UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

  

FORM 10-Q

  

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2022

or

  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to______

 

 Commission File No. 0-15905

 

bdco_10qimg41.jpg

 BLUE DOLPHIN ENERGY COMPANY

 (Exact name of registrant as specified in its charter)

     

Delaware

 

73-1268729

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

 

 

801 Travis Street, Suite 2100, Houston, Texas

 

77002

(Address of principal executive offices)

 

(Zip Code)

713-568-4725

(Registrant’s telephone number, including area code)

 

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

 

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

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.01 per share

 

BDCO

 

OTCQX

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer 

Accelerated filer

Non-accelerated Filer

Smaller reporting company

 

Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

 

Number of shares of common stock, par value $0.01 per share outstanding as of August 15, 2022: 14,799,041

     

 

 

   

Table of Contents

 

PART I – FINANCIAL INFORMATION

 

 

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

12

 

Consolidated Balance Sheets (Unaudited)

 

12

 

Consolidated Statements of Operations (Unaudited)

 

13

 

Consolidated Statements of Cash Flows (Unaudited)

 

14

 

Notes to Consolidated Financial Statements

 

15

ITEM 2.

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

 

35

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

48

ITEM 4.

CONTROLS AND PROCEDURES

 

48

 

 

 

 

PART II – OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

49

ITEM 1A.

RISK FACTORS

 

50

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

50

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

50

ITEM 4.

MINE SAFETY DISCLOSURES

 

50

ITEM 5.

OTHER INFORMATION

 

50

ITEM 6.

EXHIBITS

 

51

 

 

 

 

SIGNATURES

 

52

   

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Table of Contents

 

Glossary of Terms

  

Glossary of Terms

 

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

 

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

 

AMT. Alternative Minimum Tax.

 

Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019, between Pilot and NPS and subsequently amended on May 9, 2019, May 10, 2019, and September 3, 2019, the last amendment being Amendment No. 1; original line of credit amount was $13.0 million; NPS repaid all obligations owed to Pilot on October 4, 2021.

 

Amended and Restated Operating Agreement. Affiliate agreement between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets; three-year term effective April 1, 2020 expiring April 1, 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.

 

ARO. Asset retirement obligations.

 

ASU. Accounting Standards Update.

 

AGO. Atmospheric gas oil, which is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.

 

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

 

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

 

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

 

BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016, between BDPL and LEH in the original principal amount of $4.0 million; interest accrues at 16% annually; guaranteed by certain BDPL property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; matured August 2018; currently in default for failure to pay past due obligations at maturity.

 

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

 

BDSC-LEH Office Sub-Lease Agreement. Office sublease agreement in Houston, Texas between BDSC and LEH; sixty-eight-month (68) term effective January 1, 2018 expiring August 31, 2023; includes 6-month rent abatement period; rent approximately $0.003 million per month

 

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

 

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

 

BDEC Term Loan Due 2051 (as modified). An EIDL dated May 4, 2021 between Blue Dolphin and the SBA in the original principal amount of $0.5 million; the note was modified in February 2022 to increase the principal amount to $2.0 million; additional principal used for working capital; interest accrues at 3.75%; maturity date May 2051; monthly principal and interest payment $0.01 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due December 2023; loan not forgivable; security includes all tangible and intangible personal property, including, but not limited to inventory, equipment, instruments, chattel paper, documents, letter of credit rights, accounts, deposit accounts, commercial tort claims, general intangibles, and as-extracted collateral; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

 

Board. Board of Directors of Blue Dolphin.

 

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Table of Contents

 

Glossary of Terms

  

BOEM. Bureau of Ocean Energy Management.

 

BSEE. Bureau of Safety and Environmental Enforcement.

 

Capacity utilization rate. A percentage measure that indicates the amount of available capacity used in the Nixon refinery. With respect to the crude distillation tower, the rate is calculated by dividing total refinery throughput or total refinery production on a bpd basis by the total capacity of the crude distillation tower (currently 15,000 bpd).

 

CARES Act. Coronavirus Aid, Relief and Economic Security Act, which was passed by Congress in March 2020, to provide economic assistance related to the onset of the COVID-19 pandemic.

 

CIP. Construction in progress.

 

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

 

Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue Dolphin has 20,000,000 shares of Common Stock authorized and 12,693,514 shares of Common Stock issued and outstanding as of June 30, 2022.

 

Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.

 

Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.

 

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

 

Crude distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process refines crude oil and other inputs into intermediate and finished petroleum products. Commonly referred to as a crude distillation unit or an atmospheric distillation unit.

 

Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products.

 

Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM, reduced crude, and AGO).

 

Distillation. The first step in the refining process whereby crude oil and condensate are heated at atmospheric pressure in the base of a distillation tower. As the temperature increases, the various compounds vaporize in succession at their various boiling points and then rise to prescribed levels within the tower per their densities, from lightest to heaviest. They then condense in distillation trays and are drawn off individually for further refining. Distillation is also used at other points in the refining process to remove impurities.

 

Downtime. Scheduled and/or unscheduled periods in which the crude distillation tower is not operating. Downtime may occur for a variety of reasons, including severe weather, power failures, and preventive maintenance.

 

EIA. Energy Information Administration.

 

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

 

EPA. Environmental Protection Agency.

 

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

 

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Glossary of Terms

  

Equipment Loan Due 2025. Installment sales contract dated October 13, 2020 between LE and Texas First in the original principal amount of $0.7 million; loan represents conversion of prior equipment rental agreement with option to purchase at maturity; interest accrues at 4.50%; maturity date October 2025; monthly principal and interest payment $0.0013 million; security includes first priority lien in the equipment (backhoe); contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

 

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

 

FASB. Financial Accounting Standards Board.

 

FDIC. Federal Deposit Insurance Corporation.

 

Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or intermediate products, that are used as basic input materials in a refining process. Feedstocks are transformed into one or more finished products.

 

Finished petroleum products. Materials or products which have received the final increments of value through processing operations, and which are being held in inventory for delivery, sale, or use.

 

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

 

GEL. GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC.

 

GNCU. Greater Nevada Credit Union.

 

Greenhouse gases. Molecules in the Earth’s atmosphere such as carbon dioxide, methane, and chlorofluorocarbons which warm the atmosphere.

 

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

 

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

 

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

 

IBLA. Interior Board of Land Appeals.

 

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

 

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

 

Intermediate petroleum products. A petroleum product that might require further processing before it is saleable to the ultimate consumer. This further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company that will process it further.

 

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

 

IRS. Internal Revenue Service.

 

Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.

 

Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel between LE and LEH; one-year term effective April 1, 2022 expiring earliest to occur of March 31, 2023, 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.

 

June LEH Note. June 2017 promissory note between Blue Dolphin and LEH; for Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.

 

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Glossary of Terms

  

Kissick Debt. Previously referred to as the ‘Notre Dame Debt; loan agreement originally entered into between LE and Notre Dame Investors, Inc. in the original principal amount of $8.0 million; debt held by John Kissick as of June 30, 2022; pursuant to a 2017 sixth amendment, the Kissick Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce LE’s obligation to GEL; under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments and security interest, as well as liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034; interest accrues at 16%; no covenants; matured January 2019; security includes subordinated deed of trust that encumbers the crude distillation tower and general assets of LE; currently in default for failure to pay past due obligations at maturity.

 

Lazarus Capital. Lazarus Capital, LLC, an affiliate of Jonathan Carroll.

 

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

 

LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; tied to payoff of LE Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LE Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.

 

LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE, Veritex, and guarantors in the original principal amount of $25.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ Prime plus 2.75%; maturity date June 2034; monthly principal and interest payment $0.2 million; purpose of loan was loan refinance and Nixon facility capital improvements; loan 100% USDA-guaranteed; security includes 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, and a $0.5 million life insurance policy on Jonathan Carroll; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default for failing to make principal and interest payments, failing to replenish a $1.0 million payment reserve account, and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.

 

LE Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due March 2023; loan not forgivable; security includes business assets (e.g., machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

 

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

 

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

 

Leasehold interest. The interest of a lessee under an oil and gas lease.

 

Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.

 

LMT. Lazarus Marine Terminal I, LLC, an affiliate of LEH.

 

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

 

LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; tied to payoff of LRM Term Loan Due 2034; fee paid equal to 2% per annum of outstanding principal balance owed under LRM Term Loan Due 2034; fees payable 50% in cash and 50% in Common Stock; Blue Dolphin accrues payment of Common Stock portion quarterly.

 

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Glossary of Terms

  

LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015, between LRM, Veritex, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ plus 2.75%; maturity date December 2034; monthly principal and interest payment $0.1 million; purpose of loan to refinance bridge loan and Nixon facility capital improvements; loan 100% USDA-guaranteed; security includes 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 a second priority lien, and all other collateral as described in the security agreements; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default for failing to make principal and interest payments and events of default under other secured loan agreements with Veritex; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.

 

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

 

March Carroll Note. March 2017 promissory note between Blue Dolphin and Lazarus Capital; reflects amounts owed to Jonathan Carroll under LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.

 

March Ingleside Note. March 2017 promissory note between Blue Dolphin and Ingleside; represents periodic working capital to Blue Dolphin through conversion of accounts payable; interest accrues at 8% compounded annually; no covenants; matured January 2019; currently in default for failure to pay past due obligations at maturity.

 

Naphtha. A refined or partly refined light distillate fraction of crude oil. Blended further or mixed with other materials it can make high-grade motor gasoline or jet fuel. It is also a generic term applied to the lightest and most volatile petroleum fractions.

 

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

 

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

 

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

 

NOL. Net operating losses.

 

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

 

NPS Term Loan Due 2031. Loan Agreement dated September 20, 2021, between NPS, GNCU, and guarantors in the original principal amount of $10.0 million; Jonathan Carroll required to provide personal guarantee; interest accrues at 5.75%; maturity date October 2031; monthly principal and interest payment $0.1 million; interest-only payments first thirty-six (36) months; first principal payment due November 2024; purpose of loan working capital; loan 90% USDA-guaranteed; security includes deed of trust lien on approximately 56 acres of land and improvements owned by LE, leasehold deed of trust lien on certain property leased by NPS from LE, and assignment of leases and rents and certain personal property; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type; currently in default; covenant violations relate to debt service coverage ratio, current ratio, and debt to net worth ratio.

 

NPS Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and the SBA in the original principal amount of $0.15 million; principal used for working capital; interest accrues at 3.75%; maturity date August 2050; monthly principal and interest payment $0.0007 million; payments deferred first thirty (30) months; interest accrues during deferral period; first payment due March 2023; loan not forgivable; security includes business assets (e.g., related machinery and equipment, furniture, fixtures, etc.) as more fully described in the security agreement; contains representations and warranties, affirmative and negative covenants, and events of default that are usual and customary for a credit facility of this type.

 

Operating days. Represents the number of days in a period in which the crude distillation tower operated. Operating days is calculated by subtracting downtime in a period from calendar days in the same period.

 

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Glossary of Terms

  

OSHA. Occupational Safety and Health Administration.

 

Other conversion costs. Represents the combination of direct labor costs and manufacturing overhead costs. These are the costs that are necessary to convert our raw materials into refined products.

 

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

 

Petroleum. A naturally occurring flammable liquid consisting of a complex mixture of hydrocarbons of various molecular weights and other liquid organic compounds. The name petroleum covers both the naturally occurring unprocessed crude oils and petroleum products that are made up of refined crude oil.

 

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

 

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

 

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

 

Product slate. Represents type and quality of products produced.

 

Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene, and mixtures thereof.

 

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

 

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

 

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

 

ROU. Right-of-use.

 

SBA. Small Business Administration.

 

SEC. Securities and Exchange Commission.

 

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

 

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

 

Significant customer. A customer who represents more than 10% of our total revenue from operations.

 

Sour crude. Crude oil containing sulfur content of more than 0.5%.

 

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

 

Sulfur. Present at various levels of concentration in many hydrocarbon deposits, such as petroleum, coal, or natural gas. Also, produced as a by-product of removing sulfur-containing contaminants from natural gas and petroleum. Some of the most commonly used hydrocarbon deposits are categorized per their sulfur content, with lower sulfur fuels usually selling at a higher, or premium, price and higher sulfur fuels selling at a lower, or discounted, price.

 

Sweet crude. Crude oil containing sulfur content of less than 0.5%.

 

Tartan. Tartan Oil LLC, an affiliate of Pilot.

 

Texas First. Texas First Rentals, LLC.

 

TCEQ. Texas Commission on Environmental Quality.

 

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

 

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Glossary of Terms

  

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

 

Topping unit. A type of petroleum refinery that engages in only the first step of the refining process -- crude distillation. A topping unit uses atmospheric distillation to separate crude oil and condensate into constituent petroleum products. A topping unit has a refinery complexity range of 1.0 to 2.0.

 

Total refinery production. Refers to the volume processed as output through the crude distillation tower. Refinery production includes finished petroleum products, such as jet fuel, and intermediate petroleum products, such as naphtha, HOBM and AGO.

 

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

 

USACOE. U.S. Army Corps of Engineers.

 

USDA. U.S. Department of Agriculture; the USDA, acting through its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes; each USDA guarantee is a full faith and credit obligation of the U.S. with the USDA guaranteeing up to 100% of the principal amount; lenders of USDA-guaranteed loans are required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record; both the guaranteed and unguaranteed portions of the loan are to be secured by the same collateral with equal lien priority; the USDA-guaranteed portion of the loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion.

 

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

 

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

 

WHO. World Health Organization.

 

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

 

XBRL. eXtensible Business Reporting Language.

 

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

 

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Important Information Regarding Forward Looking Statements

   

Important Information Regarding Forward-Looking Statements

 

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

 

Business and Industry

 

·

Our going concern status.

·

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

·

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

·

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

·

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

·

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

·

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

·

Affiliate Common Stock ownership and transactions that could cause conflicts of interest.

·

Operational hazards inherent in transporting, processing, and storing crude oil and condensate and refined products.

·

Geographical concentration of our assets and customers in West Texas.

·

Competition from companies with more significant financial and other resources.

·

Environmental laws and regulations that may require us to make substantial capital improvements to remain compliant or remediate current or future contamination that could lead to material liabilities.

·

Strict laws and regulations regarding personnel and process safety.

·

Market changes in insurance that impact premium costs and available coverages.

·

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

·

Industry technological developments that outpace our ability to keep up.

·

Actual or potential terrorist threats, activist incidents, cyber-security breaches, or acts of war that could affect our business.

·

Actual or potential security threats.

·

Uncertainty regarding the impact of current and future sanctions imposed by governments and other authorities, including the United States, the European Union, and the United Kingdom in response to the conflict between Russia and Ukraine.

·

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

  

Downstream and Midstream Operations

 

·

Commodity price and refined product demand volatility, which can adversely affect our refining margins.

·

Crude oil, other feedstocks, and fuel and utility services price volatility.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 10

   

 

Table of Contents

 

Important Information Regarding Forward Looking Statements

   

·

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

·

Equipment failure and maintenance, which lead to operational downtime.

·

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

·

Adverse changes in operational cash flow and working capital, shortfalls for which Affiliates may not fund.

·

Critical personnel loss, labor actions, and workplace safety issues.

·

Market share loss, an unfavorable financial condition shift, or the bankruptcy or insolvency of a significant customer.

·

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

·

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

·

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

·

Severe weather or other climate-related events that affect our facilities or those of our vendors, suppliers, or customers.

·

Assessment of penalties by regulatory agencies, such as the TCEQ, for alleged violations.

·

Regulatory changes and other measures for the reduction of greenhouse gas emissions, including carbon dioxide.

·

Our ability to effect and integrate potential acquisitions.

 

Pipeline and Facilities and Oil and Gas Assets

 

·

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

·

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

·

Our estimates of future AROs related to our pipeline and facilities assets, which may increase.

 

Common Stock

 

·

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

·

Declines in our stock price due to share sales.

·

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

·

The potential sale of shares in accordance with Rule 144, which may adversely affect the market.

·

The lack of dividend payments.

·

Failure to maintain adequate internal controls under Section 404(a) of the Sarbanes-Oxley Act.

 

See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

 

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

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 11

  

 

Table of Contents

 

Financial Statements

  

PART I – FINANCIAL INFORMATION

  

ITEM 1.   FINANCIAL STATEMENTS

 

Consolidated Balance Sheets (Unaudited)

  

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands except share amounts)

 

 

 

 

 

 

 

 

ASSETS

 

 

 

 

 

 

CURRENT ASSETS

 

 

 

 

 

 

Cash and cash equivalents

 

$ 4

 

 

$ 9

 

Restricted cash

 

 

-

 

 

 

48

 

Accounts receivable, net

 

 

321

 

 

 

126

 

Prepaid expenses and other current assets

 

 

3,452

 

 

 

2,433

 

Deposits

 

 

110

 

 

 

110

 

Inventory

 

 

16,855

 

 

 

3,098

 

Total current assets

 

 

20,742

 

 

 

5,824

 

 

 

 

 

 

 

 

 

 

LONG-TERM ASSETS

 

 

 

 

 

 

 

 

Total property and equipment, net

 

 

58,672

 

 

 

59,923

 

Operating lease right-of-use assets, net

 

 

243

 

 

 

332

 

Surety bonds

 

 

230

 

 

 

230

 

Total long-term assets

 

 

59,145

 

 

 

60,485

 

 

 

 

 

 

 

 

 

 

TOTAL ASSETS

 

$ 79,887

 

 

$ 66,309

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)

 

 

 

 

 

 

 

 

CURRENT LIABILITIES

 

 

 

 

 

 

 

 

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

 

$ 43,055

 

 

$ 42,953

 

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

 

 

13,635

 

 

 

20,042

 

Interest payable

 

 

8,810

 

 

 

8,689

 

Interest payable, related party (in default)

 

 

3,774

 

 

 

3,454

 

Accounts payable

 

 

1,762

 

 

 

2,548

 

Accounts payable, related party

 

 

155

 

 

 

155

 

Current portion of lease liabilities

 

 

226

 

 

 

215

 

Income taxes payable

 

 

156

 

 

 

-

 

Accrued expenses and other current liabilities

 

 

7,086

 

 

 

6,225

 

Total current liabilities

 

 

78,659

 

 

 

84,281

 

 

 

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

 

 

 

Asset retirement obligations

 

 

3,527

 

 

 

3,461

 

Long-term lease liabilities, net of current

 

 

40

 

 

 

156

 

Unearned contract renewal income, net of current

 

 

975

 

 

 

1,200

 

Long-term debt, net of current portion

 

 

2,330

 

 

 

838

 

Total long-term liabilities

 

 

6,872

 

 

 

5,655

 

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES

 

 

85,531

 

 

 

89,936

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 15)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

Common stock (par value $0.01), 20,000,000 shares authorized; 14,799,041 shares issued

 

 

 

 

 

 

 

 

at June 30, 2022 and 12,693,514 shares issued at December 31, 2021)(1)

 

 

148

 

 

 

127

 

Additional paid-in capital

 

 

39,531

 

 

 

38,457

 

Accumulated deficit

 

 

(45,323 )

 

 

(62,211 )

TOTAL STOCKHOLDERS' DEFICIT

 

 

(5,644 )

 

 

(23,627 )

 

 

 

 

 

 

 

 

 

TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT

 

$ 79,887

 

 

$ 66,309

 

 

(1)  Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At both June 30, 2022 and December 31, 2021, there were no shares of preferred stock issued and outstanding.

 

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

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 12

 

 

Table of Contents

 

Financial Statements

   

Consolidated Statements of Operations (Unaudited)

    

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

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

 

REVENUE FROM OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ 135,208

 

 

$ 68,518

 

 

$ 244,965

 

 

$ 127,001

 

Tolling and terminaling

 

 

914

 

 

 

923

 

 

 

1,840

 

 

 

1,853

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenue from operations

 

 

136,122

 

 

 

69,441

 

 

 

246,805

 

 

 

128,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Crude oil, fuel use, and chemicals

 

 

116,321

 

 

 

68,499

 

 

 

218,714

 

 

 

126,282

 

Other conversion costs

 

 

2,988

 

 

 

1,967

 

 

 

4,672

 

 

 

3,807

 

Total cost of goods sold

 

 

119,309

 

 

 

70,466

 

 

 

223,386

 

 

 

130,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit (loss)

 

 

16,813

 

 

 

(1,025 )

 

 

23,419

 

 

 

(1,235 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

COST OF OPERATIONS

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH operating fee, related party

 

 

184

 

 

 

131

 

 

 

310

 

 

 

255

 

Other operating expenses

 

 

57

 

 

 

50

 

 

 

68

 

 

 

104

 

General and administrative expenses

 

 

647

 

 

 

612

 

 

 

1,271

 

 

 

1,270

 

Depletion, depreciation, and amortization

 

 

699

 

 

 

693

 

 

 

1,400

 

 

 

1,386

 

Accretion of asset retirement obligations

 

 

33

 

 

 

-

 

 

 

66

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total cost of operations

 

 

1,620

 

 

 

1,486

 

 

 

3,115

 

 

 

3,015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from operations

 

 

15,193

 

 

 

(2,511 )

 

 

20,304

 

 

 

(4,250 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Easement, interest and other income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

Interest and other expense

 

 

(1,668 )

 

 

(1,588 )

 

 

(3,260 )

 

 

(3,068 )

Gain on extinguishment of debt

 

 

-

 

 

 

-

 

 

 

-

 

 

 

43

 

Total other income (expense)

 

 

(1,668 )

 

 

(1,588 )

 

 

(3,260 )

 

 

(3,023 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

13,525

 

 

 

(4,099 )

 

 

17,044

 

 

 

(7,273 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(115 )

 

 

-

 

 

 

(156 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 13,410

 

 

$ (4,099 )

 

$ 16,888

 

 

$ (7,273 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$ 0.97

 

 

$ (0.32 )

 

$ 1.27

 

 

$ (0.57 )

Diluted

 

$ 0.97

 

 

$ (0.32 )

 

$ 1.27

 

 

$ (0.57 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

13,850,397

 

 

 

12,693,514

 

 

 

13,275,152

 

 

 

12,693,514

 

Diluted

 

 

13,850,397

 

 

 

12,693,514

 

 

 

13,275,152

 

 

 

12,693,514

 

     

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

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 13

 

 

Table of Contents

 

Financial Statements

 

Consolidated Statements of Cash Flows(Unaudited)

 

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

OPERATING ACTIVITIES

 

 

 

 

 

 

Net income (loss)

 

$ 16,888

 

 

$ (7,273 )

Adjustments to reconcile net income (loss) to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depletion, depreciation, and amortization

 

 

1,400

 

 

 

1,386

 

Accretion of asset retirement obligations

 

 

66

 

 

 

-

 

Amortization of debt issue costs

 

 

102

 

 

 

64

 

Guaranty fees paid in kind

 

 

304

 

 

 

304

 

Related-party interest expense paid in kind

 

 

401

 

 

 

646

 

Deferred revenues and expenses

 

 

(225 )

 

 

(97 )

Loss on issuance of shares

 

 

235

 

 

 

-

 

Gain on extinguishment of debt

 

 

-

 

 

 

(43 )

Changes in operating assets and liabilities

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(195 )

 

 

151

 

Prepaid expenses and other current assets

 

 

(1,019 )

 

 

1,603

 

Deposits and other assets

 

 

-

 

 

 

14

 

Inventory

 

 

(13,757 )

 

 

29

 

Accounts payable, accrued expenses, and other liabilities

 

 

673

 

 

(450 )

Net cash provided by (used in) operating activities

 

 

4,873

 

 

 

(3,666 )

 

 

 

 

 

 

 

 

 

INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Capital expenditures

 

 

(46 )

 

 

-

 

Net cash used in investing activities

 

 

(46 )

 

 

-

 

 

 

 

 

 

 

 

 

 

FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Proceeds from debt

 

 

1,500

 

 

 

500

 

Payments on debt principal

 

 

(8 )

 

 

(9 )

Net activity on related-party debt

 

 

(6,372 )

 

 

2,121

 

Net cash provided by (used in) financing activities

 

 

(4,880 )

 

 

2,612

 

Net change in cash, cash equivalents, and restricted cash

 

 

(53 )

 

 

(1,054 )

 

 

 

 

 

 

 

 

 

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

 

 

57

 

 

 

1,111

 

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

 

$ 4

 

 

$ 57

 

 

 

 

 

 

 

 

 

 

Supplemental Information:

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Financing of line of credit via related-party debt

 

$ -

 

 

$ 900

 

Financing of guaranty fees via long-term debt, related party

 

$ 304

 

 

$ 300

 

Issuance of shares for services and/or to extinguish debt

 

$ 860

 

 

$ -

 

Related-party receivables settled against related-party provided working capital

 

$ 9,523

 

 

$ 2,790

 

Line credit financed by offsetting tank leases less interest

 

$ -

 

 

$ 289

 

Interest paid

 

$ 1,534

 

 

$ 542

 

Income taxes paid (refunded)

 

$ -

 

 

$ -

 

     

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

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 14

 

 

Table of Contents

  

Notes to Consolidated Financial Statements

  

Notes to Consolidated Financial Statements

   

(1) Organization

 

Overview

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

 

Assets are organized in two business segments: 'refinery operations' (owned by LE) and 'tolling and terminaling services' (owned by LRM and NPS). 'Corporate and other' includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.

 

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

 

Affiliates

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

 

Going Concern

Management determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include defaults under secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits, as discussed more fully below. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments that might result from this uncertainty. Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements, restructuring debt obligations, or filing bankruptcy.

 

Defaults Under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. As a result, the debt associated with these obligations was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2022 and December 31, 2021. See “Notes (3) and (10)” for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.

 

Third-Party Defaults

·

Veritex Loans – As of the filing date of this report, LE and LRM were in default under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for failing to make required monthly principal and interest payments and failing to satisfy financial covenants. In addition, LE was in default under the LE Term Loan Due 2034 for failing to replenish a $1.0 million payment reserve account. In a letter to LE and LRM dated August 2, 2022, Veritex affirmed existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for failing to make payments of principal and interest when due and demanded payment of all past due amounts owed. In addition, Veritex reserved all of its rights and noted that Veritex may, at its discretion, exercise all remedies available to it, which may include accelerating the loan, requesting appointment of a receiver, initiating foreclosure proceedings, or filing a lawsuit against obligors.

 

 

·

GNCU Loan – As of the filing date of this report, NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy financial covenants.

 

 

·

Kissick Debt – Under a 2015 subordination agreement, John Kissick agreed to subordinate his 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, LE has made no payments under the subordinated Kissick Debt. To date, Mr. Kissick has taken no action due to the non-payment. As of the filing date of this report, there were defaults under the Kissick Debt related to payment of past due obligations at maturity.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 15

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on the trading prices of our Common Stock and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders regarding defaults and continues to actively discuss potential restructuring and refinancing opportunities. See “Note (10)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.

 

Related-Party Defaults

·

Notes and Loan Agreement – As of the filing date of this report, Blue Dolphin was in default concerning past due payment obligations under the March Carroll Note, March Ingleside Note, and June LEH Note. As of the same date, BDPL was also in default related to past due payment obligations under the BDPL-LEH Loan Agreement. 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 assets, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits.

  

Substantial Current Debt

Excluding accrued interest, we had current debt of $56.7 million and $63.0 million, respectively, as of June 30, 2022 and December 31, 2021. Current debt consists of bank debt, investor debt, and related party debt. Substantial current debt is primarily the result of secured loan agreements being in default. As a result, these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2022 and December 31, 2021.

 

Margin Volatility. Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable refining margins may have a material adverse effect on our earnings, cash flows, and liquidity.

 

In March 2020, the WHO declared the outbreak of COVID-19 a pandemic, and thereafter the U.S. economy experienced pronounced adverse effects as a result of the global outbreak. Considerable progress was made to combat COVID-19 and its multiple variants. While domestic demand and refining margins improved during the first half of 2022, the United States has seen a resurgence of COVID-19 cases during the same period, slightly impacting our personnel. The future impact of COVID-19 on our operational and financial performance depends on further developments, including global and domestic vaccination rates, variant outbreaks, antiviral usage, and social distancing. Overall, we expect market volatility associated with COVID-19 to decrease over time as the disease becomes an ongoing part of the world-wide infectious-disease landscape.

 

In February 2022, Russia invaded neighboring Ukraine. The conflict caused turmoil in global commodity markets, injecting even more uncertainty into a worldwide economy recovering from the effects of COVID-19. As Russia is a major global producer and exporter of crude oil, sanctions imposed on Russia resulted in global tightening of refined product inventories and crude stocks, which caused refining margins to widen significantly. These conditions contributed to a significant improvement in our refining operating results in the three and six months of 2022 compared to the same periods a year earlier. However, in the long term, the impact of the Russian-Ukrainian conflict on our financial position and results of operations depends, in part, on the duration of the conflict and the duration and complexity of sanctions.

 

The COVID-19 pandemic and the Russian conflict with Ukraine continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and future prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.

 

Historic Net Losses and Working Capital and Equity Deficits

Net Income (Losses). We had net income of $13.4 million for the three months ended June 30, 2022 compared to a net loss of $4.1 million for the three months ended June 30, 2021. We had net income of $16.9 million for the six months ended June 30, 2022 compared to a net loss of $7.3 million for the six months ended June 30, 2021. The significant improvement for the three and six-month comparative periods resulted from improved refining margins associated with supply contraction and strong demand. While refining margins improved significantly for both three- and six-month periods ended June 30, 2022, the general outlook for the remainder of the year remains unclear, and we can provide no assurances that refining margins and demand will remain at current levels.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 16

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

Working Capital Deficits. We had $57.9 million and $78.5 million in working capital deficits at June 30, 2022 and December 31, 2021, respectively. Excluding the current portion of long-term debt, we had $1.2 million and $15.5 million in working capital deficits at June 30, 2022 and December 31, 2021, respectively. The significant improvement in working capital between the periods was primarily due to favorable refining margins and increased gross profit.

 

Cash and cash equivalents totaled $0.004 million and $0.01 million at June 30, 2022 and December 31, 2021, respectively. Restricted cash (current portion) totaled $0 and $0.05 million at June 30, 2022 and December 31, 2021, respectively.

 

Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.

 

Operating Risks

Successful execution of our business strategy depends on several critical factors, including having adequate working capital to meet contractual, operational, regulatory, and safety needs and having favorable margins on refined products. The Russian conflict with Ukraine and the COVID-19 pandemic continue to evolve, and the extent to which these events may impact our business, financial condition, liquidity, results of operations, and prospects will depend highly on future developments, which are very uncertain and cannot be predicted with confidence.

 

Management continues to take steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a volatile commodity price environment. Mitigation steps include: adjusting throughput and production based on market conditions, optimizing receivables and payables by prioritizing payments, optimizing inventory levels based on demand, monitoring discretionary spending, and delaying capital expenditures. To safeguard personnel, we adopted remote working where possible and social distancing, mask-wearing, and other site-specific precautionary measures where on-site operations are required. We also continue to incentivize personnel to receive the COVID-19 vaccine and boosters.

 

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

 

(2) Principles of Consolidation and Significant Accounting Policies

 

Basis of Presentation

The accompanying 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, 2021 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, 2021 as filed with the SEC. Operating results for the three months and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022, or for any other period.

 

Significant Accounting Policies

The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.

 

Use of Estimates. The preparation of our financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and the related disclosures. Actual results could differ from those estimates. The ongoing COVID-19 pandemic and related governmental responses, volatility in commodity prices, and severe weather resulting from climate change have impacted and likely will continue to impact our business. We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us as of June 30, 2022 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, AROs, inventory and related reserves, deferred tax asset reserves, and the carrying value of long-lived assets.

  

Blue Dolphin Energy Company

 June 30, 2022

 Page 17

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

Cash, Cash Equivalents, and Restricted Cash. 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, current portion reflects amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034.

 

The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:

   

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$ 4

 

 

$ 9

 

Restricted cash

 

 

-

 

 

 

48

 

 

 

 

4

 

 

 

57

 

   

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 at both June 30, 2022 and December 31, 2021.

 

Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at the lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.

 

Property and Equipment.

Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.

 

Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016. Our pipelines and facilities assets are inactive. Decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.

 

Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties have been fully impaired since 2011.

 

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

 

Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 18

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

 

For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization expense;’ we record interest expense on the income statement in ‘interest and other expense.’

 

Revenue Recognition.

Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements, the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately identifiable refined product load.

 

We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from customers and remitted to governmental authorities in revenue.

 

Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.

 

We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement. We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

 

Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer. The fixed cost under the customer’s tank storage agreement does not include ancillary service fees. We consider ancillary services as a separate performance obligation under the tank storage agreement. We satisfy the performance obligation and recognize the associated fee when we complete the requested service.

 

Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.

 

Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a straight-line basis over the term of the supply contract.

 

Income Taxes. We determine deferred income taxes based on: (i) temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities and (ii) operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which we expect the differences to reverse. Our provision for income taxes consists of our current tax liability and the change in deferred income tax assets and liabilities.

 

Management uses significant judgment in evaluating uncertain tax positions and determining the provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to assess the realizability of deferred tax assets. We weigh whether there is a more than 50% probability of realizing a portion or all the deferred tax assets. Realization depends on the generation of future taxable income before the expiration of any NOL carryforwards. We record a valuation allowance against deferred income tax assets if there is a more than 50% probability of not realizing some portion of the asset. We recognize an uncertain tax positions benefit in our financial statements if deferred tax assets meet a minimum recognition threshold. First, we determine whether there is a more than 50% probability that our income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If we meet the criteria, we record a benefit in the financial statements equal to the largest amount greater than 50% likely to be realized upon settlement with taxing authorities.

 

A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended June 30, 2022. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of June 30, 2022 and December 31, 2021. In addition, we have NOL carryforwards that remain available for future use. See “Note (13)” to our consolidated financial statements for more information related to income taxes.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 19

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we re-assess our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be necessary.

 

Commodity price market volatility associated with the COVID-19 pandemic and the Russian conflict with Ukraine could affect the value of certain of our long-lived assets. Management evaluated refinery and facilities assets for impairment as of December 31, 2021. We did not record any impairment of our long-lived assets for the periods presented. However, impairment may be required in the future if losses continue to be material, or as new opportunities arise, such as reconfiguration of the Nixon refinery into a renewable fuels facility.

 

Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.

 

Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.

 

Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (11)” to our consolidated financial statements for additional information related to AROs.

 

Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not currently have issued options, warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (14)” to our consolidated financial statements for additional information related to EPS.

 

New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including modifications to non-authoritative SEC content. During the three months ended June 30, 2022, we did not adopt any ASUs.

 

New Pronouncements Issued, Not Yet Effective.

 

No new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.

  

(3)   Related-Party Transactions

 

Affiliate Operational Agreements Summary

Blue Dolphin and certain of its subsidiaries are parties to several operational agreements with Affiliates, including the Amended and Restated Operating Agreement, BDSC-LEH Office Sub-Lease Agreement, and the Jet Fuel Sales Agreement.

 

Working Capital

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

 

Related-Party Financial Impact

Consolidated Balance Sheets.

 

Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both June 30, 2022 and December 31, 2021.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 20

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

LEH

 

 

 

 

 

 

June LEH Note (in default)

 

$ 6,600

 

 

$ 12,672

 

BDPL-LEH Loan Agreement (in default)

 

 

7,774

 

 

 

7,454

 

LEH Total

 

 

14,374

 

 

 

20,126

 

Ingleside

 

 

 

 

 

 

 

 

March Ingleside Note (in default)

 

 

1,089

 

 

 

1,066

 

Jonathan Carroll

 

 

 

 

 

 

 

 

March Carroll Note (in default)

 

 

1,946

 

 

 

2,304

 

 

 

 

17,409

 

 

 

23,496

 

 

 

 

 

 

 

 

 

 

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

 

 

(13,635 )

 

 

(20,042 )

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

 

 

(3,774 )

 

 

(3,454 )

 

 

$ -

 

 

$ -

 

       

As indicated in the table below, the $6.0 million reduction associated with the June LEH Note reflects transactions related to the Jet Fuel Sales Agreement and the Amended and Restated Operating Agreement.

 

 

 

June LEH Note

 

 

 

(in default)

 

 

 

(in thousands)

 

 

 

 

 

Balance at December 31, 2021

 

$ 12,672

 

 

 

 

 

 

Related-party receivables settled against related-party provided working capital

 

 

(9,523 )

Blue Dolphin operating costs and related LEH management fee under

 

 

3,451

 

Amended and Restated Operating Agreement

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

$ 6,600

 

         

The $0.4 million reduction associated with the March Carroll Note reflects payment in common stock to Jonathan Carroll pursuant to the LE Amended and Restated Guaranty Fee Agreement and the LRM Amended and Restated Guaranty Fee Agreement. See “Note (15)” to our consolidated financial statements for additional information regarding the share issuance.

 

See “Notes (1) and (10)” 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.

 

Consolidated Statements of Operations.

 

Total revenue from operations.

    

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

Refinery operations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LEH

 

$ 51,337

 

 

 

37.7 %

 

$ 20,979

 

 

 

30.2 %

 

$ 85,855

 

 

 

34.8 %

 

$ 37,059

 

 

 

28.8 %

Third-Parties

 

 

83,871

 

 

 

61.6 %

 

 

47,539

 

 

 

68.5 %

 

 

159,110

 

 

 

64.5 %

 

 

89,942

 

 

 

69.8 %

Tolling and terminaling

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Third-Parties

 

 

914

 

 

 

0.7 %

 

 

923

 

 

 

1.3 %

 

 

1,840

 

 

 

0.7 %

 

 

1,853

 

 

 

1.4 %

 

 

$ 136,122

 

 

 

100.0 %

 

$ 69,441

 

 

 

100.0 %

 

$ 246,805

 

 

 

100.0 %

 

$ 128,854

 

 

 

100.0 %

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 21

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

Interest expense.

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

(in thousands)

 

Jonathan Carroll

 

 

 

 

 

 

 

 

 

 

 

 

Guaranty Fee Agreements

 

 

 

 

 

 

 

 

 

 

 

 

First Term Loan Due 2034 (in default)

 

$ 108

 

 

$ 108

 

 

$ 216

 

 

$ 216

 

Second Term Loan Due 2034 (in default)

 

 

45

 

 

 

45

 

 

 

90

 

 

 

90

 

March Carroll Note (in default)

 

 

29

 

 

 

32

 

 

 

61

 

 

 

61

 

LEH

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BDPL-LEH Loan Agreement (in default)

 

 

160

 

 

 

160

 

 

 

320

 

 

 

320

 

June LEH Note (in default)

 

 

81

 

 

 

215

 

 

 

296

 

 

 

397

 

Ingleside

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March Ingleside Note (in default)

 

 

14

 

 

 

14

 

 

 

28

 

 

 

28

 

 

 

$ 437

 

 

$ 574

 

 

$ 1,011

 

 

$ 1,112

 

   

Other. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended June 30, 2022 and 2021, respectively. BDSC received sublease income from LEH totaling $0.02 million for both six-month periods ended June 30, 2022 and 2021, respectively.

 

The LEH operating fee, related party increased to approximately $0.2 million for the three months ended June 30, 2022 compared to $0.1 million for the three months ended June 30, 2021. The increase coincided with increased cost of goods sold during the same periods. The LEH operating fee, related party was relatively flat at $0.3 million for both six-month periods ended June 30, 2022 and 2021, respectively.

 

(4)Revenue and Segment Information

 

We have two reportable business segments: (i) refinery operations, focused on refining and marketing petroleum products at the Nixon facility, and (ii) tolling and terminaling, focused on tolling and storing petroleum products for third parties at the Nixon facility. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.

 

Revenue from Contracts with Customers

Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this presentation is beneficial to users of our financial information.

 

Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance sheets.

 

Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.

 

Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.

 

Remainder of Page Intentionally Left Blank

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 22

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

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

 

 

 

 Three Months Ended

 

 

 Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 (in thousands)

 

 

(in thousands)

 

Net revenue (excluding intercompany fees and sales)

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ 135,208

 

 

$ 68,518

 

 

$ 244,965

 

 

$ 127,001

 

Tolling and terminaling

 

 

914

 

 

 

923

 

 

 

1,840

 

 

 

1,853

 

Total net revenue

 

 

136,122

 

 

 

69,441

 

 

 

246,805

 

 

 

128,854

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Intercompany fees and sales

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(675 )

 

 

(581 )

 

 

(1,328 )

 

 

(1,147 )

Tolling and terminaling

 

 

675

 

 

 

581

 

 

 

1,328

 

 

 

1,147

 

Total intercompany fees

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operation costs and expenses(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(118,736 )

 

 

(70,054 )

 

 

(222,194 )

 

 

(129,343 )

Tolling and terminaling

 

 

(573 )

 

 

(412 )

 

 

(1,192 )

 

 

(746 )

Corporate and other

 

 

(57 )

 

 

(50 )

 

 

(68 )

 

 

(104 )

Total operation costs and expenses

 

 

(119,366 )

 

 

(70,516 )

 

 

(223,454 )

 

 

(130,193 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Segment contribution margin (deficit)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

15,797

 

 

 

(2,117 )

 

 

21,443

 

 

 

(3,489 )

Tolling and terminaling

 

 

1,016

 

 

 

1,092

 

 

 

1,976

 

 

 

2,254

 

Corporate and other

 

 

(57 )

 

 

(50 )

 

 

(68 )

 

 

(104 )

Total segment contribution margin (deficit)

 

 

16,756

 

 

 

(1,075 )

 

 

23,351

 

 

 

(1,339 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

General and administrative expenses(2)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(313 )

 

 

(265 )

 

 

(595 )

 

 

(566 )

Tolling and terminaling

 

 

(53 )

 

 

(68 )

 

 

(123 )

 

 

(136 )

Corporate and other

 

 

(498 )

 

 

(410 )

 

 

(929 )

 

 

(823 )

Total general and administrative expenses

 

 

(864 )

 

 

(743 )

 

 

(1,647 )

 

 

(1,525 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(306 )

 

 

(302 )

 

 

(613 )

 

 

(604 )

Tolling and terminaling

 

 

(342 )

 

 

(340 )

 

 

(684 )

 

 

(680 )

Corporate and other

 

 

(51 )

 

 

(51 )

 

 

(103 )

 

 

(102 )

Total depreciation and amortization

 

 

(699 )

 

 

(693 )

 

 

(1,400 )

 

 

(1,386 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and other non-operating expenses, net(3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

(703 )

 

 

(708 )

 

 

(1,420 )

 

 

(1,306 )

Tolling and terminaling

 

 

(409 )

 

 

(448 )

 

 

(827 )

 

 

(900 )

Corporate and other

 

 

(556 )

 

 

(432 )

 

 

(1,013 )

 

 

(817 )

Total interest and other non-operating expenses, net

 

 

(1,668 )

 

 

(1,588 )

 

 

(3,260 )

 

 

(3,023 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) before income taxes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

 

14,475

 

 

 

(3,392 )

 

 

18,815

 

 

 

(5,965 )

Tolling and terminaling

 

 

212

 

 

 

236

 

 

 

342

 

 

 

538

 

Corporate and other

 

 

(1,162 )

 

 

(943 )

 

 

(2,113 )

 

 

(1,846 )

Total income (loss) before income taxes

 

 

13,525

 

 

 

(4,099 )

 

 

17,044

 

 

 

(7,273 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income tax expense

 

 

(115 )

 

 

-

 

 

 

(156 )

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 13,410

 

 

$ (4,099 )

 

$ 16,888

 

 

$ (7,273 )

     

(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 and accretion of asset retirement obligations.

 

(3) Corporate and other within interest and other non-operating expenses, net primarily reflects interest expense for the LE Amended and Restated Guaranty Fee Agreement, LRM Amended and Restated Guaranty Fee Agreement, June LEH Note, March Carroll Note, and March Ingleside Note.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 23

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

 

 

 Three Months Ended

 

 

 Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

 (in thousands)

 

 

(in thousands)

 

Capital expenditures

 

 

 

 

 

 

 

 

 

 

 

 

Refinery operations

 

$ (46 )

 

$ -

 

 

$ (46 )

 

$ -

 

Tolling and terminaling

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Corporate and other

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Total capital expenditures

 

$ (46 )

 

$ -

 

 

$ (46 )

 

$ -

 

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 (in thousands)

 

Identifiable assets

 

 

 

 

 

 

Refinery operations

 

$ 61,272

 

 

$ 47,047

 

Tolling and terminaling

 

 

17,320

 

 

 

17,594

 

Corporate and other

 

 

1,295

 

 

 

1,668

 

Total identifiable assets

 

$ 79,887

 

 

$ 66,309

 

 

(5) Concentration of Risk

 

Bank Accounts

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At June 30, 2022 and December 31, 2021, our cash balances (including restricted cash) did not exceed the FDIC insurance limit per depositor.

 

Key Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Either party may provide the other with notice of non-renewal at least 60 days before the expiration of any renewal term. As of June 30, 2022, we received approximately 11.2 million bbls, or 45.0%, of the contracted total volume under the Crude Supply Agreement.

 

Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.

 

Our financial health has been materially and adversely affected by defaults in our secured loan agreements, substantial current debt, margin volatility, historical net losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient amounts to meet our needs.

 

Significant Customers

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

 

Three Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

2

 

 

 

64 %

 

$ 0

 

June 30, 2021

 

 

3

 

 

 

75 %

 

$ 0

 

 

Six Months Ended

 

Number Significant

Customers

 

 

% Total Revenue from Operations

 

 

Portion of Accounts Receivable

at June 30,

 

 

 

 

 

 

 

 

 

 

 

June 30, 2022

 

 

2

 

 

 

59 %

 

$ 0

 

June 30, 2021

 

 

4

 

 

 

86 %

 

$ 0

 

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 24

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms. For the three months ended June 30, 2022 and 2021, the Affiliate accounted for approximately 38% and 30% of total revenue from operations, respectively. For the six months ended June 30, 2022 and 2021, the Affiliate accounted for approximately 35% and 29% of total revenue from operations, respectively. The Affiliate represented $0 in accounts receivable at both June 30, 2022 and 2021, respectively.

 

Concentration of Customers. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or negatively, which impacts our overall exposure to credit risk. Economic changes include the uncertainties related to the Russian invasion of Ukraine, the COVID-19 pandemic, and the associated volatility in the global commodities 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 other countries, such as low sulfur diesel to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

 

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands, except percent amounts)

 

 

(in thousands, except percent amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

LPG mix

 

$ -

 

 

 

0 %

 

$ 6

 

 

 

0 %

 

$ -

 

 

 

0 %

 

$ 12

 

 

 

0 %

Naphtha

 

 

27,382

 

 

 

22.3 %

 

 

15,264

 

 

 

22.3 %

 

 

55,136

 

 

 

23.2 %

 

 

29,488

 

 

 

23.2 %

Jet fuel

 

 

51,337

 

 

 

30.6 %

 

 

20,979

 

 

 

30.6 %

 

 

85,855

 

 

 

29.2 %

 

 

37,059

 

 

 

29.2 %

HOBM

 

 

20,827

 

 

 

23.4 %

 

 

16,012

 

 

 

23.4 %

 

 

43,902

 

 

 

24.9 %

 

 

31,675

 

 

 

24.9 %

AGO

 

 

35,662

 

 

 

23.7 %

 

 

16,257

 

 

 

23.7 %

 

 

60,072

 

 

 

22.7 %

 

 

28,767

 

 

 

22.7 %

 

 

$ 135,208

 

 

 

100.0 %

 

$ 68,518

 

 

 

100.0 %

 

$ 244,965

 

 

 

100.0 %

 

$ 127,001

 

 

 

100.0 %

    

An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (15)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements, as well as “Part I, Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 and our subsequent filings as filed with the SEC for additional disclosures related to Affiliate risk.

 

(6) Prepaid Expenses and Other Current Assets

 

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

      

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Prepaid insurance

 

$ 1,982

 

 

$ 953

 

Prepaid crude oil and condensate

 

 

1,281

 

 

 

1,368

 

Other prepaids

 

 

124

 

 

 

36

 

Prepaid easement renewal fees

 

 

65

 

 

 

76

 

 

 

$ 3,452

 

 

$ 2,433

 

 

(7) Inventory

 

Inventory as of the dates indicated consisted of the following:

   

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

HOBM

 

$ 12,113

 

 

$ 1,749

 

Naphtha

 

 

3,082

 

 

 

189

 

Crude oil and condensate

 

 

1,241

 

 

 

660

 

AGO

 

 

222

 

 

 

338

 

Chemicals

 

 

142

 

 

 

121

 

Propane

 

 

38

 

 

 

27

 

LPG mix

 

 

17

 

 

 

14

 

 

 

$ 16,855

 

 

$ 3,098

 

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 25

  

 

Table of Contents

 

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:

  

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Refinery and facilities

 

$ 72,629

 

 

$ 72,583

 

Land

 

 

566

 

 

 

566

 

Other property and equipment

 

 

903

 

 

 

903

 

 

 

 

74,098

 

 

 

74,052

 

 

 

 

 

 

 

 

 

 

Less:  Accumulated depreciation and amortiation

 

 

(19,092 )

 

 

(17,795 )

 

 

 

55,006

 

 

 

56,257

 

 

 

 

 

 

 

 

 

 

CIP

 

 

3,666

 

 

 

3,666

 

 

 

$ 58,672

 

 

$ 59,923

 

    

(9) Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities as of the dates indicated consisted of the following:

     

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Unearned revenue from contracts with customers

 

$ 4,347

 

 

$ 4,388

 

Insurance

 

 

1,096

 

 

 

273

 

Accrued fines and penalties

 

 

407

 

 

 

407

 

Unearned contract renewal income

 

 

400

 

 

 

400

 

Taxes payable

 

 

264

 

 

 

136

 

Other payable

 

 

224

 

 

 

218

 

Board of director fees payable

 

 

175

 

 

 

230

 

Customer deposits

 

 

173

 

 

 

173

 

 

 

$ 7,086

 

 

$ 6,225

 

 

(10) Third-Party Long-Term Debt

 

Outstanding Principal, Debt Issue Costs, and Accrued Interest

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

$ 23,760

 

 

$ 23,789

 

LRM Term Loan Due 2034 (in default)

 

 

9,694

 

 

 

9,861

 

Kissick Debt (in default)

 

 

10,608

 

 

 

10,210

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

9,976

 

 

 

10,094

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

2,044

 

 

 

512

 

LE Term Loan Due 2050

 

 

159

 

 

 

156

 

NPS Term Loan Due 2050

 

 

159

 

 

 

156

 

Equipment Loan Due 2025

 

 

45

 

 

 

53

 

 

 

 

56,445

 

 

 

54,831

 

 

 

 

 

 

 

 

 

 

Less: Current portion of long-term debt, net

 

 

(43,055 )

 

 

(42,953 )

Less: Unamortized debt issue costs

 

 

(2,250 )

 

 

(2,351 )

Less: Accrued interest payable

 

 

(8,810 )

 

 

(8,689 )

 

 

$ 2,330

 

 

$ 838

 

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 26

 

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands) 

 

Veritex Loans

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

$ 1,674

 

 

$ 1,674

 

LRM Term Loan Due 2034 (in default)

 

 

768

 

 

 

768

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031  (in default)

 

 

730

 

 

 

730

 

 

 

 

 

 

 

 

 

 

Less: Accumulated amortization

 

 

(922 )

 

 

(821 )

 

 

$ 2,250

 

 

$ 2,351

 

 

Amortization expense was $0.05 million and $0.03 million for the three months ended June 30, 2022 and 2021, respectively. Amortization expense was $0.1 million and $0.06 million for the six months ended June 30, 2022 and 2021, respectively.

 

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:

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Kissick Debt (in default)

 

$ 5,630

 

 

$ 5,232

 

Veritex Loans

 

 

 

 

 

 

 

 

LE Term Loan Due 2034 (in default)

 

 

2,308

 

 

 

2,338

 

LRM Term Loan Due 2034 (in default)

 

 

792

 

 

 

959

 

GNCU Loan

 

 

 

 

 

 

 

 

NPS Term Loan Due 2031 (in default)

 

 

18

 

 

 

136

 

SBA EIDLs

 

 

 

 

 

 

 

 

BDEC Term Loan Due 2051

 

 

44

 

 

 

12

 

LE Term Loan Due 2050

 

 

9

 

 

 

6

 

NPS Term Loan Due 2050

 

 

9

 

 

 

6

 

 

 

 

8,810

 

 

 

8,689

 

Less: Accrued interest payable (in default)

 

 

(8,810 )

 

 

(8,689 )

Long-term Interest Payable, Net of Current Portion

 

$ -

 

 

$ -

 

 

As reflected in the table above and elsewhere in this report, we are in default under the LE Term Loan Due 2034, LRM Term Loan Due 2034, NPS Term Loan Due 2031, and the Kissick Debt. Defaults under these secured loan agreements permit the lender to declare the amounts owed under these loan agreements immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. The debt associated with these loan agreements was classified within the current portion of long-term debt on our consolidated balance sheets at June 30, 2022 and December 31, 2021.

 

Any exercise by third parties of their rights and remedies under our secured loan agreements will have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.

 

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements, either upon maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our business, 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 (3)” 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.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 27

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

(11) AROs

 

Refinery and Facilities

Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

 

Pipelines and Facilities and Oil and Gas Properties

We have AROs associated with decommissioning our pipelines and facilities assets, as well as plugging and abandoning 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. Although these liabilities were previously fully accreted, during the twelve months ended December 31, 2021 we determined that the estimated future cost and timing of decommissioning these assets changed. As a result, we recorded an increase in liability at December 31, 2021, and we will recognize accretion expense through the anticipated decommissioning date.

 

ARO liability as of the dates indicated was as follows:

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

AROs, at the beginning of the period

 

$ 3,461

 

 

$ 2,370

 

Changes in estimates of existing obligations

 

 

-

 

 

 

1,091

 

Accretion expense

 

 

66

 

 

 

-

 

 

 

 

3,527

 

 

 

3,461

 

Less:  AROs, current portion

 

 

-

 

 

 

-

 

Long-term AROs, at the end of the period

 

$ 3,527

 

 

$ 3,461

 

 

See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.

  

(12) Lease Obligations

 

Lease Obligations

 

Office Lease. We maintain our corporate headquarters in Houston, Texas. The 68-month operating lease, with BDSC as lessee, expires in August 2023. Under the lease, BDSC has an option to extend the lease term for an additional five (5) year period. To exercise the option, BDSC must provide TR 801 Travis LLC (“Building Lessor”) notice at least twelve (12) months before the end of the current term.

 

In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and Building Lessor reached an agreement to cure BDSC’s office lease default. Under a Fourth Amendment to Lease dated May 27, 2021 (the “Fourth Amendment”), Building Lessor agreed to defer BDSC’s past due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning in June 2021, and continuing through lease expiration The Past Due Obligations were subject to an annual percentage rate of 4.50%. As revised under the Fourth Amendment, BDSC’s base rent including the prorated portion of the Past Due Obligations was $0.02 million per month.

 

Subsequent to the Fourth Amendment, Building Lessor notified BDSC of a new default under the office lease due to non-payment of rent. As a result of the subsequent default, Building Lessor deemed the Fourth Amendment null and void. On June 9, 2022, BDSC paid all past due amounts totaling approximately $0.2 million to Building Lessor and Building Lessor considered the office lease default cured.

 

An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended June 30, 2022 and 2021. BDSC received sublease income from LEH totaling $0.02 million for both six-month periods ended June 30, 2022 and 2021. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 28

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

   

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

 

 

 

 

June 30,

 

 

December 31,

 

 

 

Balance Sheet Location

 

2022

 

 

2021

 

 

 

 

(in thousands)

 

Assets

 

 

 

 

 

 

 

 

Operating lease ROU assets

 

 Operating lease ROU assets

 

$ 787

 

 

$ 787

 

Less:  Accumulated amortization on operating lease assets

 

 Operating lease ROU assets

 

 

(544 )

 

 

(455 )

 

 

 

 

 

 

 

 

 

 

 

Total lease assets

 

 

 

 

243

 

 

 

332

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

 

 

 

 

 

 

 

Operating lease

 

 Current portion of lease liabilities

 

 

226

 

 

 

215

 

 

 

 

 

 

 

 

 

 

 

 

Noncurrent

 

 

 

 

 

 

 

 

 

 

Operating lease

 

 Long-term lease liabilities, net of current

 

 

40

 

 

 

156

 

Total lease liabilities

 

 

 

$ 266

 

 

$ 371

 

    

Weighted average remaining lease term in years

 

Operating lease

 

 

1.17

 

Weighted average discount rate

 

 

 

 

Operating lease

 

 

8.25 %

Finance leases

 

 

8.25 %

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease costs

 

$ 51

 

 

$ 51

 

 

$ 103

 

 

$ 102

 

Total lease cost

 

$ 51

 

 

$ 51

 

 

$ 103

 

 

$ 102

 

    

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

 

 

 

Six Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

Operating cash flows for operating lease

 

$ 49

 

 

$ 48

 

 

$ 101

 

 

$ 95

 

  

As of June 30, 2022, maturities of lease liabilities for the periods indicated were as follows:

 

June 30,

 

Operating Lease

 

 

 

 (in thousands)

 

 

 

 

 

2023

 

$ 226

 

2024

 

 

40

 

 

 

$ 266

 

Future minimum annual lease commitments that are non-cancelable:

 

 

 

Operating

 

June 30,

 

 Lease

 

 

 

 (in thousands)

 

2023

 

$ 239

 

2024

 

 

40

 

 

 

$ 279

 

     

Blue Dolphin Energy Company

 June 30, 2022

 Page 29

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

(13) Income Taxes

 

Tax Provision

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Current

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

$ -

 

 

$ -

 

 

$ -

 

 

$ -

 

State

 

 

(115 )

 

 

-

 

 

 

(156 )

 

 

-

 

Deferred

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Federal

 

 

(2,809 )

 

 

500

 

 

 

(3,895 )

 

 

1,167

 

State

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Change in valuation allowance

 

 

2,809

 

 

 

(500 )

 

 

3,895

 

 

 

(1,167 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total provision for income taxes

 

$ (115 )

 

$ -

 

 

$ (156 )

 

$ -

 

 

TMT is treated like an income tax for financial reporting purposes.

 

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

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(in thousands)

 

Deferred tax assets:

 

 

 

 

 

 

NOL and capital loss carryforwards

 

$ 13,805

 

 

$ 16,818

 

Business interest expense

 

 

3,944

 

 

 

4,680

 

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

 

 

382

 

 

 

424

 

ARO liability/deferred revenue

 

 

741

 

 

 

727

 

Other

 

 

30

 

 

 

12

 

Total deferred tax assets

 

 

18,902

 

 

 

22,661

 

 

 

 

 

 

 

 

 

 

Deferred tax liabilities:

 

 

 

 

 

 

 

 

Basis differences in property and equipment

 

 

(8,081 )

 

 

(7,945 )

Total deferred tax liabilities

 

 

(8,081 )

 

 

(7,945 )

 

 

 

10,821

 

 

 

14,716

 

 

 

 

 

 

 

 

 

 

Valuation allowance

 

 

(10,821 )

 

 

(14,716 )

 

 

 

 

 

 

 

 

 

Deferred tax assets, net

 

$ -

 

 

$ -

 

   

Deferred Income Taxes

Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

 

NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders’ lowest percentage ownership during the testing period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements; the 2012 ownership change related to a reverse acquisition. These ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of roughly $0.6 million per year. We may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before the 2012 ownership change will expire unused. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards that were generated beginning in 2018 may only be used to offset 80% of taxable income and are carried forward indefinitely.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 30

  

 

Table of Contents

 

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

 

 

 

 

 

 

Pre-Ownership Change

 

 

Post-Ownership Change

 

 

Total

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2020

 

 

9,614

 

 

 

56,363

 

 

 

65,977

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses used and expired

 

 

(1,717 )

 

 

9,148

 

 

 

7,431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2021

 

$ 7,897

 

 

$ 65,511

 

 

$ 73,408

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating losses used and expired

 

 

(6,127 )

 

 

(8,217 )

 

 

(14,344 )

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2022

 

$ 1,770

 

 

$ 57,294

 

 

$ 59,064

 

    

Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the expiration of any NOL carryforwards. At June 30, 2022 and December 31, 2021, management determined that realization of the deferred tax assets from NOLs is unlikely based on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of June 30, 2022 and December 31, 2021.

 

We have NOL carryforwards that remain available for future use. At June 30, 2022 and December 31, 2021, there were no uncertain tax positions for which a reserve or liability was necessary.

  

(14) Earnings Per Share

 

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

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

 

 

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$ 13,410

 

 

$ (4,099 )

 

$ 16,888

 

 

$ (7,273 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted income (loss) per share

 

$ 0.97

 

 

$ (0.32 )

 

$ 1.27

 

 

$ (0.57 )

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and Diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average number of shares of

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

common stock outstanding and potential

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

dilutive shares of common stock

 

 

13,850,397

 

 

 

12,693,514

 

 

 

13,275,152

 

 

 

12,693,514

 

   

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 and six months ended June 30, 2022 and 2021 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 31

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

(15) 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 assets by an Affiliate under the Amended and Restated Operating Agreement.

 

BSEE Offshore Pipelines and Platform Decommissioning

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

 

In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020. In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL completed the required platform surveys in June 2020. Abandonment operations have been on hold due to our cash constraints associated with historical net losses and continued uncertainties surrounding commodity pricing and supply related to the COVID-19 pandemic and the Russian conflict with Ukraine . At BSEE’s request, BDPL provided BSEE with a status update on platform removal on August 3, 2022. We cannot currently estimate when decommissioning of the pipelines and platform may occur.

 

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

 

We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential penalties on our consolidated balance sheets as of June 30, 2022 and December 31, 2021. At both June 30, 2022 and December 31, 2021, BDPL maintained $3.5 million in AROs related to abandonment of these assets, which amount does not include potential penalties.

 

Defaults Under Secured Loan Agreements with Third Parties and Related Parties

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

 

Health, Safety and Environmental Matters

The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failure to obtain and comply with these permits or environmental, health, or safety laws generally could result in fines, penalties or other sanctions, or a revocation of our permits.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 32

   

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

Share Issuances

 

We are obligated to issue shares of our Common Stock to: (i) Jonathan Carroll pursuant to the Guaranty Fee Agreements and (ii) non-employee directors for services rendered to the Board. Set forth below is information regarding the issuance of Common Stock related to these obligations during the three and six months ended June 30, 2022:

 

On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from April 30, 2020 through March 31, 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement.

 

On May 12, 2022, we also issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The average cost basis was $0.55, the low was $0.33, and the high was $0.91.

 

The issuances of the securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. We recognized a loss on the issuance of shares of approximately $0.2 million for both the three and six months ended June 30, 2022.

 

Legal Matters

 

In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters. Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position, or consolidated results of operations.

 

Unresolved Matters.

 

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

 

BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. Decommissioning of these assets was delayed due to our cash constraints associated with historical net losses and the ongoing impact of COVID-19. We cannot currently estimate when decommissioning may occur.

 

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

 

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of June 30, 2022 and December 31, 2021. At both June 30, 2022 and December 31, 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 33

  

 

Table of Contents

 

Notes to Consolidated Financial Statements

  

TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered during an investigation from January 29, 2020 to March 2, 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. On May 9, 2022, management met with the TCEQ to review the alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in a letter dated June 1, 2022. We recorded a liability for the maximum proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of June 30, 2022 and December 31, 2021.

 

Pilot Dispute Related to Set-Off Payments. On October 4, 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in payments Pilot made to Tartan arising under a product sales agreement. NPS contends the disputed amount should have been applied to the balance owed by NPS under the Amended Pilot Line of Credit. Pilot has asserted that the redirected payment was offset by accrued interest owed by NPS under the Amended Pilot Line of Credit. As of the filing date of this report, the amount remained in dispute between the parties.

 

Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations. If third parties exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

 

Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows.

 

Resolved Matters.

 

None.

 

Remainder of Page Intentionally Left Blank

 

Blue Dolphin Energy Company

 June 30, 2022

 Page 34

  

 

Table of Contents

 

Management’s Discussion and Analysis

  

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

 

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

 

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BD