Attached files
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(Mark One)
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[ √ ]
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the fiscal year ended December 31,
2020
or
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[ ]
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For the
transition period from
to
Commission
File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact
name of registrant as specified in its charter)
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Delaware
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73-1268729
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(State
or other jurisdiction of incorporation or
organization)
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(I.R.S.
Employer Identification No.)
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801 Travis Street, Suite 2100, Houston, Texas
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77002
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(Address
of principal executive offices)
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(Zip
Code)
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713-568-4725
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(Registrant’s
telephone number, including area code)
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Securities registered pursuant to Section 12(b) of the Act:
None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common Stock, par value $0.01 per share
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(Title
of class)
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No [ √ ]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Act. Yes
[ ] No [ √ ]
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 emerging growth company. See the definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Act.
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Large
accelerated filer
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Accelerated
filer
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Non-accelerated
filer
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Smaller
reporting company
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[√ ]
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Emerging
growth company
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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 has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b))
by the registered public accounting firm that prepared or issued
its audit report. [ ]
Indicate
by check mark whether the registrant is a shell company (as defined
in Rule 12b-2 of the Act). Yes [
] No [ √ ]
The
aggregate market value of shares of common stock held by
non-affiliates of the registrant was $840,026 as of June 30, 2020
(the last trading day of the registrant’s most recently
completed second fiscal quarter) based on the number of shares of
common stock held by non-affiliates and the last reported sale
price of the registrant's common stock on June 30,
2020.
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Number
of shares of common stock, par value $0.01 per share, outstanding
at March 31, 2021: 12,693,514
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Blue Dolphin Energy
Company
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December
31, 2020
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Page
1
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PART I
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7
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ITEM 1.
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BUSINESS
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7
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ITEM 1A.
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RISK FACTORS
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15
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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30
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ITEM 2.
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PROPERTIES
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30
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ITEM 3.
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LEGAL PROCEEDINGS
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30
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ITEM 4.
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MINE SAFETY DISCLOSURES
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31
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PART II
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32
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ITEM 5.
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MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
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32
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ITEM 6.
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SELECTED FINANCIAL DATA
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32
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ITEM 7.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
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34
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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45
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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46
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Report of Independent Registered Public Accounting
Firm
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46
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Consolidated Balance Sheets
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47
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Consolidated Statements of Operations
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48
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Consolidated Statements of Stockholders’ Equity
(Deficit)
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49
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Consolidated Statements of Cash Flows
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50
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Notes to Consolidated Financial Statements
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51
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ITEM 9.
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CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
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76
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ITEM 9A.
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CONTROLS AND PROCEDURES
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76
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ITEM 9B.
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OTHER INFORMATION
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78
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PART III
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79
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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79
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ITEM 11.
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EXECUTIVE COMPENSATION
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83
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ITEM 12.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
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85
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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86
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ITEM 14.
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PRINCIPAL ACCOUNTING FEES AND SERVICES
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86
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PART IV
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87
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ITEM 15.
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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87
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ITEM 16.
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FORM 10-K SUMMARY
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87
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SIGNATURES
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92
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Blue Dolphin Energy
Company
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December
31, 2020
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Page
2
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Glossary of Terms
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Glossary of Terms
Throughout
this Annual Report on Form 10-K, we have used the following
terms:
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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 C&C,
Ingleside, and Lazarus Capital) and/or LEH and its affiliates
(including Lazarus Midstream, LMT, and LTRI). Together, Jonathan
Carroll and LEH owned approximately 82% of the Common Stock as of
the filing date of this report.
AMT.
Alternative Minimum Tax.
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.
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. Bureau
of Ocean Energy Management.
BSEE. Bureau
of Safety and Environmental Enforcement.
C&C.
Carroll & Company Financial Holdings, L.P., an affiliate of
Jonathan Carroll.
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).
CAA. Clean
Air Act.
CDC. Centers
for Disease Control and Prevention.
CERLA.
Comprehensive Environmental Response, Compensation, and Liability
Act of 1980.
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.
CWA. Clean
Water Act.
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.
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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.
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; also referred to herein as the Nixon
refinery.)
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.
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. 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.
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 Rentals, LLC. 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.
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Blue Dolphin Energy
Company
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December
31, 2020
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Page
3
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Glossary of Terms
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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 Final
Arbitration Award.
Damages and attorney fees and related expenses awarded to GEL by an
arbitrator on August 11, 2017.
GEL Interim
Payments. Cash payments of $0.5 million at the end of each
calendar month by the Lazarus Parties to GEL until the GEL
Settlement Payment was made.
GEL
Settlement. When all conditions of the GEL Settlement
Agreement were met by the Lazarus Parties under the GEL Settlement
Agreement, and whereby GEL and the Lazarus Parties agreed to
mutually release all claims against each other and to file a
stipulation of dismissal with prejudice in connection with
arbitration proceedings between LE and GEL related to a contractual
dispute involving a crude oil supply and throughput services
agreement, each between LE and GEL dated August 12,
2011.
GEL Settlement
Agreement. Settlement Agreement dated July 20, 2018, between
the Lazarus Parties and GEL outlining the terms and conditions for
a settlement, including: (i) the GEL Settlement Payment by the GEL
Settlement Date and (ii) GEL Interim Payments.
GEL Settlement
Date. The effective date of the GEL
Settlement.
GEL Settlement
Payment. A lump sum cash payment of $10.0 million as paid by
the Lazarus Parties to GEL under the GEL Settlement
Agreement.
Gross
profit (deficit). Calculated as total revenue less cost of goods
sold; reflected as a dollar ($) 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.
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.
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.
Lazarus
Capital. Lazarus Capital, LLC, an affiliate of Jonathan
Carroll.
Lazarus
Midstream. Lazarus Midstream Partners, L.P., an affiliate of
LEH.
Lazarus
Parties. Blue
Dolphin, C&C, NPS, LE, LEH, and Jonathan
Carroll.
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.
LEH. Lazarus
Energy Holdings, LLC, an affiliate of Jonathan Carroll and
controlling shareholder of Blue Dolphin.
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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.
LMT. Lazarus
Marine Terminal I, LLC, an affiliate of LEH.
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.
NAAQS.
National Ambient Air Quality Standards.
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.
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 GEL Final Arbitration Award by $3.6 million. The
Notre Dame Debt is currently in default.
NSR/PSD. New
Source Review/Prevention of Significant
Deterioration.
OPA 90. Oil
Pollution Act of 1990.
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.
Occupational Safety and Health Administration.
OSRO. Oil
Spill Response Organization.
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.
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Blue Dolphin Energy
Company
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December
31, 2020
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Page
4
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Glossary of Terms
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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.
RCRA.
Federal Resource Conservation and Recovery Act.
RFS2. Second
Renewable Fuels Standard.
ROU.
Right-of-use.
SBA. Small
Business Administration.
SEC.
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.
SEMS. Safety
and Environmental Management System.
Sour crude.
Crude oil containing sulfur content of more than
0.5%.
Stabilizer
unit. A distillation column intended to remove the lighter
boiling compounds, such as butane or propane, from a
product.
Sweet crude.
Crude oil containing sulfur content of less than
0.5%.
Sulfur.
Present at various levels of concentration in many hydrocarbon
deposits, such as petroleum, coal, or natural gas. Also, produced
as a by-product of removing sulfur-containing contaminants from
natural gas and petroleum. Some of the most commonly used
hydrocarbon deposits are categorized per their sulfur content, with
lower sulfur fuels usually selling at a higher, or premium, price
and higher sulfur fuels selling at a lower, or discounted,
price.
Texas First.
Texas First Rentals, LLC.
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.
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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.
WHO. World
Health Organization.
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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Blue Dolphin Energy
Company
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December
31, 2020
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Page
5
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Important Information Regarding Forward Looking
Statements
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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
“Part I, Item 1. Business” and “Part I, Item 1A.
Risk Factors,” as well as “Part II, Item 7.
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:
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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 in 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.
|
|
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.
●
A potential pivot
into other types of business, 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 “Part
I, Item 1A. Risk Factors” of this report.
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.
|
Blue Dolphin Energy
Company
|
December
31, 2020
|
Page
6
|
|
Business
|
|
|
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.
Part I
should be read in conjunction with “Part II, Item 7.
Management’s Discussion and Analysis and Results of
Operations” and “Part II, Item 8. Financial Statements
and Supplementary Data”.
PART I
ITEM 1.
BUSINESS
The following section of this Annual Report on Form 10-K generally
refers to business developments during the twelve months ended
December 31, 2020. Discussion of or references to prior period
business developments that are not included in this Form 10-K can
be found in “Part I, Item 1. Business” of our
Annual
Report on Form 10-K for the year ended December 31,
2019.
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 and properties, see “Part I. Item 1.
Business—Refinery Operations, —Tolling and Terminaling
Operations, and —Inactive Operations” and “Part
I. Item 2. Properties” in this report.
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
1A. Risk Factors” and “Part II, Item 8. Financial
Statements and Supplementary Data, Note (3)” 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
December 31, 2020 and 2019. See “Part II, Item 8. Financial
Statements and Supplementary Data, 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. As of the
filing date of this report, payments under the Veritex loans were
current, but other defaults remained outstanding.
|
Blue Dolphin Energy
Company
|
December
31, 2020
|
Page
7
|
|
Business
|
|
|
●
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 “Obligations”). Pursuant to the Amended
Pilot Line of Credit, commencing on May 4, 2020, the 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 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 twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot line of credit totaled $1.0
million and $0, respectively.
On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the SBA EIDLs was a breach of the Amended Pilot Line of Credit
and Pilot demanded full repayment of the Obligations, including
through use of the proceeds of the SBA EIDLs. Pilot also notified
the SBA that the liens securing the SBA EIDLs are junior to those
securing the Obligations. While the SBA acknowledged this point and
indicated a willingness to subordinate the SBA EIDLs, 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 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 has resulted in significant financial constraints
on producers, which in turn has resulted 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
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to 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.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
8
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Business
|
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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. 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 2020. 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.
In response
to margin deterioration and volatility, we adjust throughput and
production at the Nixon refinery based on prevailing market
conditions. Although federal, state, and
local governments and health officials have made strides to contain
the virus, treat its effects, and implement vaccine programs
and OPEC
has since agreed to certain production cuts, oil prices have
remained depressed and oversupply and lack of demand in the market
persists. Oil and refined product prices and demand are
expected to remain volatile for the foreseeable future, and we
cannot predict when prices and demand will improve and stabilize.
As of the
date of this report the Nixon refinery is still operating at
reduced throughput levels and we expect it to continue to do so
until market conditions substantially improve. 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 or results of
operations.
Historic Net Losses and Working Capital Deficits.
Net Losses
Net
loss for the twelve months ended December 31, 2020 was $14.5
million, or a loss of $1.15 per share, compared to net income of
$7.4 million, or income of $0.66 per share, for the twelve months
ended December 31, 2019. The significant increase in net loss
during the twelve months ended December 31, 2020 was the result of:
(1) lower refining margins associated with commodity price
volatility, as noted above, and (2) lower throughput volumes and
barrels sold. Net income for the twelve months ended December 31,
2019 included a $9.1 million gain on the extinguishment of debt
related to the GEL Settlement.
Working Capital Deficits
We had
a working capital deficit of $72.3 million and $59.4 million at
December 31, 2020 and 2019, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$22.9 million and $19.6 million at December 31, 2020 and 2019,
respectively. Cash and cash equivalents, restricted cash (current
portion), and restricted cash, noncurrent were as
follow:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$549
|
$72
|
|
Restricted
cash (current portion)
|
48
|
49
|
|
Restricted
cash, noncurrent
|
514
|
547
|
|
Total
|
$1,111
|
$668
|
See
“Part I, Item 1A. Risk Factors” and “Part II,
Item 8. Financial Statements and Supplementary Data, 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. Business —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 surging coronavirus
cases and roll out COVID-19 vaccines, we expect to continue
operating. 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.
Despite
this, 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.
Facility-dependent personnel, including those needed to maintain
the Nixon facility, report to the facility under strict protocols
that are designed to ensure personnel health and safety. We are
also supporting non-facility-dependent personnel through remote
work and virtual meeting technology, and we are encouraging all
personnel to follow local guidance. All non-essential business
travel and attendance at conferences, trainings, and other
gatherings have been suspended.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
9
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Business
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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.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
|
Property
|
|
Key Products
Handled
|
|
Operating Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
● Crude distillation
tower (15,000 bpd)
● Petroleum storage
tanks
● Loading and
unloading facilities
● Land (56
acres)
|
|
Crude
Oil
Refined
Products
|
|
LE
|
|
Nixon,
Texas
|
Capital Improvement Expansion Project. During 2020, we
safely completed a 5-year capital improvement expansion project of
the Nixon facility. The expansion project involved the construction
of nearly 1.0 million bbls of new petroleum storage tanks, smaller
efficiency improvements to the refinery, and acquisition of
refurbished refinery equipment for future deployment. The increase
in petroleum storage capacity has helped with de-bottlenecking the
Nixon refinery. Additional petroleum storage capacity will allow
for increased refinery throughput of up to approximately 30,000 bpd
while deployment of various refurbished refinery equipment will
help improve processing capacity and increase the Nixon
refinery’s complexity. The total cost of the project, which
was funded through the Veritex loans, was approximately $32.5
million.
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. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Effective
March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a
Pilot affiliate. Either party may terminate the crude supply
agreement by providing the other party 60 days prior written
notice. 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 renewed 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. In addition, sustained periods of low crude oil prices
due to market volatility associated with the COVID-19 pandemic has
resulted in significant financial constraints on producers, which
in turn has resulted 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 twelve-month period ended
December 31, 2020, our refinery experienced downtime as a result of
lack of crude due to cash constraints.
Products and Markets. Our market is the Gulf Coast region of
the U.S., which is represented by the EIA as Petroleum
Administration for 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
|
December 31,
2020
|
Page
10
|
|
Business
|
|
|
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 OSHA, the EPA, 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. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, disabled
equipment, or lack of crude 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 related to freezing temperatures in
February 2021. However, the plant was down for approximately 8 days
as a result of lost external power. Planned turnarounds are used to repair,
restore, refurbish, or replace refinery equipment. Refineries
typically undergo a major turnaround every three to five years.
Since the Nixon refinery was placed back in service in 2012
(commonly referred to as “recommissioning”),
turnarounds are needed more frequently for unanticipated
maintenance or repairs.
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
● Petroleum storage
tanks
● Loading and
unloading facilities
|
|
Crude
Oil
Refined
Products
|
|
LRM,
NPS
|
|
Nixon,
Texas
|
Capital Improvement Expansion Project. As previously noted,
we completed a 5-year capital improvement expansion project of the
Nixon facility during 2020. Tolling and terminaling capital
improvements primarily related to construction of new petroleum
storage tanks to significantly increase petroleum storage capacity.
Increased petroleum storage capacity will provide an opportunity to
generate additional tolling and terminaling revenue.
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.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
11
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Business
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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 twelve months ended December 31, 2020 and 2019. See “Part
II, Item 8. Financial Statements and Supplementary Data, Note
(16)” related to pipelines and platform decommissioning
requirements and related risks.
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Property
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Operating Subsidiary
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Location
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Freeport
facility
● Crude oil and
natural gas separation and dehydration
● Natural gas
processing, treating, and redelivery
● Vapor recovery
unit
● Two onshore
pipelines
● Land (162
acres)
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BDPL
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Freeport,
Texas
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Offshore
Pipelines (Trunk Line and Lateral Lines)
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BDPL
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Gulf of
Mexico
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Oil and
Gas Leasehold Interests
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BDPC
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Gulf of
Mexico
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Pipeline and Facilities Safety.
Although
our pipeline and facility assets are inactive, they require upkeep
and maintenance and are subject to safety regulations under OSHA,
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.
Personnel
We have
no employees. We rely on an Affiliate to manage our facilities
pursuant to the Amended and Restated Operating Agreement. Services
under the Amended and Restated Operating Agreement include
personnel serving in a variety of capacities, including, but not
limited to corporate executives, operations and maintenance,
environmental, health and safety, and administrative and
professional services. At December 31, 2020, the Affiliate had a
total of 199 employees, 161 full-time and 38 part-time. No
personnel were covered by collective bargaining agreements. See
“Part II, Item 8. Financial Statements and Supplementary
Data, Note (3)” for additional disclosures related to
Affiliate arrangements.
Insurance and Risk Management
Our
operations are subject to significant hazards and risks inherent in
crude oil and condensate refining operations, as well as the
transportation and storage of crude oil and condensate and refined
products. We have property damage and business interruption
coverage at the Nixon facility. Business interruption coverage is
for 24 months from the date of the loss, subject to a deductible
with a 45-day waiting period. Our property damage insurance has
deductibles ranging from $5,000 to $500,000. In addition, we have a
full suite of insurance policies covering workers’
compensation, general liability, directors’ and
officers’ liability, environmental liability, and other
business risks. These coverages are supported by safety and other
risk management programs.
Intellectual Property
We rely
on intellectual property laws to protect our brand, as well as
those of our subsidiaries. “Blue Dolphin Energy
Company” is a registered trademark in the U.S. in name and
logo form. “Petroport, Inc.” is a registered trademark
in the U.S. in name form. In addition,
“www.blue-dolphin-energy.com” is a registered domain
name.
Website Access to Reports and Other Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other public filings with the SEC
are available, free of charge, on our website (http://www.blue-dolphin-energy.com)
as soon as reasonably practical after we file them with, or furnish
them to, the SEC. Information contained on our website is not part
of this report. You may also access these reports on the
SEC’s website at http://www.sec.gov.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
12
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Business
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Government Regulations
General. Our operations are subject to extensive and
frequently changing federal, state, and local laws, regulations,
permits, and ordinances relating to the protection of the
environment. Among other things, these laws and regulations govern
obtaining and maintaining construction and operating permits, the
emission and discharge of pollutants into or onto the land, air,
and water, the handling and disposal of solid, liquid, and
hazardous wastes and the remediation of contamination. Compliance
with existing and anticipated environmental laws and regulations
increases our overall cost of business, including our capital costs
to construct, maintain, operate and upgrade equipment and
facilities. Failure to comply with these laws and regulations may
trigger a variety of administrative, civil, and criminal
enforcement measures, including the assessment of monetary
penalties. Certain environmental statutes impose strict, joint and
several liability for costs required to clean up and restore sites
where hazardous substances, hydrocarbons or wastes have been
disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release
of hazardous substances, hydrocarbons, or other waste products into
the environment. These requirements may also significantly affect
our customers’ operations and may have an indirect effect on
our business, financial condition and results of operations.
However, we do not expect such effects will have a material impact
on our financial position, results of operations, or
liquidity.
Air Emissions and Climate Change Regulations. Our operations are
subject to the Clean Air Act and comparable state and local
statutes. Under these laws, we are required to obtain permits, as
well as test, monitor, report, and implement control requirements.
If regulations become more stringent, additional emission control
technologies may be required to be installed at the Nixon facility
and certain emission sources located offshore, and our ability to
secure future permits may become less certain. Any such future
obligations could require us to incur significant additional
capital or operating costs.
The EPA
has undertaken significant regulatory initiatives under authority
of the Clean Air Act’s NSR/PSD program to further reduce
emissions of volatile organic compounds, nitrogen oxides, sulfur
dioxide, and particulate matter. These regulatory initiatives have
been targeted at industries with large manufacturing facilities
that are significant sources of emissions, such as refining, paper
and pulp, and electric power generating industries. The basic
premise of these initiatives is the EPA’s assertion that many
of these industrial establishments have modified or expanded their
operations over time without complying with NSR/PSD regulations
adopted by the EPA that require permits and new emission controls
in connection with any significant facility modifications or
expansions that can result in emission increases above certain
thresholds. As part of this ongoing NSR/PSD regulatory initiative,
the EPA has consent decrees with several refiners that require
refiners to make significant capital expenditures to install
emissions control equipment at selected facilities. We have not
been selected by the EPA to enter a consent decree. If selected, as
a small refiner we do not expect any additional requirements to
have a material impact on our financial position, results of
operations, or liquidity.
The EPA
strengthened the NAAQS for ground-level ozone to 70 parts per
billion in 2015 from the 75-parts per billion level set in 2008. To
implement the revised ozone NAAQS, all states will need to review
their existing air quality management infrastructure State
Implementation Plan for ozone and ensure it is appropriate and
adequate. Where areas remain in ozone non-attainment, or come into
ozone non-attainment as a result of the revised NAAQS, it is likely
that additional planning and control obligations will be required.
States may impose additional emissions control requirements on
stationary sources, changes in fuels specifications, and changes in
fuels mix and mobile source emissions controls. The ongoing and
potential future requirements imposed by states to meet the ozone
NAAQS could have direct impacts on terminaling facilities through
additional requirements and increased permitting costs and could
have indirect impacts through changing or decreasing fuel
demand.
The
Energy Independence and Security Act of 2007 created RFS2 requiring
the total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the U.S. to
reach 36.0 billion gallons by 2022. We applied for an extension of
the temporary exemption afforded small refineries through December
31, 2010. The EPA granted the Nixon refinery a small refinery
exemption from RFS2 requirements for 2013 and 2014. Since 2014, the
Nixon refinery has solely produced HOBM, a non-transportation
lubricant blend product that does not fall under RFS2.
Currently,
multiple legislative and regulatory measures to address greenhouse
gas emissions are in various phases of discussion or
implementation. These include actions to develop national, state,
or regional programs, each of which would require reductions in our
greenhouse gas emissions or those of our customers. In 2015, the
EPA amended the Petroleum and Natural Gas Systems source category
(Subpart W) of the Greenhouse Gas Reporting Program, to include
among other things a new Onshore Petroleum and Natural Gas
Gathering and Boosting segment that encompasses greenhouse gas
emissions from equipment and sources within the petroleum and
natural gas gathering boosting systems. In 2016, the EPA
promulgated regulations regarding performance standards for methane
emissions from new and modified oil and gas production and natural
gas processing and transmission facilities, and in September 2018,
proposed targeted improvements to these standards to streamline
implementation of the rules. These and other legislative regulatory
measures will impose additional burdens on our business and those
of our customers.
Hazardous Substances and Waste Regulations. The CERCLA imposes strict, joint and
several liability on a broad group of potentially responsible
parties for response actions necessary to address a release of
hazardous substances into the environment. The law authorizes
two kinds of response actions: (i) short-term removals, where
actions may be taken to address releases or threatened releases
requiring prompt response, and (ii) long-term remedial response
actions, that permanently and significantly reduce the dangers
associated with releases or threats of releases of hazardous
substances that are serious, but not immediately life threatening.
Neither we nor any of our predecessors have been designated as a
potentially responsible party under CERCLA or a similar state
statute.
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Blue Dolphin Energy
Company
|
December 31,
2020
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Page
13
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Business
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We
generate petroleum product wastes, solid wastes, and ordinary
industrial wastes, such as from paints and solvents, that are
regulated under RCRA and comparable state statues. We are not
currently required to comply with a substantial portion of the RCRA
requirements because we are considered small quantity generators of
hazardous wastes by the EPA and state regulations. However, it is
possible that additional wastes, which could include wastes
currently generated during operations, will in the future be
designated as hazardous wastes. Hazardous wastes are subject to
more rigorous and costly disposal requirements than are
non-hazardous wastes. The Hazardous Waste Generator Improvement
Rule of the EPA provides some additional flexibility for small
generators but also increases certain recordkeeping and
administrative burdens. Several states are now in the process of
adopting this rule. Any additional changes in the regulations could
increase our capital and operating costs.
We
currently own properties where crude oil, refined petroleum
hydrocarbons, and fuel additives have been handled for many years
by previous owners. At some facilities, hydrocarbons or other waste
may have been disposed of or released on or under the properties
owned by us or on or under other locations where these wastes have
been taken for disposal. Although prior owners and operators may
have used operating and waste disposal practices that were standard
in the industry at the time, these properties and wastes disposed
thereon are now subject to CERCLA, RCRA and analogous state laws.
Under these laws, we could be required to remove or remediate
previously disposed or released wastes (including wastes disposed
of or released by prior owners or operators), to clean up
contaminated property (including impacted groundwater), or to
perform remedial operations to prevent future contamination to the
extent we are not indemnified for such matters.
Water Pollution Regulations. Our operations can result in the
discharge of pollutants, including chemical components of crude oil
and refined products, into federal and state waters. The CWA prohibits the discharge of pollutants into
U.S. waters except as authorized by the terms of a permit issued by
the EPA or a state agency with delegated authority. The
transportation and storage of crude oil and refined products over
and adjacent to water involves risks and subjects us to the
provisions of the CWA, OPA 90, and related state
requirements.
Spill
prevention, control, and countermeasure requirements mandate the
use of structures, such as berms and other secondary containment,
to prevent hydrocarbons or other pollutants from reaching a
jurisdictional body of water in the event of a spill or leak. These
requirements prevent pollutant releases and minimize potential
impacts should a release occur. We have federally certified OSROs
available to respond to a spill and, in the case of our offshore
pipelines, we maintain the statutory $35.0 million coverage
required proof of financial responsibility. In the event of an oil
spill into navigable waters, we can be subject to strict, joint,
and potentially unlimited liability for removal costs and other
consequences.
Wastewater
is subject to restrictions and strict controls under the CWA.
Federal and state regulatory agencies can impose administrative,
civil, and criminal penalties for non-compliance with discharge
permits. Process wastewater from the
Nixon refinery is tested and discharged to a nearby municipal
treatment facility pursuant to applicable process wastewater
permits. Wastewater from our offshore facilities, including our oil
and natural gas pipelines and anchor platform, is tested and
discharged pursuant to applicable produced water permits.
Stormwater at the Nixon facility is tested and discharged pursuant
to applicable stormwater permits.
Offshore “Idle Iron” Decommissioning
Regulations. In
2018 BSEE updated its earlier 2010 guidance and regulations on
decommissioning that mandates lessees and rights-of-way holders
permanently abandon and/or remove platforms and other structures
when no longer useful for operations. 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 minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines 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.
We are
required by BOEM to: (i) maintain acceptable financial assurance
(pipeline bonds) for the decommissioning of our assets offshore in
federal waters and (ii) decommission these assets following a
certain period of inactivity. As of December 31, 2020, we
maintained approximately $0.9 million in credit and cash-backed
pipeline rights-of-way bonds issued to the BOEM. As of December 31,
2020, we maintained $2.6 million in AROs related to abandonment of
these assets. See “Part I, Item 1A. Risk Factors” and
“Part II, Item 8. Financial Statements and Supplementary
Data, Notes (12) and (16)” for additional disclosures related
to idle iron decommissioning requirements for our pipelines and
facilities assets and related risks.
Health, Safety and Maintenance
We are
subject to the requirements of OSHA and other federal and state
agencies that address employee health and safety. In general, we
believe current expenditures are fulfilling the OSHA requirements
and protecting the health and safety of our employees. Based on new
regulatory developments, we may increase expenditures in the future
to comply with higher industry and regulatory safety standards.
However, such increases in our expenditures, and the extent to
which they might be offset, cannot be estimated at this
time.
BSEE
also requires offshore operators to employ a SEMS
plan. SEMS are designed to reduce human and
organizational errors as root causes of work-related accidents and
offshore spills, develop protocols as to who at the facility has
the ultimate operational safety and decision-making authority, and
establish procedures to provide all personnel with “stop
work” authority. We have a SEMS program in
place.
|
Blue Dolphin Energy
Company
|
December 31,
2020
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Page
14
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Risk Factors
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, in
addition to the other information contained in this document.
Realization of any of the following risks could have a material
adverse effect on our business, financial condition, cash flows and
results of operations.
A.
Risks Related to the COVID-19 Pandemic
A1.
The outbreak of the COVID-19 pandemic significantly affected our
liquidity, business, financial condition, and results of operations
in 2020 and may continue to do so thereafter. There can be no
assurance that our liquidity, business, financial condition, and
results of operations will revert to pre-2020 levels once the
impacts of COVID-19 pandemic cease.
The
outbreak of the COVID-19 pandemic negatively impacted worldwide
economic and commercial activity and financial markets, as well as
global demand for petroleum products in 2020 and is expected to
continue in 2021. The COVID-19 pandemic also created simultaneous
shocks in oil supply, demand, and pricing resulting in an economic
challenge to our industry which has not occurred since our
formation. The COVID-19 pandemic and related governmental
responses, as well as developments in the global oil markets,
resulted in significant business and operational disruptions,
including business closures, supply chain disruptions, travel
restrictions, stay-at-home orders, and limitations on the
availability of workforces. As a result of commodity price
volatility and decreased demand for our products, our business
results and cash flows were significantly adversely impacted by the
COVID-19 pandemic. Specifically, Blue Dolphin’s income and
cash flow from operations reflected a loss of $7.9 million and use
of cash of $3.9 million, respectively, for the twelve months ended
December 31, 2020 compared to income of $5.5 million and use of
cash of $8.2 million, respectively, for the twelve months ended
December 31, 2019. We expect the combination of abnormal volatility
in commodity prices and significant decreased demand for our
refined products to continue for the foreseeable
future.
The
duration of the impact of the COVID-19 pandemic and the related
market developments is unknown. The continued negative impact of
these events on our business and operations will depend on the
ongoing severity, location and duration of the effects and spread
of COVID-19, the effectiveness of vaccine programs, other actions
undertaken by federal, state, and local governments and health
officials to contain the virus or treat its effects, and how
quickly and to what extent economic conditions improve and normal
business and operating conditions resume in 2021 or thereafter. We
continue to take measures to lessen the impact of the pandemic on
our operations and limit the spread of the virus among personnel.
For example, we operated the Nixon facility at reduced rates in
2020 based on market conditions and staffing levels, and we expect
to continue adjusting the facility’s operating rate until
market and other conditions substantially improve. We have
carefully evaluated projects and, as a result, have limited or
postponed projects and other non-essential work. We have planned a
level of capital expenditures we believe will allow us to satisfy
and comply with all required safety, environmental, and planned
regulatory capital commitments and other regulatory requirements,
although there are no assurances that we will be able to continue
to do so. 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.
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. To the extent the COVID-19
pandemic continues to adversely affect our business, financial
condition, results of operations and liquidity, it may also have
the effect of heightening many of the other risks associated with
our company, our business, and our industry, as those risk factors
are amended or supplemented by reports and documents that we file
with the SEC after the date of this Form 10-K.
A2.
The persistence or worsening of market conditions related to the
COVID-19 pandemic 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.
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.
The
effects of the COVID-19 pandemic on macroeconomic conditions and
the capital markets make it more challenging to raise capital.
Adverse effects include a
global tightening of credit and liquidity, reduced availability,
increased cost of credit, and a slow down the decision-making of
financial institutions. These factors could materially and
negatively affect the availability, timing, and cost for which we
may obtain any additional funding for working capital purposes or
to refinance existing debt. 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 COVID-19 disruptions to our
business.
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Blue Dolphin Energy
Company
|
December 31,
2020
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Page
15
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Risk Factors
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A3.
Continued or further deterioration in demand for our refined
products could negatively affect our operations and financial
condition.
Business closings
and layoffs in the markets we operate have adversely affected
demand for our refined products. Sustained deterioration of general
economic conditions or weak demand levels persisting in 2021 could
require additional actions on our part, such as temporarily or
permanently ceasing to operate the Nixon facility to lower our
operating costs or reconfigure the Nixon facility to increase
flexibility to be responsive to evolving market conditions,
including potentially pivoting to renewable fuels. There may be
significant incremental costs or impairment charges associated with
such actions. Continued or further deterioration of economic
conditions may harm our liquidity and ability to repay our
outstanding debt and the trading price of Blue Dolphin’s
Common Stock.
A4.
Potential
impairment in the carrying value of long-lived assets could
negatively affect our
operating results.
We have a significant amount of long-lived assets
on our consolidated balance sheet. Under generally accepted
accounting principles, long-lived assets are required to be
reviewed for impairment annually or whenever adverse events or
changes in circumstances indicate a possible impairment. If
business conditions or other factors cause the undiscounted
estimated pretax cash flows for long-lived assets to fall below
their carrying value, we may be required to record non-cash
impairment charges. Events and conditions that could result in
impairment in the value of our long-lived assets include
lower realized refining
margins, decreased refinery production, other factors leading to a reduction in expected
long-term sales or profitability, or significant
changes in the manner of use for the assets or the overall business
strategy.
In this
challenging business environment, we continuously monitor our
assets for impairment, as well as optimization opportunities.
We evaluated our refinery and
facilities assets for impairment as of June 30, September 30, and
December 31, 2020. Although no indicators of asset impairment were
identified as of each reporting period indicated, an impairment may
be required in the future as the long-term impact of the crisis
becomes clearer, losses continue to be material, or as new
opportunities arise, such as reconfiguration of the Nixon refinery into a
renewable fuels facility.
Significant
management judgment is required in the forecasting of future
operating results that are used in the preparation of projected
cash flows. As a result, there can be no assurance that the
estimates and assumptions made for purposes of our impairment
analysis will prove to be an accurate prediction of the future.
Should our assumptions significantly change in future periods, it
is possible we may later determine the carrying values of our
refinery and facilities assets exceed the undiscounted estimated
pretax cash flows, which would result in a future impairment
charge.
B.
Risks Related to Our Business and Industry
B1.
Management has determined that there is, and the report of our
independent registered public accounting firm expresses,
substantial doubt about our ability to continue as a going
concern.
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. 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.A ‘going
concern’ opinion could impair 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 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 potentially filing for
bankruptcy.
B2.
We have 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,
any of which could have a material adverse effect on
us.
We
currently rely on revenue from operations, including sales of
refined products and rental of petroleum storage tanks, and
Affiliates to meet our liquidity needs. Our short-term working
capital needs are primarily related to acquisition of crude oil and
condensate to operate the Nixon refinery, repayment of short-term
debt obligations, and capital expenditures for maintenance,
upgrades, and refurbishment of equipment at the Nixon facility. Our
long-term working capital needs are primarily related to repayment
of long-term debt obligations. In addition, we continue to utilize
capital to reduce operational, safety and environmental risks. We
may incur substantial compliance costs relating to any new
environmental, health and safety regulations. Our liquidity will
affect our ability to satisfy any of these needs.
|
Blue Dolphin Energy
Company
|
December 31,
2020
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Page
16
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Risk Factors
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We had
a working capital deficit of $72.3 million and $59.4 million at
December 31, 2020 and 2019, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$22.9 million and $19.6 million at December 31, 2020 and 2019,
respectively. Cash and cash equivalents, restricted cash (current
portion), and restricted cash (noncurrent) were as
follow:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$549
|
$72
|
|
Restricted
cash (current portion)
|
48
|
49
|
|
Restricted
cash, noncurrent
|
514
|
547
|
|
Total
|
$1,111
|
$668
|
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 COVID-19 disruptions to our
business. If
we do not have sufficient liquidity, 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 potentially filing for
bankruptcy.
B3.
Our substantial current debt, which is included in the current
portion of long-term debt (in default), long-term debt, related
party (in default), and line of credit payable (in default), could
adversely affect our financial health and make us more vulnerable
to adverse economic conditions.
As of
December 31, 2020 and 2019, we had current debt of $57.7 million
and $51.3 million, respectively, consisting of bank debt, related
party debt, and a line of credit payable. Blue Dolphin, as parent
company, has guaranteed the indebtedness of certain subsidiaries.
In addition, Affiliates have guaranteed the indebtedness of Blue
Dolphin and certain of its subsidiaries. This level of debt in
current liabilities and the cross guarantee agreements could have
important consequences, such as: (i) limiting our ability to obtain
additional financing to fund our working capital, capital
expenditures, debt service requirements or potential growth, or for
other purposes; (ii) increasing the cost of future borrowings;
(iii) limiting our ability to use operating cash flow in other
areas of our business because we must dedicate a substantial
portion of these funds to make payments on our debt; (iv) placing
us at a competitive disadvantage compared to competitors with less
debt; and (v) increasing our vulnerability to adverse economic and
industry conditions.
As of
the filing date of this report, we were current with the monthly
payments required under our bank debt; however, partial payments
are being made monthly to the line of credit payable as a tank
lease setoff using amounts NPS is due from Pilot under two tank
lease agreements. Our ability to service our debt is dependent
upon, among other things, business conditions, our financial and
operating performance, our ability to raise capital, and regulatory
and other factors, many of which are beyond our control. If our
working capital is not sufficient to service our debt, and any
future indebtedness that we incur, our business, financial
condition, and results of operations will be materially adversely
affected.
B4.
Our ability to regain compliance with the terms of our outstanding
indebtedness depends on us generating sufficient cash flow to meet
debt service obligations or refinancing or restructuring the
debt.
As
described elsewhere in this report, we are in default under our
secured loan agreements with third parties and related parties.
Defaults include events of default and financial covenant
violations, as follow:
●
Veritex
– At December 31, 2020, LE and LRM were in violation of the
debt service coverage ratio, current ratio, and debt to net worth
ratio financial covenants under our secured loan agreements with
Veritex. As of the filing date of this report, payments under the
Veritex loans were current, but other defaults remained
outstanding.
●
Pilot
– The Amended Pilot Line of Credit matured in May 2020.
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. The
tank lease setoff amounts only partially satisfy NPS’
obligations to Pilot, 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 twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot line of credit totaled $1.0
million and $0, respectively. On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the SBA EIDLs was a breach of the Amended Pilot Line of Credit
and Pilot demanded full repayment of the Obligations, including
through use of the proceeds of the SBA EIDLs. Pilot also notified
the SBA that the liens securing the SBA EIDLs are junior to those
securing the Obligations. While the SBA acknowledged this point and
indicated a willingness to subordinate the SBA EIDLs, no further
action has been taken by Pilot as of the filing date of this
report.
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●
Notre
Dame Debt – Pursuant to a 2015 subordination agreement, the
holder of the Notre Dame Debt agreed to subordinate their right to
payments from LE, 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.
●
Related
Party Debt – 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, which is currently in
default, represents such working capital borrowings.
Defaults under our
secured loan agreements with third parties permit Veritex and Pilot
to declare the amounts owed under these loan agreements immediately
due and payable, exercise their 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 secured loan agreements with third parties and
related parties was classified within the current portion of
long-term debt (in default), long-term debt, related party (in
default), and line of credit payable (in default) on our
consolidated balance sheets at December 31, 2020 and
2019.
Our
ability to regain compliance with the terms of our outstanding
indebtedness depends on our ability to generate sufficient cash
flow to meet debt service obligations or refinance or restructure
the debt. This is dependent on, among other things, business
conditions, our financial performance, and the general condition of
the financial markets. We can provide no assurance that our assets
or cash flow will be sufficient to fully repay borrowings under our
secured loan agreements. 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. Given the current
financial markets, we can provide no assurance that we can
successfully generate sufficient cash from operations to repay our
outstanding debt or otherwise restructure or refinance the debt. 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. 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, we
may be unable to pay the amounts outstanding, 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.
B5.
Our business, financial condition, and operating results may be
adversely affected by increased costs of capital or a reduction in
the availability of credit.
Adverse
changes to the availability, terms and cost of capital, interest
rates or our credit ratings (which would have a corresponding
impact on the credit ratings of our subsidiaries that are party to
any cross-guarantee agreements) could cause our cost of doing
business to increase by limiting our access to capital, including
our ability to refinance maturing or accelerated existing
indebtedness on similar terms. As a result, we cannot provide any
assurance that any financing will be available to us in the future
on acceptable terms or at all. Any such financing could be dilutive
to our existing stockholders. If we cannot raise required funds on
acceptable terms, we may further reduce our expenses and we may not
be able to, among other things, (i) maintain our general and
administrative expenses at current levels; (ii) successfully
implement our business strategy; (iii) fund certain obligations as
they become due; (iv) respond to competitive pressures or
unanticipated capital requirements; or (v) repay our indebtedness.
Based on the historical negative cash flows and the continued
limited cash inflows in the period subsequent to year end there is
substantial doubt about our ability to continue as a going
concern.
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B6.
Restrictive covenants in our debt
instruments may limit our ability to undertake certain types of
transactions, which could adversely affect our business, financial
condition, results of operations, and our ability to service our
indebtedness.
Various covenants in our debt instruments may
restrict our financial flexibility in a number of ways. Our current
indebtedness subjects us to significant financial and other
restrictive covenants, including restrictions on our ability to
incur additional indebtedness, place liens upon assets, pay
dividends or make certain other restricted payments and
investments, consummate certain asset sales or asset swaps, conduct
businesses other than our current businesses, or sell, assign,
transfer, lease, convey or otherwise dispose of all or
substantially all of our assets. Some of our debt instruments also
require us to satisfy or maintain certain financial condition tests
in certain circumstances. Our ability to meet these financial
condition tests can be affected by events beyond our control and we
may not meet such tests. In addition, a failure to comply with the
provisions of our existing debt could result in a further event of
default that could enable our lenders, subject to the terms and
conditions of such debt, to declare the outstanding principal,
together with accrued interest, to be immediately due and payable.
Events beyond our control, including the impact of the COVID-19
pandemic and related governmental responses, volatility in
commodity prices, and extreme weather resulting from climate
change may affect our ability to
comply with our covenants. If we are unable to repay the
accelerated amounts, our lenders could proceed against the
collateral granted to them to secure such debt. If the payment of
our debt is accelerated, defaults under our other debt instruments,
if any, may be triggered, and our assets may be insufficient to
repay such debt in full.
During
the twelve-month period ended December 31, 2020, we received two
small loans totaling $0.3 million in the aggregate under federal or
other governmental programs to support our operations as a result
of the COVID-19 pandemic. Loans provided or guaranteed by the U.S.
government, including pursuant to the Coronavirus Aid, Relief and
Economic Security Act, signed into law on March 27, 2020, subject
us to additional restrictions on our operations, including
limitations on personnel headcount and compensation reductions and
other cost reduction activities that could adversely affect
us.
B7.
Affiliates hold a significant ownership interest in us and exert
significant influence over us, and their interests may conflict
with the interests of our other stockholders; Affiliate
transactions may cause conflicts of interest that may adversely
affect us.
Affiliates
controlled approximately 82% of the voting power of our
Common Stock as of the filing date of this report and, by virtue of
such stock ownership, can control or exert substantial influence
over us, including:
●
Election and
appointment of directors;
●
Business strategy
and policies;
●
Mergers and other
business combinations;
●
Acquisition or
disposition of assets;
●
Future issuances of
Common Stock or other securities; and
●
Incurrence of debt
or obtaining other sources of financing.
The
existence of a controlling stockholder may have the effect of
making it difficult for, or may discourage or delay, a third party
from seeking to acquire a majority of our outstanding Common Stock,
which may adversely affect the market price of our Common
Stock.
Affiliate interest
may not always be consistent with our interests or with the
interests of our other stockholders. Affiliates may also pursue
acquisitions or business opportunities in industries in which we
compete, and there is no requirement that any additional business
opportunities be presented to us. We also have and may in the
future enter transactions to purchase goods or services with
Affiliates. To the extent that conflicts of interest may arise
between us and Affiliates, those conflicts may be resolved in a
manner adverse to us or its other stockholders.
These
relationships could create, or appear to create, potential
conflicts of interest when our Board is faced with decisions that
could have different implications for us and Affiliates. The
appearance of conflicts, even if such conflicts do not materialize,
might adversely affect the public’s perception of us, as well
as our relationship with other companies and our ability to enter
new relationships in the future, which may have a material adverse
effect on our ability to do business.
B8.
The dangers inherent in oil and gas operations could expose us to
potentially significant losses, costs or liabilities, and reduce
our liquidity.
Oil and
gas operations are inherently subject to significant hazards and
risks. These hazards and risks include, but are not limited to,
fires, explosions, ruptures, blowouts, spills, third-party
interference and equipment failure, any of which could result in
interruption or termination of operations, pollution, personal
injury and death, or damage to our assets and the property of
others. These risks could result in substantial losses to us from
injury and loss of life, damage to and destruction of property and
equipment, pollution and other environmental damage and suspension
of operations. Offshore operations are also subject to a variety of
operating risks peculiar to the marine environment, such as
hurricanes or other severe weather conditions, and more extensive
governmental regulation. These regulations may, in certain
circumstances, impose strict liability for pollution damage or
result in the interruption or termination of operations. These
risks could harm our reputation and business, result in claims
against us, and have a material adverse effect on our results of
operations and financial condition.
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B9.
The geographic concentration of our assets creates a significant
exposure to the risks of the regional economy and other regional
adverse conditions.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined products in a single, relatively
limited geographic area. In addition, we have facilities and
related onshore pipeline assets in Freeport, Texas, and offshore
pipelines and oil and gas properties in the Gulf of Mexico. As a
result, our operations are more susceptible to regional economic
conditions than our more geographically diversified competitors.
Any changes in market conditions, unforeseen circumstances, or
other events affecting the area in which our assets are located
could have a material adverse effect on our business, financial
condition, and results of operations. These factors include, among
other things, changes in the economy, weather, demographics, and
population.
B10.
Competition from companies having greater financial and other
resources could materially and adversely affect our business and
results of operations.
The
refining industry is highly competitive. Our refining
operations compete with domestic refiners and marketers in PADD 3
(Gulf Coast), domestic refiners in other PADD regions, and foreign
refiners that import products into the U.S. Certain of our
competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. Several of
our principal competitors are integrated national or international
oil companies that are larger and have substantially greater
resources than we do and have access to proprietary sources of
controlled crude oil production. Unlike these competitors, we
obtain all our feedstocks from a single supplier. Because of their
integrated operations and larger capitalization, larger, more
complex refineries may be more flexible in responding to volatile
industry or market conditions, such as crude oil and other
feedstocks supply shortages or commodity price
fluctuations. If we are unable to compete effectively,
we may lose existing customers or fail to acquire new
customers.
B11.
Environmental laws and regulations could require us to make
substantial capital expenditures to remain in compliance or to
remediate current or future contamination that could give rise to
material liabilities.
Our
operations are subject to a variety of federal, state and local
environmental laws and regulations relating to the protection of
the environment and natural resources, including those governing
the emission or discharge of pollutants into the environment,
product specifications and the generation, treatment, storage,
transportation, disposal and remediation of solid and hazardous
wastes. Violations of these laws and regulations or permit
conditions can result in substantial penalties, injunctive orders
compelling installation of additional controls, civil and criminal
sanctions, permit revocations and/or facility
shutdowns.
In
addition, new environmental laws and regulations, new
interpretations of existing laws and regulations, increased
governmental enforcement of laws and regulations, or other
developments could require us to make additional unforeseen
expenditures. Many of these laws and regulations are becoming
increasingly stringent, and the cost of compliance with these
requirements can be expected to increase over time. The
requirements to be met, as well as the technology and length of
time available to meet those requirements, continue to develop and
change. Expenditures or costs for environmental compliance could
have a material adverse effect on our results of operations,
financial condition, and profitability. For example, President
Biden has issued an executive order seeking to adopt new
regulations and policies to address climate change and to consider
suspending, revising, or rescinding prior agency actions that are
identified as conflicting with the Biden Administration’s
climate policies. The current administration may take further
actions that could restrict or limit operations as currently
conducted at the Nixon Facility.
The
Nixon facility operates under several federal and state permits,
licenses, and approvals with terms and conditions that contain a
significant number of prescriptive limits and performance
standards. These permits, licenses, approvals, limits, and
standards require a significant amount of monitoring, record
keeping and reporting to demonstrate compliance with the underlying
permit, license, approval, limit or standard. Non-compliance or
incomplete documentation of our compliance status may result in the
imposition of fines, penalties and injunctive relief. Additionally,
there may be times when we are unable to meet the standards and
terms and conditions of our permits, licenses and approvals due to
operational upsets or malfunctions, which may lead to the
imposition of fines and penalties or operating restrictions that
may have a material adverse effect on our ability to operate our
facilities, and accordingly our financial performance.
B12.
We are subject to strict laws and regulations regarding personnel
and process safety, and failure to comply with these laws and
regulations could have a material adverse effect on our results of
operations, financial condition, and profitability.
We are
subject to the requirements of OSHA, SEMS, and comparable state
statutes that regulate the protection, health, and safety of
workers, and the proper design, operation and maintenance of our
equipment. In addition, OSHA and certain other environmental
regulations require that we maintain information about hazardous
materials used or produced in our operations and that we provide
this information to personnel and state and local governmental
authorities. Failure to comply with these requirements, including
general industry standards, record keeping requirements and
monitoring and control of occupational exposure to regulated
substances, may result in significant fines or compliance costs,
which could have a material adverse effect on our results of
operations, financial condition and cash flows.
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B13.
Our insurance policies do not cover all losses, costs, or
liabilities that we may experience, and insurance companies that
currently insure companies in the energy industry may cease to do
so or substantially increase premiums.
Our
insurance program may not cover all operational risks and costs and
may not provide sufficient coverage in the event of a claim. We do
not maintain insurance coverage against all potential losses and
could suffer losses for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. Losses in excess
of our insurance coverage could have a material adverse effect on
our business, financial condition, and results of
operations.
Changes
in the insurance markets subsequent to certain hurricanes and other
natural disasters have made it more difficult and more expensive to
obtain certain types of coverage. The occurrence of an event that
is not fully covered by insurance, or failure by one or more of our
insurers to honor its coverage commitments for an insured event,
could have a material adverse effect on our business, financial
condition, and results of operations. Insurance companies may
reduce the insurance capacity they are willing to offer or may
demand significantly higher premiums or deductibles to cover our
assets. If significant changes in the number or financial solvency
of insurance underwriters for the energy industry occur, we may be
unable to obtain and maintain adequate insurance at a reasonable
cost. There is no assurance that our insurers will renew their
insurance coverage on acceptable terms, if at all, or that we will
be able to arrange for adequate alternative coverage in the event
of non-renewal. The unavailability of full insurance coverage to
cover events in which we suffer significant losses could have a
material adverse effect on our business, financial condition and
results of operations.
B14.
Our ability to use NOL carryforwards to offset future taxable
income for U.S. federal income tax purposes is subject to
limitation.
Under
IRC Section 382, a corporation that undergoes an “ownership
change” is subject to limitations on its ability to utilize
its 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 50 percentage points
over such stockholders' lowest percentage ownership during the
testing period (generally three years).
Blue
Dolphin experienced ownership changes in 2005 because of a series
of private placements, and in 2012 because of a reverse
acquisition. The 2012 ownership change limits our ability to
utilize NOLs following the 2005 ownership change that were not
previously subject to limitation. Limitations imposed on our
ability to use NOLs to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would
be paid if such limitations were not in effect, and could cause
such NOLs to expire unused, in each case reducing or eliminating
the benefit of such NOLs. Similar rules and limitations may apply
for state income tax purposes. NOLs generated after the 2012
ownership change are not subject to limitation. If the IRS were to
challenge our NOLs in an audit, we cannot assure that we would
prevail against such challenge. If the IRS were successful in
challenging our NOLs, all or some portion of our NOLs would not be
available to offset any future consolidated income, which would
negatively impact our results of operations and cash flows. Certain
provisions of the Tax Cuts and Jobs Act, enacted in 2017, may also
limit our ability to utilize our net operating tax loss
carryforwards.
At
December 31, 2020 and 2019, 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 full valuation allowance
against the deferred tax assets as of December 31, 2020 and
2019.
B15.
We may not be able to keep pace with technological developments in
our industry.
The oil
and natural gas industry is characterized by rapid and significant
technological advancements and introductions of new products and
services using new technologies. As others use or development new
technologies, we may be placed at a competitive disadvantage or may
be forced by competitive pressures to implement those new
technologies at substantial costs. We may not be able to respond do
these competitive pressures or implement new technologies on a
timely basis or at an acceptable cost. If one or more of the
technologies we use now or in the future were to become obsolete,
our business, financial condition or results of operations could be
materially and adversely affected.
B16.
A terrorist attack or armed conflict could harm our
business.
Terrorist
activities, anti-terrorist efforts and other armed conflicts
involving the United States or other countries may adversely affect
the United States and global economies and could prevent us from
meeting our financial and other obligations. If any of these events
occur, the resulting political instability and societal disruption
could reduce overall demand for oil and natural gas, potentially
putting downward pressure on demand for our production and causing
a reduction in our revenues. Oil and natural gas related facilities
could be direct targets of terrorist attacks, and our operations
could be adversely impacted if infrastructure integral to our
customers’ operations is destroyed or damaged. Costs for
insurance and other security may increase as a result of these
threats, and some insurance coverage may become more difficult to
obtain, if available at all.
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B17.
Our business could be negatively affected by security
threats.
A
cyberattack or similar incident could occur and result in
information theft, data corruption, operational disruption, damage
to our reputation or financial loss. Our industry has become
increasingly dependent on digital technologies to conduct certain
exploration, development, production, processing and financial
activities. Our technologies, systems, networks, or other
proprietary information, and those of our vendors, suppliers and
other business partners, may become the target of cyberattacks or
information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, loss or destruction of
proprietary and other information, or could otherwise lead to the
disruption of our business operations. Cyberattacks are becoming
more sophisticated and certain cyber incidents, such as
surveillance, may remain undetected for an extended period and
could lead to disruptions in critical systems or the unauthorized
release of confidential or otherwise protected information. These
events could lead to financial loss from remedial actions, loss of
business, disruption of operations, damage to our reputation or
potential liability. Also, computers control nearly all the oil and
gas distribution systems in the United States and abroad, which are
necessary to transportation our production to market. A cyberattack
directed at oil and gas distribution systems could damage critical
distribution and storage assets or the environment, delay or
prevent delivery of production to markets and make it difficult or
impossible to accurately account for production and settle
transactions. Cyber incidents have increased, and the United States
government has issued warnings indicating that energy assets may be
specific targets of cybersecurity threats. Our systems and
insurance coverage for protecting against cybersecurity risks may
not be sufficient. Further, as cyberattacks continue to evolve, we
may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to
investigate and remediate any vulnerability to
cyberattacks.
B18.
We face various risks associated with increased activism against
oil and natural gas companies.
Opposition toward
oil and natural gas companies has been growing globally and is
particularly pronounced in the United States. Companies in the oil
and natural gas industry are often the target of activist efforts
from both individuals and non-governmental organizations regarding
safety, human rights, environmental matters, sustainability, and
business practices. Anti-development activists are working to,
among other things, reduce access to federal and state government
lands and delay or cancel certain operations such as drilling and
development. Any
restrictions or limitations on our business or operations resulting
from such opposition could have a material adverse effect on our
financial condition and results of operations.
B19.
An outbreak of another highly infectious or contagious disease
could adversely affect the combined company’s business,
financial condition, and results of operations.
Our
business will be dependent upon the willingness and ability of our
customers to conduct transactions. The spread of a highly
infectious or contagious disease, such as COVID-19, could cause
severe disruptions in the worldwide economy, which could in turn
disrupt our business, activities, and operations, as well as that
of our customers. Moreover, since the beginning of January 2020,
the COVID-19 outbreak has caused significant disruption in the
financial markets both globally and in the United States. The
spread of COVID-19, or an outbreak of another highly infectious or
contagious disease, may result in a significant decrease in
business and/or cause customers to be unable to meet existing
payment or other obligations. A spread of COVID-19, or an outbreak
of another contagious disease, could also negatively impact the
availability of key personnel necessary to conduct our business.
Such a spread or outbreak could also negatively impact the business
and operations of third-party providers who perform critical
services for our business. If COVID-19, or another highly
infectious or contagious disease, spreads or the response to
contain COVID-19 is unsuccessful, we could experience a material
adverse effect on our business, financial condition, and results of
operations.
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C.
Risks Related to Our Operations
C1.
Refining margins, which are affected by commodity prices and
refined product demand, are volatile, and a reduction in refining
margins will adversely affect the amount of cash we will have
available for working capital.
Historically,
refining margins have been volatile, and they are likely to
continue to be volatile in the future. Our financial results are
primarily affected by the relationship between our crude oil and
condensate acquisition costs, the prices at which we ultimately
sell our refined products, and the volume of refined products that
we sell, all of which depend upon numerous factors beyond our
control. The prices at which we sell our refined products are
strongly influenced by the commodity price of crude oil. If crude
oil prices increase, our ‘refinery operations’ business
segment margins will fall unless we can pass along these price
increases to our wholesale customers. Increases in the selling
prices for refined products typically trail the rising cost of
crude oil and may be difficult to implement when crude oil costs
increase dramatically over a short period. Sharp decreases in
refined product market demand, such as the record low demand that
has occurred because of widespread COVID-19 related travel
restrictions, can adversely affect our refining
margins.
C2.
The price volatility of crude oil, other feedstocks, refined
products, and fuel and utility services may have a material adverse
effect on our earnings, cash flows, and liquidity.
Our
refining earnings, cash flows and liquidity from operations depend
primarily on the margin above operating expenses (including the
cost of refinery feedstocks, such as crude oil and condensate that
are processed and blended into refined products) at which we can
sell refined products. Crude oil refining is primarily a
margin-based business. To improve margins, it is important for a
crude oil refinery to maximize the yields of high value finished
petroleum produces and to minimize the costs of feedstocks and
operating expenses. When the margin between refined product prices
and crude oil and other feedstock costs decreases, our margins are
negatively affected. Crude oil refining margins have historically
been volatile, and are likely to continue to be volatile, because
of a variety of factors, including fluctuations in the prices of
crude oil, other feedstocks, refined products, and fuel and utility
services. Although an increase or decrease in the price for crude
oil generally results in a similar increase or decrease in prices
for refined products, typically there is a time lag between the
comparable increase or decrease in prices for refined products. The
effect of changes in crude oil and condensate prices on our
refining margins therefore depends, in part, on how quickly and how
fully refined product prices adjust to reflect these
changes.
Prices
of crude oil, other feedstocks and refined products depend on
numerous factors beyond our control, including the supply of and
demand for crude oil, other feedstocks, and refined products. Such
supply and demand are affected by, among other things:
●
changes
in foreign, domestic, and local economic conditions;
●
foreign
and domestic demand for fuel products;
●
worldwide
political conditions, particularly in significant oil producing
regions;
●
foreign
and domestic production levels of crude oil, other feedstocks, and
refined products and the volume of crude oil, feedstocks, and
refined products imported into the U.S.;
●
availability
of and access to transportation infrastructure;
●
capacity
utilization rates of refineries in the U.S.;
●
Organization
of Petroleum Exporting Countries’ influence on oil
prices;
●
development
and marketing of alternative and competing fuels;
●
commodities
speculation;
●
natural
disasters (such as hurricanes and tornadoes), accidents,
interruptions in transportation, inclement weather, or other events
that can cause unscheduled shutdowns or otherwise adversely affect
our refineries;
●
federal
and state governmental regulations and taxes; and
●
local
factors, including market conditions, weather, and the level of
operations of other refineries and pipelines in our
markets.
C3.
Our future success depends on our ability to acquire sufficient
levels of crude oil on favorable terms to operate the Nixon
refinery.
Operation of the
Nixon refinery depends on our ability to purchase adequate amounts
of crude oil and condensate. Although we have no crude oil reserves
and are not engaged in the exploration or production of crude oil,
we believe that will be able to obtain adequate crude oil and other
feedstocks at generally competitive prices for the foreseeable
future. We have a long-term crude supply agreement in place with
Pilot. In April 2020, the crude supply agreement renewed on a
one-year evergreen basis. Pilot may terminate the crude supply
agreement at any time by providing us 60 days prior written notice.
We may terminate the agreement at any time during a renewal term by
giving Pilot 60 days prior written notice.
Pilot
also stores crude oil at the Nixon facility under a terminal
services agreement Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. In April 2020, the
terminal services agreement renewed on a one-year evergreen basis.
Either party may terminate the terminal services agreement by
providing the other party 60 days prior written notice. The
terminal services agreement will automatically terminate upon
expiration or termination of the crude supply
agreement.
|
Blue Dolphin Energy
Company
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December 31,
2020
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Page
23
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Risk Factors
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Our
financial health could be adversely affected by defaults under our
secured loan agreements, margin deterioration and volatility, and
historic net losses and working capital deficits, which could
impact our ability to acquire crude oil and condensate. A failure
to acquire crude oil and condensate when needed will have a
material effect on our business results and operations. During the
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints.
C4.
Downtime at the Nixon refinery could result in lost margin
opportunity, increased maintenance expense, increased inventory,
and a reduction in cash available for payment of our
obligations.
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, disabled
equipment, or lack of crude due to cash constraints. However, in
Texas the most typically reason is excessive heat or power outages
from high winds and thunderstorms. The Nixon refinery did not incur
significant damage related to freezing temperatures in February
2021. However, the plant was down for approximately 8 days as a
result of lost external power. Planned turnarounds are used to
repair, restore, refurbish, or replace refinery equipment.
Refineries typically undergo a major turnaround every three to five
years. Since the Nixon refinery is still in the recommissioning
phase, turnarounds are needed more frequently for unanticipated
maintenance or repairs.
We are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Refinery downtime in 2020 totaled 42 days compared to 21 days in
2019. Refinery downtime in 2020 primarily related to lack of crude
due to cash restraints, a maintenance turnaround, and equipment
repairs while refinery downtime in 2019 primarily related to a
maintenance turnaround and equipment repairs. Significant refinery
downtime in 2020 negatively impacted refinery throughput, refinery
production, and capacity utilization rate. 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.
C5.
We may have capital needs for which our internally generated cash
flows and other sources of liquidity may not be adequate. Further,
Affiliates may, but are not required to, fund our working capital
requirements in the event our internally generated cash flows and
other sources of liquidity are inadequate.
If we
are unable to generate sufficient cash flows or otherwise secure
sufficient liquidity to support our short-term and long-term
capital requirements, we may not be able to meet our payment
obligations or pursue our business strategies, any of which could
have a material adverse effect on our results of operations or
liquidity. We currently rely on revenue from operations, including
sales of refined products and rental of petroleum storage tanks,
and Affiliates to meet our liquidity needs. At December 31, 2020
and 2019, accounts payable, related party totaled $0.2 million and
$0.1 million, respectively. At December 31, 2020 and 2019,
long-term debt and accrued interest, related party combined totaled
$18.5 million and $8.2 million, respectively.
In the
event our working capital requirements are inadequate, or we are
otherwise unable to secure sufficient liquidity to support our
short term and/or long-term capital requirements, we may not be
able to meet our payment obligations, comply with certain deadlines
related to environmental regulations and standards, or pursue our
business strategies, any of which may have a material adverse
effect on our results of operations or liquidity. Our short-term
working capital needs are primarily related to acquisition of crude
oil and condensate to operate the Nixon refinery, repayment of debt
obligations, and capital expenditures for maintenance, upgrades,
and refurbishment of equipment at the Nixon facility. Our long-term
working capital needs are primarily related to repayment of
long-term debt obligations. Our liquidity will affect our ability
to satisfy all these needs.
C6.
Our business may suffer if any of the executive officers or other
key personnel discontinue employment with us. Furthermore, a
shortage of skilled labor or disruptions in our labor force may
make it difficult for us to maintain productivity.
Our
future success depends on the services of the executive officers
and other key personnel and on our continuing ability to recruit,
train and retain highly qualified personnel in all areas of our
operations. Furthermore, our operations require skilled and
experienced personnel with proficiency in multiple tasks.
Competition for skilled personnel with industry-specific experience
is intense, and the loss of these executives or personnel could
harm our business. If any of these executives or other key
personnel resign or become unable to continue in their present
roles and are not adequately replaced, our business could be
materially adversely affected.
C7.
Loss of business from, or the bankruptcy or insolvency of, one or
more of our significant customers, one of which is an Affiliate,
could have a material adverse effect on our financial condition,
results of operations, liquidity, and cash flows.
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.
|
Blue Dolphin Energy
Company
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December 31,
2020
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Page
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Risk Factors
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Our
customers have a variety of suppliers to choose from. As a result,
they can make substantial demands on us, including demands for more
favorable product pricing or contractual terms. Our ability to
maintain strong relationships with our principal customers is
essential to our future performance. Our operating results could be
harmed if a key customer is lost, reduces their order quantity,
requires us to reduce our prices, is acquired by a competitor, or
suffers financial hardship. Additionally, our profitability could
be adversely affected if there is consolidation among our customer
base and our customers command increased leverage in negotiating
prices and other terms of sale. We could decide not to sell our
refined products to a certain customer if, because of increased
leverage, the customer pressures us to reduce our pricing such that
our gross profits are diminished, which could result in a decrease
in our revenue. Consolidation may also lead to reduced demand for
our products, replacement of our products by the combined entity
with those of our competitors, and cancellations of orders, each of
which could harm our operating results. Loss of business from, or
the bankruptcy or insolvency of, one or more of our major customers
could similarly affect our financial condition, results of
operations, liquidity, and cash flows.
One of
our significant customers is 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 28.7% and 31.3% of total
revenue from operations in 2020 and 2019, respectively. The
Affiliate represented approximately $0 and $1.4 million in accounts
receivable at December 31, 2020 and 2019, respectively. The amounts
will be paid under normal business terms. Amounts outstanding
relating to the Jet Fuel Sales Agreement can significantly vary
period to period based on the timing of the related sales and
payments received. Amounts we owed to LEH under various long-term
debt, related-party agreements totaled $9.1 million and $6.2
million at December 31, 2020 and 2019, respectively.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31,
|
|
|
|
|
|
|
2020
|
3
|
70.8%
|
$0
|
|
|
|
|
|
|
2019
|
4
|
96.5%
|
$1.7
million
|
C8.
We are dependent on third parties for the transportation of crude
oil and condensate into and refined products out of our Nixon
facility; if these third parties become unavailable to us, our
ability to process crude oil and condensate and sell refined
products to wholesale markets could be materially and adversely
affected.
We rely
on trucks for the receipt of crude oil and condensate into and the
sale of refined products out of our Nixon facility. Since we do not
own or operate any of these trucks, their continuing operation is
not within our control. If any of the third-party trucking
companies that we use, or the trucking industry in general, become
unavailable to transport crude oil, condensate, and/or our refined
products because of acts of God, accidents, government regulation,
terrorism or other events, our revenue and net income would be
materially and adversely affected.
C9.
Our suppliers source a substantial amount, if not all, of our crude
oil and condensate from the Eagle Ford Shale and may experience
interruptions of supply from that region.
Our
suppliers source a substantial amount, if not all, of our crude oil
and condensate from the Eagle Ford Shale. Consequently, we may be
disproportionately exposed to the impact of delays or interruptions
of supply from that region caused by transportation capacity
constraints, curtailment of production, unavailability of
equipment, facilities, personnel or services, significant
governmental regulation, severe weather, plant closures for
scheduled maintenance, or the interruption of oil or natural gas
being transported from wells in that area.
C10.
Our refining operations and customers are primarily located within
the Eagle Ford Shale and changes in the supply/demand balance in
this region could result in lower refining margins.
Our
primary operating assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined products in a single, relatively
limited geographic area. Therefore, we are more susceptible to
regional economic conditions than our more geographically
diversified competitors. Should the supply/demand balance shift in
our region due to changes in the local economy, an increase in
refining capacity or other reasons, resulting in supply in the PADD
3 (Gulf Coast) region to exceed demand, we would have to deliver
refined products to customers outside of our current operating
region and thus incur considerably higher transportation costs,
resulting in lower refining margins.
|
Blue Dolphin Energy
Company
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December 31,
2020
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Risk Factors
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C11.
Severe weather or other events affecting our facilities, or those
of our vendors, suppliers, or customers could have a material
adverse effect on our liquidity, business, financial condition, and
results of operations.
Our operations are subject to all of the risks and operational
hazards inherent in receiving, handling, storing, and transferring
crude oil and petroleum products, including: damages to facilities,
related equipment and surrounding properties caused by severe
weather (such as cold temperatures, hurricanes, floods, and other
natural disasters) or other events (such as equipment malfunctions,
mechanical or structural failures, explosions, fires, spills, or
acts of terrorism) at our facilities or at third-party facilities
on which our operations are dependent could result in severe damage
or destruction to our assets or the temporary or permanent
shut-down of our operations. If we are unable to operate, our
liquidity, business, financial condition, and results of operations
could be materially affected.
C12.
Regulatory changes, as well as proposed measures that are
reasonably likely to be enacted, to reduce greenhouse gas emissions
could require us to incur significant costs or could result in a
decrease in demand for our refined products, which could adversely
affect our business.
Scientific studies
have indicated that increasing concentrations of greenhouse gases
in the atmosphere can produce changes in climate with significant
physical effects, including increased frequency and severity of
storms, floods, and other extreme weather events that could affect
our operations. Increased concern over the effects of climate
change may also affect our customers’ energy strategies,
consumer consumption patterns, and government and private sector
alternative energy initiatives, any of which could adversely affect
demand for petroleum products and have a material adverse effect on
our business, financial condition, and results of
operations.
Both
houses of Congress have actively considered legislation to reduce
emissions of greenhouse gases, such as carbon dioxide and methane,
including proposals to: (i) establish a Cap-and-Trade system,
(ii) create a federal renewable energy or “clean”
energy standard requiring electric utilities to provide a certain
percentage of power from such sources, and (iii) create
enhanced incentives for use of renewable energy and increased
efficiency in energy supply and use. In addition, the EPA is taking
steps to regulate greenhouse gases under the existing federal CAA.
The EPA has already adopted regulations limiting emissions of
greenhouse gases from motor vehicles, addressing the permitting of
greenhouse gas emissions from stationary sources, and requiring the
reporting of greenhouse gas emissions from specified large
greenhouse gas emission sources, including refineries. Various
states, individually as well as in some cases on a regional basis,
have taken steps to control greenhouse gas emissions, including
adoption of greenhouse gas reporting requirements, Cap-and-Trade
systems, and renewable portfolio standards. This has also
been a focus of the Biden Administration in its first few months.
These and similar regulations could require us to incur costs to
monitor and report greenhouse gas emissions or reduce emissions of
greenhouse gases associated with our operations.
Requirements
to reduce greenhouse gas emissions could result in increased costs
to operate and maintain the Nixon facility as well as implement and
manage new emission controls and programs. For example, some states
have passed regulations, such as Cap-and-Trade and the Low Carbon
Fuel Standard, to achieve greenhouse gas emission reductions below
set targets by 2030 and beyond. Cap-and-Trade places a cap on
greenhouse gases and refiners are required to acquire a sufficient
number of credits to cover emissions from their refinery and
in-state sales of gasoline and diesel. The Low Carbon Fuel Standard
requires an established percentage reduction in the carbon
intensity of gasoline and diesel by a specified time
period. Compliance with the Low Carbon Fuel Standard is
achieved through blending lower carbon intensity biofuels into
gasoline and diesel or by purchasing credits. Compliance with each
of these programs is facilitated through a market-based credit
system. If sufficient credits are unavailable for purchase or
refiners are unable to pass through costs to their customers, they
must pay a higher price for credits. It is currently uncertain how
the current presidential administration or future administrations
will address greenhouse gas emissions. In the event we do incur
increased costs as a result of increased efforts to control
greenhouse gas emissions, we may not be able to pass on any of
these costs to our customers. Regulatory requirements also could
adversely affect demand for the refined petroleum products that we
produce. Any increased costs or reduced demand could materially and
adversely affect our business and results of
operations.
C13.
We may not be successful in integrating or pursuing acquisitions in
the future.
Although we
regularly engage in discussions with, and submit proposals to,
acquisition candidates, suitable acquisitions may not be available
in the future on reasonable terms. Even if we do identify an
appropriate acquisition candidate, we may be unable to successfully
negotiate the terms of an acquisition, finance the acquisition, or,
if the acquisition occurs, effectively integrate the acquired
business into our existing businesses. Negotiations of potential
acquisitions and the integration of acquired business operations
may require a disproportionate amount of management’s
attention and our resources. Even if we complete additional
acquisitions, continued acquisition financing may not be available
or available on reasonable terms, any new businesses may not
generate the anticipated level of revenues, the anticipated cost
efficiencies, or synergies may not be realized, and these
businesses may not be integrated successfully or operated
profitably. Our inability to successfully identify, execute, or
effectively integrate future acquisitions may negatively affect our
results of operations.
|
Blue Dolphin Energy
Company
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December 31,
2020
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Page
26
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Risk Factors
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D.
Risks Related to Pipeline and Facilities Assets, as well as our
Pipelines and Oil and Gas Properties
D1.
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.
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 in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does 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 December 31, 2020. At both December 31, 2020
and 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
D2.
Assessment of civil penalties by BSEE for our failure to
decommission pipeline and platform assets within the time periods
prescribed.
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. Although we planned to decommission the
offshore pipelines and platform assets in the third quarter of
2020, decommissioning of these assets has been delayed due to cash
constraints associated with the ongoing impact of COVID-19 and
winter being the offseason for dive operations in the U.S. Gulf of
Mexico. We cannot currently estimate when decommissioning may
occur. In the interim, BDPL provides BSEE with updates regarding
the project’s status.
|
Blue Dolphin Energy
Company
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December 31,
2020
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Page
27
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Risk Factors
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|
Lack of
permit approvals does 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 December 31, 2020. At December 31, 2020 and
2019, BDPL maintained $2.4 million and $2.6 million, respectively,
in AROs related to abandonment of these assets.
E.
Risks Related to Our Common Stock
E1.
Our stock price has experienced price fluctuations and may continue
to do so, resulting in a substantial loss in your
investment.
The
market for our common stock has been characterized by volatile
prices. As a result, investors in our common stock may experience a
decrease in the value of their securities, including decreases
unrelated to our operating performance or prospects. The market
price of our common stock is likely to be highly unpredictable and
subject to wide fluctuations in response to various factors, many
of which are beyond our control. These factors
include:
●
Quarterly
variations in our operating results and achievement of key business
metrics.
●
Changes in the
global economy and the local economies in which we
operate.
●
Our ability to
obtain working capital financing.
●
Changes in the
federal, state, and local laws and regulations to which we are
subject.
●
Market reaction to
any acquisitions, joint ventures or strategic investments announced
by us or our competitors.
●
The departure of
any of our key executive officers and directors.
●
Future sales of our
securities.
E2.
Our stock price may decline due to sales of shares by
Affiliates.
Affiliates sales of
substantial amounts of our Common Stock, or the perception that
these sales may occur, may adversely affect the price of our Common
Stock and impede our ability to raise capital through the issuance
of equity securities in the future. Affiliates could elect in the
future to request that we file a registration statement to them to
sell shares of our Common Stock. If Affiliates were to sell a large
number of shares into the public markets, Affiliates could cause
the price of our Common Stock to decline.
E3.
We are authorized to issue up to a total of 20 million shares of
our Common Stock and 2.5 million shares of preferred stock;
issuance of additional shares would further dilute the equity
ownership of current holders and potentially dilute the share price
of our Common Stock.
We
periodically issue Common Stock to non-employee directors for
services rendered to the Board and to Jonathan Carroll pursuant to
the Guaranty Fee Agreements. In the past, we have also issued
Common Stock, Preferred Stock, convertible securities (such as
convertible notes), and warrants in order to raise capital. We
believe that it is necessary to maintain a sufficient number of
available authorized shares of our Common Stock and Preferred Stock
to provide us with the flexibility to issue Common Stock or
Preferred Stock for business purposes that may arise as deemed
advisable by our Board. These purposes could include, among other
things, (i) future stock splits, which may increase the liquidity
of our shares; (ii) the sale of stock to obtain additional capital
or to acquire other companies or businesses, which could enhance
our growth strategy or allow us to reduce debt if needed; and (iii)
for other bona fide purposes. Our Board may authorize us to issue
the available authorized shares of Common Stock or Preferred Stock
without notice to, or further action by, our stockholders, unless
stockholder approval is required by law or the rules of the
OTCQX.
The
issuance of additional shares of Common Stock or new shares of
Preferred Stock, convertible securities, and/or warrants may
significantly dilute the equity ownership of the current holders of
our Common Stock, affect the rights of our stockholders, or could
reduce the market price of our common stock. In addition, the
issuance or sale of large amounts of our Common Stock, or the
potential for issuance or sale even if they do not actually occur,
may have the effect of depressing the market price of our Common
Stock.
|
Blue Dolphin Energy
Company
|
December 31,
2020
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28
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Risk Factors
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E4.
Shares eligible for future sale pursuant to Rule 144 may adversely
affect the market.
From
time to time, certain of our stockholders may be eligible to sell
all or some of their shares of Common Stock by means of ordinary
brokerage transactions in the open market pursuant to Rule 144
promulgated under the Securities Act, subject to certain
limitations. In general, pursuant to Rule 144, stockholders who
have been non-affiliates for the preceding three months may sell
shares of our Common Stock freely after six months subject only to
the current public information requirement. Affiliates may sell
shares of our Common Stock after six months subject to the Rule 144
volume, manner of sale, current public information, and notice
requirements. Any substantial sales of our Common Stock pursuant to
Rule 144 may have a material adverse effect on the market price of
our common stock.
E5.
We do not expect to pay cash dividends in the foreseeable future
and therefore investors should not anticipate cash dividends on
their investment.
Under
certain of our secured loan agreements, we are restricted from
declaring or paying any dividend on our Common Stock without the
prior written consent of the lender. We have historically not
declared any dividends on our Common Stock and
there can be no assurance that cash dividends will ever be paid on
our common stock.
E6.
Failure to maintain effective internal controls in accordance with
Section 404(a) of the Sarbanes-Oxley Act could have a material
adverse effect on our business and stock price.
As
a publicly traded company, we are required to comply with the
SEC’s rules implementing Sections 302 and 404(a) of the
Sarbanes-Oxley Act, which requires management to certify financial
and other information in our quarterly and annual reports and
provide an annual management report on the effectiveness of
controls over financial reporting.
There
are inherent limitations in the effectiveness of any control
system, including the potential for human error and the possible
circumvention or overriding of controls and procedures.
Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of a simple error or mistake. An
effective control system can provide only reasonable, not absolute,
assurance that the control objectives of the system are adequately
met. Accordingly, management does not expect that the control
system can prevent or detect all errors or fraud. Further,
projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that,
over time, controls may become inadequate because of changes in an
entity’s operating environment or deterioration in the degree
of compliance with policies or procedures.
Management’s
evaluation of our internal controls over financial reporting for
the twelve months ended December 31, 2020 determined they were
ineffective. There is currently not a process in place for formal
review of manual journal entries. In addition, we currently lack
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. Prior year audit procedures resulted in
significant adjustments related to the accounting for a certain
stock issuance in payment of related party debt, as well as
deferred revenue relating to consideration received from a
supplier. Management has taken steps to address these matters,
however, efforts have been affected by remote work arrangements,
reduced personnel, business disruption, and a diversion of
resources due to the impact of the COVID-19 pandemic. We cannot at
this time estimate how long it will take to fully remedy the
identified weakness and deficiency, and our initiatives may not
prove to be successful in fully remediating the identified weakness
and deficiency. Full remediation requires one or more additional
period-end financial reporting periods to evaluate effectiveness.
Because we are unable to resolve internal control deficiencies in a
timely manner, investors could lose confidence in the accuracy and
completeness of our financial reports and the market price of our
common stock could be negatively affected.
Remainder of Page Intentionally Left Blank
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
29
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Properties and Legal Proceedings
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ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
An
Affiliate operates and manages all our properties under the Amended
and Restated Operating Agreement. Our owned facilities have been
constructed or acquired over a period of years and vary in age and
operating efficiency. We believe that all our properties and
facilities are adequate for our operations and that are facilities
are adequately maintained. At our corporate headquarters, BDSC
leases 7,675 square feet of office space in Houston, Texas. The
location and general description of our other properties are
described within the refinery operations, tolling and terminaling,
and inactive operations discussions in “Part I, Item 1.
Business”.
BDSC Office Lease Default
Pursuant
to a letter dated March 29, 2021, TR 801 Travis LLC, a Delaware
limited partnership (“Landlord”), 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. Landlord is entitled to,
and is fully prepared to, immediately exercise any or all of its
rights and remedies, without giving BDSC any further notice or
demand. Landlord 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 Landlord
under the office lease or applicable law or equity.
See
“Part I, Item 1. Business” and “Part II, Item 8.
Financial Statements and Supplementary Data, Notes (4), (10), (12),
and (13)” for additional disclosures related to our
properties, leases, decommissioning obligations, and assets pledged
as collateral.
ITEM 3. 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 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 in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does 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 December 31, 2020. At both December 31, 2020
and 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
30
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Properties and Legal Proceedings
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Resolved - GEL Settlement
As
previously disclosed, GEL was awarded the GEL Final Arbitration
Award in the aggregate amount of $31.3 million. In July 2018, the
Lazarus Parties and GEL entered into the GEL Settlement Agreement.
The GEL Settlement Agreement was subsequently amended five (5)
times to extend the GEL Settlement Payment Date and/or modify
certain terms related to the GEL Interim Payments or the GEL
Settlement Payment. During the period September 2017 to August
2019, GEL received the following amounts from the Lazarus Parties
to reduce the outstanding balance of the GEL Final Arbitration
Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
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$22.2
|
In
August 2019, the GEL Final Arbitration Award was resolved as a
result of the GEL Settlement. Under the GEL Settlement: (i) the
mutual releases between the parties became effective, (ii) GEL
filed a stipulation of dismissal of claims against LE, and (iii)
Blue Dolphin recognized a $9.1 million gain on the extinguishment
of debt on its consolidated statements of operations in the third
quarter of 2019. Until the GEL Settlement occurred, the debt was
reflected on Blue Dolphin’s consolidated balance sheets as
accrued arbitration award payable. At both December 31, 2020 and
2019, accrued arbitration award payable was $0.
Other Legal Matters
From
time to time, we are involved in legal matters incidental to the
routine operation of our business. Such legal matters include
mechanic’s liens, contract-related disputes, and
administrative proceedings. As of the filing date of this report,
we were involved in a contract-related dispute with a counterparty.
Management is working to resolve the dispute amicably, however, the
potential outcome is unknown. Management does not believe that the
contract-related dispute or other matters will have a material
adverse effect on our financial position, earnings, or cash flows.
However, there can be no assurance that management's efforts 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 4. MINE SAFETY DISCLOSURES
Not
applicable.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
31
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Market for Equity, Stockholder Matters and Purchases of Equity
Securities
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PART II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
Common Stock trades on the OTCQX U.S. tier of the OTC Markets under
the ticker symbol “BDCO." The following table sets forth, for
the quarterly periods indicated, the high and low bid prices for
our Common Stock as reported by the OTC Market Report published by
OTC Markets Group Inc. The quotations reflect inter-dealer prices,
without adjustment for retail mark-ups, markdowns or commissions
and may not represent actual transactions.
|
|
High Bid
|
Low Bid
|
High Bid
|
Low Bid
|
|
|
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
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December 31
|
$0.39
|
$0.11
|
December
31
|
$1.16
|
$0.42
|
|
September 30
|
$0.51
|
$0.25
|
September
30
|
$1.24
|
$0.95
|
|
June 30
|
$0.53
|
$0.35
|
June
30
|
$1.07
|
$0.85
|
|
March 31
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$0.55
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$0.35
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March
31
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$1.25
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$0.64
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At
December 31, 2020, we had 12,693,514 shares of Common Stock
outstanding. Affiliates controlled approximately 82% of
the voting power of our Common Stock as of the filing date of this
report. See “Part I, Item 1A. Risk Factors” for risks
associated with investments in our common stock.
Stockholders
At
March 31, 2021, we had approximately 270 record holders of our
Common Stock. We have approximately 3,000 beneficial holders of our
Common Stock.
Dividends
Under
certain of our secured loan agreements, we are restricted from
declaring or paying any dividend on our Common Stock without the
prior written consent of the lender. We have not declared any
dividends on our Common Stock during the last two fiscal
years.
Sales of Unregistered Securities
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us for the twelve months ended December 31, 2020
and 2019 that were not registered under the Securities Act of
1933:
●
On April 30, 2020,
we issued an aggregate of 231,065 restricted shares of Common Stock
to Jonathan Carroll, which represents payment of the common stock
component of guaranty fees for the period November 2019 through
March 2020. We recorded income of approximately $0.03 million
related to the share issuance.
●
On April 30, 2020,
we also issued an aggregate of 135,084 restricted shares of Common
Stock to certain of our non-employee, independent directors, which
represents payment for services rendered to the Board for the
three-month periods ended September 30, 2018, March 31, 2019,
September 30, 2019, and March 31, 2020. We recorded income of
approximately $0.05 million related to the share
issuance.
●
On November 14,
2019, we issued an aggregate of 1,351,851 restricted shares of
Common Stock to Jonathan Carroll, which represents payment of the
common stock component of the guaranty fees for the period May 2017
through October 2019. During this period payments were not
permissible under the GEL Settlement Agreement. We recorded an
expense of approximately $0.5 million related to the share
issuance.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act. For the foreseeable future, management does not
intend on paying Mr. Carroll the cash portion of guaranty fees due
to Blue Dolphin’s working capital deficits. The cash portion
will continue to be accrued and added to the principal balance of
the March Carroll Note. See “Part II, Item 8. Financial
Statements and Supplementary Data, Note (3)” for additional
disclosures related to Affiliates and working capital deficits, as
well as for information related to the guaranty fee
agreements.
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Blue Dolphin Energy
Company
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December 31,
2020
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Market for Equity, Stockholder Matters and Purchases of Equity
Securities
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ITEM 6. SELECTED FINANCIAL DATA
Not
applicable.
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Blue Dolphin Energy
Company
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December 31,
2020
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33
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Management’s Discussion and Analysis
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ITEM 7.
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” and “Risk
Factors” for a discussion of the factors that could cause
actual results to differ materially from those projected in these
statements.
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 more than 1.2 million bbls of petroleum storage tank capacity
in Nixon, Texas. Our assets are primarily organized in two
segments: refinery operations (owned by LE) and tolling and
terminaling services (owned by LRM and NPS). Active subsidiaries
that are reflected in corporate and other include BDPL (inactive
pipeline assets), BDPC (inactive leasehold interests in oil and gas
wells), and BDSC (administrative services). See “Part II,
Item 8. Financial Statements and Supplementary Data, Note
(4)” for more information related to our business segments
and properties. Blue Dolphin was formed in 1986 as a Delaware
corporation and is traded on the OTCQX under the ticker symbol
“BDCO”.
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 has
historically funded 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 II, Item 8. Financial Statements and
Supplementary Data, Note (3)” for additional disclosures
related to Affiliate agreements and arrangements and risks
associated with working capital deficits.
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:
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|
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Optimizing
Existing Asset Base
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|
● Operating safely
and enhancing health, safety, and environmental
systems.
● Planning and
managing turnarounds and downtime.
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|
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Improving
Operational Efficiencies
|
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● Reducing or
streamlining variable costs incurred in production.
● Increasing
throughput capacity and optimizing product slate.
● Increasing tolling
and terminaling revenue.
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Seizing
Market Opportunities
|
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● Taking
advantage of market opportunities as they arise.
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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. Our financial
results are primarily affected by the relationship between our
crude oil and condensate acquisition costs, the prices at which we
ultimately sell our refined products, and the volume of refined
products that we sell, all of which depend upon numerous factors
beyond our control. The prices at which we sell our refined
products are strongly influenced by the commodity price of crude
oil. If crude oil prices increase, our ‘refinery
operations’ business segment margins will fall unless we can
pass along these price increases to our wholesale customers.
Increases in the selling price for refined products typically trail
the rising cost of crude oil and may be difficult to implement when
crude oil costs increase dramatically over a short period. Sharp
decreases in refined product market demand, such as the record low
demand that has occurred because of widespread COVID-19 related
travel restrictions, can adversely affect our refining
margins.
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.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
34
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Management’s Discussion and Analysis
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We
regularly engage in discussions with third parties regarding the
possible purchase of assets and operations that are strategic and
complementary to our existing operations. However, we do not
anticipate any material acquisition activity 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 could impair 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 will
depend 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 would be jeopardized, and we may
not be able to continue.
Business Operations Update
We
continue to proactively address the known impacts of COVID-19.
Facility-dependent personnel, including those needed to maintain
the Nixon facility, report to the facility under strict protocols
that are designed to ensure personnel health and safety. We are
also supporting non-facility-dependent personnel through remote
work and virtual meeting technology, and we are encouraging all
personnel to follow local guidance. All non-essential business
travel and attendance at conferences, trainings, and other
gatherings have been suspended.
The
outbreak of the COVID-19 pandemic negatively impacted worldwide
economic and commercial activity and financial markets, as well as
global demand for petroleum products in 2020 and is expected to
continue in 2021. The COVID-19 pandemic also created simultaneous
shocks in oil supply, demand, and pricing resulting in an economic
challenge to our industry which has not occurred since our
formation. The COVID-19 pandemic and related governmental
responses, as well as developments in the global oil markets,
resulted in significant business and operational disruptions,
including business closures, supply chain disruptions, travel
restrictions, stay-at-home orders, and limitations on the
availability of workforces. As a result of commodity price
volatility and decreased demand for our products, our business
results and cash flows were significantly adversely impacted by the
COVID-19 pandemic. Specifically, Blue Dolphin’s income and
cash flow from operations reflected a loss of $7.9 million and a
use of cash of $3.9 million, respectively, for the twelve months
ended December 31, 2020 compared to income of $5.5 million and a
use of cash of $8.2 million, respectively, for the twelve months
ended December 31, 2019. The twelve months ended December 31, 2019
included a gain on the extinguishment of debt of $9.1 million. We
expect the combination of abnormal volatility in commodity prices
and significant decreased demand for our refined products to
continue for the foreseeable future.
The
duration of the impact of the COVID-19 pandemic and the related
market developments is unknown. The continued negative impact of
these events on our business and operations will depend on the
ongoing severity, location and duration of the effects and spread
of COVID-19, the effectiveness of vaccine programs, other actions
undertaken by federal, state, and local governments and health
officials to contain the virus or treat its effects, and how
quickly and to what extent economic conditions improve and normal
business and operating conditions resume in 2021 or thereafter. We
continue to take measures to lessen the impact of the pandemic on
our operations and limit the spread of the virus among personnel.
For example, we operated the Nixon facility at reduced rates in
2020 based on market conditions and staffing levels, and we expect
to continue adjusting the facility’s operating rate until
market and other conditions substantially improve. We have
carefully evaluated projects and, as a result, have limited or
postponed projects and other non-essential work. We have planned a
level of capital expenditures we believe will allow us to satisfy
and comply with all required safety, environmental, and planned
regulatory capital commitments and other regulatory requirements,
although there are no assurances that we will be able to continue
to do so. 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.
2020 Successes
Despite a going concern due to defaults under our secured loan
agreements, margin deterioration and volatility, historic net
losses and working capital deficits, and the COVID-19 pandemic,
management took decisive steps in 2020 to further improve our
operations and financial stability. Achieved milestones
include:
●
We safely completed a 13-day planned maintenance
turnaround and concluded the 5-year capital improvement
expansion project of the Nixon facility. The turnaround focused on
resolving crude heater issues while the expansion project involved
the construction of nearly 1.0 million bbls of new petroleum
storage tanks, smaller efficiency improvements to the refinery, and
acquisition of refurbished refinery equipment for future
deployment. The increase in petroleum storage capacity has helped
with de-bottlenecking the Nixon refinery. The additional petroleum
storage capacity will allow for increased refinery throughput of up
to approximately 30,000 bpd while deployment of various refurbished
refinery equipment will help improve processing capacity and
increase the Nixon refinery’s complexity.
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
35
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Management’s Discussion and Analysis
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●
Although
in place pre-pandemic, we 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.
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 II, Item 8. Financial Statements and Supplementary
Data”. 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. 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 2020. In addition, actions by
members of OPEC and other producer countries with respect to oil
production and pricing significantly impacted supply and demand in
global oil and gas markets. Although federal, state, and
local governments and health officials have made strides to contain
the virus, treat its effects, and implement vaccine programs
and OPEC
has since agreed to certain production cuts, oil prices have
remained depressed and oversupply and lack of demand in the market
persists. Oil and refined product prices and demand are
expected to remain volatile for the foreseeable future, and we
cannot predict when prices and demand will improve and stabilize.
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 or results of
operations.
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), and 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 “Part II, Item 7. Management’s
Discussion and Analysis and Results of Operations —Non-GAAP
Reconciliations” and the financial statements within
“Part II, Item 8. Financial Statements and Supplementary
Data” 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
|
December 31,
2020
|
Page
36
|
|
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.
|
Twelve Months Ended December 31, 2020 Versus December 31, 2019 (YE
2020 Versus YE 2019)
|
||
|
Overview. Net loss for YE 2020 was $14.5 million, or a loss
of $1.15 per share, compared to net income of $7.4 million, or
income of $0.66 per share, in YE 2019. The increase in net loss was
the result of unfavorable margins per bbl and significantly lower
sales volume. YE 2019 included a gain on the extinguishment of debt
of $9.1 million.
Total Revenue from Operations. Total revenue from operations
decreased nearly 44% to $174.8 million for YE 2020 from $309.3
million for YE 2019. The significant decrease related to a decline
in refinery operations revenue as a result of lower commodity
pricing per bbl on refined products sold and significantly lower
sales volumes in 2020 due to market fluctuations associated with
the COVID-19 pandemic. Tolling and terminaling revenue decreased by
$0.1 million between the periods to $4.2 million.
Total Cost of Goods Sold. Total cost of goods sold decreased
approximately 41% to $176.9 million for YE 2020 from $297.8 million
for YE 2019. The significant decrease related to lower commodity
prices per bbl for crude oil and chemicals due to market
fluctuations associated with the COVID-19 pandemic and significant
refinery downtime in 2020, which resulted in lower sales
volumes.
|
|
Gross Profit (Deficit). Gross deficit was $2.1 million for YE
2020 compared to a gross profit of $11.4 million for YE 2019. The
significant decrease in gross profit between the periods primarily
related to lower margins per bbl due to market fluctuations
associated with the COVID-19 pandemic in 2020.
General and Administrative Expenses. General and administrative expenses
decreased nearly 14% to $2.3 million from $2.7 million in YE 2019.
The decrease related to significantly lower legal expenses in YE
2020 compared to YE 2019.
Depletion, Depreciation and Amortization. Depletion, depreciation, and
amortization expenses for YE 2020 totaled approximately $2.7
million compared to approximately $2.5 million in YE 2019. The
nearly 8% increase primarily related to placing a petroleum storage
tank in service.
Total Other Income (Expense). Total
other expense in YE 2020 was $6.6 million compared to total other
income of $1.9 million in YE 2019, representing a decrease of $8.5
million. Total other expense in YE 2020 primarily related to
interest expense associated with our secured loan agreements with
Veritex, related-party debt, and the line of credit with Pilot.
Total other income in YE 2019 included a $9.1 million gain on the
extinguishment of debt related to the GEL Settlement, which was
offset by interest and other expense of $7.2
million.
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
37
|
|
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.
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Refined
product sales
|
$170,601
|
$304,924
|
|
Less: Total
cost of goods sold
|
(176,862)
|
(297,827)
|
|
Gross profit
(deficit)
|
(6,261)
|
7,097
|
|
|
|
|
|
Sales
(Bbls)
|
3,916
|
4,547
|
|
|
|
|
|
Gross Profit (Deficit) per Bbl
|
$(1.60)
|
$1.56
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Net
revenue (1)
|
$170,601
|
$304,924
|
|
Intercompany
fees and sales
|
(2,384)
|
(2,615)
|
|
Operation
costs and expenses
|
(175,201)
|
(296,502)
|
|
Segment Contribution Margin (Deficit)
|
$(6,984)
|
$5,807
|
(1) Net revenue
excludes intercompany crude sales.
YE 2020 Versus YE 2019
●
Refining gross
deficit per bbl was $1.60 for YE 2020 compared to a gross profit
per bbl of $1.56 in YE 2019, representing a decrease of $3.16 per
bbl. The significant
decrease related to lower margins and significant refinery downtime
in 2020 due to market fluctuations associated with the COVID-19
pandemic.
●
Segment
contribution margin decreased approximately $12.8 million to a
deficit of $7.0 million in YE 2020 compared to profit of $5.8
million in YE 2019. The decrease related to lower margins per bbl
and lower sales volume in 2020 due to market fluctuations
associated with the COVID-19 pandemic.
●
Refinery downtime
increased significantly to 42 days in YE 2020 compared to 21 days
in YE 2019. Refinery downtime in 2020 primarily related to lack of
crude due to cash restraints, a maintenance turnaround, and
equipment repairs while refinery downtime in YE 2019 primarily
related to a maintenance turnaround and equipment repairs.
Significant refinery downtime in YE 2020 negatively impacted
refinery throughput, refinery production, and capacity utilization
rate.
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.
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Net
revenue (1)
|
$4,209
|
$4,338
|
|
Intercompany fees and
sales
|
2,384
|
2,615
|
|
Operation costs and
expenses
|
(1,661)
|
(1,325)
|
|
Segment
Contribution Margin
|
$4,932
|
$5,628
|
(1) Net revenue
excludes intercompany crude sales.
YE 2020 Versus YE 2019
●
Tolling and
terminaling net revenue decreased 3% in YE 2020 compared to YE 2019
primarily as a result of lower tank rental revenue and decreased
fees collected for ancillary services, such
as truck loading/unloading, lab testing, and in-tank and
tank-to-tank blending.
●
Intercompany fees
and sales, which reflect fees associated with an intercompany
tolling agreement tied to naphtha volumes, decreased in YE 2020
compared to YE 2019. Naphtha sales volumes decreased between the
periods.
●
Segment
contribution margin in YE 2020 decreased 12% to $4.9 million
compared to $5.6 million YE 2019. The decrease related to lower
revenue and intercompany fees tied to naphtha volumes.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
38
|
|
Management’s Discussion and Analysis
|
|
|
Non-GAAP Reconciliations.
|
Reconciliation of Segment Contribution Margin
(Deficit)
|
|
|
|
Twelve Months Ended December 31,
|
|||||||
|
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
2020
|
2019
|
|
|
Refinery Operations
|
Tolling and Terminaling
|
Corporate and Other
|
Total
|
||||
|
|
(in
thousands)
|
|||||||
|
|
|
|
|
|
|
|
|
|
|
Segment
contribution margin
|
$(6,984)
|
$5,807
|
$4,932
|
$5,628
|
$(169)
|
$(222)
|
$(2,221)
|
$11,213
|
|
General and administrative
expenses(1)
|
(1,257)
|
(1,252)
|
(307)
|
(262)
|
(1,381)
|
(1,756)
|
$(2,945)
|
$(3,270)
|
|
Depreciation
and amortization
|
(1,186)
|
(1,913)
|
(1,296)
|
(396)
|
(204)
|
(181)
|
$(2,686)
|
$(2,490)
|
|
Interest and
other non-operating income (expenses), net
|
(2,929)
|
5,668
|
(2,546)
|
(2,398)
|
(1,116)
|
(1,362)
|
$(6,591)
|
$1,908
|
|
Income (loss)
before income taxes
|
(12,356)
|
8,310
|
783
|
2,572
|
(2,870)
|
(3,521)
|
(14,443)
|
7,361
|
|
Income tax
expense
|
-
|
-
|
-
|
-
|
(15)
|
-
|
(15)
|
-
|
|
Income (loss) before income taxes
|
$(12,356)
|
$8,310
|
$783
|
$2,572
|
$(2,885)
|
$(3,521)
|
$(14,458)
|
$7,361
|
(1)
General and
administrative expenses within refinery operations include the LEH
operating fee.
Capital Resources and Liquidity
Considering this period of extreme economic disruption,
combined with the weaker commodity price environment, 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 COVID-19 disruptions
to our business.
We had
a working capital deficit of $72.3 million and $59.4 million at
December 31, 2020 and 2019, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$22.9 million and $19.6 million at December 31, 2020 and 2019,
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.
The
duration of the impact of the COVID-19 pandemic and the related
market developments is unknown. The continued negative impact of
these events on our business and operations will depend on the
ongoing severity, location and duration of the effects and spread
of COVID-19, the effectiveness of vaccine programs, other actions
undertaken by federal, state, and local governments and health
officials to contain the virus or treat its effects, and how
quickly and to what extent economic conditions improve and normal
business and operating conditions resume in 2021 or thereafter. A
sustained period of low crude oil prices due to market volatility
associated with the COVID-19 pandemic may also result in
significant financial constraints on producers, which could result
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. 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.
During the twelve-month period ended December 31, 2020, we received
two small loans totaling $0.3 million in the aggregate under
federal or other governmental programs to support our operations as
a result of the COVID-19 pandemic. These loans provided or
guaranteed by the U.S. government, including pursuant to the
Coronavirus Aid, Relief and Economic Security Act, signed into law
on March 27, 2020, subject us to additional restrictions on our
operations, including limitations on personnel headcount and
compensation reductions and other cost reduction activities that
could adversely affect us.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
39
|
|
Management’s Discussion and Analysis
|
|
|
Debt Overview.
|
Total Debt and Accrued Interest
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
$22,840
|
$21,776
|
|
LRM Term Loan Due 2034 (in
default)
|
9,473
|
9,031
|
|
Amended Pilot Line of Credit (in
default)
|
8,145
|
11,786
|
|
Notre Dame Debt (in
default)
|
9,413
|
8,617
|
|
Related-Party
Debt
|
|
|
|
BDPL Loan Agreement (in
default)
|
6,814
|
6,174
|
|
March Ingleside Note (in
default)
|
1,013
|
1,004
|
|
March Carroll Note (in
default)
|
1,551
|
997
|
|
June LEH Note (in
default)
|
9,446
|
-
|
|
LE
Term Loan Due 2050
|
152
|
-
|
|
NPS
Term Loan Due 2050
|
152
|
-
|
|
Equipment
Loan Due 2025
|
71
|
-
|
|
Total
Debt
|
69,070
|
59,385
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(57,744)
|
(51,301)
|
|
Less:
Unamortized debt issue costs
|
(1,749)
|
(2,096)
|
|
Less: Accrued interest payable (in
default)
|
(9,222)
|
(5,988)
|
|
|
$355
|
$-
|
Net
cash provided by financing activities was $5.4 million in YE 2020
compared to $8.8 million in YE 2019. Net proceeds from the issuance
of debt totaled $0.4 million in YE 2020 compared to $12.4 million
in YE 2019.
Principal
payments on long-term debt totaled $3.6 million in YE 2020 compared
to $2.6 million in YE 2019. As of the filing date of this report,
LE and LRM were current on required monthly payments under secured
loan agreements with Veritex, but other defaults remain outstanding
as noted below. 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 Veritex financial covenant violations, a Pilot event of
default and debt acceleration, and a Notre Dame Debt event of
default. We also have defaults under secured and unsecured
related-party debt. See “Part II, Item 8. Financial
Statements and Supplementary Data, 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.
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.
|
|
Number Significant
Customers
|
% Total Revenue from Operations
|
Portion of Accounts Receivable
December 31,
|
|
|
|
|
|
|
2020
|
3
|
70.8%
|
$0
|
|
|
|
|
|
|
2019
|
4
|
96.5%
|
$1.7
million
|
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 28.7% and 31.3%
of total revenue from operations in 2020 and 2019, respectively.
The Affiliate represented approximately $0 and $1.4 million in
accounts receivable at December 31, 2020 and 2019, respectively.
The amounts will be paid under normal business terms. Amounts
outstanding relating to the Jet Fuel Sales Agreement can
significantly vary period to period based on the timing of the
related sales and payments received. Amounts we owed to LEH under
various long-term debt, related-party agreements totaled $9.1
million and $6.2 million at December 31, 2020 and 2019,
respectively. See “Part I, Item 1A. Risk Factors” and
“Part II, Item 8. Financial Statements and Supplementary
Data, Notes (3) and (16)” for additional disclosures related
to Affiliate agreements, arrangements, and risk.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
40
|
|
Management’s Discussion and Analysis
|
|
|
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; interest still accruing
|
|
March Ingleside Note (in default)
|
Ingleside – Blue
Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue Dolphin working capital;
reflects amounts owed to Ingleside under previous Amended and
Restated Tank Lease Agreement; 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; reflects amounts owed to Jonathan Carroll
under guaranty fee agreements; 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 obligations; loan matured January
2019
|
--
|
|
March
Ingleside Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
June
LEH Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
BDPL-LEH
Loan Agreement (in
default)
|
Failure
of borrower to pay past due obligations; loan matured August
2018
|
---
|
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 Final 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
|
|
|
|
|
|
|
|
LE Term Loan Due 2050(4)
|
LE-SBA
|
$0.15
|
Aug 2050
|
$0.0007 million
|
3.75%
|
Working capital
|
|
NPS Term Loan Due 2050(4)
|
NPS-SBA
|
$0.15
|
Aug 2050
|
$0.0007 million
|
3.75%
|
Working capital
|
|
Equipment Loan Due
2025
|
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 December 31, 2020, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.5 million. At
December 31, 2019, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.6
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 GEL Final
Arbitration Award 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)
Payments are
deferred for the first twelve (12) months of the loan; the first
payment is due August 2021; interest accrues during the deferral
period. SBA EIDLs are not forgivable.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
41
|
|
Management’s Discussion and Analysis
|
|
|
Third-Party Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
Veritex
Loans
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; 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)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; 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
|
---
|
|
|
|
|
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 in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does 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 December 31, 2020. At both December 31, 2020
and 2019, 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.
Although
we planned to decommission the offshore pipelines and platform
assets in the third quarter of 2020, decommissioning of these
assets has been delayed due to cash constraints associated with the
ongoing impact of COVID-19 and winter being the offseason for dive
operations in the U.S. Gulf of Mexico. We cannot currently estimate
when decommissioning may occur. In the interim, BDPL provides BSEE
with updates regarding the project’s status.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
42
|
|
Management’s Discussion and Analysis
|
|
|
Lack of
permit approvals does 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 December 31, 2020. At December 31, 2020 and
2019, BDPL maintained $2.4 million and $2.6 million, respectively,
in AROs related to abandonment of these assets.
Sources and Use of
Cash.
|
Components of Cash Flows
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Cash Flows Provided By (Used In):
|
|
|
|
Operating
activities
|
$(3,901)
|
$(8,190)
|
|
Investing
activities
|
(1,085)
|
(1,574)
|
|
Financing
activities
|
5,429
|
8,767
|
|
Increase
(Decrease) in Cash and Cash Equivalents
|
$443
|
$(997)
|
Cash Flow 2020 Compared to 2019
We had
a cash flow deficit from operations of $3.9 million for YE 2020
compared to $8.2 million for YE 2019. The approximate $4.3 million
improvement in cash flow from operations in FY 2020 compared to FY
2019 was due to no longer having to make payments to GEL. The cash
flow deficit for YE 2020 primarily related to loss from operations.
The cash flow deficit from operations for YE 2019 was primarily the
result of payments toward the accrued arbitration award with
GEL.
2020 Capital Expenditures
During
YE 2020, capital expenditures totaled $1.1 million compared to $1.6
million during YE 2019. Capital expenditures primarily related
to:
●
Completion of Nixon
Facility Expansion Project – We completed a 5-year expansion
project involving the construction of nearly 1.0 million bbls of
new petroleum storage tanks, smaller efficiency improvements to the
refinery, and acquisition of refurbished refinery equipment for
future deployment. The increase in petroleum storage capacity has
helped with de-bottlenecking the Nixon refinery. The additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd while deployment of
various refurbished refinery equipment will help improve processing
capacity and increase the Nixon refinery’s complexity. The
total cost of the project, which was funded through the Veritex
loans, was approximately $32.5 million.
●
Maintenance
Turnaround and Repairs – We completed a 13-day, planned
maintenance turnaround that primarily involved replacing a key
component of the crude heater. We also made equipment repairs.
These costs were expensed as incurred.
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.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
43
|
|
Management’s Discussion and Analysis
|
|
|
Future Expected Capital Expenditures
We
remain focused on the safe and reliable operation of the Nixon
facility. 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 in 2021in .
However, capital spending using remaining funds under a loan from
Veritex will continue until the funds are depleted. Unused amounts
under the Veritex loans are reflected in restricted cash (current
and non-current portions) on our consolidated balance sheets. See
“Part II, Item 8. Financial Statements and Supplementary
Data, Note (10)” for additional disclosures related to
borrowings for capital spending.
Off-Balance Sheet Arrangements. None.
Accounting
Standards.
Critical Accounting Policies and Estimates
Our
significant accounting policies and recent accounting developments
are described in “Part II, Item 8. Financial Statements and
Supplementary Data, 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 surging
coronavirus cases and roll out COVID-19 vaccines, 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 December 31, 2020 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
II, Item 8. Financial Statements and Supplementary Data, Note
(2)”.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
44
|
|
Quantitative and Qualitative Disclosure
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
45
|
|
Financial Statements
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report of Independent Registered Public Accounting
Firm
To the Board of Directors and
Stockholders of Blue Dolphin Energy Company
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of
Blue Dolphin Energy Company and Subsidiaries (the
“Company”) as of December 31, 2020 and 2019, and the
related consolidated statements of operations, stockholders’
equity (deficit) and cash flows for the years then ended, and the
related notes (collectively referred to as the consolidated
financial statements). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial
position of the Company as of December 31, 2020 and 2019, and the
results of its operations and its cash flows for the years then
ended, in conformity with accounting principles generally accepted
in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note (1) to the consolidated financial statements, the
Company is in default under secured and related party loan
agreements and has a net working capital deficiency. These
conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note (1). The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of
the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the
PCAOB. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below are matters arising
from the current period audit of the consolidated financial
statements that were communicated or required to be communicated to
the audit committee and that: (1) relate
to accounts or disclosures that are material to the consolidated
financial statements and (2) involved especially challenging,
subjective, or complex judgments. The communication of critical
audit matters does not alter in any way our opinion on the
consolidated financial statements, taken as a whole, and we are
not, by communicating the critical audit matters below, providing
separate opinions on the critical audit matters or on the accounts
or disclosures to which they relate.
Impairment of Long-Lived Assets
As described in Note 8 to the consolidated financial statements,
the Company’s consolidated property, plant and equipment
balance relating to refinery operations was $64 million as of
December 31, 2020. Management conducts an impairment test whenever
facts or circumstances indicate that the carrying value of the
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. Management applies significant
judgment in projecting future cash flow that includes the use of
significant assumptions with respect to future sales of refined
product and commodity pricing.
We identified the evaluation of the impairment analysis for
long-lived assets associated with the refinery operations as a
critical audit matter due to the high degree of auditor judgment
and subjectivity in performing procedures to evaluate
management’s significant assumptions in projecting its future
cash flows.
Our audit procedures included, among others (i) testing
management’s process to project future cash flows, (ii)
testing the completeness, accuracy and relevance of the data used
in projected future cash flows and (iii) evaluating the
reasonableness of the significant assumptions used by management.
Evaluating the reasonableness of the significant assumptions used
by management involved a comparison of projected sales volumes to
historic amounts and evaluating the reasonableness of fluctuations
based on management’s future plans as well as factors
surrounding expected margins based on commodity
pricing.
We have
served as the Company’s auditor since 2002.
|
___________
|
|
|
UHY
LLP
|
|
|
Sterling Heights, Michigan
March
31,
2021
|
|
|
December 31,
2020
|
Page
46
|
|
Financial Statements
|
|
|
Consolidated Balance Sheets
|
|
December 31,
|
December
31,
|
|
|
2020
|
2019
|
|
|
(in thousands
except share amounts)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$549
|
$72
|
|
Restricted
cash
|
48
|
49
|
|
Accounts
receivable, net
|
214
|
446
|
|
Accounts
receivable, related party
|
-
|
1,364
|
|
Prepaid
expenses and other current assets
|
3,564
|
2,276
|
|
Deposits
|
124
|
158
|
|
Inventory
|
1,062
|
1,645
|
|
Refundable
federal income tax
|
-
|
65
|
|
Total
current assets
|
5,561
|
6,075
|
|
|
|
|
|
LONG-TERM
ASSETS
|
|
|
|
Total
property and equipment, net
|
62,497
|
63,893
|
|
Operating
lease right-of-use assets, net
|
498
|
649
|
|
Restricted
cash, noncurrent
|
514
|
547
|
|
Surety
bonds
|
230
|
230
|
|
Deferred
tax assets, net
|
-
|
50
|
|
Total
long-term assets
|
63,739
|
65,369
|
|
|
|
|
|
TOTAL
ASSETS
|
$69,300
|
$71,444
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Long-term
debt less unamortized debt issue costs, current portion (in
default)
|
$33,692
|
$33,836
|
|
Line
of credit payable less unamortized debt issue costs (in
default)
|
8,042
|
11,464
|
|
Long-term
debt, related party, current portion (in default)
|
16,010
|
6,001
|
|
Interest
payable (in default)
|
6,408
|
3,814
|
|
Interest
payable, related party (in default)
|
2,814
|
2,174
|
|
Accounts
payable
|
3,274
|
1,877
|
|
Accounts
payable, related party
|
155
|
149
|
|
Current
portion of lease liabilities
|
194
|
251
|
|
Asset
retirement obligations, current portion
|
2,370
|
2,565
|
|
Accrued
expenses and other current liabilities
|
4,882
|
3,333
|
|
Total
current liabilities
|
77,841
|
65,464
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Long-term
lease liabilities, net of current
|
370
|
564
|
|
Deferred
revenues
|
1,520
|
1,930
|
|
Long-term
debt, net of current portion
|
355
|
-
|
|
Total
long-term liabilities
|
2,245
|
2,494
|
|
|
|
|
|
TOTAL
LIABILITIES
|
80,086
|
67,958
|
|
|
|
|
|
Commitments
and contingencies (Note 16)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Common
stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514
and 12,327,365
|
|
|
|
shares issued at December 31, 2020 and 2019,
respectively)(1)
|
127
|
123
|
|
Additional
paid-in capital
|
38,457
|
38,275
|
|
Accumulated
deficit
|
(49,370)
|
(34,912)
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
(10,786)
|
3,486
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$69,300
|
$71,444
|
(1)
Blue Dolphin has
20,000,000 shares of common stock, par value $0.01 per share, and
2,500,000 shares of preferred stock, par value $0.10 per share,
authorized. There are 12,693,514 shares of common stock issued and
outstanding and no shares of preferred stock issued and
outstanding.
The
accompanying notes are an integral part of these consolidated
financial statements.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
47
|
|
Financial Statements
|
|
|
Consolidated Statements of Operations
|
|
Twelve Months Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands,
except share and per-share amounts)
|
|
|
REVENUE
FROM OPERATIONS
|
|
|
|
Refinery
operations
|
$170,601
|
$304,924
|
|
Tolling
and terminaling
|
4,209
|
4,338
|
|
Total
revenue from operations
|
174,810
|
309,262
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
Crude
oil, fuel use, and chemicals
|
167,079
|
289,273
|
|
Other
conversion costs
|
9,783
|
8,554
|
|
Total
cost of goods sold
|
176,862
|
297,827
|
|
|
|
|
|
Gross
profit (loss)
|
(2,052)
|
11,435
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
LEH
operating fee
|
646
|
611
|
|
Other
operating expenses
|
169
|
222
|
|
General
and administrative expenses
|
2,299
|
2,659
|
|
Depletion,
depreciation and amortization
|
2,686
|
2,490
|
|
Total
cost of operations
|
5,800
|
5,982
|
|
|
|
|
|
Income
(loss) from operations
|
(7,852)
|
5,453
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Easement,
interest and other income
|
172
|
4
|
|
Interest
and other expense
|
(6,763)
|
(6,750)
|
|
Loss
on issuance of shares to extinguish related-party debt
|
-
|
(474)
|
|
Gain
on extinguishment of debt
|
-
|
9,128
|
|
Total
other income (expense)
|
(6,591)
|
1,908
|
|
|
|
|
|
Income
(loss) before income taxes
|
(14,443)
|
7,361
|
|
|
|
|
|
Income
tax expense
|
(15)
|
-
|
|
|
|
|
|
Net
Income (loss)
|
$(14,458)
|
$7,361
|
|
|
|
|
|
Income
(loss) per common share:
|
|
|
|
Basic
|
$(1.15)
|
$0.66
|
|
Diluted
|
$(1.15)
|
$0.66
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
|
|
|
Basic
|
12,574,465
|
11,156,995
|
|
Diluted
|
12,574,465
|
11,156,995
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
48
|
|
Financial Statements
|
|
|
Consolidated Statements of Stockholders’ Equity
(Deficit)
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
Additional
|
|
Total
|
|
|
|
|
Paid-In
|
Accumulated
|
Stockholders’
|
|
|
Shares
Issued
|
Par
Value
|
Capital
|
Deficit
|
Equity
(Deficit)
|
|
|
(in thousands except
share amounts)
|
||||
|
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
10,975,514
|
$110
|
$36,936
|
$(42,273)
|
$(5,227)
|
|
|
|
|
|
|
|
|
Common stock issued for
extinguishment
|
|
|
|
|
|
|
of related-party
debt
|
1,351,851
|
13
|
1,339
|
-
|
1,352
|
|
Net
income
|
-
|
-
|
-
|
7,361
|
7,361
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
12,327,365
|
$123
|
$38,275
|
$(34,912)
|
$3,486
|
|
|
|
|
|
|
|
|
Comon stock issued for
services
|
135,084
|
2
|
66
|
-
|
68
|
|
Common stock issued for
extinguishment
|
|
|
|
|
|
|
of related-party
debt
|
231,065
|
2
|
116
|
-
|
118
|
|
Net
loss
|
-
|
-
|
-
|
(14,458)
|
(14,458)
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
12,693,514
|
$127
|
$38,457
|
$(49,370)
|
$(10,786)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
49
|
|
Financial Statements
|
|
|
Consolidated Statements of Cash Flows
|
|
Twelve Months Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Net
income (loss)
|
$(14,458)
|
$7,361
|
|
Adjustments
to reconcile net income (loss) to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depletion,
depreciation and amortization
|
2,686
|
2,490
|
|
Deferred
income tax
|
15
|
-
|
|
Amortization
of debt issue costs
|
348
|
629
|
|
Guaranty
fees paid in kind
|
609
|
625
|
|
Related-party
interest expense paid in kind
|
559
|
161
|
|
Deferred
revenues and expenses
|
(410)
|
-
|
|
Loss
(gain) on issuance of shares
|
(80)
|
474
|
|
Gain
on extinguishment of debt
|
-
|
(9,128)
|
|
Changes
in operating assets and liabilities
|
|
|
|
Restricted
cash
|
1
|
-
|
|
Accounts
receivable
|
232
|
(67)
|
|
Accounts
receivable, related party
|
1,364
|
(1,364)
|
|
Prepaid
expenses and other current assets
|
(1,288)
|
(389)
|
|
Deposits
and other assets
|
34
|
36
|
|
Inventory
|
583
|
(135)
|
|
Accrued
arbitration award
|
-
|
(12,000)
|
|
Accounts
payable, accrued expenses and other liabilities
|
5,898
|
4,497
|
|
Accounts
payable, related party
|
6
|
(1,380)
|
|
Net
cash used in operating activities
|
(3,901)
|
(8,190)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Capital
expenditures
|
(1,085)
|
(1,574)
|
|
Net
cash used in investing activities
|
(1,085)
|
(1,574)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Proceeds
from debt
|
370
|
12,402
|
|
Payments
on debt
|
(3,585)
|
(2,563)
|
|
Net
activity on related-party debt
|
8,644
|
(1,072)
|
|
Net
cash provided by financing activities
|
5,429
|
8,767
|
|
Net
change in cash, cash equivalents, and restricted cash
|
443
|
(997)
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
668
|
1,665
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$1,111
|
$668
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Financing
of capital expenditures via accounts payable and finance
leases
|
$-
|
$86
|
|
Issuance
of shares to extinguish debt and for services
|
$267
|
$474
|
|
Conversion
of related-party notes to common stock
|
$148
|
$878
|
|
Line
of credit closing costs included in principal balance
|
$-
|
$398
|
|
Interest
paid
|
$2,311
|
$3,474
|
|
Income
taxes paid (refunded)
|
$(100)
|
$(101)
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
50
|
|
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 December 31, 2020 and 2019.
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. As of the
filing date of this report, payments under the Veritex loans were
current, but other defaults remained outstanding.
●
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 “Obligations”). Pursuant to the Amended
Pilot Line of Credit, commencing on May 4, 2020, the 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 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
|
December 31,
2020
|
Page
51
|
|
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 twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot Line of Credit totaled $1.0
million and $0, respectively.
On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the SBA EIDLs was a breach of the Amended Pilot Line of Credit
and Pilot demanded full repayment of the Obligations, including
through use of the proceeds of the SBA EIDLs. Pilot also notified
the SBA that the liens securing the SBA EIDLs are junior to those
securing the Obligations. While the SBA acknowledged this point and
indicated a willingness to subordinate the SBA EIDLs, 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 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 has resulted in significant financial constraints
on producers, which in turn has resulted 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
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to 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, which is currently in default, represents such working
capital borrowings.
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. 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 2020. 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.
In response
to margin deterioration and volatility, we adjust throughput and
production at the Nixon refinery based on prevailing market
conditions. Although federal, state, and
local governments and health officials have made strides to contain
the virus, treat its effects, and implement vaccine programs
and OPEC
has since agreed to certain production cuts, oil prices have
remained depressed and oversupply and lack of demand in the market
persists. Oil and refined product prices and demand are
expected to remain volatile for the foreseeable future, and we
cannot predict when prices and demand will improve and stabilize.
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 or results of
operations.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
52
|
|
Notes to Consolidated Financial Statements
|
|
|
Historic Net Losses and Working Capital Deficits
Net Losses. Net loss for the twelve months ended December
31, 2020 was $14.5 million, or a loss of $1.15 per share, compared
to net income of $7.4 million, or income of $0.66 per share, for
the twelve months ended December 31, 2019. The significant increase
in net loss during the twelve months ended December 31, 2020 was
the result of: (1) lower refining margins associated with commodity
price volatility, as noted above, and (2) lower throughput volumes
and barrels sold. Net income for the twelve months ended December
31, 2019 included a $9.1 million gain on the extinguishment of debt
related to the GEL Settlement.
Working Capital Deficits. We had a working capital deficit
of $72.3 million and $59.4 million at December 31, 2020 and 2019,
respectively. Excluding the current portion of long-term debt, we
had a working capital deficit of $22.9 million and $19.6 million at
December 31, 2020 and 2019, respectively. Cash and cash
equivalents, restricted cash (current portion), and restricted
cash, noncurrent were as follow:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Cash
and cash equivalents
|
$549
|
$72
|
|
Restricted
cash (current portion)
|
48
|
49
|
|
Restricted
cash, noncurrent
|
514
|
547
|
|
Total
|
$1,111
|
$668
|
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. Business —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 surging coronavirus
cases and roll out COVID-19 vaccines, we expect to continue
operating. 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.
Despite
this, 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.
Facility-dependent personnel, including those needed to maintain
the Nixon facility, report to the facility under strict protocols
that are designed to ensure personnel health and safety. We are
also supporting non-facility-dependent personnel through remote
work and virtual meeting technology, and we are encouraging all
personnel to follow local guidance. All non-essential business
travel and attendance at conferences, trainings, and other
gatherings have been suspended.
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.
(2)
Principles of Consolidation and Significant Accounting
Policies
Basis of Presentation
The
accompanying consolidated financial statements, which include Blue
Dolphin and its subsidiaries, have been prepared in accordance with
U.S. generally accepted accounting principles and the rules and
regulations of the SEC. These rules and regulations conform to the
accounting principles contained in FASB’s ASC, the single
source of GAAP. All significant intercompany items have been
eliminated in consolidation. Additionally, any material subsequent
events that occurred after the date through which this report
covers have been properly recognized or disclosed in our financial
statements. 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.
As
discussed further below within “Note (2) – Significant
Accounting Policies – Use of Estimates,” the ongoing
COVID-19 pandemic has resulted in significant economic disruption
globally. This disruption became more acute from the latter half of
March 2020 and continued through the end of 2020; therefore, our
operating results for the twelve months ended December 31, 2020 do
not fully reflect the impact this disruption has had, and will
likely continue to have, on us.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
53
|
|
Notes to Consolidated Financial Statements
|
|
|
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 and severe weather as of
December 31, 2020 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 December 31, 2020 and 2019.
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.
Property and Equipment.
Refinery and Facilities. During 2020, we
safely completed a 5-year capital improvement expansion project of
the Nixon facility that included construction of new storage tanks,
smaller efficiency improvements, and the acquisition of refurbished
refinery equipment for later deployment. 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 periodic 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 in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. 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.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
54
|
|
Notes to Consolidated Financial Statements
|
|
|
CIP. CIP expenditures, including capitalized interest,
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.
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 our performance. An
increase in the deferred revenue balance reflects cash
payments received or due in advance of satisfying our performance
obligations, offset by recognized revenue that was included in the
deferred revenue balance at the beginning of the period. 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.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
55
|
|
Notes to Consolidated Financial Statements
|
Significant
judgment is required in evaluating uncertain tax positions and
determining its 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 December 31, 2020. 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 December 31, 2020 and 2019. 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 December
31, 2020 and 2019, 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 December 31, 2020. 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. However, an impairment may
be required in the future as the long-term impact of the crisis
becomes clearer, losses continue to be material, or as new
opportunities arise, such as reconfiguration of the Nixon refinery
into a renewable fuels facility.
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.
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 have issued options,
warrants, or similar instruments. See “Note (15)” to
our consolidated financial statements for additional information
related to EPS.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
56
|
|
Notes to Consolidated Financial Statements
|
|
|
New Pronouncements Adopted. The FASB issues ASUs to
communicate changes to the FASB ASC, including changes to
non-authoritative SEC content. Recently adopted ASUs
include:
Income Taxes. In
March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740). This
guidance amended SEC paragraphs in ASC 740, Income Taxes, to
reflect Staff Accounting Bulletin No. 118, which provided guidance
for companies that were not able to complete their accounting for
the income tax effects of the Tax Cuts and Jobs Act in the period
of enactment. This guidance also included amendments to
the XBRL taxonomy. Although the amendments in ASU
2018-05 were effective for public business entities for fiscal
years ending after December 15, 2020, early adoption was
permitted. Adoption of this guidance did not have a
significant impact on our consolidated financial
statements.
Consolidation. In October 2018, FASB issued ASU
2018-17, Consolidation
(Topic 810). This ASU provided targeted improvements to
related-party guidance for variable interest entities. Indirect
interests held through related parties in common control
arrangements are considered on a proportional basis for determining
whether fees paid to decision makers and service providers are
variable interests. For entities other than private companies, the
amendments in ASU 2018-17 were effective for fiscal years beginning
after December 15, 2019, and interim periods within those fiscal
years. Adoption of this guidance did not have a significant impact
on our consolidated financial statements.
Codification Updates to SEC Sections. In July 2019, FASB
issued ASU 2019-07, Codification Updates to SEC Sections, which
amended certain SEC sections or paragraphs within the FASB ASC. The
amendments were made pursuant to SEC Final Rule Releases No.
33-10532, Disclosure Update and Simplification, and Nos. 33-10231
and 33-10442, Investment Company Reporting Modernization, and
Miscellaneous Updates (SEC Update). The SEC Final Rule Releases,
which required improvements to the XBRL taxonomy, were made to
improve, update, and simplify SEC regulations on financial
reporting and disclosure. For public companies, the amendments in
ASU 2019-07 were effective upon issuance. Adoption of this guidance
did not have a significant impact on our consolidated financial
statements.
Codification Improvements. In October 2020, FASB issued ASU
2020-10, Codification
Improvements. The amendments in this guidance affected a wide
variety of topics in the ASC by either clarifying the codification
or correcting unintended application of guidance. The changes were
not expected to have a significant effect on current accounting
practice or create a significant administrative cost to most
entities. For all reporting entities, the amendments in ASU 2020-10
were effective for fiscal years ending after December 15, 2020.
Early adoption was permitted. Adoption of this guidance
did not have a significant impact on our consolidated financial
statements.
New Pronouncements Issued, Not Yet Effective.
No 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
|
|
Refinery Equipment
Purchase
|
LTRI - LE
|
07/01/2019
|
LE purchase of two (2) refurbished
heat exchangers for $0.08 million each
|
|
Dock Tolling
Agreement
|
LMT - LE
|
05/24/2016
|
5-year term cancellable by either
party any time; LE paid flat reservation fee for tolling volumes up
to 84,000 gallons per day; excess tolling volumes subject to
increased per gallon rate; terminated
07/01/2019
|
|
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 financing when revenue from
operations and borrowings 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
|
December 31,
2020
|
Page
57
|
|
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 and Security
|
Loan Description
|
Guarantees
|
Security
|
|
BDPL-LEH
Loan Agreement
|
---
|
● Secured by certain
BDPL property
|
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.
Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
March
Carroll Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
--
|
|
March
Ingleside Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
June
LEH Note (in
default)
|
Failure
of borrower to pay past due obligations; loan matured January
2019
|
---
|
|
BDPL-LEH
Loan Agreement (in
default)
|
Failure
of borrower to pay past due obligations; loan matured August
2018
|
---
|
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts receivable, related party. Accounts receivable, related party
totaled $0 and $1.4 million at December 31, 2020 and 2019,
respectively. At December 31, 2019, accounts receivable, related
party represented amounts owed from LEH for the sale of jet fuel
under the Jet Fuel Sales Agreement. Amounts are settled under
normal business terms. Amounts outstanding relating to the
Jet Fuel Sales Agreement can significantly vary period to period
based on the timing of the related sales and payments
received. See below for the total amount owed to LEH under
the June LEH Note and the BDPL-LEH Loan Agreement.
Accounts payable, related party. Accounts payable, related party to LTRI
related to the purchase of refinery equipment totaled $0.2 million
at both December 31, 2020 and 2019.
Long-term debt, related party, current portion (in default) and
accrued interest payable, related party.
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
LEH
|
|
|
|
June
LEH Note (in default)
|
$9,446
|
$-
|
|
BDPL-LEH
Loan Agreement
|
6,814
|
6,174
|
|
LEH
Total
|
16,260
|
6,174
|
|
Ingleside
|
|
|
|
March
Ingleside Note (in default)
|
1,013
|
1,004
|
|
Jonathan
Carroll
|
|
|
|
March
Carroll Note (in default)
|
1,551
|
997
|
|
|
18,824
|
8,175
|
|
|
|
|
|
Less:
Long-term debt, related party, current portion, in
default
|
(16,010)
|
(6,001)
|
|
Less:
Accrued interest payable, related party (in default)
|
(2,814)
|
(2,174)
|
|
|
$-
|
$-
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
58
|
|
Notes to Consolidated Financial Statements
|
|
|
Consolidated Statements of Operations.
Total revenue from operations.
|
|
Twelve
Months Ended December 31,
|
|||
|
|
2020
|
2019
|
||
|
|
(in thousands, except
percent amounts)
|
|||
|
Refinery
operations
|
|
|
|
|
|
LEH
|
$49,786
|
28.5%
|
$97,239
|
31.0%
|
|
Third-Parties
|
120,815
|
69.1%
|
207,685
|
67.6%
|
|
Tolling
and terminaling
|
|
|
|
|
|
Third-Parties
|
4,209
|
2.4%
|
4,338
|
1.4%
|
|
|
$174,810
|
100.0%
|
$309,262
|
100.0%
|
Interest expense.
|
|
Twelve
Months Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Jonathan
Carroll
|
|
|
|
Guaranty Fee
Agreements
|
|
|
|
First Term Loan Due
2034
|
$431
|
$443
|
|
Second Term Loan Due
2034
|
178
|
183
|
|
March Carroll Note (in
default)
|
103
|
103
|
|
LEH
|
|
|
|
BDPL-LEH Loan Agreement
(in default)
|
640
|
640
|
|
June LEH Note (in
default)
|
40
|
40
|
|
Ingleside
|
|
|
|
March Ingleside Note
(in default)
|
63
|
63
|
|
|
$1,455
|
$1,472
|
Other. Fees associated with the Dock Tolling Agreement with
LMT totaled $0 and $0.3 million for the twelve months ended
December 31, 2020 and 2019, respectively. Lease payments received
under the office sub-lease agreement with LEH totaled approximately
$0.03 million for both twelve-month periods ended December 31, 2020
and 2019. The LEH operating fee was also relatively flat, totaling
approximately $0.06 million for both twelve-month periods ended
December 31, 2020 and 2019.
(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
|
December 31,
2020
|
Page
59
|
|
Notes to Consolidated Financial Statements
|
|
|
Segment Information.
Business segment information for the periods indicated (and as of
the dates indicated) was as follows:
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Net
revenue (excluding intercompany fees and sales)
|
|
|
|
Refinery
operations
|
$170,601
|
$304,924
|
|
Tolling
and terminaling
|
4,209
|
4,338
|
|
Total
net revenue
|
174,810
|
309,262
|
|
|
|
|
|
Intercompany
fees and sales
|
|
|
|
Refinery
operations
|
(2,384)
|
(2,615)
|
|
Tolling
and terminaling
|
2,384
|
2,615
|
|
Total
intercompany fees
|
-
|
-
|
|
|
|
|
|
Operation costs and expenses(1)
|
|
|
|
Refinery
operations
|
(175,201)
|
(296,502)
|
|
Tolling
and terminaling
|
(1,661)
|
(1,325)
|
|
Corporate
and other
|
(169)
|
(222)
|
|
Total
operation costs and expenses
|
(177,031)
|
(298,049)
|
|
|
|
|
|
Segment
contribution margin (deficit)
|
|
|
|
Refinery
operations
|
(6,984)
|
5,807
|
|
Tolling
and terminaling
|
4,932
|
5,628
|
|
Corporate
and other
|
(169)
|
(222)
|
|
Total
segment contribution margin (deficit)
|
(2,221)
|
11,213
|
|
|
|
|
|
General and administrative
expenses(2)
|
|
|
|
Refinery
operations
|
(1,257)
|
(1,252)
|
|
Tolling
and terminaling
|
(307)
|
(262)
|
|
Corporate
and other
|
(1,381)
|
(1,756)
|
|
Total
general and administrative expenses
|
(2,945)
|
(3,270)
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
Refinery
operations
|
(1,186)
|
(1,913)
|
|
Tolling
and terminaling
|
(1,296)
|
(396)
|
|
Corporate
and other
|
(204)
|
(181)
|
|
Total
depreciation and amortization
|
(2,686)
|
(2,490)
|
|
|
|
|
|
Interest
and other non-operating expenses, net
|
|
|
|
Refinery
operations
|
(2,929)
|
5,668
|
|
Tolling
and terminaling
|
(2,546)
|
(2,398)
|
|
Corporate
and other
|
(1,116)
|
(1,362)
|
|
Total
interest and other non-operating expenses, net
|
(6,591) #
|
1,908
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
Refinery
operations
|
(12,356)
|
8,310
|
|
Tolling
and terminaling
|
783
|
2,572
|
|
Corporate
and other
|
(2,870)
|
(3,521)
|
|
Total
income (loss) before income taxes
|
(14,443)
|
7,361
|
|
|
|
|
|
Income
tax expense
|
(15)
|
-
|
|
|
|
|
|
Net income (loss)
|
$(14,458)
|
$7,361
|
(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
|
December 31,
2020
|
Page
60
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Capital
expenditures
|
|
|
|
Refinery
operations
|
$295
|
$1,453
|
|
Tolling
and terminaling
|
790
|
121
|
|
Corporate
and other
|
-
|
-
|
|
Total
capital expenditures
|
$1,085
|
$1,574
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Identifiable
assets
|
|
|
|
Refinery
operations
|
$48,521
|
$51,317
|
|
Tolling
and terminaling
|
18,722
|
18,401
|
|
Corporate
and other
|
2,057
|
1,726
|
|
Total
identifiable assets
|
$69,300
|
$71,444
|
(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 December 31, 2020 and 2019, we had cash
balances (including restricted cash) that exceeded the FDIC
insurance limit per depositor of approximately $0.6 million and
$0.3 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. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Effective
March 1, 2020, Pilot assigned its rights, title, interest, and
obligations in the crude supply agreement to Tartan Oil LLC, a
Pilot affiliate. Either party may terminate the crude supply
agreement by providing the other party 60 days prior written
notice. 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 renewed 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 twelve-month periods ended December 31, 2020 and
2019, the tank lease setoff amounts totaled $1.3 million and $0,
respectively. For the twelve-month periods ended December 31, 2020
and 2019, the amount of interest NPS incurred under the Amended
Pilot line of credit totaled $1.0 million and $0, respectively. See
“Note (1) Organization – Going Concern” to our
consolidated financial statements for additional disclosures
related to defaults in our debt obligations.
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 has resulted in significant financial constraints
on producers, which in turn has resulted in long term crude oil
supply constraints and increased transportation costs. During the
twelve-month period ended December 31, 2020, our refinery
experienced downtime as a result of lack of crude due to cash
constraints. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
61
|
|
Notes to Consolidated Financial Statements
|
|
|
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.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31,
|
|
|
|
|
|
|
2020
|
3
|
70.8%
|
$0
|
|
|
|
|
|
|
2019
|
4
|
96.5%
|
$1.7
million
|
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 28.7% and 31.3%
of total revenue from operations in 2020 and 2019, respectively.
The Affiliate represented approximately $0 and $1.4 million in
accounts receivable at December 31, 2020 and 2019, respectively.
The amounts will be paid under normal business terms. Amounts
outstanding relating to the Jet Fuel Sales Agreement can
significantly vary period to period based on the timing of the
related sales and payments received. Amounts we owed to LEH under
various long-term debt, related-party agreements totaled $9.1
million and $6.2 million at December 31, 2020 and 2019,
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.
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:
|
|
Twelve Months Ended December 31,
|
|||
|
|
2020
|
2019
|
||
|
|
(in thousands, except
percent amounts)
|
|||
|
|
|
|
|
|
|
LPG
mix
|
$2
|
0.0%
|
$17
|
0%
|
|
Naphtha
|
34,413
|
20.2%
|
59,799
|
19.6%
|
|
Jet
fuel
|
49,786
|
29.2%
|
97,239
|
31.9%
|
|
HOBM
|
42,777
|
25.1%
|
66,891
|
21.9%
|
|
AGO
|
43,623
|
25.5%
|
80,978
|
26.6%
|
|
|
$170,601
|
100.0%
|
$304,924
|
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.
(6)
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Prepaid crude oil
and condensate
|
$2,249
|
$1,651
|
|
Prepaid
insurance
|
1,182
|
417
|
|
Prepaid eastment
renewal fees
|
99
|
121
|
|
Other
prepaids
|
34
|
87
|
|
|
$3,564
|
$2,276
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
62
|
|
Notes to Consolidated Financial Statements
|
|
|
(7)
Inventory
Inventory
as of the dates indicated consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Crude
oil and condensate
|
$463
|
$959
|
|
Chemicals
|
271
|
120
|
|
AGO
|
133
|
440
|
|
Naphtha
|
120
|
95
|
|
HOBM
|
54
|
-
|
|
Propane
|
15
|
26
|
|
LPG
mix
|
6
|
5
|
|
|
$1,062
|
$1,645
|
(8)
Property, Plant and Equipment, Net
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Refinery
and facilities
|
$72,184
|
$66,317
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
903
|
833
|
|
|
73,653
|
67,716
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortiation
|
(15,220)
|
(12,739)
|
|
|
58,433
|
54,977
|
|
|
|
|
|
CIP
|
4,064
|
8,916
|
|
|
$62,497
|
$63,893
|
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 and $0.7 million at December 31, 2020 and
2019. 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 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. See “Note (10)” to our
consolidated financial statements for additional disclosures
related to working capital deficits and borrowings for capital
spending.
(9)
Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Unearned
revenue from contracts with customers
|
$3,421
|
$1,990
|
|
Insurance
|
541
|
159
|
|
Unearned
contract renewal income
|
500
|
500
|
|
Other
payable
|
252
|
228
|
|
Board
of director fees payable
|
100
|
263
|
|
Taxes
payable
|
58
|
183
|
|
Customer
deposits
|
10
|
10
|
|
|
$4,882
|
$3,333
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
63
|
|
Notes to Consolidated Financial Statements
|
|
|
(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 balance of
GEL Final Arbitration Award
|
|
|
SBA EIDLs
|
|
|
|
|
|
|
|
|
LE Term Loan Due 2050(4)
|
LE-SBA
|
$0.15
|
Aug 2050
|
$0.0007 million
|
3.75%
|
Working capital
|
|
|
NPS Term Loan Due 2050(4)
|
NPS-SBA
|
$0.15
|
Aug 2050
|
$0.0007 million
|
3.75%
|
Working capital
|
|
|
Equipment Loan Due
2025
|
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 December 31, 2020, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.5 million. At
December 31, 2019, restricted cash (current portion) was $0.05
million and restricted cash, noncurrent was $0.6
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 GEL Final
Arbitration Award 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)
Payments are
deferred for the first twelve (12) months of the loan; the first
payment is due August 2021; interest accrues during the deferral
period. SBA EIDLs are not forgivable.
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Third-party
long-term debt (outstanding principal and accrued interest), as of
the dates indicated was as follows:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
$22,840
|
$21,776
|
|
LRM Term Loan Due 2034 (in
default)
|
9,473
|
9,031
|
|
Notre
Dame Debt (in default)
|
9,413
|
8,617
|
|
SBA
EIDLs
|
|
|
|
LE
Term Loan 2050
|
152
|
-
|
|
NPS
Term Loan 2050
|
152
|
-
|
|
Equipment
Loan Due 2025
|
71
|
-
|
|
|
42,101
|
39,424
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(33,692)
|
(33,836)
|
|
Less:
Unamortized debt issue costs
|
(1,749)
|
(1,877)
|
|
Less: Accrued interest payable (in
default)
|
(6,305)
|
(3,711)
|
|
|
$355
|
$-
|
Unamortized
debt issue costs associated with the Veritex loans as of the dates
indicated consisted of the following:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(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
|
(693)
|
(565)
|
|
|
$1,749
|
$1,877
|
Amortization
expense was $0.1 million for both twelve-month periods ended
December 31, 2020 and 2019.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
64
|
|
Notes to Consolidated Financial Statements
|
|
|
Accrued
interest 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:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt (in
default)
|
$4,435
|
$3,639
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due 2034 (in
default)
|
1,295
|
25
|
|
LRM Term Loan Due 2034 (in
default)
|
571
|
47
|
|
SBA
EIDLs
|
|
|
|
LE
Term Loan 2050
|
2
|
-
|
|
NPS
Term Loan 2050
|
2
|
-
|
|
|
6,305
|
3,711
|
|
Less:
Accrued interest payable (in default)
|
(6,305)
|
(3,711)
|
|
Long-term
Interest Payable, Net of Current Portion
|
$-
|
$-
|
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: (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. Principal and interest payments resumed on
July 22, 2020. As of the filing date of this report, we are current
on required monthly payments under our secured loan agreements with
Veritex, but other defaults remain outstanding as noted below under
“Defaults”.
SBA EIDLs. Payments under the SBA loans are deferred for the
first twelve (12) months. Interest accrues during the deferral
period. Principal and interest payments begin in August
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
|
|
|
|
LE Term Loan Due
2050
|
---
|
● Business assets (e.g., machinery
and equipment, furniture, fixtures, etc.) as more fully described
in the security agreement
|
|
NPS Term Loan Due
2050
|
---
|
● 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.
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.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
65
|
|
Notes to Consolidated Financial Statements
|
|
|
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.
Defaults
|
Loan Description
|
Event(s) of Default
|
Covenant Violations
|
|
Veritex
Loans
|
|
|
|
LE Term
Loan Due 2034 (in
default)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; 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)
|
GEL
Final Arbitration Award and associated material adverse effect
conditions; 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 report, 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 December
31, 2020 and 2019.
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.
Future annual third-party long-term debt payments, which are
reflected as current due to defaults under our secured loan
agreements:
|
Years Ending December 31,
|
Principal and
Accrued Interest
|
Debt Issue Costs
|
Total
|
|
|
(in
thousands)
|
||
|
2021
|
$35,441
|
$(1,749)
|
$33,692
|
|
2022
|
16
|
-
|
16
|
|
2023
|
18
|
-
|
18
|
|
2024
|
19
|
-
|
19
|
|
2025
|
9
|
-
|
9
|
|
Subsequent
to 2025
|
293
|
-
|
293
|
|
|
$35,796
|
$(1,749)
|
$34,047
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
66
|
|
Notes to Consolidated Financial Statements
|
|
|
(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%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
|
|
|
|
|
|
|
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Line of
credit payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Amended Pilot Line of Credit (in
default)
|
$8,145
|
$11,786
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
-
|
(219)
|
|
Less:
Interest payable, short-term
|
(103)
|
(103)
|
|
|
$8,042
|
$11,464
|
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 report, 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 unpaid principal amount and all interest accrued and unpaid,
and all other amounts owing or payable (the
“Obligations”). Pursuant to the Amended Pilot Line of
Credit, commencing on May 4, 2020, the 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
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
|
December 31,
2020
|
Page
67
|
|
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 twelve-month periods ended
December 31, 2020 and 2019, the tank lease setoff amounts totaled
$1.3 million and $0, respectively. For the twelve-month periods
ended December 31, 2020 and 2019, the amount of interest NPS
incurred under the Amended Pilot Line of Credit totaled $1.0
million and $0, respectively.
On November 23, 2020, NPS and guarantors received notice from Pilot
that the entry into the SBA EIDLs was a breach of the Amended Pilot
Line of Credit and Pilot demanded full repayment of the
Obligations, including through use of the proceeds of the SBA
EIDLs. Pilot also notified the SBA that the liens securing the SBA
EIDLs are junior to those securing the Obligations. While the SBA
acknowledged this point and indicated a willingness to subordinate
the SBA EIDLs, 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 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 December 31, 2020 and 2019, 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:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
AROs,
at the beginning of the period
|
$2,565
|
$2,565
|
|
Liabilities
settled
|
(195)
|
-
|
|
|
2,370
|
2,565
|
|
Less:
AROs, current portion
|
(2,370)
|
(2,565)
|
|
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
|
December 31,
2020
|
Page
68
|
|
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. See “Note (17)” to our
consolidated financial statements for additional disclosures
related to defaults under the office lease.
An
Affiliate, LEH, subleases a portion of the Houston office
space. Sublease income received from LEH totaled
approximately $0.03 million for both the twelve months ended
December 31, 2020 and 2019. See “Note (3)” to our
consolidated financial statements for additional disclosures
related to the Affiliate sub-lease.
Finance Leases
Crane. In January 2018, LE entered a 24-month lease for the
purchase of a 20-ton crane for use at the Nixon facility. The lease
required a negligible monthly payment and matured in January
2020.
Backhoe Rent-to-Own Agreement. 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 a new 5-year loan to finance purchase
of the backhoe. The backhoe continues to be used at the Nixon
facility. See “Note (10)” to our consolidated financial
statements for additional disclosures related to the equipment
purchase loan.
The
following table presents the lease-related assets and liabilities
recorded on the consolidated balance sheet:
|
|
|
December 31,
|
|
|
|
Balance Sheet Location
|
2020
|
2019
|
|
|
|
(in
thousands)
|
|
|
Assets
|
|
|
|
|
Operating
lease ROU assets
|
Operating
lease ROU assets
|
$787
|
$787
|
|
Less:
Accumulated amortization on operating lease assets
|
Operating
lease ROU assets
|
(289)
|
(138)
|
|
|
498
|
649
|
|
|
|
|
|
|
|
Finance
lease assets
|
Property
and equipment, net
|
-
|
180
|
|
Less:
Accumulated amortization on finance lease assets
|
Property
and equipment, net
|
-
|
(34)
|
|
|
-
|
146
|
|
|
|
|
|
|
|
Total
lease assets
|
|
498
|
795
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
194
|
175
|
|
Finance
leases
|
Current
portion of lease liabilities
|
-
|
76
|
|
|
194
|
251
|
|
|
Noncurrent
|
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
370
|
564
|
|
Total
lease liabilities
|
|
$564
|
$815
|
|
Weighted
average remaining lease term in years
|
|
|
Operating
lease
|
2.67
|
|
Weighted
average discount rate
|
|
|
Operating
lease
|
8.25%
|
|
Finance
leases
|
8.25%
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
69
|
|
Notes to Consolidated Financial Statements
|
|
|
The
following table presents information related to lease costs for
operating and finance leases:
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Operating
lease costs
|
$206
|
$206
|
|
Finance
lease costs:
|
|
|
|
Depreciation
of leased assets
|
13
|
21
|
|
Interest
on lease liabilities
|
3
|
6
|
|
Total
lease cost
|
$222
|
$233
|
The
table below presents supplemental cash flow information related to
leases as follows:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands)
|
|
|
Cash
paid for amounts included in the measurement
|
|
|
|
of
lease liabilities:
|
|
|
|
Operating
cash flows for operating lease
|
$230
|
$190
|
|
Operating
cash flows for finance leases
|
$4
|
$6
|
|
Financing
cash flows for finance leases
|
$17
|
$45
|
As of
December 31, 2020, maturities of lease liabilities for the periods
indicated were as follows:
|
December 31,
|
Operating Lease
|
Financing Leases
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
2021
|
$194
|
$-
|
$194
|
|
2022
|
214
|
-
|
214
|
|
2023
|
156
|
-
|
156
|
|
|
|
|
|
|
|
$564
|
$-
|
$564
|
Future
minimum annual lease commitments that are
non-cancelable:
|
|
Operating
|
|
December 31,
|
Lease
|
|
|
(in
thousands)
|
|
2021
|
$233
|
|
2022
|
237
|
|
2023
|
161
|
|
|
$631
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
70
|
|
Notes to Consolidated Financial Statements
|
|
|
(14)
Income Taxes
Tax Provision
The
provision for income tax benefit (expense) for the periods
indicated was as follows:
|
|
Twelve
Months Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Current
|
|
|
|
Federal
|
$(15)
|
$-
|
|
State
|
-
|
-
|
|
Deferred
|
|
|
|
Federal
|
3,033
|
(2,210)
|
|
State
|
-
|
|
|
Change
in valuation allowance
|
(3,033)
|
2,210
|
|
|
|
|
|
Total
provision for income taxes
|
$(15)
|
$-
|
The TMT
is treated as an income tax for financial reporting
purposes.
Effective Tax Rate
Our
effective tax rate was as follows:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
|
|
|
Expected
tax rate
|
21.00%
|
21.00%
|
|
Permanent
differences
|
0.00%
|
0.00%
|
|
State
tax
|
0.00%
|
0.00%
|
|
Federal
tax
|
0.00%
|
0.00%
|
|
Change
in valuation allowance
|
(21.00%)
|
(21.00%)
|
|
|
0.00%
|
0.00%
|
Our
effective tax rate differed from the U.S. federal statutory rate
primarily due to AMT credits made refundable by the Tax Cuts and
Jobs Act. At the date of enactment of the Tax Cuts and Jobs Act, we
re-measured our deferred tax assets and liabilities using a rate of
21%, which is the rate expected to be in place when such deferred
assets and liabilities are expected to reverse in the future. The
re-measurement was offset by a change in our valuation allowance,
resulting in there being no impact on our net deferred tax
assets.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
Deferred
tax assets:
|
|
|
|
NOL
and capital loss carryforwards
|
$15,258
|
$12,463
|
|
Business
interest expense
|
3,343
|
1,923
|
|
Start-up
costs (crude oil and condensate processing facility)
|
509
|
594
|
|
ARO
liability/deferred revenue
|
498
|
539
|
|
AMT
credit
|
-
|
50
|
|
Other
|
4
|
11
|
|
Total
deferred tax assets
|
19,611
|
15,580
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(7,230)
|
(6,183)
|
|
Total
deferred tax liabilities
|
(7,230)
|
(6,183)
|
|
|
12,381
|
9,397
|
|
|
|
|
|
Valuation
allowance
|
(12,381)
|
(9,347)
|
|
|
|
|
|
Deferred
tax assets, net
|
$-
|
$50
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
71
|
|
Notes to Consolidated Financial Statements
|
|
|
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, 2018
|
$9,614
|
$37,335
|
$46,949
|
|
|
|
|
|
|
Net
operating losses
|
-
|
5,723
|
5,723
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
9,614
|
43,058
|
52,672
|
|
|
|
|
|
|
Net
operating losses
|
-
|
13,305
|
13,305
|
|
|
|
|
|
|
Balance at December 31, 2020
|
$9,614
|
$56,363
|
$65,977
|
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 December 31, 2020 and 2019, 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
December 31, 2020 and 2019.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
72
|
|
Notes to Consolidated Financial Statements
|
|
|
(15)
Earnings Per Share
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Twelve Months Ended
|
|
|
|
December 31,
|
|
|
|
2020
|
2019
|
|
|
(in thousands,
except share and per share amounts)
|
|
|
|
|
|
|
Net
income (loss)
|
$(14,458)
|
$7,361
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
$(1.15)
|
$0.66
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
|
common
stock outstanding and potential
|
|
|
|
dilutive
shares of common stock
|
12,574,465
|
11,156,995
|
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 twelve months ended December
31, 2020 and 2019 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 in the third quarter of 2020, decommissioning
of these assets has been delayed due to cash constraints associated
with the ongoing impact of COVID-19 and winter being the offseason
for dive operations in the U.S. Gulf of Mexico. 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.
Lack of
permit approvals does 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 December 31, 2020. At December 31, 2020 and
2019, BDPL maintained $2.4 million and $2.6 million, respectively,
in AROs related to abandonment of these assets.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
73
|
|
Notes to Consolidated Financial Statements
|
|
|
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 in the
third quarter of 2020, decommissioning of these assets has been
delayed due to cash constraints associated with the ongoing impact
of COVID-19 and winter being the offseason for dive operations in
the U.S. Gulf of Mexico. We cannot currently estimate when
decommissioning may occur. In the interim, BDPL provides BOEM and
BSEE with updates regarding the project’s
status.
BDPL’s
pending appeal of the BOEM INCs does 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 December 31, 2020. At both December 31, 2020
and 2019, BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
74
|
|
Notes to Consolidated Financial Statements
|
|
|
Resolved - GEL Settlement. As previously disclosed, GEL was
awarded the GEL Final Arbitration Award in the aggregate amount of
$31.3 million. In July 2018, the Lazarus Parties and GEL entered
into the GEL Settlement Agreement. The GEL Settlement Agreement was
subsequently amended five (5) times to extend the GEL Settlement
Payment Date and/or modify certain terms related to the GEL Interim
Payments or the GEL Settlement Payment. During the period September
2017 to August 2019, GEL received the following amounts from the
Lazarus Parties to reduce the outstanding balance of the GEL Final
Arbitration Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
$22.2
|
In
August 2019, the GEL Final Arbitration Award was resolved as a
result of the GEL Settlement. Under the GEL Settlement: (i) the
mutual releases between the parties became effective, (ii) GEL
filed the stipulation of dismissal of claims against LE, and (iii)
Blue Dolphin recognized a $9.1 million gain on the extinguishment
of debt on its consolidated statements of operations in the third
quarter of 2019. Until the GEL Settlement occurred, the debt was
reflected on Blue Dolphin’s consolidated balance sheets as
accrued arbitration award payable. At both December 31, 2020 and
2019, the accrued arbitration award payable was $0.
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.
Share Issuances (Sales of Unregistered Securities)
We are
obligated to issue shares of our Common Stock to: (i) non-employee
directors for services rendered to the Board and (ii) to Jonathan
Carroll pursuant to the Guaranty Fee Agreements. For the
foreseeable future, management does not intend to pay Mr. Carroll
the cash portion of guaranty fees due to Blue Dolphin’s
working capital deficits. The cash portion will continue to accrue
and be added to the principal balance of the March Carroll Note.
See “Note (3)” to our consolidated financial statements
for additional disclosures related to Affiliates and working
capital deficits, as well as for information related to the
guaranty fee agreements. Set forth below is information regarding
the sale or issuance of Common Stock related to the above noted
obligations during the twelve months ended December 31, 2020 and
2019:
●
On April 30, 2020,
we issued an aggregate of 231,065 restricted shares of Common Stock
to Jonathan Carroll, which represented payment of the common stock
component of guaranty fees for the period November 2019 through
March 2020. We recorded income of approximately $0.03 million
related to the share issuance.
●
On April 30, 2020,
we also issued an aggregate of 135,084 restricted shares of Common
Stock to certain of our non-employee, independent directors, which
represented payment for services rendered to the Board for the
three-month periods ended September 30, 2018, March 31, 2019,
September 30, 2019, and March 31, 2020. We recorded income of
approximately $0.05 million related to the share
issuance.
●
On November 14,
2019, we issued an aggregate of 1,351,851 restricted shares of
Common Stock to Jonathan Carroll pursuant to guaranty fee
agreements. The issuance represented payment of the common stock
component of the guaranty fees for the period May 2017 through
October 2019, which payments were not permissible under the GEL
Settlement Agreement. We recorded an expense of approximately $0.5
million related to the share issuance.
We
recognized income on the issuance of shares of approximately $0.08
million and an expense of approximately $0.5 million for the twelve
months ended December 31, 2020 and 2019, respectively. The sale and
issuance of these securities were exempt from registration under
the Securities Act in reliance on Section 4(a)(2) of the Securities
Act.
(17)
Subsequent Events
BDSC Office Lease Default
Pursuant
to a letter dated March 29, 2021, TR 801 Travis LLC, a Delaware
limited partnership (“Landlord”), 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. Landlord is entitled to,
and is fully prepared to, immediately exercise any or all of its
rights and remedies, without giving BDSC any further notice or
demand. Landlord 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 Landlord
under the office lease or applicable law or equity.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
75
|
|
Internal Controls and Procedures
|
|
|
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified by SEC rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our Chief Executive Officer
(principal executive officer, principal financial officer, and
principal accounting officer) to allow timely decisions regarding
required disclosure. Under the supervision of, and with the
participation of our management, including our Chief Executive
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 Exchange Act, as of the end of the period
covered by this report. 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 as of the end
of the period covered by this report to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act, are recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms.
Management’s Report on Internal Control over Financial
Reporting
Management’s Responsibility. Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. A company’s internal control over financial
reporting is a process designed 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 in the
U.S.
There are inherent limitations in the effectiveness of any control
system, including the potential for human error and the possible
circumvention or overriding of controls and procedures.
Additionally, judgments in decision-making can be faulty and
breakdowns can occur because of a simple error or mistake. An
effective control system can provide only reasonable, not absolute,
assurance that the control objectives of the system are adequately
met. Accordingly, management does not expect that the control
system can prevent or detect all errors or fraud. Further,
projections of any evaluation or assessment of effectiveness of a
control system to future periods are subject to the risks that,
over time, controls may become inadequate because of changes in an
entity’s operating environment or deterioration in the degree
of compliance with policies or procedures.
Management’s Assessment.
Management, under the supervision and with the participation of our
Chief Executive Officer (principal executive officer, principal
financial officer, and principal accounting officer), assessed the
effectiveness of our internal controls over financial reporting at
December 31, 2020. In making this assessment, management used
the criteria set forth by the 2013 Committee of Sponsoring
Organizations of the Treadway Commission Framework and SOX
Compliance. Management’s evaluation of our internal controls
over financial reporting for the twelve months ended December 31,
2020 determined that they were ineffective. A previously reported
material weakness and significant deficiency continues to exist.
Relating to such evaluation, management concluded that our internal
controls over financial reporting were ineffective at December 31,
2020 and 2019 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.
Prior year audit procedures resulted in significant adjustments
related to the accounting for a certain stock issuance in payment
of related party debt, as well as deferred revenue relating to
consideration received from a supplier.
Management has taken steps to address these deficiencies, including
drafting a formal policy to review manual journal entries and
documenting procedures to identify and address complex accounting
transactions. Full remediation requires one or more additional
period-end financial reporting periods to evaluate effectiveness.
Efforts to date have been affected by remote work arrangements,
reduced personnel, business disruption, and a diversion of
resources due to the impact of the COVID-19 pandemic. We cannot at
this time estimate how long it will take to fully remedy the
identified weakness and deficiency, and our initiatives may not
prove to be successful in fully remediating the identified weakness
and deficiency.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
76
|
|
Internal Controls and Procedures
|
|
|
We intend to take the necessary measures to implement formal
policies, improve processes, document procedures, and better define
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
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. During the period covered by this report there
have been no changes in our internal control over financial
reporting that materially affected, or is reasonably likely to
materially affect, our internal control over financial
reporting.
Exemption from Management's Report on Internal Control over
Financial Reporting. This
report does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by our registered public accounting firm pursuant to rules of the
SEC for smaller reporting companies that permit us to provide only
management’s attestation in this report.
Remainder of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
77
|
|
Other Information
|
|
|
ITEM 9B. OTHER INFORMATION
Sales of Unregistered Securities
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us for the years ended December 31, 2020 and
2019 that were not registered under the Securities Act of
1933:
●
On April 30, 2020,
we issued an aggregate of 231,065 restricted shares of Common Stock
to Jonathan Carroll, which represented payment of the common stock
component of guaranty fees for the period November 2019 through
March 2020. We recorded income of approximately $0.03 million
related to the share issuance.
●
On April 30, 2020,
we also issued an aggregate of 135,084 restricted shares of Common
Stock to certain of our non-employee, independent directors, which
represented payment for services rendered to the Board for the
three-month periods ended September 30, 2018, March 31, 2019,
September 30, 2019, and March 31, 2020. We recorded income of
approximately $0.05 million related to the share
issuance.
●
On November 14,
2019, we issued an aggregate of 1,351,851 restricted shares of
Common Stock to Jonathan Carroll pursuant to guaranty fee
agreements. The issuance represented payment of the common stock
component of the guaranty fees for the period May 2017 through
October 2019, which payments were not permissible under the GEL
Settlement Agreement. We recorded an expense of approximately $0.5
million related to the share issuance.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act. See “Note (16)” to our consolidated
financial statements for additional disclosures related to share
issuances.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
78
|
|
Directors and Officers and Corporate Governance
|
|
|
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Overview
Blue
Dolphin was formed in 1986 as a Delaware corporation and is traded
on the OTCQX under the ticker symbol “BDCO”. 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
1A. Risk Factors” and “Part II, Item 8. Financial
Statements and Supplementary Data, Note (3)” for additional
disclosures related to Affiliate agreements, arrangements, and
risks associated with working capital deficits.
Board Composition
The amended and restated bylaws of Blue Dolphin provide that the
Board shall consist of five (5) members, with the precise number to
be determined from time to time by the Board, except that no
decrease in the number shall have the effect of shortening the term
of an incumbent director. The Board currently has five (5)
directors, each serving until the next annual meeting of
stockholders to be held by Blue Dolphin. The following sets forth, at March 31, 2021, each
director’s name, age, principal occupation and directorships
during the past five (5) years, as well as their relevant knowledge
and experience that led to their appointment to the
Board:
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
Knowledge and Experience
|
|
|
|
|
Jonathan P. Carroll, 59
Blue
Dolphin Energy Company
Chairman of the Board (since 2014)
Chief Executive Officer, President, Assistant Treasurer and
Secretary (since 2012)
LEH
President (since 2006) and
Majority Owner
Together,
LEH and Jonathan Carroll owned approximately 82% of our outstanding
Common Stock as of the filing date of this report.
Mr.
Carroll has served on Blue Dolphin’s Board since 2014. He is
currently Chairman of the Board. Since 2004, he has served on the
Board of Trustees of the Salient Fund Group, and has served on the
compliance, audit, and nominating committees of several of
Salient’s private and public closed-end and mutual funds. Mr.
Carroll previously served on the Board of Directors of the General
Partner of LRR Energy, L.P. (NYSE: LRE) from January 2014 until its
merger with Vanguard
Natural Resources, LLC in October 2015.
|
Mr.
Carroll earned a Bachelor of Arts degree in Human Biology and a
Bachelor of Arts degree in Economics from Stanford University, and
he completed a Directed Reading in Economics at Oxford University.
Based on his educational and professional experiences, Mr. Carroll
possesses particular knowledge and experience in business
management, finance and business development that strengthen the
Board’s collective qualifications, skills, and
experience.
|
|
|
|
|
Ryan A. Bailey, 45
Carbonado
Partners
Managing Partner (since September 2020) and Founder
Pacenote
Capital
Managing Partner (2019 to 2020) and Co-founder
Children’s
Health System of Texas
Head of Investments (2014 to 2019)
Mr.
Bailey was appointed to Blue Dolphin’s Board in November
2015. He is currently a member of the Audit and
Compensation Committees. He also serves as an advisor
and mentor to Texas Wall Street Women, a non-profit member
organization; is a member of the advisory board of Solovis, Inc.,
an investment software company; and serves as a Board member for
the Texas Hedge Fund Association.
|
Mr.
Bailey earned a Bachelor of Arts degree in Economics from Yale
University and completed a graduate course in tax planning from the
Yale School of Management. He holds professional
credentialing as a Chartered Financial Analyst (CFA), Financial
Risk Manager (FRM), Chartered Alternative Investment Analyst (CAIA)
and Chartered Market Technician (CMT). Based on his educational and
professional experiences, Mr. Bailey possesses particular knowledge
and experience in finance, financial analysis and modeling,
investment management, risk assessment and strategic planning that
strengthen the Board’s collective qualifications, skills, and
experience.
|
|
|
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
79
|
|
Directors and Officers and Corporate Governance
|
|
|
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
Knowledge and Experience
|
|
|
|
|
Amitav Misra, 43
HighRadius
Corporation
Vice President of Treasury Marketing (since July
2020)
Arundo
Analytics, Inc.
General Manager Americas (2018 to 2020)
Vice President of Marketing (2017 to 2020)
Cardinal
Advisors
Partner (2014 to 2017) and
Founder
Taxa,
Inc.
President, Director and Chief Operating Officer (2012 to
2014)
Mr.
Misra has served on Blue Dolphin’s Board since
2014. He is currently a member of the Audit and
Compensation Committees. Mr. Misra serves as an advisor
to several energy, technology, and private investment
companies. He is also a director of the Houston Center
for Literacy, a non-profit organization.
|
Mr.
Misra earned a Bachelor of Arts degree in Economics from Stanford
University and holds FINRA Series 79 and Series 63 licenses. Mr.
Misra possesses particular knowledge and experience in economics,
business development, private equity, and strategic planning that
strengthen the Board’s collective qualifications, skills, and
experience.
|
|
|
|
|
Christopher T. Morris, 59
Bonaventure
Realty Group
Executive Vice President (2020 to Present)
Impact
Partners LLC
President (2017 to 2020)
Tatum
(a Randstad Company)
New York Managing Partner (2013 to 2017)
MPact
Partners LLC
President (2011 to Present)
Mr.
Morris has served on Blue Dolphin’s Board since 2012; he is
currently Chairman of the Audit and Compensation
Committees.
|
Mr.
Morris earned a Bachelor of Arts degree in Economics from Stanford
University and a Masters degree in Business Administration from the
Harvard Business School. Based on his educational and professional
experiences, Mr. Morris possesses particular knowledge and
experience in business management, finance, strategic planning, and
business development that strengthen the Board’s collective
qualifications, skills, and experience.
|
|
|
|
|
Herbert N. Whitney, 80
Wildcat
Consulting, LLC
President (since 2006) and
Founder
Mr.
Whitney has served on Blue Dolphin’s Board since 2012. He
previously served on the Board of Directors of Blackwater Midstream
Corporation, the Advisory Board of Sheetz, Inc., as Chairman of the
Board of Directors of Colonial Pipeline Company, and as Chairman of
the Executive Committee of the Association of Oil
Pipelines.
|
Mr.
Whitney has more than 40 years of experience in pipeline
operations, crude oil supply, product supply, distribution and
trading, as well as marine operations and logistics having served
as the President of CITGO Pipeline Company and in various general
manager positions at CITGO Petroleum Corporation. He earned his
Bachelor of Science degree in Civil Engineering from Kansas State
University. Based on his educational and professional experiences,
he possesses extensive knowledge in the supply and distribution of
crude oil and petroleum products, which strengthens the
Board’s collective qualifications, skills, and
expertise.
|
|
|
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
80
|
|
Directors and Officers and Corporate Governance
|
|
|
This table shows, as of March 31, 2021, the name and age of each
executive officer, as well as their principal occupation during the
past five (5) years:
|
Name
|
Position
|
Since
|
Age
|
|
|
|
|
|
|
Jonathan P. Carroll
|
Chief
Executive Officer, President, Assistant Treasurer, and
Secretary
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
|
2012
|
59
|
|
Mr. Carroll was appointed Chairman of the Board of Blue Dolphin in
2014, and he was appointed Chief Executive Officer, President,
Assistant Treasurer and Secretary of Blue Dolphin in 2012. He has
also served as President of LEH since 2006 and is its majority
owner. Together, LEH and Jonathan Carroll owned approximately 82%
of Blue Dolphin’s Common Stock as of the filing date of this
report. Before founding LEH, Mr. Carroll was a private
investor focused on direct debt and equity investments, primarily
in distressed assets. Since 2004, he has served on the
Board of Trustees of Salient Fund Group, and has served on the
compliance, audit and nominating committees of several of
Salient’s private and public closed-end and mutual
funds. Mr. Carroll previously served on the Board of
Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE)
from January 2014 until its merger with Vanguard Natural Resources,
LLC in October 2015. He earned a Bachelor of Arts degree in Human
Biology and a Bachelor of Arts degree in Economics from Stanford
University, and he completed a Directed Reading in Economics at
Oxford University.
|
Family Relationships between Directors and Officers
At
March 31, 2021, there were no family relationships between any of
our directors or executive officers.
Structure and Meetings of the Board and Board
Committees
Board
The
Board consists of Messrs. Carroll, Bailey, Misra, Morris and
Whitney, with Mr. Carroll serving as Chairman. During 2020, the
Board met once and acted by written consent twice. All directors
participated in the meetings and acted by written consent. The
Board has two standing committees: the Audit Committee and the
Compensation Committee.
Audit Committee
The
Audit Committee consists of Messrs. Morris, Bailey, and Misra, with
Mr. Morris serving as Chairman. During 2020, the Audit Committee
met four (4) times. The Board has affirmatively determined that all
members of the Audit Committee are independent under OTCQX and SEC
rules and that each of Messrs. Morris and Bailey qualifies as an
Audit Committee Financial Expert. The Audit Committee's duties
include overseeing financial reporting and internal control
functions. The Audit Committee’s written charter is available
on our corporate website (http://www.blue-dolphin-energy.com).
Compensation Committee
The
Compensation Committee consists of Messrs. Morris, Bailey, and
Misra, with Mr. Morris serving as Chairman. Due to Blue
Dolphin’s working capital deficits, the Compensation
Committee did not meet or review compensation plans during 2020.
The Board has affirmatively determined that all members of the
Compensation Committee are independent under OTCQX rules. The
Compensation Committee’s duties include setting and
overseeing our compensation policies, as well as reviewing and
recommending to the Board for its approval all compensation for the
Chief Executive Officer, other senior executives, and directors.
The Compensation Committee’s written charter is available on
our corporate website (http://www.blue-dolphin-energy.com).
Nominating Procedures
Given
the small size of the Board, the Board adopted a “Board
Nomination Procedures” policy in lieu of appointing a
standing nominating committee. Using the “Board Nomination
Procedures” policy, the Audit Committee, which is comprised
of independent directors, uses the policy to perform in a similar
function as a standing nominating committee. The policy is used by
the independent directors when choosing nominees to stand for
election. The Board will consider for possible nomination qualified
nominees recommended by stockholders in accordance with Blue
Dolphin’s Certificate of Incorporation. As addressed in the
“Board Nomination Procedures” policy, the manner in
which independent directors evaluate nominees for director as
recommended by a stockholder is the same as that for nominees
received from other sources. See “Director Nomination and
Stockholder Proposals by Stockholders for Annual Meeting of
Stockholders” in this proxy statement for more
information.
The
Board endeavors to nominate qualified directors that will make
important contributions to the Board and to Blue Dolphin. The Board
generally requires that nominees be persons of sound ethical
character, be able to represent all stockholders fairly, have
demonstrated professional achievements, have meaningful experience,
and have a general appreciation of the major business issues facing
Blue Dolphin. The Board also considers issues of diversity and
background in its selection process, recognizing that it is
desirable for its membership to have differences in viewpoints,
professional experiences, educational backgrounds, skills, race,
gender, age, and national origin.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
81
|
|
Directors and Officers and Corporate Governance
|
|
|
Director Attendance at Annual Meeting
Given
the small size of the Board, director attendance at our annual
meeting of stockholders is encouraged but not required. Mr. Carroll
and Mr. Whitney participated in the 2020 virtual annual meeting of
stockholders.
Leadership Structure
Blue
Dolphin is led by Mr. Carroll, who has served as Chairman of the
Board since 2014 and as our Chief Executive Officer and President
since 2012. Having a single leader for the Company is commonly
utilized by other public companies in the United States, and we
believe it is effective for Blue Dolphin as well. This leadership
structure demonstrates to our personnel, customers, and
stockholders that we are under strong leadership, with a single
person setting the tone and having primary responsibility for
managing our operations and eliminates the potential for confusion
or duplication of efforts. We do not believe that appointing an
independent Board chairman, or a permanent lead director, would
improve upon the performance of the Board.
Risk Oversight
Our
Board is involved in overseeing Blue Dolphin’s risk
management. The two standing Board committees provide appropriate
risk oversight. The Audit Committee oversees the accounting and
financial reporting processes, as well as compliance, internal
control, legal and risk matters. The Compensation Committee
oversees compensation policies, including the approval of
compensation for directors and management. We believe that the
processes established to report and monitor systems for material
risks applicable to us are appropriate and effective.
Code of Ethics and Code of Conduct
In
compliance with the Sarbanes-Oxley Act of 2002, the Board adopted a
code of ethics policy and a code of conduct policy. The Audit
Committee established procedures to enable anyone who has a concern
about our conduct, policies, accounting, internal control over
financial reporting, and/or auditing matters to communicate that
concern directly to the Chairman of the Audit Committee. Our code
of ethics and code of conduct policies are available on our website
(http://www.blue-dolphin-energy.com).
Any amendments or waivers to provisions of our code of ethics or
code of conduct will be disclosed on Form 8-K as filed with the SEC
and/or posted on our website.
Communicating with Directors
As the
Board does not receive a large volume of correspondence from
stockholders, at this time, there is no formal process by which
stockholders can communicate with the Board. Instead, any
stockholder who desires to contact the Board or specific members of
the Board may do so by email to investor.relations@blue-dolphin.com,
Attention: Secretary for the Board. All emails addressed in such
manner will be sent directly to members of the Board. In the
future, if the Board adopts a formal process for determining how
communications are to be relayed to directors, that process will be
disclosed on Form 8-K as filed with the SEC and/or posted on our
website (http://www.blue-dolphin-energy.com).
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
82
|
|
Executive Compensation
|
|
|
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Policy and Procedures
An
Affiliate operates and manages all Blue Dolphin properties pursuant
to the Amended and Restated Operating Agreement. Services under the
Amended and Restated Operating Agreement include personnel serving
in a variety of capacities, including, but not limited to corporate
executives. All personnel work for and are paid by the Affiliate.
See “Part II, Item 8. Financial Statements and Supplementary
Data, Note (3)” for additional disclosures related to
Affiliate arrangements.
Compensation for Named Executives
Under
the Amended and Restated Operating Agreement, compensation paid to
our principal executive officer, principal financial officer, and
the most highly compensated executive officers other than the
principal executive officer and principal financial officer whose
annual salary exceeded $100,000 (collectively, the “Named
Executive Officers”) for the periods indicated was as
follows:
|
Summary Compensation Table
|
|
|
Name
and Principal Position
|
|
Year
|
Salary
|
Total
|
|
|
(in
thousands)
|
|||
|
|
|
|
|
|
|
Jonathan
P. Carroll
|
|
2020
|
$-
|
$-
|
|
Chief Executive Officer and
President(1)
|
|
2019
|
-
|
-
|
(1)
Mr. Carroll is also
President and majority owner of LEH, an Affiliate. He receives
compensation through LEH.
Compensation Risk Assessment
The
Affiliate’s approach to compensation practices and policies
applicable for executive and non-executive personnel throughout our
organization is consistent with the base pay market median for each
position. The Affiliate believes its practices and policies in this
regard are not reasonably likely to have a materials adverse effect
on us.
Outstanding Equity Awards
None.
Director Compensation Policy and Procedures
Although
Jonathan Carroll is a director of Blue Dolphin, his services as
Chief Executive Officer are provided under the Amended and Restated
Operating Agreement (see above under “Executive Compensation
Policy and Procedures.”) Therefore, we do not have any
directors that are also employed by Blue Dolphin. The Compensation
Committee reviews and recommends to the Board for its approval all
compensation for the directors.
Compensation for Non-Employee Directors
Non-employee,
independent directors receive compensation for their service on the
Board of $40,000 per year. Compensation is earned in Common Stock
and cash on a quarterly rotating basis, as follow:
|
Fair Market Value
|
|
Period Services Rendered
|
|
Payment Method
|
|
|
|
|
|
|
|
$10,000
|
|
January
1 – March 31 (First Quarter)
|
|
Common
stock
|
|
$10,000
|
|
April 1
– June 30 (Second Quarter)
|
|
Cash
|
|
$10,000
|
|
July 1
– September 30 (Third Quarter)
|
|
Common
stock
|
|
$10,000
|
|
October
1 – December 31 (Fourth Quarter)
|
|
Cash
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
83
|
|
Executive Compensation
|
|
|
For the
first and third quarters, the number of shares of Common Stock to
be issued is determined by the closing price of Blue
Dolphin’s Common Stock on the last trading day in the
respective quarterly period and such closing price is the cost
basis for such issuance. The shares of Common Stock are subject to
resale restrictions applicable to restricted securities and
securities held by affiliates under federal securities
laws.
Non-employee,
independent directors also earn additional compensation for serving
on the Audit Committee. The chairman of the Audit Committee earns
an additional $2,500 in cash in each of the second and fourth
quarters of the year, for a total of $5,000 annually. Members of
the Audit Committee earn an additional $1,250 in cash in each of
the second and fourth quarters of the year, for a total of $2,500
annually. Non-employee, independent directors serving on the
Compensation Committee do not earn any additional compensation for
their service as directors. Non-employee, independent directors are
reimbursed for reasonable out-of-pocket expenses related to
in-person meeting attendance.
During
periods when Blue Dolphin experiences working capital deficits,
director compensation payments have been and may continue to be
delayed. Unpaid cash fees are reflected within accrued expenses and
other current liabilities on our consolidated balance sheets. See
“Part II, Item 8. Financial Statements and Supplementary
Data, Note (9)” for additional disclosures related to board
of director fees payable.
|
Accrued Non-Employee, Independent Director
Compensation
|
|
|
|
Twelve Months Ended December 31, 2020
|
||||
|
|
Cash
|
Common
Stock(1)(2)
|
|
||
|
Name
|
Paid
|
Unpaid
|
Paid
|
Unpaid
|
Total
|
|
|
|
|
|
|
|
|
Christopher
T. Morris
|
$-
|
$25,000
|
$-
|
$10,000
|
$35,000
|
|
Ryan
A. Bailey
|
-
|
22,500
|
-
|
10,000
|
$32,500
|
|
Amitav
Misra
|
-
|
22,500
|
-
|
10,000
|
$32,500
|
|
|
|
|
|
|
$-
|
|
|
$-
|
$70,000
|
$-
|
$30,000
|
$100,000
|
|
(1)
|
At
December 31, 2020, Messrs. Morris, Bailey, Misra and Whitney had
total restricted awards of Common Stock outstanding of 108,003,
105,704, 111,795 and 9,683, respectively.
|
|
(2)
|
On
April 30, 2020, an aggregate of 135,084 restricted shares of Common
Stock were issued to Messrs. Morris, Bailey and Misra. The issuance
represents catchup payments for services rendered to the Board for
the three-month periods ended September 30, 2018, March 31, 2019,
September 30, 2019, and March 31, 2020. At September 30, 2018, the
grant date market value cost basis was $1.00 per share.
At March 31, 2019, the grant date
market value cost basis was $1.11 per share. At September 30, 2019,
the grant date market value cost basis was $1.18 per share. At
March 31, 2020, the grant date market value cost basis was $0.57
per share. The cost basis is determined by the closing price of
Blue Dolphin’s common stock on the last trading day in the
periods in which services were rendered.
|
|
|
Twelve Months Ended December 31, 2019
|
||||
|
|
Cash
|
Common
Stock(1)
|
|
||
|
Name
|
Paid
|
Unpaid
|
Paid
|
Unpaid
|
Total(2)
|
|
|
|
|
|
|
|
|
Christopher
T. Morris
|
$-
|
$25,000
|
$-
|
$20,000
|
$45,000
|
|
Ryan
A. Bailey
|
-
|
22,500
|
-
|
20,000
|
$42,500
|
|
Amitav
Misra
|
-
|
22,500
|
-
|
20,000
|
$42,500
|
|
|
|
|
|
|
$-
|
|
|
$-
|
$70,000
|
$-
|
$60,000
|
$130,000
|
|
(1)
|
At
December 31, 2019, Messrs. Morris, Bailey, Misra and Whitney had
total restricted awards of Common Stock outstanding of 75,026,
60,676, 66,767 and 9,683, respectively.
|
|
(2)
|
Board
of director fees payable at December 31, 2019 totaled $263,000,
$130,000 of which was earned during the twelve months ended
December 31, 2019 and $133,000 of which was earned in prior
periods.
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
84
|
Security Ownership and Related Stockholder Matters
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The
table below sets forth information at March 31, 2020 with respect
to persons or groups known to us to be the beneficial owners of
more than five percent (5%) of our common stock. Unless otherwise
indicated, each named party has sole voting and dispositive power
with respect to such shares.
|
Title of Class
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of
Class(1)
|
|
|
|
|
|
|
Common Stock
|
LEH
|
8,426,456
|
66.4%
|
|
|
801 Travis Street, Suite 2100
|
|
|
|
|
Houston, Texas 77002
|
|
|
(1)
Based upon
12,693,514 shares of Common Stock issued and outstanding at March
31, 2021.
Security Ownership of Management
The
table below sets forth information at March 31, 2021 with respect
to: (i) directors, (ii) executive officers and (iii) directors and
executive officers as a group beneficially owning our common stock.
Unless otherwise indicated, each of the following persons has sole
voting and dispositive power with respect to such
shares.
|
Title of Class
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial
Ownership
|
Percent of Class(1)
|
|
|
|
|
|
|
Common
Stock
|
Jonathan P. Carroll(2)
|
10,346,216
|
81.5%
|
|
Common
Stock
|
Christopher
T. Morris
|
120,054
|
*
|
|
Common
Stock
|
Amitav
Misra
|
111,795
|
*
|
|
Common
Stock
|
Ryan
A. Bailey
|
105,704
|
*
|
|
Common
Stock
|
Herbert
N. Whitney
|
9,683
|
*
|
|
|
|
|
|
|
Directors/Nominees
and Executive Officers as a Group (5 Persons)
|
10,693,452
|
84.2%
|
|
(1)
Based upon
12,693,514 shares of Common Stock issued and outstanding at March
31, 2021. At March 31, 2021, there were no options outstanding, no
options exercisable or no shares of common stock reserved for
issuance under the 2000 Stock Incentive Plan.
(2)
Includes 8,426,456
shares issued to LEH. Jonathan Carroll has an approximate 60%
ownership interest in LEH.
* Less
than 1%.
Section 16(a) Beneficial Ownership Reporting
Compliance
Section
16(a) of the Exchange Act requires our directors, executive
officers, and stockholders who own more than ten percent (10%) of
our Common Stock to file reports of stock ownership and changes in
ownership with the SEC and to furnish us with copies of all such
reports as filed. Based solely on a review of the copies of the
Section 16(a) reports furnished to us, we are unaware of any late
filings made during 2020 and 2019.
Equity Compensation Plan Information
None.
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
85
|
|
Related Party Transactions, Director Independence and Accounting
Fees
|
|
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Related-Party Transactions
See
“Part II, Item 8. Financial Statements and Supplementary
Data, Note (3)” for disclosures related to relationships we
have with Affiliates.
Director Independence
The
Board has affirmatively determined that each of its members, except
for Messrs. Carroll and Whitney, are independent and have no
material relationship with us (either directly or indirectly or as
a stockholder or officer of an organization that has a relationship
with us), and that all members of the Audit and Compensation
Committees are independent, pursuant to OTCQX and SEC rules. Mr.
Whitney currently serves as a consultant to an
Affiliate.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees
that we incurred related to UHY accounting fees and services for
the periods indicated were as follow:
|
|
Year Ended December 31,
|
|
|
|
2020
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Audit
fees
|
$200
|
$247
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
|
$200
|
$247
|
Audit
fees for 2020 and 2019 related to the audit of our consolidated
financial statements and the review of our quarterly reports that
are filed with the SEC. Each year the Audit Committee pre-approves
all audit services provided to us by our registered public
accounting firm. Such approval is in the form of an engagement
letter. Non-audit services must also be pre-approved by the Audit
Committee prior to engagement of such services.
Remainder
of Page Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
86
|
|
Exhibit List
|
|
|
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules
Following
is a list of documents filed as part of this report:
●
Consolidated
balance sheets, consolidated statements of operations, consolidated
statements of shareholders’ equity (deficit), and
consolidated statements of cash flows, which appear in “Part
II, Item 8.Financial Statements and Supplementary
Data”.
●
Exhibits as listed
in the exhibit index of this report, which is incorporated herein
by reference.
ITEM 16. FORM 10-K SUMMARY
Not
applicable.
Exhibits Index
|
No.
|
|
Description
|
|
|
Amended
and Restated Certificate of Incorporation of Blue Dolphin
(incorporated by reference to Exhibit 3.1 filed with Blue
Dolphin’s Form 8-K on June 2, 2009, Commission File No.
000-15905)
|
|
|
|
|
|
|
|
Amended
and Restated By-Laws of Blue Dolphin (incorporated by reference to
Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on December
26, 2007, Commission File No. 000-15905)
|
|
|
|
|
|
|
4.1
|
|
Specimen
Stock Certificate (incorporated by reference to exhibits filed with
Blue Dolphin’s Form 10-K on March 30, 1990, Commission File
No. 000-15905)
|
|
|
|
|
|
|
Form of
Promissory Note issued pursuant to the Note and Warrant Purchase
Agreement dated September 8, 2004 (incorporated by reference to
Exhibit 4.1 filed with Blue Dolphin’s Form 8-K on September
14, 2004, Commission File No. 000-15905)
|
|
|
|
|
|
|
|
Promissory
Note of Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin
dated July 31, 2009 (incorporated by reference to Exhibit 10.1
filed with Blue Dolphin’s Form 8-K on August 6, 2009,
Commission File No. 000-15905)
|
|
|
|
|
|
|
4.4
|
|
Description
of company securities.
|
|
|
|
|
|
|
Blue
Dolphin 2000 Stock Incentive Plan (incorporated by reference to
Appendix 1 filed with Blue Dolphin’s Proxy Statement on Form
DEF 14A on April 20, 2000, Commission File No.
000-15905)
|
|
|
|
|
|
|
|
First
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Appendix B filed with Blue
Dolphin’s Proxy Statement on Form DEF 14A on April 16, 2003,
Commission File No. 000-15905)
|
|
|
|
|
|
|
|
Second
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Appendix A filed with Blue
Dolphin’s Proxy Statement on Form DEF 14A on April 27, 2006,
Commission File No. 000-15905)
|
|
|
|
|
|
|
|
Fourth
Amendment to the Blue Dolphin 2000 Stock Incentive Plan
(incorporated by reference to Exhibit B filed with Blue
Dolphin’s Proxy Statement on Form DEFA on December 28, 2011,
Commission File No. 000-15905)
|
|
|
|
|
|
|
|
Management
Agreement by and between Lazarus Energy Holdings, LLC, Lazarus
Energy, LLC and Blue Dolphin effective as of February 15, 2012
(incorporated by reference to Exhibit 10.2 filed with Amendment No.
1 to Blue Dolphin’s Form 8-K on March 14, 2012, Commission
File No. 000-15905)
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Amendment
No. 1 to Management Agreement dated May 12, 2014 by and among
Lazarus Energy Holdings, LLC, Blue Dolphin and Lazarus Energy, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on May 16, 2014, Commission File No.
000-15905)
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
87
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Exhibit List
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Promissory
Note between Lazarus Energy LLC as maker and Notre Dame Investors
Inc. as Payee in the Principal Amount of $8,000,000 dated June 1,
2006 (incorporated by reference to Exhibit 10.6 filed with Blue
Dolphin’s Form 10-Q on March 31, 2012, Commission File No.
000-15905)
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Subordination
Agreement effective August 21, 2008 by Notre Dame Investors, Inc.
in favor of First International Bank (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on March 31,
2012, Commission File No. 000-15905)
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Intercreditor
and Subordination Agreement dated September 29, 2008 by and between
Notre Dame Investors, Inc., Richard Oberlin, Lazarus Energy LLC and
First International Bank (incorporated by reference to Exhibit 10.3
filed with Blue Dolphin’s Form 10-Q on March 31, 2012,
Commission File No. 000-15905)
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Intercreditor
and Subordination Agreement dated August 12, 2011 by and among John
H. Kissick, Lazarus Energy LLC and Milam Services, Inc.
(incorporated by reference to Exhibit 10.7 filed with Blue
Dolphin’s Form 10-Q on March 31, 2012, Commission File No.
000-15905)
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First
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of July 1, 2013 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q
on November 14, 2013, Commission File No. 000-15905)
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Second
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form
10-K on March 31, 2015, Commission File No. 000-15905)
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Second
Amendment to Promissory Note by and between Lazarus Energy, LLC and
John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form
10-K on March 31, 2015, Commission File No. 000-15905)
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Loan
Agreement among Sovereign Bank, Lazarus Energy, LLC and Jonathan
Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus Refining
& Marketing, LLC, and Lazarus Energy Holdings dated June 22,
2015 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
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Promissory
Note between Lazarus Energy, LLC and Sovereign Bank for the
principal sum of $25,000,000 dated June 22, 2015 (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
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Security
Agreement of Lazarus Energy, LLC in favor of Sovereign Bank dated
June 22, 2015 (incorporated by reference to Exhibit 10.3 filed with
Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
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Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Lazarus Energy,
LLC dated June 22, 2015 (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
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Security
Agreement of Lazarus Energy, LLC for the benefit of Lazarus
Refining & Marketing, LLC dated June 22, 2015 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
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Loan
and Security Agreement between Sovereign Bank and Lazarus Refining
& Marketing, LLC dated June 22, 2015 (incorporated by reference
to Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on June
26, 2015, Commission File No. 000-15905)
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Pledge
Agreement by Lazarus Refining & Marketing, LLC in favor of
Sovereign Bank dated June 22, 2015 (incorporated by reference to
Exhibit 10.8 filed with Blue Dolphin’s Form 8-K on June 26,
2015, Commission File No. 000-15905)
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Collateral
Assignment executed by Blue Dolphin Pipe Line Company for the
benefit of Sovereign Bank dated June 22, 2015 (incorporated by
reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
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Guaranty
Agreement by Jonathan Pitts Carroll, Sr., Blue Dolphin Energy
Company, Lazarus Energy, LLC and Sovereign Bank dated June 22, 2015
(incorporated by reference to Exhibit 10.10 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
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Blue Dolphin Energy
Company
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December 31,
2020
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Page
88
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Exhibit List
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Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Energy, LLC
dated June 22, 2015 (incorporated by reference to Exhibit 10.11
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
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Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Refining
& Marketing, LLC dated June 22, 2015 (incorporated by reference
to Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on June
26, 2015, Commission File No. 000-15905)
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Amendment
No. 2. to Operating Agreement by and between Lazarus Energy
Holdings, LLC, Blue Dolphin, and Lazarus Energy, LLC effective as
of June 1, 2015 (incorporated by reference to Exhibit 10.1 filed
with Blue Dolphin’s Form 10-Q on August 14, 2015, Commission
File No. 000-15905)
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Loan
Agreement among Sovereign Bank, Lazarus Refining & Marketing,
LLC, Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company,
Lazarus Energy, LLC, and Lazarus Energy Holdings dated December 4,
2015 (incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
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Promissory
Note between Lazarus Refining & Marketing, LLC and Sovereign
Bank for the principal sum of $10,000,000 dated December 4, 2015
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
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Security
Agreement of Lazarus Refining & Marketing, LLC in favor of
Sovereign Bank dated December 4, 2015 (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
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Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Lazarus Refining
& Marketing, LLC dated December 4, 2015 (incorporated by
reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
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Construction
Rider to Loan Agreement dated December 4, 2015 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
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Absolute
Assignment of Leases and Rents dated December 4, 2015 (incorporated
by reference to Exhibit 10.6 filed with Blue Dolphin’s Form
8-K on December 10, 2015, Commission File No.
000-15905)
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Indemnification
Agreement dated December 4, 2015 (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
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Pledge
Agreement by Lazarus Energy Holdings, LLC in favor of Sovereign
Bank dated December 4, 2015 (incorporated by reference to Exhibit
10.8 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
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Collateral
Assignment of Key Agreements dated December 4, 2015 (incorporated
by reference to Exhibit 10.9 filed with Blue Dolphin’s Form
8-K on December 10, 2015, Commission File No.
000-15905)
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First
Amendment to Lazarus Energy, LLC Loan Agreement and Loan Documents
dated December 4, 2015 (incorporated by reference to Exhibit 10.10
filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
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First
Amendment to Lazarus Energy, LLC Deed of Trust, Mortgage, Security
Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing dated December 4, 2015 (incorporated by reference to
Exhibit 10.11 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
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Guaranty
Fee Agreement between Jonathan P. Carroll and Lazarus Refining
& Marketing, LLC dated December 4, 2015 (incorporated by
reference to Exhibit 10.12 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
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Loan
and Security Agreement by and between Lazarus Energy Holdings, LLC
and Blue Dolphin Pipe Line Company dated August 15, 2016
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on August 19, 2016, Commission File No.
000-15905)
|
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Promissory
Note by and between Lazarus Energy Holdings, LLC and Blue Dolphin
Pipe Line Company dated August 15, 2016 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on August
19, 2016, Commission File No. 000-15905)
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
89
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|
Exhibit List
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|
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Deed of
Trust, Mortgage, Security Agreement, Assignment of Leases and
Rents, Financing Statement and Fixture Filing for Blue Dolphin Pipe
Line Company dated August 15, 2016 (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on August 19,
2016, Commission File No. 000-15905)
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|
|
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Collateral
Assignment of Master Easement Agreement by Blue Dolphin Pipe Line
Company for the benefit of Lazarus Energy Holdings, LLC dated
August 15, 2016 (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 8-K on August 19, 2016, Commission
File No. 000-15905)
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|
Promissory
Note dated March 31, 2017, of Blue Dolphin Energy Company in favor
of Lazarus Energy Holdings, LLC (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on May 15,
2017, Commission File No. 000-15905)
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Amended
and Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Ingleside Crude, LLC (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q
on May 15, 2017, Commission File No. 000-15905)
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Amended
and Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Capital, LLC (Jonathan Carroll)
(incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on May 15, 2017, Commission File No.
000-15905)
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Amended
and Restated Operating Agreement effective as of April 1, 2017,
between Lazarus Energy Holdings, LLC, Lazarus Energy, LLC, and Blue
Dolphin Energy Company (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on May 15, 2017,
Commission File No. 000-15905)
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Amended
and Restated Promissory Note dated June 30, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Energy Holdings, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on October 12, 2017, Commission File No.
000-15905)
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Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing, LLC (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
|
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Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing LLC (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
|
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|
Amended
and Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Energy, LLC (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on October 12, 2017,
Commission File No. 000-15905)
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Line of
Credit, Guarantee and Security Agreement among Pilot Travel Centers
LLC, Nixon Product Storage, LLC and the other loan parties hereto
dated as of May 3, 2019 (as amended and restated as of May 9, 209
and May 10, 2019) (incorporated by reference to Exhibit 10.2 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
|
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Pledge
Agreement between Pilot Travel Centers LLC and Blue Dolphin Energy
Company dated as of May 3, 2019 (incorporated by
reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q
on August 14, 2019, Commission File No.
000-15905)
|
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First
Amendment and Restatement Agreement among Pilot Travel Centers LLC,
Nixon Product Storage, LLC and the other loan parties hereto dated
as of May 9, 2019 (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
|
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|
10.53
|
|
Second
Amendment and Restatement Agreement among Pilot Travel Centers LLC,
Nixon Product Storage, LLC and the other loan parties hereto dated
as of May 10, 2019 (incorporated by reference to Exhibit 10.5 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
|
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10.54
|
|
Pledge
Agreement between Pilot Travel Centers LLC and Blue Dolphin Energy
Company dated as of May 3, 2019 (incorporated by
reference to Exhibit 10.6 filed with Blue Dolphin’s Form 10-Q
on August 14, 2019, Commission File No.
000-15905)
|
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10.55
|
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Notice
from Veritex Community Bank to Lazarus Energy, LLC, Blue Dolphin
Energy Company, Lazarus Refining & Marketing, LLC, Lazarus
Energy Holdings, LLC, Lazarus Marine Terminal I, LLC and Jonathan
Pitts Carroll, Sr. dated April 30, 2019 (incorporated by reference
to Exhibit 10.7 filed with Blue Dolphin’s Form 10-Q on August
14, 2019, Commission File No. 000-15905)
|
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
90
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|
Exhibit List
|
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|
10.56
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|
Amendment
No. 1 to Line of Credit, Guarantee and Security Agreement among
Pilot Travel Centers LLC, Nixon Product Storage, LLC and the other
loan parties hereto dated as of September 3, 2019 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q
on November 14, 2019, Commission File No. 000-15905)
|
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Code of
Ethics applicable to the Chairman, Chief Executive Officer and
Senior Financial Officer (incorporated by reference to Exhibit 14.1
filed with Blue Dolphin’s Form 10-KSB on March 25, 2005,
Commission File No. 000-15905)
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List of
Subsidiaries of Blue Dolphin
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Consent
of UHY LLP
|
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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
|
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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
|
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Amended
and Restated Audit Committee Charter as reviewed by the Board of
Directors of Blue Dolphin on November 15, 2018 (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on November 15, 2018, Commission File No.
000-15905)
|
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Compensation
Committee Charter as reviewed by the Board of Directors of Blue
Dolphin on November 15, 2018 (incorporated by reference to Appendix
B filed with Blue Dolphin’s Proxy Statement on Form DEF 14A
on November 15, 2018, Commission File No. 000-15905)
|
|
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
|
_______________
*
Management Compensation Plan
**
Filed herewith
Remainder of Page
Intentionally Left Blank
|
Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
91
|
|
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 report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
|
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BLUE DOLPHIN ENERGY COMPANY
|
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(Registrant)
|
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March
31, 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)
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
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Title
|
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Date
|
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/s/
JONATHAN P. CARROLL
|
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Jonathan
P. Carroll
|
|
Chairman
of the Board, Chief Executive Officer, President, Assistant
Treasurer and Secretary (Principal Executive Officer, Principal
Financial Officer, and Principal Accounting Officer)
|
|
March
31, 2021
|
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/s/
RYAN A. BAILEY
|
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Ryan A.
Bailey
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Director
|
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March
31, 2021
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/s/
AMITAV MISRA
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Amitav
Misra
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Director
|
|
March
31, 2021
|
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/s/
CHRISTOPHER T. MORRIS
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Christopher
T. Morris
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Director
|
|
March
31, 2021
|
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/s/
HERBERT N. WHITNEY
|
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Director
|
|
March
31, 2021
|
|
Herbert
N. Whitney
|
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Blue Dolphin Energy
Company
|
December 31,
2020
|
Page
92
|