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, 2021

 

or

 

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

 

BDCO_10QIMG26.JPG  

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)

 

Securities registered pursuant to Section 12(b) of the Act: None

 

Securities registered pursuant to Section 12(g) of the Act:

 

Common Stock, par value $0.01 per share

(Title of class)

 

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 17, 2021: 12,693,514

 

 

 

 

Table of Contents

 

PART I

 

10

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

10

 

Consolidated Balance Sheets (Unaudited)

10

 

Consolidated Statements of Operations (Unaudited)

11

 

Consolidated Statements of Cash Flows (Unaudited)

12

 

Notes to Consolidated Financial Statements

13

 

 

 

 

 

ITEM 2.

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

38

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

55

 

ITEM 4.

CONTROLS AND PROCEDURES

55

 

 

 

 

 

PART II

 

56

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

56

 

ITEM 1A.

RISK FACTORS

56

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

57

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

57

 

ITEM 4.

MINE SAFETY DISCLOSURES

57

 

ITEM 5.

OTHER INFORMATION

57

 

ITEM 6.

EXHIBITS

57

 

 

 

 

 

SIGNATURES 

58

 

 

Blue Dolphin Energy Company                                       

 

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Table of Contents

 

Glossary of Terms

 

Glossary of Terms

 

Throughout this Quarterly Report on Form 10-Q, we have used the following terms:

 

Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Carroll & Company Financial Holdings, L.P., Ingleside, and Lazarus Capital, LLC) and/or LEH and its affiliates (including Lazarus Midstream Partners, L.P. and LTRI). Together, Jonathan Carroll and LEH owned approximately 82% of the Common Stock as of the filing date of this report.

 

Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019, between Pilot and NPS and subsequently amended on May 9, 2019, May 10, 2019, and September 3, 2019, the last amendment being Amendment No. 1; original line of credit amount was $13.0 million; currently in default.

 

Amended and Restated Operating Agreement. Affiliate agreement dated April 1, 2020 between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets.

 

ARO. Asset retirement obligations.

 

ASU. Accounting Standards Update.

 

AGO. Atmospheric gas oil, which is 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.

 

bbl. Barrel; a unit of volume equal to 42 U.S. gallons.

 

BDEC Term Loan Due 2051. Loan Agreement dated May 4, 2021, between Blue Dolphin and the SBA in the original principal amount of $0.5 million.

 

BDPC. Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue Dolphin.

 

BDPL. Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue Dolphin.

 

BDSC. Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.

 

Blue Dolphin. Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.

 

bpd. Barrel per day; a measure of the bbls of daily output produced in a refinery or transported through a pipeline.

 

Board. Board of Directors of Blue Dolphin.

 

BOEM. U.S. Bureau of Ocean Energy Management.

 

BSEE. U.S. Bureau of Safety and Environmental Enforcement.

 

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).

 

CIP. Construction in progress.

 

COVID-19. An infectious disease first identified in 2019 in Wuhan, the capital of China’s Hubei province; the disease has since spread globally, resulting in the ongoing 2019–2021 coronavirus pandemic.

 

Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue Dolphin has 20,000,000 shares of Common Stock authorized and 12,693,514 shares of Common Stock issued and outstanding.

 

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.

 

Blue Dolphin Energy Company                                       

 

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Table of Contents

 

Glossary of Terms

 

Cost of goods sold. Reflects the cost of crude oil and condensate, fuel use, and chemicals.

 

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 refines 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 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.

 

DOT. U.S. Department of Transportation.

 

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.

 

EIA. U.S. Energy Information Administration.

 

EIDL. Economic Injury Disaster Loan; provides economic relief to businesses that experienced a temporary loss of revenue due to COVID-19.

 

EPA. U.S. Environmental Protection Agency.

 

Eagle Ford Shale. A hydrocarbon-producing geological formation extending across South Texas from the Mexican border into East Texas.

 

Equipment Loan Due 2025. Installment sales contract dated October 13, 2020 between LE and Texas First to purchase a backhoe. LE previously rented the backhoe under a rent-to-own agreement that matured.

 

Exchange Act. Securities Exchange Act of 1934, as amended.

 

FASB. Financial Accounting Standards Board.

 

FDIC. Federal Deposit Insurance Corporation.

 

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.

 

Freeport facility. Encompasses processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas.

 

GEL. GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC; GEL was awarded damages and attorney fees and related expenses by an arbitrator on August 11, 2017; the parties fully resolved the dispute in August 2019.

 

Blue Dolphin Energy Company                                       

 

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Table of Contents

 

Glossary of Terms

 

Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount.

 

HOBM. Heavy oil-based mud blendstock; see also “distillates.”

 

HUBZone. Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.

 

IBLA. U.S. Interior Board of Land Appeals.

 

INC. Incident of Noncompliance issued by BOEM and/or BSEE.

 

Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan Carroll.

 

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.

 

IRC Section 382. Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following ownership change.

 

IRS. U.S. Internal Revenue Service.

 

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.

 

LE. Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin.

 

LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE and Veritex in the original principal amount of $25.0 million; currently in default.

 

LE Term Loan Due 2050. Loan Agreement dated August 29, 2020, between LE and the SBA in the original principal amount of $0.15 million.

 

LEH. Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin.

 

LEH Operating Fee. A management fee paid to LEH under the Amended and Restated Operating Agreement; calculated as 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC; previously reflected within refinery operating expenses in our consolidated statements of operations.

 

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.

 

LRM. Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue Dolphin.

 

LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015, between LRM and Veritex in the original principal amount of $10.0 million; currently in default.

 

LTRI. Lazarus Texas Refinery I, an affiliate of LEH.

 

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.

 

Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily of methane, but commonly including varying amounts of other higher alkanes, and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide, or helium.

 

Nixon facility. Encompasses the Nixon refinery, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas.

 

Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas.

 

NPS. Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin.

 

Blue Dolphin Energy Company                                       

 

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Table of Contents

 

Glossary of Terms

 

NPS Term Loan Due 2050. Loan Agreement dated August 29, 2020, between NPS and the SBA in the original principal amount of $0.15 million.

 

NOL. Net operating losses.

 

Notre Dame Debt. A loan agreement originally entered into between LE and Notre Dame Investors, Inc. in the principal amount of $8.0 million. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the arbitration award payable to GEL $3.6 million. The Notre Dame Debt matured in January 2018 and is currently in default.

 

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.

 

OPEC. Organization of Petroleum Exporting Countries.

 

OSHA. U.S. Occupational Safety and Health Administration.

 

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 products.

 

Other operating expenses. Represents costs associated with our natural gas processing, treating, and redelivery facility, as well as our pipeline assets and leasehold interests in oil and gas properties.

 

PCAOB. Public Company Accounting Oversight Board.

 

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.

 

PHMSA. Pipeline and Hazardous Materials Safety Administration of the U.S. Department of Transportation.

 

Pilot. Pilot Travel Centers LLC, a Delaware limited liability company.

 

Preferred Stock. Blue Dolphin preferred stock, par value $0.10 per share. Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding.

 

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 products. Hydrocarbon compounds, such as jet fuel and residual fuel, that are produced by a refinery.

 

Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.

 

Refining gross profit (deficit) per bbl. Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.

 

ROU. Right-of-use.

 

SBA. U.S. Small Business Administration.

 

SEC. U.S. Securities and Exchange Commission.

 

Securities Act. The Securities Act of 1933, as amended.

 

Segment margin (deficit). For our refinery operations and tolling and terminaling business segments, represents net revenues (excluding intercompany fees and sales) attributable to the respective business segment less associated intercompany fees and sales less associated operation costs and expenses.

Stabilizer unit. A distillation column intended to remove the lighter boiling compounds, such as butane or propane, from a product.

 

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.

 

Texas First. Texas First Rentals, LLC.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 6

 

 

Table of Contents

 

Glossary of Terms

 

Throughput. The volume processed through a unit or a refinery or transported through a pipeline.

 

TMT. Texas margins tax; a form of business tax imposed on an entity’s gross profit rather than on its net income.

 

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.

 

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.

 

Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit is taken offline for a week or more for comprehensive revamp and renewal.

 

USACOE. U.S. Army Corps of Engineers.

 

USDA. U.S. Department of Agriculture.

 

U.S. GAAP. Accounting principles generally accepted in the United States of America.

 

Veritex. Veritex Community Bank, successor in interest to Sovereign Bank by merger.

 

WSJ prime rate. A measure of the U.S. prime rate as defined by the Wall Street Journal.

 

XBRL. eXtensible Business Reporting Language.

 

Yield. The percentage of refined products that is produced from crude oil and other feedstocks.

 

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Table of Contents

 

Important Information Regarding Forward Looking Statements

 

 

 

Important Information Regarding Forward-Looking Statements

 

This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals and expectations concerning our market position, future operations and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those projected, including but not limited to:

 

Risks Related to the COVID-19 Pandemic

 

·

Continued adverse effects to our liquidity, business, financial condition, and results of operations due to the COVID-19 pandemic, which are expected to continue throughout 2021.

·

The persistence or worsening of market conditions related to the COVID-19 pandemic, which may require us to raise additional capital to operate our business or refinance existing debt on terms that are not acceptable to us or not at all.

·

Continued or further deterioration in demand for our refined products could negatively affect our operations and financial condition.

·

Potential impairment in the carrying value of long-lived assets, which could negatively affect our operating results.

 

Business and Industry

 

·

Our going concern status.

·

Inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits.

·

Substantial debt in current liabilities, which is currently in default.

·

Ability to regain compliance with the terms of our outstanding indebtedness.

·

Increased costs of capital or a reduction in the availability of credit.

·

Restrictive covenants in our debt instruments that may limit our ability to undertake certain types of transactions.

·

Affiliate common stock ownership and transactions that could cause conflicts of interest.

·

Operational hazards inherent in refining and natural gas processing operations and in transporting and storing crude oil and condensate and refined products.

·

Geographic concentration of our assets and customers in West Texas.

·

Competition from companies having greater financial and other resources.

·

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

·

Strict laws and regulations regarding personnel and process safety.

·

Changes in insurance markets impacting costs and the level and types of coverage available.

·

NOL carryforwards to offset future taxable income for U.S. federal income tax purposes that are subject to limitation.

·

Failure to keep pace with technological developments in our industry.

·

Direct or indirect effects on our business resulting from actual or threatened terrorist or activist incidents, cyber-security breaches, or acts of war.

·

Negative effects of security threats.

·

Increased activism against oil and natural gas companies.

·

The effects of public health threats, pandemics, and epidemics, such as the ongoing outbreak of COVID-19, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity.

 

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Table of Contents

 

Important Information Regarding Forward Looking Statements

 

 

  

Refinery and Tolling and Terminaling Operations

 

·

Volatility in commodity prices and refined product demand, which adversely affects our refining margins.

·

Price volatility of crude oil, other feedstocks, and fuel and utility services.

·

Availability and costs of crude oil and other feedstocks to operate the Nixon facility.

·

Disruptions due to equipment interruption or failure at the Nixon facility.

·

Failure to effectively execute new business strategies, such as renewable fuels.

·

Changes in our cash flow from operations and working capital requirements, shortfalls for which Affiliates may not fund.

·

Key personnel loss, labor relations, and workplace safety.

·

Loss of market share by and a material change in profitability of our key customers.

·

Loss of business from, or the bankruptcy or insolvency of, one or more of our significant customers.

·

Changes in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting crude oil and condensate, feedstocks, and refined products.

·

Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale.

·

Geographic concentration of our refining operations and customers within the Eagle Ford Shale.

·

Severe weather or other events affecting our facilities, or those of our vendors, suppliers, or customers.

·

Regulatory changes, as well as proposed measures that are reasonably likely to be enacted, to reduce greenhouse gas emissions.

·

Our ability to effect and integrate potential acquisitions.

 

Pipeline and Facilities and Oil and Gas Assets

 

·

Assessment of civil penalties by BOEM for our failure to satisfy orders to provide additional financial assurance (supplemental pipeline bonds) within the time period prescribed.

·

Assessment of civil penalties by BSEE for our failure to decommission pipeline and platform assets within the time periods prescribed.

 

Common Stock

 

·

Fluctuations in our stock price that may result in substantial investment loss.

·

Declines in our stock price due to share sales by Affiliates.

·

Dilution of the equity of current stockholders and the potential decline of our stock price as a result of the issuance of new Common Stock or Preferred Stock from the large pool of authorized shares that we have available to issue.

·

The potential sale of shares pursuant to Rule 144, which may adversely affect the market.

·

The lack of dividend payments.

·

Failure to maintain effective internal controls in accordance with Section 404(a) of the Sarbanes-Oxley Act.

 

See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC and elsewhere in this filing. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

 

Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.

  

Blue Dolphin Energy Company                                       

 

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Table of Contents

 

Financial Statements

 

 

 

PART I

 

ITEM 1. FINANCIAL STATEMENTS

 

Consolidated Balance Sheets (Unaudited)

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands except share amounts)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$ 9

 

 

$ 549

 

Restricted cash

 

 

48

 

 

 

48

 

Accounts receivable, net

 

 

63

 

 

 

214

 

Prepaid expenses and other current assets

 

 

1,961

 

 

 

3,564

 

Deposits

 

 

110

 

 

 

124

 

Inventory

 

 

1,033

 

 

 

1,062

 

Total current assets

 

 

3,224

 

 

 

5,561

 

 

 

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Total property and equipment, net

 

 

61,214

 

 

 

62,497

 

Operating lease right-of-use assets, net

 

 

417

 

 

 

498

 

Restricted cash, noncurrent

 

 

-

 

 

 

514

 

Surety bonds

 

 

230

 

 

 

230

 

Total long-term assets

 

 

61,861

 

 

 

63,739

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 65,085

 

 

$ 69,300

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

Long-term debt less unamortized debt issue costs, current portion (in default)

 

$ 33,756

 

 

$ 33,692

 

Line of credit payable (in default)

 

 

5,941

 

 

 

8,042

 

Long-term debt, related party, current portion (in default)

 

 

19,080

 

 

 

16,010

 

Interest payable (in default)

 

 

7,708

 

 

 

6,408

 

Interest payable, related party (in default)

 

 

3,134

 

 

 

2,814

 

Accounts payable

 

 

2,457

 

 

 

3,274

 

Accounts payable, related party

 

 

155

 

 

 

155

 

Current portion of lease liabilities

 

 

204

 

 

 

194

 

Asset retirement obligations, current portion

 

 

2,370

 

 

 

2,370

 

Accrued expenses and other current liabilities

 

 

5,803

 

 

 

4,882

 

Total current liabilities

 

 

80,608

 

 

 

77,841

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Long-term lease liabilities, net of current

 

 

266

 

 

 

370

 

Deferred revenues

 

 

1,423

 

 

 

1,520

 

Long-term debt, net of current portion

 

 

847

 

 

 

355

 

Total long-term liabilities

 

 

2,536

 

 

 

2,245

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

83,144

 

 

 

80,086

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 16)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514

 

 

 

 

 

 

 

 

shares issued at both June 30, 2021 and December 31, 2020)

 

 

127

 

 

 

127

 

Additional paid-in capital

 

 

38,457

 

 

 

38,457

 

Accumulated deficit

 

 

(56,643 )

 

 

(49,370 )

TOTAL STOCKHOLDERS' EQUITY (DEFICIT)

 

 

(18,059 )

 

 

(10,786 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

$ 65,085

 

 

$ 69,300

 

 

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

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 10

 

 

Table of Contents

 

Financial Statements

 

 

 

Consolidated Statements of Operations (Unaudited)

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands, except share and per-share amounts)

 

REVENUE FROM OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ 68,518

 

 

$ 17,359

 

 

$ 127,001

 

 

$ 78,256

 

Tolling and terminaling

 

 

923

 

 

 

1,110

 

 

 

1,853

 

 

 

2,213

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue from operations

 

 

69,441

 

 

 

18,469

 

 

 

128,854

 

 

 

80,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil, fuel use, and chemicals

 

 

68,499

 

 

 

16,783

 

 

 

126,282

 

 

 

76,503

 

Other conversion costs

 

 

1,967

 

 

 

2,893

 

 

 

3,807

 

 

 

5,261

 

Total cost of goods sold

 

 

70,466

 

 

 

19,676

 

 

 

130,089

 

 

 

81,764

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross loss

 

 

(1,025 )

 

 

(1,207 )

 

 

(1,235 )

 

 

(1,295 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH operating fee

 

 

131

 

 

 

190

 

 

 

255

 

 

 

337

 

Other operating expenses

 

 

50

 

 

 

47

 

 

 

104

 

 

 

106

 

General and administrative expenses

 

 

612

 

 

 

531

 

 

 

1,270

 

 

 

1,175

 

Depletion, depreciation and amortization

 

 

693

 

 

 

669

 

 

 

1,386

 

 

 

1,302

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations

 

 

1,486

 

 

 

1,437

 

 

 

3,015

 

 

 

2,920

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss from operations

 

 

(2,511 )

 

 

(2,644 )

 

 

(4,250 )

 

 

(4,215 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easement, interest and other income

 

 

-

 

 

 

80

 

 

 

2

 

 

 

100

 

Interest and other expense

 

 

(1,588 )

 

 

(1,678 )

 

 

(3,068 )

 

 

(3,452 )

Gain on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

43

 

 

 

-

 

Total other expense

 

 

(1,588 )

 

 

(1,598 )

 

 

(3,023 )

 

 

(3,352 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(4,099 )

 

 

(4,242 )

 

 

(7,273 )

 

 

(7,567 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net Loss

 

$ (4,099 )

 

$ (4,242 )

 

$ (7,273 )

 

$ (7,582 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$ (0.32 )

 

$ (0.34 )

 

$ (0.57 )

 

$ (0.61 )

Diluted

 

$ (0.32 )

 

$ (0.34 )

 

$ (0.57 )

 

$ (0.61 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,693,514

 

 

 

12,580,853

 

 

 

12,693,514

 

 

 

12,454,109

 

Diluted

 

 

12,693,514

 

 

 

12,580,853

 

 

 

12,693,514

 

 

 

12,454,109

 

 

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

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 11

 

 

Table of Contents

 

Financial Statements

 

 

 

Consolidated Statements of Cash Flows (Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net loss

 

$ (7,273 )

 

$ (7,582 )

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation and amortization

 

 

1,386

 

 

 

1,302

 

Deferred income tax

 

 

-

 

 

 

15

 

Amortization of debt issue costs

 

 

64

 

 

 

284

 

Guaranty fees paid in kind

 

 

304

 

 

 

305

 

Related-party interest expense paid in kind

 

 

646

 

 

 

220

 

Deferred revenues and expenses

 

 

(97 )

 

 

(182 )

Gain on issuance of shares

 

 

-

 

 

 

(80 )

Gain on extinguishment of debt

 

 

(43 )

 

 

-

 

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

151

 

 

 

308

 

Accounts receivable, related party

 

 

-

 

 

 

1,364

 

Prepaid expenses and other current assets

 

 

1,603

 

 

 

364

 

Deposits and other assets

 

 

14

 

 

 

(66 )

Inventory

 

 

29

 

 

 

(1,913 )

Accounts payable, accrued expenses and other liabilities

 

 

(450 )

 

 

1,807

 

Net cash used in operating activities

 

 

(3,666 )

 

 

(3,854 )

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

-

 

 

 

(908 )

Net cash used in investing activities

 

 

-

 

 

 

(908 )

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

500

 

 

 

-

 

Payments on debt

 

 

(9 )

 

 

(1,501 )

Net activity on related-party debt

 

 

2,121

 

 

 

6,195

 

Net cash provided by financing activities

 

 

2,612

 

 

 

4,694

 

Net change in cash, cash equivalents, and restricted cash

 

 

(1,054 )

 

 

(68 )

 

 

 

 

 

 

 

 

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD

 

 

1,111

 

 

 

668

 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD

 

$ 57

 

 

$ 600

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Issuance of shares for services and/or to extinguish debt

 

$ -

 

 

$ 120

 

Conversion of related-party notes to common stock

 

$ -

 

 

$ 148

 

Related-party payments on line of credit payable

 

$ 900

 

 

$ -

 

Interest paid

 

$ 542

 

 

$ 1,608

 

Income taxes paid (refunded)

 

$ -

 

 

$ -

 

Set-off of tank rental fees under line of credit payable

 

$ 1,201

 

 

$ -

 

 

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

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 12

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Notes to Consolidated Financial Statements

 

(1) Organization

 

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

 

Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.

 

Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.

 

Affiliates

Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

 

Going Concern

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. As discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing.

 

Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2021 and December 31, 2020.

 

Third-Party Defaults

·

Veritex Loans – Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 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. Any exercise by Veritex of its rights and remedies under our 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. Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, which could lead to holders of our common stock losing their investment in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. For both the three and six-month periods ended June 30, 2021, principal and interest payments to Veritex totaled $0. For both the three and six-month periods ended June 30, 2020, principal and interest payments to Veritex totaled $0.9 million. As of the filing date of this report, LE and LRM were in default with respect to required monthly payments under the LE Term Loan Due 2034 and LRM Term Loan Due 2034.

 

 

·

Amended Pilot Line of Credit – Upon maturity of the Pilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Pilot Obligations”). Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Pilot Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Pilot Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 13

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

 

Pursuant to a June 1, 2020 notice, Pilot began applying Pilot’s payment obligations to NPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between NPS and Pilot, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the Amended Pilot Line of Credit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0.2 million, respectively. For the three-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $1.2 million and $0.2 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.6 million and $0.8 million, respectively.

 

On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Pilot Obligations, including through use of the proceeds of these SBA EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the loans, no further action has been taken by Pilot as of the filing date of this report.

 

Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit 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. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with NPS to settle the Pilot Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. NPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price 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.

 

·

Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment.

 

Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month periods ended June 30, 2021 and 2020, our refinery experienced 4 days and 8 days of downtime, respectively, as a result of crude deficiencies associated with COVID-19 related cash constraints. During the six-month periods ended June 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies associated with COVID-19 related cash constraints.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 14

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Related-Party Defaults

Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Related party debt represents such working capital borrowings. As of the filing date of this report, Blue Dolphin was in default with respect to past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement.

 

Margin Deterioration and Volatility. Our refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil production, there is cautious optimism that the economy is improving based on signs of recovery during the first half of 2021. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future as new mutations of the virus spread. We cannot predict when prices and demand will stabilize, and we are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position and results of operations throughout 2021.

 

Historic Net Losses and Working Capital Deficits

Net Losses. Net loss for the three months ended June 30, 2021 was $4.1 million, or a loss of $0.32 per share, compared to a net loss of $4.2 million, or a loss of $0.34 per share, for the three months ended June 30, 2020. The improvement between the three-month period in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. Less refinery downtime also contributed to the improvement between the periods.

 

Net loss for the six months ended June 30, 2021 was $7.3 million, or a loss of $0.57 per share, compared to a net loss of $7.6 million, or a loss of $0.61 per share, for the six months ended June 30, 2020. The improvement between the six-month periods in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. The improvement between the periods was also due to less refinery downtime and decreased interest and other expense.

 

Working Capital Deficits. We had a working capital deficit of $77.4 million and $72.3 million at June 30, 2021 and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.5 million and $22.6 million at June 30, 2021 and December 31, 2020, respectively.

 

Cash and cash equivalents totaled $0.009 million and $0.5 million at June 30, 2021 and December 31, 2020, respectively. Restricted cash (current portion) totaled $0.05 million at both June 30, 2021 and December 31, 2021. Restricted cash, noncurrent totaled $0 and $0.5 million at June 30, 2021 and December 31, 2020, respectively.

 

Operating Risks

Successful execution of our business strategy depends on several key factors, including, having adequate working capital 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 products. We are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. As U.S. federal, state, and local officials address the spread of COVID-19 with vaccine programs and monitor variant clusters, we expect to continue operating. Any governmental mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.

 

Management believes that it has taken all prudent steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a low oil price environment. We are managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. At the Nixon facility, we adjust throughput and production based on prevailing market conditions. With regard to personnel safety, we adopted remote working where possible and social distancing, mask wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.

 

There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 15

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

  

(2) Principles of Consolidation and Significant Accounting Policies

 

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, 2020 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 on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC. Operating results for the three and six months ended June 30, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2021, or for any other period.

 

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. The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual results could differ from those estimates. The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.

 

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 of the customer’s account based on current aging status, collection history, and financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio. We had an allowance for doubtful accounts of $0.1 million at both June 30, 2021 and December 31, 2020.

 

Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined 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)” to our consolidated financial statements for additional disclosures related to inventory.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 16

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

  

Property and Equipment.

Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. Additions to refinery and facilities assets are capitalized, and 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.

 

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 FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, our pipeline assets were fully impaired at December 31, 2016. 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. Although we planned to decommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.

 

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.

 

CIP. CIP expenditures relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.

 

Leases. We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize ROU asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not determinable, we use the incremental borrowing rate to discount lease payments to present value. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

 

We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. We account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. We allocate the consideration in these contracts based on pricing information contained in the lease.

 

Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lease transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in ‘depreciation and amortization expense.’ Interest expense is incurred based on the carrying value of the lease liability and is reflected in ‘interest and other expense’.

 

Revenue Recognition.

Refinery Operations Revenue. Revenue from the sale of refined products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined 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 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.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 17

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

  

Tolling and Terminaling Revenue.

Tolling and terminaling revenue represents fees pursuant to: (i) 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 and (ii) 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.

 

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.

 

Deferred Revenue. We record deferred revenue when cash payments are received or due in advance of satisfying our performance obligations. Deferred revenue represents a liability as of the balance sheet date related to a revenue producing activity for which revenue has not yet been recognized. We record deferred revenue when we receive consideration under a contract before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.

 

Income Taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities, as well as operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which the differences are expected to reverse. We record a valuation allowance against deferred income tax assets if it is more likely than not that those assets will not be realized. The provision for income taxes comprises our current tax liability and change in deferred income tax assets and liabilities.

 

Significant judgment is required in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to determine the realizability of deferred tax assets. We consider whether it is more likely than not that a 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. When we determine 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 June 30, 2021. 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, 2021 and December 31, 2020. 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, 2021 and December 31, 2020, there were no uncertain tax positions for which a reserve or liability was necessary. See “Note (14)” to our consolidated financial statements for more information related to income taxes.

 

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.

 

The market volatility of commodity prices as a result of the ongoing COVID-19 pandemic could affect the value of certain of our long-lived assets. Management evaluated our refinery and facilities assets for impairment as of June 30, 2021. No impairment was deemed necessary based upon this testing, and we did not record any impairment of our refinery and facilities assets for the periods presented.

 

Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred, and we also capitalize the corresponding cost 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.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 18

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

   

We have concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives 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.

 

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. 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 (12)” to our consolidated financial statements for additional information related to AROs.

 

Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS 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. 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 restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (15)” to our consolidated financial statements for additional information related to EPS.

 

New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including changes to non-authoritative SEC content. During the three and six months ended June 30, 2021, we did not adopt any ASUs.

 

New Pronouncements Issued, Not Yet Effective.

 

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.

 

(3) Related-Party Transactions

 

Affiliate Operational Agreements Summary

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

 

Agreement/Transaction

Parties

Effective Date

Key Terms

Jet Fuel Sales Agreement

LEH - LE

04/01/2021

1-year term expiring earliest to occur of 03/31/2022 plus 30-day carryover or delivery of maximum jet fuel quantity; LEH bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification

Office Sub-Lease Agreement

LEH - BDSC

01/01/2018

68-month term expiring 08/31/2023; office lease Houston, Texas; includes 6-month rent abatement period; rent approximately $0.02 million per month

Amended and Restated Operating Agreement

LEH – Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC

04/01/2020

3-year term; expires 04/01/2023 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC

 

Working Capital

We have historically depended on Affiliates for funding when revenue from operations and availability under bank facilities are insufficient to meet our liquidity and working capital needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or long-term debt, related party.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 19

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Related-Party Long-Term Debt

 

Loan Description

Parties

Maturity Date

Interest Rate

Loan Purpose

March Carroll Note (in default)

Jonathan Carroll – Blue Dolphin

Jan 2019

8.00%

Blue Dolphin working capital; reflects amounts owed to Jonathan Carroll under the guaranty fee agreements

March Ingleside Note (in default)

Ingleside – Blue Dolphin

Jan 2019

8.00%

Blue Dolphin working capital

June LEH Note (in default)

LEH – Blue Dolphin

Jan 2019

8.00%

Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement

BDPL-LEH Loan Agreement (in default)(1)

LEH - BDPL

Aug 2018

16.00%

Blue Dolphin working capital

Amended and Restated Guaranty Fee Agreement(2)

Jonathan Carroll - LE

--

2.00%

Tied to payoff of LE $25 million Veritex loan

Amended and Restated Guaranty Fee Agreement(2)

Jonathan Carroll - LRM

--

2.00%

Tied to payoff of LRM $10 million Veritex loan

 

(1)

The original principal amount of the BDPL-LEH Loan Agreement was $4.0 million.

 

 

(2)

As a condition for our secured loan agreements with Veritex, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. Under the guaranty fee agreements, Mr. Carroll is entitled to receive guaranty fees. The fees are payable 50% in cash and 50% in Common Stock. The Common Stock portion is paid quarterly. For the foreseeable future, management does not intend to pay Mr. Carroll the cash portion due to Blue Dolphin’s working capital deficits. The cash portion will continue to accrue and be added to the outstanding principal balance owed to Mr. Carroll under the March Carroll Note.

 

Guarantees, Security and Defaults

 

Loan Description

Guarantees

Security

Event(s) of Default

March Carroll Note (in default)

---

---

Failure of borrower to pay past due payment obligations; loan matured January 2019

March Ingleside Note (in default)

---

---

Failure of borrower to pay past due payment obligations; loan matured January 2019

June LEH Note (in default)

---

---

Failure of borrower to pay past due payment obligations; loan matured January 2019

BDPL-LEH Loan Agreement

---

Certain BDPL property

Failure of borrower to pay past due payment obligations; loan matured August 2018

 

Covenants

The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the March Carroll Note, March Ingleside Note, or June LEH Note.

 

Related-Party Financial Impact

Consolidated Balance Sheets.

 

Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both June 30, 2021 and December 31, 2020.

 

Long-term debt, related party, current portion (in default) and accrued interest payable, related party.

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

LEH

 

 

 

 

 

 

June LEH Note (in default)

 

$ 12,119

 

 

$ 9,446

 

BDPL-LEH Loan Agreement (in default)

 

 

7,134

 

 

 

6,814

 

LEH Total

 

 

19,253

 

 

 

16,260

 

Ingleside

 

 

 

 

 

 

 

 

March Ingleside Note (in default)

 

 

1,045

 

 

 

1,013

 

Jonathan Carroll

 

 

 

 

 

 

 

 

March Carroll Note (in default)

 

 

1,916

 

 

 

1,551

 

 

 

 

22,214

 

 

 

18,824

 

 

 

 

 

 

 

 

 

 

Less: Long-term debt, related party, current portion (in default)

 

 

(19,080 )

 

 

(16,010 )

Less: Accrued interest payable, related party (in default)

 

 

(3,134 )

 

 

(2,814 )

 

 

$ -

 

 

$ -

 

   

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 20

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Consolidated Statements of Operations.

 

Total revenue from operations.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

Refinery operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH

 

$ 20,979

 

 

 

30.2 %

 

$ 4,587

 

 

 

24.8 %

 

$ 37,059

 

 

 

28.8 %

 

$ 22,302

 

 

 

27.7 %

Third-Parties

 

 

47,539

 

 

 

68.5 %

 

 

12,772

 

 

 

69.2 %

 

 

89,942

 

 

 

69.8 %

 

 

55,954

 

 

 

69.5 %

Tolling and terminaling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-Parties

 

 

923

 

 

 

1.3 %

 

 

1,110

 

 

 

6.0 %

 

 

1,853

 

 

 

1.4 %

 

 

2,213

 

 

 

2.8 %

 

 

$ 69,441

 

 

 

100.0 %

 

$ 18,469

 

 

 

100.0 %

 

$ 128,854

 

 

 

100.0 %

 

$ 80,469

 

 

 

100.0 %

 

Interest expense.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

(in thousands)

 

Jonathan Carroll

 

 

 

 

 

 

 

 

 

 

 

 

Guaranty Fee Agreements

 

 

 

 

 

 

 

 

 

 

 

 

First Term Loan Due 2034

 

$ 108

 

 

$ 108

 

 

$ 216

 

 

$ 216

 

Second Term Loan Due 2034

 

 

45

 

 

 

44

 

 

 

90

 

 

 

89

 

March Carroll Note (in default)

 

 

32

 

 

 

20

 

 

 

61

 

 

 

43

 

LEH

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BDPL-LEH Loan Agreement (in default)

 

 

160

 

 

 

160

 

 

 

320

 

 

 

320

 

June LEH Note (in default)

 

 

215

 

 

 

117

 

 

 

397

 

 

 

142

 

Ingleside

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March Ingleside Note (in default)

 

 

14

 

 

 

15

 

 

 

28

 

 

 

35

 

 

 

$ 574

 

 

$ 464

 

 

$ 1,112

 

 

$ 845

 

 

Other. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.01 million for both three-month periods ended June 30, 2021 and 2020. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.02million for both six-month periods ended June 30, 2021 and 2020.

 

The LEH operating fee totaled approximately $0.1 million and $0.2 million for the three-month periods ended June 30, 2021 and 2020, respectively. The LEH operating fee was relatively flat, totaling approximately $0.3 million for both six-month periods ended June 30, 2021 and 2020.

 

(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 third-party lease agreements. Both operations are conducted at the Nixon facility. Corporate and other includes BDSC, BDPL and BDPC.

 

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.

 

Contract Liabilities. Our contract liabilities from contracts with customers consist of unearned revenue and are included in accrued expenses and presented in “Note (9)” to our consolidated financial statements.

 

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

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 21

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

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

 

 

 

 Three Months Ended

 

 

 Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 (in thousands)

 

 

(in thousands)

 

Net revenue (excluding intercompany fees and sales)

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ 68,518

 

 

$ 17,359

 

 

$ 127,001

 

 

$ 78,256

 

Tolling and terminaling

 

 

923

 

 

 

1,110

 

 

 

1,853

 

 

 

2,213

 

Total net revenue

 

 

69,441

 

 

 

18,469

 

 

 

128,854

 

 

 

80,469

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany fees and sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(581 )

 

 

(406 )

 

 

(1,147 )

 

 

(1,023 )

Tolling and terminaling

 

 

581

 

 

 

406

 

 

 

1,147

 

 

 

1,023

 

Total intercompany fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operation costs and expenses(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(70,054 )

 

 

(19,418 )

 

 

(129,343 )

 

 

(81,251 )

Tolling and terminaling

 

 

(412 )

 

 

(258 )

 

 

(746 )

 

 

(513 )

Corporate and other

 

 

(50 )

 

 

(47 )

 

 

(104 )

 

 

(106 )

Total operation costs and expenses

 

 

(70,516 )

 

 

(19,723 )

 

 

(130,193 )

 

 

(81,870 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment contribution margin (deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(2,117 )

 

 

(2,465 )

 

 

(3,489 )

 

 

(4,018 )

Tolling and terminaling

 

 

1,092

 

 

 

1,258

 

 

 

2,254

 

 

 

2,723

 

Corporate and other

 

 

(50 )

 

 

(47 )

 

 

(104 )

 

 

(106 )

Total segment contribution deficit

 

 

(1,075 )

 

 

(1,254 )

 

 

(1,339 )

 

 

(1,401 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(265 )

 

 

(327 )

 

 

(566 )

 

 

(631 )

Tolling and terminaling

 

 

(68 )

 

 

(68 )

 

 

(136 )

 

 

(136 )

Corporate and other

 

 

(410 )

 

 

(326 )

 

 

(823 )

 

 

(745 )

Total general and administrative expenses

 

 

(743 )

 

 

(721 )

 

 

(1,525 )

 

 

(1,512 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(302 )

 

 

(294 )

 

 

(604 )

 

 

(582 )

Tolling and terminaling

 

 

(340 )

 

 

(324 )

 

 

(680 )

 

 

(618 )

Corporate and other

 

 

(51 )

 

 

(51 )

 

 

(102 )

 

 

(102 )

Total depreciation and amortization

 

 

(693 )

 

 

(669 )

 

 

(1,386 )

 

 

(1,302 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other non-operating expenses, net

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(708 )

 

 

(751 )

 

 

(1,306 )

 

 

(1,492 )

Tolling and terminaling

 

 

(448 )

 

 

(616 )

 

 

(900 )

 

 

(1,386 )

Corporate and other

 

 

(432 )

 

 

(231 )

 

 

(817 )

 

 

(474 )

Total interest and other non-operating expenses, net

 

 

(1,588 )

 

 

(1,598 )

 

 

(3,023 )

 

 

(3,352 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(3,392 )

 

 

(3,837 )

 

 

(5,965 )

 

 

(6,723 )

Tolling and terminaling

 

 

236

 

 

 

250

 

 

 

538

 

 

 

583

 

Corporate and other

 

 

(943 )

 

 

(655 )

 

 

(1,846 )

 

 

(1,427 )

Total loss before income taxes

 

 

(4,099 )

 

 

(4,242 )

 

 

(7,273 )

 

 

(7,567 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (4,099 )

 

$ (4,242 )

 

$ (7,273 )

 

$ (7,582 )

  

(1)

Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL.

(2)

General and administrative expenses within refinery operations include the LEH operating fee.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 22

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

   

 

 

 Three Months Ended

 

 

 Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

 (in thousands)

 

 

(in thousands)

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ -

 

 

$ 286

 

 

$ -

 

 

$ 292

 

Tolling and terminaling

 

 

-

 

 

 

424

 

 

 

-

 

 

 

616

 

Corporate and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total capital expenditures

 

$ -

 

 

$ 710

 

 

$ -

 

 

$ 908

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 (in thousands)

 

Identifiable assets

 

 

 

 

 

 

Refinery operations

 

$ 45,679

 

 

$ 48,521

 

Tolling and terminaling

 

 

17,847

 

 

 

18,722

 

Corporate and other

 

 

1,559

 

 

 

2,057

 

Total identifiable assets

 

$ 65,085

 

 

$ 69,300

 

 

(5) 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 cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At June 30, 2021 and December 31, 2020, we had cash balances (including restricted cash) that exceeded the FDIC insurance limit per depositor of $0 and $0.6 million, respectively.

 

Key Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. The crude supply agreement, the initial term of which is volume based, expires when Pilot sells us 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”) unless either party provides the other with notice of nonrenewal at least 60 days prior to expiration of any Renewal Term. Total volume sold to us under the crude supply agreement totaled approximately 6.8 million bbls as of June 30, 2021. Effective June 30, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month periods ended June 30, 2021 and 2020, our refinery experienced 4 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints. During the six-month periods ended June 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints.

 

Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.

 

Beginning on June 1, 2020, Pilot began applying payment obligations owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. For the three-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0.2 million, respectively. For the three-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $1.2 million and $0.2 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.6 million and $0.8 million, respectively. See “Note (1) Organization – Going Concern” to our consolidated financial statements for additional disclosures related to defaults in our debt obligations.

 

On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Pilot Obligations, including through use of the proceeds of these SBA EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the loans, no further action has been taken by Pilot as of the filing date of this report .

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 23

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate.

 

Significant Customers

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

 

Three Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

3

 

 

 

75 %

 

$ 0

 

June 30, 2020

 

 

3

 

 

 

69 %

 

$ 0

 

 

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. The Affiliate accounted for 30% and 25% of total revenue from operations for the three months ended June 30, 2021 and 2020, respectively. The Affiliate represented $0 in accounts receivable at both June 30, 2021 and 2020, respectively.

 

Six Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

4

 

 

 

86 %

 

$ 0

 

June 30, 2020

 

 

4

 

 

 

90 %

 

$ 0

 

 

The Affiliate accounted for 29% and 28% of total revenue from operations for the six months ended June 30, 2021 and 2020, respectively. The Affiliate represented $0 in accounts receivable at both June 30, 2021 and 2020, respectively.

  

Outstanding amounts under certain related party agreements can significantly vary period to period based on the timing of sales and payments. With regard to the Amended and Restated Operating Agreement, any amount that remains outstanding at the end of the quarter is added to the June LEH Note, which is reflected on the consolidated balance sheets within long-term debt, related party, current portion (in default). At June 30, 2021 and December 31, 2020, the total amount we owed to LEH under long-term debt, related-party agreements totaled $19.3 million and $16.3 million, respectively. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to transactions with Affiliates.

 

Concentration of Customers. Our customer base is concentrated on refined petroleum product wholesalers. This customer concentration may impact our overall exposure to credit risk, either positively or negatively, as our customers are likely similarly affected by economic changes. This includes the uncertainties related to the COVID-19 pandemic and the associated volatility in the global oil markets. Historically, we have had no significant problems collecting our accounts receivable, including from many of our customers that pre-pay.

 

Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to Mexico. Total refined 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,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LPG mix

 

$ 6

 

 

 

0 %

 

$ -

 

 

 

0 %

 

$ 12

 

 

 

0 %

 

$ -

 

 

 

0 %

Naphtha

 

 

15,264

 

 

 

22.3 %

 

 

3,160

 

 

 

18.2 %

 

 

29,488

 

 

 

23.2 %

 

 

14,675

 

 

 

18.8 %

Jet fuel

 

 

20,979

 

 

 

30.6 %

 

 

4,587

 

 

 

26.4 %

 

 

37,059

 

 

 

29.2 %

 

 

22,302

 

 

 

28.5 %

HOBM

 

 

16,012

 

 

 

23.4 %

 

 

3,691

 

 

 

21.3 %

 

 

31,675

 

 

 

24.9 %

 

 

18,882

 

 

 

24.1 %

AGO

 

 

16,257

 

 

 

23.7 %

 

 

5,921

 

 

 

34.1 %

 

 

28,767

 

 

 

22.7 %

 

 

22,397

 

 

 

28.6 %

 

 

$ 68,518

 

 

 

100.0 %

 

$ 17,359

 

 

 

100.0 %

 

$ 127,001

 

 

 

100.0 %

 

$ 78,256

 

 

 

100.0 %

 

An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to Affiliate transactions.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 24

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

 

 

(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,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Prepaid insurance

 

$ 1,597

 

 

$ 1,182

 

Prepaid crude oil and condensate

 

 

266

 

 

 

2,249

 

Prepaid easement renewal fees

 

 

88

 

 

 

99

 

Other prepaids

 

 

10

 

 

 

34

 

 

 

$ 1,961

 

 

$ 3,564

 

 

(7) Inventory

 

Inventory as of the dates indicated consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Crude oil and condensate

 

$ 587

 

 

$ 463

 

AGO

 

 

159

 

 

 

133

 

Naphtha

 

 

158

 

 

 

120

 

Chemicals

 

 

98

 

 

 

271

 

Propane

 

 

23

 

 

 

15

 

LPG mix

 

 

8

 

 

 

6

 

HOBM

 

 

-

 

 

 

54

 

 

 

$ 1,033

 

 

$ 1,062

 

 

(8) Property, Plant and Equipment, Net

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Refinery and facilities

 

$ 72,184

 

 

$ 72,184

 

Land

 

 

566

 

 

 

566

 

Other property and equipment

 

 

903

 

 

 

903

 

 

 

 

73,653

 

 

 

73,653

 

 

 

 

 

 

 

 

 

 

Less:  Accumulated depletion, depreciation, and amortiation

 

 

(16,503 )

 

 

(15,220 )

 

 

 

57,150

 

 

 

58,433

 

 

 

 

 

 

 

 

 

 

CIP

 

 

4,064

 

 

 

4,064

 

 

 

$ 61,214

 

 

$ 62,497

 

  

We capitalize interest cost incurred on funds used to construct property, plant, and equipment. Capitalized interest is recorded as part of the asset it relates to and is depreciated over the asset’s useful life. Capitalized interest cost, which is included in CIP, was $0 at June 30, 2021 and December 31, 2020. Capital expenditures for expansion at the Nixon facility were funded by long-term debt from Veritex, revenue from operations, and working capital from Affiliates. At June 30, 2021 and December 31, 2020, unused amounts for capital expenditures derived from Veritex loans were reflected in restricted cash (current and non-current portions) on our consolidated balance sheets.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 25

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

 

 

(9) 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,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Unearned revenue from contracts with customers

 

$ 3,878

 

 

$ 3,421

 

Insurance

 

 

783

 

 

 

541

 

Unearned contract renewal income

 

 

400

 

 

 

500

 

Taxes payable

 

 

214

 

 

 

58

 

Other payable

 

 

190

 

 

 

252

 

Customer deposits

 

 

173

 

 

 

10

 

Board of director fees payable

 

 

165

 

 

 

100

 

 

 

$ 5,803

 

 

$ 4,882

 

 

(10) Third-Party Long-Term Debt

 

Loan Agreements Summary

 

 

 

 

Loan Description

 

 

 

Parties

Original Principal Amount

(in millions)

 

 

Maturity Date

 

Monthly Principal and Interest Payment

 

 

 

Interest Rate

 

 

 

Loan Purpose

Veritex Loans(1)

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

LE-Veritex

$25.0

Jun 2034

$0.2 million

WSJ Prime + 2.75%

Refinance loan; capital improvements

LRM Term Loan Due 2034 (in default)

LRM-Veritex

$10.0

Dec 2034

$0.1 million

WSJ Prime + 2.75%

Refinance bridge loan; capital improvements

Notre Dame Debt (in default)(2)(3)

LE-Kissick

$11.7

Jan 2018

No payments to date; payment rights subordinated

16.00%

Working capital; reduced arbitration award payable to GEL

SBA EIDLs

 

 

 

 

 

 

BDEC Term Loan Due 2051(4)

Blue Dolphin-SBA

$0.5

Jun 2051

$0.003 million

3.75%

Working capital

LE Term Loan Due 2050(5)

LE-SBA

$0.15

Aug 2050

$0.0007 million

3.75%

Working capital

NPS Term Loan Due 2050(5)

NPS-SBA

$0.15

Aug 2050

$0.0007 million

3.75%

Working capital

Equipment Loan Due 2025(6)

LE-Texas First

$0.07

Oct 2025

$0.0013 million

4.50%

Equipment Lease Conversion

 

(1)

Proceeds were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected on our consolidated balance sheets as restricted cash (current portion) and restricted cash (noncurrent). At June 30, 2021, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0. At December 31, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million.

(2)

LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount of $8.0 million. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the arbitration award payable to GEL by $3.6 million.

(3)

Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034.

(4)

Payment is deferred for the first eighteen (18) months of the loan; the first payment is due December 2022; interest accrues during the deferral period. The BDEC Term Loan Due 2051 is not forgivable.

(5)

Payments are deferred for the first twelve (12) months of the loan; the first payment is due September 2021; interest accrues during the deferral period. The LE Term Loan Due 2050 and NPS Term Loan Due 2050 are not forgivable.

(6)

In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The equipment rental agreement matured in May 2020. In October 2020, LE entered into the Equipment Loan Due 2025 to finance the purchase of the backhoe. The backhoe continues to be used at the Nixon facility.

 

Remainder of Page Intentionally Left Blank

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 26

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Third-party long-term debt (outstanding principal, accrued interest, and late fees), as of the dates indicated was as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

$ 23,468

 

 

$ 22,840

 

LRM Term Loan Due 2034 (in default)

 

 

9,738

 

 

 

9,473

 

Notre Dame Debt (in default)

 

 

9,812

 

 

 

9,413

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

503

 

 

 

-

 

LE Term Loan Due 2050

 

 

155

 

 

 

152

 

NPS Term Loan Due 2050

 

 

155

 

 

 

152

 

Equipment Loan Due 2025

 

 

62

 

 

 

71

 

 

 

 

43,893

 

 

 

42,101

 

 

 

 

 

 

 

 

 

 

Less: Current portion of long-term debt, net

 

 

(33,756 )

 

 

(33,692 )

Less: Unamortized debt issue costs

 

 

(1,685 )

 

 

(1,749 )

Less: Accrued interest payable (in default)

 

 

(7,605 )

 

 

(6,305 )

 

 

$ 847

 

 

$ 355

 

 

Unamortized debt issue costs associated with the Veritex loans as of the dates indicated consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

$ 1,674

 

 

$ 1,674

 

LRM Term Loan Due 2034 (in default)

 

 

768

 

 

 

768

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

(757 )

 

 

(693 )

 

 

$ 1,685

 

 

$ 1,749

 

 

Amortization expense was $0.03 million for both three-month periods ended June 30, 2021 and 2020. Amortization expense was $0.06million for both six-month periods ended June 30, 2021 and 2020.

 

Accrued interest and late fees related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Notre Dame Debt (in default)

 

$ 4,834

 

 

$ 4,435

 

Veritex Loans

 

 

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

 

1,923

 

 

 

1,295

 

LRM Term Loan Due 2034 (in default)

 

 

835

 

 

 

571

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

3

 

 

 

-

 

LE Term Loan Due 2050

 

 

5

 

 

 

2

 

NPS Term Loan Due 2050

 

 

5

 

 

 

2

 

 

 

 

7,605

 

 

 

6,305

 

Less: Accrued interest payable (in default)

 

 

(7,605 )

 

 

(6,305 )

Long-term Interest Payable, Net of Current Portion

 

$ -

 

 

$ -

 

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 27

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

  

Payment Deferments

Veritex Loans. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period in July 2020: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the $1.0 million payment reserve account. For both the three and six-month periods ended June 30, 2021, principal and interest payments to Veritex totaled $0. For both the three and six-month periods ended June 30, 2020, principal and interest payments to Veritex totaled $0.9 million. As of the filing date of this report, LE and LRM were in default with respect to required monthly payments under the secured loan agreements with Veritex. Other defaults remain outstanding as noted below under “Defaults”.

 

SBA EIDLs. The SBA EIDLs include a payment deferment period. Interest accrues during the deferral period. The deferral period for the BDEC Term Loan Due 2051 is the first eighteen (18) months; principal and interest payments begin in December 2022. The deferral period for the LE Term Loan Due 2051 and the NPS Term Loan Due 2050 is the first twelve (12) months; principal and interest payments begin in September 2021.

 

Guarantees and Security

 

Loan Description

Guarantees

Security

Veritex Loans(1)

 

 

LE Term Loan Due 2034 (in default)

• 100% USDA-guarantee

• Jonathan Carroll personal guarantee

• LEH, LRM and Blue Dolphin cross-guarantee

 

• First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory)

• Assignment of all Nixon facility contracts, permits, and licenses

• Absolute assignment of Nixon facility rents and leases, including tank rental income

• $1.0 million payment reserve account held by Veritex

• $5.0 million life insurance policy on Jonathan Carroll

 

LRM Term Loan Due 2034 (in default)

• 100% USDA-guarantee

• Jonathan Carroll personal guarantee

• LEH, LE and Blue Dolphin cross-guarantee

 

• Second priority lien on rights of LE in crude distillation tower and other collateral of LE

• First priority lien on real property interests of LRM

• First priority lien on all LRM fixtures, furniture, machinery, and equipment

• First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien

• All other collateral as described in the security documents

 

Notre Dame Debt (in default)(2)

---

• Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE

 

SBA EIDLs

 

 

BDEC Term Loan Due 2051

• Jonathan Carroll, personal guarantee

• LEH guarantee

 

• Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement

 

LE Term Loan Due 2050(3)

---

• Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement

 

NPS Term Loan Due 2050(3)

---

• Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement

 

Equipment Loan Due 2025

---

• First priority security interest in the equipment (backhoe).

 

(1)

As a condition of the LE Term Loan Due 2034 and LRM Term Loan Due 2034, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest.

 

 

(2)

Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034.

 

 

(3)

On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Pilot Obligations, including through use of the proceeds of these SBA EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate these loans to Pilot, no further action has been taken by Pilot as of the filing date of this report.

 

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 U.S. with the USDA guaranteeing up to 100% of the principal amount. The lender for a USDA-guaranteed loan, in our case Veritex, is required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record. Both the guaranteed and unguaranteed portions 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. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and transactions, including long-term debt guarantees.

 

Covenants

The Veritex loans and SBA EIDLs contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for credit facilities of this type. There are no covenants associated with the Notre Dame Debt and the Equipment Loan Due 2025.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 28

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

 

 

Defaults

 

Loan Description

Event(s) of Default

Covenant Violations

Veritex Loans

 

 

LE Term Loan Due 2034 (in default)

 

 

Failure to make required monthly payments; failure to replenish $1.0 million payment reserve account; events of default under other secured loan agreements with Veritex

Financial covenants:

• debt service coverage ratio, current ratio, and debt to net worth ratio

 

 

LRM Term Loan Due 2034 (in default)

Failure to make required monthly payments; events of default under other secured loan agreements with Veritex

Financial covenants:

• debt service coverage ratio, current ratio, and debt to net worth ratio

 

Notre Dame Debt (in default)

Failure of borrower to pay past due obligations; loan matured January 2019

---

 

As reflected in the table above and elsewhere in this filing, we are in default under the LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt. Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 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 the LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2021 and December 31, 2020.

 

Any exercise by Veritex of its rights and remedies under our 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. In such a case, the trading price 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.

 

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Vertitex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements and any exercise by Veritex of its rights and remedies related to such defaults may have a material adverse effect on the trading prices of our common stock and on the value of an investment in our common stock, and holders of our common stock could lose their investment in our common stock in its entirety. See “Notes (1) and (11)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.

 

(11) Line of Credit Payable

 

Line of Credit Agreement Summary

 

 

 

Line of Credit Description

Original

Principal Amount

(in millions)

 

Maturity Date

 

Monthly Principal and

Interest Payment

 

Interest

Rate

 

Loan Purpose

 

 

 

 

 

 

Amended Pilot Line of Credit (in default)

$13.0

May 2020

----

14.00%

Settlement payment to GEL, NPS purchase of crude oil from Pilot, and working capital

 

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Amounts owed under the Amended Pilot Line of Credit, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Amended Pilot Line of Credit (in default)

 

$ 6,044

 

 

$ 8,145

 

 

 

 

 

 

 

 

 

 

Less:  Interest payable, short-term

 

 

(103 )

 

 

(103 )

 

 

$ 5,941

 

 

$ 8,042

 

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 29

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

Guarantees and Security

 

Loan Description

Guarantees

Security

Amended Pilot Line of Credit (in default)

• Blue Dolphin pledged its equity interests in NPS to Pilot to secure NPS’ obligations;

• Blue Dolphin, LE, LRM, and LEH have each guaranteed NPS’ obligations.

• NPS receivables;

• NPS assets, including a tank lease (the “Tank Lease”);

• LRM receivables.

 

In an Agreement Regarding Attornment of Tank Leases dated April 30, 2019 between Veritex, LE, NPS, and Pilot, Veritex in its capacity as a secured lender of LE and LRM, agreed to permit the continued performance of obligations under a certain tank lease agreement if it were to foreclose on LE property that NPS was leasing from LE so long as certain conditions were met. The effectiveness of the Agreement Regarding Attornment of Tank Leases was subject to certain conditions, including the agreement and concurrence of the USDA that the Agreement Regarding Attornment of Tank Leases does not impair or void the LE Term Loan Due 2034 and LRM Term Loan Due 2034 or any associated guarantees. Veritex used commercially reasonable efforts to obtain such USDA concurrence, however, to date such USDA concurrence has not been provided.

 

Covenants

The Amended Pilot Line of Credit contains customary affirmative and negative covenants and events of default.

 

Defaults

 

Loan Description

Event(s) of Default

Covenant Violations

Amended Pilot Line of Credit (in default)

 

 

Failure of borrower or any guarantor to pay past due obligations; loan matured May 2020

---

 

As reflected in the table above and elsewhere in this filing, we are in default under the Amended Pilot Line of Credit. Upon maturity of the Amended Pilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the Pilot Obligations. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Pilot Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Pilot Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity.

 

Pursuant to a June 1, 2020 notice, Pilot began applying Pilot’s payment obligations to NPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between NPS and Pilot, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the Amended Pilot Line of Credit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0.2 million, respectively. For the three-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $1.2 million and $0.2 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.6 million and $0.8 million, respectively.

 

On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Pilot Obligations, including through use of the proceeds of these SBA EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the loans, no further action has been taken by Pilot as of the filing date of this report.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 30

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

 

 

Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit 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. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with NPS to settle the Pilot Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. NPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price 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.

  

(12) AROs

 

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 decommissioning 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 June 30, 2021 and December 31, 2020, the liability was fully accreted. See “Note (16)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.

 

ARO liability as of the dates indicated was as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

AROs, at the beginning of the period

 

$ 2,370

 

 

$ 2,565

 

Liabilities settled

 

 

-

 

 

 

(195 )

 

 

 

2,370

 

 

 

2,370

 

Less:  AROs, current portion

 

 

(2,370 )

 

 

(2,370 )

Long-term AROs, at the end of the period

 

$ -

 

 

$ -

 

 

Liabilities settled reflects preparatory costs in the period associated with decommissioning our offshore pipelines and platform assets.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 31

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

(13) Lease Obligations

 

Lease Obligations

 

Operating Lease

Office Lease. BDSC has an office lease related to our headquarters office 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. Pursuant to a letter dated March 29, 2021, TR 801 Travis LLC, a Delaware limited partnership, informed BDSC that it was in default under its office lease. BDSC’s failure to pay past due obligations, including rent installments and other charges, constituted an event of default.

 

On May 11, 2021, BDSC and TR 801 Travis LLC reached an agreement to cure BDSC’s Houston office lease default. Under the terms of the arrangement, BDSC will pay TR 801 Travis LLC past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning June 1, 2021 and continuing through the August 31, 2023 lease expiration date. The Past Due Obligations are subject to an annual percentage rate of 4.50%. As revised, BDSC’ monthly base rent plus the prorated portion of the Past Due Obligations will approximate $0.02 million. BDSC made the revised monthly payment as required in June 2021.

 

An Affiliate, LEH, subleases a portion of the Houston office space. Sublease income received from LEH totaled approximately $0.01 million for both the three months ended June 30, 2021 and 2020. Sublease income received from LEH totaled approximately $0.02 million for both the six months ended June 30, 2021 and 2020. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

 

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

 

 

 

 

 

 

June 30,

 

 

December 31,

 

 

 

 

Balance Sheet Location

 

2021

 

 

2020

 

 

 

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

Operating lease ROU assets

 

 

Operating lease ROU assets

 

$ 787

 

 

$ 787

 

Less: Accumulated amortization on operating lease assets

 

 

Operating lease ROU assets

 

 

(370 )

 

 

(289 )

Total lease assets

 

 

 

 

 

417

 

 

 

498

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

 

Operating lease

 

 

Current portion of lease liabilities

 

 

204

 

 

 

194

 

 

 

 

 

 

 

204

 

 

 

194

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

 

Operating lease

 

 

Long-term lease liabilities, net of current

 

 

266

 

 

 

370

 

Total lease liabilities

 

 

 

 

$ 470

 

 

$ 564

 

 

Weighted average remaining lease term in years

 

Operating lease

 

 

2.17

 

Weighted average discount rate

 

 

 

 

Operating lease

 

 

8.25 %

Finance leases

 

 

8.25 %

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease costs

 

$ 51

 

 

$ 51

 

 

$ 102

 

 

$ 103

 

Finance lease costs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation of leased assets

 

 

-

 

 

 

4

 

 

 

-

 

 

 

10

 

Interest on lease liabilities

 

 

-

 

 

 

2

 

 

 

-

 

 

 

3

 

Total lease cost

 

$ 51

 

 

$ 57

 

 

$ 102

 

 

$ 116

 

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 32

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

(in thousands)

 

Cash paid for amounts included in the measurement of lease liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows for operating lease

 

$ 48

 

 

$ 43

 

 

$ 95

 

 

$ 131

 

Operating cash flows for finance leases

 

$ -

 

 

$ 2

 

 

$ -

 

 

$ 4

 

Financing cash flows for finance leases

 

$ -

 

 

$ 6

 

 

$ -

 

 

$ 12

 

 

As of June 30, 2021, maturities of lease liabilities for the periods indicated were as follows:

 

June 30,

 

Operating

Lease

 

 

 

 (in thousands)

 

 

 

 

 

2021

 

$ 204

 

2022

 

 

226

 

2023

 

 

40

 

 

 

$ 470

 

 

Future minimum annual lease commitments that are non-cancelable:

 

 

 

Operating

 

June 30,

 

Lease

 

 

 

 (in thousands)

 

2021

 

$ 235

 

2022

 

 

260

 

2023

 

 

20

 

 

 

$ 515

 

 

(14) Income Taxes

 

Tax Provision

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

(in thousands)

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$ -

 

 

$ -

 

 

$ -

 

 

$ (15 )

State

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

500

 

 

 

893

 

 

 

1,167

 

 

 

1,591

 

State

 

 

-

 

 

 

 

 

 

 

-

 

 

 

 

 

Change in valuation allowance

 

 

(500

 

 

(893 )

 

 

(1,167

)

 

 

(1,591 )

Total provision for income taxes

 

$ -

 

 

$ -

 

 

$ -

 

 

$ (15 )

 

The TMT is treated as an income tax for financial reporting purposes.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 33

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

NOL and capital loss carryforwards

 

$ 16,180

 

 

$ 15,258

 

Business interest expense

 

 

3,987

 

 

 

3,343

 

Start-up costs (crude oil and condensate processing facility)

 

 

467

 

 

 

509

 

ARO liability/deferred revenue

 

 

498

 

 

 

498

 

Other

 

 

3

 

 

 

3

 

Total deferred tax assets

 

 

21,134

 

 

 

19,611

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Basis differences in property and equipment

 

 

(7,587 )

 

 

(7,230 )

Total deferred tax liabilities

 

 

(7,587 )

 

 

(7,230 )

 

 

 

13,547

 

 

 

12,381

 

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(13,547 )

 

 

(12,381 )

 

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

$ -

 

 

$ -

 

 

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. 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, 2019

 

 

9,614

 

 

 

43,058

 

 

 

52,672

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses

 

 

-

 

 

 

13,306

 

 

 

13,306

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

$ 9,614

 

 

$ 56,364

 

 

$ 65,978

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses

 

 

-

 

 

6,108

 

 

 

4,390

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Expiration of net operating losses

 

 

 (1,718

)

 

 

-

 

 

 

 (1,718

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2021

 

$ 7,896

 

 

$ 62,472

 

 

$ 70,368

 

 

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 34

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

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, 2021 and December 31, 2020, 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, 2021 and December 31, 2020.

 

(15) Earnings Per Share

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands,

 

 

(in thousands,

 

 

 

except share and per share amounts)

 

 

except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$ (4,099 )

 

$ (4,242 )

 

$ (7,273 )

 

$ (7,582 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

$ (0.32 )

 

$ (0.34 )

 

$ (0.57 )

 

$ (0.61 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of common stock outstanding and potential dilutive shares of common stock

 

 

12,693,514

 

 

 

12,580,853

 

 

 

12,693,514

 

 

 

12,454,109

 

 

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 the three and six months ended June 30, 2021 and 2020 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.

 

(16) Commitments and Contingencies

 

Amended and Restated Operating Agreement

See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin properties by an Affiliate under the Amended and Restated Operating Agreement.

 

BSEE Offshore Pipelines and Platform Decommissioning

BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

 

In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning, along with a safe boarding plan for the platform, within six (6) months (no later than February 15, 2020), and develop and implement a safe boarding plan for submission with such permit applications. Further, BSEE proposed that BDPL complete approved, permitted work within twelve (12) months (no later than August 15, 2020). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. Although we planned to decommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. In the interim, BDPL provides BSEE with updates regarding the project’s status.

 

In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to the INC related to the structural platform surveys, and BSEE approved BDPL’s extension request. The required platform surveys were completed, and the INC was resolved in June 2020.

 

Financial constraints do not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows and liquidity.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 35

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

 

 

We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2021. At both June 30, 2021 and December 31, 2020, BDPL maintained $2.4 million in AROs related to abandonment of these assets.

 

Defaults Under Secured Loan Agreements with Third Parties

See “Notes (1), (3), (10), and (11)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.

 

Financing Agreements and Guarantees

Indebtedness. See “Notes (1), (3), (10), and (11)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.

 

Guarantees. Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made. See “Notes (1), (3), (10), and (11)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.

 

Health, Safety and Environmental Matters

The operations of certain Blue Dolphin subsidiaries 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. These 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.

 

Legal Matters

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in an August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. Although we planned to decommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. In the interim, BDPL provides BOEM and BSEE with updates regarding the project’s status.

 

Financial constraints and BDPL’s pending appeal of the BOEM INCs do not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

 

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2021. At both June 30, 2021 and December 31, 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 36

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

 

 

 

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, and administrative proceedings. 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. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

 

 

 

 

 

 

 

 

Remainder of Page Intentionally Left Blank

 

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 37

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

Management’s Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. 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 business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021.

 

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

 

Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see “Part I, Item 1. Financial Statements – Note (4)”.

 

Affiliates

Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements – Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits.

 

Business Operations Update

General Business Environment. Throughout 2020, the COVID-19 pandemic and actions taken by governments and others in response thereto negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for petroleum products. The COVID-19 pandemic also resulted in significant business and operational disruptions, including business closures, liquidity strains, destruction of non-essential demand, as well as supply chain challenges, travel restrictions, stay-at-home orders, and limitations on the availability of the workforce. However, actions taken by the U.S. government to provide stimulus to individuals and businesses helped mitigate the impacts of the downturn caused by COVID-19. Vaccination efforts underway domestically and internationally also provide promise for a sustained, near-term economic recovery. As more businesses resume operations and governmental restrictions are lifted, there is cautious optimism that the economy will continue to recover in 2021, but it is unknown if or when the economy will return to pre-COVID-19 levels.

 

As a result of government actions taken to curb the spread of COVID-19 and significant business interruptions, demand for our refined products declined sharply beginning in mid-March 2020. The U.S. market for gasoline and diesel began showing signs of improvement starting in late 2020 and improved demand has, intermittently, continued through the first half of 2021. While jet fuel demand lagged behind due to depressed international and domestic business and leisure air travel, it has also begun to recover. With regard to inventory, Winter Storm Uri caused unprecedented disruptions to natural gas and electricity supply throughout the Midwest and Gulf Coast regions, limiting refining operations, which helped further reduce excess inventories and balance supply and demand. The combination of improving demand, declining inventories, and increasing COVID-19 vaccinations led to an overall increase in refined product prices and improved refining margins during the first half of 2021. The EIA forecasts that an increase in global oil supply will contribute to a mostly balanced market during the second half of 2021. However, these projections depend on the production decisions of OPEC, U.S. oil production, and the pace of oil demand growth. While the refining market is showing signs of recovery, refinery utilization rates remain below historical levels and uncertainty remains as to whether a resurgence in the virus may spur future governmental restrictions and lockdowns which could threaten the pace of global economic recovery.

 

Our Business. While demand has improved and the uncertainties surrounding COVID-19 appear to be lessening, downward pressure on commodity prices, refining margins, and demand remain a significant risk and could continue for the foreseeable future. Improvements in our financial position and performance depend on the ongoing severity, location and duration of the effects and spread of COVID-19 and any new variants, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus and treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in the second half of 2021 and beyond. Non-compliance with applicable environmental and safety requirements, including as a result of reduced staff due to an outbreak of the virus at one of our locations, may impair our operations, subject us to fines or penalties assessed by governmental authorities, and/or result in an environmental or safety incident. We may also be subject to liability as a result of claims against us by impacted workers or third parties. The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, result of operations, financial condition, cash flows, and our ability to service our indebtedness and other obligations. There can also be no assurance that our liquidity, business, financial condition, and results of operations will revert to pre-2020 levels once the impacts of the COVID-19 pandemic cease.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 38

 

 

Table of Contents

  

Management’s Discussion and Analysis

 

 

 

Management continues to proactively address the known impacts of COVID-19 to the extent possible. We operate the Nixon facility at reduced rates based on market conditions and staffing levels, and we adjust the facility’s operating rate in response to market and other conditions. We carefully evaluate projects and, as a result, have limited or postponed projects and other non-essential work. We have also planned capital expenditures at a level we believe will satisfy all required safety, environmental, and regulatory requirements. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to collaborate virtually.

 

Going Concern

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. As discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing.

 

Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2021 and December 31, 2020. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.

 

Third-Party Defaults

·

Veritex Loans – Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 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. Any exercise by Veritex of its rights and remedies under our 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. Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, which could lead to holders of our common stock losing their investment in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. For both the three and six-month periods ended June 30, 2021, principal and interest payments to Veritex totaled $0. For both the three and six-month periods ended June 30, 2020, principal and interest payments to Veritex totaled $0.9 million. As of the filing date of this report, LE and LRM were in default with respect to required monthly payments under the LE Term Loan Due 2034 and LRM Term Loan Due 2034.

 

 

·

Amended Pilot Line of Credit – Upon maturity of the Pilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Payment Obligations”). Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Payment Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Payment Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 39

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

 

Pursuant to a June 1, 2020 notice, Pilot began applying Pilot’s payment obligations to NPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between NPS and Pilot, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the Amended Pilot Line of Credit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0.2 million, respectively. For the three-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the tank lease setoff amounts totaled $1.2 million and $0.2 million, respectively. For the six-month periods ended June 30, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.6 million and $0.8 million, respectively.

 

 

 

On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the LE Term Loan Due 2050 and NPS Term Loan Due 2050 was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Payment Obligations, including through use of the proceeds of these SBA EIDLs. Pilot also notified the SBA that the liens securing the LE Term Loan Due 2050 and NPS Term Loan Due 2050 were junior to those securing the Payment Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the loans, no further action has been taken by Pilot as of the filing date of this report.

 

 

 

Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit 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. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with NPS to settle the Payment Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. NPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price 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.

 

 

·

Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment.

 

Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month period ended June 30, 2021 and 2020, our refinery experienced 4 days and 8 days of downtime, respectively, as a result of crude deficiencies due to COVID-19 related cash constraints. During the six-month periods ended June 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints.

 

Related-Party Defaults

Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Replated party debt represents such working capital borrowings. As of the filing date of this report, Blue Dolphin was in default with respect to past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 40

 

 

Table of Contents

  

Management’s Discussion and Analysis

 

 

 

Margin Deterioration and Volatility. Our refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. While the refining market is showing signs of recovery, refinery utilization rates remain below historical levels and uncertainty remains as to whether a resurgence in the virus may spur future governmental restrictions and lockdowns which could threaten the pace of global economic recovery. We cannot predict when prices and demand will stabilize, and we are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position and results of operations throughout 2021.

 

Historic Net Losses and Working Capital Deficits.

Net Losses

Net loss for the three months ended June 30, 2021 was $4.1 million, or a loss of $0.32 per share, compared to a net loss of $4.2 million, or a loss of $0.34 per share, for the three months ended June 30, 2020. The improvement between the three-month periods in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. Less refinery downtime also contributed to the improvement between the periods.

 

Net loss for the six months ended June 30, 2021 was $7.3 million, or a loss of $0.57 per share, compared to a net loss of $7.6 million, or a loss of $0.61 per share, for the six months ended June 30, 2020. The improvement between the six-month periods in 2021 compared to 2020 was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. The improvement between the periods was also due to less refinery downtime and decreased interest and other expense.

 

Working Capital Deficits

We had a working capital deficit of $77.4 million and $72.3 million at June 30, 2021 and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.5 million and $22.6 million at June 30, 2021 and December 31, 2020, respectively.

 

Cash and cash equivalents totaled $0.009 million and $0.5 million at June 30, 2021 and December 31, 2020, respectively. Restricted cash (current portion) totaled $0.05 million at both June 30, 2021 and December 31, 2021. Restricted cash, noncurrent totaled $0 and $0.5 million at June 30, 2021 and December 31, 2020, respectively. See “Part I, Item 1. Financial Statements – Note (1)” regarding going concern factors and associated risks.

 

Operating Risks

Successful execution of our business strategy depends on several key factors, including, having adequate working capital 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 products. As discussed under “Part I, Item 1. Financial Statements – Note (1)” under “Going Concern” and throughout this report, we are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. As U.S. federal, state, and local officials address the spread of COVID-19 with vaccine programs and monitor variant clusters, we expect to continue operating. Any governmental mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.

 

Management believes that it has taken all prudent steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a low oil price environment. We are managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. At the Nixon facility, we adjust throughput and production based on prevailing market conditions. With regard to personnel safety, we adopted remote working where possible and social distancing, mask wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 41

 

 

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Management’s Discussion and Analysis

 

 

 

There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

Business Strategy

Our primary business objective is to improve our financial profile by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances:

 

 

 

 

Optimizing Existing Asset Base

·

 

·

Operating safely and enhancing health, safety, and environmental systems.

 

Planning and managing turnarounds and downtime.

 

 

 

 

 

 

Improving Operational Efficiencies

·

 

·

 

·

Reducing or streamlining variable costs incurred in production.

 

Increasing throughput capacity and optimizing product slate.

 

Increasing tolling and terminaling revenue.

 

 

 

 

 

 

Seizing Market Opportunities

·

 

·

· Leveraging existing infrastructure to engage in renewable energy projects.

 

· Taking advantage of market opportunities as they arise.

 

 

 

 

Optimizing Existing Asset Base. We are subject to extensive federal, state, and local environmental and safety laws and regulations enforced by various agencies, including the DOT, EPA, OSHA, as well as numerous state, regional and local environmental, safety and pipeline agencies. These laws and regulations govern the discharge of materials into the environment, waste management practices, pollution prevention measures and the composition of the fuels we produce, as well as the safe operation of our plants and pipelines and the safety of our workers and the public. Numerous permits or other authorizations are required under these laws and regulations for the operation of our refinery and related operations, and may be subject to revocation, modification, and renewal. We believe that our current operations are in substantial compliance with existing environmental and safety requirements. With regard to the pandemic and personnel safety, we adopted remote working where possible and social distancing, mask wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.

 

We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations. In an effort to better manage downtime, we conduct maintenance activities to the extent possible when the refinery experiences downtime.

 

Improving Operational Efficiencies. During the three and six-month periods ended June 30, 2021, refinery throughput, production and sales improved as a result of steps taken by management to maximize operational efficiency in the COVID-19 pandemic environment. Steps included managing inventory to avoid buildup and adjusting throughput and production levels based on prevailing market conditions. We are also managing cash flow by optimizing receivables and payables by prioritizing payments, as well as closely monitoring costs company-wide.

 

Seizing Market Opportunities. With our sights set on recovery from the pandemic and the future, we continue to explore and investigate growth opportunities. In March 2021, we announced a pivot to explore renewable energy opportunities through an affiliate, Lazarus Energy Alternative Fuels LLC (“LEAF”). LEAF will explore potential opportunities to position Blue Dolphin in the global transition to cleaner, lower-carbon alternatives from traditional fossil fuels. These opportunities may include technology, development, or commercial partnerships, as well as the repurposing of assets and facilities, for the production, storage, transportation and sale of alternative fuels and other low-carbon products. Under the Biden Administration, the focus on cleaner energy sources and technology to decarbonize resource-intensive industries continues to accelerate. This focus is steering government policy to incentivize clean energy sources and carbon capture technologies, as well as supporting new industry-wide investment in areas like renewables, green hydrogen, and carbon capture, utilization, and storage.

 

Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, having favorable margins on refined products, and collaborating with new partners to develop and finance clean energy projects. There can be no assurance that our business strategy will be successful, including a pivot to renewables through LEAF, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities in the foreseeable future. Management has determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. A ‘going concern’ opinion impairs our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern depends on sustained positive operating margins and working capital to sustain operations, including the purchase of crude oil and condensate and payments on long-term debt. If we are unable to achieve these goals, our business will be jeopardized, we may not be able to continue operating, and we may have to seek bankruptcy protection.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 42

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

Refinery Operations

Our refinery operations segment consists of the following assets and operations:

 

Property

 

Key Products

Handled

 

Operating Subsidiary

 

 

Location

 

 

 

 

 

Nixon facility

 

Crude Oil

 

LE

 

Nixon, Texas

· Crude distillation tower (15,000 bpd)

 

Refined Products

 

 

 

 

· Petroleum storage tanks

 

 

 

 

 

 

· Loading and unloading facilities

 

 

 

 

 

 

· Land (56 acres)

 

 

 

 

 

 

 

Crude Oil and Condensate Supply. Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. The crude supply agreement, the initial term of which is volume based, expires when Pilot sells us 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”) unless either party provides the other with notice of nonrenewal at least 60 days prior to expiration of any Renewal Term. Total volume sold to us under the crude supply agreement totaled approximately 6.8 million bbls as of June 30, 2021. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic results in significant financial constraints on producers, which in turn results in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month periods ended June 30, 2021 and 2020, our refinery experienced 4 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints. During the six-month periods ended June 30, 2021 and 2020, our refinery experienced 5 days and 8 days, respectively, of downtime as a result of crude deficiencies due to COVID-19 related cash constraints.

 

Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.

 

Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for Defense District 3 (PADD 3). We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to Mexico.

 

The Nixon refinery’s product slate is moderately adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur of March 31, 2022 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.

 

Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products.

 

Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 43

 

 

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Management’s Discussion and Analysis

 

 

 

Safety and Downtime. Our refinery operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under EPA, OSHA, and comparable state and local requirements. Together, these regulations are designed for personnel safety, process safety management, and risk management, as well as to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable, or explosive chemicals. Storage tanks used for refinery operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our refinery operations have response and control plans, spill prevention and other programs to respond to emergencies.

 

The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Planned turnarounds are used to repair, restore, refurbish, or replace refinery equipment. Unplanned shutdowns can occur for a variety of reasons, including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities, disabled equipment, or crude deficiencies due to cash constraints. However, in Texas the most typical reason is excessive heat or power outages from high winds and thunderstorms. The Nixon refinery did not incur significant damage as a result of Winter Storm Uri in February 2021. However, the facility was down for approximately 10 days as a result of lost external power.

 

We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.

 

Tolling and Terminaling Operations

Our tolling and terminaling segment consists of the following assets and operations:

 

Property

 

Key Products

Handled

 

Operating Subsidiary

 

 

Location

 

 

 

 

 

Nixon facility

 

Crude Oil

 

LRM, NPS

 

Nixon, Texas

· Petroleum storage tanks

 

Refined Products

 

 

 

 

· Loading and unloading facilities

 

 

 

 

 

 

 

Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to three years.

 

Operations Safety. Our tolling and terminal operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA and comparable state and local regulations. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.

 

Inactive Operations

We own certain other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets, which are shown below and included in corporate and other, are not operational and are fully impaired. We fully impaired our pipeline assets in 2016 and our oil and gas leasehold interests in 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three and six months ended June 30, 2021 and 2020. See “Part I, Item 1. Financial Statements – Note (16)” related to pipelines and platform decommissioning requirements and related risks.

Property

 

 

Operating Subsidiary

 

 

Location

 

 

 

 

Freeport facility

 

BDPL

 

 

Freeport, Texas

· Crude oil and natural gas separation and dehydration

 

 

 

 

 

· Natural gas processing, treating, and redelivery

 

 

 

 

 

· Vapor recovery unit

 

 

 

 

 

· Two onshore pipelines

 

 

 

 

 

· Land (162 acres)

 

 

 

 

 

Offshore Pipelines (Trunk Line and Lateral Lines)

 

BDPL

 

 

Gulf of Mexico

Oil and Gas Leasehold Interests

 

BDPC

 

 

Gulf of Mexico

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 44

 

 

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Management’s Discussion and Analysis

 

 

 

Pipeline and Facilities Safety.

Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.

 

Results of Operations

A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be in read in conjunction with our financial statements in “Part I, Item 1. Financial Statements”. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.

 

Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil production, there is cautious optimism that the economy is improving based on signs of recovery during the first half of 2021. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future as new mutations of the virus spread. We cannot predict when prices and demand will stabilize, and we are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position and results of operations throughout 2021.

 

How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), refining gross profit (deficit) per bbl, tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.

 

Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl

Segment contribution margin (deficit) is used to evaluate both refinery operations and tolling and terminaling while refining gross profit (deficit) per bbl is a refinery operations benchmark. Both measures supplement our financial information presented in accordance with U.S. GAAP. Management uses these non-GAAP measures to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate future impacts to our financial performance as a result of capital investments. Non-GAAP measures have important limitations as analytical tools. These non-GAAP measures, which are defined in our glossary of terms, should not be considered a substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results. See “Non-GAAP Reconciliations” within this Results of Operations and the financial statements within “Part I, Item 1. Financial Statements” for a reconciliation of Non-GAAP measures to U.S. GAAP.

 

Tank Rental Revenue

Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.

 

Operation Costs and Expenses

We manage operating expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs for tolling and terminaling operations are relatively fixed.

 

Refinery Throughput and Production Data

The amount of revenue we generate from our refinery operations business segment primarily depends on the volumes of crude oil and refined products that we handle through our processing assets and the volume sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime.

 

Refinery Downtime

The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 45

 

 

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Management’s Discussion and Analysis

 

 

 

Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.

 

Three Months Ended June 30, 2021 Versus June 30, 2020

(Q2 2021 Versus Q2 2020)

 

Six Months Ended June 30, 2021 Versus June 30, 2020

(6 Months 2021 Versus 6 Months 2020)

 

Overview. Net loss for Q2 2021 was $4.1 million, or a loss of $0.32 per share, compared to a net loss of $4.2 million, or a loss of $0.34 per share, in Q2 2020. The improvement between the periods was the result of slightly improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. Less refinery downtime also contributed to the improvement between the periods.

 

Total Revenue from Operations. Total revenue from operations increased significantly in Q2 2021 to $69.4 million compared to $18.5 million in Q2 2020. The increase between the periods related to higher refined product prices and higher sales volume, which was slightly offset by lower ancillary service fees (tank blending, lab testing, etc.).

 

Total Cost of Goods Sold. Total cost of goods sold increased significantly in Q2 2021 to $70.5 million compared to $19.7 million for Q2 2020. The increase in Q2 2021 related to higher crude oil costs and increased throughput volume associated with improved refined product demand as the economy recovers from the COVID-19 pandemic.

 

Gross Deficit. Gross deficit was $1.0 million for Q2 2021 compared to gross deficit of $1.2 million for Q2 2020. The slight improvement was the result of more stable commodity prices and improved sales volumes as the economy recovers from the COVID-19 pandemic.

 

General and Administrative Expenses. General and administrative expenses increased approximately 15% to $0.6 million in Q2 2021 from $0.5 million in Q2 2020. The increase primarily related to increased insurance premiums following renewals.

 

Depletion, Depreciation and Amortization. Depletion, depreciation, and amortization expenses were flat at $0.7 million for Q2 2021 and Q2 2020. Depletion, depreciation and amortization expense primarily related to refinery assets.

 

Total Other Expense. Total other expense was also flat in Q2 2021 compared to Q2 2020 at $1.6 million. Total other expense in both periods primarily related to interest expense associated with secured loan agreements with Veritex, related-party debt, and the line of credit with Pilot.

 

 

 

Overview. Net loss for 6 Months 2021 was $7.3 million, or a loss of $0.57 per share, compared to a net loss of $7.6 million, or a loss of $0.61 per share, in 6 Months 2020. The improvement between the periods was the result of improved market conditions as more businesses resumed operations and governmental pandemic-related restrictions were lifted, including more favorable commodity prices and improved throughput and sales volumes. The improvement between the periods was also due to less refinery downtime and decreased interest and other expense.

 

Total Revenue from Operations. Total revenue from operations increased significantly in 6 Months 2021 to $127.0 million compared to $78.3 million in 6 Months 2020. The increase between the periods related to higher refined product prices and higher sales volume, which was slightly offset by lower tank rental revenue.

 

Total Cost of Goods Sold. Total cost of goods sold increased significantly in 6 Months 2021 to $130.1 million compared to $81.8 million for 6 Months 2020. The increase in 6 Months 2021 related to higher crude oil costs and increased throughput volume as the economy recovers from the COVID-19 pandemic.

 

Gross Deficit. Gross deficit was $1.2 million for 6 Months 2021 compared to gross deficit of $1.3 million for 6 Months 2020. The slight improvement was the result of more stable commodity prices and improved sales volumes as the economy recovers from the COVID-19 pandemic.

 

General and Administrative Expenses. General and administrative expenses increased approximately 8% to $1.3 million in 6 Months 2021 from $1.2 million in 6 Months 2020. The increase primarily related to increased insurance premiums following renewals.

 

Depletion, Depreciation and Amortization. Depletion, depreciation, and amortization expenses totaled $1.4 million for 6 Months 2021 compared to $1.3 million for 6 Months 2020, representing an increase of approximately $0.1 million. The increase related to placing refinery assets in service.

 

Total Other Expense. Total other expense was $3.0 million in 6 Months 2021 compared to $3.4 million in 6 Months 2020, representing a decrease of approximately $0.4 million. Total other expense in both periods primarily related to interest expense associated with secured loan agreements with Veritex, related-party debt, and the line of credit with Pilot. Interest expense between the periods was the result of the decreased outstanding balance under the Amended Pilot Line of Credit. 

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 46

 

 

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Management’s Discussion and Analysis

 

 

 

Refinery Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Refined product sales

 

$ 68,518

 

 

$ 17,359

 

Less:  Total cost of goods sold

 

 

(70,466 )

 

 

(19,676 )

Gross deficit

 

 

(1,948 )

 

 

(2,317 )

 

 

 

 

 

 

 

 

 

Sales (Bbls)

 

 

988

 

 

 

669

 

 

 

 

 

 

 

 

 

 

Gross Deficit per Bbl

 

$ (1.97 )

 

$ (3.46 )

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net revenue (1)

 

$ 68,518

 

 

$ 17,359

 

Intercompany fees and sales

 

 

(581 )

 

 

(406 )

Operation costs and expenses

 

 

(70,054 )

 

 

(19,418 )

Segment Contribution Deficit

 

$ (2,117 )

 

$ (2,465 )

 

(1) Net revenue excludes intercompany crude sales.

 

Q2 2021 Versus Q2 2020

·

Refining gross deficit per bbl was $1.97 for Q2 2021 compared to gross deficit per bbl of $3.46 in Q2 2020, representing an improvement of $1.49 per bbl. The improvement between the periods related to higher refining margins and higher sales volume. Commodity prices and refined product demand experienced a recovery in Q2 2021 compared to Q2 2020 as more businesses resumed operations and governmental pandemic-related restrictions were lifted. Despite the Q2 2021 improvement, economic recovery remained well below pre-pandemic levels.

 

 

·

Segment contribution deficit improved slightly in Q2 2021 compared to Q2 2020 due to the aforementioned economic recovery and less refinery downtime.

 

 

·

Refinery downtime decreased to 4 days in Q2 2021 compared to 23 days in Q2 2020. Refinery downtime in Q2 2021 related to crude deficiencies associated with cash constraints. Refinery downtime in Q2 2020 was spurred by the COVID-19 pandemic. Management utilized Q2 2020 downtime to perform a maintenance turnaround and address other maintenance issues.

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Refined product sales

 

$ 127,001

 

 

$ 78,256

 

Less:  Total cost of goods sold

 

 

(130,089 )

 

 

(81,764 )

Gross deficit

 

 

(3,088 )

 

 

(3,508 )

 

 

 

 

 

 

 

 

 

Sales (Bbls)

 

 

1,935

 

 

 

1,810

 

 

 

 

 

 

 

 

 

 

Gross Deficit per Bbl

 

$ (1.60 )

 

$ (1.94 )

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net revenue (1)

 

$ 127,001

 

 

$ 78,256

 

Intercompany fees and sales

 

 

(1,147 )

 

 

(1,023 )

Operation costs and expenses

 

 

(129,343 )

 

 

(81,251 )

Segment Contribution Deficit

 

$ (3,489 )

 

$ (4,018 )

 

(2) Net revenue excludes intercompany crude sales.

 

6 Months 2021 Versus 6 Months 2020

·

Refining gross deficit per bbl was $1.60 for 6 Months 2021 compared to gross deficit per bbl of $1.94 in 6 Months 2020, representing an improvement of $0.34 per bbl. The improvement between the periods related to higher refining margins and higher sales volume. Commodity prices and refined product demand experienced a recovery in 6 Months 2021 compared to 6 Months 2020 as more businesses resumed operations and governmental pandemic-related restrictions were lifted. For 6 Months 2021, the economic recovery was offset by the impact of Winter Storm Uri.

 

 

·

Segment contribution deficit improved slightly in 6 Months 2021 compared to 6 Months 2020 due to the aforementioned economic recovery. However, the economic recovery was offset by the impact of Winter Storm Uri.

 

 

·

Refinery downtime decreased to 15 days in 6 Months 2021 compared to 26 days in 6 Months 2020. Refinery downtime in 6 Months 2021 related to power outages due to Winter Storm Uri and crude deficiencies associated with cash constraints. Refinery downtime in 6 Months 2020 was spurred by the COVID-19 pandemic, which included cash constraints that affected our ability to acquire crude. Management utilized 6 Months 2020 downtime to perform a maintenance turnaround and address other maintenance issues.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 47

 

 

Table of Contents

  

Management’s Discussion and Analysis

 

 

 

Tolling and Terminaling. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from tank storage rental fees, tolling and reservation fees for use of the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending.

 

 

 

Three Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net revenue (1)

 

$ 923

 

 

$ 1,110

 

Intercompany fees and sales

 

 

581

 

 

 

406

 

Operation costs and expenses

 

 

(412 )

 

 

(258 )

Segment Contribution Margin

 

$ 1,092

 

 

$ 1,258

 

 

(1) Net revenue excludes intercompany crude sales.

 

Q2 2021 Versus Q2 2020

·

Tolling and terminaling net revenue decreased nearly 17% in Q2 2021 compared to Q2 2020 primarily as a result of lower ancillary service fees (tank blending, lab testing, etc.).

 

 

·

Intercompany fees and sales, which reflect fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in Q2 2021 compared to Q2 2020. Naphtha sales volumes increased between the periods as a result of demand recovery.

 

 

·

Segment contribution margin in Q2 2021 decreased 13% to $1.1 million compared to $1.3 million Q2 2020. The decrease related to lower revenue.

 

 

 

Six Months Ended

 

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Net revenue (1)

 

$ 1,853

 

 

$ 2,213

 

Intercompany fees and sales

 

 

1,147

 

 

 

1,023

 

Operation costs and expenses

 

 

(746 )

 

 

(513 )
Segment Contribution Margin

 

$ 2,254

 

 

$ 2,723

 

 

(2) Net revenue excludes intercompany crude sales.

 

6 Months 2021 Versus 6 Months 2020

·

Tolling and terminaling net revenue decreased 16% in 6 Months 2021 compared to 6 Months 2020 primarily as a result of lower tank rental revenue.

 

 

·

Intercompany fees and sales, which reflect fees associated with an intercompany tolling agreement tied to naphtha volumes, increased in 6 Months 2021 compared to 6 Months 2020. Naphtha sales volumes increased between the periods as a result of demand recovery.

 

 

·

Segment contribution margin in 6 Months 2021 decreased 17% to $2.3 million compared to $2.7 million 6 Months 2020. The decrease related to lower revenue.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 48

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

Non-GAAP Reconciliations.

 

Reconciliation of Segment Contribution Margin (Deficit)

 

 

 

 

Three Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

Refinery Operations

 

 

Tolling and Terminaling

 

 

Corporate and Other

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment contribution margin (deficit)

 

$ (2,117 )

 

$ (2,465 )

 

$ 1,092

 

 

$ 1,258

 

 

$ (50 )

 

$ (47 )

 

$ (1,075 )

 

$ (1,254 )

General and administrative expenses(1)

 

 

(265 )

 

 

(327 )

 

 

(68 )

 

 

(68 )

 

 

(410 )

 

 

(326 )

 

 

(743 )

 

 

(721 )

Depreciation and amortization

 

 

(302 )

 

 

(294 )

 

 

(340 )

 

 

(324 )

 

 

(51 )

 

 

(51 )

 

 

(693 )

 

 

(669 )

Interest and other non-operating expenses, net

 

 

(708 )

 

 

(751 )

 

 

(448 )

 

 

(616 )

 

 

(432 )

 

 

(231 )

 

 

(1,588 )

 

 

(1,598 )

Income (loss) before income taxes

 

 

(3,392 )

 

 

(3,837 )

 

 

236

 

 

 

250

 

 

 

(943 )

 

 

(655 )

 

 

(4,099 )

 

 

(4,242 )

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15 )

 

 

-

 

 

 

-

 

Income (loss)

 

$ (3,392 )

 

$ (3,837 )

 

$ 236

 

 

$ 250

 

 

$ (943 )

 

$ (670 )

 

$ (4,099 )

 

$ (4,242 )

 

(1)

General and administrative expenses within refinery operations include the LEH operating fee.

 

 

 

Six Months Ended June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

Refinery Operations

 

 

Tolling and Terminaling

 

 

Corporate and Other

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment contribution margin (deficit)

 

$ (3,489 )

 

$ (4,018 )

 

$ 2,254

 

 

$ 2,723

 

 

$ (104 )

 

$ (106 )

 

$ (1,339 )

 

$ (1,401 )

General and administrative expenses(1)

 

 

(566 )

 

 

(631 )

 

 

(136 )

 

 

(136 )

 

 

(823 )

 

 

(745 )

 

 

(1,525 )

 

 

(1,512 )

Depreciation and amortization

 

 

(604 )

 

 

(582 )

 

 

(680 )

 

 

(618 )

 

 

(102 )

 

 

(102 )

 

 

(1,386 )

 

 

(1,302 )

Interest and other non-operating expenses, net

 

 

(1,306 )

 

 

(1,492 )

 

 

(900 )

 

 

(1,386 )

 

 

(817 )

 

 

(474 )

 

 

(3,023 )

 

 

(3,352 )

Income (loss) before income taxes

 

 

(5,965 )

 

 

(6,723 )

 

 

538

 

 

 

583

 

 

 

(1,846 )

 

 

(1,427 )

 

 

(7,273 )

 

 

(7,567 )

Income tax expense

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15 )

 

 

-

 

 

 

(15 )

Income (loss)

 

$ (5,965 )

 

$ (6,723 )

 

$ 538

 

 

$ 583

 

 

$ (1,846 )

 

$ (1,442 )

 

$ (7,273 )

 

$ (7,582 )

 

(1)

General and administrative expenses within refinery operations include the LEH operating fee.

 

Liquidity and Capital Resources

We had a working capital deficit of $77.4 million and $72.3 million at June 30, 2021 and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.5 million and $22.6 million at June 30, 2021 and December 31, 2020, respectively. Although in place pre-pandemic, we have further tightened our cash conservation program to manage cash flow and remain competitive in a low oil price environment. This includes optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. Despite this focus, management is keeping in mind the overall safety of our operations and personnel, as well as the impact to our business over the long-term.

 

We remain focused on the safe and reliable operation of the Nixon facility and cash conservation. Our primary cash requirements relate to: (i) purchasing crude oil and condensate for the operation of the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement and (iii) servicing debt. In instances where we experience a working capital deficit, we have historically relied on Affiliates to meet our liquidity needs. We are actively exploring additional financing; however, we currently have no arrangements for additional capital and no assurances can be given that we will be able to raise sufficient capital when needed, on acceptable terms, or at all. If we are unable to raise sufficient additional capital in the very near term, we may further default on our payment obligations under certain of our existing debt obligations. Without additional financing, it remains unclear whether we will have or can obtain sufficient liquidity to withstand further disruptions to our business.

 

How long and to what extent COVID-19 and related market developments will continue to affect our business and operations is unknown. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil production, there is cautious optimism that the economy is improving based on signs of recovery during the first half of 2021. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future as new mutations of the virus spread. We cannot predict when prices and demand will stabilize, and we are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position and results of operations throughout 2021. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. As a result, we may have to seek protection under bankruptcy laws. In such a case, the trading price 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.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 49

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

Debt Overview.

 

Total Debt and Accrued Interest

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

$ 23,468

 

 

$ 22,840

 

LRM Term Loan Due 2034 (in default)

 

 

9,738

 

 

 

9,473

 

Amended Pilot Line of Credit (in default)

 

 

6,044

 

 

 

8,145

 

Notre Dame Debt (in default)

 

 

9,812

 

 

 

9,413

 

Related-Party Debt

 

 

 

 

 

 

 

 

BDPL Loan Agreement (in default)

 

 

7,134

 

 

 

6,814

 

March Ingleside Note (in default)

 

 

1,045

 

 

 

1,013

 

March Carroll Note (in default)

 

 

1,916

 

 

 

1,551

 

June LEH Note (in default)

 

 

12,119

 

 

 

9,446

 

BDEC Term Loan Due 2051

 

 

503

 

 

 

-

 

LE Term Loan Due 2050

 

 

155

 

 

 

152

 

NPS Term Loan Due 2050

 

 

155

 

 

 

152

 

Equipment Loan Due 2025

 

 

62

 

 

 

71

 

Total debt and accrued interest

 

 

72,151

 

 

 

69,070

 

 

 

 

 

 

 

 

 

 

Less: Current portion of long-term debt, net

 

 

(58,777 )

 

 

(57,744 )

Less: Unamortized debt issue costs

 

 

(1,685 )

 

 

(1,749 )

Less: Accrued interest payable (in default)

 

 

(10,842 )

 

 

(9,222 )

Long-term debt, net of current portion

 

$ 847

 

 

$ 355

 

 

Net cash provided by financing activities totaled $2.6 million in Q2 2021 compared to $4.0 million provided by financing activities in Q2 2020. Principal payments on debt totaled $0.003 million in Q2 2021 compared to $0.8 million in Q2 2020. Net cash provided by financing activities totaled $1.7 million in 6 Months 2021 compared to $4.7 million provided by financing activities in 6 Months 2020. Principal payments on debt totaled $0.009 million in 6 Months 2021 compared to $1.5 million in 6 Months 2020. As of the filing date of this report, LE and LRM were in default with respect to required monthly payments under secured loan agreements with Veritex. NPS is making partial monthly payments to Pilot under the Amended Pilot Line of Credit as a tank lease setoff using amounts Pilot owed to NPS under two tank lease agreements. No payments have been made under the subordinated Notre Dame Debt.

 

Debt Defaults. The majority of our debt is in default. Defaults under our secured loan agreements with third parties include: (1) Veritex financial covenant violations, failure to make monthly payments, and failure to replenish a payment reserve account; (2) Pilot event of default and debt acceleration; and (3) Notre Dame Debt event of default. We also have defaults under secured and unsecured related-party debt. As of the filing date of this report, Blue Dolphin was in default with respect to past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to Affiliate and third-party debt agreements, including debt guarantees, and defaults in our debt obligations.

 

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Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 50

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

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

 

Three Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

3

 

 

 

75 %

 

$ 0

 

June 30, 2020

 

 

3

 

 

 

69 %

 

$ 0

 

 

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. The Affiliate accounted for 30% and 25% of total revenue from operations for the three months ended June 30, 2021 and 2020, respectively. The Affiliate represented $0 in accounts receivable at both June 30, 2021 and 2020, respectively.

 

Six Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2021

 

 

4

 

 

 

86 %

 

$ 0

 

June 30, 2020

 

 

4

 

 

 

90 %

 

$ 0

 

 

The Affiliate accounted for 29% and 28% of total revenue from operations for the six months ended June 30, 2021 and 2020, respectively. The Affiliate represented $0 in accounts receivable at both June 30, 2021 and 2020, respectively.

  

Outstanding amounts under certain related party agreements can significantly vary period to period based on the timing of sales and payments. With regard to the Amended and Restated Operating Agreement, any amount that remains outstanding at the end of the quarter is added to the June LEH Note, which is reflected on the consolidated balance sheets within long-term debt, related party, current portion (in default). At June 30, 2021 and December 31, 2020, the total amount we owed to LEH under long-term debt, related-party agreements totaled $19.3 million and $16.3 million, respectively. See “Part I, Item 1. Financial Statements – Notes (3) and (16)” for additional disclosures related to Affiliate agreements, arrangements, and risk.

 

Contractual Obligations.

Related-Party Debt

 

Agreement/Transaction

Parties

Type

Effective Date

Interest Rate

Key Terms

Amended and Restated Guaranty Fee Agreement

Jonathan Carroll - LE

Debt

04/01/2017

2.00%

Tied to payoff of LE $25 million Veritex loan; payments 50% cash, 50% Common Stock

Amended and Restated Guaranty Fee Agreement

Jonathan Carroll - LRM

Debt

04/01/2017

2.00%

Tied to payoff of LRM $10 million Veritex loan; payments 50% cash, 50% Common Stock

March Carroll Note (in default)

Jonathan Carroll – Blue Dolphin

Debt

03/31/2017

8.00%

Blue Dolphin working capital; matured 01/01/2019; reflects amounts owed to Jonathan Carroll under guaranty fee agreements; interest still accruing

March Ingleside Note (in default)

Ingleside – Blue Dolphin

Debt

03/31/2017

8.00%

Blue Dolphin working capital; matured 01/01/2019; interest still accruing

June LEH Note (in default)

LEH – Blue Dolphin

Debt

03/31/2017

8.00%

Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; matured 01/01/2019; interest still accruing

BDPL-LEH Loan Agreement (in default)

LEH - BDPL

Debt

08/15/2016

16.00%

2-year term; $4.0 million principal amount; $0.5 million annual payment; proceeds used for working capital; no financial maintenance covenants; secured by certain BDPL property

 

Related-Party Defaults

 

Loan Description

Event(s) of Default

Covenant Violations

March Carroll Note (in default)

Failure of borrower to pay past due payment obligations; loan matured January 2019

--

March Ingleside Note (in default)

Failure of borrower to pay past due payment obligations; loan matured January 2019

---

June LEH Note (in default)

Failure of borrower to pay past due payment obligations; loan matured January 2019

---

BDPL-LEH Loan Agreement (in default)

Failure of borrower to pay past due payment obligations; loan matured August 2018

---

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 51

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

Third-Party Debt

 

Loan Description

Parties

Original Principal Amount

(in millions)

Maturity Date

Monthly Principal and Interest Payment

Interest Rate

Loan Purpose

Veritex Loans(1)

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

LE-Veritex

$25.0

Jun 2034

$0.2 million

WSJ Prime + 2.75%

Refinance loan; capital improvements

LRM Term Loan Due 2034 (in default)

LRM-Veritex

$10.0

Dec 2034

$0.1 million

WSJ Prime + 2.75%

Refinance bridge loan; capital improvements

Notre Dame Debt (in default)(2)(3)

LE-Kissick

$11.7

Jan 2018

No payments to date; payment rights subordinated

16.00%

Working capital; reduced balance of GEL arbitration award

Amended Pilot Line of Credit (in default)

NPS-Pilot

$13.0

May 2020

---

14.00%

GEL settlement payment, NPS purchase of crude oil from Pilot, and working capital

SBA EIDLs

 

 

 

 

 

 

BDEC Term Loan Due 2051(4)

Blue Dolphin-SBA

$0.5

Jun 2051

$0.003 million

3.75%

Working capital

LE Term Loan Due 2050(5)

LE-SBA

$0.15

Aug 2050

$0.0007 million

3.75%

Working capital

NPS Term Loan Due 2050(5)

NPS-SBA

$0.15

Aug 2050

$0.0007 million

3.75%

Working capital

Equipment Loan Due 2025(6)

LE-Texas First

$0.07

Oct 2025

$0.0013 million

4.50%

Equipment Lease Conversion

 

(1)

Proceeds were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected on our consolidated balance sheets as restricted cash (current portion) and restricted cash, noncurrent. At June 30, 2021, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0. At December 31, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million.

 

 

(2)

LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount of $8.0 million. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the arbitration award with GEL by $3.6 million.

 

 

(3)

Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their 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 LE Term Loan Due 2034.

 

 

(4)

Payment is deferred for the first eighteen (18) months of the loan; the first payment is due December 2022; interest accrues during the deferral period. The BDEC Term Loan Due 2051 is not forgivable.

 

 

(5)

Payments are deferred for the first twelve (12) months of the loan; the first payment is due September 2021; interest accrues during the deferral period. The LE Term Loan Due 2050 and NPS Term Loan Due 2050 are not forgivable.

 

 

(6)

In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The equipment rental agreement matured in May 2020. In October 2020, LE entered into the Equipment Loan Due 2025 to finance the purchase of the backhoe. The backhoe continues to be used at the Nixon facility.

  

Third-Party Defaults

 

Loan Description

Event(s) of Default

Covenant Violations

Veritex Loans

 

 

LE Term Loan Due 2034 (in default)

 

 

Failure to make required monthly payments; failure to replenish $1.0 million payment reserve account; events of default under other secured loan agreements with Veritex

Financial covenants:

● debt service coverage ratio, current ratio, and debt to net worth ratio

 

 

LRM Term Loan Due 2034 (in default)

Events of default under other secured loan agreements with Veritex

Financial covenants:

● debt service coverage ratio, current ratio, and debt to net worth ratio

 

Amended Pilot Line of Credit (in default)

Failure of borrower or any guarantor to pay past due obligations; loan matured May 2020

---

Notre Dame Debt (in default)

Failure of borrower to pay past due obligations; loan matured January 2019

---

  

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Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 52

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)

To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in an August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. BDPL reasonably expected to complete its decommissioning obligations prior to BSEE’s August 2020 deadline. However, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. Decommissioning of the assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs.

 

Financial constraints and BDPL’s pending appeal of the BOEM INCs do not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

 

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2021. At both June 30, 2021 and December 31, 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.

 

BSEE Offshore Pipelines and Platform Decommissioning

BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

 

In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning, along with a safe boarding plan for the platform, within six (6) months (no later than February 15, 2020), and develop and implement a safe boarding plan for submission with such permit applications. Further, BSEE proposed that BDPL complete approved, permitted work within twelve (12) months (no later than August 15, 2020). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to the INC related to the structural platform surveys, and BSEE approved BDPL’s extension request. The required platform surveys were completed, and the INC was resolved in June 2020.

 

BDPL reasonably expected to complete its decommissioning obligations prior to BSEE’s August 2020 deadline. However, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.

 

Financial constraints do not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows and liquidity.

 

We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2021. At both June 30, 2021 and December 31, 2020, BDPL maintained $2.4 million in AROs related to abandonment of these assets.

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 53

 

 

Table of Contents

 

Management’s Discussion and Analysis

 

 

 

Sources and Use of Cash.

 

Components of Cash Flows

 

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

 

 

(in thousands)

 

 

(in thousands)

 

Cash Flows Provided By (Used In):

 

 

 

 

 

 

 

 

 

 

 

 

Operating activities

 

$ (3,139 )

 

$ (3,595 )

 

$ (2,766 )

 

$ (3,854 )

Investing activities

 

 

-

 

 

 

(710 )

 

 

-

 

 

 

(908 )

Financing activities

 

 

2,627

 

 

 

4,040

 

 

 

1,712

 

 

 

4,694

 

Decrease in Cash and Cash Equivalents

 

$ (512 )

 

$ (265 )

 

$ (1,054 )

 

$ (68 )

 

Cash Flow

We had a cash flow deficit of approximately $0.5 million for Q2 2021 compared to a cash flow deficit of approximately $0.3 million for Q2 2020. We had a cash flow deficit of approximately $1.1 million for 6 Months 2021 compared to a cash flow deficit of approximately $0.1 million for 6 Months 2020. The cash flow deficit between both periods primarily related to loss from operations.

 

Capital Expenditures

During Q2 2021, capital expenditures totaled $0 compared to $0.7 million during Q2 2020. During 6 Months 2021, capital expenditures totaled $0 compared to $0.9 million during 6 Months 2020. Capital expenditures during 2020 primarily related to completion of a petroleum storage tank and a maintenance turnaround. The 5-year Nixon capital improvement expansion project was completed during Q2 2020 with completion of the last petroleum storage tank. In view of the uncertainty surrounding the COVID-19 pandemic, combined with the weaker commodity price environment, we anticipate new capital expenditures to be minimal for the remainder of 2021.

 

We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion.

 

We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.

 

Off-Balance Sheet Arrangements. None.

 

Accounting Standards.

 

Critical Accounting Policies and Estimates

Our significant accounting policies and recent accounting developments are described in “Part I, Item 1. Financial Statements – Note (2)”. The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. As U.S. federal, state, and local officials address the spread of COVID-19 with vaccine programs and monitor variant clusters, we expect to continue operating. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through 2021 and beyond.

 

The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so.

 

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.

 

New Accounting Standards and Disclosures

New accounting standards and disclosures are discussed in “Part I, Item 1. Financial Statements – Note (2)”.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 54

 

 

Table of Contents

 

Internal Controls

 

 

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 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 previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2021, based on our evaluation, our Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer) concluded that our disclosure controls and procedures were ineffective due to certain material weaknesses and/or significant deficiencies as described below:

 

Significant deficiency – There is currently not a process in place for formal review of manual journal entries.

 

Material weakness – The company currently lacks resources to handle complex accounting transactions. This can result in errors related to the recording, disclosure and presentation of consolidated financial information in quarterly, annual, and other filings.

 

These disclosure controls and procedures remained ineffective as of the end of the period covered by this report. Management is currently evaluating internal processes in order to take corrective actions. Corrective actions may include implementing formal policies, improving processes, documenting procedures, and better defining segregation of duties to improve financial reporting. These actions will be subject to ongoing senior management review, as well as Audit Committee oversight. Although we plan to complete remediation efforts as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in fully remediating the identified weakness and deficiency.

 

Changes in Internal Control over Financial Reporting

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, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. (See the above section “Evaluation of Disclosure Controls and Procedures” for a discussion related to current ineffective disclosure controls and procedures.)

 

Remainder of Page Intentionally Left Blank

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 55

 

 

Table of Contents

 

Legal Proceedings and Risk Factors

 

 

 

PART II

 ITEM 1. LEGAL PROCEEDINGS

 

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)

To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

 

BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in the August 15, 2019 meeting may help in future discussions with BOEM related to the INCs. BDPL reasonably expected to complete its decommissioning obligations (discussed within this “Note (16)” under ‘BSEE Offshore Pipelines and Platform Decommissioning’) prior to BSEE’s August 2020 deadline. However, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur. Decommissioning of the assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs.

 

Financial constraints and BDPL’s pending appeal of the BOEM INCs do not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

 

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2021. At June 30, 2021 and December 31, 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.

 

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, and administrative proceedings. 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. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

ITEM 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 on Form 10-K for the fiscal year ended December 31, 2020 as filed with the SEC. 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. With the exception of the risk factor identified below, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report for the fiscal year ended December 31, 2020.

 

Our future results could be adversely affected if we are unable to effectively execute new business strategies, such as renewable fuels.

 

Our results of operations depend on the extent to which we can execute new business strategies effectively. Our strategies, which include pivoting to renewable fuels, are subject to business, economic, and competitive uncertainties and contingencies, many of which are beyond our control. Additionally, we may be forced to develop or implement new technologies at substantial costs to achieve our strategies. These uncertainties and costs could cause us to not be able to fully implement or realize the anticipated results and benefits of our business strategies.

  

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 56

 

 

Table of Contents

 

Exhibits

 

 

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

See “Part I, Item. 1. Financial Statements – Notes (10) and (11)” for disclosures related to defaults on our debt.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

Exhibits Index

 

No.

 

Description

 

 

 

10.1

 

Loan Authorization and Agreement between Blue Dolphin Energy Company and the Small Business Administration effective May 4, 2021.

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                                       

 

June 30, 2021   │Page 57

 

 

Table of Contents

 

Signature Page 

 

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 17, 2021

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)

 

 

 

Blue Dolphin Energy Company                                       

 

June 30, 2021   │Page 58

 

 

 

 EXHIBIT 10.1

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

EXHIBIT 31.1

 

I, Jonathan P. Carroll, certify that:

 

1.

I have reviewed this quarterly report on Form 10-Q of Blue Dolphin Energy Company (the “Registrant”).

 

2.

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this quarterly report;

 

3.

Based on my knowledge, the financial statements and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this quarterly report;

 

4.

I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and I have:

 

 

a)

Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

 

 

 

 

b)

Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

 

 

 

 

c)

Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

 

 

 

 

d)

Disclosed in this quarterly report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s first fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

 

5.

I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the Registrant’s Board of Directors:

 

 

(a)

All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

 

 

 

 

(b)

Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

 

Date: August 17, 2021

 

/s/ JONATHAN P. CARROLL

 

Jonathan P. Carroll

 

Chief Executive Officer, President,

Assistant Treasurer and Secretary

(Principal Executive Officer and

Principal Financial Officer) 

EXHIBIT 32.1

 

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER AND

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

 

In connection with the Quarterly Report of Blue Dolphin Energy Company (the “Blue Dolphin”) on Form 10-Q for the period ended June 30, 2021 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jonathan P. Carroll, Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer and Principal Financial Officer) of Blue Dolphin, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

 

 

1.

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and

 

 

 

 

2.

The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Blue Dolphin.

  

/s/ JONATHAN P. CARROLL

 

Jonathan P. Carroll

 

Chief Executive Officer, President,

Assistant Treasurer and Secretary

(Principal Executive Officer and

Principal Financial Officer)

August 17, 2021