UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K10-K/A
Amendment No. 1
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 20212022
or
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ___________ to ____________
Commission File No. 0-15905
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Delaware |
| 73-1268729 | |
(State or other jurisdiction of incorporation or organization) |
| (I.R.S. Employer Identification No.) | |
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801 Travis Street, Suite 2100, Houston, Texas |
| 77002 | |
(Address of principal executive offices) |
| (Zip Code) |
713-568-4725
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share |
(Title of class) |
Indicate by check mark 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.
Large accelerated filer | ☐ | Accelerated filer | ☐ |
Non-accelerated Filer | ☐ | Smaller reporting company | ☒ |
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| Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant 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. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. Yes ☐ No ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☒
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$2,919,215 as of June 30, 20212022 (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, 2021.2022.
Number of shares of common stock, par value $0.01 per share, outstanding at May 1, 2023: 14,921,968 |
Number of shares of common stock, par value $0.01 per share, outstanding at April 1, 2022: 12,693,514
Auditor Name | Auditor Location | PCAOB Number |
UHY, LLP | Sterling Heights, Michigan | 01195 |
EXPLANATORY NOTE |
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Glossary of Terms
Throughout thisThis Amendment No. 1 on Form 10-K/A (the “Amendment”) amends the Annual Report on Form 10-K (the “2022 Form 10-K”) of Blue Dolphin Energy Company (“Blue Dolphin”) for the fiscal year ended December 31, 2022 (the “2022 Fiscal Year”), as filed with the Securities and Exchange Commission (the “SEC”) on April 3, 2023. We are filing this Amendment to amend Part III of the 2022 Form 10-K to include the information required by and not included in Part III of the 2022 Form 10-K because we have useddo not intend to file our definitive proxy statement within 120 days of the following terms:
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Important Information Regarding Forward-Looking Statementsend of the 2022 Fiscal Year.
This report (including information incorporated by reference) contains “forward-looking statements” withinIn addition, this Amendment updates the meaningExhibit Index in Item 15 of Section 27APart IV of the Securities Act, and2022 Form 10-K to file as an exhibit a currently dated certification as required under Section 21E302 of the ExchangeSarbanes-Oxley Act including, butof 2002. This certification is attached as Exhibit 31.1. Because no financial statements are contained within this Amendment, we are not limitedfiling a currently dated certification pursuant 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 useSection 906 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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See also the risk factors described in greater detail under “Part I, Item 1A. Risk Factors”Sarbanes-Oxley Act of this report.2002.
All forward-looking statements included in this report are based on information availableExcept as described above, no other changes have been made to us onthe 2022 Form 10-K. The 2022 Form 10-K continues to speak as of the date of the 2022 Form 10-K, and we have not updated the disclosures contained therein to reflect any events which occurred at a date subsequent to the filing of the 2022 Form 10-K other than as expressly indicated in this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.Amendment.
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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.
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PART IIII
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, 2021. 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, 2020.
Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see “Part I. Item 1. Business—Refinery Operations,—Tolling and Terminaling Operations, and —Inactive Operations” and “Part I. Item 2. Properties” in this report.
AffiliatesITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
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. In addition, 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 ConcernDirectors
Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical 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 this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
Defaults Under Secured Loan Agreements
As discussed in more detail elsewhere in this Annual Report, we are currently in default under certain of our secured loan agreements with third partiesThis table reflects: (i) each Director’s name, age, principal occupation, and related parties.directorships during the past five (5) years and (ii) their relevant knowledge and experience that led to their service on the Board:
Third-Party Defaults
Principal Occupation and Directorships During Past 5 Years |
Knowledge and |
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Blue Dolphin Energy Company Chairman of the Board (since 2014) Chief Executive Officer, President, Assistant Treasurer and Secretary (since 2012) Lazarus Energy Holdings, LLC (“LEH”) Manager (since 2006) and Majority Owner Together, LEH and Jonathan Carroll own approximately 83% of our outstanding Common Stock as of the Record Date. Mr. Carroll has served on Blue Dolphin’s Board since 2014. He is currently Chairman of the Board. He previously served on the Board of Trustees of the Salient Fund Group from 2004 to 2022, and served on the compliance, audit, and nominating committees of several of Salient’s private and public closed-end and mutual funds at various times within that period. Mr. Carroll also 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 |
Blue Dolphin Energy Company |
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Name, Age Principal Occupation and Directorships During Past 5 Years | Knowledge and Experience | ||
Ryan A. Bailey, 47 Paradigm Institutional Investments Chief Investment Officer and Managing Partner (April 2023 to Present) Investment Office Resources Co-CIO and Partner (June 2022 to March 2023) Carbonado Partners Strategic Advisor (since June 2022 to Present) Managing Partner (September 2020 to June 2022) 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; serves as Chairman of the Texas Alternative Investment Association; serves as member of the board of director, Stream Foundation, Bridgeway Capital Management, and Portfolios with Purpose. Mr. Bailey is also a member of the investment committees of Texas Employee Retirement System, American Heart Association, Dallas Police and Fire, and Dallas Parkland Hospital. | Mr. Bailey earned a Bachelor of Arts 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. | ||
Amitav Misra, 45 HighRadius Corporation Vice President of Experiential Marketing and Partnerships (since December 2022) Vice President of Global Marketing, Mid-Market (July 2022 to December 2022) Vice President of Treasury Line of Business(December 2020 to July 2022) Vice President of Treasury Marketing (July 2020 to July 2022) Arundo Analytics, Inc. General Manager Americas (2018 to 2020) Vice President of Marketing (2017 to 2020) 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 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, 61 MPact Partners LLC President (2011 to Present) Bonaventure Realty Group Executive Vice President (2020 to 2022) Impact Partners LLC President (2017 to 2020) 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 in Economics from Stanford University and a Masters 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. | ||
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We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their 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. Management maintains ongoing dialogue with lenders regarding defaults and potential restructuring and refinance opportunities.
Related-Party Defaults
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Substantial Current Debt
Excluding accrued interest, we had current debt of $63.0 million and $57.7 million, respectively, as of December 31, 2021 and 2020. Current debt consists of bank debt, investor debt, and related party debt. Although the line of credit payable to Pilot fell within current debt during 2021, the Pilot debt was repaid in October 2021. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2021 and 2020.
Margin Volatility
Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
Since the beginning of 2020, the COVID-19 pandemic disrupted economies around the world, including the oil and gas industry in which we operate. The rapid spread of the virus led to the implementation of various responses, including federal, state, and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health and safety measures. Actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets, which impacted our operational and financial performance. In particular, we experienced net losses due to unfavorable margins per bbl and significantly lower sales volume due to significant refinery downtime. Global oil prices and refined product demand recovered somewhat in 2021 compared to 2020 as COVID-19 cases stabilized, mortality rates decreased, and availability and inoculation rates of vaccines increased. However, recovery of jet fuel demand lagged that of other refined products as airline travel restrictions and consumer hesitancy to fly during the pandemic continued. Despite the uptick in market conditions during the second half of 2021, overall, we experienced operating and net losses due to unfavorable margins and lower sales volume, which affected our liquidity. Cash constraints adversely impacted the frequency of crude oil acquisition, debt payments, and abandonment of pipeline and facilities assets.
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The extent to which the continued COVID-19 pandemic will impact our operations depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning variants, actions taken to contain the spread of COVID-19 and treat its impact, and the availability and acceptance of vaccines to mitigate such spread, among others.
In February 2022, Russia invaded neighboring Ukraine. The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations.
The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. The COVID-19 pandemic continues to evolve, and the extent to which the pandemic may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.
We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if third parties exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
Downstream Operations
The refinery operations business segment consists of the following assets and operations:
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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. |
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Crude OilExecutive Officers
Our sole executive officer is Jonathan Carroll, who serves as President and Condensate SupplyChief Executive Officer.
Audit Committee. Operation
The Audit Committee consists of Messrs. Morris, Bailey, and Misra, with Mr. Morris serving as Chairman. During 2022, the Audit Committee met four (4) times. The Board has affirmatively determined that all members of the Nixon refinery dependsAudit 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 abilitycorporate website (http://www.blue-dolphin-energy.com).
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 purchase adequate amountsenable 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 crude oilthe Audit Committee. Our code of ethics and condensate. We havecode 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.
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 the 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 long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires whenreview of the copies of the Section 16(a) reports furnished to us, we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expirationare unaware of any renewal term. As of December 31, 2021, we received 9.0 million bbls, or 36%, of the contracted total volume under the Crude Supply Agreement.late filings made during 2022.
PilotITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Policy and Tartan store jet fuelProcedures
Lazarus Energy Holdings, LLC (“LEH”) operates and crude oil, respectively, at the Nixon facility under two terminal services agreements: (i) a Terminal Servicesmanages all Blue Dolphin assets pursuant to an Amended and Restated Operating Agreement dated as of May 2019 (covering Tank Nos. 67, 71, 72, 73, 77,April 1, 2020 (the “Amended and 78) for jet fuelRestated Operating Agreement) between LEH and (ii) a TerminalBlue Dolphin, Lazarus Energy, LLC (“LE”), Lazarus Refining & Marketing, LLC (“LRM”), Nixon Product Storage, LLC (“NPS”), Blue Dolphin Pipe Line Company (“BDPL”), Blue Dolphin Petroleum Company (“BDPC”), and Blue Dolphin Services Agreement dated as of June 1, 2019 (covering Tank Nos. 1 and 56) for crude oil. Under both terminal services agreements, Pilot and Tartan store product at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreements renew on a one-year evergreen basis. Either party may terminate the terminal services agreements by providing the other party 60 days prior written notice. The terminal services agreements will automatically terminate upon expiration or termination of the Crude Supply Agreement.
From June 2020 to October 2021, Pilot applied payments owed to NPS under the above referenced terminal services agreements against NPS’ payment obligations to PilotCo. (“BDSC”). Services under the Amended Pilot Lineand Restated Operating Agreement include personnel serving in a variety of Credit. For the twelve-month periods ended December 31, 2021capacities, including, but not limited to corporate executives. All personnel work for and 2020, the tank lease payment setoff totaled $1.9 million and $1.3 million, respectively.are paid by LEH.
Blue Dolphin Energy Company |
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Compensation for Named Executives
Jonathan Carroll is our only executive officer. As noted above under “Executive Compensation Policy and Procedures,” Mr. Carroll’s remuneration is provided by LEH under the Amended and Restated Operating Agreement.We do not provide any of his remuneration, but rather pay a management fee to LEH under the Amended and Restated Operating Agreement. During the fiscal year ended December 31, 2022, we paid $0.7 million to LEH under this agreement. Also, as disclosed under “Related Party Transactions – Affiliate Agreements,” Mr. Carroll receives certain fees under various other affiliate agreements.
Summary Compensation Table
Name and Principal Position |
| Salary | Total | |||||
(in thousands) | ||||||||
Jonathan P. Carroll | 2022 | $ | - | $ | - | |||
Chief Executive Officer and President | 2021 | - | - | |||||
(Principal Executive Officer, Principal | ||||||||
Financial Officer, and Principal | ||||||||
Accounting Officer) |
Compensation Risk Assessment
LEH’s approach to compensation practices and policies applicable for non-executive personnel throughout our organization is consistent with the base pay market median for each position. LEH believes its practices and policies in this regard are not reasonably likely to have a material 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 directors.
Compensation for Non-Employee Directors
For the fiscal year ended December 31, 2022, non-employee, independent directors received compensation in Common Stock and cash for their service on the Board in the amount of $40,000, as follow:
Fair Market Value | Period Services Rendered | Payment Method | ||
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$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 |
The amountFor the first and third quarters, the number of interest NPS incurred undershares of Common Stock issued was determined by the Amended Pilot Lineclosing price of Credit totaled $0.7 million and $1.4 million, respectively, forBlue Dolphin’s Common Stock on the twelve months ended December 31, 2021 and 2020. See “Part II, Item 8. Financial Statements and Supplementary Data – Note (11)” and “Note (17)” to our consolidated financial statements for more information related to the Amended Pilot Line of Credit.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital deficits. If Pilot or Tartan terminate the Crude Supply Agreement or terminal services agreements, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the twelve-month periods ended December 31, 2021 and 2020, the refinery experienced 23 days and 42 days of downtime, respectively. During the same time periods, 13 days and 20 days, respectively, related to lack of crude associated with cash constraints.
Products and Markets. Our market is the Gulf Coast region of the U.S., which the EIA represents as Petroleum Administration for Defense District 3 (PADD 3). We sell our products primarilylast trading day in the U.S. within PADD 3. We also occasionally sell refined products to customers that export to Mexico.
respective quarterly period and such closing price was the cost basis for such issuance. The Nixon refinery’s product slate is moderately adjusted based on current market demand. We produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. We sell our jet fuel to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring upon the earliest to occurshares of March 31, 2023, 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. Nearly all of our contracts require customer prepayments and the sale of fixed or minimum quantities of finished and intermediate petroleum products. Many of these arrangementsCommon Stock are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative commodity prices on future refined product sales.resale restrictions applicable to restricted securities and securities held by affiliates under federal securities laws.
Competition.MostNon-employee, independent directors also earned additional compensation for serving on the Audit Committee. The chairman of our competitors are significantly larger than us. They have greater access to resources that allow them to compete on a nationalthe Audit Committee earned an additional $2,500 in cash in each of the second and international level. In addition, they can respond more quickly to market fluctuations. We compete primarily based on cost. Due tofourth quarters of the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate due to shifting commodity prices, market demand, and operating costs.
Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of toxic, reactive, flammable, or explosive chemicals. Most of our storage tanks are equipped with emissions monitoring devices. We also have response and control plans in place for spill prevention and emergencies.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore, refurbish, or replace refinery equipment. Occasionally, unplanned shutdowns occur. Unplanned downtime can occuryear, for a varietytotal of reasons; however, common reasons$5,000 annually. Members of the Audit Committee earned an additional $1,250 in cash in each of the second and fourth quarters of the year, for unplanned downtime include repair/replacementa total of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages. The Nixon refinery$2,500 annually. Non-employee, independent directors serving on the Compensation Committee did not incur significant damage dueearn any additional compensation for their service as directors. Non-employee, independent directors were reimbursed for reasonable out-of-pocket expenses related to Winter Storm Uri in the first quarter of 2021. However, the facility lost external power for 10 days due to the storm.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment obligations.
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Blue Dolphin Energy Company |
| │Page 5 |
Accrued and Unpaid Non-Employee, Independent Director Compensation
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| Fiscal Year Ended December 31, 2022 |
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| Cash |
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| Common Stock(1)(2)(3) |
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Name |
| Paid |
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| Unpaid |
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| Paid |
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| Unpaid |
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| Total |
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Christopher T. Morris |
| $ | - |
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| $ | 25,000 |
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| $ | 20,000 |
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| $ | - |
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| $ | 45,000 |
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Ryan A. Bailey |
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| - |
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| 22,500 |
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| 20,000 |
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| - |
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| $ | 42,500 |
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Amitav Misra |
|
| - |
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| 22,500 |
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| 20,000 |
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|
| - |
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| $ | 42,500 |
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| $ | - |
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| $ | 70,000 |
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| $ | 60,000 |
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| $ | - |
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| $ | 130,000 |
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| Fiscal Year Ended December 31, 2021 |
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| Cash |
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| Common Stock(1)(2)(4) |
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Name |
| Paid |
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| Unpaid |
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| Paid |
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| Unpaid |
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| Total |
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Christopher T. Morris |
| $ | - |
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| $ | 25,000 |
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| $ | - |
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| $ | 20,000 |
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| $ | 45,000 |
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Ryan A. Bailey |
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| - |
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| 22,500 |
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|
| - |
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| 20,000 |
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| $ | 42,500 |
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Amitav Misra |
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| - |
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| 22,500 |
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| - |
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| 20,000 |
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| $ | 42,500 |
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| $ | - |
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| $ | 70,000 |
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| $ | - |
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| $ | 60,000 |
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| $ | 130,000 |
|
| On October 27, 2022, an aggregate of 24,591 restricted shares of Common Stock were issued to Messrs. Morris, Bailey, and Misra. No loss or gain was recorded related to the share issuance. The issuance represented payment for services rendered to the Board for the three-month period ended September 30, 2022. At September 30, 2022, the grant date market value cost basis was $1.22 per share. The cost basis for the period was determined by the closing price of Blue Dolphin’s common stock on the last trading day in the period in which services were rendered. |
(2) | On May 12, 2022, an aggregate of 252,447 restricted shares of Common Stock were issued to Messrs. Morris, Bailey, and Misra. We recorded a loss of $11,272 related to the share issuance. The issuance represented catchup payments for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. At September 30, 2020, the grant date market value cost basis was $0.40 per share. At March 31, 2021, the grant date market value cost basis was $0.56 per share. At September 30, 2021, the grant date market value cost basis was $0.33 per share. At March 31, 2022, the grant date market value cost basis was $0.91 per share. The cost basis for each period was determined by the closing price of Blue Dolphin’s common stock on the last trading day in the period in which services were rendered. |
(3) | At December 31, 2022, Messrs. Morris, Bailey, Misra, and Whitney had total restricted awards of Common Stock outstanding of 212,400, 198,050, 204,141 and 9,683, respectively. |
(4) | At December 31, 2021, Messrs. Morris, Bailey, Misra, and Whitney had total restricted awards of Common Stock outstanding of 120,054, 105,704, 111,795 and 9,683, respectively. |
Midstream OperationsPay Versus Performance
The tollingfollowing disclosure is required by Securities and terminaling business segment consistsExchange Commission (“SEC”) rules but is not reflective of how we or the following assetsCompensation Committee determine executive compensation for our sole executive officer, Jonathan Carroll. As noted above under “Executive Compensation Policy and operations:Procedures,” Mr. Carroll’s remuneration is provided by LEH under the Amended and Restated Operating Agreement. As a result, there is no applicable information to be provided pursuant to this table.
| Summary Compensation Table Total for PEO | Compensation Actually Paid to PEO | Average Summary Compensation Table Total for Non-PEO NEOs | Average Compensation Actually Paid to non-PEO NEOs | Value of Initial Fixed $100 Investment Based on Total Shareholder Return | Net Income |
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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 midstream operations are conducted in a manner materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state and local agencies provide regulatory oversight. We have the appropriate emergency response and spill prevention and control plans in place.
Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in ‘corporate and other.’ 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, 2021 and 2020.
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2022 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||||
2021 | $ | - | $ | - | $ | - | $ | - | $ | - | $ | - |
Pipeline and Facilities SafetyEquity Compensation Plan Information.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance. They are also subject to safety requirements under PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention, and other programs to respond to emergencies related to these assets.
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, business interruption, and pollution liability coverages 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. Pollution liability provides coverage due to named perils for claims involving pollutants where the discharge is sudden and accidental and first commences at a specific day and time during the policy period. The pollution policy is subject to a retention and deductible and contains discovery requirements, reporting requirements, exclusions, definitions, conditions, and limitations that could apply to a particular pollution claim. As a result, there can be no assurance such claim will be adequately insured for all potential damages.
Additional coverage includes umbrella, excess liability, workers’ compensation, directors’ and officers’ liability, environmental liability, and other business risks. These coverages are supported by safety and other risk management programs. 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 or cancellation of policies could have a material adverse effect on our business, financial condition, and results of operations.None.
Blue Dolphin Energy Company |
| │Page 6 |
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Intellectual PropertyITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
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
We make certain filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments and exhibits to those reports, which are available free of charge through the SEC’s website (http://www.sec.gov) or through our website (http://www.blue-dolphin-energy.com), as soon as reasonably practicable after they are filed with the SEC. We have also posted our Code of Business Ethics, board committee charters and other corporate governance documents on our website. Our website and the information contained on that site, or connected to that site, are not incorporated by reference into this report.
Human Capital Management
General. Our operations and activities are managed by an Affiliate. We do not have any employees. As of December 31, 2021, 89 employees of the Affiliate provided support for our operations pursuant to the Amended and Restated Operating Agreement. None of these employees were covered by collective bargaining agreements. Under the Amended and Restated Operating Agreement, the Affiliate operates and manages all of our properties.
Safety, Health, and WellnessSecurity Ownership of Certain Beneficial Owners. We must comply
This table shows information with a numberrespect to persons or groups known to us to be the beneficial owners of federal and state laws and regulations related to safety that protect the health and safetymore than five percent (5%) of our workforce. We operate a safetyCommon Stock as of May 1, 2023. Unless otherwise indicated, each named party has sole voting and health programdispositive power with participation by personnel at all levels of the organization. Despite our effortsrespect to achieve excellence in our safety and health performance, there can be no assurances that there will not be accidents resulting in injuries or even fatalities.such shares.
Title of Class |
| Name of Beneficial Owner |
| Amount and Nature of Beneficial Ownership |
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| Percent of Class(1) |
| ||
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Common Stock |
| Lazarus Energy Holdings, LLC |
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| 8,426,456 |
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| 56.5 | % |
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| 801 Travis Street, Suite 2100 |
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| Houston, Texas 77002 |
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We have developed
(1) Based upon 14,921,968 shares of Common Stock issued and implemented a COVID-19 mitigation plan based on CDC and state health guidelines. This plan includes the implementationoutstanding as of health-screening protocols, elevated cleaning measures, reduced shared spaces, the purchase of masks for all personnel for use when social-distancing measures are not possible, and providing work-from-home support to facilitate remote working. Although vaccines have not been mandated, we have actively communicated updates to our workforce regarding vaccine availability and have encouraged eligible personnel to get vaccinated.May 1, 2023.
Inclusion and DiversitySecurity Ownership of Management. We are evaluating measures to put in place that track our progress with regard to diversity and inclusion.
Government Regulations
General. Our operations are subject to extensiveThis table shows information as of May 1, 2023 with respect to: (i) directors, (ii) executive officers and frequently changing federal, state,(iii) directors and local laws, regulations, permits, and ordinances relating to the protectionexecutive officers as a group beneficially owning our Common Stock. Unless otherwise indicated, each of the environment. Among other things, these lawsfollowing persons has sole voting 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. Compliancedispositive power with existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costsrespect 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.shares.
Title of Class |
| Name of Beneficial Owner |
| Amount and Nature of Beneficial Ownership |
|
| Percent of Class(1) |
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Common Stock |
| Jonathan P. Carroll(2) |
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| 12,357,754 |
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| 82.8 | % |
Common Stock |
| Christopher T. Morris / Mpact Partners, LLC |
|
| 212,400 |
|
| * |
| |
Common Stock |
| Amitav Misra |
|
| 204,141 |
|
| * |
| |
Common Stock |
| Ryan A. Bailey |
|
| 198,050 |
|
| * |
| |
Common Stock |
| Herbert N. Whitney |
|
| 9,683 |
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|
| --- |
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Directors/Nominees and Executive Officers as a Group (5 Persons) |
|
|
| 12,982,028 |
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| 87.0 | % |
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, which result in emission increases above threshold limits. 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 are not under 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.
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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. 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.
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.
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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, 2021, we maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to the BOEM. At December 31, 2021 and 2020, BDPL maintained $3.5 million and $2.4 million, respectively, in AROs related to abandonment of these assets. See “Part I, Item 1A. Risk Factors” for additional disclosures related to idle iron decommissioning requirements for our pipelines and facilities assets and related risks.
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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.
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Twelve Months Ended |
| Number Significant Customers |
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| % Total Revenue from Operations |
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| Portion of Accounts Receivable at December 31, |
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December 31, 2021 |
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| 3 |
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| 71.9 | % |
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December 31, 2020 |
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| 70.8 | % |
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Blue Dolphin Energy Company |
| │Page 7 |
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ITEM 1B. UNRESOLVED STAFF COMMENTS13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
None.Related-Party Transactions
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 refinery operations, tolling and terminaling, and inactive operations discussions in “Part I, Item 1. Business”.
BDSC Office Lease Default
In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement to cure BDSC’s office lease default. Under the terms of a fourth amendment to the office lease, Building Lessor agreed to defer BDSC’s past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning in June 2021, and continuing through lease expiration The Past Due Obligations are subject to an annual percentage rate of 4.50%. BDSC’s monthly base rent including the prorated portion of the Past Due Obligations is $0.02 million.
Building Lessor notified BDSC in an October 11, 2021 letter of a new default under the office lease due to non-payment of rent. As of the filing date of this report, BDSC was in default related to required monthly base rent including Past Due Obligations from April 2021 to March 2022. Default under the office lease permits Building Lessor to declare the amounts owed under the office lease immediately due and payable, exercise its rights concerning collateral securing obligors’ obligations under the office lease, including property placed in or upon the leased premises, and exercise any other rights and remedies available. Although BDSC intends to cure the lease default, we can provide no assurance that our efforts will be successful.
See “Part I, Item 1. Business” for additional disclosures related to our properties, leases, decommissioning obligations, and assets pledged as collateral.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved 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 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. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 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. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
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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 did not record a liability on our consolidated balance sheets as of December 31, 2021 and 2020. At both December 31, 2021 and 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January 29, 2020 to March 2, 2020. The proposed agreed order assesses an administrative penalty of approximately $0.4 million and identifies actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. However, we recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheet as of December 31, 2021.
Pilot Dispute Related to Set-Off Payments. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments NPS believes Pilot misapplied as part of the Amended Pilot Line of Credit setoff. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. 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. If third parties 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.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute 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.
Resolved Matters
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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PART II
ITEM 5. MARKET FOR REGISTRANT’S 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.
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2021 |
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| 2020 |
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December 31 |
| $ | 0.40 |
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| $ | 0.22 |
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| December 31 |
| $ | 0.39 |
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| $ | 0.11 |
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September 30 |
| $ | 0.44 |
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| $ | 0.22 |
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| September 30 |
| $ | 0.51 |
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| $ | 0.25 |
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June 30 |
| $ | 0.57 |
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| $ | 0.33 |
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| June 30 |
| $ | 0.53 |
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| $ | 0.35 |
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March 31 |
| $ | 0.63 |
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| $ | 0.23 |
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| March 31 |
| $ | 0.55 |
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| $ | 0.35 |
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At both December 31, 2021 and 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, 2022, we had approximately 270 record holders and 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, 2021 and 2020 that were not registered under the Securities Act:
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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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ITEM 6. SELECTED FINANCIAL DATA
[Reserved]
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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). 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.
General Trends and Outlook
We anticipate that our business will continue to be affected by the following key factors. Our expectations are based on assumptions made by us and information currently available to us. To the extent our underlying assumptions about, or interpretations of, available information prove to be incorrect, our actual results may vary materially from our expected results.
COVID-19 Pandemic. In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and the U.S. economy began to experience pronounced adverse effects as a result of the global outbreak. COVID-19 has disrupted the U.S. economy since the first quarter of 2020 and immediately resulted in a decline in demand for our products. We began to see improvement in demand for our refined products beginning late in the second half of 2020, which continued through 2021. Despite worldwide advances in containment of the virus and incremental economic market recovery throughout 2021, COVID-19 continues to be dynamic, and near-term economic and other challenges remain. The COVID-19 pandemic continues to evolve, and the extent to which the pandemic may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Under earlier state and federal mandates that regulated business closures, our business was deemed an essential business and, as such, remained open. Although uncertainties exist with respect to the future impact of the pandemic, we expect to continue operating with minimal disruptions. 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. Personnel safety continues to be prioritized through cleaning procedures, social distancing guidelines, personal protection equipment, outside visitor limitations, and remote working for all corporate personnel.
Commodity Prices. In February 2022, Russia invaded neighboring Ukraine. The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations. These events have and continue to impact commodity prices, which could have a material effect on our earnings, cash flows, and financial condition. In the short-term, commodity price fluctuations are highly uncertain. Actual price outcomes will be dependent on the degree to which existing sanctions imposed on Russia, any potential future sanctions, and independent corporate actions affect Russia’s oil production or the sale of Russia’s oil in the global market. In addition, the degree to which other oil producers respond to current oil prices, as well as the effects macroeconomic developments might have on global oil demand, will be important for oil price formation in the coming months.
Liquidity and Access to Capital Markets. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. During the twelve months ended December 31, 2021 and 2020, we successfully secured $10.5 million and $0.3 million, respectively, in working capital through CARES Act loans. In addition, subsequent to the period covered by this report, we secured an additional $1.5 million in working capital through modification of the existing BDEC Term Loan Due 2051. There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing operations.
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Changes in Regulations. Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state, tribal, local, and other laws and regulations that are becoming more numerous, more stringent, and more complex. These laws and regulations include, among other things, permitting requirements, environmental protection measures such as limitations on methane and other GHG emissions, and renewable fuels standards. The number and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations, reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.
Business Strategy and Accomplishments
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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Optimize Existing Asset Base. Management is committed to maintaining the safe and reliable operation of Nixon facility. We successfully balanced protecting personnel from exposure to COVID-19 with ensuring adequate staffing levels to operate the plant. Although the refinery experienced 42 days downtime during the twelve-month period ended 2020 due to the impact of COVID-19, management efficiently used more than half of the downtime (22 days) to safely complete a planned maintenance turnaround and perform repairs and maintenance on boilers, heaters, and an exchanger. Despite the continued impact of COVID-19, downtime during the twelve-month period ended 2021 significantly decreased to 23 days. Of the 23 days of downtime in 2021, 10 days related to a power failure due to Winter Storm Uri.
Improve Operational Efficiencies. Given the impact of COVID-19, management focused on optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. These austerity measures, combined with maintenance and repair activities, gave rise to improved refinery throughput, production, and sales during the twelve-months ended December 31, 2021 compared to 2020.
Seize Market Opportunities. We intend to be a proactive participant in the transition to a lower carbon energy future. In March 2021, we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green energy growth. During 2021, we explored several potential commercial partnerships and will continue these efforts throughout 2022. While we believe our renewable energy strategy successfully aligns with our long-term growth strategy and financial and operational priorities, they are aspirational and may change, and there is no guarantee that we will achieve our objectives.
Successful execution of our business strategy depends on several factors. These factors include (i) having adequate working capital to meet operational needs and regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure investors that our plans will be successful.
We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities outside of renewable energy-related projects in the foreseeable future. Management 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, substantial current debt, margin volatility, historical net losses and working capital deficits. A ‘going concern’ opinion could impair our ability to finance our operations by selling equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern depends on sustained positive operating margins and working capital to sustain operations, purchase of crude oil and condensate, and payments on long-term debt. If we cannot achieve these goals, we may have to cease operating or seek bankruptcy protection.
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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 commodity 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. When the spread between these commodity prices decreases, our margins are negatively affected. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
Since the beginning of 2020, the COVID-19 pandemic disrupted economies around the world, including the oil and gas industry in which we operate. The rapid spread of the virus led to the implementation of various responses, including federal, state, and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health and safety measures. Actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets, which impacted our operational and financial performance. In particular, we experienced net losses due to unfavorable margins per bbl and significantly lower sales volume due to significant refinery downtime. Global oil prices and refined product demand recovered somewhat in 2021 compared to 2020 as COVID-19 cases stabilized, mortality rates decreased, and availability and inoculation rates of vaccines increased. However, recovery of jet fuel demand lagged that of other refined products as airline travel restrictions and consumer hesitancy to fly during the pandemic continued. Despite the uptick in market conditions during the second half of 2021, overall, we experienced operating and net losses due to unfavorable margins and lower sales volume, which affected our liquidity. Cash constraints adversely impacted the frequency of crude oil acquisition, debt payments, and abandonment of pipeline and facilities assets.
The extent to which the continued COVID-19 pandemic will impact our operations depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning variants, actions taken to contain the spread of COVID-19 and treat its impact, and the availability and acceptance of vaccines to mitigate such spread, among others.
In February 2022, Russia invaded neighboring Ukraine. The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations.
The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
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.
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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 the 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.
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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 operating results of refinery operations and tolling and terminaling business segments.
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Refinery Operations. The 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.
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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.
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Non-GAAP Reconciliations
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| Twelve Months Ended December 31, |
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| 2021 |
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| 2020 |
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| 2021 |
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| Refinery Operations | Tolling and Terminaling | Corporate and Other | Total |
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Segment contribution margin (deficit) |
| $ | (3,436 | ) |
| $ | (6,984 | ) |
| $ | 4,349 |
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| $ | 4,932 |
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| $ | (197 | ) |
| $ | (169 | ) |
| $ | 716 |
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| $ | (2,221 | ) |
General and administrative expenses(1) |
|
| (1,549 | ) |
|
| (1,257 | ) |
|
| (343 | ) |
|
| (307 | ) |
|
| (2,742 | ) |
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| (1,381 | ) |
| $ | (4,634 | ) |
| $ | (2,945 | ) |
Depreciation and amortization |
|
| (1,214 | ) |
|
| (1,186 | ) |
|
| (1,362 | ) |
|
| (1,296 | ) |
|
| (204 | ) |
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| (204 | ) |
| $ | (2,780 | ) |
| $ | (2,686 | ) |
Interest and other non-operating income (expenses), net |
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| (2,779 | ) |
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| (2,929 | ) |
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| (1,649 | ) |
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| (2,546 | ) |
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| (1,715 | ) |
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| (1,116 | ) |
| $ | (6,143 | ) |
| $ | (6,591 | ) |
Income (loss) before income taxes |
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| (8,978 | ) |
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| (12,356 | ) |
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| 995 |
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| 783 |
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| (4,858 | ) |
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| (2,870 | ) |
|
| (12,841 | ) |
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| (14,443 | ) |
Income tax expense |
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| - |
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| - |
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| - |
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| - |
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| - |
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| (15 | ) |
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| - |
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| (15 | ) |
Income (loss) before income taxes |
| $ | (8,978 | ) |
| $ | (12,356 | ) |
| $ | 995 |
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| $ | 783 |
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| $ | (4,858 | ) |
| $ | (2,885 | ) |
| $ | (12,841 | ) |
| $ | (14,458 | ) |
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Capital Resources and Liquidity
We currently rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity needs. Due to defaults under our secured loan agreements, substantial current debt, margin volatility, historic net losses and working capital deficits, we have inadequate liquidity to sustain operations. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and expanding the Nixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.
We remain focused on maintaining the safe and reliable operation of Nixon facility and conserving cash. The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Management believes it has made significant progress on bolstering liquidity through efforts including securing additional financing, aggressively evaluating all discretionary spending, non-essential costs for near-term cost reductions; and where possible, modifying vendor and contractor payment terms. During the twelve months ended December 31, 2021 and 2020, we successfully secured $10.5 million and $0.3 million, respectively, in working capital through CARES Act loans. In addition, subsequent to the period covered by this report, we secured an additional $1.5 million in working capital through modification of the existing BDEC Term Loan Due 2051. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt.
There can be no assurance that we will be able to raise additional capital on acceptable terms, or at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seek bankruptcy protection, or cease operating.
Working Capital
We had $78.5 million and $72.3 million in working capital deficits at December 31, 2021 and 2020, respectively. Excluding the current portion of long-term debt, we had $15.5 million and $22.6 million in working capital deficits at December 31, 2021 and 2020, respectively. Cash and cash equivalents totaled $0.01 and $0.5 million at December 31, 2021 and 2020, respectively. Restricted cash (current portion) totaled $0.05 million at both December 31, 2021 and 2020. Restricted cash, noncurrent totaled $0 and $0.5 million at December 31, 2021 and 2020, respectively.
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Sources and Use of Cash
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| December 31, |
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Cash Flows Provided By (Used In): |
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Operating activities |
| $ | (6,056 | ) |
| $ | (3,901 | ) |
Investing activities |
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| - |
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| (1,085 | ) |
Financing activities |
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| 5,002 |
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| 5,429 |
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Increase (Decrease) in Cash and Cash Equivalents |
| $ | (1,054 | ) |
| $ | 443 |
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Cash Flow 2021 Compared to 2020
We had a cash flow deficit from operations of $6.1 million for YE 2021 compared to a cash flow deficit of $3.9 million for YE 2020. The significant reduction in cash flow from operations in FY 2021 was due to payoff of the Pilot Amended Line of Credit in October 2021 and loss from operations. The cash flow deficit for YE 2020 primarily related to loss from operations.
Capital Expenditures
During YE 2021, capital expenditures totaled $0. In FY 2020, we invested $1.1 million in capital expenditures. Capital expenditures in YE 2020 primarily related to: (i) a 13-day maintenance turnaround and equipment repairs and (ii) completion of the Nixon Facility Expansion Project, which involved 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 development. Maintenance and repair 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.
Future Expected Capital Expenditures
Management is committed to maintaining the safe and reliable operation of the Nixon facility. Due to continued uncertainties related to the COVID-19 pandemic, we anticipate little, if any, new capital expenditures in 2022.However, to the extent we are able to capitalize on green energy growth opportunities, capital expenditures may be financed through project-based government loans.
Remainder of Page Intentionally Left Blank
|
|
|
Debt Overview.
The table below summarizes our principal contractual obligations at December 31, 2021, by expected settlement period.
|
|
|
|
| Between |
|
| Between |
|
|
|
|
|
| |||||||
|
| Less than |
|
| 1 and 3 |
|
| 3 and 5 |
|
| 5 Years |
|
|
| ||||||
|
| 1 Year |
|
| Years |
|
| Years |
|
| and Later |
|
| Total |
| |||||
|
|
|
|
|
| (in thousands) |
|
|
|
|
| |||||||||
Long-Term Debt(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||||
Third-Party |
| $ | 42,953 |
|
| $ | 32 |
|
| $ | 30 |
|
| $ | 776 |
|
| $ | 43,791 |
|
Related-Party |
|
| 20,042 |
|
|
| - |
|
|
| - |
|
|
| - |
|
|
| 20,042 |
|
Total Long-Term Debt |
|
| 62,995 |
|
|
| 32 |
|
|
| 30 |
|
|
| 776 |
|
|
| 63,833 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease Obligations |
|
| 215 |
|
|
| 156 |
|
|
| - |
|
|
| - |
|
|
| 371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| $ | 63,210 |
|
| $ | 188 |
|
| $ | 30 |
|
| $ | 776 |
|
| $ | 64,204 |
|
|
|
Net cash provided by financing activities was $5.0 million in YE 2021 compared to $5.4 million in YE 2020. Net proceeds from the issuance of debt totaled $10.5 million in YE 2021 compared to $0.4 million in YE 2020. In YE 2021, issuance of debt was associated with the NPS Term Loan Due 2031.
Principal payments on long-term debt totaled $4.7 million in YE 2021 compared to $3.9 million in YE 2020. For YE 2021 and YE 2020, principal and interest payments to Veritex were $0.6 million and $0.9 million, respectively. For both YE 2021 and YE 2020, principal and interest payments to John Kissick and related parties were $0. From June 2020 to October 2021, Pilot applied payments owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. For YE 2021 and YE 2020, the tank lease payment setoff totaled $1.9 million and $1.3 million, respectively.
On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments NPS believes Pilot misapplied as part of the Amended Pilot Line of Credit setoff. As of the filing date of this report, the amount remained in dispute between the parties.
Debt Defaults. The majority of our debt is in default.
Third-Party Defaults
| |
| |
| |
|
|
|
|
|
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their 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. Management maintains ongoing dialogue with lenders regarding defaults and potential restructuring and refinance opportunities.
Related-Party Defaults
|
|
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.
Twelve Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at December 31, |
| |||
|
|
|
|
|
|
|
|
|
| |||
December 31, 2021 |
|
| 3 |
|
|
| 71.9 | % |
| $ | 0 |
|
December 31, 2020 |
|
| 3 |
|
|
| 70.8 | % |
| $ | 0 |
|
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. The Affiliate accounted for 29.9% and 28.7% of total revenue from operations for the twelve months ended December 31, 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both December 31, 2021, and 2020, 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.
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 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. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 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. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
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 did not record a liability on our consolidated balance sheets as of December 31, 2021 and 2020. At both December 31, 2021 and 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
|
|
|
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020. Abandonment operations were delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
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, 2021. At December 31, 2021 and 2020, BDPL maintained $3.5 million and $2.4 million, respectively, in AROs related to abandonment of these assets.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset retirement obligations, and computation of earnings per share.
Estimates. 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.
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.
In February 2022, Russia invaded neighboring Ukraine. The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations.
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 Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve. Therefore, uncertainty around the availability and commodity prices of crude oil, the commodity prices and demand for our refined products, and the general business environment is expected to continue through 2022 and beyond.
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 the Russian-Ukrainian conflict and COVID-19 as of December 31, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
|
|
|
New Accounting Standards and Disclosures
New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritative SEC content. During the twelve months ended December 31, 2021, we did not adopt any ASUs.
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 did not 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.
Remainder of Page Intentionally Left Blank
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Remainder of Page Intentionally Left Blank
|
|
|
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, 2021 and 2020, 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, 2021 and 2020, 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 $60 million as of December 31, 2021. 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 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
April 1, 2022
PCAOB Number: 01195
|
|
|
Consolidated Balance Sheets
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands except share amounts) |
| |||||
ASSETS |
|
|
|
|
|
| ||
CURRENT ASSETS |
|
|
|
|
|
| ||
Cash and cash equivalents |
| $ | 9 |
|
| $ | 549 |
|
Restricted cash |
|
| 48 |
|
|
| 48 |
|
Accounts receivable, net |
|
| 126 |
|
|
| 214 |
|
Prepaid expenses and other current assets |
|
| 2,433 |
|
|
| 3,564 |
|
Deposits |
|
| 110 |
|
|
| 124 |
|
Inventory |
|
| 3,098 |
|
|
| 1,062 |
|
Total current assets |
|
| 5,824 |
|
|
| 5,561 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM ASSETS |
|
|
|
|
|
|
|
|
Total property and equipment, net |
|
| 59,923 |
|
|
| 62,497 |
|
Operating lease right-of-use assets, net |
|
| 332 |
|
|
| 498 |
|
Restricted cash, noncurrent |
|
| 0 |
|
|
| 514 |
|
Surety bonds |
|
| 230 |
|
|
| 230 |
|
Total long-term assets |
|
| 60,485 |
|
|
| 63,739 |
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS |
| $ | 66,309 |
|
| $ | 69,300 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) |
|
|
|
|
|
|
|
|
CURRENT LIABILITIES |
|
|
|
|
|
|
|
|
Long-term debt less unamortized debt issue costs, current portion (in default) |
| $ | 42,953 |
|
| $ | 33,692 |
|
Line of credit payable (in default) |
|
| 0 |
|
|
| 8,042 |
|
Long-term debt, related party, current portion (in default) |
|
| 20,042 |
|
|
| 16,010 |
|
Interest payable (in default) |
|
| 8,689 |
|
|
| 6,408 |
|
Interest payable, related party (in default) |
|
| 3,454 |
|
|
| 2,814 |
|
Accounts payable |
|
| 2,548 |
|
|
| 3,274 |
|
Accounts payable, related party |
|
| 155 |
|
|
| 155 |
|
Current portion of lease liabilities |
|
| 215 |
|
|
| 194 |
|
Asset retirement obligations, current portion |
|
| 0 |
|
|
| 2,370 |
|
Accrued expenses and other current liabilities |
|
| 6,225 |
|
|
| 4,882 |
|
Total current liabilities |
|
| 84,281 |
|
|
| 77,841 |
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES |
|
|
|
|
|
|
|
|
Asset retirement obligations, net of current |
|
| 3,461 |
|
|
| 0 |
|
Long-term lease liabilities, net of current |
|
| 156 |
|
|
| 370 |
|
Deferred revenues |
|
| 1,200 |
|
|
| 1,520 |
|
Long-term debt, net of current portion |
|
| 838 |
|
|
| 355 |
|
Total long-term liabilities |
|
| 5,655 |
|
|
| 2,245 |
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES |
|
| 89,936 |
|
|
| 80,086 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 16) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT |
|
|
|
|
|
|
|
|
Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514 shares issued at both December 31, 2021 and 2020)(1) |
|
| 127 |
|
|
| 127 |
|
Additional paid-in capital |
|
| 38,457 |
|
|
| 38,457 |
|
Accumulated deficit |
|
| (62,211 | ) |
|
| (49,370 | ) |
TOTAL STOCKHOLDERS' DEFICIT |
|
| (23,627 | ) |
|
| (10,786 | ) |
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT |
| $ | 66,309 |
|
| $ | 69,300 |
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
Consolidated Statements of Operations
|
| Twelve Months Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands, except share and per-share amounts) |
| |||||
REVENUE FROM OPERATIONS |
|
|
|
|
|
| ||
Refinery operations |
| $ | 297,103 |
|
| $ | 170,601 |
|
Tolling and terminaling |
|
| 3,717 |
|
|
| 4,209 |
|
|
|
|
|
|
|
|
|
|
Total revenue from operations |
|
| 300,820 |
|
|
| 174,810 |
|
|
|
|
|
|
|
|
|
|
COST OF GOODS SOLD |
|
|
|
|
|
|
|
|
Crude oil, fuel use, and chemicals |
|
| 292,438 |
|
|
| 167,079 |
|
Other conversion costs |
|
| 7,468 |
|
|
| 9,783 |
|
Total cost of goods sold |
|
| 299,906 |
|
|
| 176,862 |
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
| 914 |
|
|
| (2,052 | ) |
|
|
|
|
|
|
|
|
|
COST OF OPERATIONS |
|
|
|
|
|
|
|
|
LEH operating fee, related party |
|
| 522 |
|
|
| 646 |
|
Other operating expenses |
|
| 198 |
|
|
| 169 |
|
General and administrative expenses |
|
| 3,021 |
|
|
| 2,299 |
|
Depletion, depreciation and amortization |
|
| 2,780 |
|
|
| 2,686 |
|
Impairment of assets |
|
| 1,092 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Total cost of operations |
|
| 7,613 |
|
|
| 5,800 |
|
|
|
|
|
|
|
|
|
|
Loss from operations, related party |
|
| (6,699 | ) |
|
| (7,852 | ) |
|
|
|
|
|
|
|
|
|
OTHER INCOME (EXPENSE) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Easement, interest and other income |
|
| 2 |
|
|
| 172 |
|
Interest and other expense |
|
| (6,199 | ) |
|
| (6,763 | ) |
Gain on extinguishment of debt |
|
| 55 |
|
|
| 0 |
|
Total other expense |
|
| (6,142 | ) |
|
| (6,591 | ) |
|
|
|
|
|
|
|
|
|
Loss before income taxes |
|
| (12,841 | ) |
|
| (14,443 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| 0 |
|
|
| (15 | ) |
|
|
|
|
|
|
|
|
|
Net Loss |
| $ | (12,841 | ) |
| $ | (14,458 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss per common share: |
|
|
|
|
|
|
|
|
Basic |
| $ | (1.01 | ) |
| $ | (1.15 | ) |
Diluted |
| $ | (1.01 | ) |
| $ | 1.15 | ) |
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
Basic |
|
| 12,693,514 |
|
|
| 12,574,465 |
|
Diluted |
|
| 12,693,514 |
|
|
| 12,574,465 |
|
The accompanying notes are an integral part of these consolidated 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, 2019 |
|
| 12,327,365 |
|
| $ | 123 |
|
| $ | 38,275 |
|
| $ | (34,912 | ) |
| $ | 3,486 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comon stock issued for services |
|
| 135,084 |
|
|
| 2 |
|
|
| 66 |
|
|
| 0 |
|
|
| 68 |
|
Common stock issued for extinguishment of related-party debt |
|
| 231,065 |
|
|
| 2 |
|
|
| 116 |
|
|
| 0 |
|
|
| 118 |
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| (14,458 | ) |
|
| (14,458 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
|
| 12,693,514 |
|
| $ | 127 |
|
| $ | 38,457 |
|
| $ | (49,370 | ) |
| $ | (10,786 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
| - |
|
|
| 0 |
|
|
| 0 |
|
|
| (12,841 | ) |
|
| (12,841 | ) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
|
| 12,693,514 |
|
| $ | 127 |
|
| $ | 38,457 |
|
| $ | (62,211 | ) |
| $ | (23,627 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
Remainder of Page Intentionally Left Blank
|
|
|
Consolidated Statements of Cash Flows
|
| Twelve Months Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
OPERATING ACTIVITIES |
|
|
|
|
|
| ||
Net loss |
| $ | (12,841 | ) |
| $ | (14,458 | ) |
Adjustments to reconcile net income (loss) to net cash used in operating activities: |
|
|
|
|
|
|
|
|
Depletion, depreciation and amortization |
|
| 2,780 |
|
|
| 2,686 |
|
Deferred income tax |
|
| 0 |
|
|
| 15 |
|
Amortization of debt issue costs |
|
| 147 |
|
|
| 348 |
|
Guaranty fees paid in kind |
|
| 608 |
|
|
| 609 |
|
Related-party interest expense paid in kind |
|
| 1,116 |
|
|
| 559 |
|
Deferred revenues and expenses |
|
| (320 | ) |
|
| (410 | ) |
Loss (gain) on issuance of shares |
|
| 0 |
|
|
| (80 | ) |
Impairment of assets |
|
| 1,092 |
|
|
| 0 |
|
Gain on extinguishment of debt |
|
| (55 | ) |
|
| 0 |
|
Changes in operating assets and liabilities |
|
|
|
|
|
|
|
|
Accounts receivable |
|
| 88 |
|
|
| 232 |
|
Accounts receivable, related party |
|
| 0 |
|
|
| 1,364 |
|
Prepaid expenses and other current assets |
|
| 1,131 |
|
|
| (1,288 | ) |
Deposits and other assets |
|
| 14 |
|
|
| 34 |
|
Inventory |
|
| (2,036 | ) |
|
| 583 |
|
Accounts payable, accrued expenses and other liabilities |
|
| 2,220 |
|
|
| 5,899 |
|
Accounts payable, related party |
|
| 0 |
|
|
| 6 |
|
Net cash used in operating activities |
|
| (6,056 | ) |
|
| (3,901 | ) |
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Capital expenditures |
|
| 0 |
|
|
| (1,085 | ) |
Net cash used in investing activities |
|
| 0 |
|
|
| (1,085 | ) |
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Proceeds from debt |
|
| 10,500 |
|
|
| 370 |
|
Payments on debt |
|
| (4,738 | ) |
|
| (3,930 | ) |
Payments of debt issuance costs |
|
| (750 | ) |
|
| 0 |
|
Net activity on related-party debt |
|
| (10 | ) |
|
| 8,989 |
|
Net cash provided by financing activities |
|
| 5,002 |
|
|
| 5,429 |
|
Net change in cash, cash equivalents, and restricted cash |
|
| (1,054 | ) |
|
| 443 |
|
|
|
|
|
|
|
|
|
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD |
|
| 1,111 |
|
|
| 668 |
|
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD |
| $ | 57 |
|
| $ | 1,111 |
|
|
|
|
|
|
|
|
|
|
Supplemental Information: |
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Financing of line of credit via related-party debt |
| $ | 2,331 |
|
| $ | 2,778 |
|
Issuance of shares for services and/or to extinguish debt |
| $ | 0 |
|
| $ | 267 |
|
Conversion of related-party notes to common stock |
| $ | 0 |
|
| $ | 148 |
|
Line of credit financed by offsetting tank leases less interest |
| $ | 1,098 |
|
| $ | 273 |
|
Interest paid |
| $ | 1,252 |
|
| $ | 2,311 |
|
Income taxes paid (refunded) |
| $ | 0 |
|
| $ | (100 | ) |
The accompanying notes are an integral part of these consolidated financial statements.
|
|
|
Notes to Consolidated Financial Statements
(1) Organization
Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminaling services’ (owned by LRM and NPS). ‘Corporate and other’ includes subsidiaries 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. In addition, 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 determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital deficits, as discussed more fully below. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.
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, 2021 and 2020. See Notes (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
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We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their 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. Management maintains ongoing dialogue with lenders regarding defaults and potential restructuring and refinance opportunities. 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.
Related-Party Defaults
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Substantial Current Debt
Excluding accrued interest, we had current debt of $63.0 million and $57.7 million, respectively, as of December 31, 2021 and 2020. Current debt consists of bank debt, investor debt, and related party debt. Although the line of credit payable to Pilot fell within current debt during 2021, the Pilot debt was repaid in October 2021. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2021 and 2020.
Margin Volatility. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity.
Since the beginning of 2020, the COVID-19 pandemic disrupted economies around the world, including the oil and gas industry in which we operate. The rapid spread of the virus led to the implementation of various responses, including federal, state, and local government-imposed quarantines, shelter-in-place mandates, sweeping restrictions on travel, and other public health and safety measures. Actions by members of OPEC and other producer countries in 2020 concerning oil production and pricing significantly impacted supply and demand in global oil and gas markets, which impacted our operational and financial performance. In particular, we experienced net losses due to unfavorable margins per bbl and significantly lower sales volume due to significant refinery downtime. Global oil prices and refined product demand recovered somewhat in 2021 compared to 2020 as COVID-19 cases stabilized, mortality rates decreased, and availability and inoculation rates of vaccines increased. However, recovery of jet fuel demand lagged that of other refined products as airline travel restrictions and consumer hesitancy to fly during the pandemic continued. Despite the uptick in market conditions during the second half of 2021, overall, we experienced operating and net losses due to unfavorable margins and lower sales volume, which affected our liquidity. Cash constraints adversely impacted the frequency of crude oil acquisition, debt payments, and abandonment of pipeline and facilities assets.
The extent to which the continued COVID-19 pandemic will impact our operations depends on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, additional or modified government actions, new information that may emerge concerning variants, actions taken to contain the spread of COVID-19 and treat its impact, and the availability and acceptance of vaccines to mitigate such spread, among others.
In February 2022, Russia invaded neighboring Ukraine. The conflict has caused turmoil in global markets, resulting in higher oil prices, and injected even more uncertainty into a worldwide economy recovering from the effects of COVID-19. Given the evolving conflict, there are many unknown factors and events that could materially impact our operations.
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The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Historic Net Losses and Working Capital Deficits
Net Losses. Net loss for the twelve months ended December 31, 2021, was $12.8 million, or a loss of $1.01 per share, compared to a net loss of $14.5 million, or a loss of $1.15 per share, for the twelve months ended December 31, 2020. The improvement between the comparative periods resulted from demand recovery, commodity price improvements, and encouraging trends in pandemic containment efforts.
Working Capital Deficits. We had $78.5 million and $72.3 million in working capital deficits at December 31, 2021 and 2020, respectively. Excluding the current portion of long-term debt, we had $15.5 million and $22.6 million in working capital deficits at December 31, 2021 and 2020, respectively.
Cash and cash equivalents totaled $0.01 and $0.5 million at December 31, 2021 and 2020, respectively. Restricted cash (current portion) totaled $0.05 million at both December 31, 2021 and 2020. Restricted cash, noncurrent totaled $0 and $0.5 million at December 31, 2021 and 2020, respectively.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital deficits. If Pilot or Tartan terminate the Crude Supply Agreement or terminal services agreements, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the twelve-month periods ended December 31, 2021 and 2020, the refinery experienced 23 days and 42 days of downtime, respectively. During the same time periods, 13 days and 20 days, respectively, related to lack of crude associated with cash constraints.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.
Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-site operations are required. We also incentivize personnel to receive the COVID-19 vaccine.
We can provide no guarantees that: our business strategy will be successful, Affiliates will continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or margins on our refined products will be favorable. Further, if third parties 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.
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.
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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 as of December 31, 2021 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory, and related reserves, and the carrying value of long-lived assets.
Cash and Cash Equivalents. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts.
Restricted Cash. Restricted cash, current portion reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. Restricted cash, noncurrent represents funds held in a Veritex disbursement account for payment of construction related expenses. The 5-year capital improvement to build new petroleum storage tanks at the Nixon facility was completed in 2020.
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 and $0.1 million at December 31, 2021 and 2020, respectively.
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. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts 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, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.
Pipelines and Facilities.We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016. Our pipelines and facilities assets are inactive. Decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties were fully impaired in 2011.
CIP. CIP expenditures, 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 refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
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For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a 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. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over 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 the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. 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. The fixed cost under the customer’s tank storage agreement does not include ancillary service fees. We consider ancillary services as a separate performance obligation under the tank storage agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Income Taxes. We determine deferred income taxes based on: (i) temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities and (ii) operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which we expect the differences to reverse. Our provision for income taxes consists of our current tax liability and the change in deferred income tax assets and liabilities.
Management uses significant judgment in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to assess the realizability of deferred tax assets. We weigh whether there is a more than 50% probability of realizing a portion or all the deferred tax assets. Realization depends on the generation of future taxable income before the expiration of any NOL carryforwards. We record a valuation allowance against deferred income tax assets if there is a more than 50% probability of not realizing some portion of the asset. We recognize an uncertain tax positions benefit in our financial statements if deferred tax assets meet a minimum recognition threshold. First, we determine whether there is a more than 50% probability that our income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If we meet the criteria, we record a benefit in the financial statements equal to the largest amount greater than 50% likely to be realized upon settlement with taxing authorities.
A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended December 31, 2021. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of December 31, 2021 and 2020. In addition, we have NOL carryforwards that remain available for future use. See “Note (14)” to our consolidated financial statements for more information related to income taxes.
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Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we re-assess 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 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 uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.
Commodity price market volatility associated with the COVID-19 pandemic could affect the value of certain of our long-lived assets. Management evaluated refinery and facilities assets for impairment as of December 31, 2021. We did not record any impairment of our refinery and facilities assets for the periods presented. We recorded an impairment of $1.1 million related to asset retirement costs for our pipeline/platform assets as of December 31, 2021. Additional impairment may be required in the future if 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. 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 we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and seabeds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. 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. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS 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 entity’s earnings. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (15)” to our consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritative SEC content. During the twelve months ended December 31, 2021, we did not adopt any ASUs.
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 did not 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.
Remainder of Page Intentionally Left Blank
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(3) Related-Party Transactions
Affiliate Operational Agreements Summary
Blue Dolphin and certain of its subsidiaries are parties to several operational agreements with Affiliates.LEH and its affiliates (the “Affiliates”). With regard to guaranty fee agreements, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest under certain secured loan agreements. Management believes that these related-party agreements are arm’s-length transactions.
Agreement/Transaction | Parties | Effective Date | Key Terms |
Jet Fuel Sales Agreement | LEH LE | 04/01/2022 | 1-year term expiring earliest to occur of 03/31/ |
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 $0.01 million per |
Amended and Restated Operating Agreement | LEH Blue Dolphin LE LRM NPS BDPL BDPC BDSC | 04/01/2020 |
|
LE Amended and Restated Guaranty Fee Agreement(1) | LE Jonathan Carroll | 04/01/2017 | Related to payoff of LE $25.0 million Veritex Community Bank (“Veritex”) loan (the “LE Term Loan Due 2034”); Jonathan Carroll receives fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034. |
LRM Amended and Restated Guaranty Fee Agreement(1) | LRM Jonathan Carroll | 04/01/2017 | Related to payoff of LRM $10.0 million Veritex loan (the “LRM Term Loan Due 2034”); Jonathan Carroll receives fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034. |
(1) | Effective January 1, 2023, the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement were modified; as modified, Jonathan Carroll shall receive a fee payable 100% in cash instead of 50% in stock and 50% in cash. |
Under the Office Sub-Lease Agreement,BDSC received sublease income from LEH totaling $0.03 million for both fiscal years ended December 31, 2022 and 2021. Under the Amended and Restated Operating Agreement, the LEH operating fee, related party was $0.7 million for the fiscal year ended December 31, 2022 compared to $0.5 million for the fiscal year ended December 31, 2021. The increase between the comparative periods coincided with increased cost of goods sold during the same periods.
Working Capital
We have historically relied on Affiliates for funding when revenue from operations and availability under bank facilities were insufficient to meet our liquidity andduring periods of working capital needs.deficits. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party. During the fiscal year ended December 31, 2022, continued liquidity improvement related to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations.
Related-PartyAffiliate Long-Term Debt
Blue Dolphin and certain of its subsidiaries are parties to debt agreements with Affiliates. Related-party long-term debt as defined within this section includes:
|
|
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|
– June 2017 promissory note between Blue Dolphin |
|
| and LEH; for Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; interest accrues at 8.00% compounded annually; no covenants; matured January 2019; currently in default for failing to pay past due obligations at maturity; pursuant to an Assignment Agreement between LEH, Ingleside Crude, LLC (“Ingleside”), and Lazarus Capital, LLC (“Lazarus Capital”) effective December 31, 2022, balances previously due under promissory notes between Ingleside and Lazarus Capital/Jonathan Carroll were added to the balance due under the |
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| |||
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| |||
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Loan Description |
| Maturity Date | Interest Rate | Loan Purpose |
June LEH Note | 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 | LEH BDPL | Aug 2018 | 16.00% | Original principal amount of $4.0 million; Blue Dolphin working capital |
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| ||
| ||
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Guarantees, Security, and Defaults
Loan Description | Guarantees | Security | Event(s) of Default |
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|
|
|
|
|
|
|
June LEH Note (in default) | --- | --- | Failure to pay past due obligations at maturity (loan matured January 2019) |
BDPL-LEH Loan Agreement(in default) | --- | Certain BDPL property | Failure to pay past due obligations at maturity (loan matured August 2018) |
Blue Dolphin Energy Company | │Page 8 |
Covenants
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the March Carroll Note, March Ingleside Note, or June LEH Note.
Related-Party Financial ImpactDirector Independence
Consolidated Balance Sheets.
Accounts payable, related party. Accounts payable, related partyThe Board has affirmatively determined that each of Ryan A. Bailey, Amitav Misra, and Christopher T. Morris, each an outside director, is considered an “Independent Director” as such term is defined by OTCQX and SEC rules. Jonathan P. Carroll, our Chief Executive Officer and President, and Herbert N. Whitney, are not independent directors. Mr. Whitney serves as a consultant.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
This table shows fees paid to LTRIUHY during the periods indicated:
|
| December 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
|
|
|
|
| ||||
Audit fees |
| $ | 232,500 |
|
| $ | 175,000 |
|
Audit-related fees |
|
| - |
|
|
| - |
|
Tax fees |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
|
| $ | 232,500 |
|
| $ | 175,000 |
|
Amounts billed but unpaid during 2022 and 2021 totaled $55,000 and $107,500, respectively. Audit fees for 2022 and 2021 related to the purchaseaudit of refinery equipment totaled $0.2 million at both December 31, 2021our consolidated financial statements and 2020.the review of our quarterly reports that are filed with the SEC. The Audit Committee must pre-approve all audit and non-audit services provided to us by our independent registered public accounting firm.
Blue Dolphin Energy Company |
| │Page 9 |
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Long-term debt, related party, current portion (in default) and accrued interest payable, related party
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
LEH |
|
|
|
|
|
| ||
June LEH Note (in default) |
| $ | 12,672 |
|
| $ | 9,446 |
|
BDPL-LEH Loan Agreement |
|
| 7,454 |
|
|
| 6,814 |
|
LEH Total |
|
| 20,126 |
|
|
| 16,260 |
|
Ingleside |
|
|
|
|
|
|
|
|
March Ingleside Note (in default) |
|
| 1,066 |
|
|
| 1,013 |
|
Jonathan Carroll |
|
|
|
|
|
|
|
|
March Carroll Note (in default) |
|
| 2,304 |
|
|
| 1,551 |
|
|
|
| 23,496 |
|
|
| 18,824 |
|
|
|
|
|
|
|
|
|
|
Less: Long-term debt, related party, current portion, in default |
|
| (20,042 | ) |
|
| (16,010 | ) |
Less: Accrued interest payable, related party (in default) |
|
| (3,454 | ) |
|
| (2,814 | ) |
|
| $ | 0 |
|
| $ | 0 |
|
Consolidated Statements of Operations.
Total revenue from operations.
��
|
| Twelve Months Ended December 31, |
| |||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||
|
| (in thousands, except percent amounts) |
| |||||||||||||
Refinery operations |
|
|
|
|
|
|
|
|
|
|
|
| ||||
LEH |
| $ | 90,062 |
|
|
| 29.9 | % |
| $ | 49,786 |
|
|
| 28.5 | % |
Third-Parties |
|
| 207,041 |
|
|
| 68.8 | % |
|
| 120,815 |
|
|
| 69.1 | % |
Tolling and terminaling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Third-Parties |
|
| 3,717 |
|
|
| 1.2 | % |
|
| 4,209 |
|
|
| 2.4 | % |
|
| $ | 300,820 |
|
|
| 100.0 | % |
| $ | 174,810 |
|
|
| 100.0 | % |
Interest expense.
|
| Twelve Months Ended December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Jonathan Carroll |
|
|
|
|
|
| ||
Guaranty Fee Agreements |
|
|
|
|
|
| ||
LE Term Loan Due 2034 |
| $ | 451 |
|
| $ | 431 |
|
LRM Term Loan Due 2034 |
|
| 178 |
|
|
| 178 |
|
March Carroll Note (in default) |
|
| 131 |
|
|
| 103 |
|
LEH |
|
|
|
|
|
|
|
|
BDPL-LEH Loan Agreement (in default) |
|
| 640 |
|
|
| 640 |
|
June LEH Note (in default) |
|
| 288 |
|
|
| 40 |
|
Ingleside |
|
|
|
|
|
|
|
|
March Ingleside Note (in default) |
|
| 56 |
|
|
| 63 |
|
|
| $ | 1,744 |
|
| $ | 1,455 |
|
Other.BDSC received sublease income from LEH totaling $0.03 million for both twelve-month periods ended December 31, 2021, and 2020. The LEH operating fee totaled approximately $0.5 million and $0.6 million for the twelve months ended December 31, 2021, and 2020, respectively. With respect to the decrease between the periods, although throughput volume was slightly higher, operating costs per bbl were lower due to reduced refinery maintenance and repair expenses.
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(4) Revenue and Segment InformationPART IV
We have two reportable business segments: (i) refinery operations, focused on refining and marketing petroleum products at the Nixon facility, and (ii) tolling and terminaling, focused on tolling and storing petroleum products for third parties at the Nixon facility. Corporate and other includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Remainder of Page Intentionally Left Blank
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Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
|
| Twelve Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Net revenue (excluding intercompany fees and sales) | �� |
|
|
|
|
| ||
Refinery operations |
| $ | 297,103 |
|
| $ | 170,601 |
|
Tolling and terminaling |
|
| 3,717 |
|
|
| 4,209 |
|
Total net revenue |
|
| 300,820 |
|
|
| 174,810 |
|
|
|
|
|
|
|
|
|
|
Intercompany fees and sales |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (2,457 | ) |
|
| (2,384 | ) |
Tolling and terminaling |
|
| 2,457 |
|
|
| 2,384 |
|
Total intercompany fees |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
|
Operation costs and expenses(1) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (298,082 | ) |
|
| (175,201 | ) |
Tolling and terminaling |
|
| (1,825 | ) |
|
| (1,661 | ) |
Corporate and other |
|
| (197 | ) |
|
| (169 | ) |
Total operation costs and expenses |
|
| (300,104 | ) |
|
| (177,031 | ) |
|
|
|
|
|
|
|
|
|
Segment contribution margin (deficit) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (3,436 | ) |
|
| (6,984 | ) |
Tolling and terminaling |
|
| 4,349 |
|
|
| 4,932 |
|
Corporate and other |
|
| (197 | ) |
|
| (169 | ) |
Total segment contribution margin (deficit) |
|
| 716 |
|
|
| (2,221 | ) |
|
|
|
|
|
|
|
|
|
General and administrative expenses(2) |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (1,549 | ) |
|
| (1,257 | ) |
Tolling and terminaling |
|
| (343 | ) |
|
| (307 | ) |
Corporate and other |
|
| (2,742 | ) |
|
| (1,381 | ) |
Total general and administrative expenses |
|
| (4,634 | ) |
|
| (2,945 | ) |
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (1,214 | ) |
|
| (1,186 | ) |
Tolling and terminaling |
|
| (1,362 | ) |
|
| (1,296 | ) |
Corporate and other |
|
| (204 | ) |
|
| (204 | ) |
Total depreciation and amortization |
|
| (2,780 | ) |
|
| (2,686 | ) |
|
|
|
|
|
|
|
|
|
Interest and other non-operating expenses, net |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (2,779 | ) |
|
| (2,929 | ) |
Tolling and terminaling |
|
| (1,649 | ) |
|
| (2,546 | ) |
Corporate and other |
|
| (1,715 | ) |
|
| (1,116 | ) |
Total interest and other non-operating expenses, net |
|
| (6,143 | ) |
|
| (6,591 | ) |
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes |
|
|
|
|
|
|
|
|
Refinery operations |
|
| (8,978 | ) |
|
| (12,356 | ) |
Tolling and terminaling |
|
| 995 |
|
|
| 783 |
|
Corporate and other |
|
| (4,858 | ) |
|
| (2,870 | ) |
Total loss before income taxes |
|
| (12,841 | ) |
|
| (14,443 | ) |
|
|
|
|
|
|
|
|
|
Income tax expense |
|
| - |
|
|
| 15 | ) |
|
|
|
|
|
|
|
|
|
Net loss |
| $ | (12,841 | ) |
| $ | (14,458 | ) |
|
|
|
|
|
|
|
| Twelve Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
|
|
| |||
Capital expenditures |
|
|
|
|
|
| ||
Refinery operations |
| $ | 0 |
|
| $ | 295 |
|
Tolling and terminaling |
|
| 0 |
|
|
| 790 |
|
Corporate and other |
|
| 0 |
|
|
| 0 |
|
Total capital expenditures |
| $ | 0 |
|
| $ | 1,085 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| December 31, | ||||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
|
|
|
|
| |
Identifiable assets |
|
|
|
|
|
|
|
|
Refinery operations |
| $ | 47,047 |
|
| $ | 48,521 |
|
Tolling and terminaling |
|
| 17,594 |
|
|
| 18,722 |
|
Corporate and other |
|
| 1,668 |
|
|
| 2,057 |
|
Total identifiable assets |
| $ | 66,309 |
|
| $ | 69,300 |
|
(5) Concentration of Risk
Bank Accounts
Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At December 31, 2021 and 2020, we had cash balances (including restricted cash) that exceeded the FDIC insurance limit per depositor of approximately $0 and $0.6 million, respectively.
Key Supplier
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any renewal term. As of December 31, 2021, we received 9.0 million bbls, or 36%, of the contracted total volume under the crude supply agreement.
Pilot and Tartan store jet fuel and crude oil, respectively, at the Nixon facility under two terminal services agreements: (i) a Terminal Services Agreement dated as of May 2019 (covering Tank Nos. 67, 71, 72, 73, 77, and 78) for jet fuel and (ii) a Terminal Services Agreement dated as of June 1, 2019 (covering Tank Nos. 1 and 56) for crude oil. Under both terminal services agreements, Pilot and Tartan store product at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreements renew on a one-year evergreen basis. Either party may terminate the terminal services agreements by providing the other party 60 days prior written notice. The terminal services agreements will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital deficits. If Pilot or Tartan terminate the Crude Supply Agreement or terminal services agreements, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs. During the twelve-month periods ended December 31, 2021 and 2020, the refinery experienced 23 days and 42 days of downtime, respectively. During the same time periods, 13 days and 20 days, respectively, related to lack of crude associated with cash constraints.
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|
|
Significant Customers
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Twelve Months Ended |
| Number Significant Customers |
|
| % Total Revenue from Operations |
|
| Portion of Accounts Receivable at December 31, |
| |||
|
|
|
|
|
|
|
|
|
| |||
December 31, 2021 |
|
| 3 |
|
|
| 71.9 | % |
| $ | 0 |
|
December 31, 2020 |
|
| 3 |
|
|
| 70.8 | % |
| $ | 0 |
|
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. The Affiliate accounted for 29.9% and 28.7% of total revenue from operations for the twelve months ended December 31, 2021, and 2020, respectively. The Affiliate represented $0 in accounts receivable at both December 31, 2021, and 2020, respectively.
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, |
| |||||||||||||
|
| 2021 |
|
| 2020 |
| ||||||||||
|
| (in thousands, except percent amounts) |
| |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||
LPG mix |
| $ | 21 |
|
|
| 0.0 | % |
| $ | 2 |
|
|
| 0.0 | % |
Naphtha |
|
| 74,683 |
|
|
| 25.2 | % |
|
| 34,413 |
|
|
| 20.2 | % |
Jet fuel |
|
| 90,062 |
|
|
| 30.3 | % |
|
| 49,786 |
|
|
| 29.2 | % |
HOBM |
|
| 65,386 |
|
|
| 22.0 | % |
|
| 42,777 |
|
|
| 25.1 | % |
AGO |
|
| 66,951 |
|
|
| 22.5 | % |
|
| 43,623 |
|
|
| 25.5 | % |
|
| $ | 297,103 |
|
|
| 100.0 | % |
| $ | 170,601 |
|
|
| 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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Prepaid crude oil and condensate |
| $ | 1,368 |
|
| $ | 2,249 |
|
Prepaid insurance |
|
| 953 |
|
|
| 1,182 |
|
Prepaid easement renewal fees |
|
| 76 |
|
|
| 99 |
|
Other prepaids |
|
| 36 |
|
|
| 34 |
|
|
| $ | 2,433 |
|
| $ | 3,564 |
|
|
|
|
(7) Inventory
Inventory as of the dates indicated consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
HOBM |
| $ | 1,749 |
|
| $ | 54 |
|
Crude oil and condensate |
|
| 660 |
|
|
| 463 |
|
AGO |
|
| 338 |
|
|
| 133 |
|
Naphtha |
|
| 189 |
|
|
| 120 |
|
Chemicals |
|
| 121 |
|
|
| 271 |
|
Propane |
|
| 27 |
|
|
| 15 |
|
LPG mix |
|
| 14 |
|
|
| 6 |
|
|
| $ | 3,098 |
|
| $ | 1,062 |
|
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Refinery and facilities |
| $ | 72,583 |
|
| $ | 72,184 |
|
Land |
|
| 566 |
|
|
| 566 |
|
Other property and equipment |
|
| 903 |
|
|
| 903 |
|
|
|
| 74,052 |
|
|
| 73,653 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated depletion, depreciation, and amortization |
|
| (17,795 | ) |
|
| (15,220 | ) |
|
|
| 56,257 |
|
|
| 58,433 |
|
|
|
|
|
|
|
|
|
|
CIP |
|
| 3,666 |
|
|
| 4,064 |
|
|
| $ | 59,923 |
|
| $ | 62,497 |
|
Capital expenditures for expansion at the Nixon facility were funded by long-term debt from Veritex, revenue from operations, and working capital from Affiliates. Unused amounts for capital expenditures derived from Veritex loans totaled $0 and $0.5 million at December 31, 2021 and 2020, respectively, and were reflected in restricted cash, non-current 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.
We recorded an impairment of $1.1 million related to asset retirement costs that were capitalized for our pipeline/platform assets at December 31, 2021. See “Note (12)” to our consolidated financial statements for additional disclosures related to assets retirement costs.
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Unearned revenue from contracts with customers |
| $ | 4,388 |
|
| $ | 3,421 |
|
Accrued fines and penalties |
|
| 407 |
|
|
| 0 |
|
Unearned contract renewal income |
|
| 400 |
|
|
| 500 |
|
Insurance |
|
| 273 |
|
|
| 541 |
|
Board of director fees payable |
|
| 230 |
|
|
| 100 |
|
Other payable |
|
| 218 |
|
|
| 252 |
|
Customer deposits |
|
| 173 |
|
|
| 10 |
|
Taxes payable |
|
| 136 |
|
|
| 58 |
|
|
| $ | 6,225 |
|
| $ | 4,882 |
|
|
|
|
(10) Third-Party Long-Term Debt
Loan Agreements Summary
Loan Description |
| Parties |
| Original Principal Amount (in millions) |
|
| Maturity Date |
| Monthly Principal and Interest Payment | Interest Rate |
|
| Loan Purpose | |||
Veritex Loans |
|
|
|
|
|
|
|
|
|
|
|
|
| |||
LE Term Loan Due 2034 (in default) (1)(2) |
| LE Veritex |
| $ | 25.0 |
|
| Jun 2034 |
| $0.2 million |
| WSJ Prime + 2.75% |
|
| Refinance loan; capital improvements | |
LRM Term Loan Due 2034 (in default) (1) |
| LRM Veritex |
| $ | 10.0 |
|
| Dec 2034 |
| $0.1 million |
| WSJ Prime + 2.75% |
|
| Refinance bridge loan; capital improvements | |
Kissick Debt (in default)(3)(4) |
| LE Kissick |
| $ | 11.7 |
|
| Jan 2018 |
|
|
| 16.00% |
| Working capital; reduced LE’s obligation to GEL | ||
GNCU Loan (in default) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
NPS Term Loan Due 2031(5) |
| NPS GNCU |
| $ | 10.0 |
|
| Oct 2031 |
| $0.1 million |
| 5.75% |
| Working capital | ||
SBA EIDLs |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
BDEC Term Loan Due 2051 (as modified)(6) |
| Blue Dolphin SBA |
| $ | 2.0 |
|
| Jun 2051 |
| $0.01 million |
| 3.75% |
| Working capital | ||
LE Term Loan Due 2050(7) |
| LE SBA |
| $ | 0.15 |
|
| Aug 2050 |
| $0.0007 million |
| 3.75% |
| Working capital | ||
NPS Term Loan Due 2050(7) |
| NPS SBA |
| $ | 0.15 |
|
| Aug 2050 |
| $0.0007 million |
| 3.75% |
| Working capital | ||
Equipment Loan Due 2025(8) |
| LE Texas First |
| $ | 0.07 |
|
| Oct 2025 |
| $0.0013 million |
| 4.50% |
| Equipment Lease Conversion |
|
| |
|
| |
|
|
|
| |
|
| |
|
| |
|
| |
|
|
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ | 23,789 |
|
| $ | 22,840 |
|
LRM Term Loan Due 2034 (in default) |
|
| 9,861 |
|
|
| 9,473 |
|
Kissick Debt (in default) |
|
| 10,210 |
|
|
| 9,413 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 10,094 |
|
|
| 0 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 512 |
|
|
| 0 |
|
LE Term Loan Due 2050 |
|
| 156 |
|
|
| 152 |
|
NPS Term Loan Due 2050 |
|
| 156 |
|
|
| 152 |
|
Equipment Loan Due 2025 |
|
| 53 |
|
|
| 71 |
|
|
|
| 54,831 |
|
|
| 42,101 |
|
|
|
|
|
|
|
|
|
|
Less: Current portion of long-term debt, net |
|
| (42,953 | ) |
|
| (33,692 | ) |
Less: Unamortized debt issue costs |
|
| (2,351 | ) |
|
| (1,749 | ) |
Less: Accrued interest payable (in default) |
|
| (8,689 | ) |
|
| (6,305 | ) |
|
| $ | 838 |
|
| $ | 355 |
|
|
|
|
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Veritex Loans |
|
|
|
|
|
| ||
LE Term Loan Due 2034 (in default) |
| $ | 1,674 |
|
| $ | 1,674 |
|
LRM Term Loan Due 2034 (in default) |
|
| 768 |
|
|
| 768 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 730 |
|
|
| 0 |
|
|
|
|
|
|
|
|
|
|
Less: Accumulated amortization |
|
| (821 | ) |
|
| (693 | ) |
|
| $ | 2,351 |
|
| $ | 1,749 |
|
Amortization expense was $0.1 million for both twelve-month periods ended December 31, 2021 and 2020.
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Notre Dame Debt (in default) |
| $ | 5,232 |
|
| $ | 4,435 |
|
Veritex Loans |
|
|
|
|
|
|
|
|
LE Term Loan Due 2034 (in default) |
|
| 2,338 |
|
|
| 1,295 |
|
LRM Term Loan Due 2034 (in default) |
|
| 959 |
|
|
| 571 |
|
GNCU Loan |
|
|
|
|
|
|
|
|
NPS Term Loan Due 2031 (in default) |
|
| 136 |
|
|
| 0 |
|
SBA EIDLs |
|
|
|
|
|
|
|
|
BDEC Term Loan Due 2051 |
|
| 12 |
|
|
| 0 |
|
LE Term Loan Due 2050 |
|
| 6 |
|
|
| 2 |
|
NPS Term Loan Due 2050 |
|
| 6 |
|
|
| 2 |
|
|
|
| 8,689 |
|
|
| 6,305 |
|
Less: Accrued interest payable (in default) |
|
| (8,689 | ) |
|
| (6,305 | ) |
Long-term Interest Payable, Net of Current Portion |
| $ | 0 |
|
| $ | 0 |
|
Payment Deferments
Veritex Loans. In 2020, LE and LRM were each granted a two-month payment deferment on their respective Veritex loans. The moratorium was from April 2020 to June 2020. LE and LRM were not required to make payments during the deferment period. However, interest continued to accrue at the stated rates of the loans. In July 2020, Veritex re-amortized the loans to recast principal and interest payments. Veritex also reinstated previous defaults. See ‘Defaults’ within this “Note (10) for additional disclosures related to defaults.
GNCU Loan. Payments under the NPS Term Loan Due 2031 are deferred for the first thirty-six (36) months. Interest accrues during the deferral period. Principal and interest payments begin in October 2024.
SBA EIDLs. SBA EIDLs include a payment deferral period. Interest accrues during the deferral period. The deferral period for the BDEC Term Loan Due 2051 (as modified) is the first thirty (30) months; principal and interest payments begin in December 2023. See “Note (17)” to our consolidated financial statements for more information regarding the loan modification. The deferral period for the LE Term Loan Due 2050 and the NPS Term Loan Due 2050 is the first thirty (30) months; principal and interest payments begin in March 2023.
Remainder of Page Intentionally Left Blank
|
|
|
Guarantees and Security
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
|
| ||
|
|
|
|
|
|
|
|
|
| ||
|
|
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. Lenders of USDA-guaranteed loans are required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record. Both the guaranteed and unguaranteed portions of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion. See “Notes (3) and (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and transactions, including long-term debt guarantees.
Covenants
The Veritex loans, GNCU loan, 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 Kissick Debt and the Equipment Loan Due 2025.
Defaults
|
|
|
| ||
|
|
|
|
|
|
| ||
|
|
|
|
|
|
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, NPS Term Loan Due 2031, and the Kissick 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 Kissick Debt was classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2021 and 2020.
|
|
|
Any exercise by third parties of their rights and remedies under our secured loan agreements will 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, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their 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 |
|
| Debt Issue Costs |
|
| Total |
| |||
|
|
|
| (in thousands) |
|
|
| |||||
2022 |
| $ | 45,304 |
|
| $ | (2,351 | ) |
| $ | 42,953 |
|
2023 |
|
| 16 |
|
|
| 0 |
|
|
| 16 |
|
2024 |
|
| 16 |
|
|
| 0 |
|
|
| 16 |
|
2025 |
|
| 12 |
|
|
| 0 |
|
|
| 12 |
|
2026 |
|
| 18 |
|
|
|
|
|
|
|
|
|
Subsequent to 2026 |
|
| 776 |
|
|
| 0 |
|
|
| 776 |
|
|
| $ | 46,142 |
|
| $ | (2,351 | ) |
| $ | 43,791 |
|
(11) Line of Credit Payable
Line of Credit Agreement Summary
|
|
|
|
|
|
|
|
|
|
|
|
On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments NPS believes Pilot misapplied as part of the Amended Pilot Line of Credit setoff. As of the filing date of this report, the amount remained in dispute between the parties.
NPS was in default as of December 31, 2020, for failure of the borrower or any guarantor to pay past due obligations at maturity.
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Amended Pilot Line of Credit (in default) |
| $ | 0 |
|
| $ | 8,145 |
|
|
|
|
|
|
|
|
|
|
Less: Unamortized debt issue costs |
|
| 0 |
|
|
| 0 |
|
Less: Interest payable, short-term |
|
| 0 |
|
|
| (103 | ) |
|
| $ | 0 |
|
| $ | 8,042 |
|
|
|
|
Guarantees and Security
|
|
|
|
|
|
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 did 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, the USDA did not provide its concurrence during the term of the agreement.
Covenants
The Amended Pilot Line of Credit contained customary affirmative and negative covenants and events of default.
Defaults
|
|
|
|
|
|
As reflected in the table above and elsewhere in this report, we were in default under the Amended Pilot Line of Credit prior to pay off in October 2021. 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 accruing 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 applied 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 for the storage of jet fuel, and (b) the Terminal Services Agreement (covering Tank Nos. 1 and 56), dated as of June 1, 2019, between NPS and Tartan for the storage of crude oil, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfied 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, 2021 and 2020, the tank lease payment setoff totaled $1.9 million and $1.3 million, respectively. The amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.7 million and $1.4 million, respectively, for the twelve months ended December 31, 2021 and 2020.
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 were junior to those securing the Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action was taken by Pilot.
(12) AROs
Refinery and Facilities
Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that 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 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. During the twelve months ended December 31, 2021, we determined that the estimated future cost and timing of decommissioning our pipelines and facilities assets has changed. As a result, we recorded an increase in liability at December 31, 2021.
ARO liability as of the dates indicated was as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
AROs, at the beginning of the period |
| $ | 2,370 |
|
| $ | 2,565 |
|
Changes in estimates of existing obligations |
|
| 1,091 |
|
|
| 0 |
|
Liabilities settled |
|
| 0 |
|
|
| (195 | ) |
|
|
| 3,461 |
|
|
| 2,370 |
|
Less: AROs, current portion |
|
| 0 |
|
|
| (2,370 | ) |
Long-term AROs, at the end of the period |
| $ | 3,461 |
|
| $ | 0 |
|
Liabilities settled reflects preparatory costs in the period associated with decommissioning our offshore pipelines and platform assets.
See “Note (16)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.
(13) Lease Obligations
Lease Obligations
Office Lease. BDSC has an office lease related to our headquarters office in Houston, Texas. The 68-month operating lease expires in August 2023. Under the lease, BDSC has an option to extend the lease term for an additional five (5) year period. To exercise the option, BDSC must provide lessor notice at least twelve (12) months before the end of the current term.
In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement to cure BDSC’s office lease default. Under the terms of a fourth amendment to the office lease, Building Lessor agreed to defer BDSC’s past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning in June 2021, and continuing through lease expiration The Past Due Obligations are subject to an annual percentage rate of 4.50%. BDSC’s monthly base rent including the prorated portion of the Past Due Obligations is $0.02 million.
Building Lessor notified BDSC in an October 11, 2021 letter of a new default under the office lease due to non-payment of rent. As of the filing date of this report, BDSC was in default related to required monthly base rent including Past Due Obligations from April 2021 to March 2022. Default under the office lease permits Building Lessor to declare the amounts owed under the office lease immediately due and payable, exercise its rights concerning collateral securing obligors’ obligations under the office lease, including property placed in or upon the leased premises, and exercise any other rights and remedies available. Although BDSC intends to cure the lease default, we can provide no assurance that our efforts will be successful.
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.03 million for both twelve-month periods ended December 31, 2021, and 2020. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.
|
|
|
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
|
|
|
| December 31, |
| |||||||
|
| Balance Sheet Location |
|
| 2021 |
|
| 2020 |
| |||
|
|
|
|
| (in thousands) |
| ||||||
Assets |
|
|
|
|
|
|
|
| ||||
Operating lease ROU assets |
| Operating lease ROU assets |
|
| $ | 787 |
|
| $ | 787 |
| |
Less: Accumulated amortization on operating lease assets |
| Operating lease ROU assets |
|
|
| (455 | ) |
|
| (289 | ) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total lease assets |
|
|
|
|
|
| 332 |
|
|
| 498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Current |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease |
| Current portion of lease liabilities |
|
|
| 215 |
|
|
| 194 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Noncurrent |
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease |
| Long-term lease liabilities, net of current |
|
|
| 156 |
|
|
| 370 |
| |
Total lease liabilities |
|
|
|
|
| $ | 371 |
|
| $ | 564 |
|
| ||||
| ||||
| ||||
|
The following table presents information related to lease costs for operating and finance leases:
|
| Twelve Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
Operating lease costs |
| $ | 206 |
|
| $ | 206 |
|
Finance lease costs: |
|
|
|
|
|
|
|
|
Depreciation of leased assets |
|
| 0 |
|
|
| 13 |
|
Interest on lease liabilities |
|
| 0 |
|
|
| 3 |
|
Total lease cost |
| $ | 206 |
|
| $ | 222 |
|
The table below presents supplemental cash flow information related to leases as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Cash paid for amounts included in the measurement |
|
|
|
|
|
| ||
of lease liabilities: |
|
|
|
|
|
| ||
Operating cash flows for operating lease |
| $ | 233 |
|
| $ | 230 |
|
Operating cash flows for finance leases |
| $ | 0 |
|
| $ | 4 |
|
Financing cash flows for finance leases |
| $ | 0 |
|
| $ | 17 |
|
As of December 31, 2021, maturities of lease liabilities for the periods indicated were as follows:
December 31, |
| Operating Lease |
|
| Total |
| ||
|
| (in thousands) |
| |||||
|
|
|
|
|
|
| ||
2022 |
| $ | 214 |
|
| $ | 214 |
|
2023 |
|
| 157 |
|
|
| 157 |
|
|
|
|
|
|
|
|
|
|
|
| $ | 371 |
|
| $ | 371 |
|
|
|
|
Future minimum annual lease commitments that are non-cancelable:
|
| Operating |
| |
December 31, |
| Lease |
| |
|
| (in thousands) |
| |
2022 |
| $ | 237 |
|
2023 |
|
| 161 |
|
|
| $ | 398 |
|
(14)Income Taxes
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
|
| Twelve Months Ended |
| |||||
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Current |
|
|
|
|
|
| ||
Federal |
| $ | 0 |
|
| $ | (15 | ) |
State |
|
| 0 |
|
|
| 0 |
|
Deferred |
|
|
|
|
|
|
|
|
Federal |
|
| 2,335 |
|
|
| 3,033 |
|
State |
|
| 0 |
|
|
| 0 |
|
Change in valuation allowance |
|
| (2,335 | ) |
|
| (3,033 | ) |
|
|
|
|
|
|
|
|
|
Total provision for income taxes |
| $ | - |
|
| $ | (15 | ) |
GAAP treats TMT like an income tax for financial reporting purposes.
Effective Tax Rate
Our effective tax rate was as follows:
|
| December 31, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
|
|
|
|
|
| ||
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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands) |
| |||||
Deferred tax assets: |
|
|
|
|
|
| ||
NOL and capital loss carryforwards |
| $ | 16,818 |
|
| $ | 15,258 |
|
Business interest expense |
|
| 4,680 |
|
|
| 3,343 |
|
Start-up costs (crude oil and condensate processing facility) |
|
| 424 |
|
|
| 509 |
|
ARO liability/deferred revenue |
|
| 727 |
|
|
| 498 |
|
AMT credit |
|
| 0 |
|
|
| 0 |
|
Other |
|
| 12 |
|
|
| 3 |
|
Total deferred tax assets |
|
| 22,661 |
|
|
| 19,611 |
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Basis differences in property and equipment |
|
| (7,945 | ) |
|
| (7,230 | ) |
Total deferred tax liabilities |
|
| (7,945 | ) |
|
| (7,230 | ) |
|
|
| 14,716 |
|
|
| 12,381 |
|
|
|
|
|
|
|
|
|
|
Valuation allowance |
|
| (14,716 | ) |
|
| (12,381 | ) |
|
|
|
|
|
|
|
|
|
Deferred tax assets, net |
| $ | 0 |
|
| $ | 0 |
|
Deferred Income Taxes
Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when 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 stockholders who own more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders' lowest percentage ownership during the testing period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition. These ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of roughly $0.6 million per year. We may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change.
NOL Carryforwards. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):
|
| Net Operating Loss Carryforward |
|
|
| |||||||
|
| Pre-Ownership Change |
|
| Post-Ownership Change |
|
| Total |
| |||
|
| (in thousands) |
| |||||||||
|
|
|
|
|
|
|
|
|
| |||
Balance at December 31, 2019 |
|
| 9,614 |
|
|
| 43,058 |
|
|
| 52,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
| 0 |
|
|
| 13,305 |
|
|
| 13,305 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020 |
| $ | 9,614 |
|
| $ | 56,363 |
|
| $ | 65,977 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating losses |
|
| (1,717 | ) |
|
| 9,148 |
|
|
| 7,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2021 |
| $ | 7,897 |
|
| $ | 65,511 |
|
| $ | 73,408 |
|
|
|
|
Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At December 31, 2021 and 2020, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of December 31, 2021 and 2020.
We have NOL carryforwards that remain available for future use. At December 31, 2021 and 2020, there were no uncertain tax positions for which a reserve or liability was necessary.
(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, |
| |||||
|
| 2021 |
|
| 2020 |
| ||
|
| (in thousands, |
| |||||
|
| except share and per share amounts) |
| |||||
|
|
|
|
|
|
| ||
Net income (loss) |
| $ | (12,841 | ) |
| $ | (14,458 | ) |
|
|
|
|
|
|
|
|
|
Basic and diluted income (loss) per share |
| $ | (1.01 | ) |
| $ | (1.15 | ) |
|
|
|
|
|
|
|
|
|
Basic and Diluted |
|
|
|
|
|
|
|
|
Weighted average number of shares of |
|
|
|
|
|
|
|
|
common stock outstanding and potential |
|
|
|
|
|
|
|
|
dilutive shares of common stock |
|
| 12,693,514 |
|
|
| 12,574,465 |
|
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, 2021 and 2020 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.
|
|
|
(16) Commitments and Contingencies
Amended and Restated Operating Agreement
See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin properties by an Affiliate under the Amended and Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020. Abandonment operations were delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
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, 2021 and 2020, BDPL maintained $3.5 million and $2.4 million, respectively, in AROs related to abandonment of these assets.
|
|
|
Defaults Under Secured Loan Agreements with Third Parties and Related 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
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.
Unresolved 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 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. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 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. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.
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 did not record a liability on our consolidated balance sheets as of December 31, 2021 and 2020. At both December 31, 2021 and 2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
|
|
|
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January 29, 2020 to March 2, 2020. The proposed agreed order assesses an administrative penalty of approximately $0.4 million and identifies actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. However, we recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheet as of December 31, 2021.
Pilot Dispute Related to Set-Off Payments. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments Pilot made to Tartan Oil LLC, a Pilot affiliate, arising under a product sales agreement. NPS contends the disputed amount should have been applied to the balance owed by NPS under the Amended Pilot Line of Credit. Pilot has asserted that the redirected payment was offset by accrued interest owed by NPS under the Amended Pilot Line of Credit. As of the filing date of this report, the amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. 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. If third parties 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.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute 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.
Resolved Matters.
None.
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, 2021 and 2020:
|
|
|
|
We recognized income on the issuance of shares of approximately $0.08 million and $0 for the twelve months ended December 31, 2021 and 2020, 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
BDEC Term Loan Due 2051 Modification
Effective February 18, 2022, BDEC executed a 1st Loan Modification of Note to secure additional monies under the BDEC Term Loan Due 2051. The original principal amount of the loan increased by $1.5 million from $0.5 million to $2.0 million. Proceeds will be used for working capital purposes. With the exception of the monthly principal payment, all loan terms remained materially unchanged. Interest on the loan accrues at the rate of 3.75% per annum and will accrue from the date of loan. Installment payments, including principal and interest, total $0.01 million per month and are due beginning thirty (30) months from the original loan date of May 4, 2021. The balance of principal and interest is payable over a 30-year term; the loan maturity date remains June 7, 2051.
SBA EIDLs are not forgivable. Jonathan Carroll, the company’s chief executive officer, and an Affiliate provided guarantees of the debt. The debt is subject to certain customary covenants and default provisions.
Remainder of Page Intentionally Left Blank
|
|
|
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 effective as of the end of the period covered by this report to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms.
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.
As previously reported, for the twelve months ended December 31, 2020 management’s evaluation of our internal controls over financial reporting identified a material weakness and significant deficiency, as follow:
|
|
|
|
During the twelve months ended December 31, 2021, management took steps to remediate these deficiencies, including implementing a formal policy to review manual journal entries and documenting procedures to identify and address complex accounting transactions. 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, 2021. 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, 2021 determined that they were effective.
Changes in Internal Control over Financial Reporting. Except as noted above, 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
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|
|
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, 2021 and 2020 that were not registered under the Securities Act:
|
|
|
|
BDEC Term Loan Due 2051 Modification
Effective February 18, 2022, BDEC executed a 1st Loan Modification of Note to secure additional monies under the BDEC Term Loan Due 2051. The original principal amount of the loan increased by $1.5 million from $0.5 million to $2.0 million. Proceeds will be used for working capital purposes. With the exception of the monthly principal payment, all loan terms remained materially unchanged. Interest on the loan accrues at the rate of 3.75% per annum and will accrue from the date of loan. Installment payments, including principal and interest, total $0.01 million per month and are due beginning thirty (30) months from the original loan date of May 4, 2021. The balance of principal and interest is payable over a 30-year term; the loan maturity date remains June 7, 2051.
SBA EIDLs are not forgivable. Jonathan Carroll, the company’s chief executive officer, and an Affiliate provided guarantees of the debt. The debt is subject to certain customary covenants and default provisions.
Remainder of Page Intentionally Left Blank
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PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
The information required in response to this Item 10 is incorporated herein by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this Item 12 is incorporated herein by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item 13 is incorporated herein by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item 14 is incorporated herein by reference to our definitive proxy statement relating to our 2022 Annual Meeting of Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
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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:
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| 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
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Blue Dolphin Energy Company |
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_________________
* Management Compensation Plan
** Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this reportAmendment to be signed on its behalf by the undersigned, thereunto duly authorized.
| BLUE DOLPHIN ENERGY COMPANY |
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| (Registrant) |
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May 1, | By: | /s/ JONATHAN P. CARROLL |
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| 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.
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Blue Dolphin Energy Company |
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