Blue Dolphin Energy Company one or more of its consolidated subsidiaries, or all of them taken as a whole. | | March 31, 2021 │Page 6
Blue Dolphin Energy Company | June 30, 2020 |
6
Consolidated Balance Sheets (Unaudited) | | | | | | | | | | (in thousands except share amounts) | | | | | | ASSETS | | | | CURRENT ASSETS | | | | Cash and cash equivalents | $521 | $549 | | Restricted cash | 48 | 48 | | Accounts receivable, net | 170 | 214 | | Prepaid expenses and other current assets | 1,060 | 3,564 | | Deposits | 110 | 124 | | Inventory | 1,099 | 1,062 | | Total current assets | 3,008 | 5,561 | | | | | | LONG-TERM ASSETS | | | | Total property and equipment, net | 61,856 | 62,497 | | Operating lease right-of-use assets, net | 458 | 498 | | Restricted cash, noncurrent | - | 514 | | Surety bonds | 230 | 230 | | Total long-term assets | 62,544 | 63,739 | | | | | | TOTAL ASSETS | $65,552 | $69,300 | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | CURRENT LIABILITIES | | | | Long-term debt less unamortized debt issue costs, current portion (in default) | $33,724 | $33,692 | | Line of credit payable less unamortized debt issue costs (in default) | 7,169 | 8,042 | | Long-term debt, related party, current portion (in default) | 16,351 | 16,010 | | Interest payable (in default) | 7,001 | 6,408 | | Interest payable, related party (in default) | 2,974 | 2,814 | | Accounts payable | 2,689 | 3,274 | | Accounts payable, related party | 155 | 155 | | Current portion of lease liabilities | 199 | 194 | | Asset retirement obligations, current portion | 2,370 | 2,370 | | Accrued expenses and other current liabilities | 4,689 | 4,882 | | Total current liabilities | 77,321 | 77,841 | | | | | | LONG-TERM LIABILITIES | | | | Long-term lease liabilities, net of current | 319 | 370 | | Deferred revenues | 1,523 | 1,520 | | Long-term debt, net of current portion | 349 | 355 | | Total long-term liabilities | 2,191 | 2,245 | | | | | | TOTAL LIABILITIES | 79,512 | 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 and outstanding at both March 31, 2021 and December 31, 2020) | 127 | 127 | | Additional paid-in capital | 38,457 | 38,457 | | Accumulated deficit | (52,544) | (49,370) | | TOTAL STOCKHOLDERS' DEFICIT | (13,960) | (10,786) | | | | | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $65,552 | $69,300 |
The accompanying notes are an integral part of these consolidated financial statements.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 7
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PART I
ITEM 1.
FINANCIAL STATEMENTS
Consolidated Balance Sheets (Unaudited)| | | | | | | | | | | | | | (in thousands except share amounts) | | | | | | ASSETS | | | | CURRENT ASSETS | | | | Cash and cash equivalents | $4 | $72 | | Restricted cash | 49 | 49 | | Accounts receivable, net | 138 | 446 | | Accounts receivable, related party | - | 1,364 | | Prepaid expenses and other current assets | 1,912 | 2,276 | | Deposits | 224 | 158 | | Inventory | 3,558 | 1,645 | | Refundable federal income tax | 100 | 65 | | Total current assets | 5,985 | 6,075 | | | | | | LONG-TERM ASSETS | | | | Total property and equipment, net | 63,601 | 63,893 | | Operating lease right-of-use assets | 576 | 649 | | Restricted cash, noncurrent | 547 | 547 | | Surety bonds | 230 | 230 | | Deferred tax assets, net | - | 50 | | Total long-term assets | 64,954 | 65,369 | | | | | | TOTAL ASSETS | $70,939 | $71,444 | | | | | | LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | | | | CURRENT LIABILITIES | | | | Long-term debt less unamortized debt issue costs, current portion (in default) | $33,612 | $33,836 | | Line of credit payable less unamortized debt issue costs (in default) | 10,470 | 11,464 | | Long-term debt, related party, current portion (in default) | 12,573 | 6,001 | | Interest payable (in default) | 4,824 | 3,814 | | Interest payable, related party (in default) | 2,494 | 2,174 | | Accounts payable | 2,985 | 1,877 | | Accounts payable, related party | 149 | 149 | | Current portion of lease liabilities | 313 | 251 | | Asset retirement obligations, current portion | 2,436 | 2,565 | | Accrued expenses and other current liabilities | 2,775 | 3,333 | | Total current liabilities | 72,631 | 65,464 | | | | | | LONG-TERM LIABILITIES | | | | Long-term lease liabilities, net of current | 470 | 564 | | Deferred revenues | 1,748 | 1,930 | | Total long-term liabilities | 2,218 | 2,494 | | | | | | TOTAL LIABILITIES | 74,849 | 67,958 | | | | | | Commitments and contingencies (Note 16) | | | | | | | | STOCKHOLDERS' EQUITY (DEFICIT) | | | | Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514 and 12,327,365 | | | | shares issued at June 30, 2020 and December 31, 2019, respectively) | 127 | 123 | | Additional paid-in capital | 38,457 | 38,275 | | Accumulated deficit | (42,494) | (34,912) | | TOTAL STOCKHOLDERS' EQUITY (DEFICIT) | (3,910) | 3,486 | | | | | | TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | $70,939 | $71,444 |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | June 30, 2020 |
7
Consolidated Statements of Operations (Unaudited) | | | | | | (in thousands, except share and per-share amounts) | | REVENUE FROM OPERATIONS | | | | Refinery operations | $58,483 | $60,897 | | Tolling and terminaling | 930 | 1,103 | | | | | | Total revenue from operations | 59,413 | 62,000 | | | | | | COST OF GOODS SOLD | | | | Crude oil, fuel use, and chemicals | 57,783 | 59,720 | | Other conversion costs | 1,840 | 2,368 | | Total cost of goods sold | 59,623 | 62,088 | | | | | | Gross deficit | (210) | (88) | | | | | | COST OF OPERATIONS | | | | LEH operating fee | 124 | 147 | | Other operating expenses | 54 | 59 | | General and administrative expenses | 658 | 644 | | Depletion, depreciation and amortization | 693 | 633 | | | | | | Total cost of operations | 1,529 | 1,483 | | | | | | Loss from operations | (1,739) | (1,571) | | | | | | OTHER INCOME (EXPENSE) | | | | | | | | Easement, interest and other income | 2 | 20 | | Interest and other expense | (1,480) | (1,774) | | Gain on extinguishment of debt | 43 | - | | Total other expense | (1,435) | (1,754) | | | | | | Loss before income taxes | (3,174) | (3,325) | | | | | | Income tax expense | - | (15) | | | | | | Net loss | $(3,174) | $(3,340) | | | | | | | | | | Loss per common share: | | | | Basic | $(0.25) | $(0.27) | | Diluted | $(0.25) | $(0.27) | | | | | | Weighted average number of common shares outstanding: | | | | Basic | 12,693,514 | 12,327,365 | | Diluted | 12,693,514 | 12,327,365 |
The accompanying notes are an integral part of these consolidated financial statements. | Blue Dolphin Energy Company | | March 31, 2021 │Page 8
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Consolidated Statements of Operations (Unaudited)| | Three Months Ended June 30, | Six Months Ended June 30, | | | | | | | | | (in thousands, except share and per-share amounts) | | REVENUE FROM OPERATIONS | | | | | | Refinery operations | $17,359 | $77,257 | $78,256 | $145,115 | | Tolling and terminaling | 1,110 | 1,088 | 2,213 | 2,157 | | Total revenue from operations | 18,469 | 78,345 | 80,469 | 147,272 | | | | | | | | COST OF GOODS SOLD | | | | | | Crude oil, fuel use, and chemicals | 16,783 | 76,364 | 76,503 | 139,551 | | Other conversion costs | 2,893 | 2,192 | 5,261 | 4,521 | | Total cost of goods sold | 19,676 | 78,556 | 81,764 | 144,072 | | | | | | | | Gross profit (deficit) | (1,207) | (211) | (1,295) | 3,200 | | | | | | | | COST OF OPERATIONS | | | | | | LEH operating fee | 190 | 183 | 337 | 333 | | Other operating expenses | 47 | 56 | 106 | 113 | | General and administrative expenses | 531 | 579 | 1,175 | 1,249 | | Depletion, depreciation and amortization | 669 | 633 | 1,302 | 1,223 | | | | | | | | Total cost of operations | 1,437 | 1,451 | 2,920 | 2,918 | | | | | | | | Income (loss) from operations | (2,644) | (1,662) | (4,215) | 282 | | | | | | | | OTHER INCOME (EXPENSE) | | | | | | | | | | | | Easement, interest and other income | 80 | 1 | 100 | 1 | | Interest and other expense | (1,678) | (1,638) | (3,452) | (2,835) | | Total other expense | (1,598) | (1,637) | (3,352) | (2,834) | | | | | | | | Loss before income taxes | (4,242) | (3,299) | (7,567) | (2,552) | | | | | | | | Income tax expense | - | - | (15) | - | | | | | | | | Net loss | $(4,242) | $(3,299) | $(7,582) | $(2,552) | | | | | | | | | | | | | | Loss per common share: | | | | | | Basic | $(0.34) | $(0.30) | $(0.61) | $(0.23) | | Diluted | $(0.34) | $(0.30) | $(0.61) | $(0.23) | | | | | | | | Weighted average number of common shares outstanding: | | | | | | Basic | 12,580,853 | 10,975,514 | 12,454,109 | 10,975,514 | | Diluted | 12,580,853 | 10,975,514 | 12,454,109 | 10,975,514 |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | June 30, 2020 |
8
Consolidated Statements of Cash Flows (Unaudited) | | Three Months Ended March 31, | | | | | | | (in thousands) | | OPERATING ACTIVITIES | | | | Net loss | $(3,174) | $(3,340) | | Adjustments to reconcile net loss to net cash | | | | used in operating activities: | | | | Depletion, depreciation and amortization | 693 | 633 | | Deferred income tax | - | 15 | | Amortization of debt issue costs | 32 | 220 | | Guaranty fees paid in kind | 152 | 153 | | Related-party interest expense paid in kind | 225 | 68 | | Deferred revenues and expenses | 3 | (122) | | Gain on extinguishment of debt | (43) | - | | Changes in operating assets and liabilities | | - | | Accounts receivable | 44 | (879) | | Accounts receivable, related party | - | 1,364 | | Prepaid expenses and other current assets | 2,504 | 1,496 | | Deposits and other assets | 14 | (16) | | Inventory | (37) | 832 | | Accounts payable, accrued expenses and other liabilities | (40) | (683) | | Net cash provided by (used in) operating activities | 373 | (259) | | | | | | INVESTING ACTIVITIES | | | | Capital expenditures | - | (198) | | Net cash used in investing activities | - | (198) | | | | | | FINANCING ACTIVITIES | | | | Proceeds from debt | - | (696) | | Payments on debt | (879) | - | | Net activity on related-party debt | (36) | 1,350 | | Net cash provided by (used in) financing activities | (915) | 654 | | Net change in cash, cash equivalents, and restricted cash | (542) | 197 | | | | | | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD | 1,111 | 668 | | CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD | $569 | $865 | | | | | | Supplemental Information: | | | | Non-cash investing and financing activities: | | | | Interest paid | $287 | $361 | | Income taxes paid (refunded) | $- | $- |
The accompanying notes are an integral part of these consolidated financial statements. | Blue Dolphin Energy Company | | March 31, 2021 │Page 9
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Consolidated Statements of Cash Flows (Unaudited)| | Six Months Ended June 30, | | | | | | | | | | OPERATING ACTIVITIES | | | | Net loss | $(7,582) | $(2,552) | | Adjustments to reconcile net loss to net cash | | used in operating activities: | | | | Depletion, depreciation and amortization | 1,302 | 1,223 | | Deferred income tax | 15 | - | | Amortization of debt issue costs | 284 | 189 | | Guaranty fees paid in kind | 305 | - | | Deferred revenues and expenses | (182) | - | | Gain on issuance of shares | (80) | - | | Changes in operating assets and liabilities | | | | Accounts receivable | 308 | 209 | | Accounts receivable, related party | 1,364 | (492) | | Prepaid expenses and other current assets | 364 | 503 | | Deposits and other assets | (66) | - | | Inventory | (1,913) | (287) | | Accrued arbitration award | - | (11,600) | | Accounts payable, accrued expenses and other liabilities | 1,807 | 1,211 | | Accounts payable, related party | - | 302 | | Net cash used in operating activities | (4,074) | (11,294) | | | | | | INVESTING ACTIVITIES | | | | Capital expenditures | (908) | (494) | | Net cash used in investing activities | (908) | (494) | | | | | | FINANCING ACTIVITIES | | | | Proceeds from line of credit | - | 12,402 | | Payments on debt | (1,501) | (541) | | Net activity on related-party debt | 6,415 | 229 | | Net cash provided by financing activities | 4,914 | 12,090 | | Net change in cash, cash equivalents, and restricted cash | (68) | 302 |
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD | 668
| 1,665
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| CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD | $600 | $1,967 | | | | | | Supplemental Information: | | | | Non-cash investing and financing activities: | | | | Financing of capital expenditures via accounts payable and finance leases | $- | $86 | | Issuance of shares to extinguish debt | $120 | $- | | Conversion of related-party notes to common stock | $148 | $- | | Line of credit closing costs included in principal balance | $- | $398 | | Interest paid | $1,608 | $1,174 | | Income taxes paid | $- | $- |
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
| Notes to Consolidated Financial Statements | | |
OverviewNotes to Consolidated Financial StatementsBlue 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. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Blue Dolphin has 20.0 million shares of Common Stock and 2.5 million shares of Preferred Stock authorized. There are approximately 12.7 million shares of Common Stock and no shares of Preferred Stock issued and outstanding.
Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.
Affiliates
Affiliates control approximately 82% of the voting power of our Common Stock.
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Overview Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments. Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole. Affiliates Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, and arrangements, and risks associated with working capital deficits. Going Concern Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. TheseAs discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the following:outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing. Defaults Under Secured Loan Agreements with Third Parties. DefaultsWe are currently in default under certain of our secured loan agreements with third parties include loan agreements with Veritex in the original aggregate principal amount of $35.0 million, which are guaranteed 100% by the USDA, and a line of credit agreement with Pilot in the original principal amount of $13.0 million. Certain of our related-party debt is also in default. See “Note (3)” of our consolidated financial statements for disclosures related to related-party debt. Veritex Loan Agreements. In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex regarding events of default under our secured loan agreements, including, but not limited to, the occurrence of the GEL Final Arbitration Award, associated material adverse effect conditions, failure by LE to replenish a $1.0 million payment reserve account, and the occurrence of events of default under our other secured loan agreements with Veritex. Further, Veritex informed obligors that it would consider a final confirmation of the GEL Final Arbitration Award to be a material event of default under the loan agreements. Veritex did not accelerate or call due our secured loan agreements considering then ongoing settlement discussions between GEL and the Lazarus Parties. Instead, Veritex expressly reserved all its rights, privileges and remedies related to events of default.
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant defaults and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.
In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.
At June 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex.parties. As a result, the debt associated with these loansobligations was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2020March 31, 2021 and December 31, 2019.2020.
Third-Party Defaults ● Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowingsVeritex Loans – Defaults under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii)the LE Term Loan Due 2034 and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements with VeritexTerm Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further,Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remained outstanding.
● Amended Pilot Line of Credit. On – Upon maturity of the Pilot Line of Credit in May 4, 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”“Pilot Obligations”) under the Amended Pilot Line of Credit.. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Pilot Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Pilot Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 10
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On
| Notes to Consolidated Financial Statements | | |
Pursuant to a June 1, 2020 notice, Pilot notified borrower and guarantors by letter of its intent to apply as a setoffbegan applying Pilot’s payment obligations owing to or for the credit or the account of borrowerNPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between borrowerNPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between the borrowerNPS and Pilot, against NPS’ payment obligations to Pilot under the Obligations. AsAmended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the dateAmended Pilot Line of the letter, the amount of such setoff was approximately $0.2 million. The setoff was only in partial satisfaction of the ObligationsCredit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. The borrowerOn 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 Pilot Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report.
Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue to workworking with the borrowerNPS to settle the Pilot Obligations. BorrowerNPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. OurNPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, weNPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. See “Note (10)”● Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and “Note (11)” to our consolidatedliens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment. Our financial statements for additional information related tohealth could be materially and adversely affected by defaults underin our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with VeritexPilot, which could impact our ability to acquire crude oil and Pilotcondensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply constraints and their potential effectsincreased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business financial condition,results and resultsoperations. During the three-month period ended March 31, 2021, our refinery experienced 1 day of operations.downtime as a result of lack of crude due to cash constraints. Related-Party Defaults Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Replated party debt, which is currently in default, represents such working capital borrowings. Margin Deterioration and Volatility. StepsOur refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the ongoing COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and thevoluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions ofby members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets, causingmarkets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil prices to decline sharply, as well as other changes toproduction, there is cautious optimism that the economic outlookeconomy will improve in the near term. Such subsequent developments included, but are not limited to, government-imposed temporary business closuresshort-term. However, oil and voluntary shelter-at-home directives as well as developments in production discussions between global oil producers,refined product prices and the effect thereof. Oil prices as well as demand are expected to continue to beremain volatile as a resultfor the foreseeable future, despite signs of recovery during the near-term over-supply and the ongoing COVID-19 pandemic as changes in oil inventories, industry demand and global and national economic performance are reported, and wefirst quarter of 2021. We cannot predict when prices and demand will improvestabilize, and stabilize. Wewe are currently unable to estimate the impact these events will have on our future financial position and results of operations. However,Accordingly, we expect margins will likely remain weak for the remainder of 2020 until global demand begins to recover. Accordingly, we can provide no assurances that these events will notcontinue to have a material adverse effect on our financial position orand results of operations.operations throughout 2021.
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 11
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| Notes to Consolidated Financial Statements | | |
Historic Net Losses and Working Capital Deficits. Net Losses. Net loss for the three months ended June 30, 2020March 31, 2021 was $4.2$3.2 million, or a loss of $0.34$0.25 per share, compared to a net loss of $3.3 million, or a loss of $0.30$0.27 per share, for the three months ended June 30, 2019. The increaseMarch 31, 2020. Net losses in net loss wasboth periods were the result of less favorableunfavorable refining margins per bbl and lower sales volumebbl. The net loss during the three months ended June 30, 2020 comparedMarch 31, 2021 was also due to the same period in 2019. Net loss for the six months ended June 30, 2020 was $7.6 million, or a loss10 days of $0.61 per share, compared to a net loss of $2.6 million, or a loss of $0.23 per share, for the six months ended June 30, 2019. The significant increase in net loss was the result of less favorable margins per bbl and lower sales volume during the six-month period ended June 30, 2020 compared to the same period a year earlier.refinery downtime associated with Winter Storm Uri. Working Capital Deficits. We had a working capital deficit of $66.6$74.3 million and $59.4$72.3 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $20.5$24.2 million and $19.6$22.6 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. We had cashCash and cash equivalents, and restricted cash (current portion) of less than $0.01 million and $0.05 million, respectively, at June 30, 2020. Comparatively, we had cash and cash equivalents, and restricted cash, (current portion) of $0.07 million and $0.05 million, respectively, at December 31, 2019.noncurrent were as follow: | | | | | | | | | | | | | | | | Cash and cash equivalents | $521 | $549 | | Restricted cash (current portion) | 48 | 48 | | Restricted cash, noncurrent | - | 514 | | Total | $569 | $1,111 |
Operating Risks Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under “Note (1) – Going Concern” above and throughout this report, weWe are currently unable to estimate the impact the ongoing COVID-19 pandemic will have on our future financial position and results of operations. OurUnder earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, has remained open. We have instituted various initiatives throughoutAs U.S. federal, state, and local officials roll out COVID-19 vaccines, we expect to continue operating. Any governmental mandates, while necessary to address the company as part of ourvirus, will result in further business continuity programs, and we are workingoperational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability. Management believes that it has taken all prudent steps to mitigate risk, whenavoid business disruptions, occur. Management has takenmanage cash flow, and continuesremain competitive in a low oil price environment. We are managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to take all prudent steps, however, thereavoid buildup, monitoring discretionary spending, and delaying capital expenditures. At the Nixon facility, we adjust throughput and production based on prevailing market conditions. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to collaborate virtually. There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected. (2) Principles of Consolidation and Significant Accounting Policies Basis of Presentation The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading. The consolidated balance sheet as of December 31, 20192020 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 20192020 as filed with the SEC. Operating results for the three and six months ended June 30, 2020March 31, 2021 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020,2021, or for any other period. As discussed further below within this “Note (2) – Use of Estimates,” the ongoing COVID-19 pandemic has resulted in significant economic disruption globally. This disruption became more acute in the latter half of March 2020; therefore, our operating results for the three and six months ended June 30, 2020 do not fully reflect the impact this disruption has had, and will likely continue to have, on us.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 12 |
| Notes to Consolidated Financial Statements | | |
Significant Accounting Policies The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements. Use of Estimates. The ongoing COVID-19 pandemic and certain developments in the global oil markets have impacted and continue to impact our business. Our business was designated as an essential business and, as such, has remained open. We have instituted various initiatives throughout the company as partpreparation of our business continuity programs, and we are workingfinancial statements in conformity with U.S. GAAP requires management to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through the remainder of the year and beyond. Given diminished expectations for the global economy, and speculation regarding a prolonged slowdown and recession, we are unable to predict the ultimate economic impact of COVID-19 on our business. Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptionsthat affect the reported amounts of assets, liabilities, revenues and liabilitiesexpenses, 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.related disclosures. Actual results could differ from those estimates. The ongoing COVID-19 pandemic hasand related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted these estimates and assumptions andlikely will continue to do so.
impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2020March 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 primarily represents a payment reserve account held by Veritex as security for payments under a loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction related expenses to complete building new petroleum storage tanks. Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management's judgment, deserve consideration in estimating bad debts. Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio. We had an allowance for doubtful accounts of $0.1 million at both June 30, 2020March 31, 2021 and December 31, 2019.2020. Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory. Property and Equipment. Refinery and Facilities. During 2020, we safely completed a 5-year capital improvement expansion project of the Nixon facility that included construction of new storage tanks, smaller efficiency improvements, and the acquisition of refurbished refinery equipment for later deployment. We plan to continue makingtypically make ongoing improvements to the crude distillation towerNixon facility based on operational needs, technological advances, and technological advances.safety and regulatory requirements. Additions to refinery and facilities assets are capitalized, and expenditures for repairs and maintenance are expensed as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. Adjustment of the asset and the related accumulated depreciation accounts are made for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, depreciation of refinery and facilities assets is computed using the straight-line method using an estimated useful life of 25 years beginning when the refinery and facilities assets are placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented. Pipelines and Facilities. Our pipelines and facilities are recorded at cost less any adjustments for depreciation or impairment. Depreciation is computed using the straight-line method over estimated useful lives ranging from 10 to 22 years. In accordance with FASB ASC guidance, we performed periodic impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, our pipeline assets were fully impaired at December 31, 2016. All pipeline transportation services to third parties have ceased, existing third-party wells along our pipeline corridor have been permanently abandoned, and no new third-party wells are being drilled near our pipelines. We planAlthough we planned to decommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19 and winter being the offseason for dive operations in the third quarterU.S. Gulf of 2020.Mexico. We cannot currently estimate when decommissioning may occur. Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties were fully impaired in 2011.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 13 |
| Notes to Consolidated Financial Statements | | |
CIP. CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP. Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
Leases. We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize ROU asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not determinable, we use the incremental borrowing rate to discount lease payments to present value. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options. We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. We account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. We allocate the consideration in these contracts based on pricing information contained in the lease. Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lease transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in ‘depreciation and amortization expense.’ Interest expense is incurred based on the carrying value of the lease liability and is reflected in ‘interest and other expense.’ Revenue Recognition. Refinery Operations Revenue. Revenue from the sale of refined products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined product is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are met when control is transferred to the customer. Control is transferred to the customer when the product has been lifted or, in cases where the product is not lifted immediately (bill and hold arrangements), when the product is added to the customer’s bulk inventory as stored at the Nixon facility. We consider a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. Transportation, shipping, and handling costs incurred are included in cost of goods sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue. Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees pursuant to: (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over a period of time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for use of the naphtha stabilizer unit. We typically satisfy performance obligations for tolling and terminaling operations with the passage of time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the term of the agreement. We allocate the transaction price to the single performance obligation that exists under the agreement, and we recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days. Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer, and the price we charge for such services is not included in the fixed cost under the customer’s tank storage agreement. Ancillary services are considered a separate performance obligation by us under the tank storage agreement. The performance obligation is satisfied when the requested service has been performed in the applicable period. Deferred Revenue. We record deferred revenue when cash payments are received or due in advance of our performance. An increase in the deferred revenue balance reflects cash payments received or due in advance of satisfying our performance obligations, offset by recognized revenue that was included in the deferred revenue balance at the beginning of the period. Deferred revenue represents a liability as of the balance sheet date related to a revenue producing activity for which revenue has not yet been recognized. We record deferred revenue when we receive consideration under a contract before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 14 |
| Notes to Consolidated Financial Statements | | |
Income Taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities, as well as operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which the differences are expected to reverse. We record a valuation allowance against deferred income tax assets if it is more likely than not that those assets will not be realized. The provision for income taxes comprises our current tax liability and change in deferred income tax assets and liabilities. Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
Significant judgment is required in evaluating uncertain tax positions and determining its provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to determine the realizability of deferred tax assets. We consider whether it is more likely than not that a portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. When we determine that it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets. A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended June 30, 2020.March 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 June 30, 2020March 31, 2021 and December 31, 2019. We expect to recover deferred tax assets related to AMT credit carryforwards.2020. In addition, we have NOL carryforwards that remain available for future use. The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At June 30, 2020March 31, 2021 and December 31, 2019,2020, there were no uncertain tax positions for which a reserve or liability was necessary. See “Note (14)” to our consolidated financial statements for more information related to income taxes. Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we evaluate our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could be necessary. The GEL Final Arbitration Award represented a significant adverse change that could have affected the value of certain of our long-lived assets, and management performed potential impairment testing of our refinery and facilities assets in 2019 and 2018. Upon completion of each testing, no impairment was deemed necessary. In addition, the market volatility of crude oilcommodity prices as a result of the ongoing COVID-19 pandemic could have affectedaffect the value of certain of our long-lived assets, and management performed impairment testing ofassets. Management evaluated our refinery and facilities assets at June 30, 2020.for impairment as of March 31, 2021. No impairment was deemed necessary based upon June 30, 2020this testing, and we did not record any impairment of our refinery and facilities assets for the periods presented. Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred, and we also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized. We have concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques. We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating, or disposing of our offshore platform, pipeline systems, and related onshore facilities, as well as for plugging and abandoning wells and restoring land and sea-beds. Cost estimates for each of our assets were developed based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current retirement procedures, and construction and engineering consultations. Estimating future costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology, political, and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (12)” to our consolidated financial statements for additional information related to AROs. Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding, which includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the earnings of the entity. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (15)” to our consolidated financial statements for additional information related to EPS.
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 15 |
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| Notes to Consolidated Financial Statements | | |
New Pronouncements Adopted. The FASB issues an ASUASUs to communicate changes to the FASB ASC, including changes to non-authoritative SEC content. Recently adopted ASUs include: Codification Updates to SEC SectionsImprovements. In July 2019,October 2020, FASB issued ASU 2019-07,2020-10, Codification Updates to SEC Sections, which amended certain SEC sections or paragraphs within the FASB ASC.Improvements. The amendments were made pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update).in this guidance affected a wide variety of topics in the ASC by either clarifying the codification or correcting unintended application of guidance. The SEC Final Rule Releases, which required improvements to the XBRL taxonomy, were made to improve, update, and simplify SEC regulations on financial reporting and disclosure. For public companies, the amendments in ASU 2019-07 were effective upon issuance. Adoption of this guidancechanges did not have a significant impacteffect on our consolidated financial statements. Consolidation. In October 2018, FASB issued ASU 2018-17, Consolidation (Topic 810). This ASU provided targeted improvementsaccounting practice or create a significant administrative cost burden to related-party guidance for variable interestmost entities. Indirect interests held through related parties in common control arrangements are considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For all reporting entities, other than private companies, the amendments in ASU 2018-172020-10 were effective for fiscal years beginningending after December 15, 2019, and interim periods within those fiscal years.2020. Adoption of this guidance did not have a significant impact on our consolidated financial statements.
New Pronouncements Issued, Not Yet Effective. Income Taxes. In March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740). This guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect Staff Accounting Bulletin No. 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment. This guidance also includes amendments to the XBRL taxonomy. For public business entities, the amendments in ASU 2018-05 are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity. Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
(3) Related-Party Transactions Working Capital
Currently, we depend on Affiliates for financing when revenue from operations and borrowings under bank facilities are insufficient to meet our liquidity and working capital needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or long-term debt, related party.
Affiliate Agreements/TransactionsOperational Agreements Summary Blue Dolphin and certain of its subsidiaries are party to several operational agreements with Affiliates. Management believes that these related-party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. Related-party transactionsagreements related to Blue Dolphin’s operations consist of the following: | Agreement/Transaction | Parties | Type | Effective Date | Interest Rate | Key Terms | Amended and Restated Guaranty Fee Agreement(1)
| Jonathan Carroll - LE | Debt | 04/01/2017 | 2.00% | Tied to payoff of LE $25 million Veritex loan; payments 50% cash, 50% Common Stock | Amended and Restated Guaranty Fee Agreement(1)
| Jonathan Carroll - LRM | Debt | 04/01/2017 | 2.00% | Tied to payoff of LRM $10 million Veritex loan; payments 50% cash, 50% Common Stock | Refinery Equipment Purchase | LTRI - LE | Operations | 07/01/2019 | --- | LE purchase of two (2) refurbished heat exchangers for $0.08 million each | Dock Tolling Agreement | LMT - LE | Operations | 05/24/2016 | --- | 5-year term cancellable by either party any time; LE paid flat reservation fee for tolling volumes up to 84,000 gallons per day; excess tolling volumes subject to increased per gallon rate; terminated 07/01/2019 | | Jet Fuel Sales Agreement | LEH - LE | Operations | 04/01/2020 | ---2021 | 1-year term expiring earliest to occur of 03/31/20212022 plus 30-day carryover or delivery of maximum jet fuel quantity; LEH bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification | March Carroll Note (in default)
| Jonathan Carroll – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; matured 01/01/2019; interest still accruing | March Ingleside Note (in default)
| Ingleside – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; reflects amounts owed to Ingleside under previous Amended and Restated Tank Lease Agreement; matured 01/01/2019; interest still accruing | June LEH Note (in default)
| LEH – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; reflects amounts owed to Jonathan Carroll under guaranty fee agreements; matured 01/01/2019; interest still accruing | | Office Sub-Lease Agreement | LEH - BDSC | Operations | 01/01/2018 | --- | 68-month term expiring 08/31/2023; office lease Houston, Texas; includes 6-month rent abatement period; rent approximately $0.02 million per month | | Amended and Restated Operating Agreement | LEH – Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC | Debt | 04/01/2020 | --- | 3-year term; expires 04/01/2023 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC |
Working Capital We have historically depended on Affiliates for financing when revenue from operations and borrowings under bank facilities are insufficient to meet our liquidity and working capital needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or long-term debt, related party. Related-Party Long-Term Debt | Loan Description | Parties | Maturity Date | Interest Rate | Loan Purpose | Loan and Security AgreementMarch Carroll Note (in default)
| Jonathan Carroll – Blue Dolphin | Jan 2019 | 8.00% | Blue Dolphin working capital; reflects amounts owed to Jonathan Carroll under the guaranty fee agreements | March Ingleside Note (in default) | Ingleside – Blue Dolphin | Jan 2019 | 8.00% | Blue Dolphin working capital | June LEH Note (in default) | LEH – Blue Dolphin | Jan 2019 | 8.00% | Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement | BDPL-LEH Loan Agreement (in default)(1) | LEH - BDPL | Debt | 08/15/2016Aug 2018 | 16.00% | 2-year term; $4.0Blue Dolphin working capital | Amended and Restated Guaranty Fee Agreement(2) | Jonathan Carroll - LE | -- | 2.00% | Tied to payoff of LE $25 million principal amount; $0.5Veritex loan | Amended and Restated Guaranty Fee Agreement(2) | Jonathan Carroll - LRM | -- | 2.00% | Tied to payoff of LRM $10 million annual payment; proceeds used for working capital; no financial maintenance covenants; secured by certain BDPL propertyVeritex loan |
(1) On April 30, 2020, we issued an aggregateThe original principal amount of 231,065 restricted sharesthe BDPL-LEH Loan Agreement was $4.0 million.
(2) As a condition for our secured loan agreements with Veritex, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. Under the guaranty fee agreements, Mr. Carroll is entitled to receive guaranty fees. The fees are payable 50% in cash and 50% in Common Stock. The Common Stock to Jonathan Carroll, which represents payment of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52, and the high was $1.07.portion is paid quarterly. For the foreseeable future, management does not intend on payingto 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 accrued and added to the outstanding principal balance ofowed to Mr. Carroll under the March Carroll Note.
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 16 |
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| Notes to Consolidated Financial Statements | | |
Guarantees, Security and Defaults | Loan Description | Guarantees | Security | Event(s) of Default | March Carroll Note (in default) | --- | --- | Failure of borrower to pay past due obligations; loan matured January 2019 | March Ingleside Note (in default) | --- | --- | Failure of borrower to pay past due obligations; loan matured January 2019 | June LEH Note (in default) | --- | --- | Failure of borrower to pay past due obligations; loan matured January 2019 | | BDPL-LEH Loan Agreement | --- | Secured by certain BDPL property | Failure of borrower to pay past due obligations; loan matured August 2018 |
Covenants The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the March Carroll Note, March Ingleside Note, or June LEH Note. Related-Party Financial Impact Consolidated Balance Sheets. Accounts receivable, related party. Accounts receivable, related party totaled $0 and $1.4 million at June 30, 2020 and December 31, 2019, respectively. At December 31, 2019, accounts receivable, related party represented amounts owed from LEH for the sale of jet fuel under the Jet Fuel Sales Agreement. Amounts are settled under normal business terms. Amounts outstanding relating to the Jet Fuel Sales Agreement can vary significantly period to period based on the timing of the related sales and payments received. See below for the total amount owed to LEH under the June LEH Note and the BDPL Loan Agreement.
Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both June 30, 2020March 31, 2021 and December 31, 2019.2020. Long-term debt, related party, current portion (in default) and accrued interest payable, related party. | | | | | | | | | | | | LEH | | | | June LEH Note (in default) | $6,336 | $- | | BDPL Loan Agreement | 6,494 | 6,174 | | LEH Total | 12,830 | 6,174 | | Ingleside | | | | March Ingleside Note (in default) | 1,039 | 1,004 | | Jonathan Carroll | | | | March Carroll Note (in default) | 1,198 | 997 | | | 15,067 | 8,175 | | | | | | Less: Long-term debt, related party, current portion, in default | (12,573) | (6,001) | | Less: Accrued interest payable, related party (in default) | (2,494) | (2,174) | | | $- | $- |
Consolidated Statements of Operations.
Total revenue from operations.| | | | | | | | | | | | LEH | | | | June LEH Note (in default) | $9,588 | $9,446 | | BDPL-LEH Loan Agreement | 6,974 | 6,814 | | LEH Total | 16,562 | 16,260 | | Ingleside | | | | March Ingleside Note (in default) | 1,031 | 1,013 | | Jonathan Carroll | | | | March Carroll Note (in default) | 1,732 | 1,551 | | | 19,325 | 18,824 | | | | | | Less: Long-term debt, related party, current portion, in default | (16,351) | (16,010) | | Less: Accrued interest payable, related party (in default) | (2,974) | (2,814) | | | $- | $- |
| | Three Months Ended June 30, | Six Months Ended June 30, | | | | | | | | | | | | | | | | | | Refinery operations | | | | | | | | | | LEH | $4,587 | 24.8% | $24,173 | 30.2% | $22,302 | 27.7% | $44,982 | 30.2% | | Third-Parties | 12,772 | 69.2% | 53,084 | 68.3% | 55,954 | 69.5% | 100,133 | 68.3% | | Tolling and terminaling | | | | | | | | | | Third-Parties | 1,110 | 6.0% | 1,088 | 1.5% | 2,213 | 2.8% | 2,157 | 1.5% | | | $18,469 | 100.0% | $78,345 | 100.0% | $80,469 | 100.0% | $147,272 | 100.0% |
Interest expense.
| | Three Months Ended June 30, | Six Months Ended June 30, | | | | | | | | | | | Jonathan Carroll | | | | | | Guaranty Fee Agreements | | | | | | First Term Loan Due 2034 | $108 | $111 | $216 | $223 | | Second Term Loan Due 2034 | 44 | 46 | 89 | 92 | | March Carroll Note (in default) | 20 | 28 | 43 | 53 | | LEH | | | | | | BDPL Loan Agreement (in default) | 160 | 160 | 320 | 320 | | June LEH Note (in default) | 117 | 16 | 142 | 23 | | Ingleside | | | | | | March Ingleside Note (in default) | 15 | 26 | 35 | 52 | | | $464 | $387 | $845 | $763 |
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| Notes to Consolidated Financial Statements | | |
Consolidated Statements of Operations.
Total revenue from operations. | | Three Months Ended March 31, | | | | | | | (in thousands, except percents) | | Refinery operations | | | | | | LEH | $16,080 | 27.1% | $17,715 | 28.6% | | Third-Parties | 42,403 | 71.3% | 43,182 | 69.6% | | Tolling and terminaling | | Third-Parties | 930 | 1.6% | 1,103 | 1.8% | | | $59,413 | 100.0% | $62,000 | 100.0% |
Interest expense. | | Three Months Ended March 31, | | | | | | | (in thousands) | | Jonathan Carroll | | | | Guaranty Fee Agreements | | | | First Term Loan Due 2034 | $108 | $108 | | Second Term Loan Due 2034 | 45 | 45 | | March Carroll Note (in default) | 29 | 23 | | LEH | | | | BDPL-LEH Loan Agreement (in default) | 160 | 160 | | June LEH Note (in default) | 182 | 25 | | Ingleside | | | | March Ingleside Note (in default) | 14 | 20 | | | $538 | $381 |
Other. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.2 million for the three months ended June 30, 2020 and 2019, respectively. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.4 million for the six months ended June 30, 2020 and 2019, respectively. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.01 million for both three-month periods ended June 30, 2020March 31, 2021 and 2019. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.02 million for both six-month periods ended June 30, 2020 and 2019. The LEH operating fee was flat, totaling approximately $0.2 million for both three-month periods ended June 30, 2020 and 2019.2020. The LEH operating fee was also relatively flat, totaling approximately $0.3$0.1 million for both six-monththree-month periods ended June 30, 2020March 31, 2021 and 2019.2020.
(4) Revenue and Segment Information
| Blue Dolphin Energy Company | | March 31, 2021 │Page 18 |
| Notes to Consolidated Financial Statements | | |
We have two reportable business segments: (i) refinery operations and (ii) tolling and terminaling. Refinery operations relate to the refining and marketing of petroleum products at our 15,000-bpd crude distillation tower. Tolling and terminaling operations relate to tolling and storage terminaling services under third-party lease agreements. Both operations are conducted at the Nixon facility. Corporate and other includes BDSC, BDPL and BDPC. Revenue from Contracts with Customers Disaggregation of Revenue. Revenue is presented in the table below under “Segment Information” disaggregated by business segment because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements. Receivables from Contracts with Customers. Our receivables from contracts with customers are presented as receivables, net on our consolidated balance sheets. Contract Liabilities. Our contract liabilities from contracts with customers consist of unearned revenue and are included in accrued expenses and presented in “Note (9)” to our consolidated financial statements. Remaining Performance Obligations. Most of our contracts with customers are spot contracts and therefore have no remaining performance obligations.
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| Notes to Consolidated Financial Statements | | |
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows: | | | | | | Three Months Ended June 30, | Six Months Ended June 30, | | | | | | | | | | | | | | | Net revenue (excluding intercompany fees and sales) | | | | Refinery operations | $17,359 | $77,257 | $78,256 | $145,115 | $58,483 | $60,897 | | Tolling and terminaling | 1,110 | 1,088 | 2,213 | 2,157 | 930 | 1,103 | | Total net revenue | 18,469 | 78,345 | 80,469 | 147,272 | 59,413 | 62,000 | | | | | | Intercompany fees and sales | | | | Refinery operations | (406) | (653) | (1,023) | (1,259) | (566) | (617) | | Tolling and terminaling | 406 | 653 | 1,023 | 1,259 | 566 | 617 | | Total intercompany fees | - | - | - | - | - | - | | | | | Operation costs and expenses(1) | | | | Refinery operations | (19,418) | (78,376) | (81,251) | (143,528) | (59,289) | (61,833) | | Tolling and terminaling | (258) | (363) | (513) | (727) | (334) | (255) | | Corporate and other | (47) | (56) | (106) | (113) | (54) | (59) | | Total operation costs and expenses | (19,723) | (78,795) | (81,870) | (144,368) | (59,677) | (62,147) | | | | | | Segment contribution margin (deficit) | | | | Refinery operations | (2,465) | (1,772) | (4,018) | 328 | (1,372) | (1,553) | | Tolling and terminaling | 1,258 | 1,378 | 2,723 | 2,689 | 1,162 | 1,465 | | Corporate and other | (47) | (56) | (106) | (113) | (54) | (59) | | Total segment contribution margin (deficit) | (1,254) | (450) | (1,401) | 2,904 | (264) | (147) | | | | | General and administrative expenses(2) | | | | Refinery operations | (327) | (274) | (631) | (606) | (301) | (304) | | Tolling and terminaling | (68) | (62) | (136) | (105) | (68) | (68) | | Corporate and other | (326) | (243) | (745) | (688) | (413) | (419) | | Total general and administrative expenses | (721) | (579) | (1,512) | (1,399) | (782) | (791) | | | | | | Depreciation and amortization | | | | Refinery operations | (294) | (483) | (582) | (948) | (302) | (288) | | Tolling and terminaling | (324) | (99) | (618) | (198) | (340) | (294) | | Corporate and other | (51) | (51) | (102) | (77) | (51) | (51) | | Total depreciation and amortization | (669) | (633) | (1,302) | (1,223) | (693) | (633) | | | | | | Interest and other non-operating expenses, net | | Interest and other non-operating expenses, net | | Refinery operations | (751) | (823) | (1,492) | (1,606) | (598) | (741) | | Tolling and terminaling | (616) | (579) | (1,386) | (775) | (452) | (770) | | Corporate and other | (231) | (235) | (474) | (453) | (385) | (243) | | Total interest and other non-operating expenses, net | (1,598) | (1,637) | (3,352) | (2,834) | (1,435) | (1,754) | | | | | | Income (loss) before income taxes | | | | Refinery operations | (3,837) | (3,352) | (6,723) | (2,832) | (2,573) | (2,886) | | Tolling and terminaling | 250 | 638 | 583 | 1,611 | 302 | 333 | | Corporate and other | (655) | (585) | (1,427) | (1,331) | (903) | (772) | | Total loss before income taxes | (4,242) | (3,299) | (7,567) | (2,552) | (3,174) | (3,325) | | | | | | Income tax expense | - | - | (15) | - | - | (15) | | | | | | Net loss | $(4,242) | $(3,299) | $(7,582) | $(2,552) | $(3,174) | $(3,340) |
(1) Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL. (2) General and administrative expenses within refinery operations include the LEH operating fee.
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| Notes to Consolidated Financial Statements | | |
| | | | | | | | | | | | | | Capital expenditures | | | | Refinery operations | $- | $6 | | Tolling and terminaling | - | 192 | | Corporate and other | - | - | | Total capital expenditures | $- | $198 |
| | | | | | | | | | | | | | Capital expenditures | | | | Refinery operations | $292 | $411 | | Tolling and terminaling | 616 | 83 | | Corporate and other | - | - | | Total capital expenditures | $908 | $494 |
| | | | | | | | | | | | | | | | | Identifiable assets | | | | Refinery operations | $50,341 | $51,317 | $45,186 | $48,521 | | Tolling and terminaling | 18,750 | 18,401 | 18,527 | 18,722 | | Corporate and other | 1,848 | 1,726 | 1,839 | 2,057 | | Total identifiable assets | $70,939 | $71,444 | $65,552 | $69,300 |
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 both June 30, 2020March 31, 2021 and December 31, 2019,2020, we had cash balances (including restricted cash) that exceeded the FDIC insurance limit per depositor of approximately $0.3 million.million and $0.6 million, respectively. Key Supplier Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. UnderThe crude supply agreement, the initial term of the crude supply agreement,which is volume based, expires when Pilot will sellsells us approximately 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement will continue onautomatically renews for successive one-year terms (each such term, a one-year evergreen basis.“Renewal Term”) unless either party provides the other with notice of nonrenewal at least 60 days prior to expiration of any Renewal Term. Total volume billed under the crude supply agreement totaled approximately 5.8 million bbls as of March 31, 2021. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Either party may terminateSustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply agreement by providingconstraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the other party 60three-month periods ended March 31, 2021 and 2020, our refinery experienced 1 day and no days, prior written notice.respectively, of downtime as a result of lack of crude due to cash constraints. Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement. During the second quarter of Beginning on June 1, 2020, Pilot applied as a setoff Pilot’sbegan applying payment obligations owed to usNPS under thetwo terminal services agreements between us and Pilot. The setoff was in partial satisfaction of ouragainst NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. As of June 1,For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of such setoff was approximately $0.2 million.interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. See ‘going concern’ within “Note (1)” Organization – Going Concern” to our consolidated financial statements for additional disclosures related to defaults in our debt obligations. On November 23, 2020, NPS and guarantors received notice from Pilot that the entry into the SBA EIDLs was a breach of the Amended Pilot Line of Credit and Pilot demanded full repayment of the Pilot Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 21
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| Notes to Consolidated Financial Statements | | |
Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, a sustained periodperiods of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also resulthas resulted in significant financial constraints on producers, which could resultin turn has resulted in long term crude oil supply constraints and increased transportation costs. During the three-month period ended March 31, 2021, our refinery experienced 1 day of downtime as a result of lack of crude due to cash constraints. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. Significant Customers We routinely assess the financial strength of our customers and have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited. | | Number Significant Customers | % Total Revenue from Operations | Portion of Accounts Receivable at Date Indicated | | | | | | | Three Months Ended June 30, 2020 | 3 | 69% | $0 | | | | | | | Three Months Ended June 30, 2019 | 4 | 97% | $0.6 million | | | | | | | Six Months Ended June 30, 2020 | 4 | 90% | $0.006 million | | | | | | | Six Months Ended June 30, 2019 | 4 | 97% | $0.6 million |
| | Number Significant Customers | % Total Revenue from Operations | Portion of Accounts Receivable at March 31, | | | (in thousands, except percents) | | March 31, 2021 | 4 | 90% | $0 | | | | | | | March 31, 2020 | 4 | 94% | |
Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
One of our significant customers is LEH, an Affiliate. The Affiliate LEH, purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. LEHThe Affiliate accounted for nearly 25%27% and 31%29% of our total revenue from operations for the three months ended June 30,in 2021 and 2020, and 2019, respectively. LEH accounted for nearly 28% and 31% of our total revenue from operations for the six months ended June 30, 2020 and 2019, respectively. LEHThe Affiliate represented $0 in accounts receivable at June 30, 2020. LEH represented $0.5 million in accounts receivable at June 30, 2019. both March 31, 2021 and 2020, respectively. Amounts outstanding relating to the Jet Fuel Sales Agreement can significantly vary significantly period to period based on the timing of the related sales and payments received. The amounts are settled under normal business terms. The total amountAmounts we owed to LEH under the June LEH Note and the BDPL Loan Agreementvarious long-term debt, related-party agreements totaled $12.8$16.6 million and $6.2$16.3 million at June 30, 2020March 31, 2021 and December 31, 2019,2020, respectively. See “Note“Notes (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to transactions with Affiliates. Concentration of Customers. Our operations have a concentration of customers who arecustomer base is concentrated on refined petroleum product wholesalers. These concentrations of customersThis customer concentration may impact our overall exposure to credit risk, either positively or negatively, in that theseas our customers may beare likely similarly affected by changes in economic or other conditions includingchanges. This includes the uncertainties concerningrelated to the COVID-19 pandemic and the associated volatility in the global oil markets. Historically, we have not had anyno 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: | | Three Months Ended June 30, | Six Months Ended Ended June 30, | Three Months Ended March 31, | | | | | | | | | | | (in thousands, except percent amounts) | (in thousands, except percents) | | | | | | LPG mix | $- | 0.0% | $1 | 0% | $- | 0.0% | $9 | 0% | $6 | 0.0% | $- | 0% | | Naphtha | 3,160 | 18.2% | 15,416 | 20.3% | 14,675 | 18.8% | 29,211 | 20.1% | 14,224 | 24.3% | 11,515 | 18.9% | | Jet fuel | 4,587 | 26.4% | 24,173 | 30.7% | 22,302 | 28.5% | 44,982 | 31.0% | 16,080 | 27.5% | 17,715 | 29.1% | | HOBM | 3,691 | 21.3% | 16,747 | 23.8% | 18,882 | 24.1% | 32,907 | 22.7% | 15,663 | 26.8% | 15,191 | 24.9% | | AGO | 5,921 | 34.1% | 20,920 | 25.2% | 22,397 | 28.6% | 38,006 | 26.2% | 12,510 | 21.4% | 16,476 | 27.1% | | | $17,359 | 100.0% | $77,257 | 100.0% | $78,256 | 100.0% | $145,115 | 100.0% | $58,483 | 100.0% | $60,897 | 100.0% |
An Affiliate, LEH, purchases all of our jet fuel. See “Note“Notes (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate transactions.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 22 |
| Notes to Consolidated Financial Statements | | |
(6) Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets as of the dates indicated consisted of the following: | | | | | | | | | | | | | | | (in thousands) | | Prepaid insurance | $1,691 | $417 | $556 | $1,182 | | Prepaid crude oil and condensate | | 383 | 2,249 | | Prepaid easement renewal fees | | 93 | 99 | | Other prepaids | 111 | 87 | 28 | 34 | | Prepaid easement renewal fees | 110 | 121 | | | Prepaid crude oil and condensate | - | 1,651 | | | | $1,912 | $2,276 | $1,060 | $3,564 |
Inventory as of the dates indicated consisted of the following: | | | | | | | | | | | | | | | | | HOBM | $2,833 | $- | | | Crude oil and condensate | 445 | 959 | $608 | $463 | | Chemicals | 227 | 120 | 175 | 271 | | Naphtha | | 164 | 120 | | AGO | 38 | 440 | 121 | 133 | | Propane | 12 | 26 | 25 | 15 | | LPG mix | 3 | 5 | 6 | 6 | | Naphtha | - | 95 | | | HOBM | | - | 54 | | | $3,558 | $1,645 | $1,099 | $1,062 |
Due to fluctuating commodity prices, we recorded a net realizable value adjustment to inventory of approximately $0.2 million and $0.3 million at June 30, 2020 and December 31, 2019, respectively.
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| Notes to Consolidated Financial Statements | | |
(8) Property, Plant and Equipment, Net Property, plant and equipment, net, as of the dates indicated consisted of the following: | | | | | | | | | | | | | | | | | Refinery and facilities | $71,254 | $66,317 | $72,184 | $72,184 | | Land | 566 | 566 | 566 | 566 | | Other property and equipment | 833 | 833 | 903 | 903 | | | 72,653 | 67,716 | 73,653 | 73,653 | | | | | | Less: Accumulated depletion, depreciation, and amortiation | (13,938) | (12,739) | (15,861) | (15,220) | | | 58,715 | 54,977 | 57,792 | 58,433 | | | | | | CIP | 4,886 | 8,916 | 4,064 | 4,064 | | | $63,601 | $63,893 | $61,856 | $62,497 |
We capitalize interest cost incurred on funds used to construct property, plant, and equipment. Capitalized interest is recorded as part of the asset it relates to and is depreciated over the asset’s useful life. Capitalized interest cost, which is included in CIP, was $0 and $0.7 million at June 30, 2020March 31, 2021 and December 31, 2019.2020. Capital expenditures for expansion at the Nixon facility were funded by long-term debt from Veritex, revenue from operations, and working capital from Affiliates. At June 30,March 31, 2021 and December 31, 2020, unused amounts for capital expenditures derived from Veritex loans were reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (10)” to our consolidated financial statements for additional disclosures related to working capital deficits and borrowings for capital spending. (9) Accrued Expenses and Other Current Liabilities Accrued expenses and other current liabilities as of the dates indicated consisted of the following: | | | | | | | | | | | | | | | | | Insurance | $1,079 | $159 | | | Unearned revenue from contracts with customers | 643 | 1,990 | $3,489 | $3,421 | | Unearned contract renewal income | 500 | 500 | 400 | 500 | | Property, fuel and other taxes | 331 | 183 | | | Insurance | | 181 | 541 | | Other payable | 177 | 228 | 176 | 252 | | Customer deposits | | 173 | 10 | | Taxes payable | | 137 | 58 | | Board of director fees payable | 35 | 263 | 133 | 100 | | Customer deposits | 10 | 10 | | | | $2,775 | $3,333 | $4,689 | $4,882 |
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| Notes to Consolidated Financial Statements | | |
(10) Third-Party Long-Term Debt Loan Agreements Summary Loan Description
| Original Principal Amount
(in millions)
| Maturity Date
| Monthly Principal and Interest Payment | Interest Rate
| Loan Purpose
| USDA-Guaranteed Loans | | | | | | First Term Loan Due 2034 (in default)
| $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements | Second Term Loan Due 2034 (in default)
| $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements | Notre Dame Debt (in default)
| $11.7(1)
| Jan 2018 | No payments to date; payment rights subordinated(2)
| 16.00% | Working capital; reduced balance of GEL Final Arbitration Award |
Loan Description | Parties | Original Principal Amount (in millions) | Maturity Date | Monthly Principal and Interest Payment | Interest Rate | Loan Purpose | Veritex Loans(1) | | | | | | | LE Term Loan Due 2034 (in default) | LE-Veritex | $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements | LRM Term Loan Due 2034 (in default) | LRM-Veritex | $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements | Notre Dame Debt (in default)(2)(3) | LE-Kissick | $11.7 | Jan 2018 | No payments to date; payment rights subordinated | 16.00% | Working capital; reduced arbitration award payable to GEL | | SBA EIDLs | | | | | | | LE Term Loan Due 2050(4) | LE-SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital | NPS Term Loan Due 2050(4) | NPS-SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital | Equipment Loan Due 2025(5) | LE-Texas First | $0.07 | Oct 2025 | $0.0013 million | 4.50% | Equipment Lease Conversion |
(1) OriginalProceeds were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected on our consolidated balance sheets as restricted cash (current portion) and restricted cash (noncurrent). At March 31, 2021, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0. At December 31, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million.
(2) LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount wasof $8.0 million; pursuantmillion. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the arbitration award payable to GEL Final Arbitration Award by $3.6 million. (2) (3)
Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the FirstLE Term Loan Due 2034. (4) Payments are deferred for the first twelve (12) months of the loan; the first payment is due August 2021; interest accrues during the deferral period. SBA EIDLs are not forgivable. (5) In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The equipment rental agreement matured in May 2020. In October 2020, LE entered into the Equipment Loan Due 2025 to finance the purchase of the backhoe. The backhoe continues to be used at the Nixon facility. 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: | | | | | | | | | | | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | $23,104 | $22,840 | LRM Term Loan Due 2034 (in default) | 9,601 | 9,473 | | Notre Dame Debt (in default) | 9,613 | 9,413 | | SBA EIDLs | | | | LE Term Loan 2050 | 153 | 152 | | NPS Term Loan 2050 | 153 | 152 | | Equipment Loan Due 2025 | 65 | 71 | | | 42,689 | 42,101 | | | | | | Less: Current portion of long-term debt, net | (33,724) | (33,692) | | Less: Unamortized debt issue costs | (1,718) | (1,749) | Less: Accrued interest payable (in default) | (6,898) | (6,305) | | | $349 | $355 |
| Blue Dolphin Energy Company | | March 31, 2021 │Page 25 |
| Notes to Consolidated Financial Statements | | |
Unamortized debt issue costs associated with the Veritex loans as of the dates indicated consisted of the following: | | | | | | | | | | | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | $1,674 | $1,674 | LRM Term Loan Due 2034 (in default) | 768 | 768 | | | | | | Less: Accumulated amortization | (724) | (693) | | | $1,718 | $1,749 |
Amortization expense was $0.03 million for both three-month periods ended March 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: | | | | | | | | | | | Notre Dame Debt (in default) | $4,635 | $4,435 | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | 1,559 | 1,295 | LRM Term Loan Due 2034 (in default) | 698 | 571 | | SBA EIDLs | | | | LE Term Loan 2050 | 3 | 2 | | NPS Term Loan 2050 | 3 | 2 | | | 6,898 | 6,305 | Less: Accrued interest payable (in default) | (6,898) | (6,305) | | Long-term Interest Payable, Net of Current Portion | $- | $- |
Payment Deferments Veritex Loans. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the $1.0 million payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, LE and LRM were in default with respect to required monthly payments under the secured loan agreements with Veritex. Other defaults remain outstanding as noted below under “Defaults”. SBA EIDLs. Payments under the SBA loans are deferred for the first twelve (12) months. Interest accrues during the deferral period. Principal and interest payments begin in August 2021.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 26 |
| Notes to Consolidated Financial Statements | | |
Guarantees and Security | Loan Description | Guarantees | Security | USDA-GuaranteedVeritex Loans(1) | | | FirstLE Term Loan Due 2034
(in default) | ● 100% USDA-guarantee; 100% USDA-guarantee ● Jonathan Carroll personal guarantee(1); ● LEH, LRM and Blue Dolphin cross-guarantee | ● first First priority lien on Nixon facility’s business assets (excluding accounts receivable and inventory); ● assignment Assignment of all Nixon facility contracts, permits, and licenses;licenses ● absolute Absolute assignment of Nixon facility rents and leases, including tank rental income;income ● $1.0 $1.0 million payment reserve account held by Veritex; andVeritex ● $5.0 $5.0 million life insurance policy on Jonathan Carroll.Carroll | SecondLRM Term Loan Due 2034
(in default) | ● 100% USDA-guarantee; 100% USDA-guarantee ● Jonathan Carroll personal guarantee(1); ● LEH, LE and Blue Dolphin cross-guarantee | ● second Second priority lien on rights of LE in crude distillation tower and other collateral of LE;LE ● first First priority lien on real property interests of LRM;LRM ● first First priority lien on all LRM fixtures, furniture, machinery, and equipment;equipment ● first First priority lien on all LRM contractual rights, general intangibles, and instruments, except with respect to LRM rights in its leases of certain specified tanks for which Veritex has second priority lien; andlien ● all All other collateral as described in the security documents.documents | Notre Dame Debt (in default)(2) | --- | ● ● Subordinated deed of trust that encumbers the crude distillation tower and general assets of LE
| (2)SBA EIDLs(3)
| | | | LE Term Loan Due 2050 | --- | ● Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement | | NPS Term Loan Due 2050 | --- | ● Business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement | | Equipment Loan Due 2025 | --- | ● First priority security interest in the equipment (backhoe). |
(1) As a condition of the FirstLE Term Loan Due 2034 and SecondLRM Term Loan Due 2034, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. (2) Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the FirstLE Term Loan Due 2034. (3) 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 Pilot Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report. The USDA, acting through its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes. Each USDA guarantee is a full faith and credit obligation of the U.S. with the USDA guaranteeing up to 100% of the principal amount. The lender for a USDA-guaranteed loan, in our case Veritex, is required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record. Both the guaranteed and unguaranteed portions of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion. See “Note“Notes (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and transactions, including long-term debt guarantees. Representations, Warranties, Covenants and Defaults
The First Term Loan Due 2034Veritex loans and Second Term Loan Due 2034SBA EIDLs contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for bankcredit facilities of this type. Specifically, the First Term Loan Due 2034 and Second Term Loan Due 2034 contain debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants. The First Term Loan Due 2034 also requires that a $1.0 million payment reserve account be maintained. There are no financial maintenance covenants associated with the Notre Dame Debt.Debt and the Equipment Loan Due 2025.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 27 |
Proceeds available for use under the First Term Loan Due 2034 and Second Term Loan Due 2034 were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held
| Notes to Consolidated Financial Statements | | |
Defaults | Loan Description | Event(s) of Default | Covenant Violations | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | Failure to make required monthly payments; failure to replenish $1.0 million payment reserve account; events of default under other secured loan agreements with Veritex | Financial covenants: ● debt service coverage ratio, current ratio, and debt to net worth ratio | LRM Term Loan Due 2034 (in default) | Failure to make required monthly payments; events of default under other secured loan agreements with Veritex | Financial covenants: ● debt service coverage ratio, current ratio, and debt to net worth ratio | Notre Dame Debt (in default) | Failure of borrower to pay past due obligations; loan matured January 2019 | --- | | | |
As reflected in the disbursement account are reflected as restricted cash (current portion)table above and restricted cash, noncurrent in our consolidated balance sheets. As described elsewhere in this report, we are in default under our secured loan agreements. Defaults include events of defaultthe LE Term Loan Due 2034, LRM Term Loan Due 2034, and financial covenant violations.the Notre Dame Debt. Defaults under our secured loan agreementsthe 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 these loansthe LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2020March 31, 2021 and December 31, 2019.2020.
Blue Dolphin Energy Company | June 30, 2020 |
24
Notes to Consolidated Financial Statements | | |
Events of Default. In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex regarding events of default under our secured loan agreements, including, but not limited to, the occurrence of the GEL Final Arbitration Award, associated material adverse effect conditions, failure by LE to replenish a $1.0 million payment reserve account, and the occurrence of events of default under our other secured loan agreements with Veritex. Further, Veritex informed obligors that it would consider a final confirmation of the GEL Final Arbitration Award to be a material event of default under the loan agreements. Veritex did not accelerate or call due our secured loan agreements considering then ongoing settlement discussions between GEL and the Lazarus Parties. Instead, Veritex expressly reserved all its rights, privileges and remedies related to events of default.
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant violations and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.
Payment Deferments. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.
Financial Covenant Violations. At June 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Vertitex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements and any exercise by Veritex of its rights and remedies related to such defaults may have a material adverse effect on the trading prices of our common stock and on the value of an investment in our common stock, and holders of our common stock could lose their investment in our common stock in its entirety. See “Note“Notes (1)” and “Note (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. Outstanding Principal, Debt Issue Costs, and Accrued Interest(11) Third-party long-term debt (outstanding principal and accrued interest), asLine of the dates indicated was as follows:Credit Payable
| | | | | | | | | | | | USDA-Guaranteed Loans | | | First Term Loan Due 2034 (in default) | $22,006 | $21,776 | Second Term Loan Due 2034 (in default) | 9,125 | 9,031 | Notre Dame Debt (in default) | 9,015 | 8,617 | | | 40,146 | 39,424 | | | | | | Less: Current portion of long-term debt, net | (33,612) | (33,836) | | Less: Unamortized debt issue costs | (1,813) | (1,877) | Less: Accrued interest payable (in default) | (4,721) | (3,711) | | | $- | $- |
Line of Credit Description | Original Principal Amount (in millions) | Maturity Date | Monthly Principal and Interest Payment | Interest Rate | Loan Purpose | | | | | | | | Amended Pilot Line of Credit (in default) | $13.0 | May 2020 | ---- | 14.00% | Settlement payment to GEL, NPS purchase of crude oil from Pilot, and working capital | | | | | | | |
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 28 |
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| Notes to Consolidated Financial Statements | | |
Unamortized debt issue costs associated with USDA-guaranteed loansOutstanding Principal, Debt Issue Costs, and Accrued Interest
Line of credit payable, which represents outstanding principal and accrued interest, as of the dates indicated consistedwas as follows: | | | | | | | | | | | | | | | Amended Pilot Line of Credit (in default) | $7,272 | $8,145 | | | | | | Less: Interest payable, short-term | (103) | (103) | | | $7,169 | $8,042 |
Guarantees and Security | Loan Description | Guarantees | Security | Amended Pilot Line of Credit (in default) | ● Blue Dolphin pledged its equity interests in NPS to Pilot to secure NPS’ obligations; ● Blue Dolphin, LE, LRM, and LEH have each guaranteed NPS’ obligations. | ● NPS assets, including a tank lease (the “Tank Lease”); |
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 following:Agreement Regarding Attornment of Tank Leases was subject to certain conditions, including the agreement and concurrence of the USDA that the Agreement Regarding Attornment of Tank Leases does not impair or void the LE Term Loan Due 2034 and LRM Term Loan Due 2034 or any associated guarantees. Veritex used commercially reasonable efforts to obtain such USDA concurrence, however, to date such USDA concurrence has not been provided. | | | | | | | | | | | | USDA-Guaranteed Loans | | | First Term Loan Due 2034 (in default) | $1,674 | $1,674 | Second Term Loan Due 2034 (in default) | 768 | 768 | | | | | | Less: Accumulated amortization | (629) | (565) | | | $1,813 | $1,877 |
Amortization expense was $0.03 million for both three-month periods ended June 30, 2020 and 2019. Amortization expense was $0.06 million for both six-month periods ended June 30, 2020 and 2019.
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:
| | | | | | | | | | | Notre Dame Debt (in default) | $4,037 | $3,639 | | USDA-Guaranteed Loans | | | First Term Loan Due 2034 (in default) | 461 | 25 | Second Term Loan Due 2034 (in default) | 223 | 47 | | | 4,721 | 3,711 | | Less: Accrued interest payable (in default) | (4,721) | (3,711) | | Long-term Interest Payable, Net of Current Portion | $- | $- |
(11)
The Amended Pilot Line of Credit Payablecontains customary affirmative and negative covenants and events of default. Defaults | Loan Description | Event(s) of Default | Covenant Violations | Amended Pilot Line of Credit (in default) | Failure of borrower or any guarantor to pay past due obligations; loan matured May 2020 | --- | | | |
| Blue Dolphin Energy Company | | March 31, 2021 │Page 29 |
Line of Credit Agreement
| Notes to Consolidated Financial Statements | | |
| Line of Credit Description | Principal Amount (in millions) | Maturity Date | Monthly Principal and Interest Payment | Interest Rate | Loan Purpose | | | | | | | | Amended Pilot Line of Credit (in default) | $13.0 | May 2020 | ---- | 14.00% | GEL Settlement Payment, NPS purchase of crude oil from Pilot, and working capital | | | | | | | |
UnderAs reflected in the table above and elsewhere in this report, we are in default under the Amended Pilot Line of Credit. Upon maturity of the Amended Pilot Line of Credit NPS was required to make monthly interest only payments to Pilot in each of September and October 2019 in the amount of $0.1 million. The required payments were made.
On May 4, 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 Obligations under the Amended Pilot Line of Credit.Obligations. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Pilot Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Pilot Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.
OnPursuant to a June 1, 2020 notice, Pilot notified borrower and guarantors by letter of its intent to apply as a setoffbegan applying Pilot’s payment obligations owing to or for the credit or the account of borrowerNPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between borrowerNPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between the borrowerNPS and Pilot, against NPS’ payment obligations to Pilot under the Obligations. AsAmended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the dateAmended Pilot Line of the letter, the amount of such setoff was approximately $0.2 million. The setoff was only in partial satisfaction of the ObligationsCredit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively.
Blue Dolphin Energy Company | June 30, 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 Pilot Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Pilot Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report. 26
Notes to Consolidated Financial Statements | | |
Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue to workworking with NPS to settle the Pilot Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. OurNPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, weNPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. Guarantees and Security
Loan Description | Guarantees | Security | Amended Pilot Line of Credit
(in default)
| ● Blue Dolphin pledged its equity interests in NPS to Pilot to secure NPS’ obligations;
● Blue Dolphin, LE, LRM, and LEH have each guaranteed NPS’ obligations.
| ● NPS receivables;
● NPS assets, including a tank lease (the “Tank Lease”);
● LRM receivables.
|
Representations, Warranties, and Covenants
The Amended Pilot Line of Credit contains customary affirmative and negative covenants and events of default. In a April 30, 2019, Agreement Regarding Attornment of Tank Leases between Veritex, LE, NPS, and Pilot, Veritex in its capacity as a secured lender of LE and LRM, agreed to permit the continued performance of obligations under a certain tank lease agreement if it were to foreclose on LE property that NPS was leasing from LE so long as certain conditions were met. The effectiveness of the Agreement Regarding Attornment of Tank Leases was subject to certain conditions, including the agreement and concurrence of the USDA that the Agreement Regarding Attornment of Tank Leases does not impair or void the First Term Loan Due 2034 and Second Term Loan Due 2034 or any associated guarantees. Veritex agreed to use commercially reasonable efforts to obtain such USDA concurrence, however, as of the filing date of this report such USDA concurrence has not been provided.
Line of credit payable, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:
| | | | | | | | | | | | | | | Amended Pilot Line of Credit (in default) | $10,573 | $11,786 | | | | | | Less: Unamortized debt issue costs | - | (219) | | Less: Interest payable, short-term | (103) | (103) | | | $10,470 | $11,464 |
Refinery and Facilities Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Management believes that the refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques. Pipelines and Facilities and Oil and Gas Properties We have AROs associated with the decommissioning of our pipelines and facilities assets, as well as the plugging and abandonment of our oil and gas properties. We recorded a discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipment and recognized accretion expense relating to the discounted liability over the remaining life of the asset. At June 30, 2020March 31, 2021 and December 31, 2019,2020, the liability was fully accreted. See “Note (16)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks. ARO liability as of the dates indicated was as follows: | | | | | | | | | | | | | | | | AROs, at the beginning of the period | $2,370 | $2,565 | | Liabilities settled | - | (195) | | | 2,370 | 2,370 | | Less: AROs, current portion | (2,370) | (2,370) | | Long-term AROs, at the end of the period | $- | $- |
Liabilities settled reflects preparatory costs in the period associated with decommissioning our offshore pipelines and platform assets.
| Blue Dolphin Energy Company | June | March 31, 2021 │Page 30 2020
|
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| Notes to Consolidated Financial Statements | | |
ARO liability as of the dates indicated was as follows:
| | | | | | | | | | | | | | | | AROs, at the beginning of the period | $2,565 | $2,565 | | Liabilities settled | (129) | - | | | 2,436 | 2,565 | | Less: AROs, current portion | (2,436) | (2,565) | | Long-term AROs, at the end of the period | $- | $- |
Liabilities settled reflects preparatory costs associated with decommissioning our offshore pipelines and platform assets.
Lease Obligations Operating Lease Office Lease. BDSC has an office lease related to our headquarters office in Houston, Texas. The 68-month operating lease expires in 2023. BDSC has the option to extend the lease term for one additional five (5) year period if notice of intent to extend is provided to the lessor at least twelve (12) months before the end of the current term. Pursuant to a letter dated March 29, 2021, TR 801 Travis LLC, a Delaware limited partnership, informed BDSC that it was in default under its office lease. BDSC’s failure to pay past due obligations, including rent installments and other charges, constituted an event of default. The parties reached an agreement to cure the default. See “Note (17) Subsequent Events” to our consolidated financial statements for additional disclosures related to the Houston office lease. An Affiliate, LEH, subleases a portion of thisthe Houston office space. Sublease income received from LEH totaled approximately $0.01 million for both the three months ended June 30, 2020March 31, 2021 and 2019. Sublease income received from LEH totaled approximately $0.02 million for both the six months ended June 30, 2020 and 2019.2020. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease. Finance Leases
Crane. In January 2018, LE entered a 24-month lease for the purchase of a 20-ton crane for use at the Nixon facility. The lease required a negligible monthly payment and matured in January 2020.
Backhoe Rent-to-Own Agreement. In May 2019, LE entered into a 12-month equipment rental agreement with the option to purchase the backhoe at maturity. The backhoe is being used at the Nixon facility. The equipment rental agreement matured in May 2020. The parties are currently negotiating on the end of lease purchase price for the backhoe.
LACT Unit Rent-to-Own Agreement. In April 2020, LE entered into a 12-month equipment rental agreement with the option to purchase the LACT unit at maturity. The LACT unit, which was installed in June 2020, is being used at the Nixon facility. The equipment rental agreement requires a negligible monthly payment and matures in June 2021. Subsequent to the consolidated balance sheet date, the lease was canceled, and the related equipment was returned.
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet: | | | | | | | | | | Balance Sheet Location | | | Balance Sheet Location | | | | | | | | | | Assets | | | | | | Operating lease ROU assets | Operating lease ROU assets | $787 | $787 | Operating lease ROU assets | $787 | $787 | | Less: Accumulated amortization on operating lease assets | Operating lease ROU assets | (211) | (138) | Operating lease ROU assets | (329) | (289) | | | | 576 | 649 | | | | | | | | Finance lease assets | Property and equipment, net | 148 | 180 | | | Less: Accumulated amortization on finance lease assets | Property and equipment, net | (10) | (34) | | | | 138 | 146 | | | | | | | Total lease assets | | 714 | 795 | | 458 | 498 | | | | | | | | Liabilities | | | | | | Current | | | | | | Operating lease | Current portion of lease liabilities | 185 | 175 | Current portion of lease liabilities | 199 | 194 | | Finance leases | Current portion of lease liabilities | 128 | 76 | | | | | 313 | 251 | | 199 | 194 | | Noncurrent | | | | | | Operating lease | Long-term lease liabilities, net of current | 470 | 564 | Long-term lease liabilities, net of current | 319 | 370 | | Total lease liabilities | | $783 | $815 | | $518 | $564 |
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 31
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| Notes to Consolidated Financial Statements | | |
| Weighted average remaining lease term in years | | Operating lease | 3.17 | Finance leases | 0.682.42
| | Weighted average discount rate | | | Operating lease | 8.25% | | Finance leases | 8.25% | | |
The following table presents information related to lease costs for operating and finance leases: | | | | | | | | | | | | | | | | | | | | | | | | | | Operating lease costs | $51 | $51 | $103 | $77 | $51 | $51 | | Finance lease costs: | | | | Depreciation of leased assets | 4 | 4 | 10 | 8 | - | 6 | | Interest on lease liabilities | 2 | 1 | 3 | 2 | - | 2 | | Total lease cost | $57 | $56 | $116 | $87 | $51 | $59 |
The table below presents supplemental cash flow information related to leases as follows: | | | | | | | | | | | | | | | | | | | | | | Cash paid for amounts included in the measurement | | | | of lease liabilities: | | | | Operating cash flows for operating lease | $43 | $40 | $131 | $96 | $47 | $88 | | Operating cash flows for finance leases | $2 | $1 | $4 | $2 | $- | $2 | | Financing cash flows for finance leases | $6 | $10 | $12 | $21 | $- | $6 |
| Blue Dolphin Energy Company | | March 31, 2021 │Page 32 |
| Notes to Consolidated Financial Statements | | |
As of June 30, 2020,March 31, 2021, maturities of lease liabilities for the periods indicated were as follows: June 30, | | | | | | March 31, | | | | | | | | | | | | 2020 | $184 | $128 | $312 | | | 2021 | 204 | - | 204 | $199 | | 2022 | 226 | - | 226 | 220 | | 2023 | 41 | - | 41 | 99 | | | | | | | $655 | $128 | $783 | $518 |
Future minimum annual lease commitments that are non-cancelable: | | | | June 30, | | | | March 31, | | | | | | | | 2020 | $232 | | | 2021 | 235 | $233 | | 2022 | 239 | 237 | | 2023 | 40 | 101 | | | $746 | $571 |
Tax Provision The provision for income tax expense for the periods indicated was as follows: | | | | | | | | | | | | | | Current | | | | Federal | $- | $(15) | | State | - | - | | Deferred | | | | Federal | 667 | 698 | | State | - | | | Change in valuation allowance | (667) | (698) | | | | | | Total provision for income taxes | $- | $(15) |
The TMT is treated as an income tax for financial reporting purposes.
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 33 |
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| Notes to Consolidated Financial Statements | | |
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
| | | | | | | | | | | | | | | | | | | | | Current | | | | | | Federal | $- | $- | $(15) | $- | | State | - | - | - | - | | Deferred | | | | | | Federal | 893 | 800 | 1,591 | 643 | | State | - | | - | | | Change in valuation allowance | (893) | (800) | (1,591) | (643) | | Total provision for income taxes | $- | $- | $(15) | $- |
The state of Texas, TMT is treated as an income tax for financial reporting purposes.
Deferred income taxes as of the dates indicated consisted of the following: | | | | | | | | | | | | | | | | | Deferred tax assets: | | | | NOL and capital loss carryforwards | $13,897 | $12,463 | $15,773 | $15,258 | | Business interest expense | 2,648 | 1,923 | 3,693 | 3,343 | | Start-up costs (crude oil and condensate processing facility) | 551 | 594 | 488 | 509 | | ARO liability/deferred revenue | 511 | 539 | 498 | 498 | | AMT credit | - | 50 | | | Other | 36 | 11 | 4 | 3 | | Total deferred tax assets | 17,643 | 15,580 | 20,456 | 19,611 | | | | | | Deferred tax liabilities: | | | | Basis differences in property and equipment | (6,705) | (6,183) | (7,409) | (7,230) | | Total deferred tax liabilities | (6,705) | (6,183) | (7,409) | (7,230) | | | 10,938 | 9,397 | 13,047 | (7,230) | | | | | | Valuation allowance | (10,938) | (9,347) | (13,047) | (12,381) | | | | | | Deferred tax assets, net | $- | $50 | $- | $- |
Deferred Income Taxes Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, as well as from NOL carryforwards. We state those balances at the enacted tax rates we expect will be in effect when taxes are paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income. NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than fifty (50) percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years). For income tax purposes, we experienced ownership changes in 2005, relating to a series of private placements, and in 2012, because of a reverse acquisition, that limit the use of pre-change NOL carryforwards to offset future taxable income. In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards that were generated prior to the ownership change to an annual use limitation of approximately $0.6 million per year. Unused portions of the annual use limitation amount may be used in subsequent years. Because of the annual use limitation, approximately $6.7 million in NOL carryforwards that were generated prior to the 2012 ownership change will expire unused. NOL carryforwards that were generated after the 2012 ownership change and prior to 2018 are not subject to an annual use limitation under IRC Section 382 and may be used for a period of 20 years in addition to available amounts of NOL carryforwards generated prior to the ownership change.
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| Notes to Consolidated Financial Statements | | |
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 | | Net Operating Loss Carryforward | | | | | | | | | | | | | | | | | | | | Balance at December 31, 2018 | $9,614 | $37,335 | $46,949 | | | | | | | Net operating losses | - | 5,723 | | | | | | | Balance at December 31, 2019 | 9,614 | 43,058 | 52,672 | 9,614 | 43,058 | 52,672 | | | | | | Net operating losses | - | 6,826 | - | 13,305 | | | | | | Balance at June 30, 2020 | $9,614 | $49,884 | $59,498 | | | Balance at December 31, 2020 | | $9,614 | $56,363 | $65,977 | | | | | | Net operating losses | | (1,718) | 2,456 | 738 | | | | | | Balance at March 31, 2021 | | $7,896 | $58,819 | $66,715 |
Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. At June 30, 2020March 31, 2021 and December 31, 2019,2020, management determined that cumulative losses incurred over the prior three-year period provided significant objective evidence that limited the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of June 30, 2020March 31, 2021 and December 31, 2019.2020. A reconciliation between basic and diluted income per share for the periods indicated was as follows: | | | | | | | | | | | | | | | | | | | | | | | | | except share and per share amounts) | | Net income (loss) | $(4,242) | $(3,299) | $(7,582) | $(2,552) | | | | | | | Net loss | | $(3,174) | $(3,340) | | | | | | Basic and diluted income (loss) per share | $(0.34) | $(0.30) | $(0.61) | $(0.23) | $(0.25) | $(0.27) | | | | | | Basic and Diluted | | | | Weighted average number of shares of | | | | common stock outstanding and potential | common stock outstanding and potential | common stock outstanding and potential | | dilutive shares of common stock | 12,580,853 | 10,975,514 | 12,454,109 | 10,975,215 | 12,693,514 | 12,327,365 |
| Blue Dolphin Energy Company | | March 31, 2021 │Page 35 |
| Notes to Consolidated Financial Statements | | |
Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS for the three and six months ended June 30,March 31, 2021 and 2020 and 2019 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding. Blue Dolphin Energy Company | June 30, 2020 |
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Notes to Consolidated Financial Statements | | |
(16) Commitments and Contingencies Amended and Restated Operating Agreement See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin properties by an Affiliate under the Amended and Restated Operating Agreement. BSEE Offshore Pipelines and Platform Decommissioning BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements. In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning, along with a safe boarding plan for the platform, within six (6) months (no later than February 15, 2020), and develop and implement a safe boarding plan for submission with such permit applications. Further, BSEE proposed that BDPL complete approved, permitted work within 12twelve (12) months (no later than August 15, 2020). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. Not all permit applications haveAlthough we planned to decommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been approved bydelayed due to cash constraints associated with the ongoing impact of COVID-19 and winter being the offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently estimate when decommissioning may occur. In the interim, BDPL provides BSEE andwith updates regarding the USACOE as required prior to work commencement. Delays in permit approvals may be the result of COVID-19. As a result, BDPL plans to request an extension for decommissioning work.project’s status. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to the INC related to the structural platform surveys, and BSEE approved BDPL’s extension request. The required platform surveys were completed, and the INC was resolved in June 2020. BSEE’s deadline to complete decommissioningLack of BDPL’s offshore pipelines and platform assets, as well as to complete the structural platform surveys,permit approvals does not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. There can be no assurance that we will be able to meet BSEE’s time tables. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or structural surveys ofremedy the platform are not completedINCs within a timeframe determined to be prudent by the allowable time frames,BSEE, BDPL willcould be subject to vigorous regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which maycould have a material adverse effect on our earnings, cash flows and liquidity.
We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2020.March 31, 2021. At June 30, 2020both March 31, 2021 and December 31, 2019,2020, BDPL maintained $2.4 million and $2.6 million, respectively, in AROs related to abandonment of these assets. Defaults Under Secured Loan Agreements with Third Parties See “Note“Notes (1),” “Note (3),” “Note (10),” and “Note (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 “Note“Notes (1),” “Note (3),” “Note (10),” and “Note (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 “Note“Notes (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 36 |
| Notes to Consolidated Financial Statements | | |
Health, Safety and Environmental Matters Our
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. OurThese 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. Blue Dolphin Energy Company | June 30, 2020 |
Legal Matters 32
Notes to Consolidated Financial Statements | | |
Legal Matters
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in an August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. BDPL reasonably expects that successful completionDecommissioning of its decommissioning obligations (see “Note (16) – BSEE Offshore Pipelines and Platform Decommissioning”)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. DueAlthough we planned to delays in permit application approvals likely becausedecommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19 and winter being the offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently estimate when decommissioning may occur. In the interim, BDPL plans to request an extension to BSEE’s August 2020 deadline.provides BOEM and BSEE with updates regarding the project’s status. BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2020.March 31, 2021. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM. Resolved - GEL Settlement. As previously disclosed, GEL was awarded the GEL Final Arbitration Award in the aggregate amount of $31.3 million. In July 2018, the Lazarus Parties and GEL entered into the GEL Settlement Agreement. The GEL Settlement Agreement was subsequently amended five (5) times to extend the GEL Settlement Payment Date and/or modify certain terms related to the GEL Interim Payments or the GEL Settlement Payment. During the period September 2017 to August 2019, GEL received the following amounts from the Lazarus Parties to reduce the outstanding balance of the GEL Final Arbitration Award:
| | Initial payment (September 2017) | $3.7
| GEL Interim Payments (July 2018 to April 2019) | 8.0
| Settlement Payment (Multiple Payments May 7 to 10, 2019) | 10.0
| Deferred Interim Installment Payments (June 2019 to August 2019) | 0.5
| | | | $22.2
|
The GEL Settlement Effective Date occurred on August 23, 2019. As a result of the GEL Settlement: (i) the mutual releases became effective, (ii) GEL filed the stipulation of dismissal of claims against LE, and (iii) Blue Dolphin recognized a $9.1 million gain on the extinguishment of debt on its consolidated statements of operations in the third quarter of 2019. Until the GEL Settlement occurred, the debt was reflected on Blue Dolphin’s consolidated balance sheets as accrued arbitration award payable. At both June 30, 2020 and December 31, 2019, the accrued arbitration award payable was $0.
Other Legal Matters. We are involved in lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens, contract-related disputes, and administrative proceedings. Management is in discussion with all concerned parties and does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that such discussions will result in a manageable outcome. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 37 |
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| Notes to Consolidated Financial Statements | | |
Nixon Facility Improvements
We have made and will continue to make capital and efficiency improvements at the Nixon facility. Therefore, we incurred and will continue to incur capital expenditures related to these improvements, which include, among other things, facility and land improvements and installation of new or refurbished refinery process equipment.BDSC Office Lease Default
Share Issuances (Sales of Unregistered Securities)
We are obligatedOn May 11, 2021, BDSC and TR 801 Travis LLC reached an agreement to issue shares of our Common Stock to: (i) non-employee directors for services rendered tocure BDSC’s Houston office lease default. Under the Board and (ii) to Jonathan Carroll pursuant to the Guaranty Fee Agreements. Set forth below is information regarding the sale or issuance of Common Stock related to these obligations during the three and six months ended June 30, 2020:
●
On April 30, 2020, we issued an aggregate of 231,065 restricted shares of Common Stock to Jonathan Carroll, which represents paymentterms of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52,arrangement, BDSC will pay TR 801 Travis LLC past due obligations, including rent installments and the high was $1.07. 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 “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.
●
On April 30, 2020, we also issued an aggregate of 135,084 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three month periods ended September 30, 2018, March 31, 2019, September 30, 2019, and March 31, 2020. The average cost basis was $0.97, the low was $0.57, and the high was $1.18.
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.
We recognized a gain on the issuance of shares ofother charges totaling approximately $0.1 million for both(the “Past Due Obligations”), in equal monthly installments beginning June 1, 2021 and continuing through the three and six months ended June 30, 2020.August 31, 2023 lease expiration date. The Past Due Obligations shall be subject to an annual percentage rate of 4.50%. As revised, BDSC’ monthly base rent plus the prorated portion of the Past Due Obligations will approximate $0.02 million.
BDEC EIDL
Remainder
On May 11, 2021, BDEC executed the standard loan documents required to secure an EIDL through the SBA for COVID-19 pandemic relief. The principal amount of Page Intentionally Left Blank the loan is $0.5 million. Proceeds will be used for working capital purposes. 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 $.003 million per month and will begin eighteen (18) months from the date of the loan. The balance of principal and interest is payable over a 30-year term. SBA EIDLs are not forgivable. Jonathan Carroll and LEH, an Affiliate, provided gurantees of the debt. The debt is subject to certain customary covenants and default provisions.
Remainder of Page Intentionally Left Blank
| Blue Dolphin Energy Company | June 30, 2020 | March 31, 2021 │Page 38 |
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| Management’s Discussion and Analysis and Internal Controls | | |
MANAGEMENT'S MDANAGEMENT'S DISCUSSIONISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020. 2020. 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 thanapproximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Active subsidiariesSubsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements forFor 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”see “Part I, Item 1. Financial Statements – Note (4)”. Affiliates Affiliates controlcontrolled approximately 82% of the voting power of our Common Stock.Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note“Part I, Item 1. Financial Statements – Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, and arrangements, and risks associated with working capital deficits. Business Operations Update The ongoingIn 2020, the outbreak of the COVID-19 pandemic has resulted in significantnegatively impacted worldwide economic disruption globally, including in the United States. Governmental authorities around the world have taken actions, suchand commercial activity and financial markets, as stay-at-home orders and other social distancing measures, to prevent the spread of COVID-19. These measures have resulted in significant business and operational disruptions, including demand destruction for non-essential businesses, business closures, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and limitations on workforce availability. In particular, travel restrictions have dramatically reduced flights, cruises, and motor vehicle usage at a time when seasonal travel patterns typically result in an increase in consumerwell as global demand for certain refined petroleum products.
The impact As a result of commodity price volatility and decreased demand for our products, our business results and cash flows were significantly adversely impacted by the COVID-19 was further amplified by market plays between the world’s oil producers beginning latepandemic in 2020 and throughout the first quarter of 2020, which led to a decline in the demand for, and thus also the market prices of, crude oil, and most of our refined products. In addition, global crude oil production levels did not decline despite lower demand and storage capacity constraints, which further intensified the decline in crude oil prices and contributed to an increase in crude oil price volatility. The decrease in demand for refined petroleum products coupled with the decline in the price of crude oil resulted in a significant decrease in the price of refined petroleum products. Although prices recovered slightly during the second quarter, overall market prices remained volatile. The purchase price of crude oil and the selling price of refined products significantly impacts our revenue, cost of goods sold, operating income, and liquidity. In addition, declines in the market prices of crude oil and refined products below their inventory carrying values results in a write down in the value of our inventories and an adjustment to cost of goods sold.
We continue to proactively address the known impacts of COVID-19 to the extent possible. The uncertainty2021. As vaccine rollouts ramp up around the availabilityworld, travel restrictions are pared back, and prices of crude oil, the pricesOPEC and demand for our refined products, and the general business environment is expected to continue through the remainder of the year and beyond. Given diminished expectations forother producer countries re-balance inventories, we are cautiously optimistic that the global economy, oil demand, and speculation regarding a prolonged slowdown and recession, we are unable to predictcommodity prices will recover from the ultimate economic impact of the pandemic.
In the wake of the COVID-19 pandemic, we continue to take measures to lessen the impact on our business.operations and limit the spread of the virus among personnel. We operate the Nixon facility at reduced rates based on market conditions and staffing levels, and we adjust the facility’s operating rate in response to market and other conditions. We careful evaluate projects and, as a result, have limited or postponed projects and other non-essential work. We have also planned capital expenditures at a level we believe will satisfy all required safety, environmental, and regulatory requirements. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to collaborate virtually. The duration of the impact of the COVID-19 pandemic and related market developments is unknown. The continued negative impact of these events on our business and operations will depend on the ongoing severity, location and duration of the effects and spread of COVID-19, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in 2021 or thereafter. Non-compliance with applicable environmental and safety requirements, including as a result of reduced staff due to an outbreak of the virus at one of our locations, may impair our operations, subject us to fines or penalties assessed by governmental authorities, and/or result in an environmental or safety incident. We may also be subject to liability as a result of claims against us by impacted workers or third parties. The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, result of operations, financial condition, cash flows, and our ability to service our indebtedness and other obligations. There can also be no assurance that our liquidity, business, financial condition, and results of operations will revert to pre-2020 levels once the impacts of the COVID-19 pandemic cease.
| Blue Dolphin Energy Company | | March 31, 2021 │Page 39 |
| Management’s Discussion and Analysis and Internal Controls | | |
Going Concern Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. TheseAs discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the following:outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing. Defaults Under Secured Loan Agreements with Third Parties. DefaultsWe are currently in default under certain of our secured loan agreements with third parties include loans with Veritex in the original aggregate principal amount of $35.0 million, which are guaranteed 100% by the USDA, and a line of credit agreement with Pilot in the original principal amount of $13.0 million. Certain of our related-party debt is also in default. See “Note (3)” of our consolidated financial statements for disclosures related to related-party debt. Blue Dolphin Energy Company | June 30, 2020 |
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Management’s Discussion and Analysis | | |
Veritex Loan Agreements
In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex regarding events of default under our secured loan agreements, including, but not limited to, the occurrence of the GEL Final Arbitration Award, associated material adverse effect conditions, failure by LE to replenish a $1.0 million payment reserve account, and the occurrence of events of default under our other secured loan agreements with Veritex. Further, Veritex informed obligors that it would consider a final confirmation of the GEL Final Arbitration Award to be a material event of default under the loan agreements. Veritex did not accelerate or call due our secured loan agreements considering then ongoing settlement discussions between GEL and the Lazarus Parties. Instead, Veritex expressly reserved all its rights, privileges and remedies related to events of default.
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant defaults and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.
In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.
At June 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex.parties. As a result, the debt associated with these loansobligations was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2020March 31, 2021 and December 31, 2019.2020. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowingsThird-Party Defaults
● Veritex Loans – Defaults under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii)the LE Term Loan Due 2034 and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements with VeritexTerm Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further,Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remained outstanding. ● Amended Pilot Line of Credit On – Upon maturity of the Pilot Line of Credit in May 4, 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”“Payment Obligations”) under the Amended Pilot Line of Credit.. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Payment Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Payment Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.
OnPursuant to a June 1, 2020 notice, Pilot notified borrower and guarantors by letter of its intent to apply as a setoffbegan applying Pilot’s payment obligations owing to or for the credit or the account of borrowerNPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between borrowerNPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between the borrowerNPS and Pilot, against NPS’ payment obligations to Pilot under the Obligations. AsAmended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the dateAmended Pilot Line of the letter, the amount of such setoff was approximately $0.2 million. The setoff was only in partial satisfaction of the ObligationsCredit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively.
Blue Dolphin Energy Company | June 30, 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 Payment Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Payment Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report. 36
Management’s Discussion and Analysis | | |
The borrowerAny exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue to workworking with the borrowerNPS to settle the Payment Obligations. BorrowerNPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. OurNPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, weNPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
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See “Note (10)”
| Management’s Discussion and Analysis and Internal Controls | | |
● Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and “Note (11)” to our consolidatedliens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment. Our financial statements for additional information related tohealth could be materially and adversely affected by defaults underin our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with VeritexPilot, which could impact our ability to acquire crude oil and Pilotcondensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply constraints and their potential effectsincreased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business financial condition,results and resultsoperations. During the three-month period ended March 31, 2021, our refinery experienced 1 day of operations.downtime as a result of lack of crude due to cash constraints. Related-Party Defaults Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Margin Deterioration and Volatility. StepsOur refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and thevoluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions ofby members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets, causingmarkets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil prices to decline sharply, as well as other changes toproduction, there is cautious optimism that the economic outlookeconomy will improve in the near term. Such developments included, but are not limited to, government-imposed temporary business closuresshort-term. However, oil and voluntary shelter-at-home directives as well as developments in production discussions between global oil producers,refined product prices and the effect thereof. Oil prices as well as demand are expected to continue to beremain volatile as a resultfor the foreseeable future, despite signs of recovery during the near-term over-supply and the ongoing COVID-19 pandemic as changes in oil inventories, industry demand and global and national economic performance are reported, and wefirst quarter of 2021. We cannot predict when prices and demand will improvestabilize, and stabilize. Wewe are currently unable to estimate the impact these events will have on our future financial position and results of operations. However,Accordingly, we expect margins will likely remain weak for the remainder of 2020 until global demand begins to recover. Accordingly, we can provide no assurances that these events will notcontinue to have a material adverse effect on our financial position orand results of operations.operations throughout 2021. Historic Net Losses and Working Capital Deficits. Net LossesRemainder of Page Intentionally Left Blank
Net loss for the three months ended June 30, 2020 was $4.2 million, or a loss of $0.34 per share, compared to a net loss of $3.3 million, or a loss of $0.30 per share, for the three months ended June 30, 2019. The increase in net loss was the result of less favorable margins per bbl and lower sales volume in the three-month period ended June 30, 2020 compared to the three-month period ended June 30, 2019. Net loss for the six months ended June 30, 2020 was $7.6 million, or a loss of $0.61 per share, compared to a net loss of $2.6 million, or a loss of $0.23 per share, for the six months ended June 30, 2019. The significant increase in net loss was the result of less favorable margins per bbl and lower sales volume in the six-month period ended June 30, 2020 compared to the same period a year earlier.
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Working Capital Deficits
We had a working capital deficit of $66.6 million and $59.4 million at June 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $20.5 million and $19.6 million at June 30, 2020 and December 31, 2019, respectively. We had cash and cash equivalents and restricted cash (current portion) of less than $0.01 million and $0.05 million, respectively, at June 30, 2020. Comparatively, we had cash and cash equivalents and restricted cash (current portion) of $0.07 million and $0.05 million, respectively, at December 31, 2019.| Management’s Discussion and Analysis and Internal Controls | | |
Operating RisksSuccessful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under ”Going Concern” within this MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSManagement’s Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Overview Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see “Part I, Item 1. Financial ConditionStatements – Note (4)”. Affiliates Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and Resultsmanages all Blue Dolphin properties and funds working capital requirements during periods of Operationsworking capital deficits, and throughout this report, wean Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently unableparties to estimatea variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements – Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. Business Operations Update In 2020, the impactoutbreak of the COVID-19 pandemic negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for petroleum products. As a result of commodity price volatility and decreased demand for our products, our business results and cash flows were significantly adversely impacted by the COVID-19 pandemic in 2020 and throughout the first quarter of 2021. As vaccine rollouts ramp up around the world, travel restrictions are pared back, and OPEC and other producer countries re-balance inventories, we are cautiously optimistic that the global economy, oil demand, and commodity prices will haverecover from the impact of the pandemic. In the wake of the COVID-19 pandemic, we continue to take measures to lessen the impact on our future financial positionoperations and resultslimit the spread of operations. Ourthe virus among personnel. We operate the Nixon facility at reduced rates based on market conditions and staffing levels, and we adjust the facility’s operating rate in response to market and other conditions. We careful evaluate projects and, as a result, have limited or postponed projects and other non-essential work. We have also planned capital expenditures at a level we believe will satisfy all required safety, environmental, and regulatory requirements. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business was deemed as an essentialtravel. Personnel, customers, and partners are also encouraged to collaborate virtually. The duration of the impact of the COVID-19 pandemic and related market developments is unknown. The continued negative impact of these events on our business and operations will depend on the ongoing severity, location and duration of the effects and spread of COVID-19, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in 2021 or thereafter. Non-compliance with applicable environmental and safety requirements, including as such, has remained open. We have instituted various initiatives throughouta result of reduced staff due to an outbreak of the company as partvirus at one of our locations, may impair our operations, subject us to fines or penalties assessed by governmental authorities, and/or result in an environmental or safety incident. We may also be subject to liability as a result of claims against us by impacted workers or third parties. The foregoing and other continued disruptions to our business continuity programs,as a result of the COVID-19 pandemic could result in a material adverse effect on our business, result of operations, financial condition, cash flows, and we are workingour ability to mitigate risk when disruptions occur. Management believes that it is taking all prudent steps, however, thereservice our indebtedness and other obligations. There can also be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, ourliquidity, business, financial condition, and results of operations will be materially adversely affected.revert to pre-2020 levels once the impacts of the COVID-19 pandemic cease.
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| Management’s Discussion and Analysis and Internal Controls | | |
Business StrategyGoing Concern
Considering the uncertainty of the depth and extent of the contraction in demand due to the COVID-19 pandemic, combined with the weaker commodity price environment, we remain focused on safe and reliable operations and cash conservation. In May 2020, we safely completed the planned maintenance turnaround of the Nixon facility.
As discussed above under “Going Concern” and ”Operating Risks” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations many uncertainties remain with respect to COVID-19 and the global oil markets, and it is currently difficult to accurately forecast and plan future business activities. There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. If Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
We regularly engage in discussions with third parties regarding the possible purchase of assets and operations that are strategic and complementary to our existing operations. However, we do not anticipate any material acquisition activity in the foreseeable future. As noted above, managementManagement has determined that conditions exist thatcertain factors raise substantial doubt about our ability to continue as a going concernconcern. As discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, with third parties, margin deterioration and volatility, and historic net losses and working capital deficits. A ‘going concern’ opinion could impair our ability to finance our operations throughOur consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the saleoutcome of equity, incurring debt, or other financing alternative s.this uncertainty. Our ability to continue as a going concern will dependdepends on sustained positive operating margins and having working capital to sustain operations, including the purchase offor, amongst other requirements, purchasing crude oil and condensate and making payments on our secured debt agreements with third parties. If we are unable to achieve these goals,long-term debt. Without positive operating margins and working capital, our business wouldwill be jeopardized, and we may not be able to continue.
Refinery Operations
Our refinery operations segment consists of the following If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, and operations:
Property | | Key Products
Handled
| | Operating Subsidiary | | Location
| | | | | | | | Nixon facility
● Crude distillation tower (15,000 bpd)
● Petroleum storage tanks
● Loading and unloading facilities
● Land (56 acres)
| | Crude Oil
Refined Products
| | LE | | Nixon, Texas | | | | | | | |
Capital Improvement Expansion Project. In 2015, the Nixon facility beganraising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a 5-year capital improvement expansion project primarily to construct new petroleum storage tanks. The project also included smaller efficiency improvements and the acquisition of refurbished refinery equipment for future deployment. The increase of nearly 1.0 million bbls of petroleum storage capacity has helped with de-bottlenecking the Nixon refinery. In the future, additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase the Nixon refinery’s complexity. The project was completed in the second quarter of 2020 at a total cost of approximately $32.5 million.potential bankruptcy filing.
Crude OilDefaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and Condensate Supply. Operationrelated parties. As a result, the debt associated with these obligations was classified within the current portion of the Nixon refinery dependslong-term debt on our abilityconsolidated balance sheets at March 31, 2021 and December 31, 2020. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to purchase adequatethird-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.
Third-Party Defaults ● Veritex Loans – Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate.condensate procurement and our customer relationships; financial condition; and results of operations. Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, which could lead to holders of our common stock losing their investment in its entirety. We have a long-term crude supply agreement in placecan provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Pilot. UnderVeritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the initial termpayments of the crude supply agreement,debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remained outstanding. ● Amended Pilot will sell us approximately 24.8 million net bblsLine of crude oil. Thereafter,Credit – Upon maturity of the crude supply agreement will continuePilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Payment Obligations”). Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Payment Obligations began to accrue interest at a one-year evergreen basis. Effective Marchdefault rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Payment Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Pursuant to a June 1, 2020 notice, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Either party may terminate the crude supply agreement by providing the other party 60 days prior written notice.
Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreement, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement. During the second quarter of 2020, Pilot applied as a setoffbegan applying Pilot’s payment obligations owed to usNPS under each of (a) the terminal services agreementsTerminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between usNPS and Pilot. The setoff was in partial satisfactionPilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of ourJune 1, 2019, between NPS and Pilot, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. AsSuch tank lease setoff amounts only partially satisfy NPS’ obligations under the Amended Pilot Line of June 1,Credit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively.
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 Payment Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Payment Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with NPS to settle the Payment Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. NPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such setoff was approximately $0.2 million. See ‘going concern’ within this Management’s Discussionindebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and Analysis section, as well as “Note (1)” to our consolidated financial statements for additional disclosures related to defaultsthe value of an investment in our debt obligations.common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
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| Management’s Discussion and Analysis and Internal Controls | | |
● Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment. Our financial health could be materially and adversely affected by defaults underin our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, a sustained periodperiods of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also resulthas resulted in significant financial constraints on producers, which could resultin turn has resulted in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month period ended March 31, 2021, our refinery experienced 1 day of downtime as a result of lack of crude due to cash constraints. Related-Party Defaults Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. ProductsMargin Deterioration and MarketsVolatility. Our market isrefining margins generally improve in an environment of higher crude oil and refined product prices, and where the Gulf Coast regionspread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of the U.S., whichOPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil production, there is represented bycautious optimism that the EIA as Petroleum Administration for PADD 3. We sell our products primarilyeconomy will improve in the U.S. within PADD 3. Occasionally,short-term. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future, despite signs of recovery during the first quarter of 2021. We cannot predict when prices and demand will stabilize, and we sell refined productsare currently unable to customersestimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that exportthese events will continue to Mexico.
The Nixon refinery’s product slate is moderately adjusted basedhave a material adverse effect on market demand. We currently produce a single finished product – jet fuel –our financial position and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliates arrangements and transactions.
Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portionresults of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products. See “Note (5)” to our consolidated financial statements for disclosures related to concentration of risk associated with significant customers.operations throughout 2021.
Competition. Many of our competitors are substantially larger than usHistoric Net Losses and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and DowntimeWorking Capital Deficits. Our refinery operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA, the EPA, and comparable state and local requirements. Together, these regulations are designed for personnel safety, process safety management, and risk management, as well as to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable, or explosive chemicals. Storage tanks used for refinery operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our refinery operations have response and control plans, spill prevention and other programs to respond to emergencies.
The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Unplanned shutdowns can occur for a variety of reasons, including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities, or disabled equipment. However, in Texas the most typical reason is excessive heat or power outages from high winds and thunderstorms. Planned turnarounds are used to repair, restore, refurbish, or replace refinery equipment. Refineries typically undergo a major turnaround every three to five years. Since the Nixon refinery was placed back in service in 2012 (commonly referred to as “recommissioning”), turnarounds are needed more frequently for unanticipated maintenance or repairs.
We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.
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| Management’s Discussion and Analysis and Internal Controls | | |
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Management’s Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020. Overview Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with approximately 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For more information related to our business segments, see “Part I, Item 1. Financial Statements – Note (4)”. Affiliates Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Part I, Item 1. Financial Statements – Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and risks associated with working capital deficits. Business Operations Update In 2020, the outbreak of the COVID-19 pandemic negatively impacted worldwide economic and commercial activity and financial markets, as well as global demand for petroleum products. As a result of commodity price volatility and decreased demand for our products, our business results and cash flows were significantly adversely impacted by the COVID-19 pandemic in 2020 and throughout the first quarter of 2021. As vaccine rollouts ramp up around the world, travel restrictions are pared back, and OPEC and other producer countries re-balance inventories, we are cautiously optimistic that the global economy, oil demand, and commodity prices will recover from the impact of the pandemic. In the wake of the COVID-19 pandemic, we continue to take measures to lessen the impact on our operations and limit the spread of the virus among personnel. We operate the Nixon facility at reduced rates based on market conditions and staffing levels, and we adjust the facility’s operating rate in response to market and other conditions. We careful evaluate projects and, as a result, have limited or postponed projects and other non-essential work. We have also planned capital expenditures at a level we believe will satisfy all required safety, environmental, and regulatory requirements. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to collaborate virtually. The duration of the impact of the COVID-19 pandemic and related market developments is unknown. The continued negative impact of these events on our business and operations will depend on the ongoing severity, location and duration of the effects and spread of COVID-19, the effectiveness of vaccine programs, other actions undertaken by federal, state, and local governments and health officials to contain the virus or treat its effects, and how quickly and to what extent economic conditions improve and normal business and operating conditions resume in 2021 or thereafter. Non-compliance with applicable environmental and safety requirements, including as a result of reduced staff due to an outbreak of the virus at one of our locations, may impair our operations, subject us to fines or penalties assessed by governmental authorities, and/or result in an environmental or safety incident. We may also be subject to liability as a result of claims against us by impacted workers or third parties. The foregoing and other continued disruptions to our business as a result of the COVID-19 pandemic could result in a material adverse effect on our business, result of operations, financial condition, cash flows, and our ability to service our indebtedness and other obligations. There can also be no assurance that our liquidity, business, financial condition, and results of operations will revert to pre-2020 levels once the impacts of the COVID-19 pandemic cease.
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| Management’s Discussion and Analysis and Internal Controls | | |
Going Concern Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. As discussed more fully below, these factors include inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from the outcome of this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as selling assets, raising additional debt or equity capital, cutting costs or otherwise reducing our cash requirements, or negotiating with our creditors to restructure our applicable obligations, including a potential bankruptcy filing. Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at March 31, 2021 and December 31, 2020. See “Part I, Item 1. Financial Statements – Notes (1), (3), (10), and (11)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. Third-Party Defaults ● Veritex Loans – Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, which could lead to holders of our common stock losing their investment in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remained outstanding. ● Amended Pilot Line of Credit – Upon maturity of the Pilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Payment Obligations”). Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Payment Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Payment Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Pursuant to a June 1, 2020 notice, Pilot began applying Pilot’s payment obligations to NPS under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May 2019, between NPS and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between NPS and Pilot, against NPS’ payment obligations to Pilot under the Amended Pilot Line of Credit. Such tank lease setoff amounts only partially satisfy NPS’ obligations under the Amended Pilot Line of Credit, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three-month periods ended March 31, 2021 and 2020, the tank lease setoff amounts totaled $0.6 million and $0, respectively. For the three-month periods ended March 31, 2021 and 2020, the amount of interest NPS incurred under the Amended Pilot Line of Credit totaled $0.3 million and $0.4 million, respectively. 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 Payment Obligations, including through use of the proceeds of the SBA EIDLs. Pilot also notified the SBA that the liens securing the SBA EIDLs are junior to those securing the Payment Obligations. While the SBA acknowledged this point and indicated a willingness to subordinate the SBA EIDLs, no further action has been taken by Pilot as of the filing date of this report. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. NPS and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with NPS to settle the Payment Obligations. NPS and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. NPS’s ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to the Company’s current consolidated debt levels, the related risks that it now faces could intensify. In the event we are unsuccessful in such endeavors, NPS may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
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| Management’s Discussion and Analysis and Internal Controls | | |
● Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. To date, no payments have been made under the subordinated Notre Dame Debt and the holder of the Notre Dame Debt has taken no action as a result of the non-payment. Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month period ended March 31, 2021, our refinery experienced 1 day of downtime as a result of lack of crude due to cash constraints. Related-Party Defaults Affiliates controlled approximately 82% of the voting power of our Common Stock as of the filing date of this report, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Margin Deterioration and Volatility. Our refining margins generally improve in an environment of higher crude oil and refined product prices, and where the spread between crude oil prices and refined product prices widen. In 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and voluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions by members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil production, there is cautious optimism that the economy will improve in the short-term. However, oil and refined product prices and demand are expected to remain volatile for the foreseeable future, despite signs of recovery during the first quarter of 2021. We cannot predict when prices and demand will stabilize, and we are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we expect that these events will continue to have a material adverse effect on our financial position and results of operations throughout 2021. Historic Net Losses and Working Capital Deficits. Net Losses Net loss for the three months ended March 31, 2021 was $3.4 million, or a loss of $0.27 per share, compared to a net loss of $3.3 million, or a loss of $0.27 per share, for the three months ended March 31, 2020. Net losses in both periods were the result of unfavorable refining margins per bbl. The net loss during the three months ended March 31, 2021 was also due to 10 days of refinery downtime associated with Winter Storm Uri. Working Capital Deficits We had a working capital deficit of $74.3 million and $72.3 million at March 31, 2021 and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.2 million and $22.6 million at March 31, 2021 and December 31, 2020, respectively. Cash and cash equivalents, restricted cash (current portion), and restricted cash, noncurrent were as follow: | | | | | | | | | | | | | | | | Cash and cash equivalents | $521 | $549 | | Restricted cash (current portion) | 48 | 48 | | Restricted cash, noncurrent | - | 514 | | Total | $569 | $1,111 |
See “Part I, Item 1. Financial Statements – Note (1)” regarding going concern factors and associated risks.
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| Management’s Discussion and Analysis and Internal Controls | | |
Operating Risks Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under “Part I, Item 1. Financial Statements – Note (1)” under “Going Concern” and throughout this report, we are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, remained open. As U.S. federal, state, and local officials roll out COVID-19 vaccines, we expect to continue operating. Any governmental mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability. Management believes that it has taken all prudent steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a low oil price environment. We are managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. At the Nixon facility, we adjust throughput and production based on prevailing market conditions. With regard to personnel, we have adopted remote working where possible. Where on-site operations are required, personnel are required to wear masks and practice social distancing. We also implemented other site-specific precautionary measures to reduce the risk of exposure and have restricted non-essential business travel. Personnel, customers, and partners are also encouraged to collaborate virtually. There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected. Business Strategy Our primary business objective is to improve our financial profile by executing the below strategies, modified as necessary, to reflect changing economic conditions and other circumstances: | | | | Optimizing Existing Asset Base | | ●Operating safely and enhancing health, safety, and environmental systems. ●Planning and managing turnarounds and downtime. | | | | | | | | Improving Operational Efficiencies | | ●Reducing or streamlining variable costs incurred in production. ●Increasing throughput capacity and optimizing product slate. ●Increasing tolling and terminaling revenue. | | | | | | | | Seizing Market Opportunities | | ●Leveraging existing infrastructure to engage in renewable energy projects. ●Taking advantage of market opportunities as they arise. | | | |
Under the Biden Administration, the focus on cleaner energy sources and technology to decarbonize resource-intensive industries continues to accelerate. This focus is steering government policy to incentivize clean energy sources and carbon capture technologies, as well as supporting new industry-wide investment in areas like renewables, green hydrogen, and carbon capture, utilization, and storage. During the first quarter of 2021, we announced a pivot to explore renewable energy opportunities through an affiliate, Lazarus Energy Alternative Fuels LLC (“LEAF”). LEAF will explore potential opportunities to position Blue Dolphin in the global transition to cleaner, lower-carbon alternatives from traditional fossil fuels. These opportunities may include technology, development, or commercial partnerships, as well as the repurposing of assets and facilities, for the production, storage, transportation and sale of alternative fuels and other low-carbon products. Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, having favorable margins on refined products, and collaborating with new partners to develop and finance clean energy projects. There can be no assurance that our business strategy will be successful, including a pivot to renewables through LEAF, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
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| Management’s Discussion and Analysis and Internal Controls | | |
We regularly engage in discussions with third parties regarding possible joint ventures, asset sales, mergers, and other potential business combinations. However, we do not anticipate any material activities in the foreseeable future. Management has determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under our secured loan agreements, margin deterioration and volatility, and historic net losses and working capital deficits. A ‘going concern’ opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend on sustained positive operating margins and working capital to sustain operations, including the purchase of crude oil and condensate and payments on long-term debt. If we are unable to achieve these goals, our business would be jeopardized, we may not be able to continue operating, and we may have to seek bankruptcy protection. Refinery Operations Our refinery operations segment consists of the following assets and operations: | Property | | Key Products Handled | | Operating Subsidiary | | Location | | | | | | | | Nixon facility ●Crude distillation tower (15,000 bpd) ●Petroleum storage tanks ●Loading and unloading facilities ●Land (56 acres) | | Crude Oil Refined Products | | LE | | Nixon, Texas | | | | | | | |
Crude Oil and Condensate Supply. Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. The crude supply agreement, the initial term of which is volume based, expires when Pilot sells us 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement automatically renews for successive one-year terms (each such term, a “Renewal Term”) unless either party provides the other with notice of nonrenewal at least 60 days prior to expiration of any Renewal Term. Total volume billed under the crude supply agreement totaled approximately 5.8 million bbls as of March 31, 2021. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three-month periods ended March 31, 2021 and 2020, our refinery experienced 1 day and no days, respectively, of downtime as a result of lack of crude due to cash constraints. Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement. Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for PADD 3. We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to Mexico. The Nixon refinery’s product slate is moderately adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a 1-year term expiring the earliest to occur of March 31, 2022 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing. Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products. Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
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| Management’s Discussion and Analysis and Internal Controls | | |
Safety and Downtime. Our refinery operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA, the EPA, and comparable state and local requirements. Together, these regulations are designed for personnel safety, process safety management, and risk management, as well as to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable, or explosive chemicals. Storage tanks used for refinery operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our refinery operations have response and control plans, spill prevention and other programs to respond to emergencies. The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Planned turnarounds are used to repair, restore, refurbish, or replace refinery equipment. Unplanned shutdowns can occur for a variety of reasons, including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities, disabled equipment, or lack of crude due to cash constraints. However, in Texas the most typical reason is excessive heat or power outages from high winds and thunderstorms. The Nixon refinery did not incur significant damage as a result of Winter Storm Uri in February 2021. However, the facility was down for approximately 10 days as a result of lost external power. We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations. Tolling and Terminaling Operations Our tolling and terminaling segment consists of the following assets and operations: | Property | | Key Products Handled | | Operating Subsidiary | | Location | | | | | | | | | Nixon facility ●Petroleum storage tanks ●Loading and unloading facilities | | Crude Oil Refined Products | | LRM, NPS | | Nixon, Texas | | | | | | | | |
Capital Improvement Expansion Project. As previously noted, the Nixon facility underwent a 5-year capital improvement expansion project beginning in 2015. Tolling and terminaling capital improvements primarily related to construction of new petroleum storage tanks to significantly increase petroleum storage capacity. Increased petroleum storage capacity will provide an opportunity to generate additional tolling and terminaling revenue.
Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to three years. Operations Safety. Our tolling and terminal operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA and comparable state and local regulations. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies. Inactive Operations We own certain other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets, which are shown below and included in corporate and other, are not operational and are fully impaired. We fully impaired our pipeline assets in 2016 and our oil and gas leasehold interests in 2011. Our pipeline assets and oil and gas leasehold interests had no revenue during the three months ended March 31, 2021 and 2020. See “Part I, Item 1. Financial Statements – Note (16)” related to pipelines and platform decommissioning requirements and related risks. | Property | | Operating Subsidiary | | | Location | | | | | | | | Freeport facility ●Crude oil and natural gas separation and dehydration ●Natural gas processing, treating, and redelivery ●Vapor recovery unit ●Two onshore pipelines ●Land (162 acres) | | BDPL | | | Freeport, Texas | | Offshore Pipelines (Trunk Line and Lateral Lines) | | BDPL | | | Gulf of Mexico | | Oil and Gas Leasehold Interests | | BDPC | | | Gulf of Mexico | | | | | | | |
We fully impaired our pipeline assets at December 31, 2016 and our oil and gas properties at December 31, 2011. Our pipeline and oil and gas properties had no revenue during the three and six months ended June 30, 2020 and 2019. See “Note (16)” to our consolidated financial statements related to pipelines and platform decommissioning requirements and related risks.
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| Management’s Discussion and Analysis and Internal Controls | | |
Pipeline and Facilities Safety. Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets. Blue Dolphin Energy Company | June 30, 2020 |
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Management’s Discussion and Analysis | | |
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below.below and should be in read in conjunction with our financial statements in “Part I, Item 1. Financial Statements”. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance. Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide fluctuations. StepsIn 2020, steps taken early on to address the COVID-19 pandemic globally and nationally, including government-imposed temporary business closures and thevoluntary shelter-at-home directives, caused oil prices to decline sharply. In addition, actions ofby members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets, causingmarkets. As COVID-19 vaccinations increase, global economic activity rises, and the OPEC and partner countries limit crude oil prices to decline sharply, as well as other changes toproduction, there is cautious optimism that the economic outlookeconomy will improve in the near term. Such developments included, but are not limited to, government-imposed temporary business closuresshort-term. However, oil and voluntary shelter-at-home directives as well as developments in production discussions between global oil producers,refined product prices and the effect thereof. Oil prices as well as demand are expected to continue to beremain volatile as a resultfor the foreseeable future, despite signs of recovery during the near-term over-supply and the ongoing COVID-19 pandemic as changes in oil inventories, industry demand and global and national economic performance are reported, and wefirst quarter of 2021. We cannot predict when prices and demand will improvestabilize, and stabilize. Wewe are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we can provide no assurancesexpect that these events will not continue to have a material adverse effect on our financial position orand results of operations.operations throughout 2021. How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), 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 “Non-GAAP Reconciliations” within this “Item 2.”Results of Operations and the financial statements within “Item“Part I, Item 1.” Financial Statements” for a reconciliation of Non-GAAP measures to U.S. GAAP. Tank Rental Revenue Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment. Operation Costs and Expenses We manage operating expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs for tolling and terminaling operations are relatively fixed. Refinery Throughput and Production Data The amount of revenue we generate from our refinery operations business segment primarily depends on the volumes of crude oil and refined products that we handle through our processing assets and the volume sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime. Refinery Downtime The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.
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| Management’s Discussion and Analysis and Internal Controls | | |
Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments. Three Months Ended June 30,March 31, 2021 Versus March 31, 2020 (Q1 2021 Versus June 30, 2019(Q2 2020 Versus Q2 2019)Q1 2020) | Overview. Net loss for Q2 2020Q1 2021 was $4.2$3.2 million, or a loss of $0.34$0.25 per share, compared to a net loss of $3.3 million, or a loss of $0.30$0.27 per share, in Q2 2019. The increaseQ1 2020. Net losses in net loss wasboth periods were the result of unfavorable refining margins per bbl and significantly lower sales volume.bbl. The net loss in Q1 2021 was also due to 10 days of refinery downtime associated with Winter Storm Uri. Total Revenue from Operations. Total revenue from operations for Q2 2020 decreased $59.8 million, or 76%,approximately 4% to $18.5 million compared to $78.3$59.4 million for Q2 2019. The significant decrease related to a declineQ1 2021 from $62.0 million for Q1 2020. Although refined product prices improved in Q1 2021, refinery operations revenue decreased due to lower sales volumes. Tolling and terminaling revenue decreased as a result of lower commodity pricing per bbl on refined products sold due to market fluctuations associated with the COVID-19 pandemic and significantly lower sales volumes in 2020. Tolling and terminaling revenue remained flat between the periods at approximately $1.1 million.tank rental fees. Total Cost of Goods Sold. Total cost of goods sold was $19.7decreased approximately 4% to $59.6 million for Q2 2020 compared to $78.6Q1 2021 from $62.1 million for Q2 2019.Q1 2020. The $58.9 million decrease related to lower commodity prices per bbl for crude oil and chemicalsthroughput due to market fluctuations associated with the COVID-19 pandemic and significant refinery downtime in 2020, which resulted in lower sales volumes.downtime. Gross Deficit. Gross deficit was $1.2$0.2 million for Q2 2020Q1 2021 compared to a gross deficit of $0.2$0.1 million for Q2 2019. The significant decrease in gross profit between the periods primarily related toQ1 2020. Refinery margins were adversely affected by lower margins per bbl due to market fluctuationsand refinery downtime primarily associated with the COVID-19 pandemic in 2020.Winter Storm Uri. | | General and Administrative Expenses. General and administrative expenses decreasedincreased approximately 8%,2% to $0.5$0.7 million compared toin Q1 2021 from $0.6 million for Q2 2019.in Q1 2020. The decreaseincrease primarily related to lower legal fees in Q2 2020 compared to Q2 2019.rising insurance premiums. Depletion, Depreciation and Amortization. Depletion, depreciation, and amortization expenses for Q2 2020Q1 2021 totaled approximately $0.7 million compared to approximately $0.6 million in Q2 2019.Q1 2020. The nearly 6%10% increase primarily related to placing a petroleum storage tank in service. Total Other ExpenseIncome (Expense). Total other expense in Q2 2020Q1 2021 was flat$1.4 million compared to Q2 2019 at $1.6total other expense of $1.8 million in Q1 2020, representing a decrease of approximately $0.4 million. OtherTotal other expense in Q1 2021 primarily related to interest expense associated with our secured loan agreements with Veritex, related-party debt, and the line of credit with Pilot. | | Six Months Ended June 30, 2020 Versus June 30, 2019(6 Months 2020 Versus 6 Months 2019)
Overview. Net loss for 6 Months 2020 was $7.6 million, or a loss of $0.61 per share, compared to a net loss of $2.6 million, or a loss of $0.23 per share, in 6 Months 2019. The significant increase in net loss was the result of unfavorable margins per bbl and significantly lower sales volume.
Total Revenue from Operations. Total revenue from operations for 6 Months 2020 decreased $66.8 million, or 45%, to $80.5 million compared to $147.3 million for 6 Months 2019. The significant decrease in refinery operations revenue was the result of lower commodity pricing per bbl on refined products sold due to market fluctuations associated with the COVID-19 pandemic and significantly lower sales volumes in 2020. Tolling and terminaling revenue remained flat between the periods at approximately $2.2 million.
Total Cost of Goods Sold. Total cost of goods sold was $81.8 million for 6 Months 2020 compared to $144.1 million for 6 Months 2019. The $62.3 million, or 43%, decrease related to lower commodity prices per bbl for crude oil and chemicals due to market fluctuations associated with the COVID-19 pandemic and significant refinery downtime in 2020, which resulted in lower sales volumes.
Gross Profit (Deficit). Gross deficit was $1.3 million for 6 Months 2020 compared to gross profit of $3.2 million for 6 Months 2019. The significant decrease in gross profit between the periods primarily related to lower margins per bbl due to market fluctuations associated with the COVID-19 pandemic in 2020.
General and Administrative Expenses. General and administrative expenses were relatively flat at approximately $1.2 million for 6 Months 2020 compared to 6 Months 2019. General and administrative expenses primarily consisted of insurance, taxes, and professional fees.
Depletion, Depreciation and Amortization. Depletion, depreciation, and amortization expenses for 6 Months 2020 totaled $1.3 million compared to $1.2 million for 6 Months 2019. The nearly 7% increase primarily related to placing a petroleum storage tank in service.
Total Other Expense. Total other expense was $3.4 million in 6 Months 2020 compared to an expense of $2.8 million in 6 Months 2019, a 20% increase. Interest expense increased in 6 Months 2020 compared to 6 Months 2019 due to completion of certain CIP for which interest was no longer being capitalized and the addition of the line of credit with Pilot.
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| Management’s Discussion and Analysis and Internal Controls | | |
Refinery Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales. | | | | | | | | | | | | | | | | | | | | | | | | | | Refined product sales | $17,359 | $77,257 | $78,256 | $145,115 | $58,483 | $60,897 | | Less: Total cost of goods sold | (19,676) | (78,556) | (81,764) | (144,072) | (59,623) | (62,088) | | Gross profit (deficit) | (2,317) | (1,299) | (3,508) | 1,043 | | | Gross deficit | | (1,140) | (1,191) | | | | | | Sales (Bbls) | 669 | 1,104 | 1,810 | 2,133 | 948 | 1,141 | | | | | | Gross Profit (Deficit) per Bbl | $(3.46) | $(1.18) | $(1.94) | $0.49 | | | Gross Deficit per Bbl | | $(1.20) | $(1.04) |
| | | | | | | | | | | | | | | | | | | | | Net revenue (1) | $17,359 | $77,257 | $78,256 | $145,115 | $58,483 | $60,897 | | Intercompany fees and sales | (406) | (653) | (1,023) | (1,259) | (566) | (617) | | Operation costs and expenses | (19,418) | (78,376) | (81,251) | (143,528) | (59,289) | (61,833) | | Segment Contribution Margin (Deficit) | $(2,465) | $(1,772) | $(4,018) | $328 | | | Segment Contribution Deficit | | $(1,372) | $(1,553) |
(1)
Net revenue excludes intercompany crude sales.
| | | | | | | | | | | | | | | | | | | | | Calendar | 91 | 91 | 182 | 181 | | Operating | (68) | (84) | (156) | (163) | | Refinery Downtime (Days) | 23 | 7 | 26 | 18 | | | | | | | | Refinery Throughput | | | | | | bpd | 11,447 | 13,501 | 12,578 | 13,381 | | bbls | 778,397 | 1,134,105 | 1,962,143 | 2,181,164 | | Capacity utilization rate | 76.3% | 90.0% | 83.9% | 89.2% | | | | | | | | Refinery Production | | | | | | bpd | 11,088 | 13,123 | 12,270 | 13,038 | | bbls | 754,014 | 1,102,340 | 1,914,105 | 2,125,169 | | Capacity utilization rate | 73.9% | 87.5% | 81.8% | 86.9% |
Q2Q1 2021 Versus Q1 2020 Versus Q2 2019
● Refiningdeficit per bbl was $1.20 for Q1 2021 compared to gross deficit per bbl was $3.46 for Q2of $1.04 in Q1 2020, compared to $1.18 in Q2 2019, representing a decreasedecline of $2.28$0.16 per bbl. The significant decreasedeficit in both periods related to lower margins due toand market fluctuations associated with the COVID-19 pandemic and significant refinerypandemic. Refinery downtime in 2020.
●
Segment contribution margin decreased approximately $0.7 million to a deficit of $2.5 million in Q2 2020 compared to a deficit of $1.8 million in Q2 2019. The decrease related to lower margins per bbl due to market fluctuations associated with the COVID-19 pandemic and lower sales volumeWinter Storm Uri also caused an increase in 2020.
●
Refinery downtime increased significantly to 23 days in Q2 2020 compared to 7 days in Q2 2019; refinery downtime in 2020 related to a maintenance turnaround, lack of crude due to cash constraints, and an equipment repair while refinery downtime in Q2 2019 primarily related to equipment repairs. Significant refinery downtime in Q2 2020 negatively impacted refinery throughput, refinery production, and capacity utilization rate.
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Management’s Discussion and Analysis | | |
6 Months 2020 Versus 6 Months 2019
●
Refining gross deficit per bbl was $1.94 for 6 Months 2020 compared to a gross profit per bbl of $0.49 in 6 Months 2019, representing a decrease of $2.43 per bbl. The significant decrease related to lower margins due to market fluctuations associated with the COVID-19 pandemic and significant refinery downtime in 2020.Q1 2021.
● Segment contribution margin decreased approximately $3.7 million to a loss of $4.0 milliondeficit improved slightly in 6 Months 2020Q1 2021 compared to a profit of $0.3 million in 6 Months 2019. The significant decrease related to lower margins per bbl due to market fluctuations associated with the COVID-19 pandemic and lower sales volume inQ1 2020.
● Refinery downtime increased significantly to 2611 days in 6 Months 2020Q1 2021 compared to 183 days in 6 Months 2019.Q1 2020. Refinery downtime in 2020Q1 2021 primarily related to a maintenance turnaround, lack of crude due to cash constraints, and an equipment repair; 2019 downtime related to a maintenance turnaround and equipment repairs. Significant refinery downtime in 6 Months 2020 negatively impacted refinery throughput, refinery production, and capacity utilization rate.power outages during Winter Storm Uri.
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. | | | | | | | | | | | | | Net revenue (1) | $930 | $1,103 | | Intercompany fees and sales | 566 | 617 | | Operation costs and expenses | (334) | (255) | | Segment Contribution Margin | $1,162 | $1,465 |
| | | | | | | | | | | | | | | | | Net revenue (1) | $1,110 | $1,088 | $2,213 | $2,157 | | Intercompany fees and sales | 406 | 653 | 1,023 | 1,259 | | Operation costs and expenses | (258) | (363) | (513) | (727) | | Segment Contribution Margin (Deficit) | $1,258 | $1,378 | $2,723 | $2,689 |
(1)
Net revenue excludes intercompany crude sales.
Q2Q1 2021 Versus Q1 2020 Versus Q2 2019
● Tolling and terminaling net revenue increased approximately 2%decreased nearly 16% in Q2 2020Q1 2021 compared to Q2 2019Q1 2020 primarily as a result of increasedlower tank storage rental fees and fees collected for ancillary services, such as in-tank and tank-to-tank blending.revenue. ● Intercompany fees and sales, which reflect fees associated with an intercompany tolling agreement tied to naphtha volumes, decreased in Q2 2020Q1 2021 compared to Q2 2019.Q1 2020. Naphtha sales volumes decreased between the periods. ● Segment contribution margin in Q2 2020Q1 2021 decreased nearly 9%20% to approximately $1.3$1.2 million compared to approximately $1.4$1.5 million Q2 2019.Q1 2020. The decrease related to lower revenue and intercompany fees and sales tied to naphtha.naphtha volumes. 6 Months 2020 Versus 6 Months 2019
●
Tolling and terminaling net revenue increased nearly 3% in 6 Months 2020 compared to 6 Months 2019 primarily as a result of increased tank storage rental fees and fees collected for ancillary services.
●
Intercompany fees and sales decreased in 6 Months 2020 compared to 6 Months 2019 as a result of lower naphtha sales volumes.
●
Segment contribution margin increased a nominal 1% between the periods. The increase was primarily due to increased fees associated with ancillary services.
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| Management’s Discussion and Analysis and Internal Controls | | |
Non-GAAP Reconciliations. Reconciliation of Segment Contribution Margin (Deficit) | |
| | Three Months Ended June 30, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Segment contribution margin | $(2,465) | $(1,589) | $1,258 | $1,378 | $(47) | $(56) | $(1,254) | $(267) | General and administrative expenses(1) | (327) | (274) | (68) | (62) | (326) | (426) | $(721) | $(762) | | Depreciation and amortization | (294) | (483) | (324) | (99) | (51) | (51) | $(669) | $(633) | | Interest and other non-operating income (expenses), net | (751) | (823) | (616) | (579) | (231) | (235) | $(1,598) | $(1,637) | | Income (loss) before income taxes | (3,837) | (3,169) | 250 | 638 | (655) | (768) | (4,242) | (3,299) | | Income tax benefit | - | - | - | - | - | - | - | - | | Income (loss) before income taxes | $(3,837) | $(3,169) | $250 | $638 | $(655) | $(768) | $(4,242) | $(3,299) |
| | Six Months Ended June 30, | Three Months Ended March 31, | | | | | | | | | | | | | | | | | | | | | | | | | | | | | Total | | | | (in thousands) | | | | | | Segment contribution margin | $(4,018) | $511 | $2,723 | $2,689 | $(106) | $(113) | $(1,401) | $3,087 | | | Segment contribution margin (deficit) | | $(1,372) | $(1,553) | $1,162 | $1,465 | $(54) | $(59) | $(264) | $(147) | General and administrative expenses(1) | (631) | (606) | (136) | (105) | (745) | (871) | $(1,512) | $(1,582) | (301) | (304) | (68) | (68) | (413) | (419) | (782) | (791) | | Depreciation and amortization | (582) | (948) | (618) | (198) | (102) | (77) | $(1,302) | $(1,223) | (302) | (288) | (340) | (294) | (51) | (51) | (693) | (633) | | Interest and other non-operating income (expenses), net | (1,492) | (1,606) | (1,386) | (775) | (474) | (453) | $(3,352) | $(2,834) | (598) | (741) | (452) | (770) | (385) | (243) | (1,435) | (1,754) | | Income (loss) before income taxes | (6,723) | (2,649) | 583 | 1,611 | (1,427) | (1,514) | (7,567) | (2,552) | (2,573) | (2,886) | 302 | 333 | (903) | (772) | (3,174) | (3,325) | | Income tax benefit | - | - | - | - | (15) | - | (15) | - | | | Income tax expense | | - | - | - | - | - | (15) | - | (15) | | Income (loss) before income taxes | $(6,723) | $(2,649) | $583 | $1,611 | $(1,442) | $(1,514) | $(7,582) | $(2,552) | $(2,573) | $(2,886) | $302 | $333 | $(903) | $(787) | $(3,174) | $(3,340) |
(1) General and administrative expenses within refinery operations include the LEH operating fee.
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Management’s Discussion and Analysis | | |
Capital Resources and Liquidity We had a working capital deficit of $74.3 million and $72.3 million at March 31, 2021 and December 31, 2020, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.2 million and $22.6 million at March 31, 2021 and December 31, 2020, respectively. Although in place pre-pandemic, we have further tightened our cash conservation program to manage cash flow and remain competitive in a low oil price environment. This includes optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. Despite this focus, management is keeping in mind the overall safety of our operations and personnel, as well as the impact to our business over the long-term. Considering this recent period of extreme economic disruption, combined with the weaker commodity price environment, we remain focused on the safe and reliable operation of the Nixon facility and cash conservation. Our primary cash requirements relate to: (i) purchasing crude oil and condensate for the operation of the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement and (iii) servicing debt. In instances where we experience a working capital deficit, we have historically relied on Affiliates to meet our liquidity needs. WhileWe are actively exploring additional financing; however, we believecurrently have no arrangements for additional capital and no assurances can be given that we can fund our operations through revenue from operations and Affiliate financing, we may notwill be able to among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respondraise sufficient capital when needed, on acceptable terms, or at all. If we are unable to competitive pressures or unanticipatedraise sufficient additional capital requirements. We cannot provide any assurance that financing will be available to us in the futurevery near term, we may further default on acceptable terms. We had a working capital deficitour payment obligations under certain of $66.6 million and $59.4 million at June 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-termour existing debt obligations. Without additional financing, it remains unclear whether we had a working capital deficit of $20.5 million and $19.6 million at June 30, 2020 and December 31, 2019, respectively. During the three and six-month periods ended June 30, 2020, we did not receive funding under any federalwill have or other governmental programscan obtain sufficient liquidity to supportwithstand further disruptions to our operations as a result of the COVID-19 pandemic.business.
The future impact thatHow long and to what extent COVID-19 and related market developments will have onaffect our business cash flows, sourcesand operations is unknown. The overall impact of liquidity, financial condition and results of operationsthese events will depend on future developments, including, among other things, volatility in the global capital markets, the ultimate geographic spreadactions of federal, state, and severity oflocal government and health officials to contain and treat the virus, the consequencesincluding deployment of governmentalvaccines, and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normalhow quickly economic and operating conditions resume.improve thereafter. A sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. As a result, we may have to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
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| Management’s Discussion and Analysis and Internal Controls | | |
Debt Overview. Total Debt and Accrued Interest | |
| | | | | | | | | | | | | | | | | USDA-Guaranteed Loans | | | First Term Loan Due 2034 (in default) | $22,006 | $21,776 | | Second Term Loan Due 2034 (in default) | 9,125 | 9,031 | | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | | $23,104 | $22,840 | LRM Term Loan Due 2034 (in default) | | 9,601 | 9,473 | Amended Pilot Line of Credit (in default) | 10,573 | 11,786 | 7,272 | 8,145 | Notre Dame Debt (in default) | 9,015 | 8,617 | 9,613 | 9,413 | | Related-Party Debt | | | BDPL Loan Agreement (in default) | 6,494 | 6,174 | 6,974 | 6,814 | March Ingleside Note (in default) | 1,039 | 1,004 | 1,031 | 1,013 | March Carroll Note (in default) | 1,198 | 997 | 1,732 | 1,551 | June LEH Note (in default) | 6,336 | - | 9,588 | 9,446 | | LE Term Loan Due 2050 | | 153 | 152 | | NPS Term Loan Due 2050 | | 153 | 152 | | Equipment Loan Due 2025 | | 65 | 71 | | Total Debt | 65,786 | 59,385 | 69,286 | 69,070 | | | | | | Less: Current portion of long-term debt, net | (56,655) | (51,301) | (57,244) | (57,744) | | Less: Unamortized debt issue costs | (1,813) | (2,096) | (1,718) | (1,749) | Less: Accrued interest payable (in default) | (7,318) | (5,988) | (9,975) | (9,222) | | | $- | $- | $349 | $355 |
Net proceeds fromcash used in financing activities was $4.2totaled $0.9 million in Q2 2020Q1 2021 compared to $12.1$0.7 million in Q2 2019. Net proceeds fromprovided by financing activities was $4.9 in 6 Months 2020 compared to $12.1 million in 6 Months 2019. Q1 2020. Principal payments on long-term debt totaled $0.8$0.9 million in Q2 2020Q1 2021 compared to $0.3$0.7 million in Q2 2019. Principal payments on long-term debt totaled $1.5 million in 6 Months 2020 compared to $0.5 million in 6 Months 2019.Q1 2020. As of the filing date of this report, we are current onLE and LRM were in default with respect to required monthly payments under our secured loan agreements with Veritex. NPS is making partial monthly payments to Pilot under the Amended Pilot Line of Credit as a tank lease setoff using amounts Pilot owed to NPS under two tank lease agreements. No payments have been made under the subordinated loan agreements. Blue Dolphin Energy Company | June 30, 2020 |
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Management’s Discussion and Analysis | | |
On April 30, 2020, we issued an aggregate of 231,065 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52, and the high was $1.07. 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 “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.
On April 30, 2020, we also issued an aggregate of 135,084 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three month periods ended September 30, 2018, March 31, 2019, September 30, 2019, and March 31, 2020. The average cost basis was $0.97, the low was $0.57, and the high was $1.18.Notre Dame Debt.
Debt Defaults. AllThe majority of our debt is in default. Defaults under our secured loan agreements with third parties includeinclude: (1) Veritex events of default and financial covenant violations, failure to make monthly payments, and failure to replenish a payment reserve account; (2) Pilot event of default and debt acceleration.acceleration; and (3) Notre Dame Debt event of default. We also have defaults under secured and unsecured related-party debt. See ‘going concern’ within this Management’s Discussion“Part I, Item 1. Financial Statements – Notes (1), (3), (10), and Analysis section, as well as “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party debt agreements, including debt guarantees, and defaults in our debt obligations. Concentration of Customers Risk. Our operationsWe routinely assess the financial strength of our customers and have a concentration of customers who are refined petroleum product wholesalers. These concentrations of customers may impactnot experienced significant write-downs in accounts receivable balances. We believe that our overall exposure toaccounts receivable credit risk either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions including the uncertainties concerning COVID-19 and volatility in the global oil markets. Historically, we have not had any significant problems collecting our accounts receivable.exposure is limited. | | Number Significant Customers | % Total Revenue from Operations | Portion of Accounts Receivable at March 31, | | | | | | | March 31, 2021 | 4 | 90% | $0 | | | | | | | March 31, 2020 | 4 | 94% | |
One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. The Affiliate accounted for 27% and 29% of total revenue from operations in 2021 and 2020, respectively. The Affiliate represented $0 in accounts receivable at both March 31, 2021 and 2020, respectively. Amounts outstanding relating to the Jet Fuel Sales Agreement can significantly vary period to period based on the timing of the related sales and payments received. Amounts we owed to LEH under various long-term debt, related-party agreements totaled $16.6 million and $16.3 million at March 31, 2021 and December 31, 2020, respectively. See “Part I, Item 1. Financial Statements – Notes (3) and (16)” for additional disclosures related to Affiliate agreements, arrangements, and risk.
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| Management’s Discussion and Analysis and Internal Controls | | |
Contractual Obligations. Related-Party Debt | Agreement/Transaction | Parties | Type | Effective Date | Interest Rate | Key Terms | | Amended and Restated Guaranty Fee Agreement | Jonathan Carroll - LE | Debt | 04/01/2017 | 2.00% | Tied to payoff of LE $25 million Veritex loan; payments 50% cash, 50% Common Stock | | Amended and Restated Guaranty Fee Agreement | Jonathan Carroll - LRM | Debt | 04/01/2017 | 2.00% | Tied to payoff of LRM $10 million Veritex loan; payments 50% cash, 50% Common Stock | March Carroll Note (in default) | Jonathan Carroll – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; matured 01/01/2019; interest still accruing | March Ingleside Note (in default) | Ingleside – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; reflects amounts owed to Ingleside under previous Amended and Restated Tank Lease Agreement; matured 01/01/2019; interest still accruing | June LEH Note (in default) | LEH – Blue Dolphin | Debt | 03/31/2017 | 8.00% | Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; reflects amounts owed to Jonathan Carroll under guaranty fee agreements; matured 01/01/2019; interest still accruing | BDPL-LEH Loan and Security Agreement (in default) | LEH - BDPL | Debt | 08/15/2016 | 16.00% | 2-year term; $4.0 million principal amount; $0.5 million annual payment; proceeds used for working capital; no financial maintenance covenants; secured by certain BDPL property |
Related-Party Defaults | Loan Description | Event(s) of Default | Covenant Violations | March Carroll Note (in default) | Failure of borrower to pay past due obligations; loan matured January 2019 | -- | March Ingleside Note (in default) | Failure of borrower to pay past due obligations; loan matured January 2019 | --- | June LEH Note (in default) | Failure of borrower to pay past due obligations; loan matured January 2019 | --- | BDPL-LEH Loan Agreement (in default) | Failure of borrower to pay past due obligations; loan matured August 2018 | --- |
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| Management’s Discussion and Analysis and Internal Controls | | |
Third-Party Debt Loan Description | Original Principal Amount (in millions) | Maturity Date | Monthly Principal and Interest Payment | Interest Rate | Loan Purpose | | USDA-Guaranteed Loans | | | | | | First Term Loan Due 2034 (in default) | $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements | Second Term Loan Due 2034 (in default) | $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements | Notre Dame Debt (in default) | $11.7(1) | Jan 2018 | No payments to date; payment rights subordinated(2) | 16.00% | Working capital; reduce balance of GEL Final Arbitration Award | Amended Pilot Line of Credit (in default) | $13.0 | May 2020 | ---- | 14.00% | GEL Settlement Payment, NPS purchase of crude oil from Pilot, and working capital |
Loan Description | Parties | Original Principal Amount (in millions) | Maturity Date | Monthly Principal and Interest Payment | Interest Rate | Loan Purpose | Veritex Loans(1) | | | | | | | LE Term Loan Due 2034 (in default) | LE-Veritex | $25.0 | Jun 2034 | $0.2 million | WSJ Prime + 2.75% | Refinance loan; capital improvements | LRM Term Loan Due 2034 (in default) | LRM-Veritex | $10.0 | Dec 2034 | $0.1 million | WSJ Prime + 2.75% | Refinance bridge loan; capital improvements | Notre Dame Debt (in default)(2)(3) | LE-Kissick | $11.7 | Jan 2018 | No payments to date; payment rights subordinated | 16.00% | Working capital; reduced balance of GEL arbitration award | Amended Pilot Line of Credit (in default) | NPS-Pilot | $13.0 | May 2020 | --- | 14.00% | GEL settlement payment, NPS purchase of crude oil from Pilot, and working capital | | SBA EIDLs | | | | | | | LE Term Loan Due 2050(4) | LE-SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital | NPS Term Loan Due 2050(4) | NPS-SBA | $0.15 | Aug 2050 | $0.0007 million | 3.75% | Working capital | | Equipment Loan Due 2025 | LE-Texas First | $0.07 | Oct 2025 | $0.0013 million | 4.50% | Equipment Lease Conversion |
(1) OriginalProceeds were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected on our consolidated balance sheets as restricted cash (current portion) and restricted cash, noncurrent. At March 31, 2021, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0. December 31, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million.
(2) LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount wasof $8.0 million; pursuantmillion. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the arbitration award with GEL Final Arbitration Award by $3.6 million. (2) (3)
Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the FirstLE Term Loan Due 2034. (4) Payments are deferred for the first twelve (12) months of the loan; the first payment is due August 2021; interest accrues during the deferral period. SBA EIDLs are not forgivable.
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| Management’s Discussion and Analysis and Internal Controls | | |
Third-Party Defaults | Loan Description | Event(s) of Default | Covenant Violations | | Veritex Loans | | | LE Term Loan Due 2034 (in default) | Failure to make required monthly payments; failure to replenish $1.0 million payment reserve account; events of default under other secured loan agreements with Veritex | Financial covenants: ● debt service coverage ratio, current ratio, and debt to net worth ratio | LRM Term Loan Due 2034 (in default) | Events of default under other secured loan agreements with Veritex | Financial covenants: ● debt service coverage ratio, current ratio, and debt to net worth ratio | Amended Pilot Line of Credit (in default) | Failure of borrower or any guarantor to pay past due obligations; loan matured May 2020 | --- | Notre Dame Debt (in default) | Failure of borrower to pay past due obligations; loan matured January 2019 | --- | | | |
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds) To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in an August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. BDPL reasonably expects that successful completionDecommissioning of its decommissioning obligations (see “Note (16) – BSEE Offshore Pipelines and Platform Decommissioning”)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. DueAlthough we planned to delays in permit application approvals likely becausedecommission the offshore pipelines and platform assets during 2020, decommissioning of these assets has been delayed due to cash constraints associated with the ongoing impact of COVID-19 and winter being the offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently estimate when decommissioning may occur. In the interim, BDPL plans to request an extension to BSEE’s August 2020 deadline.provides BOEM and BSEE with updates regarding the project’s status. BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2020.March 31, 2021. At both June 30, 2020March 31, 2021 and December 31, 2019,2020, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.
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| Management’s Discussion and Analysis and Internal Controls | | |
BSEE Offshore Pipelines and Platform Decommissioning BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements. In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning, along with a safe boarding plan for the platform, within six (6) months (no later than February 15, 2020), and develop and implement a safe boarding plan for submission with such permit applications. Further, BSEE proposed that BDPL complete approved, permitted work within 12twelve (12) months (no later than August 15, 2020). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. Not all permit applications have been approved by BSEE and the USACOE as required prior to work commencement. Delays in permit approvals may be the result of COVID-19. As a result, BDPL plans to request an extension for decommissioning work. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to the INC related to the structural platform surveys, and BSEE approved BDPL’s extension request. The required platform surveys were completed, and the INC was resolved in June 2020. BSEE’s deadlineAlthough we planned to complete decommissioning of BDPL’sdecommission the offshore pipelines and platform assets as well asduring 2020, decommissioning of these assets has been delayed due to completecash constraints associated with the structural platform surveys,ongoing impact of COVID-19 and winter being the offseason for dive operations in the U.S. Gulf of Mexico. We cannot currently estimate when decommissioning may occur. In the interim, BDPL provides BSEE with updates regarding the project’s status.
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. There can be no assurance that we will be able to meet BSEE’s time tables. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or structural surveys ofremedy the platform are not completedINCs within a timeframe determined to be prudent by the allowable time frames,BSEE, BDPL willcould be subject to vigorous regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which maycould have a material adverse effect on our earnings, cash flows and liquidity. We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30, 2020.March 31, 2021. At June 30, 2020both March 31, 2021 and December 31, 2019,2020, BDPL maintained $2.4 million and $2.6 million, respectively, in AROs related to abandonment of these assets. Blue Dolphin Energy Company | June 30, 2020 |
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Management’s Discussion and Analysis | | |
Sources and Use of Cash. | | | | | | Three Months Ended June 30, | Six Months Ended June 30, | | | | | | | | | | | | | | | Cash Flows Provided By (Used In): | | | | Operating activities | $(3,707) | $(11,421) | $(4,034) | $(11,294) | $373 | $(259) | | Investing activities | (710) | (371) | (908) | (494) | - | (198) | | Financing activities | 4,152 | 12,079 | 4,874 | 12,090 | (915) | 654 | | Increase (Decrease) in Cash and Cash Equivalents | $(265) | $287 | $(68) | $302 | $(542) | $197 |
2020Cash Flow Q1 2021 Compared to 2019Q1 2020
We had a cash flow deficit from operations of $3.7approximately $0.3 million for Q2 2020Q1 2021 compared to a cash flow deficit of $11.4approximately $0.3 million for Q2 2019.Q1 2020. Cash frow from operations for Q1 2021 was due to the timing of crude oil purchases. The cash flow deficit from operations in Q2 2020 and 6 Monthsfor Q1 2020 primarily related to loss from operations. The cash flow deficit from operations in Q2 2019 and 6 Months 2019 was primarily the result of payments toward the accrued arbitration award with GEL. Capital Spending We account for our capital expenditures in accordance with GAAP. We also distinguish between capital expenditures that are for maintenance and those that are for expansion. We classify a capital expenditure as maintenance if it maintains capacity or throughput. A classification of expansion is used if the capital expenditure is expected to increase capacity or throughput. The distinction between maintenance and expansion is made consistent with our accounting policies and is generally a straightforward process. However, in certain circumstances the distinction can be a matter of management judgment and discretion.
Budgeting and approval of maintenance capital expenditures is done throughout the year on a project-by-project basis. We budget for and make maintenance capital expenditures that are necessary to maintain safe and efficient operations, meet customer needs and comply with operating policies and applicable law. We may budget for and make additional maintenance capital expenditures that we expect to produce economic benefits such as increasing efficiency and/or lowering future expenses. Budgeting and approval of expansion capital expenditures are generally made periodically on a project-by-project basis in response to specific investment opportunities identified by our business segments.
Capital Improvement Expansion Project
In 2015, the Nixon facility began a 5-year capital improvement expansion project primarily to construct new petroleum storage tanks. The project also included smaller efficiency improvements and the acquisition of refurbished refinery equipment for future deployment. The increase of nearly 1.0 million bbls of petroleum storage capacity has helped with de-bottlenecking the Nixon refinery. In the future, additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase the Nixon refinery’s complexity. The project was completed in the second quarter of 2020 at a total cost of approximately $32.5 million.
2020 Capital Expenditures
During Q2 2020,Q1 2021, capital expenditures totaled $0.7 million$0 compared to $0.4$0.2 million during Q2 2019. During 6 Months 2020, capitalQ1 2020. Capital expenditures totaled $0.9 million compared to $0.5 million during 6 Months 2019. Expenditures duringin Q1 2020 primarily related to completion of a petroleum storage tank and a maintenance turnaround. The 5-year Nixon capital improvement expansion project was completed during Q2 2020 with completion of the last petroleum storage tank. Future Expected Capital Expenditures
We remain focused on the safe and reliable operation of the Nixon facility. In view of the uncertainty surrounding the COVID-19 pandemic, combined with the weaker commodity price environment, we anticipate new capital expenditures to be minimal over the next 12 months. However, capital spending using remaining funds under a loan from Veritex will continue until the funds are depleted. Unused amounts under the Veritex loans are reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (10)” to our consolidated financial statements for additional disclosures related to borrowings for capital spending.2021.
Off-Balance Sheet Arrangements. None.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.
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| Management’s Discussion and Analysis and Internal Controls | | |
We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses. Off-Balance Sheet Arrangements. None. Accounting Standards. Critical Accounting Policies and Estimates Our significant accounting policies and recent accounting developments are described in “Note“Part I, Item 1. Financial Statements – Note (2)” to our consolidated financial statements.. The ongoing COVID-19 pandemic and certain developmentsrelated governmental responses, volatility in the global oil marketscommodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. OurUnder earlier state and federal mandates that regulated business closures, our business was designateddeemed as an essential business and, as such, has remained open. As U.S. federal, state, and local officials roll out COVID-19 vaccines, we expect to continue operating. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through the remainder of the year2021 and beyond. Given diminished expectations for the global economy, and speculation regarding a prolonged slowdown and recession, we are unable to predict the ultimate economic impact of COVID-19 on our business. The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2020March 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 accounting standards and disclosures are discussed in “Note“Part I, Item 1. Financial Statements – Note (2)” to our consolidated financial statements.. ITEM 3. QUANTITATIVE QAUANTITATIVE ANDND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Not applicable. ITEM 4. CONTROLSCONTROLS AND PROCEDURES Evaluation of Disclosure Controls and Procedures Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019,2020, based on our evaluation, our Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer) concluded that our disclosure controls and procedures were ineffective due to certain material weaknesses and/or significant deficiencies as described below: | ● | Significant deficiency – There is currently not a process in place for formal review of manual journal entries. | | ● | Material weakness – The company currently lacks resources to handle complex accounting transactions. This can result in errors related to the recording, disclosure and presentation of consolidated financial information in quarterly, annual, and other filings. |
These disclosure controls and procedures remained ineffective as of the end of the period covered by this Quarterly Report.report. Management continues to evaluateis currently evaluating internal processes in order to take corrective actions. Corrective actions may include implementing formal policies, improving processes, documenting procedures, and better defining segregation of duties to improve financial reporting. These actions will be subject to ongoing senior management review, as well as Audit Committee oversight. Although we plan to complete remediation efforts as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in fully remediating the identified weakness and deficiency. Changes in Internal Control over Financial Reporting There have been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and six months ended June 30, 2020March 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. See(See the above section “Evaluation of Disclosure Controls and Procedures” for a discussion related to current ineffective disclosure controls and procedures.)
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Legal ProceedingsExhibits | | |
PART II
ITEM 1. LEGAL LPEGAL PROCEEDINGSROCEEDINGS BOEM Additional Financial Assurance (Supplemental Pipeline Bonds) To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM. BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in anthe August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. BDPL reasonably expects that successful completion of its decommissioning obligations (see(discussed within this “Note (16) – BSEE” under ‘BSEE Offshore Pipelines and Platform Decommissioning”Decommissioning’) prior to BSEE’s August 2020 deadline will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. Due to delays in permit application approvals likely because of COVID-19, BDPL plans to request an extension to BSEE’s August 2020 deadline. BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition. We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of June 30,March 31, 2020. At both June 30,March 31, 2020 and December 31, 2019, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM. Resolved - GEL Settlement
As previously disclosed, GEL was awarded the GEL Final Arbitration Award in the aggregate amount of $31.3 million. In July 2018, the Lazarus Parties and GEL entered into the GEL Settlement Agreement. The GEL Settlement Agreement was subsequently amended five (5) times to extend the GEL Settlement Payment Date and/or modify certain terms related to the GEL Interim Payments or the GEL Settlement Payment. During the period September 2017 to August 2019, GEL received the following amounts from the Lazarus Parties to reduce the outstanding balance of the GEL Final Arbitration Award:
| | Initial payment (September 2017) | $3.7
| GEL Interim Payments (July 2018 to April 2019) | 8.0
| Settlement Payment (Multiple Payments May 7 to 10, 2019) | 10.0
| Deferred Interim Installment Payments (June 2019 to August 2019) | 0.5
| | | | $22.2
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The GEL Settlement Effective Date occurred on August 23, 2019. As a result of the GEL Settlement: (i) the mutual releases became effective, (ii) GEL filed the stipulation of dismissal of claims against LE, and (iii) Blue Dolphin recognized a $9.1 million gain on the extinguishment of debt on its consolidated statements of operations in the third quarter of 2019. Until the GEL Settlement occurred, the debt was reflected on Blue Dolphin’s consolidated balance sheets as accrued arbitration award payable. At both June 30, 2020 and December 31, 2019, accrued arbitration award payable was $0.
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Legal Proceedings (Continued) and Risk Factors | |
Other Legal Matters We are involved in lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens, contract-related disputes, and administrative proceedings. Management is in discussion with all concerned parties and does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that such discussions will result in a manageable outcome. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected. ITEM 1A. RISKRISK FACTORS In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Report for the three month period ended March 31, 2020 as filed with the SEC. These risks and uncertainties could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. Except as noted below, thereThere have been no material changes in our assessment of our risk factors from those set forth in our Annual Report for the fiscal year ended December 31, 2019 and our Quarterly Report for the three month period ended March 31, 2020.
The ongoing COVID-19 pandemic, and actions taken in response thereto, as well as certain developments in the global oil markets have had, and will likely continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition, results of operations and cash flows and those of our customers and suppliers.
The ongoing COVID-19 pandemic, and actions taken in response thereto, have resulted in significant economic disruption globally, including in the United States. Governmental authorities around the world have taken actions, such as stay-at-home orders and other social distancing measures, to prevent the spread of COVID-19. These measures have resulted in significant business and operational disruptions, including demand destruction for non-essential businesses, business closures, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and limitations on workforce availability. In particular, travel restrictions have dramatically reduced flights, cruises, and motor vehicle usage at a time when seasonal travel patterns typically result in an increase in consumer demand for certain refined petroleum products.
Concerns over the negative effects of COVID-19 on economic and business prospects across the world have contributed to increased market and oil price volatility and have diminished expectations for the global economy. These factors, coupled with the emergence of decreasing business and consumer confidence and increasing unemployment resulting from the COVID-19 outbreak and the recent abrupt oil price decline, may precipitate a prolonged economic slowdown and recession. Our refinery utilization and operating margins and other aspects of our business have been adversely impacted by these developments. Any such prolonged period of economic slowdown or recession, or a protracted period of depressed prices for crude oil and our refined products or reduced margins for the refined products we produce and sell could have significant adverse consequences for our financial condition and the financial condition of our customers and suppliers, and could diminish our liquidity and negatively affect our ability to obtain adequate crude oil volumes and to market certain of our products at favorable prices, or at all.
Due to declines in the market prices of products held in our inventories, in future periods we may record an inventory write-down to cost of goods sold to value certain of our inventories at the lower of cost or market, which charge may be material. This expected inventory valuation write-down will have a negative effect on our earnings. Depending on future movements of refined product prices, future inventory valuation adjustments could have a negative or positive effect on our financial performance. In addition, a sustained period of low crude oil prices may also result in significant financial constraints on our crude oil supplier, which could result in long term crude oil supply constraints and higher transportation costs for our business. Such conditions could also result in an increased risk that our customers may be unable to fully fulfill their obligations in a timely manner, or at all. Any of the foregoing events or conditions, or other unforeseen consequences of COVID-19, could significantly adversely affect our business and financial condition and the business and financial condition of our customers.
The future impact that COVID-19 will have on our business, results of operations, financial condition, cash flows, and stock price will depend on future developments, including, among others, volatility in the global capital markets, the ultimate geographic spread and severity of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. A sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations.
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Unregistered Sales of Equity Securities and Exhibits | | |
ITEM 2. UNREGISTEREDUNREGISTERED SALES OF EQUITYEQUITY SECURITIES AND USE OF PROCEEDS Set forth below is information regarding the sale or issuance of shares of Common Stock by us that were not registered under the Securities Act of 1933 during the three and six months ended June 30, 2020:
On April 30, 2020, we issued an aggregate of 231,065 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52, and the high was $1.07. 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 “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.
On April 30, 2020, we also issued an aggregate of 135,084 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three month periods ended September 30, 2018, March 31, 2019, September 30, 2019, and March 31, 2020. The average cost basis was $0.97, the low was $0.57, and the high was $1.18.
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.None.
ITEM 3. DEFAULTSDEFAULTS UPON SENIOR SECURITIES See “Part I, Item. 1. Financial Statements – NoteNotes (10)” and “Note (11)” for disclosures related to defaults on our debt. ITEM 4. MINEMINE SAFETY DISCLOSURES Not applicable. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.None.
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Exhibits Index | Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002. | | Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002. | | 101.INS* | XBRL Instance Document. | | 101.SCH* | XBRL Taxonomy Schema Document. | | 101.CAL* | XBRL Calculation Linkbase Document. | | 101.LAB* | XBRL Label Linkbase Document. | | 101.PRE* | XBRL Presentation Linkbase Document. | | 101.DEF* | XBRL Definition Linkbase Document. |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized. | | | BLUE DOLPHIN ENERGY COMPANY | | | | (Registrant) | | | | | | | | | | | | | | | | August 14, 2020May 17, 2021 | | By: | /s/ JONATHAN P. CARROLL | | | | | Jonathan P. Carroll Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) |
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