and other agreements (including the related contract), Supporting Obligations or arrangements of whatever character from time to time supporting or securing payment of such Receivable or otherwise relating to such Receivable, whether pursuant to the contract or other arrangement related to such Receivable or otherwise and (e) all proceeds of such Receivable or Related Security with respect thereto.

“ Restricted Payment ” means any dividend or other distribution (whether in cash, securities or other property) with respect to any Equity Interest of any Person, or any payment (whether in cash, securities or other property), including any sinking fund or similar deposit, on account of the purchase, redemption, retirement, acquisition, cancellation or termination of any such Equity Interest, or on account of any return of capital to such Person’s shareholders, partners or members (or the equivalent Persons thereof); provided that, for the avoidance of doubt, ordinary-course payments under Affiliate Funding Transactions are not Restricted Payments.

“ Sanctioned Country ” means, at any time, a country or territory which is, or whose government is, the subject or target of any Sanctions broadly restricting or prohibiting dealings with such country, territory or government (currently, Cuba, Iran, Crimea, North Korea, and Syria).

“ Sanctioned Person ” means, at any time, any Person with whom dealings are restricted or prohibited under Sanctions, including (a) any Person listed in any Sanctions-related list of designated Persons maintained by the United States (including by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, or the U.S. Department of Commerce), the United Nations Security Council, the European Union or any of its member states, Her Majesty’s Treasury, Switzerland or any other relevant authority, (b) any Person located, organized or resident in, or any Governmental Authority or governmental instrumentality of, a Sanctioned Country or (c) any Person 25% or more directly or indirectly owned by, controlled by, or acting for the benefit or on behalf of, any Person described in clauses (a) or (b) hereof.

“ Sanctions ” means economic or financial sanctions or trade embargoes or restrictive measures enacted, imposed, administered or enforced from time to time by (a) the U.S. government, including those administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury, the U.S. Department of State, or the U.S. Department of Commerce; (b) the United Nations Security Council; (c) the European Union or any of its member states; (d) Her Majesty’s Treasury; (e) the Australian Department of Foreign Affairs and Trade, (f) Switzerland; or (g) any other relevant authority.

“ Subsidiary ” means with respect to any Person, a corporation of which such Person owns, directly or indirectly, more than fifty percent (50%) of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time stock of any other class of such corporation shall have or might have voting power by reason of the happening of any contingency) and any partnership, joint venture or limited liability company of which more than fifty percent (50%) of the outstanding Equity Interests are at the time, directly or indirectly, owned by such Person or any partnership of which such Person is a general partner. Unless the context otherwise requires, each reference to Subsidiaries herein shall be a reference to Subsidiaries of Borrower.

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“ Supporting Obligations ” has the meaning set forth in the UCC.

“ Tangible Chattel Paper ” has the meaning ascribed to such term in the UCC.

“ Taxes ” shall mean any and all present and future taxes, duties, levies, imposts, deductions, assessments, charges or withholdings (including backup withholding) and any and all liabilities (including interest and penalties and other additions to taxes) with respect to the foregoing.

“ Termination Date ” shall be the date on which the Borrower shall have repaid all of the Obligations (other than unasserted contingent obligations) and this Agreement (including the Lender’s commitment to make Loans hereunder) has terminated.

“ UCC ” means the Uniform Commercial Code as in effect from time to time in the State of New York or any other state the laws of which are required to be applied in connection with the creation or perfection of the security interest granted hereunder.

“ USA Patriot Act ” has the meaning set forth in Section 12.2 hereof.

“ Veritex ” has the meaning set forth in Section 11.1 hereof.

“ Veritex Release Date ” has the meaning set forth in Section 7.15 .

SECTION 2

LOANS.

2.1. Line of Credit Commitment .

Subject to the terms and conditions of this Agreement and the other Loan Documents, and relying upon the representations and warranties herein set forth, Lender hereby establishes a line of credit to Borrower in an aggregate principal amount of up to twelve million eight hundred thousand Dollars ($12,800,000.00) (the “ Line of Credit ”).

2.2. Advances; Loans under Line of Credit .

Subject to the terms and conditions of this Agreement and the other Loan Documents, and relying upon the representations and warranties herein set forth, (a) on the date hereof, notwithstanding that the Closing Date has not yet occurred, Lender shall make an advance to the Borrower in an aggregate principal amount of $3,300,000, (b) on May 9, 2019 notwithstanding that the Closing Date has not yet occurred, Lender shall make an advance to the Borrower in an aggregate principal amount of $1,200,000 and (c) from time to time after the Closing Date until the later of (i) the twentieth (20th) Business Day following the Closing Date and (ii) such later date as Lender may in its sole discretion agree from time to time, Lender shall make advances to the Borrower in an aggregate principal amount, when taken together with the advances contemplated by the foregoing clauses (a) and (b), up to the amount of the Line of Credit specified in Section 2.1 (such advances, collectively, the “ Loans ”); provided that each advance hereunder shall be in an amount not less than one million Dollars ($1,000,000). Amounts repaid with respect to the Loans may not be reborrowed.

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2.3. Borrowing Procedures .

Borrower shall give written notice (each such written notice, a “ Notice of Borrowing ”) substantially in the form of Exhibit B to Lender of each proposed Borrowing not later than 11:00 A.M., New York time, one Business Day prior to the proposed date of such Borrowing. Each such notice shall be effective upon receipt by Lender, shall be irrevocable, and shall specify the date and amount of such proposed Borrowing, which shall be a Business Day. Borrower shall be deemed to have duly provided a Notice of Borrowing (and, for the avoidance of doubt, made the representations, warranties and certifications set forth therein) in respect of (a) the advance on the date hereof contemplated by Section 2.2(a) , (b) the advance contemplated by Section 2.2 (b) on the date thereof and (c) each date and for each respective amount that, in each case, is set forth in Schedule 2.3 .

2.4. Funding .

The Lender shall make each advance to be made by it hereunder (other than the advance on the date hereof and the advance contemplated by Section 2.2 (b) on the date thereof ) on the applicable Borrowing date by wire transfer of immediately available funds by 2:00 P.M., New York time.

2.5. Repayment of Loans .

The Borrower hereby unconditionally promises to pay to the Lender the outstanding principal amount of the Loans on the Maturity Date. To the extent not previously paid, the outstanding balance of the Loans shall be due and payable on the Maturity Date, together with accrued and unpaid interest thereon.

2.6. Interest on Loans .

Subject to the provisions of Section 2.7 below, the outstanding principal amount of the Loans shall bear interest (computed on the basis of the actual number of days elapsed over a year of three hundred sixty (360) days) at a rate of twelve percent (12%) per annum. Interest on the Loans shall be payable on each Interest Payment Date.

2.7. Default Interest .

If any Event of Default has occurred and is continuing, then to the extent permitted by law all amounts outstanding under this Agreement and the other Loan Documents shall bear interest (after as well as before judgment), immediately upon the occurrence and during the continuance of such Event of Default, payable on demand, at a rate of fourteen percent (14%) per annum (and not for the avoidance of doubt at the rate set forth in Section 2.6 ); provided , however, that immediately upon and after the date that such Event of Default is cured, waived or no longer continuing, the interest rate shall revert to the interest rate specified in Section 2.6 .

2.8. Payment Procedures .

The Borrower shall make each payment (including principal of or interest on any Borrowing or any fees or other amounts) required hereunder and under any other Loan Document not later than 2:00 p.m., New York time, on the date when due in immediately available Dollars, without setoff, defense or counterclaim. Any amounts received after such time on any date may, in the discretion of the Lender, be deemed to have been received on the next succeeding Business Day for purposes of calculating interest thereon. Each such payment shall be made to the Lender at the account designated in writing by an authorized officer of the Lender. Except as otherwise expressly provided herein, whenever any payment (including principal of or interest on any Borrowing or any fees or other amounts) hereunder or under any other Loan Document shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or fees, if applicable, unless such next succeeding Business Day would fall in the next calendar month, in which case payment will be made on the next preceding Business Day.

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2.9. Prepayments of the Loans .

2.9.1. Voluntary Prepayments .

Upon at least three (3) days’ prior written notice to the Lender, the Borrower may prepay a portion or all of the Loans, together with accrued and unpaid interest thereon and all other amounts payable by the Borrower under this Agreement, without premium or penalty.

2.9.2. Mandatory Prepayments of the Loans .

(a) Asset Sale . If at any time Borrower shall receive Net Cash Proceeds in an aggregate amount equal to or exceeding fifty thousand Dollars ($50,000) from (i) any Asset Sale or (ii) any Recovery Event, the Borrower shall, within five Business Days after the date of the receipt of such Net Cash Proceeds by such Loan Party or any of its Subsidiaries, prepay the Loans and other Obligations in an amount equal to 100% of such Net Cash Proceeds; provided that, if prior to that date a Reinvestment Notice is delivered to the Lender in respect thereof, then the Loan Party or its Subsidiary shall be permitted to defer such prepayment for a period of up to 45 days after the date of such Asset Sale or Recovery Event and on such 45 th day shall be required to make such prepayment to the extent that such reinvestment shall not have been made.

(b) Issuance of Debt . If at any time any Loan Party or any of its Subsidiaries shall receive Net Cash Proceeds from the issuance or incurrence of any Debt prohibited under Section 8.2 below, the Borrower shall, within one Business Day after the date of receipt of such Net Cash Proceeds by such Loan Party or any of its Subsidiaries, prepay the Loans and other Obligations in an amount equal to 100% of such Net Cash Proceeds.

2.9.3. Prepayment Procedures .

Any prepayment under this section shall be applied first , to payment of that portion of the Obligations constituting fees, indemnities, costs and expenses payable to Lender hereunder, second, to payment of that portion of the Obligations constituting accrued but unpaid interest, third , to payment of that portion of the Obligations constituting unpaid principal of the Loans and, fourth , to payment of any other Obligations due.

2.10. Commitment Fee .

The Borrower agrees to pay to the Lender on the date hereof the following amounts which amount shall be paid from the proceeds of the first Loan: (a) a commitment fee in the amount of one hundred thousand Dollars ($100,000) and (b) all expenses contemplated by Section 2.12(a)(i) incurred through the date hereof.

2.11. Recordkeeping .

Lender shall record in its records, the date and amount of each advance made by Lender hereunder, and each repayment thereof. The aggregate unpaid principal amount so recorded shall be rebuttably presumptive evidence of the principal amount of the Loans owing and unpaid. The failure to so record any such amount or any error in so recording any such amount shall not, however, limit or otherwise affect the Obligations of Borrower hereunder to repay the principal amount of the Loans hereunder, together with all interest accruing thereon. The Lender shall provide the Borrower with the foregoing books and records upon reasonable request.

2.12. Costs and Expenses .

Regardless of whether the Loan Documents are executed and delivered, Borrower agrees to reimburse Lender for (a) all reasonable, documented out-of-pocket costs and expenses incurred by Lender in connection with the (i) preparation, due diligence, development, consummation and administration of any of the Loan Documents including, without limitation, attorney’s fees and other expenses of internal and external legal counsel, independent engineers, investigators or other consultants to the Lender, Uniform Commercial Code and other public record searches and filings, overnight courier, other express or messenger delivery, appraisal costs, surveys, title insurance and environmental audit or review costs; and (ii) administration of this Agreement or any other Loan Document (including, without limitation, any costs and expenses of any third party provider engaged by Lender for such purposes) and (b) all costs and expenses incurred by Lender (including, without limitation, any costs and expenses of any third party provider engaged by Lender for such purposes) in connection with the (i) collection, protection or enforcement of any of Lender’s rights in or to the Collateral; (ii) collection of any Obligations; and (iii) enforcement of any of Lender's remedies under this Agreement or any other Loan Document.

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2.13. Taxes .

(a) All payments made by a Loan Party hereunder or under any Loan Documents shall be made without setoff, counterclaim, or other defense. To the extent permitted by applicable law, all payments hereunder or under the Loan Documents (including any payment of principal, interest, or fees) to, or for the benefit, of any person shall be made by the Loan Party free and clear of and without deduction or withholding for, or account of, any Taxes now or hereinafter imposed by any taxing authority.

(b) If a Loan Party makes any payment hereunder or under any Loan Document in respect of which it is required by applicable law to deduct or withhold any Indemnified Taxes, the Loan Parties shall increase the payment hereunder or under any such Loan Document such that after the reduction for the amount of Indemnified Taxes withheld (and any Taxes withheld or imposed with respect to the additional payments required under this Section 2.13(b) ), the amount paid to Lender equals the sum it would have received had no such deduction or withholding been made. To the extent a Loan Party withholds any Taxes on payments hereunder or under any Loan Document, such Loan Party shall pay the full amount deducted to the relevant taxing authority within the time allowed for payment under applicable law and shall deliver to Lender within 30 days after it has made payment to such authority a receipt issued by such authority (or other evidence satisfactory to Lender) evidencing the payment of all amounts so required to be deducted or withheld from such payment. In addition, the Loan Parties shall timely pay to the relevant Governmental Authority in accordance with applicable law, or at the option of the Lender timely reimburse it for the payment of, any Other Taxes.

(c) If Lender (or any of its Affiliates, agents, or employees) is required by law to make any payments of any Indemnified Taxes on or in relation to any amounts received or receivable hereunder or under any other Loan Document, or any Indemnified Tax is assessed against Lender (or any of its Affiliates, agents, or employees) with respect to amounts received or receivable hereunder or under any other Loan Document, the Loan Parties will jointly and severally indemnify such person within 10 days after demand therefor, for the full amount of (i) such Indemnified Tax (and any reasonable counsel fees and other expenses associated with such Tax) and (ii) any Taxes imposed as a result of the receipt of the payment under this Section 2.13 , in each case, whether or not such Indemnified Taxes were correctly or legally imposed or asserted by the relevant Governmental Authority. A certificate prepared in good faith by Lender and delivered to any Loan Party as to the amount of such payment or liability shall, absent manifest error, be final, conclusive, and binding on all parties.

(d) If a payment made to Lender under any Loan Document would be subject to U.S. federal withholding tax imposed by FATCA if such Lender were to fail to comply with the applicable reporting requirements of FATCA (including those contained in Section 1471(b) or 1472(b) of the Code, as applicable), such Lender shall deliver to the Borrower at the time or times prescribed by law and at such time or times reasonably requested by the Borrower such documentation prescribed by applicable law (including as prescribed by Section 1471(b)(3)(C)(i) of the Code) and such additional documentation reasonably requested by the Borrower as may be necessary for the Borrower to comply with its obligations under FATCA and to determine that such Lender has complied with such Lender’s obligations under FATCA or to determine the amount to deduct and withhold from such payment. Solely for purposes of this clause (d) , “FATCA” shall include any amendments made to FATCA after the date of this Agreement.

(e) If any party determines, in its sole discretion exercised in good faith, that it has received a refund of any Indemnified Taxes as to which it has been indemnified pursuant to this Section 2.13 (including by the payment of additional amounts pursuant to Section 2.13(b) ), it shall, so long as no Event of Default has occurred and is continuing, pay to the indemnifying party an amount equal to such refund (but only to the extent of indemnity payments made under this Section with respect to the Indemnified Taxes giving rise to such refund), net of all out-of-pocket expenses (including Taxes) of such indemnified party and without interest (other than any interest paid by the relevant Governmental Authority with respect to such refund). Such indemnifying party, upon the request of such indemnified party, shall repay to such indemnified party the amount paid over pursuant to this Section 2.13(e) (plus any penalties, interest or other charges imposed by the relevant Governmental Authority) in the event that such indemnified party is required to repay such refund to such Governmental Authority. Notwithstanding anything to the contrary in this Section 2.13(e) , in no event will the indemnified party be required to pay any amount to an indemnifying party pursuant to this Section, the payment of which would place the indemnified party in a less favorable net after-Tax position than the indemnified party would have been in if the indemnification payments or additional amounts giving rise to such refund had never been paid. This Section 2.13(e) shall not be construed to require any indemnified party to make available its Tax returns (or any other information relating to its Taxes that it deems confidential) to the indemnifying party or any other Person.

(f) All obligations of the Loan Parties provided for in this Section 2.13 shall survive payment in full of the Loans, any foreclosure thereunder, any modification, release, discharge of, or termination of, any of the Loan Documents.

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2.14. Maximum Interest .

It is the intent of the parties that the rate of interest and other charges to Borrower under this Agreement and the other Loan Documents shall be lawful; therefore, if for any reason the interest or other charges payable under this Agreement are found by a court of competent jurisdiction, in a final determination, to exceed the limit which Lender may lawfully charge Borrower, then the obligation to pay interest and other charges shall automatically be reduced to such limit and, if any amount in excess of such limit shall have been paid, then such amount shall be refunded to such Borrower.

2.15. Change in Circumstances .

(a) Notwithstanding any other provision of this Agreement, if any Change in Law shall (i) impose, modify or deem applicable any reserve, special deposit, compulsory loan, insurance charge or similar requirement against assets of, deposits with or for the account of or credit extended by the Lender; or (ii) subject the Lender to any Taxes (other than (A) Indemnified Taxes, (B) Taxes described in clauses (c) and (d) of the definition of Excluded Taxes and (C) Connection Income Taxes) on its loans, loan principal, letters of credit, commitments, or other obligations, or its deposits, reserves, other liabilities or capital attributable thereto; or (iii) impose on the Lender or the London interbank market any other condition, cost or expense (other than Taxes) affecting this Agreement or Loans made by the Lender, and the result of any of the foregoing shall be to increase the cost to the Lender of making, converting to, continuing or maintaining any Loan or of maintaining its obligation to make any such Loan or to reduce the amount of any sum received or receivable by the Lender hereunder (whether of principal, interest or any other amount), then the Borrower will pay to the Lender, as the case may be, upon demand such additional amount or amounts as will compensate the Lender, as the case may be, for such additional costs incurred or reduction suffered.

(b) If the Lender shall have determined that any Change in Law regarding capital or liquidity requirements has or would have the effect of reducing the rate of return on the Lender’s capital or on the capital of the Lender’s holding company, if any, as a consequence of this Agreement, the Loans made to a level below that which the Lender or the Lender’s holding company could have achieved but for such Change in Law (taking into consideration the Lender’s policies and the policies of the Lender’s holding company with respect to capital adequacy), then from time to time the Borrower shall pay to the Lender, as the case may be, such additional amount or amounts as will compensate the Lender or the Lender’s holding company for any such reduction actually incurred or suffered. Lender agrees to provide Borrower with reasonable evidence as to the basis for such determination and such amounts, but Lender’s entitlement to such amounts shall not be subject to delivery of such evidence or Borrower’s satisfaction with any evidence so provided.

(c) A certificate of the Lender setting forth the amount or amounts necessary to compensate the Lender or its holding company, as applicable, as specified in paragraph (a) or (b) above shall be delivered to the Borrower and shall be conclusive absent manifest error. The Borrower shall pay the Lender the amount shown as due on any such certificate delivered by it within twenty (20) Business Days after its receipt of the same.

(d) Failure or delay on the part of the Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital shall not constitute a waiver of the Lender’s right to demand such compensation; provided that the Borrower shall not be under any obligation to compensate the Lender under paragraph (a) or (b) above with respect to increased costs or reductions with respect to any period prior to the date that is one hundred eighty (180) days prior to such request; provided further that the foregoing limitation shall not apply to any increased costs or reductions arising out of the retroactive application of any Change in Law within such one hundred eighty (180)-day period.

2.16. Change in Legality .

Notwithstanding any other provision of this Agreement, if any Change in Law shall make it unlawful for the Lender to make or maintain any Loan, if such law shall mandate, then, upon notice from the Lender to the Borrower, the Borrower shall prepay such Loans, together with accrued and unpaid interest thereon and all other amounts payable by the Borrower under this Agreement on or before such date as shall be mandated by such law.

SECTION 3

GUARANTY

3.1. Guaranty of the Obligations .

Each Guarantor jointly and severally hereby irrevocably and unconditionally guarantees to the Lender, and its successors and permitted assignees (the “ Guaranty Beneficiaries ”) the due and punctual payment in full of all Obligations when the same shall become due, whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 USC. § 362(a), collectively, the “ Guaranteed Obligations ”).

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3.2. Payment by Guarantors .

Each Guarantor hereby jointly and severally agrees in furtherance of the foregoing and not in limitation of any other right which any Guaranty Beneficiaries may have at law or in equity against any Guarantor by virtue hereof, that upon the failure of the Borrower to pay any of the Guaranteed Obligations when and as the same shall become due (or, in the case of any extension of time of payment or renewal of any of the Guaranteed Obligations, in accordance with the terms of such extension or renewal), whether at stated maturity, by required prepayment, declaration, acceleration, demand or otherwise (including amounts that would become due but for the operation of the automatic stay under Section 362(a) of the Bankruptcy Code, 11 USC. § 362(a)), each Guarantor will, upon demand, pay, or cause to be paid, in cash, to the Guaranty Beneficiaries, an amount equal to the sum of the unpaid principal amount of all Guaranteed Obligations then due as aforesaid, accrued and unpaid interest on such Guaranteed Obligations (including interest which, but for the Borrower’s becoming the subject of a proceeding under any debtor relief law, would have accrued on such Guaranteed Obligations, whether or not a claim is allowed against the Borrower for such interest in such proceeding) and all other Guaranteed Obligations then owed to Guaranty Beneficiaries as aforesaid.

3.3. Liability of Guarantor Absolute .

Each Guarantor agrees that its obligations hereunder are irrevocable, absolute, independent and unconditional and shall not be affected by any circumstance which constitutes a legal or equitable discharge of a guarantor or surety other than payment in full of the Guaranteed Obligations. In furtherance of the foregoing and without limiting the generality thereof, each Guarantor agrees as follows:

(a) this Guaranty is a guaranty of payment when due and not of collectability; this Guaranty is a primary obligation of each Guarantor and not merely a contract of surety;

(b) any Guaranty Beneficiary may enforce this Guaranty upon the occurrence of an Event of Default notwithstanding the existence of any dispute between the Borrower and any Guaranty Beneficiary with respect to the existence of such Event of Default;

(c) the obligations of each Guarantor hereunder are independent of the obligations of the Borrower and the obligations of any other guarantor of the obligations of the Borrower, and a separate action or actions may be brought and prosecuted against each Guarantor whether or not any action is brought against the Borrower or any of such other guarantors and whether or not the Borrower is joined in any such action or actions;

(d) payment by each Guarantor of a portion, but not all, of the Guaranteed Obligations shall in no way limit, affect, modify or abridge each Guarantor’s liability for any portion of the Guaranteed Obligations which has not been paid. Without limiting the generality of the foregoing, if any Guaranty Beneficiary is awarded a judgment in any suit brought to enforce each Guarantor’s covenant to pay a portion of the Guaranteed Obligations, such judgment shall not be deemed to release Guarantor from its covenant to pay the portion of the Guaranteed Obligations that is not the subject of such suit;

(e) any Guaranty Beneficiaries, upon such terms as it deems appropriate, without notice or demand and without affecting the validity or enforceability hereof or giving rise to any reduction, limitation, impairment, discharge or termination of any Guarantor’s liability hereunder, from time to time may, without limiting this Guaranty, (i) renew, extend, accelerate, increase the rate of interest on, or otherwise change the time, place, manner or terms of payment of the Guaranteed Obligations; (ii) settle, compromise, release or discharge, or accept or refuse any offer of performance with respect to, or substitutions for, the Guaranteed Obligations or any agreement relating thereto and/or subordinate the payment of the same to the payment of any other obligations; (iii) request and accept other guaranties of the Guaranteed Obligations and take and hold security for the payment hereof or the Guaranteed Obligations; (iv) release, surrender, exchange, substitute, compromise, settle, rescind, waive, alter, subordinate or modify, with or without consideration, any security for payment of the Guaranteed Obligations, any other guaranties of the Guaranteed Obligations, or any other obligation of any Person with respect to the Guaranteed Obligations; (v) enforce and apply any security now or hereafter held by or for the benefit of such Beneficiaries in respect hereof or the Guaranteed Obligations and direct the order or manner of sale thereof, or exercise any other right or remedy that such Guaranty Beneficiaries may have against any such security, in each case as such Guaranty Beneficiaries in its discretion may determine consistent herewith or the applicable Loan Documents and any applicable security agreement, including foreclosure on any such security pursuant to one or more judicial or no judicial sales, whether or not every aspect of any such sale is commercially reasonable, and even though such action operates to impair or extinguish any right of reimbursement or subrogation or other right or remedy of any Guarantor against the Borrower or any security for the Guaranteed Obligations; and (vi) exercise any other rights available to it under the Loan Documents. The foregoing shall not be deemed to modify Section 12.5 of this Agreement; and

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(f) this Guaranty and the obligations of each Guarantor hereunder shall be valid and enforceable and shall not be subject to any reduction, limitation, impairment, discharge or termination for any reason (other than payment in full of the Guaranteed Obligations or the occurrence of the Termination Date), including the occurrence of any of the following, whether or not any Guarantor shall have had notice or knowledge of any of them: (i) any failure or omission to assert or enforce or agreement or election not to assert or enforce, or the stay or enjoining, by order of court, by operation of law or otherwise, of the exercise or enforcement of, any claim or demand or any right, power or remedy (whether arising under the Loan Documents, at law, in equity or otherwise) with respect to the Guaranteed Obligations or any agreement relating thereto, or with respect to any other guaranty of or security for the payment of the Guaranteed Obligations; (ii) any rescission, waiver, amendment or modification of, or any consent to departure from, any of the terms or provisions (including provisions relating to events of default) hereof, any of the other Loan Documents, or any agreement or instrument executed pursuant thereto, or of any other guaranty or security for the Guaranteed Obligations, in each case whether or not in accordance with the terms hereof or such Loan Document or any agreement relating to such other guaranty or security; (iii) the Guaranteed Obligations, or any agreement relating thereto, at any time being found to be illegal, invalid or unenforceable in any respect; (iv) the application of payments received from any source (other than payments received pursuant to the other Loan Documents or from the proceeds of any security for the Guaranteed Obligations, except to the extent such security also serves as collateral for indebtedness other than the Guaranteed Obligations) to the payment of indebtedness other than the Guaranteed Obligations, even though any Guaranty Beneficiaries might have elected to apply such payment to any part or all of the Guaranteed Obligations; (v) any failure to perfect or continue perfection of a security interest in any collateral which secures any of the Guaranteed Obligations; (vii) any defenses, set-offs or counterclaims which the Borrower may allege or assert against any Guaranty Beneficiaries in respect of the Guaranteed Obligations, including failure of consideration, breach of warranty, payment, statute of frauds, statute of limitations, accord and satisfaction and usury; and (viii) any other act or thing or omission, or delay to do any other act or thing, which may or might in any manner or to any extent vary the risk of any Guarantor as an obligor in respect of the Guaranteed Obligations.

3.4. Waivers by Guarantor .

Each Guarantor hereby waives, for the benefit of the Guaranty Beneficiaries:

(a) any right to require any Guaranty Beneficiaries, as a condition of payment or performance by such Guarantor, to (i) proceed against the Borrower, any other guarantor of the Guaranteed Obligations or any other Person, (ii) proceed against or exhaust any security held from the Borrower, any such other guarantor or any other Person, (iii) proceed against or have resort to any balance of any deposit account or credit on the books of any Guaranty Beneficiaries in favor of the Borrower or any other Person, or (iv) pursue any other remedy in the power of any Guaranty Beneficiaries whatsoever;

(b) any defense arising by reason of the incapacity, lack of authority or any disability or other defense of the Borrower including any defense based on or arising out of the lack of validity or the unenforceability of the Guaranteed Obligations or any agreement or instrument relating thereto or by reason of the cessation of the liability of the Borrower from any cause other than payment in full of the Guaranteed Obligations;

(c) any defense based upon any statute or rule of law which provides that the obligation of a surety must be neither larger in amount nor in other respects more burdensome than that of the principal;

(d) any defense based upon any Guaranty Beneficiaries’ errors or omissions in the administration of the Guaranteed Obligations, except behavior which amounts to bad faith;

(e) (i) any principles or provisions of Law, statutory or otherwise, which are or might be in conflict with the terms hereof and any legal or equitable discharge of such Guarantor’s obligations hereunder, (ii) the benefit of any statute of limitations affecting such Guarantor’s liability hereunder or the enforcement hereof, (iii) any rights to set-offs, recoupments and counterclaims, and (iv) promptness, diligence and any requirement that any Guaranty Beneficiaries protect, secure, perfect or insure any security interest or lien or any property subject thereto;

(f) notices, demands, presentments, protests, notices of protest, notices of dishonor and notices of any action or inaction, including acceptance hereof, notices of default hereunder, or under any agreement or instrument related thereto, notices of any renewal, extension or modification of the Guaranteed Obligations or any agreement related thereto, notices of any extension of credit to the Borrower and any right to consent to any thereof; and

(g) any defenses or benefits that may be derived from or afforded by Law which limit the liability of or exonerate guarantors or sureties, or which may conflict with the terms hereof.

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3.5. Guarantors’ Right of Subrogation .

Until the Termination Date, each Guarantor hereby waives any claim, right or remedy, direct or indirect, that such Guarantor now has or may hereafter have against the Borrower or any of its assets in connection with this Guaranty or the performance by such Guarantor of its obligations hereunder, in each case whether such claim, right or remedy arises in equity, under contract, by statute, under common law or otherwise and including:

(a) any right of subrogation, reimbursement or indemnification that such Guarantor now has or may hereafter have against the Borrower with respect to the Guaranteed Obligations,

(b) any right to enforce, or to participate in, any claim, right or remedy that any Beneficiaries now has or may hereafter have against the Borrower, and

(c) any benefit of, and any right to participate in, any collateral or security now or hereafter held by any Guaranty Beneficiaries. Guarantor further agrees that, to the extent the waiver or agreement to withhold the exercise of its rights of subrogation, reimbursement or indemnification as set forth herein is found by a court of competent jurisdiction to be void or voidable for any reason, any rights of subrogation, reimbursement or indemnification such Guarantor may have against the Borrower or against any collateral or security, shall be junior and subordinate to any rights of the Beneficiaries against the Borrower, and to all right, title and interest the Beneficiaries may have in any such collateral or security. If any amount shall be paid to each Guarantor before the Termination Date on account of any such subrogation, reimbursement, indemnification contribution rights at any time when all Guaranteed Obligations shall not have been finally and indefeasibly paid in full, such amount shall be held in trust for the Guaranty Beneficiaries and shall forthwith be paid over to the Guaranty Beneficiaries to be credited and applied against the Guaranteed Obligations, whether matured or unmatured, in accordance with the terms hereof.

3.6. Subordination of Other Obligations .

Any Debt of the Borrower now or hereafter held by any Guarantor is hereby subordinated in right of payment to the Guaranteed Obligations, and any such indebtedness collected or received by such Guarantor after an Event of Default has occurred and is continuing shall be held in trust for the Guaranty Beneficiaries and shall forthwith be paid over to the Guaranty Beneficiaries to be credited and applied against the Guaranteed Obligations but without affecting, impairing or limiting in any manner the liability of such Guarantor under any other provision hereof.

3.7. Continuing Guaranty .

This Guaranty is a continuing guaranty and shall remain in effect until the Termination Date. Each Guarantor hereby irrevocably waives any right to revoke this Guaranty as to future transactions giving rise to any Guaranteed Obligations.

3.8. Authority of Guarantors or the Borrower .

It is not necessary for any Guaranty Beneficiaries to inquire into the capacity or powers of the Borrower or the officers, members of the Board of Directors or any agents acting or purporting to act on behalf of any of them.

3.9. Financial Condition of the Borrower .

Any advance under the Line of Credit may be made to the Borrower or continued from time to time, without notice to or authorization from any Guarantor regardless of the financial or other condition of the Borrower at the time of any such grant. No Guaranty Beneficiaries shall have any obligation to disclose or discuss with any Guarantor its assessment, or any Guarantor’s assessment, of the financial condition of the Borrower. Each Guarantor has adequate means to obtain information from the Borrower on a continuing basis concerning the financial condition of the Borrower and its ability to perform its obligations under the Loan Documents, and each Guarantor assumes the responsibility for being and keeping informed of the financial condition of the Borrower and of all circumstances bearing upon the risk of nonpayment of the Guaranteed Obligations. Each Guarantor hereby waives and relinquishes any duty on the part of any Beneficiaries to disclose any matter, fact or thing relating to the business, operations or conditions of the Borrower now known or hereafter known by any Guaranty Beneficiaries.

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3.10. Bankruptcy, Etc .

(a) So long as any Guaranteed Obligations remain outstanding, each Guarantor shall not, without the prior written consent of the Lender, commence or join with any other Person in commencing any proceeding under any debtor relief law of or against the Borrower. The obligations of each Guarantor hereunder shall not be reduced, limited, impaired, discharged, deferred, suspended or terminated by any case or proceeding, voluntary or involuntary, involving the bankruptcy, insolvency, receivership, reorganization, liquidation or arrangement of the Borrower or by any defense which the Borrower may have by reason of the order, decree or decision of any court or administrative body resulting from any such proceeding.

(b) Each Guarantor acknowledges and agrees that any interest on any portion of the Guaranteed Obligations which accrues after the commencement of any case or proceeding referred to in clause (a) above (or, if interest on any portion of the Guaranteed Obligations ceases to accrue by operation of law by reason of the commencement of such case or proceeding, such interest as would have accrued on such portion of the Guaranteed Obligations if such case or proceeding had not been commenced) shall be included in the Guaranteed Obligations because it is the intention of Guarantors and Guaranty Beneficiaries that the Guaranteed Obligations which are Guaranteed by Guarantors pursuant hereto should be determined without regard to any rule of law or order which may relieve the Borrower of any portion of such Guaranteed Obligations. Each Guarantor will permit any trustee in bankruptcy, receiver, debtor in possession, assignee for the benefit of creditors or similar Person to pay the Lender, or allow the claim of the Lender in respect of, any such interest accruing after the date on which such case or proceeding is commenced.

(c) In the event that all or any portion of the Guaranteed Obligations are paid by the Borrower, the obligations of Guarantors hereunder shall continue and remain in full force and effect or be reinstated, as the case may be, in the event that all or any part of such payment(s) are rescinded or recovered directly or indirectly from any Beneficiaries as a preference, fraudulent transfer or otherwise, and any such payments which are so rescinded or recovered shall constitute Guaranteed Obligations for all purposes hereunder.

3.11. Maximum Liability .

It is the desire and intent of the Guarantors and the Guaranty Beneficiaries that this Guaranty shall be enforced against each Guarantor to the fullest extent permissible under the laws and public policies applied in each jurisdiction in which enforcement is sought. The provisions of this Guaranty are severable, and in any action or proceeding involving any state corporate law, or any state, Federal or foreign bankruptcy, insolvency, reorganization or other law affecting the rights of creditors generally, if the obligations of any Guarantor under this Guaranty would otherwise be held or determined to be avoidable, invalid or unenforceable on account of the amount of such Guarantor’s liability under this Guaranty, then, notwithstanding any other provision of this Guaranty to the contrary, the amount of such liability shall, without any further action by the Guarantor Subsidiaries or the Guaranty Beneficiaries, be automatically limited and reduced to the highest amount that is valid and enforceable as determined in such action or proceeding (such highest amount determined hereunder being the Guarantor’s “ Maximum Liability ”). Each Guarantor agrees that the Guaranteed Obligations may at any time and from time to time exceed the Maximum Liability of Guarantor without impairing this Guaranty or affecting the rights and remedies of the Guaranty Beneficiaries hereunder; provided , nothing in this sentence shall be construed to increase any Guarantor’s obligations hereunder beyond its Maximum Liability.

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SECTION 4

COLLATERAL GRANTED.

4.1. Grant of Security Interest to Lender .

As security for the payment of the Loans made by Lender to the Borrower hereunder and for the payment, performance or other satisfaction of all other Obligations:

(a) Borrower hereby grants to Lender and its Affiliates a continuing security interest in Borrower’s right, title and interest in the following, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (i) all Accounts and all Goods whose sale, lease or other disposition has given rise to Accounts and have been returned, repossessed or stopped in transit; (ii) all Chattel Paper, Instruments, Documents and General Intangibles (including, without limitation, all patents, patent applications, trademarks, trademark applications, trade names, trade secrets, goodwill, copyrights, copyright applications, registrations, licenses, software, franchises, customer lists, Tax refund claims, claims against carriers and shippers, guarantee claims, contract rights, payment intangibles, security interests, security deposits and rights to indemnification); (iii) all Inventory; (iv) all Goods (other than Inventory), including, without limitation, Equipment, vehicles and Fixtures; (v) all Investment Property; (vi) all Deposit Accounts, Securities Accounts, bank accounts, deposits and cash; (vii) all Letter-of-Credit Rights; (viii) Commercial Tort Claims listed on Exhibit C hereto; (ix) all Supporting Obligations; (x) any other property now or hereafter in the possession, custody or control of Lender, Lender’s agent or Lender’s parent, any Affiliates of Lender, or any Subsidiary of Lender or any participant with Lender in the Loans, for any purpose (whether for safekeeping, deposit, collection, custody, pledge, transmission or otherwise) and (xi) all additions and accessions to, substitutions for, and replacements, products and Proceeds of the foregoing property, including, without limitation, proceeds of all insurance policies insuring the foregoing property, and all books and records relating to any of the foregoing and to Borrower’s business.

(b) Borrower hereby grants to Lender and its Affiliates a security interest in Borrower’s right, title and interest in the following, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located: (i) all Receivables and all Related Security, (ii) all Collections, (iii) the Collection Accounts and all amounts on deposit therein, and all certificates and instruments, if any, from time to time evidencing such Collection Accounts and amounts on deposit therein, (iv) all books and records to the extent related to any of the foregoing, together with all rights (but not obligations) under the contracts related to the Receivables, and (v) all proceeds of, and all amounts received or receivable under, any or all of the foregoing.

(c) LR&M hereby grants to Lender and its Affiliates a security interest in LR&M’s right, title and interest in the following, whether now or hereafter owned, existing, acquired or arising and wherever now or hereafter located, upon the occurrence of the Veritex Release Date: (i) all LR&M Receivables and Related Security, (ii) all Collections in respect thereof, (iii) the Collection Accounts and all amounts on deposit therein, and all certificates and instruments, if any, from time to time evidencing such Collection Accounts and amounts on deposit therein, (iv) all books and records to the extent related to any of the foregoing, and (v) all proceeds of, and all amounts received or receivable under, any or all of the foregoing.

4.2. Collection of Receivables .

(a) Each Grantor shall direct all of its Account Debtors to make all payments on Receivables that are Collateral directly into a Collection Account. If a Loan Party, any Affiliate or Subsidiary, any shareholder, officer, director, employee or agent of a Loan Party or any Affiliate or Subsidiary, or any other Person acting for or in concert with a Loan Party shall receive any monies, checks, notes, drafts or other payments relating to, or as Collections of Receivables included in, the Collateral, such Loan Party and each such Person shall receive all such items in trust for the Lender and, immediately upon receipt thereof, shall remit the same (or cause the same to be remitted) in kind to a Collection Account in a manner satisfactory to Lender. Each Loan Party agrees that, if an Event of Default occurs and is continuing, all payments made to such Collection Account or otherwise received by Lender, whether in respect of the Receivables or as Proceeds of other Collateral or otherwise (except for proceeds of Collateral which are required to be delivered to the holder of a Permitted Lien which is prior in right of payment), may be applied on account of the Obligations in accordance with the terms of this Agreement. Each Loan Party agrees to pay all customary fees, costs and expenses in connection with opening and maintaining each Collection Account. All of such fees, costs and expenses if not paid by a Loan Party, may be paid by Lender or otherwise charged to Borrower and in such event all amounts paid by Lender or charged by Lender shall constitute Obligations hereunder, shall be payable to Lender by Borrower upon demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder.

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(b) Lender may, at any time and from time to time after the occurrence and during the continuance of an Event of Default, whether before or after notification to any Account Debtor and whether before or after the maturity of any of the Obligations, (i) enforce collection of any of a Grantor’s Receivables that are Collateral or other amounts owed to a Grantor by suit or otherwise that are Collateral; (ii) exercise all of such Grantor’s rights and remedies with respect to proceedings brought to collect any Receivables that are Collateral or other amounts owed to such Grantor that are Collateral; (iii) surrender, release or exchange all or any part of any Receivables that are Collateral or other amounts owed to such Grantor that are Collateral, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder; (iv) sell or assign any Receivable of a Grantor that is Collateral or other amount owed to a Grantor that is Collateral upon such terms, for such amount and at such time or times as Lender deems advisable; (v) prepare, file and sign the applicable Grantor’s name on any proof of claim in bankruptcy or other similar document against any Account Debtor or other Person obligated to such Grantor; and (vi) do all other acts and things which are necessary, in Lender's sole discretion, to fulfill Loan Parties' obligations under this Agreement and the other Loan Documents and to allow Lender to collect the Receivables that are Collateral or other amounts owed to each Grantor that are Collateral. In addition to any other provision hereof, Lender may at any time, after the occurrence and during the continuance of an Event of Default, at Borrowers' expense, notify any parties obligated on any of the Receivables that are Collateral to make payment directly to Lender of any amounts due or to become due thereunder.

4.3. Other Security .

Lender, in its sole discretion, without waiving or releasing (i) any obligation, liability or duty of any Loan Party under this Agreement or the other Loan Documents or (ii) any Event of Default, may at any time or times hereafter, but shall not be obligated to, pay, acquire or accept an assignment of any security interest, lien, encumbrance or claim asserted by any Person in, upon or against the Collateral that is prohibited under Section 8.3 , provided , that Lender may take such actions with respect to Permitted Liens only after the occurrence and during the continuance of an Event of Default. All sums paid by Lender in respect thereof and all costs, fees and expenses including, without limitation, reasonable attorney fees, all court costs and all other charges relating thereto incurred by Lender shall constitute Obligations, payable by Borrower to Lender on demand and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder.

4.4. Possessory Collateral .

Immediately upon a Loan Party’s receipt of any portion of the Collateral worth in excess of fifty thousand dollars ($50,000) evidenced by an Instrument or Document, including, without limitation, any Tangible Chattel Paper or any Investment Property consisting of certificated securities, such Loan Party shall deliver the original thereof to Lender together with an appropriate endorsement or other specific evidence of assignment thereof to Lender (in form and substance acceptable to Lender). If an endorsement or assignment of any such items shall not be made for any reason, Lender is hereby irrevocably authorized, as such Loan Party’s attorney and agent-in-fact, to endorse or assign the same on such Loan Party’s behalf.

4.5. Electronic Chattel Paper .

To the extent that a Loan Party obtains or maintains any Electronic Chattel Paper that is Collateral and worth in excess of fifty thousand dollars ($50,000), such Loan Party shall create, store and assign the record or records comprising the Electronic Chattel Paper in such a manner that (i) a single authoritative copy of the record or records exists which is unique, identifiable and except as otherwise provided in clauses (iv), (v) and (vi) below, unalterable, (ii) the authoritative copy identifies Lender as the assignee of the record or records, (iii) the authoritative copy is communicated to and maintained by the Lender or its designated custodian, (iv) copies or revisions that add or change an identified assignee of the authoritative copy can only be made with the participation of Lender, (v) each copy of the authoritative copy and any copy of a copy is readily identifiable as a copy that is not the authoritative copy and (vi) any revision of the authoritative copy is readily identifiable as an authorized or unauthorized revision.

4.6. Preservation of Collateral and Perfection of Security Interests Therein .

(a) Each Grantor shall, at Lender's request, at any time and from time to time, authenticate, execute and deliver to Lender such financing statements, documents and other agreements and instruments (and pay the cost of filing or recording the same in all public offices deemed necessary or desirable by Lender) and do such other acts and things or cause third parties to do such other acts and things as Lender may deem necessary or desirable in its sole discretion in order to establish and maintain a valid, attached and perfected security interest in the Collateral in favor of Lender (free and clear of all other liens, claims, encumbrances and rights of third parties whatsoever, whether voluntarily or involuntarily created, except Permitted Liens) to secure payment of the Obligations, and in order to facilitate the collection of the Collateral. Each Grantor irrevocably hereby makes, constitutes and appoints Lender (and all Persons designated by Lender for that purpose) as such Grantor's true and lawful attorney and agent-in-fact solely to, following the occurrence and during the continuation of an Event of Default, execute and file such financing statements, documents and other agreements and instruments and do such other acts and things as may be necessary to preserve and perfect Lender's security interest in the Collateral. Each Grantor further ratifies and confirms the prior filing by Lender of any and all financing statements which identify such Grantor as debtor, Lender as secured party and any or all Collateral as collateral.

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(b) The Lender is hereby authorized to file (at the sole expense and cost of the Borrower) UCC financing or continuation statements, intellectual property security agreements and amendments to any of the foregoing or any similar document, in any jurisdictions and with any filing offices as the Lender may reasonably determine are necessary or advisable to perfect or otherwise protect the security interests granted to the Lender herein. Such documents may describe the Collateral in the same manner as described herein or may contain an indication or description of collateral that describes such property in any other manner as the Lender may reasonably determine is necessary or advisable, including (in respect of the Borrower only) describing such property as “all assets” or words of similar effect.

SECTION 5

TERMINATION OF THIS AGREEMENT; TERMINATION OF LIENS.

Lender's obligations under this Agreement shall be in effect from the date hereof until the earlier of (i) the Maturity Date, (ii) the date that the Obligations are accelerated pursuant to Section 10.1 , and (iii) the Termination Date. Upon the Termination Date, remaining Collateral shall automatically be released from the Lien of this Agreement and all rights to the Collateral shall revert to the Grantors and Pledgor. Upon such release or any such sale, transfer or disposition of Collateral or any part thereof, Lender shall, upon the request of the Grantors and Pledgor and at the sole expense of the Borrower, assign, transfer and deliver to the Grantors and/or Pledgor proper documents and instruments (including UCC-3 termination financing statements or releases) acknowledging the termination hereof or the release of such Collateral, as the case may be.

SECTION 6

REPRESENTATIONS AND WARRANTIES.

Each Loan Party hereby represents and warrants to Lender, which representations and warranties (whether appearing in this Section 6 , elsewhere in this Agreement or in any other Loan Document) shall be true at the time of the date hereof (other than the representation in Section 6.5 that Blue Dolphin is in good standing in the State of Delaware), the date of the advance contemplated by Section 2.2 (b) (other than the representation in Section 6.5 that Blue Dolphin is in good standing in the State of Delaware), and the Closing Date, and shall be remade by each applicable Loan Party at the time each Loan is made pursuant to this Agreement, provided , that representations and warranties made as of a particular date shall be true and correct as of such date:

6.1. Financial Statements and Other Information .

The financial statements and other information delivered or to be delivered by any Loan Party to Lender at or prior to the date of this Agreement fairly present in all material respects the financial condition of each Loan Party, and there has been no material adverse change in the financial condition, the operations or any other status of any Loan Party since the date of the financial statements delivered to Lender most recently prior to the date of this Agreement. All written information now or heretofore furnished by each Loan Party to Lender is true and correct as of the date with respect to which such information was furnished.

6.2. Locations .

The office where each Loan Party keeps its books, records and accounts (or copies thereof) concerning the Collateral, each Loan Party’s principal place of business and all of each Loan Party’s other places of business, locations of Collateral and post office boxes and locations of bank accounts are as set forth in Schedule 6.2 and at other locations within the continental United States of which Lender has been advised by a Loan Party in accordance with Section 7.2.1 . The Collateral (except any part thereof which a Loan Party shall have advised Lender in writing consists of Collateral normally used in more than one state) is kept, or, in the case of vehicles, based, only at the addresses set forth on Schedule 6.2 , and at other locations within the continental United States of which Lender has been advised by a Loan Party in writing in accordance with Section 7.2.1 hereof.

6.3. Loans by Loan Parties .

No Loan Party has made any loans or advances to any Affiliate or other Person except (i) Existing Indebtedness, (ii) advances authorized hereunder to employees, officers and directors of a Loan Party for travel and other expenses arising in the ordinary course of such Loan Party’s business and (iii) Affiliate Funding Transactions.

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6.4. Liens .

Each Loan Party is the lawful owner of all Collateral now purportedly owned or hereafter purportedly acquired by such Loan Party, free from all liens, claims, security interests and encumbrances whatsoever, whether voluntarily or involuntarily created and whether or not perfected, other than Permitted Liens.

6.5. Organization, Authority and No Conflict .

The Borrower is a limited liability company, duly organized, validly existing and in good standing in the State of Delaware and its state organizational identification number is 5279048. Lazarus is a limited liability company, duly organized, validly existing and in good standing in the State of Delaware and its organizational identification number is 4108611. Blue Dolphin is a corporation, duly organized, validly existing and in good standing in the State of Delaware and its organizational identification number is 2081487. LR&M is a limited liability company, duly organized, validly existing and in good standing in the State of Delaware and its organizational identification number is 4169296. Each Loan Party is duly qualified and in good standing in all states where the nature and extent of the business transacted by it or the ownership of its assets makes such qualification necessary or, if such Loan Party is not so qualified, such Loan Party may cure any such failure without losing any of its rights, incurring any liens or material penalties, or otherwise affecting Lender's rights. Each Loan Party has the right and power and is duly authorized and empowered to enter into, execute and deliver this Agreement and the other Loan Documents and perform its obligations hereunder and thereunder. Each Loan Party’s execution, delivery and performance of this Agreement and the other Loan Documents does not conflict with the provisions of the organizational documents of such Loan Party, any statute, regulation, ordinance or rule of law, or any agreement, contract or other document which may now or hereafter be binding on such Loan Party, except for conflicts with agreements, contracts or other documents which would not have a Material Adverse Effect, and such Loan Party’s execution, delivery and performance of this Agreement and the other Loan Documents shall not result in the imposition of any lien or other encumbrance upon any of such Loan Party’s property (other than Permitted Liens) under any existing indenture, mortgage, deed of trust, loan or credit agreement or other agreement or instrument by which such Loan Party or any of its property may be bound or affected. If a Loan Party is a partnership or limited liability company, such Loan Party has not expressly elected to have its Equity Interests treated as “Securities” under and as defined in Article 8 of the Uniform Commercial Code.

6.6. Litigation .

(a) Except as disclosed to Lender on Schedule 6.6 hereto, there are no actions or proceedings which are pending or, to the best of any Loan Party’s knowledge, threatened against a Loan Party which is, in the determination of Lender, reasonably likely to have a Material Adverse Effect, and each Loan Party shall, promptly upon becoming aware of any such pending or threatened action or proceeding, give written notice thereof to Lender.

(b) Borrower has no Commercial Tort Claims pending other than those set forth on Exhibit C hereto as such exhibit may be amended from time to time.

6.7. Compliance with Laws and Maintenance of Permits .

Each Loan Party has obtained all governmental consents, franchises, certificates, licenses, authorizations, approvals and permits, the lack of which would have a Material Adverse Effect. Each Loan Party is in compliance in all material respects with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, Environmental Laws and statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, ERISA or employee health and safety) the failure to comply with which would have a Material Adverse Effect.

6.8. Affiliate Transactions .

Except as set forth on Schedule 6.8 hereto or as permitted pursuant to Section 8.11 hereof, no Loan Party is conducting, permitting or suffering to be conducted, transactions with any Affiliate other than Affiliate Funding Transactions and transactions with Affiliates for the purchase or sale of Inventory or services in the ordinary course of business pursuant to terms that are no less favorable to such Loan Party than the terms upon which such transactions would have been made had they been made to or with a Person that is not an Affiliate.

6.9. Names and Trade Names .

Each Loan Party’s name has always been as set forth on the first page of this Agreement and no Loan Party uses any trade names, assumed names, fictitious names or division names in the operation of its business, except as set forth on Schedule 6.9 hereto.

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6.10. Equipment .

Except for Permitted Liens, Borrower has good and indefeasible and merchantable title to and ownership of all of its Equipment. No Equipment is a Fixture to real estate unless such real estate is owned by a Loan Party and is subject to a mortgage in favor of Lender, or if such real estate is leased, is subject to a landlord's agreement in favor of Lender on terms acceptable to Lender, or an accession to other personal property unless such personal property is subject to a first priority lien in favor of Lender.

6.11. Enforceability .

This Agreement and the other Loan Documents to which each Loan Party is a party are the legal, valid and binding obligations of such Loan Party and are enforceable against such Loan Party in accordance with their respective terms.

6.12. Solvency .

Borrower is and, upon the occurrence of the Settlement Payment Date (as defined in the GEL Tex Settlement Agreement), each other Loan Party is, after giving effect to the transactions contemplated hereby solvent, able to pay its debts as they become due, has capital sufficient to carry on its business, now owns property having a value both at fair valuation and at present fair saleable value greater than the amount required to pay its debts, and will not be rendered insolvent by the execution and delivery of this Agreement or any of the other Loan Documents or by completion of the transactions contemplated hereunder or thereunder.

6.13. Indebtedness .

As of the date hereof, except as set forth on Schedule 1.01 hereto, no Loan Party is obligated (directly or indirectly), for any loans or other indebtedness for borrowed money other than the Loans.

6.14. Margin Security and Use of Proceeds .

Except as set forth on Schedule 6.14 hereto, no Loan Party owns any margin securities. None of the proceeds of the Loans hereunder shall be used for the purpose of purchasing or carrying any margin securities or for the purpose of reducing or retiring any indebtedness which was originally incurred to purchase any margin securities or for any other purpose not permitted by Regulation U of the Board of Governors of the Federal Reserve System as in effect from time to time.

6.15. Parent, Subsidiaries and Affiliates .

Except as set forth on Schedule 6.15 hereto, no Loan Party has any Parents, Subsidiaries or other Affiliates or divisions, nor is any Loan Party engaged in any joint venture or partnership with any other Person.

6.16. Contracts; No Defaults .

Schedule 6.16 includes all contracts, leases, commitments and other agreements to which the Borrower is a party. Except as set forth on Schedule 6.16 , (i) (a) the Borrower is not in default under any material contract, lease or commitment to which it is a party or by which it is bound, and (b) no other Loan Party is in default under any material contract, lease or commitment to which it is a party or by which it is bound other than a default which would not have a Material Adverse Effect; and (ii) no Loan Party knows of any dispute regarding any contract, lease or commitment which would have a Material Adverse Effect.

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6.17. Employee Matters .

There are no controversies pending or threatened between a Loan Party and any of its employees, agents or independent contractors other than employee grievances arising in the ordinary course of business which would not, in the aggregate, have a Material Adverse Effect, and each Loan Party is in compliance with all federal and state laws respecting employment and employment terms, conditions and practices except for such non-compliance which would not have a Material Adverse Effect.

6.18. Intellectual Property .

(a) Each Loan Party possesses adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and trade names to continue to conduct its business as heretofore conducted by it except to the extent that the failure to possess such items would not have a Material Adverse Effect.

(b) The Borrower owns no registered intellectual property.

6.19. Environmental Matters .

No Loan Party has generated, used, stored, treated, transported, manufactured, handled, produced or disposed of any Hazardous Materials, on or off its premises (whether or not owned by it) in any manner which at any time violates in any material respect any Environmental Law or any license, permit, certificate, approval or similar authorization thereunder and the operations of each Loan Party comply in all material respects with all Environmental Laws and all licenses, permits, certificates, approvals and similar authorizations thereunder. There has been no investigation, proceeding, complaint, order, directive, claim, citation or notice by any Governmental Authority or any other Person, nor is any pending or to the best of each Loan Party’s knowledge threatened with respect to any non-compliance with or violation of the requirements of any Environmental Law by a Loan Party or the release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter, which affects the Loan Party or its business, operations or assets or any properties at which a Loan Party has transported, stored or disposed of any Hazardous Materials. No Loan Party has any material liability (contingent or otherwise) in connection with a release, spill or discharge, threatened or actual, of any Hazardous Materials or the generation, use, storage, treatment, transportation, manufacture, handling, production or disposal of any Hazardous Materials.

6.20. ERISA Matters .

None of the Loan Parties nor any of their respective Subsidiaries sponsors, maintains, contributes to, or has any obligation to contribute to, and within the prior six (6) years has not sponsored, maintained, contributed to or had any obligation to contribute to, any Employee Benefit Plan. None of the Loan Parties nor any of their respective Subsidiaries has any liability (whether actual, contingent or otherwise) with respect to a Pension Plan or a Multiemployer Plan. No ERISA Affiliate of any Loan Party sponsors, maintains, contributes to, or has any liability (whether actual, contingent or otherwise) with respect to a Pension Plan, or has any obligation to contribute to or any liability (whether actual, contingent or otherwise) with respect to any Multiemployer Plan.

6.21. Investment Company Act .

No Loan Party is an “investment company” or a company “controlled” by an “investment company” or a “subsidiary” of an “investment company” within the meaning of the Investment Company Act of 1940.

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6.22. AML Laws , Anti-Corruption Laws, Anti-Terrorism Laws and Sanctions .

(a) Each of the Loan Parties has implemented and maintains in effect policies and procedures designed to ensure compliance by such Loan Party, its Subsidiaries and their respective directors, officers, employees and agents with Anti-Corruption Laws, Anti-Terrorism Laws, applicable AML Laws and applicable Sanctions. N one of (i) the Loan Parties or any of their Subsidiaries or any of their respective directors or officers, or, to the knowledge of the Loan Parties, any of their respective employees or Affiliates, or (ii) to the knowledge of the Loan Parties, any agent of a Loan Party (A) is a Sanctioned Person, or (B) is in violation of AML Laws, Anti-Corruption Laws, Anti-Terrorism Laws or Sanctions.

(b) The use of the proceeds of the Loan by the Borrower will not violate the Trading with the Enemy Act, or any of the foreign assets control regulations of the United States Treasury Department (Title 31, Subtitle B, Chapter V of the U.S. Code of Federal Regulations, as amended) or any enabling legislation or executive order relating thereto.

(c) No Borrowing, use of proceeds or other transaction contemplated by this Agreement will cause a violation of AML Laws, Anti-Corruption Laws, Anti-Terrorism Laws or applicable Sanctions by any Person participating in the transactions contemplated by this Agreement, whether as lender, borrower, guarantor, agent or otherwise. Each of the Loan Parties represents that, except as disclosed in writing to the Lender prior to the date of this Agreement, none of the Loan Parties nor any of their Subsidiaries, nor, to the knowledge of the Loan Parties, any of their Affiliates, or and of their members has engaged in or intends to engage in any dealings or transactions with, or for the benefit of, any Sanctioned Person or with or in any Sanctioned Country.

6.23. Taxes .

The Borrower and each other Loan Party has timely filed all federal and state income tax returns and other material tax returns and reports required by law to have been filed by it, and the Borrower and each other Loan Party and has paid all material Taxes and governmental charges due and owing, whether or not shown on any return or report, except for any such Taxes or charges which are being diligently contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP shall have been set aside on its books. Schedule 6.23 hereto sets forth the entity classification for United States federal income tax purposes of each Loan Party as of the date hereof.

6.24. Collection Accounts .

Schedule 1.03 sets forth the Collection Accounts of each Grantor.

SECTION 7

AFFIRMATIVE COVENANTS.

Until the Termination Date, unless Borrower obtains Lender’s prior written consent waiving or modifying any of Loan Parties’ covenants hereunder in any specific instance, each Loan Party covenants and agrees as follows:

7.1. Maintenance of Records .

Each Loan Party shall at all times keep accurate and complete books, records and accounts with respect to all of such Loan Party’s business activities, in accordance with sound accounting practices and GAAP consistently applied, and shall keep such books, records and accounts, and any copies thereof, only at the addresses indicated for such purpose on Schedule 6.2 .

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7.2. Notices .

Each Loan Party shall:

7.2.1. Locations . Promptly (but in no event less than ten (10) days prior to the occurrence thereof) notify Lender in writing of the proposed opening of any new place of business or new location of Collateral, the closing of any existing place of business or location of Collateral, any change of in the location of such Loan Party’s books, records and accounts (or copies thereof), the opening or closing of any post office box, the opening or closing of any bank account or, if any of the Collateral consists of Goods of a type normally used in more than one state, the use of any such Goods in any state other than a state in which such Loan Party has previously advised Lender that such Goods will be used.

7.2.1. Litigation and Proceedings . Promptly upon becoming aware thereof, notify Lender of any actions or proceedings which are pending or threatened against a Loan Party in which the claim exceeds one-hundred thousand Dollars ($100,000) or which might have a Material Adverse Effect and of any Commercial Tort Claims of Borrower which may arise, which notice shall constitute such Loan Party’s authorization to amend Exhibit C to add such Commercial Tort Claim.

7.2.2. Names and Trade Names . Provide Lender with at least ten (10) days’ advance written notice of the change of its name or the use of any trade name, assumed name, fictitious name or division name not previously disclosed to Lender in writing.

7.2.3. [Reserved].

7.2.4. Environmental Matters . Immediately notify Lender upon becoming aware of any investigation, proceeding, complaint, order, directive, claim, citation or notice with respect to any non-compliance with or violation of the requirements of any Environmental Law by such Loan Party or the generation, use, storage, treatment, transportation, manufacture handling, production or disposal of any Hazardous Materials or any other environmental, health or safety matter which affects such Loan Party or its business operations or assets or any properties at which such Loan Party has transported, stored or disposed of any Hazardous Materials unless the foregoing could not reasonably be expected to have a Material Adverse Effect.

7.2.5. Default; Material Adverse Change . Promptly advise Lender of the occurrence of any event having or causing a Material Adverse Effect or the occurrence of any Default or Event of Default hereunder.

7.2.6. New Subsidiaries of the Borrower, Lazarus Energy or LR&M . Promptly (but in no event less than ten (10) days prior to the occurrence thereof) notify Lender of the proposed formation of any new Subsidiary of the Borrower, Lazarus Energy or LR&M. The Loan Party that is a Parent to the new Subsidiary of the Borrower, Lazarus Energy, or LR&M shall cause such Subsidiary to become a Guarantor by executing a Joinder Agreement substantially in the form of Exhibit E .

All of the notices provided for in this section shall be provided by each Loan Party to Lender in writing in accordance with the provisions of Section 12.4 below.

7.3. Compliance with Laws and Maintenance of Permits .

Each Loan Party shall maintain all governmental consents, franchises, certificates, licenses, authorizations, approvals and permits, the lack of which would have a Material Adverse Effect and each Loan Party shall remain in compliance with all applicable federal, state, local and foreign statutes, orders, regulations, rules and ordinances (including, without limitation, Environmental Laws and statutes, orders, regulations, rules and ordinances relating to taxes, employer and employee contributions and similar items, securities, ERISA or employee health and safety) the failure with which to comply would have a Material Adverse Effect. Following any determination by Lender that there is non-compliance, or any condition which requires any action by or on behalf of such Loan Party in order to avoid non-compliance, with any Environmental Law, at Borrower’s expense cause an independent environmental engineer acceptable to Lender to conduct such tests of the relevant site(s) as are appropriate and prepare and deliver a report setting forth the results of such tests, a proposed plan for remediation and an estimate of the costs thereof.

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7.4. Inspection and Audits .

(a) Each Loan Party shall permit Lender, or any Persons designated by it, to call at such Loan Party’s places of business at any reasonable times, and, without hindrance or delay, to inspect the Collateral and to inspect, audit, check and make extracts from such Loan Party’s books, records, journals, orders, receipts and any correspondence and other data relating to such Loan Party’s business, the Collateral or any transactions between the parties hereto, and shall have the right to make such verification concerning such Loan Party’s business as Lender may consider reasonable under the circumstances. Each Loan Party shall furnish to Lender such information relevant to Lender's rights under this Agreement and the other Loan Documents as Lender shall at any time and from time to time request. Lender, through its officers, employees or agents shall have the right, at any time and from time to time, to verify the validity, amount or any other matter relating to any of such Loan Party’s Accounts and other Receivables that are Collateral , by mail, telephone, telecopy, electronic mail, or otherwise.

(b) Prior to Closing Date and upon reasonable prior notice by Lender, the Loan Parties shall permit any representative designated by the Lender to perform, to the reasonable satisfaction of Lender, engineering, environmental, commercial, operations and legal due diligence of the Refinery Assets, a review of the required permits and authorizations, and a review the financial model of Lazarus of the Refinery Assets.

(c) Each Loan Party agrees to provide Lender and its agents with reasonable access during normal business hours to any officers, employees or directors of such Loan Party, its Parent and its Affiliates to discuss the affairs, finances and business of such Loan Party, and to permit discussions of the financial condition of such Loan Party with such Loan Party’s independent public accountants. Any such discussions shall be without liability to Lender or to such Loan Party’s independent public accountants.

7.5. Insurance .

Each Loan Party shall:

7.5.1. Casualty Insurance; Business Interruption Insurance. Keep the Collateral properly housed and insured for the full insurable value thereof against loss or damage by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles) and such other risks as are customarily insured against by Persons engaged in businesses similar to that of such Loan Party, with such companies, in such amounts, with such deductibles, and under policies in such form, as shall be satisfactory to Lender. Original (or certified) copies of such policies of insurance have been or shall be, within ninety (90) days of the date hereof, delivered to Lender, together with evidence of payment of all premiums therefor, and shall contain an endorsement, in form and substance acceptable to Lender, showing loss under such insurance policies payable to Lender. Such endorsement, or an independent instrument furnished to Lender, shall provide that the insurance company shall give Lender at least thirty (30) days written notice before any such policy of insurance is altered or canceled and that no act, whether willful or negligent, or default of such Loan Party or any other Person shall affect the right of Lender to recover under such policy of insurance in case of loss or damage. In addition, each Loan Party shall cause to be executed and delivered to Lender an assignment of proceeds of its business interruption insurance policies. Each Loan Party hereby directs all insurers under all policies of insurance to pay all proceeds payable thereunder directly to Lender. Each Loan Party irrevocably makes, constitutes and appoints Lender (and all officers, employees or agents designated by Lender) as such Loan Party’s true and lawful attorney (and agent-in-fact) for the purpose of making, settling and adjusting claims under such policies of insurance, endorsing the name of such Loan Party on any check, draft, instrument or other item of payment for the proceeds of such policies of insurance and making all determinations and decisions with respect to such policies of insurance, provided however, that if no Event of Default shall have occurred and is continuing, such Loan Party may make, settle and adjust claims involving less than $100,000 in the aggregate without Lender's consent.

7.5.2. Liability Insurance. Maintain, at its expense, such public liability and third party property damage insurance as is customary for Persons engaged in businesses similar to that of such Loan Party with such companies and in such amounts, with such deductibles and under policies in such form as shall be satisfactory to Lender and original (or certified) copies of such policies have been or shall be, within ninety (90) days after the date hereof, delivered to Lender, together with evidence of payment of all premiums therefor; each such policy shall contain an endorsement showing Lender as additional insured thereunder and providing that the insurance company shall give Lender at least thirty (30) days written notice before any such policy shall be altered or canceled.

7.6. Collateral .

Each Loan Party shall keep the Collateral in good condition, repair and order and shall make all necessary repairs to the Equipment that is Collateral and replacements thereof so that the operating efficiency and the value thereof shall at all times be preserved and maintained in all material respects. Each Loan Party shall permit Lender to examine any of the Collateral at any time and wherever the Collateral may be located and, such Loan Party shall, immediately upon request therefor by Lender, deliver to Lender any and all evidence of ownership of any of the Equipment that is Collateral including, without limitation, certificates of title and applications of title. Each Loan Party shall, at the request of Lender, indicate on its records concerning the Collateral a notation, in form satisfactory to Lender, of the security interest of Lender hereunder.

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7.7. Use of Proceeds .

All monies and other property obtained by Borrower from Lender pursuant to this Agreement shall be used solely for working capital purposes and for other business purposes of Borrower.

7.8. Taxes .

Each Loan Party shall file all required tax returns and pay all of its Taxes when due, subject to any extensions granted by the applicable taxing authority, including, without limitation, taxes imposed by federal, state or municipal agencies, and shall cause any liens for Taxes to be promptly released; provided , that each Loan Party shall have the right to contest the payment of such Taxes in good faith by appropriate proceedings so long as (i) the amount so contested is shown on such Loan Party’s financial statements, (ii) adequate reserves for such Taxes have been set aside in accordance with GAAP, and (iii) the contesting of any such payment does not give rise to a lien for Taxes. If such Loan Party fails to pay any such Taxes and in the absence of any such contest by such Loan Party, Lender may (but shall be under no obligation to) advance and pay any sums required to pay any such Taxes and/or to secure the release of any lien therefor, and any sums so advanced by Lender shall constitute Loans hereunder, shall be payable by Borrower to Lender on demand, and, until paid, shall bear interest at the highest rate then applicable to Loans hereunder.

7.9. Intellectual Property .

Each Loan Party shall maintain adequate licenses, patents, patent applications, copyrights, service marks, trademarks, trademark applications, tradestyles and trade names to continue its business as heretofore conducted by it or as hereafter conducted by it unless the failure to maintain any of the foregoing could not reasonably be expected to have a Material Adverse Effect.

7.10. Deposit Accounts .

Each Grantor shall notify Lender in writing thirty (30) days prior to opening any new Deposit Account or Securities Account and shall enter into a control agreement satisfactory to Lender for each such Deposit Account or Securities Account of any Grantor on or before the opening of such Deposit Account or Securities Account; provided , however, that no control agreement shall be required in respect of (i) any Deposit Account or Securities Account of LR&M if no obligor on LR&M Receivables will be directed to make payment of Collections to such account or (ii) the Green Bank Account.

7.11. AML Laws, Anti-Corruption Laws, Anti-Terrorism Laws and Sanctions .

(a) The Loan Parties shall not request any Borrowing, and the Loan Parties shall not use, and shall cause their Subsidiaries and its or their respective directors, officers, employees, Affiliates and agents not to use, directly or indirectly, the proceeds of any Borrowing, or lend, contribute or otherwise make available such proceeds to any Subsidiary, other Affiliate, joint venture partner or other Person, (A) in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any Person in violation of any Anti-Corruption Laws, AML Laws or Anti-Terrorism Laws, (B) for the purpose of funding, financing or facilitating any activities, business or transaction of or with any Sanctioned Person, or in any Sanctioned Country, or involving any goods originating in or with a Sanctioned Person or Sanctioned Country, or (C) in any manner that would result in the violation of any Sanctions by any Person (including any Person participating in the transactions contemplated hereunder, whether as underwriter, advisor, lender, investor or otherwise).

(b) The Loan Parties shall not fund all or part of any repayment under the Loans out of proceeds derived from transactions which would be prohibited by AML Laws, Anti-Terrorism Laws, Anti-Corruption Laws or applicable Sanctions or would otherwise cause any Person to be in breach of any of the foregoing.

(c) The Loan Parties shall ensure, and cause each other Loan Party to ensure, that no Person who owns a controlling interest in or otherwise controls a Loan Party is or shall be a Sanctioned Person, and comply, and cause each other Loan Party to comply, with all applicable Anti-Corruption Laws, AML Laws and Anti-Terrorism Laws.

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7.12. Financial Statements and Reports .

(a) Monthly Reports . The Grantors shall deliver to Lender, in addition to any other reports, as soon as practicable and in any event: (i) within ten (10) days after the end of each month, (A) a detailed trial balance of the Accounts of the Grantors aged per invoice date, in form and substance reasonably satisfactory to Lender including, without limitation, the names and addresses of all Account Debtors of the Grantors, and (B) a summary and detail of accounts payable (such Accounts and accounts payable divided into such time intervals as Lender may require in its sole discretion), including a listing of any held checks; and (ii) within ten (10) days after the end of each month, the general ledger inventory account balance and a perpetual inventory report, for Borrower by each category of Inventory, together with a description of the monthly change in each category of Inventory.

(b) Financial Statements . The Borrower and each Guarantor shall deliver to Lender the following financial information, all of which shall be prepared in accordance with generally accepted accounting principles consistently applied, and shall be accompanied by a compliance certificate in the form of Exhibit A hereto: (i) no later than twenty (20) days after each calendar month, copies of internally prepared financial statements, including, without limitation, balance sheets and statements of income, retained earnings and cash flow of the Borrower and each Guarantor, on a consolidated and consolidating basis, certified by the Chief Financial Officer of each of the Borrower and each Guarantor; and (iii) no later than ninety (90) days after the end of each of the Fiscal Years of the Borrower and each Guarantor, audited annual financial statements with an unqualified opinion by independent certified public accountants selected by the Borrower and each Guarantor and reasonably satisfactory to Lender, which financial statements shall be accompanied by (A) a letter from such accountants acknowledging that they are aware that a primary intent of the Borrower and each Guarantor in obtaining such financial statements is to influence Lender and that Lender is relying upon such financial statements in connection with the exercise of its rights hereunder, provided , that the Borrower and each Guarantor shall only be required to use their reasonable efforts exercised in good faith to obtain such letter; and (B) copies of any management letters sent to the Borrower and each Guarantor by such accountants.

(c) Annual Projections of the Borrower and each Guarantor . As soon as practicable and in any event prior to the beginning of each Fiscal Year, the Borrower and each Guarantor shall deliver to Lender projected balance sheets, statements of income and cash flow for the Borrower and each Guarantor, on a consolidated and consolidating basis for each of the twelve (12) months during such Fiscal Year, which shall include the assumptions used therein, together with appropriate supporting details as reasonably requested by Lender.

(d) Public Reporting of Blue Dolphin . Promptly upon the filing thereof, Borrower shall deliver to Lender copies of all registration statements and annual, quarterly, monthly or other regular reports which Blue Dolphin or any of its Subsidiaries files with the Securities and Exchange Commission, as well as promptly providing to Lender copies of any reports and proxy statements delivered to its shareholders.

(e) Other Information . Promptly following request therefor by Lender, such other business or financial data, reports, appraisals and projections as Lender may reasonably request.

7.13. Commitment Period Reports .

During a Commitment Period, the Loan Parties shall provide Lender with (i) weekly updates regarding the status of negotiations regarding the applicable commitment and documentation of the refinancing contemplated thereby, (ii) subject to Lender’s execution of a nondisclosure agreement, if applicable, copies of all material communications regarding the commitment letter and the proposed loan set forth therein, and (iii) copies of any final term sheets and other related documents regarding such commitment or the financing contemplated thereby within five (5) business days of any Loan Party’s execution of such documents.

7.14. GEL Tex Settlement Agreement.

Lazarus Energy shall (a) pay all payments required under the GEL Tex Settlement Agreement when due and (b) promptly provide Lender with evidence of each such payment in a form satisfactory to Lender.

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7.15. Veritex Lien Release .

By June 1, 2019, all liens granted by LR&M to Veritex on the Collateral shall be released and LR&M shall provide evidence thereof satisfactory to the Lender (the date of such occurrence, the “ Veritex Release Date ”); provided that, if such liens are not released by June 1, 2019, LR&M may elect, in its sole discretion with notice to the Lender, to instead grant a perfected, first lien security interest in cash collateral in an amount of no less than $60,000 (which shall be “Collateral”) on such date; provided , further, that upon providing such perfected first lien security interest on such collateral, the definition for the term “LR&M Receivables” shall be deleted in its entirety and replaced with the following: ““LR&M Receivables” means nothing.”

7.16. Green Bank Account .

(a) On or before May 17, 2019, Borrower shall transfer the entire balance of funds in or credited to the Borrower’s account at Green Bank with the account number 5501265168 as further described in Schedule 1.03 (the “ Green Bank Account ”) to the Borrower’s account at Cadence Bank, N.A., a national banking association, with the account number 5500212658 as further described in Schedule 1.03 (the “ Cadence Bank Account ”) and provide Lender with evidence thereof (satisfactory to Lender) on the date of such transfer, (b) after the transfer described in the preceding clause (a), if, at any time, funds are deposited in or credited to the Green Bank Account, Borrower shall promptly transfer such funds to the Cadence Bank Account and provide Lender with evidence thereof (satisfactory to Lender) on the date of such transfer, (c) on or before May 17, 2019, Borrower shall close the Green Bank Account and provide Lender with evidence of such closure (satisfactory to Lender) and (d) on each Business Day until Borrower has closed the Green Bank Account, Borrower shall provide an electronic screen capture image of the online balance statement for the Green Bank Account by email to the following address: James.Chiu@pilottravelcenters.com .

SECTION 8

NEGATIVE COVENANTS.

Until the Termination Date, unless Borrower obtains Lender’s prior written consent waiving or modifying any of Loan Party’s covenants hereunder in any specific instance (which consent may be provided by email), each Loan Party (other than Blue Dolphin) (each, a “ Covenant Party ”) agrees as follows:

8.1. [Reserved.]

8.2. Indebtedness .

No Covenant Party shall create, incur, assume or become obligated (directly or indirectly), for any Debt other than the Loans, except that Borrower and the other Covenant Parties may (i) maintain their present indebtedness listed on Schedule 1.01 hereto; (ii) incur unsecured indebtedness to trade creditors in the ordinary course of business; (iii) incur indebtedness under Affiliate Funding Transactions; (iv) incur purchase money indebtedness or capitalized lease obligations in the ordinary course of business in an aggregate principal amount not to exceed two million Dollars ($2,000,000); and (v) incur indebtedness under the Loan Documents.

8.3. Liens .

No Covenant Party shall grant or permit to exist (voluntarily or involuntarily) any lien, claim, security interest or other encumbrance whatsoever on any of its assets (other than margin stock) other than Permitted Liens, and no Loan Party shall grant or permit to exist (voluntarily or involuntarily) any lien, claim, security interest or other encumbrance whatsoever on any Collateral other than Permitted Liens set forth in clauses (a) through (f) of the definition thereof and, until the Veritex Release Date, liens of Veritex on the LR&M Collateral granted by LR&M.

8.4. Mergers, Sales, Acquisitions, Subsidiaries and Other Transactions Outside the Ordinary Course of Business .

No Covenant Party shall (i) enter into any merger or consolidation; (ii) change the state of such Covenant Party’s organization or enter into any transaction which has the effect of changing such Covenant Party’s state of organization; (iii) sell, lease or otherwise dispose of any of its assets other than in the ordinary course of business or as permitted under Section 8.15 hereto; (iv) purchase the stock, other Equity Interests or all or a material portion of the assets of any Person or division of such Person; or (v) enter into any other transaction outside the ordinary course of such Covenant Party’s business, including, without limitation, any purchase, redemption or retirement of any shares of any class of its stock or any other Equity Interest, and any issuance of any shares of, or warrants or other rights to receive or purchase any shares of, any class of its stock or any other Equity Interest. No Covenant Party shall enter into any joint ventures or partnerships with any other Person.

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8.5. Restricted Payments .

No Covenant Party shall declare or pay, directly or indirectly, any Restricted Payment, or incur any obligation (contingent or otherwise) to do so, except that, so long as no Event of Default shall have occurred and be continuing at the time of payment thereof, Permitted Tax Distributions may be declared or paid.

8.6. Investments; Loans .

No Covenant Party shall purchase or otherwise acquire, or contract to purchase or otherwise acquire, the obligations or stock of any Person, other than direct obligations of the United States, obligations insured by the Federal Deposit Insurance Corporation and obligations unconditionally guaranteed by the United States; nor shall Covenant Party lend or otherwise advance funds to any Person except for advances made to employees, officers and directors for travel and other expenses arising in the ordinary course of business and Affiliate Funding Transactions.

8.7. Prepayment of Subordinated Debt .

The Covenant Parties will not, and will not permit any of their Subsidiaries to, purchase, redeem, retire, or otherwise acquire for value, or set apart any money for a sinking, defeasance or other analogous fund for the purchase, redemption, retirement, or other acquisition of, or make any voluntary payment or prepayment of the principal of or interest on, or any other amount owning in respect of, any Debt that is subordinate to the Obligations, except for (a) regularly scheduled payments, prepayments, or redemptions of principal and interest in respect thereof required pursuant to the instruments evidencing such Debt, (b) extensions, renewals, and refinancings thereof permitted under Section 8.2 above, and (c) dispositions permitted under Section 8.15(a) .

8.8. Sale Leasebacks .

The Covenant Parties will not, directly or indirectly, enter into any arrangement providing for the sale or transfer of property, real or personal, used or useful in the business of any of the Covenant Parties, whether now owned or hereafter acquired, and thereafter rent or lease such property or other property that any of them intend to use for substantially the same purpose or purposes as the property sold or transferred.

8.9. Fundamental Changes, Accounting Changes, Line of Business .

No Covenant Party shall (i) amend its organizational documents or change its Fiscal Year or make any change in accounting treatment or reporting except as required by GAAP unless (w) such actions would not have a Material Adverse Effect; (x) such actions would not affect the obligations of such Covenant Party to Lender; (y) such actions would not adversely affect the interpretation of any of the terms of this Agreement or the other Loan Documents and (z) Lender has received ten (10) days prior written notice of such amendment or change or (ii) enter into a new line of business materially different from such Covenant Party’s current business. No Covenant Party shall change its entity classification for United States federal income tax purposes from that set forth on Schedule 6.23 without prior written notice to, and consent of, Lender.

8.10. Equipment .

Borrower shall not (i) permit any Equipment that is Collateral to become a Fixture to real property unless such real property is owned by Borrower and is subject to a mortgage in favor of Lender, or if such real estate is leased, is subject to a landlord's agreement in favor of Lender on terms acceptable to Lender, or (ii) permit any Equipment that is Collateral to become an accession to any other personal property unless such personal property is subject to a first priority lien in favor of Lender.

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8.11. Affiliate Transactions .

Except as set forth on Schedule 6.8 hereto or as permitted under Sections 6.3 or 8.5 hereof, no Covenant Party shall conduct, permit or suffer to be conducted, transactions with Affiliates other than Affiliate Funding Transactions, transactions for the purchase or sale of Inventory or services in the ordinary course of business pursuant to terms that are no less favorable to such Covenant Party than the terms upon which such transactions would have been made had they been made to or with a Person that is not an Affiliate or transfers of items to the Borrower for no consideration.

8.12. Settling of Accounts .

No Grantor shall settle or adjust any Account that is Collateral without the consent of Lender.

8.13. Management Fees; Compensation .

Borrower shall not pay any management or consulting fees to any Persons, or pay annual aggregate compensation, whether as salary, bonus or otherwise, to all directors or officers of such Borrower in excess of $70,000. The aggregate annual compensation amount(s) shall be adjusted each year for the net addition or loss of directors or officers.

8.14. Restrictive Agreements .

Except as set forth on Schedule 8.14 , no Covenant Party shall enter into any agreement prohibiting or otherwise restricting the creation or assumption of any lien in favor of the Lender upon the properties, revenues or assets of such Covenant Party, whether now owned or hereafter acquired, except restrictions existing by reason of:

(a) restrictions imposed by applicable law;

(b) any restrictions imposed by any agreement relating to secured Debt permitted by this Agreement to the extent that such restrictions apply only to the property or assets securing such Debt;

(c) customary provisions contained in leases or licenses of intellectual property and other similar agreements entered into in the ordinary course of business;

(d) customary provisions restricting subletting or assignment of any lease governing a leasehold interest and not for the purpose of avoiding the restrictions imposed by this Section 8.14 ;

(e) customary provisions restricting assignment of any agreement entered into in the ordinary course of business and not for the purpose of avoiding the restrictions imposed by this Section 8.14 ;

(f) customary restrictions and conditions contained in any agreement relating to the sale of any asset permitted under Section 8.15 hereto pending the consummation of such sale;

(g) contractual encumbrances or restrictions contained in any agreement in respect of permitted unsecured Debt so long as such encumbrances or restrictions permit the liens granted to secure the Obligations;

(h) customary restrictions and conditions contained in the documents relating to any lien, so long as: (i) such lien is permitted hereunder and such restrictions or conditions relate only to the specific asset subject to such lien; and (ii) such restrictions and conditions are not created for the purpose of avoiding the restrictions imposed by this Section 8.14 ;

The foregoing prohibitions shall not apply to restrictions contained in any Loan Document or Commodity Transaction Document.

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8.15. Dispositions .

No Covenant Party shall dispose of any of such Covenant Party’s assets (other than margin stock), including (i) Equity Interests and (ii) Receivables that are Collateral, to any Person in one transaction or a series of transactions, unless such disposition is:

(a) sales of crude oil by Borrower to Lazarus Energy at a price no less than the price paid by Borrower for such crude oil and not to exceed the price paid by the Borrower plus $0.50 per barrel;

(b) of inventory or obsolete, damaged, worn out, or surplus assets disposed of in the ordinary course of business;

(a) in respect of investments permitted under Section 8.6 hereto; Permitted Liens permitted pursuant to Section 8.3 (to the extent that the granting of any such lien would constitute a disposition) ; or Restricted Payments permitted under Section 8.5 ;

(b) for cash or cash equivalents and for fair market value, in an aggregate amount not to exceed one hundred thousand Dollars ($100,000) during the term of this Agreement; and

(c) leases, granting of easements, or subleases of real or personal property in the ordinary course of business that could not reasonably be expected, either individually or in the aggregate, to materially and adversely impact the operation of the Refinery Assets taken as a whole.

8.16. ERISA .

No Loan Party shall, nor shall any Loan Party permit any of its Subsidiaries to, sponsor, maintain, contribute to, or incur any liability (whether actual, contingent or otherwise) with respect to any Employee Benefit Plan, including a Pension Plan or a Multiemployer Plan. No Loan Party shall permit any ERISA Affiliate to sponsor, maintain, contribute to, or have any liability (whether actual, contingent or otherwise) with respect to a Pension Plan, or to have an obligation to contribute to or have any liability (whether actual, contingent or otherwise) with respect to a Multiemployer Plan.

SECTION 9

DEFAULT.

The occurrence of any one or more of the following events shall constitute an “ Event of Default ” by Borrower hereunder:

9.1. Payment .

The failure of any Loan Party to (i) pay any principal of or interest on the Loans when due in accordance with the terms hereof or (ii) pay any other amount payable hereunder or under any other Loan Document if such failure is not remedied within (x) during a Commitment Period, ten (10) Business Days and (y) otherwise, five (5) Business Days.

9.2. Breach of this Agreement and the other Loan Documents .

The failure of any Loan Party to perform, keep or observe any of the covenants, conditions, promises, agreements or obligations of such Loan Party under this Agreement or any of the other Loan Documents (a) set forth in Section 7.2 , 7.5 7.10 , 7.12 , 7.13 or 7.14 of this Agreement or in Section 8 of this Agreement or (b) otherwise, if such failure is not remedied on or before (i) during a Commitment Period, fifteen (15) Business Days and (ii) otherwise, five (5) Business Days, in each case, after notice of such failure is given to Borrower; provided that any such failure by a Loan Party under subsections 7.2.1 and 7.2.3 of this Agreement shall not constitute an Event of Default hereunder until the fifteenth (15th) day following the occurrence thereof.

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9.3. Breaches of Other Obligations .

The failure of any Loan Party to perform, keep or observe (after any applicable notice and cure period) any of the covenants, conditions, promises, agreements or obligations of such Loan Party (other than a covenant not to incur liens on margin stock) under (a) any agreement with any Person other than the Loan Documents or the Commodity Transaction Documents if such failure could reasonably be expected to have a Material Adverse Effect and such failure is not remedied within (i) during a Commitment Period, fifteen (15) Business Days and (ii) otherwise, five (5) Business Days, in each case, after notice of such failure is given to Borrower, or (b) any Commodity Transaction Document and such failure is not remedied within five (5) Business Days after notice of such failure is given to Borrower.

9.4. Breach of Representations and Warranties .

The making or furnishing by any Loan Party to Lender of any representation, warranty, certificate, schedule, report or other communication within or in connection with this Agreement or the other Loan Documents or in connection with any other agreement between such Loan Party and Lender, which is untrue or misleading in any material respect as of the date made. Any Event of Default under this Section 9.4 shall be deemed cured at such time as the applicable representation, warranty, certificate, schedule, report or other communication becomes true in all respects if none of the Loan Parties or the Lender suffered any uncured harm as a result of the facts and circumstances that made the representation, warranty, certificate, schedule, report or other communication untrue or misleading.

9.5. Loss of Collateral .

The loss, theft, damage or destruction of any of the Collateral in an amount in excess of five hundred thousand Dollars ($500,000) in the aggregate for all such events during any Fiscal Year as determined by Lender in its sole discretion determined in good faith, or (except as permitted hereby) sale, lease or furnishing under a contract of service of, any of the Collateral.

9.6. Levy, Seizure or Attachment .

The making or any attempt by any Person to make any levy, seizure or attachment upon any of the Collateral in excess of five hundred thousand Dollars ($500,000).

9.7. Bankruptcy or Similar Proceedings .

The commencement of any proceedings in bankruptcy by or against any Loan Party or for the liquidation or reorganization of any Loan Party, or alleging that such Loan Party is insolvent or unable to pay its debts as they mature, or for the readjustment or arrangement of any Loan Party 's debts, whether under the United States Bankruptcy Code or under any other law, whether state or federal, now or hereafter existing, for the relief of debtors, or the commencement of any analogous statutory or non-statutory proceedings involving any Loan Party; provided , however, that if such commencement of proceedings against such Loan Party is involuntary, such action shall not constitute an Event of Default unless such proceedings are not dismissed within forty-five (45) days after the commencement of such proceedings.

9.8. Appointment of Receiver .

The appointment of a receiver or trustee for any Loan Party, for any of the Collateral or for any substantial part of any Loan Party’s assets or the institution of any proceedings for the dissolution, or the full or partial liquidation, or the merger or consolidation, of any Loan Party which is a corporation, limited liability company or a partnership; provided , however, that if such appointment or commencement of proceedings against such Loan Party is involuntary, such action shall not constitute an Event of Default unless such appointment is not revoked or such proceedings are not dismissed within forty-five (45) days after the commencement of such proceedings.

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9.9. Judgment .

The entry of any judgments or orders aggregating in excess of five hundred thousand Dollars ($500,000) against any Loan Party which remains unsatisfied or undischarged and in effect for thirty (30) days after such entry without a stay of enforcement or execution.

9.10. Dissolution of Loan Party .

The dissolution of any Loan Party.

9.11. Default or Revocation of Guaranty .

The occurrence of an event of default under, or the revocation or termination of, any agreement, instrument or document executed and delivered by any Loan Party to Lender pursuant to which such Loan Party has guaranteed to Lender the payment of all or any of the Obligations or has granted Lender a security interest in or lien upon some or all of such Loan Party's real and/or personal property to secure the payment of all or any of the Obligations.

9.12. Criminal Proceedings .

(a) The institution in any court of a criminal proceeding against any Loan Party which would have a Material Adverse Effect, (b) the indictment of any officer of a Loan Party, for any crime which would have a Material Adverse Effect or (c) the indictment of any Loan Party for any crime.

9.13. Change of Control .

The failure of (i) Lazarus to own and have voting control of at least seventy-nine percent (79%) of the issued and outstanding voting Equity Interests of Blue Dolphin; (ii) Blue Dolphin to own and have voting control of one hundred percent (100%) of the issued and outstanding voting Equity Interests of each of the Borrower and LR&M; (iii) the Borrower to own and have voting control of at least one hundred percent (100%) of the issued and outstanding voting Equity Interests of each Subsidiary of the Borrower, if any; or (iv) LR&M to own and have voting control of at least one hundred percent (100%) of the issued and outstanding voting Equity Interests of each Subsidiary of LR&M, if any.

9.14. Material Adverse Change .

The occurrence and continuation of any Material Adverse Effect.

SECTION 10

REMEDIES UPON AN EVENT OF DEFAULT.

10.1. Acceleration .

Upon the occurrence and during the continuance of an Event of Default described in Sections 9.7 or 9.8 hereof, all of the Obligations shall immediately and automatically become due and payable, without notice of any kind. Upon the occurrence and during the continuation of any other Event of Default, the Lender, by notice to the Borrower, may take any or all of the following actions, at the same or different times: (i) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued fees and all other liabilities of the Borrower accrued hereunder and under any other Loan Document, shall become forthwith due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived by the Borrower, anything contained herein or in any other Loan Document to the contrary notwithstanding; and (ii) exercise any rights and remedies provided to the Lender under this Agreement, any other Loan Documents (subject to the restrictions referred to therein) or at law or at equity.

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10.2. Other Remedies .

Upon the occurrence and during the continuance of an Event of Default, Lender may exercise from time to time any rights and remedies available to it under the Uniform Commercial Code and any other applicable law in addition to, and not in lieu of, any rights and remedies expressly granted in this Agreement or in any of the other Loan Documents and all of Lender's rights and remedies shall be cumulative and non-exclusive to the extent permitted by law. In particular, but not by way of limitation of the foregoing, Lender may, without notice, demand or legal process of any kind, take possession of any or all of the Collateral (in addition to Collateral of which it already has possession), wherever it may be found, and for that purpose may pursue the same wherever it may be found, and may enter onto any of each Loan Party’s premises where any of the Collateral may be, and search for, take possession of, remove, keep and store any of the Collateral until the same shall be sold or otherwise disposed of, and Lender shall have the right to store the same at any of Loan Party’s premises without cost to Lender. At Lender's request, each Loan Party shall, at Borrower’s expense, assemble the Collateral and make it available to Lender at one or more places to be designated by Lender and reasonably convenient to Lender and Loan Parties. Each Loan Party recognizes that if a Loan Party fails to perform, observe or discharge any of its Obligations under this Agreement or the other Loan Documents, no remedy at law will provide adequate relief to Lender, and agrees that Lender shall be entitled to temporary and permanent injunctive relief in any such case without the necessity of proving actual damages. Any notification of intended disposition of any of the Collateral required by law will be deemed to be a reasonable authenticated notification of disposition if given at least ten (10) days prior to such disposition and such notice shall (i) describe Lender and such Loan Party, (ii) describe the Collateral that is the subject of the intended disposition, (iii) state the method of the intended disposition, (iv) state that such Loan Party is entitled to an accounting of the Obligations and state the charge, if any, for an accounting and (v) state the time and place of any public disposition or the time after which any private sale is to be made. Lender may disclaim any warranties that might arise in connection with the sale, lease or other disposition of the Collateral and has no obligation to provide any warranties at such time. Any Proceeds of any disposition by Lender of any of the Collateral may be applied by Lender to the payment of expenses in connection with the Collateral, including, without limitation, legal expenses and reasonable attorneys' fees, and any balance of such Proceeds and all other payments received by Lender during the continuance of an Event of Default may be applied by Lender toward the payment of such of the Obligations, and in such order of application, as Lender may from time to time elect.

SECTION 11

CONDITIONS PRECEDENT.

11.1. Conditions to Loans .

The obligation of Lender to fund the Loans is subject to the satisfaction or waiver (each in form and substance satisfactory to the Lender in its sole discretion) of the following conditions precedent on or before the date falling one month after the date of this Agreement (the “ Outside Date ”) (and “ Closing Date ” is the first Business Day on or before the Outside Date on which all such conditions precedent have been satisfied or waived (in form and substance satisfactory to the Lender in its sole discretion), as applicable). If the conditions set forth in this Section 11.1 are not satisfied or waived (in form and substance satisfactory to the Lender in its sole discretion) by the Outside Date, then (x) the obligation of the Lender to fund the Loans shall not become effective, (y) the Lender's commitments under this Agreement shall automatically terminate without further action by any party hereto, and (z) the Maturity Date shall be deemed to be the Outside Date:

(a) Lender shall have received (i) a copy of the certificate of formation, including all amendments thereto, of Borrower, certified as of a recent date by the Secretary of State of the State of Delaware; (ii) a certificate as to the good standing of Borrower as of a recent date from such Secretary of State of the State of Delaware; and (iii) a certificate of the Secretary or Assistant Secretary or other authorized officer of Borrower dated as of the Closing Date and certifying: (A) that attached thereto is a true and complete copy of the constitutive documents of Borrower as in effect on the Closing Date, (B) that attached thereto is a true and complete copy of the written consent duly adopted by an authorized officer of the sole member of the Borrower authorizing the execution, delivery and performance of the Loan Documents to which Borrower is a party, (C) that such written consent has not been modified, rescinded or amended and is in full force and effect, (D) that the certificate of formation of Borrower has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (ii) above, and (E) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of Borrower;

(b) Lender shall have received (i) a copy of the certificate of formation, including all amendments thereto, of each Guarantor and Grantor, certified as of a recent date by the Secretary of State of the State of Delaware; (ii) a certificate as to the good standing of each Guarantor and Grantor as of a recent date from such Secretary of State of the State of Delaware; and (iii) a certificate of the Secretary or Assistant Secretary or other authorized officer of each Guarantor and Grantor dated as of the Closing Date and certifying: (A) that attached thereto is a true and complete copy of the constitutive documents of such Guarantor and/or Grantor as in effect on the Closing Date, (B) that attached thereto is a true and complete copy of the written consent duly adopted by the sole Member or Board (as applicable) of such Guarantor and/or Grantor authorizing the execution, delivery and performance of the Loan Documents to which such Guarantor and/or Grantor is a party, (C) that such written consent has not been modified, rescinded or amended and is in full force and effect, (D) that the certificate of formation of such Guarantor and/or Grantor has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to clause (ii) above, and (E) as to the incumbency and specimen signature of each officer executing any Loan Document or any other document delivered in connection herewith on behalf of such Guarantor and/or Grantor;

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(d) except as set forth on Schedule 11.1(d) , since December 31, 2018, no event shall have occurred which has had or could reasonably be expected to have a Material Adverse Effect on any Loan Party, its lines of business or the markets in which such Person operates or in the ownership, control and/or management of any Loan Party, as determined by Lender in its sole discretion and in good faith (it being agreed for the purpose of this Section 11.1(d) that a Material Adverse Effect includes the Refinery Assets (i) not producing refined products for a period of five (5) consecutive days, or (ii) being shut down or ceasing to operate for a period of one (1) day, in each case as determined by the Lender in its sole discretion);

(e) Lender shall have received payment in full of all fees and expenses payable to it by Borrower or any other Person in connection herewith, on or before disbursement of the Loans hereunder;

(f) each Loan Party shall have duly executed and delivered to Lender the following documents, each in form and substance satisfactory to the Lender in its sole discretion:

(i) this Agreement;

(ii) the Pledge Agreement;

(iii) a one-year crude supply agreement automatically renewed for successive terms of one year, dated on or about the date hereof, between the Lender as seller and Lazarus Energy as buyer (the “ Crude Supply Agreement ”);

(iv) a one-year master purchase and sale agreement, dated on or about the date hereof, between the Lender and Lazarus (including any confirmations thereunder, the “ Jet Fuel Master Agreement ”);

(v) a one-year crude storage lease dated on or about the date hereof, between the Lender as customer and the Borrower as terminal (the “ Crude Storage Lease ”);

(vi) a one-year jet storage lease dated on or about the date hereof, between the Lender as customer and the Borrower as terminal (the “ Jet Storage Lease ”);

(vii) (i) a jet fuel purchase agreement dated on or about the date hereof between the Lender as buyer and the Lazarus as seller, and (ii) a jet fuel sale agreement dated on or about the date hereof between the Lender as seller and Lazarus as buyer (together the “ Jet Inventory Purchase and Sale Agreements ”);

(viii) a parent guaranty from Blue Dolphin guaranteeing certain obligations under the Crude Supply Agreement (the “ Blue Dolphin Parent Guarantee ”);

(ix) a letter agreement dated on or about the date hereof between the Borrower, Lazarus Energy, LR&M and the Lender (the “ NPS Exclusivity Letter ”);

(x) a consent and assignment agreement for the benefit of the Lender dated as of the date hereof among the Borrower, Lazarus Energy, and the Lender (the “ Consent and Assignment Agreement (Storage Tank Lease) ”) in relation to the Storage Tank Lease Agreement effective as of June 1, 2018 between Lazarus Energy and the Borrower;

(xi) a consent and assignment agreement for the benefit of the Lender dated as of the date hereof among the Borrower, Haltermann Solutions and the Lender (the “ Consent and Assignment Agreement (Haltermann MSA) ”) in relation to the Master Service Agreement effective as of January 1, 2018 between Haltermann Solutions and the Borrower; and

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(xii) amendments, subordinations, notes, forbearances, consents, and such other agreements from each of the following parties as may be required by the Lender in its sole discretion, in form and substance acceptable to Lender (collectively, the “ Related Party Agreements ”):

(A) Veritex Community Bank (“ Veritex ”);

(B) GEL Tex Marketing, LLC (“ GEL Tex ”);

(D) all other holders of Debt of the Loan Parities set forth on Schedule 1.01 other than Affiliates of Loan Parties;

(xiii) A Subordination Agreement in form and substance satisfactory to the Lender from each Affiliate of a Loan Party (other than any other Loan Party) that is a holder of Existing Indebtedness of a Loan Party (which, for the avoidance of doubt, shall not restrict or subordinate Affiliate Funding Transactions that are (A) extensions of credit by Lazarus to, or (B) payments by Lazarus in exchange for such extensions of credit on account, any other Loan Party);

(xiv) control agreements in respect of each account listed on Schedule 1.03 , other than the Green Bank Account;

(xv) any other documents, instruments and agreements which Lender determines are reasonably necessary to consummate the transactions contemplated hereby;

(g) as of the date hereof and at the time of and immediately after giving effect to each Borrowing, no Default or Event of Default shall exist at the time of or result from such funding, grant or pledge;

(h) as of the date hereof and at the time of and immediately after giving effect to each Borrowing, the representations and warranties of each Loan Party in this Agreement and the other Loan Documents shall be true and correct in all material respects (except for representations and warranties that expressly relate to an earlier date which must be true and correct as of such earlier date);

(i) there is no action or proceeding from a Governmental Authority and no Person has initiated litigation that is pending or has been threatened in writing against a Loan Party which is reasonably likely to prevent any Loan Party from continuing operations;

(j) this Agreement and the Pledge Agreement shall be in full force and effect on the date hereof through the Closing Date, as applicable, and the Lender shall have a perfected security interest in the Collateral of the type and priority described in this Agreement and the Pledge Agreement;

(k) the Lender shall have received the Notice of Borrowing for any Loans made as of the Closing Date as contemplated by Section 2.3 above;

(l) [Reserved];

(m) the Lender shall have received a copy of an amendment to the Settlement Agreement, dated as of July 20, 2018, among GEL Tex Marketing, LLC, Lazarus Energy, Blue Dolphin, Lazarus, the Borrower, Carroll & Company Financial Holdings, L.P. and Jonathan Carroll (as amended pursuant to the First Amendment to the Settlement Agreement dated as of October 17, 2018, the Second Amendment to the Settlement Agreement dated as of November 15, 2018, the Third Amendment to the Settlement Agreement dated as of December 19, 2018, and the Fourth Amendment to the Settlement Agreement dated as of March 19, 2019, and as further amended, supplemented or otherwise modified from time to time, the “ GEL Tex Settlement Agreement ”) in form and substance satisfactory to Lender in its sole discretion;

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(n) the Lender shall have received copies of all consents from third parties, including Veritex and GEL Tex (which may be in the form of an amendment to the GEL Tex Settlement Agreement specifically authorizing the Loan Parties to enter into the Loan Documents), which are required for the Loan Parties to enter into the Loan Documents, as determined by Lender in its sole discretion and in good faith;

(o) the Lender shall have received (i) a duly executed release agreement (in form and substance satisfactory to the lender in its sole discretion) in respect of any liens or other encumbrances granted in favor of any Person in respect of the Collateral, and (ii) satisfactory evidence that any lien filings, fixture filings or other filings in respect of any such liens and encumbrances have been terminated or amended to exclude the Collateral from the collateral description therein (the form of any such amendment to be pre-approved by the Lender), and (iii) satisfactory lien search results;

(p) the Lender shall have received a copy of an IRS Form W-9 in respect of the Borrower; and

(q) the Lender shall have received a certified copy of each of the following: (i) a crude purchase contract between the Borrower and Lazarus Energy, (ii) a Subordination and Attornment Agreement between Borrower, Lazarus Energy and Veritex Community Bank, and (iii) a Tank Access Agreement between Lender and Veritex.

SECTION 12

MISCELLANEOUS.

12.1. Assignments; Participations .

12.1.1. Assignments .

(a) Lender may at any time assign to one or more Persons (any such Person, an “ Assignee ”) all or any portion of its Loans or its commitment to make advances under the Line of Credit, without consent of Borrower. Any such assignment shall be made with prior written notice to Borrower and delivery to Borrower of an Assignment Agreement that identifies the Assignee, its address, its U.S. tax identification number, if any, and any requisite documentation required by Section 12.2 and the principal amount of the Loans and interest owing thereon assigned to Assignee. Borrower shall maintain a copy of each such notice and Assignment Agreement delivered to it and register (the “ Register ”) for the recordation of names and addresses of the Lenders and the commitment of, and principal amount and interest thereon of each Loan assigned to each Lender from time to time and whether such Lender is the original Lender or the Assignee. No assignment shall be effective unless and until the Assignment Agreement is accepted and registered in the Register. All records of transfer of a Lender's interest in the Register shall be conclusive, absent manifest error, as to the ownership of the interests in the Loans. The parties hereto agree and intend that the Loans shall be treated as being in “registered form” for the purposes of the Code, and the Register shall be maintained in accordance with such intention. Each Lender granting a participation shall, as a non-fiduciary agent of the Borrower, maintain a register containing information similar to that of the Register in a manner such that the Loans hereunder are in “registered form” for the purposes of the Code. To the extent Lender assigns all or a portion of the Loans and commitments hereunder, Borrower and the other Loan Parties hereby agree to execute such amendments and/or restatements of this agreement and the other Loan Documents to reflect the existence of an administrative agent for the Lenders and/or reflect tax provisions to protect any foreign lenders.

(b) From and after the date on which the conditions described above have been met, (i) such Assignee shall be deemed automatically to have become a party hereto and, to the extent that rights and obligations hereunder have been assigned to such Assignee pursuant to an assignment agreement between Lender and the Assignee, shall have the rights and obligations of Lender hereunder and (ii) Lender, to the extent that rights and obligations hereunder have been assigned by it pursuant to such Assignment Agreement, shall be released from its rights (other than its indemnification rights) and obligations hereunder. Upon the request of the Assignee (and, as applicable, Lender) pursuant to an effective assignment agreement, Borrower shall execute and deliver to the Assignee (and, as applicable, Lender) a note in the principal amount of the principal amount of the Assignee's Loans (and, as applicable, a note in the principal amount of the pro rata share of the principal amount of the Loans retained by Lender). Each such note shall be dated the effective date of such assignment. Upon receipt by Lender of such note, Lender shall return to Borrower any prior note held by it.

(c) Lender may at any time pledge or assign a security interest in all or any portion of its rights under this Agreement to secure obligations of Lender, including any pledge or assignment to secure obligations to a Federal Reserve Bank, and this Section shall not apply to any such pledge or assignment of a security interest; provided that no such pledge or assignment of a security interest shall release Lender from any of its obligations hereunder or substitute any such pledgee or assignee for Lender as a party hereto.

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12.1.2. Participations . Lender may at any time sell to one or more Persons participating interests in its Loans, commitment to make advance under the Line of Credit or other interests hereunder (any such Person, a “ Participant ”). In the event of a sale by Lender of a participating interest to a Participant, (a) Lender's obligations hereunder shall remain unchanged for all purposes, (b) Borrower shall continue to deal solely and directly with Lender in connection with Lender's rights and obligations hereunder and (c) all amounts payable by Borrower shall be determined as if Lender had not sold such participation and shall be paid directly to Lender. Each Loan Party agrees that, if amounts outstanding under this Agreement are due and payable (as a result of acceleration or otherwise), each Participant shall be deemed to have the right of set-off in respect of its participating interest in amounts owing under this Agreement to the same extent as if the amount of its participating interest were owing directly to it as Lender under this Agreement; provided that such right of set-off shall be subject to the obligation of each Participant to share with Lender, and Lender agrees to share with each Participant, on a pro rata basis. Each Loan Party also agrees that each Participant shall be entitled to the benefits of Sections 2.13 and 2.15 as if it were Lender; provided that on the date of the participation no Participant shall be entitled to any greater compensation pursuant to Sections 2.13 and 2.15 than would have been paid to Lender on such date if no participation had been sold, except to the extent such entitlement to receive a greater payment results from a Change in Law that occurs after the Participant acquired the applicable participation. Lender, acting solely for this purpose as a non-fiduciary agent of Borrower, shall maintain a register on which it enters the name and address of each Participant and the principal amounts (and stated interest) of each Participant’s interest in the Loans or other obligations under the Loan Documents (the “ Participant Register ”); provided that Lender shall not have any obligation to disclose all or any portion of the Participant Register (including the identity of any Participant or any information relating to a Participant’s interest in any commitments, loans, letters of credit or its other obligations under any Loan Document) to any Person except to the extent that such disclosure is necessary to establish that such commitment, loan, letter of credit or other obligation is in registered form under Section 5f.103-1(c) of the United States Treasury Regulations. The entries in the Participant Register shall be conclusive absent manifest error, and such Lender shall treat each Person whose name is recorded in the Participant Register as the owner of such participation for all purposes of this Agreement notwithstanding any notice to the contrary.

12.2. Customer Identification - USA Patriot Act Notice .

Lender (for itself and not on behalf of any other party) hereby notifies the Loan Parties that, pursuant to the requirements of the USA Patriot Act, Title III of Pub. L. 107-56, signed into law October 26, 2001 (the “ USA Patriot Act ”), it is required to obtain, verify and record information that identifies the Loan Parties, which information includes the name and address of the Loan Parties and other information that will allow Lender, as applicable, to identify the Loan Parties in accordance with the Act.

12.3. Indemnification by Borrower .

IN CONSIDERATION OF THE EXECUTION AND DELIVERY OF THIS AGREEMENT AND THE AGREEMENT TO EXTEND THE COMMITMENTS PROVIDED HEREUNDER, EACH LOAN PARTY HEREBY AGREES TO INDEMNIFY, EXONERATE AND HOLD LENDER AND EACH OF THE OFFICERS, DIRECTORS, EMPLOYEES, AFFILIATES AND AGENTS OF LENDER (EACH A “ LENDER PARTY ”) FREE AND HARMLESS FROM AND AGAINST ANY AND ALL ACTIONS, CAUSES OF ACTION, SUITS, LOSSES, LIABILITIES, TAXES, DAMAGES AND EXPENSES, INCLUDING ATTORNEY COSTS (COLLECTIVELY, THE “ INDEMNIFIED LIABILITIES ”), INCURRED BY LENDER PARTIES OR ANY OF THEM AS A RESULT OF, OR ARISING OUT OF, OR RELATING TO (A) ANY TENDER OFFER, MERGER, PURCHASE OF CAPITAL SECURITIES, PURCHASE OF ASSETS OR OTHER SIMILAR TRANSACTION FINANCED OR PROPOSED TO BE FINANCED IN WHOLE OR IN PART, DIRECTLY OR INDIRECTLY, WITH THE PROCEEDS OF ANY OF THE LOANS, (B) THE USE, HANDLING, RELEASE, EMISSION, DISCHARGE, TRANSPORTATION, STORAGE, TREATMENT OR DISPOSAL OF ANY HAZARDOUS MATERIAL AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY, (C) ANY VIOLATION OF ANY ENVIRONMENTAL LAWS WITH RESPECT TO CONDITIONS AT ANY PROPERTY OWNED OR LEASED BY ANY LOAN PARTY OR THE OPERATIONS CONDUCTED THEREON, (D) THE INVESTIGATION, CLEANUP OR REMEDIATION OF OFFSITE LOCATIONS AT WHICH ANY LOAN PARTY OR THEIR RESPECTIVE PREDECESSORS ARE ALLEGED TO HAVE DIRECTLY OR INDIRECTLY DISPOSED OF HAZARDOUS MATERIALS OR (E) THE EXECUTION, DELIVERY, PERFORMANCE OR ENFORCEMENT OF THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT BY ANY OF LENDER PARTIES, EXCEPT FOR ANY SUCH INDEMNIFIED LIABILITIES ARISING ON ACCOUNT OF THE APPLICABLE LENDER PARTY’S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT AS DETERMINED BY A FINAL, NONAPPEALABLE JUDGMENT BY A COURT OF COMPETENT JURISDICTION. IF AND TO THE EXTENT THAT THE FOREGOING UNDERTAKING MAY BE UNENFORCEABLE FOR ANY REASON, EACH LOAN PARTY HEREBY AGREES TO MAKE THE MAXIMUM CONTRIBUTION TO THE PAYMENT AND SATISFACTION OF EACH OF THE INDEMNIFIED LIABILITIES WHICH IS PERMISSIBLE UNDER APPLICABLE LAW. ALL OBLIGATIONS PROVIDED FOR IN THIS SECTION 12.3 SHALL SURVIVE REPAYMENT OF THE LOANS, CANCELLATION OF THE LOANS, ANY FORECLOSURE UNDER, OR ANY MODIFICATION, RELEASE OR DISCHARGE OF, ANY OR ALL OF THE COLLATERAL DOCUMENTS AND TERMINATION OF THIS AGREEMENT. NOTWITHSTANDING ANYTHING TO THE CONTRARY IN THE FOREGOING, THIS SECTION 12.3 SHALL NOT APPLY WITH RESPECT TO TAXES OTHER THAN ANY TAXES THAT REPRESENT LOSSES, CLAIMS, DAMAGES, ETC. ARISING FROM ANY NON-TAX CLAIM. The foregoing indemnity shall not require reimbursement of costs and expenses in connection with the execution and delivery of the Loan Documents and the ongoing ordinary course administration thereof, which amounts are subject to Section 2.12 hereof.

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12.4. Notice .

All written notices and other written communications with respect to this Agreement shall be sent by ordinary, certified or overnight mail, by telecopy or delivered in person, and in the case of Lender shall be sent to it at Pilot Travel Centers LLC, 20 Greenway Plaza, Suite 310, Houston, TX 77046, attention: Head of Commercial Credit and Finance (Jason Sohmer), email: CommercialCredit@pilottravelcenters.com, and in the case of Loan Parties shall be sent to it at its principal place of business set forth on Schedule 6.2 hereto or as otherwise directed by Borrower in writing. All notices shall be deemed received upon actual receipt thereof or refusal of delivery. Notwithstanding the foregoing, requests for written consent may be communicated by email to James.Chiu@pilottravelcenters.com, or such other person or address that Lender may designate from time to time.

12.5. Modification and Benefit of Agreement .

This Agreement and the other Loan Documents may not be modified, altered or amended except by an agreement in writing signed by each Loan Party who is a party to such Loan Document and Lender.

12.6. Headings of Subdivisions .

The headings of subdivisions in this Agreement are for convenience of reference only, and shall not govern the interpretation of any of the provisions of this Agreement.

12.7. Power of Attorney .

Each Loan Party acknowledges and agrees that its appointment of Lender as its attorney and agent-in-fact for the purposes specified in this Agreement is an appointment coupled with an interest and shall be irrevocable until the Termination Date, provided that Lender shall have no rights in respect of such appointment except after the occurrence and during the continuance of an Event of Default.

12.8. Counterparts .

This Agreement, any of the other Loan Documents, and any amendments, waivers, consents or supplements may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which, when so executed and delivered, shall be deemed an original, but all of which counterparts together shall constitute but one agreement.

12.9. Refinancing Support .

Lender agrees to make available information regarding the Line of Credit as may be reasonably requested by the Loan Parties to facilitate a refinancing of the Loans.

12.10. Waiver of Jury Trial: Other Waivers .

(a) EACH LOAN PARTY AND LENDER EACH HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, ANY OF THE OTHER LOAN DOCUMENTS, THE OBLIGATIONS, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY A LOAN PARTY OR LENDER OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF OR RELATES TO THE RELATIONSHIP BETWEEN A LOAN PARTY AND LENDER. IN NO EVENT SHALL LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL, EXEMPLARY, PUNITIVE OR CONSEQUENTIAL DAMAGES.

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(b) Each Loan Party hereby waives demand, presentment, protest and notice of nonpayment, and further waives the benefit of all valuation, appraisal and exemption laws.

(c) Each Loan Party hereby waives the benefit of any law that would otherwise restrict or limit Lender or any Affiliate of Lender in the exercise of its right, which is hereby acknowledged and agreed to, to set-off against the Obligations, without notice at any time hereafter, any indebtedness, matured or unmatured, owing by Lender or such Affiliate of Lender to such Loan Party.

(d) EACH LOAN PARTY HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF SUCH LOAN PARTY WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH COLLATERAL, PROVIDED THAT IN THE EVENT THAT LENDER SEEKS TO ENFORCE ITS RIGHTS HEREUNDER BY JUDICIAL PROCESS OR SELF HELP, LENDER SHALL PROVIDE SUCH LOAN PARTY WITH SUCH NOTICES AS ARE REQUIRED BY LAW.

Lender's failure, at any time or times hereafter, to require strict performance by any Loan Party of any provision of this Agreement or any of the other Loan Documents shall not waive, affect or diminish any right of Lender thereafter to demand strict compliance and performance therewith. Any suspension or waiver by Lender of an Event of Default under this Agreement or any default under any of the other Loan Documents shall not suspend, waive or affect any other Event of Default under this Agreement or any other default under any of the other Loan Documents, whether the same is prior or subsequent thereto and whether of the same or of a different kind or character. No delay on the part of Lender in the exercise of any right or remedy under this Agreement or any other loan Document shall preclude other or further exercise thereof or the exercise of any right or remedy. None of the undertakings, agreements, warranties, covenants and representations of Loan Parties contained in this Agreement or any of the other Loan Documents and no Event of Default under this Agreement or default under any of the other Loan Documents shall be deemed to have been suspended or waived by Lender unless such suspension or waiver is in writing, signed by a duly authorized officer of Lender and directed to Borrower specifying such suspension or waiver.

12.11. Choice of Governing Laws; Construction; Forum Selection .

(a) This Agreement and the other Loan Documents are submitted by each Loan Party to Lender for Lender's acceptance or rejection at Lender's principal place of business as an offer by Borrower to borrow monies from Lender now and from time to time hereafter, and shall not be binding upon Lender or become effective until accepted by Lender, in writing, at said place of business. If so accepted by Lender, this Agreement and the other Loan Documents shall be deemed to have been made at said place of business. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE GOVERNED AND CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF NEW YORK AS TO INTERPRETATION, ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS, INCLUDING, WITHOUT LIMITATION, THE LEGALITY OF THE INTEREST RATE AND OTHER CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN COLLATERAL LOCATED OUTSIDE OF THE STATE OF NEW YORK, WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION IN WHICH SUCH COLLATERAL IS LOCATED. If any provision of this Agreement shall be held to be prohibited by or invalid under applicable law, such provision shall be ineffective only to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or remaining provisions of this Agreement.

(b) To induce Lender to accept this Agreement, EACH LOAN PARTY IRREVOCABLY AGREES THAT, SUBJECT TO LENDER'S SOLE AND ABSOLUTE ELECTION, ANY LEGAL ACTION OR PROCEEDING ARISING OUT OF OR WITH RESPECT TO THIS AGREEMENT AND ANY ACTION FOR ENFORCEMENT OF ANY JUDGMENT IN RESPECT THEREOF (OTHER THAN THE RIGHTS AND OBLIGATIONS UNDER ANY LOAN DOCUMENT EXPRESSLY GOVERNED BY THE LAWS OF ANOTHER JURISDICTION) SHALL BE BROUGHT ONLY IN ANY OF THE COURTS OF THE STATE OF NEW YORK OR OF THE UNITED STATES OF AMERICA SITTING IN THE BOROUGH OF MANHATTAN, IN THE CITY OF NEW YORK. BY EXECUTION AND DELIVERY OF THIS AGREEMENT, EACH OF THE LOAN PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE EXCLUSIVE JURISDICTION OF THE AFORESAID COURTS AND APPELLATE COURTS IN ANY LEGAL ACTION, SUIT OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT. EACH OF THE LOAN PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY AND UNCONDITIONALLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, THE JURISDICTION OF ANY OTHER COURTS THAT MAY CORRESPOND BY VIRTUE OF SUCH PARTY’S DOMICILE (PRESENT OR FUTURE), THE LOCATION OF ITS ASSETS OR OTHERWISE. FURTHERMORE, EACH OF THE LOAN PARTIES HERETO HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT BROUGHT IN THE COURTS REFERRED TO ABOVE AND HEREBY FURTHER IRREVOCABLY WAIVES AND AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. NOTHING IN THIS AGREEMENT SHALL AFFECT ANY RIGHT THAT THE LENDER MAY HAVE TO BRING ANY ACTION OR PROCEEDING ARISING OUT OF OR WITH RESPECT TO THIS AGREEMENT AGAINST ANY OF THE LOAN PARTIES OR THEIR PROPERTY IN THE COURTS OF ANY JURISDICTION.

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SECTION 13

LIABILITY.

(a) Notwithstanding any provisions of this Agreement to the contrary, it is intended that the joint and several nature of the Obligations of the Loan Parties and the liens and security interests granted by Borrower to secure the Obligations, not constitute a “Fraudulent Conveyance” (as defined below). Consequently, Lender and of the Loan Parties agree that if the Obligations of the Loan Parties, or any liens or security interests granted by such Loan Parties securing the Obligations would, but for the application of this sentence, constitute a Fraudulent Conveyance, the Obligations of such Loan Party and the liens and security interests securing such Obligations shall be valid and enforceable only to the maximum extent that would not cause such Obligations or such lien or security interest to constitute a Fraudulent Conveyance, and the Obligations of such Loan Party and this Agreement shall automatically be deemed to have been amended accordingly. For purposes hereof, “Fraudulent Conveyance” means a fraudulent conveyance under Section 548 of Chapter 11 of Title II of the United States Code (11 U.S.C. § 101, et seq.), as amended (the “Bankruptcy Code”) or a fraudulent conveyance or fraudulent transfer under the applicable provisions of any fraudulent conveyance or fraudulent transfer law or similar law of any state, nation or other governmental unit, as in effect from time to time.

(b) Each Loan Party assumes responsibility for keeping itself informed of the financial condition of each other Loan Party, and any and all endorsers and/or guarantors of any instrument or document evidencing all or any part of such other Loan Party 's Obligations and of all other circumstances bearing upon the risk of nonpayment by such other Loan Party of their Obligations and each Loan Party agrees that Lender shall not have any duty to advise such Loan Party of information known to Lender regarding such condition or any such circumstances or to undertake any investigation not a part of its regular business routine. If Lender, in its sole discretion, undertakes at any time or from time to time to provide any such information to a Loan Party, Lender shall not be under any obligation to update any such information or to provide any such information to such Loan Party on any subsequent occasion.

(c) Lender is hereby authorized, without notice or demand and without affecting the liability of Loan Party hereunder or under the other Loan Documents, to, at any time and from time to time, (i) accept partial payments on Loan Party’s Obligations; (ii) take and hold security or collateral for the payment of Loan Party’s Obligations hereunder or for the payment of any guaranties of Loan Party’s Obligations or other liabilities of Loan Party and exchange, enforce, waive and release any such security or collateral; (iii) apply such security or collateral and direct the order or manner of sale thereof as Lender, in its sole discretion, may determine; and (iv) settle, release, compromise, collect or otherwise liquidate Loan Party’s Obligations and any security or collateral therefor in any manner, without affecting or impairing the obligations of the other Loan Parties. Lender shall have the exclusive right to determine the manner of application of any payments or credits, whether received from a Loan Party or any other source, and such determination shall be binding on such Borrower. All such payments and credits may be applied, reversed and reapplied, in whole or in part, to any of a Loan Party’s Obligations as Lender shall determine in its sole discretion without affecting the validity or enforceability of the Obligations of the other Loan Parties.

(d) Each Loan Party hereby agrees that, except as hereinafter provided, its obligations hereunder shall be unconditional, irrespective of (i) the absence of any attempt to collect Loan Party’s Obligations from any Borrower or any guarantor or other action to enforce the same; (ii) the waiver or consent by Lender with respect to any provision of any instrument evidencing Borrower’s Obligations, or any part thereof, or any other agreement heretofore, now or hereafter executed by a Loan Party and delivered to Lender; (iii) failure by Lender to take any steps to perfect and maintain its security interest in, or to preserve its rights to, any security or collateral for Borrower’s Obligations; (iv) the institution of any proceeding under the Bankruptcy Code, or any similar proceeding, by or against a Loan Party or Lender’s election in any such proceeding of the application of Section 1111(b)(2) of the Bankruptcy Code; (v) any Borrowing or grant of a security interest by any Borrower as debtor-in-possession, under Section 364 of the Bankruptcy Code; (vi) the disallowance, under Section 502 of the Bankruptcy Code, of all or any portion of Lender's claim(s) for repayment of any of Loan Parties’ Obligations; or (vii) any other circumstance which might otherwise constitute a legal or equitable discharge or defense of a guarantor.

(e) No payment made by or for the account of a Loan Party including, without limitations, (i) a payment made by such Loan Party on behalf of another Loan Party 's Obligations or (ii) a payment made by any other person under any guaranty, shall entitle such Loan Party, by subrogation or otherwise, to any payment from such other Borrower or from or out of such other Loan Party 's property and such Loan Party shall not exercise any right or remedy against such other Loan Party or any property of such other Loan Party by reason of any performance of such Loan Party of its joint and several obligations hereunder.

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SECTION 14

NONLIABILITY OF LENDER.

The relationship between the Loan Parties on the one hand and Lender on the other hand shall be solely that of borrower, guarantor or grantor (as applicable) and lender. Lender has no fiduciary relationship with or duty to any Loan Party arising out of or in connection with this Agreement or any of the other Loan Documents, and the relationship between the Loan Parties, on the one hand, and Lender, on the other hand, in connection herewith or therewith is solely that of debtor and creditor. Lender undertakes no responsibility to any Loan Party to review or inform any Loan Party of any matter in connection with any phase of any Loan Party’s business or operations. Each Loan Party agrees that Lender shall have no liability to any Loan Party (whether sounding in tort, contract or otherwise) for losses suffered by any Loan Party in connection with, arising out of, or in any way related to the transactions contemplated and the relationship established by the Loan Documents, or any act, omission or event occurring in connection therewith, unless it is determined in a final non-appealable judgment by a court of competent jurisdiction that such losses resulted from the gross negligence or willful misconduct of the party from which recovery is sought. NO LENDER PARTY SHALL HAVE ANY LIABILITY WITH RESPECT TO, AND EACH LOAN PARTY HEREBY WAIVES, RELEASES AND AGREES NOT TO SUE FOR ANY SPECIAL, PUNITIVE, EXEMPLARY, INDIRECT OR CONSEQUENTIAL DAMAGES RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR ARISING OUT OF ITS ACTIVITIES IN CONNECTION HEREWITH OR THEREWITH (WHETHER BEFORE OR AFTER THE CLOSING DATE). Each Loan Party acknowledges that it has been advised by counsel in the negotiation, execution and delivery of this Agreement and the other Loan Documents to which it is a party. No joint venture is created hereby or by the other Loan Documents or otherwise exists by virtue of the transactions contemplated hereby among the Loan Parties and Lender.

[ Signature Pages Follow ]

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IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first written above.

NIXON PRODUCT STORAGE, LLC , as Borrower and Grantor By: BLUE DOLPHIN ENERGY COMPANY, its sole Member
By:	/s/ JONATHAN CARROLL
Name:	Jonathan Carroll
Title:	President