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Notes to Consolidated Financial Statements
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Notes to
Consolidated Financial
Statements
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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, arrangements, and
risks associated with working capital deficits.
Going Concern
Management
has determined that certain factors raise substantial doubt about
our ability to continue as a going concern. As discussed more fully
below, these factors include inadequate liquidity to sustain
operations due to defaults under our secured loan agreements,
margin deterioration and volatility, and historic net losses and
working capital deficits. Our consolidated financial statements
assume we will continue as a going concern and do not include any
adjustments that might result from the outcome of this uncertainty.
Our ability to continue as a going concern depends on sustained
positive operating margins and having working capital for, amongst
other requirements, purchasing crude oil and condensate and making
payments on long-term debt. Without positive operating margins and
working capital, our business will be jeopardized, and we may not
be able to continue. If we are unable to make required debt
payments, we would likely have to consider other options, such as
selling assets, raising additional debt or equity capital, cutting
costs or otherwise reducing our cash requirements, or negotiating
with our creditors to restructure our applicable obligations,
including a potential bankruptcy filing.
Defaults Under Secured Loan Agreements.
We are currently in default under
certain of our secured loan agreements with third parties and
related parties. As a result, the debt associated with these
obligations was classified within the current portion of long-term
debt on our consolidated balance sheets at March 31, 2021 and
December 31, 2020.
Third-Party Defaults
●
Veritex Loans
– Defaults under the LE Term Loan Due 2034 and LRM Term Loan
Due 2034 permit Veritex to declare the amounts owed under these
loan agreements immediately due and payable, exercise its rights
with respect to collateral securing obligors’ obligations
under these loan agreements, and/or exercise any other rights and
remedies available. Any exercise by Veritex of its rights and
remedies under our secured loan agreements would have a material
adverse effect on our business operations, including crude oil and
condensate procurement and our customer relationships; financial
condition; and results of operations. Veritex exercising its rights
would also adversely impact the trading price of our common stock
and the value of an investment in our common stock, which could
lead to holders of our common stock losing their investment in its
entirety. We can provide no assurance that: (i) our assets or cash
flow will be sufficient to fully repay borrowings under our secured
loan agreements with Veritex, either upon maturity or if
accelerated, (ii) LE and LRM will be able to refinance or
restructure the payments of the debt, and/or (iii) Veritex, as
first lien holder, will provide future default waivers. The
borrowers continue in active dialogue with Veritex. 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 “Pilot Obligations”). Pursuant to the
Amended Pilot Line of Credit, commencing on May 4, 2020, the Pilot
Obligations began to accrue interest at a default rate of fourteen
percent (14%) per annum. Failure of the borrower or any guarantor
of paying the past due Pilot Obligations constituted an event of
default. Pilot expressly retained and reserved all its rights and
remedies available to it at any time, including without limitation,
the right to exercise all rights and remedies available to Pilot
under the Amended Pilot Line of Credit or applicable law or
equity.
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March 31, 2021
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Notes to Consolidated Financial Statements
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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 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 working with NPS to settle the Pilot Obligations.
NPS and guarantors are also working on the possible refinance of
amounts owing and payable under the Amended Pilot Line of Credit.
However, progress with potential lenders has been slow due to the
ongoing COVID-19 pandemic. NPS’s ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, we could be forced to undertake
alternate financings, including a sale of additional common stock,
negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance
that we will be able to consummate any such transaction on terms
that are commercially reasonable, on terms acceptable to us or at
all. If new debt or other liabilities are added to the
Company’s current consolidated debt levels, the related risks
that it now faces could intensify. In the event we are unsuccessful
in such endeavors, NPS may be unable to pay the amounts outstanding
under the Amended Pilot Line of Credit, which may require us to
seek protection under bankruptcy laws. In such a case, the trading
price of our common stock and the value of an investment in our
common stock could significantly decrease, which could lead to
holders of our common stock losing their investment in our common
stock in its entirety.
●
Notre Dame Debt
– Pursuant to a 2015 subordination agreement, the holder of
the Notre Dame Debt agreed to subordinate their right to payments,
as well as any security interest and liens on the Nixon
facility’s business assets, in favor of Veritex as holder of
the LE Term Loan Due 2034. To date, no payments have been made
under the subordinated Notre Dame Debt and the holder of the Notre
Dame Debt has taken no action as a result of the
non-payment.
Our financial
health could be materially and adversely affected by defaults in
our secured loan agreements, margin deterioration and volatility,
historic net losses and working capital deficits, as well as
termination of the crude supply agreement or terminal services
agreement with Pilot, which could impact our ability to acquire
crude oil and condensate. In addition, sustained periods of low
crude oil prices due to market volatility associated with the
COVID-19 pandemic 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. Replated
party debt, which is currently in default, represents such working
capital borrowings.
Margin
Deterioration and Volatility. Our refining
margins generally improve in an environment of higher crude oil and
refined product prices, and where the spread between crude oil
prices and refined product prices widen. 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.
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Blue Dolphin Energy
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March 31, 2021
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Notes to Consolidated Financial Statements
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Historic
Net Losses and Working Capital Deficits
Net Losses. Net loss
for the three months ended March 31, 2021 was $3.2 million, or a
loss of $0.25 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:
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Cash
and cash equivalents
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$521
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$549
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Restricted
cash (current portion)
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48
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48
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Restricted
cash, noncurrent
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-
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514
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Total
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$569
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$1,111
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Operating Risks
Successful
execution of our business strategy depends on several key factors,
including, having adequate working capital to meet operational
needs and regulatory requirements, maintaining safe and reliable
operations at the Nixon facility, meeting contractual obligations,
and having favorable margins on refined products. We are currently
unable to estimate the impact the COVID-19 pandemic will have on
our future financial position and results of operations. Under
earlier state and federal mandates that regulated business
closures, our business was deemed as an essential business and, as
such, remained open. As U.S. federal, state, and local officials
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.
(2)
Principles of Consolidation and Significant Accounting
Policies
Basis of Presentation
The accompanying
unaudited consolidated financial statements, which include Blue
Dolphin and its subsidiaries, have been prepared in accordance with
GAAP for interim consolidated financial information pursuant to the
rules and regulations of the SEC under Article 10 of Regulation S-X
and the instructions to Form 10-Q. Accordingly, certain information
and footnote disclosures normally included in our audited financial
statements have been condensed or omitted pursuant to the
SEC’s rules and regulations. Significant intercompany
transactions have been eliminated in the consolidation. In
management’s opinion, all adjustments considered necessary
for a fair presentation have been included, disclosures are
adequate, and the presented information is not
misleading.
The consolidated
balance sheet as of December 31, 2020 was derived from the audited
financial statements at that date. The accompanying consolidated
financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our
Annual
Report on Form 10-K for the fiscal year ended December 31,
2020 as filed with the SEC. Operating results for the three
months ended March 31, 2021 are not necessarily indicative of the
results that may be expected for the fiscal year ending December
31, 2021, or for any other period.
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March 31, 2021
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Notes to Consolidated Financial Statements
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Significant Accounting Policies
The summary of
significant accounting policies of Blue Dolphin is presented to
assist in understanding our consolidated financial statements. Our
consolidated financial statements and accompanying notes are
representations of management, who is responsible for their
integrity and objectivity. These accounting policies conform to
GAAP and have been consistently applied in the preparation of our
consolidated financial statements.
Use of Estimates. The preparation of our
financial statements in conformity with U.S. GAAP requires
management to make estimates and assumptions that affect the
reported amounts of assets, liabilities, revenues and expenses, and
the related disclosures. Actual results could differ from those
estimates. The ongoing COVID-19 pandemic and related governmental
responses, volatility in commodity prices, and severe weather
resulting from climate change have impacted and likely will
continue to impact our business. We assessed certain accounting
matters that generally require consideration of forecasted
financial information in context with the information reasonably
available to us and the unknown future impacts of COVID-19 as of
March 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 March 31, 2021 and December 31,
2020.
Inventory. Inventory primarily consists
of refined products, crude oil and condensate, and chemicals.
Inventory is valued at lower of cost or net realizable value with
cost determined by the average cost method, and net realizable
value determined based on estimated selling prices less associated
delivery costs. If the net realizable value of our refined products
inventory declines to an amount less than our average cost, we
record a write-down of inventory and an associated adjustment to
cost of goods sold. See “Note (7)” to our consolidated
financial statements for additional disclosures related to
inventory.
Property and Equipment.
Refinery and
Facilities. During 2020, we safely completed a 5-year
capital improvement expansion project of the Nixon facility that
included construction of new storage tanks, smaller efficiency
improvements, and the acquisition of refurbished refinery equipment
for later deployment. We typically make ongoing improvements to the
Nixon facility based on operational needs, technological advances,
and safety and regulatory requirements. Additions to refinery and
facilities assets are capitalized, and expenditures for repairs and
maintenance are expensed as incurred. We record refinery and
facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of operations. For
financial reporting purposes, depreciation of refinery and
facilities assets is computed using the straight-line method using
an estimated useful life of 25 years beginning when the refinery
and facilities assets are placed in service. We did not record any
impairment of our refinery and facilities assets for the periods
presented.
Pipelines and
Facilities. Our pipelines and facilities are recorded at
cost less any adjustments for depreciation or impairment.
Depreciation is computed using the straight-line method over
estimated useful lives ranging from 10 to 22 years. In accordance
with FASB ASC guidance, we performed periodic impairment testing of
our pipeline and facilities assets in 2016. Upon completion of
testing, our pipeline assets were fully impaired at December 31,
2016. All pipeline transportation services to third parties have
ceased, existing third-party wells along our pipeline corridor have
been permanently abandoned, and no new third-party wells are being
drilled near our pipelines. Although we planned to decommission the
offshore pipelines and platform assets 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.
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.
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March 31, 2021
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Notes to Consolidated Financial Statements
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CIP. CIP expenditures,
including capitalized interest, relate to construction and
refurbishment activities and equipment for the Nixon facility.
These expenditures are capitalized as incurred. Depreciation begins
once the asset is placed in service. See “Note (8)” to
our consolidated financial statements for additional disclosures
related to our refinery and facilities assets, oil and gas
properties, pipelines and facilities assets, and CIP.
Leases. We evaluate if a contract is or
contains a lease at inception of the contract. If we determine that
a contract is or contains a lease, we recognize ROU asset and lease
liability at the commencement date of the lease based on the
present value of lease payments over the lease term. The present
value of the lease payments is determined by using the implicit
rate when readily determinable. If not determinable, we use the
incremental borrowing rate to discount lease payments to present
value. Lease terms include options to extend or terminate the lease
when it is reasonably certain that we will exercise those
options.
We recognize ROU
assets and lease liabilities for leasing arrangements with terms
greater than one year. We account for lease and non-lease
components in a contract as a single lease component for all
classes of underlying assets. We allocate the consideration in
these contracts based on pricing information contained in the
lease.
Expense for an
operating lease is recognized as a single lease cost on a
straight-line basis over the lease term and is reflected in the
appropriate income statement line item based on the leased
asset’s function. Amortization expense of a finance lease ROU
asset is recognized on a straight-line basis over the lesser of the
useful life of the leased asset or the lease term. However, if the
lease transfers ownership of the finance lease ROU asset to us at
the end of the lease term, the finance lease ROU asset is amortized
over the useful life of the leased asset. Amortization expense is
reflected in ‘depreciation and amortization expense.’
Interest expense is incurred based on the carrying value of the
lease liability and is reflected in ‘interest and other
expense.
Revenue Recognition.
Refinery Operations
Revenue. Revenue from the sale of refined products is
recognized when the product is sold to the customer in fulfillment
of performance obligations. Each load of refined product is
separately identifiable and represents a distinct performance
obligation to which the transaction price is allocated. Performance
obligations are met when control is transferred to the customer.
Control is transferred to the customer when the product has been
lifted or, in cases where the product is not lifted immediately
(bill and hold arrangements), when the product is added to the
customer’s bulk inventory as stored at the Nixon
facility.
We consider a
variety of facts and circumstances in assessing the point of
control transfer, including but not limited to: whether the
purchaser can direct the use of the refined product, the transfer
of significant risks and rewards, our rights to payment, and
transfer of legal title. In each case, the term between the sale
and when payment is due is not significant. Transportation,
shipping, and handling costs incurred are included in cost of goods
sold. Excise and other taxes that are collected from customers and
remitted to governmental authorities are not included in
revenue.
Tolling and Terminaling
Revenue. Tolling and terminaling revenue represents fees
pursuant to: (i) tank storage agreements, whereby a customer agrees
to pay a certain fee per tank based on tank size over a period of
time for the storage of products and (ii) tolling agreements,
whereby a customer agrees to pay a certain fee per gallon or barrel
for throughput volumes moving through the naphtha stabilizer unit
and a fixed monthly reservation fee for use of the naphtha
stabilizer unit.
We typically
satisfy performance obligations for tolling and terminaling
operations with the passage of time. We determine the transaction
price at agreement inception based on the guaranteed minimum amount
of revenue over the term of the agreement. We allocate the
transaction price to the single performance obligation that exists
under the agreement, and we recognize revenue in the amount for
which we have a right to invoice. Generally, payment terms do
not exceed 30 days.
Revenue from tank
storage customers may, from time to time, include fees for
ancillary services, such as in-tank and tank-to-tank blending.
These services are considered optional to the customer, and the
price we charge for such services is not included in the fixed cost
under the customer’s tank storage agreement. Ancillary
services are considered a separate performance obligation by us
under the tank storage agreement. The performance obligation is
satisfied when the requested service has been performed in the
applicable period.
Deferred Revenue. We
record deferred revenue when cash payments are received or due in
advance of our performance. An increase in the deferred
revenue balance reflects cash payments received or due in advance
of satisfying our performance obligations, offset by recognized
revenue that was included in the deferred revenue balance at the
beginning of the period. Deferred revenue represents a liability as
of the balance sheet date related to a revenue producing activity
for which revenue has not yet been recognized. We record deferred
revenue when we receive consideration under a contract before
achieving certain criteria that must be met for revenue to be
recognized in conformity with GAAP.
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March 31, 2021
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Notes to Consolidated Financial Statements
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Income Taxes. Deferred income taxes are
determined based on the differences between the financial reporting
and tax basis of assets and liabilities, as well as operating
losses and tax credit carryforwards using currently enacted tax
rates and laws in effect for the year in which the differences are
expected to reverse. We record a valuation allowance against
deferred income tax assets if it is more likely than not that those
assets will not be realized. The provision for income taxes
comprises our current tax liability and change in deferred income
tax assets and liabilities.
Significant
judgment is required in evaluating uncertain tax positions and
determining 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 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 March 31, 2021 and December 31, 2020. In addition, we
have NOL carryforwards that remain available for future
use.
The benefit of an
uncertain tax position is recognized in the financial statements if
it meets a minimum recognition threshold. A determination is first
made as to whether it is more likely than not that the income tax
position will be sustained, based upon technical merits, upon
examination by the taxing authorities. If the income tax position
is expected to meet the more-likely-than-not criteria, the benefit
recorded in the financial statements equals the largest amount that
is greater than 50% likely to be realized upon its ultimate
settlement. At March 31, 2021 and December 31, 2020, there were no
uncertain tax positions for which a reserve or liability was
necessary. See “Note (14)” to our consolidated
financial statements for more information related to income
taxes.
Impairment or Disposal of Long-Lived
Assets. We periodically evaluate our long-lived assets for
impairment. Additionally, we evaluate our long-lived assets when
events or circumstances indicate that the carrying value of these
assets may not be recoverable. The carrying value is not
recoverable if it exceeds the sum of the undiscounted cash flows
expected to result from the use and eventual disposition of the
asset or group of assets. If the carrying value exceeds the sum of
the undiscounted cash flows, an impairment loss equal to the amount
by which the carrying value exceeds the fair value of the asset or
group of assets is recognized. Significant management judgment is
required in the forecasting of future operating results that are
used in the preparation of projected cash flows and, should
different conditions prevail or judgments be made, material
impairment charges could be necessary.
The market
volatility of commodity prices as a result of the ongoing COVID-19
pandemic could affect the value of certain of our long-lived
assets. Management evaluated our
refinery and facilities assets for impairment as of March 31,
2021. No impairment was deemed necessary based upon this
testing, and we did not record any impairment of our refinery and
facilities assets for the periods presented.
Asset Retirement Obligations. We record
a liability for the discounted fair value of an ARO in the period
incurred, and we also capitalize the corresponding cost by
increasing the carrying amount of the related long-lived asset. The
liability is accreted towards its future value each period, and the
capitalized cost is depreciated over the useful life of the related
asset. If the liability is settled for an amount other than the
recorded amount, a gain or loss is recognized.
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
|
|
March 31, 2021
│Page 15
|
|
Notes to Consolidated Financial Statements
|
|
|
New Pronouncements Adopted. The FASB
issues ASUs to communicate changes to the FASB ASC, including
changes to non-authoritative SEC content. Recently adopted ASUs
include:
Codification
Improvements. In
October 2020, FASB issued ASU 2020-10, Codification Improvements. The
amendments in this guidance affected a wide variety of topics in
the ASC by either clarifying the codification or correcting
unintended application of guidance. The changes did not have a
significant effect on accounting practice or create a significant
administrative cost burden to most entities. For all reporting
entities, the amendments in ASU 2020-10 were effective for fiscal
years ending after December 15, 2020. Adoption of this guidance did
not have a significant impact on our consolidated financial
statements.
New Pronouncements Issued, Not Yet
Effective.
Other new
pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
(3)
Related-Party Transactions
Affiliate Operational Agreements Summary
Blue Dolphin and
certain of its subsidiaries are party to several operational
agreements with Affiliates. Management believes that these
related-party transactions were consummated on terms equivalent to
those that prevail in arm's-length transactions. Related-party
agreements related to Blue Dolphin’s operations consist of
the following:
|
Agreement/Transaction
|
Parties
|
Effective
Date
|
Key
Terms
|
|
Jet Fuel Sales
Agreement
|
LEH -
LE
|
04/01/2021
|
1-year term
expiring earliest to occur of 03/31/2022 plus 30-day carryover or
delivery of maximum jet fuel quantity; LEH bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification
|
|
Office Sub-Lease
Agreement
|
LEH -
BDSC
|
01/01/2018
|
68-month term
expiring 08/31/2023; office lease Houston, Texas; includes 6-month
rent abatement period; rent approximately $0.02 million per
month
|
|
Amended and
Restated Operating Agreement
|
LEH – Blue
Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC
|
04/01/2020
|
3-year term;
expires 04/01/2023 or notice by either party at any time of
material breach or 90 days Board notice; LEH receives management
fee of 5% of all consolidated operating costs, excluding crude
costs, depreciation, amortization and interest, of Blue Dolphin,
LE, LRM, NPS, BDPL, BDPC and BDSC
|
Working Capital
We have
historically depended on Affiliates for 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
|
|
March Carroll Note
(in default)
|
Jonathan Carroll
– Blue Dolphin
|
Jan
2019
|
8.00%
|
Blue Dolphin
working capital; reflects amounts owed to Jonathan Carroll under
the guaranty fee agreements
|
|
March Ingleside
Note (in
default)
|
Ingleside –
Blue Dolphin
|
Jan
2019
|
8.00%
|
Blue Dolphin
working capital
|
|
June LEH Note
(in default)
|
LEH – Blue
Dolphin
|
Jan
2019
|
8.00%
|
Blue Dolphin
working capital; reflects amounts owed to LEH under the Amended and
Restated Operating Agreement
|
|
BDPL-LEH Loan
Agreement (in
default)(1)
|
LEH -
BDPL
|
Aug
2018
|
16.00%
|
Blue Dolphin
working capital
|
|
Amended and
Restated Guaranty Fee Agreement(2)
|
Jonathan Carroll -
LE
|
--
|
2.00%
|
Tied to payoff of
LE $25 million Veritex loan
|
|
Amended and
Restated Guaranty Fee Agreement(2)
|
Jonathan Carroll -
LRM
|
--
|
2.00%
|
Tied to payoff of
LRM $10 million Veritex loan
|
(1)
The original
principal amount of the BDPL-LEH Loan Agreement was $4.0
million.
(2)
As a condition for
our secured loan agreements with Veritex, Jonathan Carroll was
required to personally guarantee repayment of borrowed funds and
accrued interest. Under the guaranty fee agreements, Mr. Carroll is
entitled to receive guaranty fees. The fees are payable 50% in cash
and 50% in Common Stock. The Common Stock portion is paid
quarterly. For the foreseeable future, management does not intend
to pay Mr. Carroll the cash portion due to Blue Dolphin’s
working capital deficits. The cash portion will continue to accrue
and be added to the outstanding principal balance owed to Mr.
Carroll under the March Carroll Note.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 16
|
|
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 payable, related
party. Accounts payable,
related party to LTRI related to the purchase of refinery equipment
totaled $0.2 million at both March 31, 2021 and December 31,
2020.
Long-term debt, related party, current portion (in default) and
accrued interest payable, related party.
|
|
|
|
|
|
|
|
|
|
|
|
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)
|
|
|
$-
|
$-
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 17
|
|
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. Lease payments
received under the office sub-lease agreement with LEH totaled
approximately $0.01 million for both three-month periods ended
March 31, 2021 and 2020. The LEH operating fee was also relatively
flat, totaling approximately $0.1 million for both three-month
periods ended March 31, 2021 and 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.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 19
|
|
Notes to Consolidated Financial Statements
|
|
|
Segment
Information. Business
segment information for the periods indicated (and as of the dates
indicated) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
revenue (excluding intercompany fees and sales)
|
|
|
|
Refinery
operations
|
$58,483
|
$60,897
|
|
Tolling
and terminaling
|
930
|
1,103
|
|
Total
net revenue
|
59,413
|
62,000
|
|
|
|
|
|
Intercompany
fees and sales
|
|
|
|
Refinery
operations
|
(566)
|
(617)
|
|
Tolling
and terminaling
|
566
|
617
|
|
Total
intercompany fees
|
-
|
-
|
|
|
|
|
|
Operation costs and expenses(1)
|
|
|
|
Refinery
operations
|
(59,289)
|
(61,833)
|
|
Tolling
and terminaling
|
(334)
|
(255)
|
|
Corporate
and other
|
(54)
|
(59)
|
|
Total
operation costs and expenses
|
(59,677)
|
(62,147)
|
|
|
|
|
|
Segment
contribution margin (deficit)
|
|
|
|
Refinery
operations
|
(1,372)
|
(1,553)
|
|
Tolling
and terminaling
|
1,162
|
1,465
|
|
Corporate
and other
|
(54)
|
(59)
|
|
Total
segment contribution margin (deficit)
|
(264)
|
(147)
|
|
|
|
|
|
General and administrative
expenses(2)
|
|
|
|
Refinery
operations
|
(301)
|
(304)
|
|
Tolling
and terminaling
|
(68)
|
(68)
|
|
Corporate
and other
|
(413)
|
(419)
|
|
Total
general and administrative expenses
|
(782)
|
(791)
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
|
Refinery
operations
|
(302)
|
(288)
|
|
Tolling
and terminaling
|
(340)
|
(294)
|
|
Corporate
and other
|
(51)
|
(51)
|
|
Total
depreciation and amortization
|
(693)
|
(633)
|
|
|
|
|
Interest
and other non-operating expenses, net
|
|
Refinery
operations
|
(598)
|
(741)
|
|
Tolling
and terminaling
|
(452)
|
(770)
|
|
Corporate
and other
|
(385)
|
(243)
|
|
Total
interest and other non-operating expenses, net
|
(1,435)
|
(1,754)
|
|
|
|
|
|
Income
(loss) before income taxes
|
|
|
|
Refinery
operations
|
(2,573)
|
(2,886)
|
|
Tolling
and terminaling
|
302
|
333
|
|
Corporate
and other
|
(903)
|
(772)
|
|
Total
loss before income taxes
|
(3,174)
|
(3,325)
|
|
|
|
|
|
Income
tax expense
|
-
|
(15)
|
|
|
|
|
|
Net loss
|
$(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.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 20
|
|
Notes to Consolidated Financial Statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
expenditures
|
|
|
|
Refinery
operations
|
$-
|
$6
|
|
Tolling
and terminaling
|
-
|
192
|
|
Corporate
and other
|
-
|
-
|
|
Total
capital expenditures
|
$-
|
$198
|
|
|
|
|
|
|
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
Refinery
operations
|
$45,186
|
$48,521
|
|
Tolling
and terminaling
|
18,527
|
18,722
|
|
Corporate
and other
|
1,839
|
2,057
|
|
Total
identifiable assets
|
$65,552
|
$69,300
|
(5)
Concentration of Risk
Bank Accounts
Financial
instruments that potentially subject us to concentrations of risk
consist primarily of cash, trade receivables and payables. We
maintain cash balances at financial institutions in Houston, Texas.
The FDIC insures certain financial products up to a maximum of
$250,000 per depositor. At March 31, 2021 and December 31, 2020, we
had cash balances (including restricted cash) that exceeded the
FDIC insurance limit per depositor of approximately $0.3 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. 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.
Beginning on June
1, 2020, Pilot began applying payment obligations owed to NPS under
two terminal services agreements against NPS’ payment
obligations to Pilot under the Amended Pilot Line of Credit. For
the three-month periods ended 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. See
“Note (1) Organization – Going Concern” to our
consolidated financial statements for additional disclosures
related to defaults in our debt obligations. On November 23, 2020,
NPS and guarantors received notice from Pilot that the entry into
the 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
|
|
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, sustained periods of low
crude oil prices due to market volatility associated with the
COVID-19 pandemic has resulted in significant financial constraints
on producers, which in turn has resulted in long term crude oil
supply constraints and increased transportation costs. During the
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 March
31,
|
|
|
(in thousands, except
percents)
|
|
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 “Notes (3) and
(16)” to our consolidated financial statements for additional
disclosures related to transactions with Affiliates.
Concentration of Customers. Our customer
base is concentrated on refined petroleum product wholesalers. This
customer concentration may impact our overall exposure to credit
risk, either positively or negatively, as our customers are likely
similarly affected by economic changes. This includes the
uncertainties related to the COVID-19 pandemic and the associated
volatility in the global oil markets. Historically, we have had no
significant problems collecting our accounts
receivable.
Refined Product Sales. We sell our
products primarily in the U.S. within PADD 3. Occasionally we sell
refined products to customers that export to Mexico. Total refined
product sales by distillation (from light to heavy) for the periods
indicated consisted of the following:
|
|
Three
Months Ended March 31,
|
|
|
|
|
|
|
(in thousands, except
percents)
|
|
|
|
|
|
|
|
LPG
mix
|
$6
|
0.0%
|
$-
|
0%
|
|
Naphtha
|
14,224
|
24.3%
|
11,515
|
18.9%
|
|
Jet
fuel
|
16,080
|
27.5%
|
17,715
|
29.1%
|
|
HOBM
|
15,663
|
26.8%
|
15,191
|
24.9%
|
|
AGO
|
12,510
|
21.4%
|
16,476
|
27.1%
|
|
|
$58,483
|
100.0%
|
$60,897
|
100.0%
|
An Affiliate, LEH,
purchases all of our jet fuel. See “Notes (3) and (16)”
to our consolidated financial statements for additional disclosures
related to Affiliate transactions.
|
Blue Dolphin Energy
Company
|
|
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
|
$556
|
$1,182
|
|
Prepaid
crude oil and condensate
|
383
|
2,249
|
|
Prepaid
easement renewal fees
|
93
|
99
|
|
Other
prepaids
|
28
|
34
|
|
|
$1,060
|
$3,564
|
Inventory as of the
dates indicated consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Crude
oil and condensate
|
$608
|
$463
|
|
Chemicals
|
175
|
271
|
|
Naphtha
|
164
|
120
|
|
AGO
|
121
|
133
|
|
Propane
|
25
|
15
|
|
LPG
mix
|
6
|
6
|
|
HOBM
|
-
|
54
|
|
|
$1,099
|
$1,062
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 23
|
|
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
|
$72,184
|
$72,184
|
|
Land
|
566
|
566
|
|
Other
property and equipment
|
903
|
903
|
|
|
73,653
|
73,653
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortiation
|
(15,861)
|
(15,220)
|
|
|
57,792
|
58,433
|
|
|
|
|
|
CIP
|
4,064
|
4,064
|
|
|
$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 at March 31, 2021 and December 31, 2020. Capital
expenditures for expansion at the Nixon facility were funded by
long-term debt from Veritex, revenue from operations, and working
capital from Affiliates. At 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:
|
|
|
|
|
|
|
|
|
|
|
|
Unearned
revenue from contracts with customers
|
$3,489
|
$3,421
|
|
Unearned
contract renewal income
|
400
|
500
|
|
Insurance
|
181
|
541
|
|
Other
payable
|
176
|
252
|
|
Customer
deposits
|
173
|
10
|
|
Taxes
payable
|
137
|
58
|
|
Board
of director fees payable
|
133
|
100
|
|
|
$4,689
|
$4,882
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 24
|
|
Notes to Consolidated Financial Statements
|
|
|
(10)
Third-Party Long-Term Debt
Loan Agreements Summary
|
Loan
Description
|
Parties
|
Original
Principal Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
Veritex
Loans(1)
|
|
|
|
|
|
|
|
LE Term Loan Due
2034 (in
default)
|
LE-Veritex
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ Prime +
2.75%
|
Refinance loan;
capital improvements
|
|
LRM Term Loan Due
2034 (in
default)
|
LRM-Veritex
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ Prime +
2.75%
|
Refinance bridge
loan; capital improvements
|
|
Notre Dame Debt
(in default)(2)(3)
|
LE-Kissick
|
$11.7
|
Jan
2018
|
No payments to
date; payment rights subordinated
|
16.00%
|
Working capital;
reduced 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)
Proceeds were
placed in a disbursement account whereby Veritex makes payments for
construction related expenses. Amounts held in the disbursement
account are reflected on our consolidated balance sheets as
restricted cash (current portion) and restricted cash (noncurrent).
At 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 of $8.0 million. The debt is currently held by
John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame
Debt was amended to increase the principal amount by $3.7 million;
the additional principal was used to reduce the arbitration award
payable to GEL by $3.6 million.
(3)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their right to payments, as well as any security
interest and liens on the Nixon facility’s business assets,
in favor of Veritex as holder of the LE Term Loan Due
2034.
(4)
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
|
|
Veritex
Loans(1)
|
|
|
|
LE Term Loan Due
2034 (in
default)
|
●
Jonathan Carroll
personal guarantee
●
LEH, LRM and Blue
Dolphin cross-guarantee
|
●
First priority lien
on Nixon facility’s business assets (excluding accounts
receivable and inventory)
●
Assignment of all
Nixon facility contracts, permits, and licenses
●
Absolute assignment
of Nixon facility rents and leases, including tank rental
income
●
$1.0 million
payment reserve account held by Veritex
●
$5.0 million life
insurance policy on Jonathan Carroll
|
|
LRM Term Loan Due
2034 (in
default)
|
●
Jonathan Carroll
personal guarantee
●
LEH, LE and Blue
Dolphin cross-guarantee
|
●
Second priority
lien on rights of LE in crude distillation tower and other
collateral of LE
●
First priority lien
on real property interests of LRM
●
First priority lien
on all LRM fixtures, furniture, machinery, and
equipment
●
First priority lien
on all LRM contractual rights, general intangibles, and
instruments, except with respect to LRM rights in its leases of
certain specified tanks for which Veritex has second priority
lien
●
All other
collateral as described in the security documents
|
|
Notre Dame Debt
(in default)(2)
|
---
|
●
Subordinated deed
of trust that encumbers the crude distillation tower and general
assets of LE
|
|
SBA
EIDLs(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 LE Term Loan Due 2034 and LRM Term Loan Due 2034, Jonathan
Carroll was required to personally guarantee repayment of borrowed
funds and accrued interest.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their right to payments, as well as any security
interest and liens on the Nixon facility’s business assets,
in favor of Veritex as holder of the LE Term Loan Due
2034.
(3)
On November 23,
2020, NPS and guarantors received notice from Pilot that the entry
into the 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 “Notes (3) and
(16)” to our consolidated financial statements for additional
disclosures related to Affiliate agreements and transactions,
including long-term debt guarantees.
Covenants
The Veritex loans
and SBA EIDLs contain representations and warranties, affirmative
and negative covenants, and events of default that we consider
usual and customary for credit facilities of this type. There are
no covenants associated with the Notre Dame Debt and the Equipment
Loan Due 2025.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 27
|
|
Notes to Consolidated Financial Statements
|
|
|
Defaults
|
Loan
Description
|
Event(s)
of Default
|
Covenant
Violations
|
|
Veritex
Loans
|
|
|
|
LE Term Loan Due
2034 (in
default)
|
Failure to make
required monthly payments; failure to replenish $1.0 million
payment reserve account; events of default under other secured loan
agreements with Veritex
|
Financial
covenants:
●
debt service
coverage ratio, current ratio, and debt to net worth
ratio
|
|
LRM Term Loan Due
2034 (in
default)
|
Failure to make
required monthly payments; events of default under other secured
loan agreements with Veritex
|
Financial
covenants:
●
debt service
coverage ratio, current ratio, and debt to net worth
ratio
|
|
Notre Dame Debt
(in default)
|
Failure of borrower
to pay past due obligations; loan matured January 2019
|
---
|
|
|
|
|
As reflected in the
table above and elsewhere in this report, we are in default under
the LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre
Dame Debt. Defaults under the LE Term Loan Due 2034 and LRM Term
Loan Due 2034 permit Veritex to declare the amounts owed under
these loan agreements immediately due and payable, exercise its
rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available. The debt associated with the LE Term
Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt was
classified within the current portion of long-term debt on our
consolidated balance sheets at March 31, 2021 and December 31,
2020.
Any exercise by
Veritex of its rights and remedies under our secured loan
agreements would have a material adverse effect on our business
operations, including crude oil and condensate procurement and our
customer relationships; financial condition; and results of
operations. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
We can provide no
assurance that: (i) our assets or cash flow will be sufficient to
fully repay borrowings under our secured loan agreements with
Vertitex, either upon maturity or if accelerated, (ii) LE and LRM
will be able to refinance or restructure the payments of the debt,
and/or (iii) Veritex, as first lien holder, will provide future
default waivers. Defaults under our secured loan agreements and any
exercise by Veritex of its rights and remedies related to such
defaults may have a material adverse effect on the trading prices
of our common stock and on the value of an investment in our common
stock, and holders of our common stock could lose their investment
in our common stock in its entirety. See “Notes (1) and
(11)” to our consolidated financial statements for additional
information regarding defaults under our secured loan agreements
and their potential effects on our business, financial condition,
and results of operations.
(11)
Line of Credit Payable
Line of Credit Agreement Summary
|
Line
of Credit Description
|
Original
Principal
Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
|
|
|
|
|
|
|
Amended Pilot Line
of Credit (in default)
|
$13.0
|
May
2020
|
----
|
14.00%
|
Settlement payment
to GEL, NPS purchase of crude oil from Pilot, and working
capital
|
|
|
|
|
|
|
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 28
|
|
Notes to Consolidated Financial Statements
|
|
|
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Line of credit
payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Agreement
Regarding Attornment of Tank Leases was subject to certain
conditions, including the agreement and concurrence of the USDA
that the Agreement Regarding Attornment of Tank Leases does not
impair or void the LE Term Loan Due 2034 and LRM Term Loan Due 2034
or any associated guarantees. Veritex used commercially reasonable
efforts to obtain such USDA concurrence, however, to date such USDA
concurrence has not been provided.
Covenants
The Amended Pilot
Line of Credit contains customary affirmative and negative
covenants and events of default.
Defaults
|
Loan
Description
|
Event(s)
of Default
|
Covenant
Violations
|
|
Amended Pilot Line
of Credit (in
default)
|
Failure of borrower
or any guarantor to pay past due obligations; loan matured May
2020
|
---
|
|
|
|
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 29
|
|
Notes to Consolidated Financial Statements
|
|
|
As reflected in the
table above and elsewhere in this report, we are in default under
the Amended Pilot Line of Credit. Upon maturity of the Amended
Pilot Line of Credit in May 2020, Pilot sent NPS, as borrower, and
LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively
guarantors, a notice demanding the immediate payment of the Pilot
Obligations. Pursuant to the Amended Pilot Line of Credit,
commencing on May 4, 2020, the Pilot Obligations began to accrue
interest at a default rate of fourteen percent (14%) per annum.
Failure of the borrower or any guarantor of paying the past due
Pilot Obligations constituted an event of default. Pilot expressly
retained and reserved all its rights and remedies available to it
at any time, including without limitation, the right to exercise
all rights and remedies available to Pilot under the Amended Pilot
Line of Credit or applicable law or equity.
Pursuant to a June
1, 2020 notice, Pilot began applying Pilot’s payment
obligations to NPS under each of (a) the Terminal Services
Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as
of May 2019, between NPS and Pilot, and (b) the Terminal Services
Agreement (covering Tank No. 56), dated as of June 1, 2019, between
NPS and Pilot, against NPS’ payment obligations to Pilot
under the Amended Pilot Line of Credit. Such tank lease setoff
amounts only partially satisfy NPS’ obligations under the
Amended Pilot Line of Credit, and Pilot expressly retained and
reserved all its rights and remedies available to it at any time,
including, without limitation, the right to exercise all rights and
remedies available to Pilot under the Amended Pilot Line of Credit
or applicable law or equity. For the three-month periods ended
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 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 working with NPS to settle the Pilot Obligations.
NPS and guarantors are also working on the possible refinance of
amounts owing and payable under the Amended Pilot Line of Credit.
However, progress with potential lenders has been slow due to the
ongoing COVID-19 pandemic. NPS’s ability to repay, refinance,
replace or otherwise extend this credit facility is dependent on,
among other things, business conditions, our financial performance,
and the general condition of the financial markets. Given the
current financial markets, we could be forced to undertake
alternate financings, including a sale of additional common stock,
negotiate for an extension of the maturity, or sell assets and
delay capital expenditures in order to generate proceeds that could
be used to repay such indebtedness. We can provide no assurance
that we will be able to consummate any such transaction on terms
that are commercially reasonable, on terms acceptable to us or at
all. If new debt or other liabilities are added to the
Company’s current consolidated debt levels, the related risks
that it now faces could intensify. In the event we are unsuccessful
in such endeavors, NPS may be unable to pay the amounts outstanding
under the Amended Pilot Line of Credit, which may require us to
seek protection under bankruptcy laws. In such a case, the trading
price of our common stock and the value of an investment in our
common stock could significantly decrease, which could lead to
holders of our common stock losing their investment in our common
stock in its entirety.
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 March
31, 2021 and December 31, 2020, the liability was fully accreted.
See “Note (16)” to our consolidated financial
statements for disclosures related to decommissioning of our
offshore pipelines and platform assets and related
risks.
ARO liability as of
the dates indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
March 31, 2021
│Page 30
|
|
Notes to Consolidated Financial Statements
|
|
|
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 the Houston office
space. Sublease income received from LEH totaled
approximately $0.01 million for both the three months ended March
31, 2021 and 2020. See “Note (3)” to our consolidated
financial statements for additional disclosures related to the
Affiliate sub-lease.
The following table
presents the lease-related assets and liabilities recorded on the
consolidated balance sheet:
|
|
|
|
|
|
|
Balance
Sheet Location
|
|
|
|
|
|
|
|
Assets
|
|
|
|
|
Operating
lease ROU assets
|
Operating
lease ROU assets
|
$787
|
$787
|
|
Less:
Accumulated amortization on operating lease assets
|
Operating
lease ROU assets
|
(329)
|
(289)
|
|
|
|
|
|
Total
lease assets
|
|
458
|
498
|
|
|
|
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
199
|
194
|
|
|
199
|
194
|
|
Noncurrent
|
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
319
|
370
|
|
Total
lease liabilities
|
|
$518
|
$564
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 31
|
|
Notes to Consolidated Financial Statements
|
|
|
|
Weighted
average remaining lease term in years
|
|
Operating
lease
|
2.42
|
|
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
|
|
Finance
lease costs:
|
|
|
|
Depreciation
of leased assets
|
-
|
6
|
|
Interest
on lease liabilities
|
-
|
2
|
|
Total
lease cost
|
$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
|
$47
|
$88
|
|
Operating
cash flows for finance leases
|
$-
|
$2
|
|
Financing
cash flows for finance leases
|
$-
|
$6
|
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 32
|
|
Notes to Consolidated Financial Statements
|
|
|
As of March 31,
2021, maturities of lease liabilities for the periods indicated
were as follows:
|
March
31,
|
|
|
|
|
|
|
|
|
2021
|
$199
|
|
2022
|
220
|
|
2023
|
99
|
|
|
|
|
|
$518
|
Future minimum
annual lease commitments that are non-cancelable:
|
|
|
|
March
31,
|
|
|
|
|
|
2021
|
$233
|
|
2022
|
237
|
|
2023
|
101
|
|
|
$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
|
|
March 31, 2021
│Page 33
|
|
Notes to Consolidated Financial Statements
|
|
|
Deferred income
taxes as of the dates indicated consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
NOL
and capital loss carryforwards
|
$15,773
|
$15,258
|
|
Business
interest expense
|
3,693
|
3,343
|
|
Start-up
costs (crude oil and condensate processing facility)
|
488
|
509
|
|
ARO
liability/deferred revenue
|
498
|
498
|
|
Other
|
4
|
3
|
|
Total
deferred tax assets
|
20,456
|
19,611
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(7,409)
|
(7,230)
|
|
Total
deferred tax liabilities
|
(7,409)
|
(7,230)
|
|
|
13,047
|
(7,230)
|
|
|
|
|
|
Valuation
allowance
|
(13,047)
|
(12,381)
|
|
|
|
|
|
Deferred
tax assets, net
|
$-
|
$-
|
Deferred Income Taxes
Deferred income tax
balances reflect the effects of temporary differences between the
carrying amounts of assets and liabilities and their tax basis, as
well as from NOL carryforwards. We state those balances at the
enacted tax rates we expect will be in effect when taxes are paid.
NOL carryforwards and deferred tax assets represent amounts
available to reduce future taxable income.
NOL Carryforwards. Under IRC Section
382, a corporation that undergoes an “ownership change”
is subject to limitations on its use of pre-change NOL
carryforwards to offset future taxable income. Within the meaning
of IRC Section 382, an “ownership change” occurs when
the aggregate stock ownership of certain stockholders (generally 5%
shareholders, applying certain look-through rules) increases by
more than fifty (50) percentage points over such stockholders'
lowest percentage ownership during the testing period (generally
three years). For income tax purposes, we experienced ownership
changes in 2005, relating to a series of private placements, and in
2012, because of a reverse acquisition, that limit the use of
pre-change NOL carryforwards to offset future taxable income. In
general, the annual use limitation equals the aggregate value of
common stock at the time of the ownership change multiplied by a
specified tax-exempt interest rate. The 2012 ownership change will
subject approximately $16.3 million in NOL carryforwards that were
generated prior to the ownership change to an annual use limitation
of approximately $0.6 million per year. Unused portions of the
annual use limitation amount may be used in subsequent years.
Because of the annual use limitation, approximately $6.7 million in
NOL carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were generated
after the 2012 ownership change and prior to 2018 are not subject
to an annual use limitation under IRC Section 382 and may be used
for a period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 34
|
|
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
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
9,614
|
43,058
|
52,672
|
|
|
|
|
|
|
Net
operating losses
|
-
|
13,305
|
13,305
|
|
|
|
|
|
|
Balance
at December 31, 2020
|
$9,614
|
$56,363
|
$65,977
|
|
|
|
|
|
|
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 March 31, 2021
and December 31, 2020, management determined that cumulative losses
incurred over the prior three-year period provided significant
objective evidence that limited the ability to consider other
subjective evidence, such as projections for future growth. Based
on this evaluation, we recorded a valuation allowance against the
deferred tax assets for which realization was not deemed more
likely than not as of March 31, 2021 and December 31,
2020.
A reconciliation
between basic and diluted income per share for the periods
indicated was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
except share
and per share amounts)
|
|
|
|
|
|
Net
loss
|
$(3,174)
|
$(3,340)
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
$(0.25)
|
$(0.27)
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
common
stock outstanding and potential
|
|
dilutive
shares of common stock
|
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 months ended March 31, 2021 and 2020 was
the same as basic EPS as there were no stock options or other
dilutive instruments outstanding.
(16)
Commitments and Contingencies
Amended and Restated Operating Agreement
See “Note
(3)” to our consolidated financial statements for additional
disclosures related to operation and management of all Blue Dolphin
properties by an Affiliate under the Amended and Restated Operating
Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines
and platform assets that are subject to BSEE’s idle iron
regulations. Idle iron regulations mandate lessees and
rights-of-way holders to permanently abandon and/or remove
platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees
and rights-of-way holders are required to inspect and maintain the
assets in accordance with regulatory requirements.
In December 2018,
BSEE issued an INC to BDPL for failure to flush and fill Pipeline
Segment No. 13101. Management met with BSEE on August 15, 2019 to
address BDPL’s plans with respect to decommissioning its
offshore pipelines and platform assets. BSEE proposed that BDPL
re-submit permit applications for pipeline and platform
decommissioning, along with a safe boarding plan for the platform,
within six (6) months (no later than February 15, 2020), and
develop and implement a safe boarding plan for submission with such
permit applications. Further, BSEE proposed that BDPL complete
approved, permitted work within twelve (12) months (no later than
August 15, 2020). BDPL timely submitted permit applications for
decommissioning of the subject offshore pipelines and platform
assets to BSEE on February 11, 2020 and the USACOE on March 25,
2020. Although we planned to decommission the offshore pipelines
and platform assets during 2020, decommissioning of these assets
has been delayed due to cash constraints associated with the
ongoing impact of COVID-19 and winter being the offseason for dive
operations in the U.S. Gulf of Mexico. We cannot currently estimate
when decommissioning may occur. In the interim, BDPL provides BSEE
with updates regarding the project’s status.
In April 2020, BSEE
issued another INC to BDPL for failure to perform the required
structural surveys for the GA-288C Platform. BDPL requested an
extension to the INC related to the structural platform surveys,
and BSEE approved BDPL’s extension request. The required
platform surveys were completed, and the INC was resolved in June
2020.
Lack of permit
approvals does not relieve BDPL of its obligations to remedy the
BSEE INCs or of BSEE’s authority to impose financial
penalties. If BDPL fails to complete decommissioning of the
offshore pipelines and platform assets and/or remedy the INCs
within a timeframe determined to be prudent by BSEE, BDPL could be
subject to regulatory oversight and enforcement, including but not
limited to failure to correct an INC, civil penalties, and
revocation of BDPL’s operator designation, which could have a
material adverse effect on our earnings, cash flows and
liquidity.
We are currently
unable to predict the outcome of the BSEE INCs. Accordingly, we
have not recorded a liability on our consolidated balance sheet as
of March 31, 2021. At both March 31, 2021 and December 31, 2020,
BDPL maintained $2.4 million in AROs related to abandonment of
these assets.
Defaults Under Secured Loan Agreements with Third
Parties
See “Notes
(1), (3), (10), and (11)” to our consolidated financial
statements for additional disclosures related to defaults under our
secured and unsecured debt agreements.
Financing Agreements and Guarantees
Indebtedness. See “Notes (1), (3),
(10), and (11)” to our consolidated financial statements for
disclosures related to Affiliate and third-party indebtedness and
defaults thereto.
Guarantees. Affiliates provided
guarantees on certain debt of Blue Dolphin and its subsidiaries.
The maximum amount of any guarantee is equal to the principal
amount and accrued interest, which amounts are reduced as payments
are made. See “Notes (1), (3), (10), and (11)” to our
consolidated financial statements for additional disclosures
related to Affiliate and third-party guarantees associated with
indebtedness and defaults thereto.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 36
|
|
Notes to Consolidated Financial Statements
|
|
|
Health, Safety and Environmental Matters
The operations of
certain Blue Dolphin subsidiaries are subject to extensive federal,
state, and local environmental, health, and safety regulations
governing, among other things, the generation, storage, handling,
use and transportation of petroleum products and hazardous
substances; the emission and discharge of materials into the
environment; waste management; characteristics and composition of
jet fuel and other products; and the monitoring, reporting and
control of air emissions. These operations also require numerous
permits and authorizations under various environmental, health, and
safety laws and regulations. Failure to obtain and comply with
these permits or environmental, health, or safety laws generally
could result in fines, penalties or other sanctions, or a
revocation of our permits.
Legal Matters
BOEM Additional Financial Assurance
(Supplemental Pipeline Bonds). To cover the various
obligations of lessees and rights-of-way holders operating in
federal waters of the Gulf of Mexico, BOEM evaluates an
operator’s financial ability to carry out present and future
obligations to determine whether the operator must provide
additional security beyond the statutory bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning pipelines and platforms at the end of production or
service activities. Once plugging and abandonment work has been
completed, the collateral backing the financial assurance is
released by BOEM.
BDPL has
historically maintained $0.9 million in financial assurance to BOEM
for the decommissioning of its trunk pipeline offshore in federal
waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
additional financial assurance totaling approximately $4.8 million
for five (5) existing pipeline rights-of-way within sixty (60)
calendar days. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. On August 9, 2019, BDPL timely filed
its statement of reasons for the appeal with the IBLA. Considering
BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested
a stay in the IBLA matter until August 2020. The Office of the
Solicitor of the U.S. Department of the Interior was agreeable to a
10-day extension while it conferred with BOEM on BDPL’s stay
request. In late October 2019, BDPL filed a motion to request the
10-day extension, which motion was subsequently granted by the
IBLA. The solicitor’s office consented to an additional
14-day extension for BDPL to file its reply, and BDPL filed a
motion to request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in an
August 15, 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning
of these assets will significantly reduce or eliminate the amount
of financial assurance required by BOEM, which may serve to
partially or fully resolve the INCs. Although we planned to
decommission the offshore pipelines and platform assets during
2020, decommissioning of these assets has been delayed due to cash
constraints associated with the ongoing impact of COVID-19 and
winter being the offseason for dive operations in the U.S. Gulf of
Mexico. We cannot currently estimate when decommissioning may
occur. In the interim, BDPL provides BOEM and BSEE with updates
regarding the project’s status.
BDPL’s
pending appeal of the BOEM INCs does not relieve BDPL of its
obligations to provide additional financial assurance or of
BOEM’s authority to impose financial penalties. There can be
no assurance that we will be able to meet additional financial
assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial
assurance (supplemental pipeline bonds) or is assessed significant
penalties under the INCs, we will experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
We are currently
unable to predict the outcome of the BOEM INCs. Accordingly, we
have not recorded a liability on our consolidated balance sheet as
of March 31, 2021. At both March 31, 2021 and December 31, 2020,
BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to
BOEM.
Other Legal Matters. We are involved in
lawsuits, claims, and proceedings incidental to the conduct of our
business, including mechanic’s liens, contract-related
disputes, and administrative proceedings. Management is in
discussion with all concerned parties and does not believe that
such matters will have a material adverse effect on our financial
position, earnings, or cash flows. However, there can be no
assurance that such discussions will result in a manageable
outcome. If Veritex and/or Pilot exercise their rights and remedies
due to defaults under our secured loan agreements, our business,
financial condition, and results of operations will be materially
adversely affected.
|
Blue Dolphin Energy
Company
|
|
March 31, 2021
│Page 37
|
|
Notes to Consolidated Financial Statements
|
|
|
BDSC Office Lease Default
On May 11, 2021,
BDSC and TR 801 Travis LLC reached an agreement to cure
BDSC’s Houston office lease default. Under the terms of the
arrangement, BDSC will pay TR 801 Travis LLC past due obligations,
including rent installments and other charges totaling
approximately $0.1 million (the “Past Due
Obligations”), in equal monthly installments beginning June
1, 2021 and continuing through the August 31, 2023 lease expiration
date. The Past Due Obligations 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
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 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
|
|
March 31, 2021
│Page 38
|