BLUE DOLPHIN ENERGY CO
10-Ks and 10-Qs
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
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FORM
10-K
(Mark
One)
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ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the fiscal year
ended
December 31,
2017
or
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☐
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TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
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For the transition
period from
to
Commission File No.
0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of
registrant as specified in its charter)
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Delaware
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73-1268729
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(State or other
jurisdiction of incorporation or organization)
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(I.R.S. Employer
Identification No.)
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801
Travis Street, Suite 2100, Houston, Texas
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77002
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(Address of
principal executive offices)
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(Zip
Code)
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713-568-4725
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(Registrant’s
telephone number, including area code)
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Securities
registered pursuant to Section 12(b) of the
Act: None
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Securities
registered pursuant to Section 12(g) of the Act:
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Common
Stock, par value $0.01 per share
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(Title of
class)
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Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined
in Rule 405 of the Securities Act. Yes ☐ No ☑
Indicate by check
mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
☐
No ☑
Indicate by check
mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past
90 days. Yes
☑
No
☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted 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 and post such files). Yes
☑
No ☐
Indicate by check
mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (§229.405 of this chapter) is not contained
herein, and will not be contained, to the best of
registrant’s knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. ☑
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, a smaller reporting
company, or emerging growth company. See the definition of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company,” and
“emerging growth company” in Rule 12b-2 of the
Act.
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Large accelerated filer
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☐
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Accelerated filer
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☐
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Non-accelerated
filer
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☐
(Do not check if a smaller reporting
company)
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Smaller reporting company
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☑
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Emerging
growth company
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☐
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If an emerging
growth company, indicate by check mark if the registrant has
elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided
pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ☐ No ☑
The aggregate
market value of shares of common stock held by non-affiliates of
the registrant was $3,800,118 based on the number of shares of
common stock held by non-affiliates and the last reported sale
price of the registrant's common stock on June 30,
2017.
Number of shares
of common stock, par value $0.01 per share, outstanding at April 2,
2018: 10,925,513
1
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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INTRODUCTION
This Annual Report
for the fiscal year ended December 31, 2017 (this “Annual
Report”) is a document that U.S. public companies file with
the Securities and Exchange Commission (“SEC”) every
year. Part I of the Annual Report provides a general overview of
our business, including relevant risk factors. Part II
of the Annual Report contains financial information and
management’s discussion and analysis of our financial
condition and results of operations. We hope investors will find it
useful to have all this information in a single
document.
In this Annual
Report, “Blue Dolphin,” “we,”
“our,” and “us” are used interchangeably to
refer to Blue Dolphin Energy Company individually or to Blue
Dolphin Energy Company and its subsidiaries collectively, as
appropriate to the context. Information in this Annual Report is
current as of the filing date, unless otherwise
specified.
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
In this Annual
Report, and from time to time throughout the year, we share our
expectations for our future performance. These forward-looking
statements include statements about our business plans; our
expected financial performance, including the anticipated effect of
strategic actions; previously reported material weakness in our
internal control over financial reporting; economic, political and
market conditions; and other factors that could affect our future
results of operations or financial condition, including, without
limitation, statements under the sections entitled “Part I,
Item 1. Business,” “Part I, Item 1A. Risk
Factors,” “Part I, Item 3. Legal Proceedings,”
and “Part II, Item 7. Management’s Discussion and
Analysis of Financial Condition and Results of Operations”.
Any statements we make that are not matters of current reportage or
historical fact should be considered forward-looking. Such
statements often include words such as “believe,”
“expect,” “anticipate,”
“intend,” “plan,” “estimate,”
“will,” and similar expressions. By their nature, these
types of statements are uncertain and are not guarantees of our
future performance. Our forward-looking statements represent our
estimates and expectations at the time of disclosure. However,
circumstances change constantly, often unpredictably, and investors
should not place undue reliance on these statements. Many events
beyond our control will determine whether our expectations will be
realized. We disclaim any current intention or obligation to revise
or update any forward-looking statements, or the factors that may
affect their realization, whether considering new information,
future events or otherwise, and investors should not rely on us to
do so. In accordance with the “safe harbor” provisions
of the Private Securities Litigation Reform Act of 1995,
“Part I, Item 1A. Risk Factors” in this Annual Report
explains some of the important factors that may cause actual
results to be materially different from those that we
anticipate.
Remainder of Page
Intentionally Left Blank
2
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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GLOSSARY OF SELECTED ENERGY AND FINANCIAL TERMS
Below are
abbreviations and definitions of certain commonly used oil and gas
industry terms, as well as key financial performance measures used
by management, that are used in this Annual Report on Form 10-K for
the fiscal year ended December 31, 2017 (this “Annual
Report”).
Regarding financial
terms, management uses GAAP and certain non-GAAP performance
measures to assess our results of operations. Certain performance
measures used by management to assess our operating results and the
effectiveness of our business segment are considered non-GAAP
performance measures. These performance measures may differ from
similar calculations used by other companies within the petroleum
industry, thereby limiting their usefulness as a comparative
measure. We refer to certain refinery throughput and
production data in the explanation of our period over
period
changes in results
of operations. For our consolidated results, we refer to
our consolidated statements of operations in the explanation of our
period over period changes in results of operations.
Energy Terms
Atmospheric gas oil
(“AGO”)
. The heaviest product boiled by a crude
oil distillation unit operating at atmospheric pressure. This
fraction ordinarily sells as distillate fuel oil, either in pure
form or blended with cracked stocks. Blended AGO usually serves as
the premium quality component used to lift lesser streams to the
standards of saleable furnace oil or diesel engine fuel. Certain
ethylene plants, called heavy oil crackers, can take AGO as
feedstock.
Barrel
(“bbl”)
. One stock tank bbl, or 42 U.S. gallons
of liquid volume, used about oil or other liquid
hydrocarbons.
Blending
.
The physical mixture of several different liquid hydrocarbons to
produce a finished product with certain desired characteristics.
Products can be blended in-line through a manifold system, or batch
blended in tanks and vessels. In-line blending of gasoline,
distillates, jet fuel and kerosene is accomplished by injecting
proportionate amounts of each component into the main stream where
turbulence promotes thorough mixing. Additives, including octane
enhancers, metal deactivators, anti-oxidants, anti-knock agents,
gum and rust inhibitors, and detergents, are added during and/or
after blending to result in specifically desired properties not
inherent in hydrocarbons.
Barrels per Day
(“bpd”)
. A measure of the bbls of
daily output produced in a refinery or transported through a
pipeline.
Complexity
. A
numerical score that denotes, for a given refinery, the extent,
capability, and capital intensity of the refining processes
downstream of the crude oil distillation unit. The
higher a refinery’s complexity, the greater the
refinery’s capital investment and number of operating units
used to separate feedstock into fractions, improve their quality,
and increase the production of higher-valued products. Refinery
complexities range from the relatively simple crude oil
distillation unit (“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.
Crude oil
. A
mixture of thousands of chemicals and compounds, primarily
hydrocarbons. Crude oil quality is measured in terms of density
(light to heavy) and sulfur content (sweet to sour). Crude oil must
be broken down into its various components by distillation before
these chemicals and compounds can be used as fuels or converted to
more valuable products.
Depropanizer
unit
. A distillation column that is used to isolate propane
from a mixture containing butane and other heavy
components.
Distillates
. The
result of crude distillation and therefore any refined oil
product. Distillate is more commonly used as an
abbreviated form of middle distillate. There are mainly
four (4) types of distillates: (i) very light oils or light
distillates (such as naphtha), (ii) light oils or middle
distillates (such as our jet fuel), (iii) medium oils, and (iv)
heavy oils (such as our low-sulfur diesel and heavy oil-based mud
blendstock (“HOBM”), reduced crude, and
AGO).
Distillation
.
The first step in the refining process whereby crude oil and
condensate is heated at atmospheric pressure in the base of a
distillation tower. As the temperature increases, the various
compounds vaporize in succession at their various boiling points
and then rise to prescribed levels within the tower per their
densities, from lightest to heaviest. They then condense in
distillation trays and are drawn off individually for further
refining. Distillation is also used at other points in the refining
process to remove impurities. Lighter products produced in this
process can be further refined in a catalytic cracking unit or
reforming unit. Heavier products, which cannot be vaporized and
separated in this process, can be further distilled in a vacuum
distillation unit or coker.
Distillation
tower
. A tall column-like vessel in which crude oil and
condensate is heated and its vaporized components distilled by
means of distillation trays.
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.
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.
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 about 8 and 16
carbon atoms per molecule; wide-cut or naphtha-type jet fuel
(including Jet B) has between about 5 and 15 carbon atoms per
molecule.
Kerosene
. A
middle distillate fraction of crude oil that is produced at higher
temperatures than naphtha and lower temperatures than gas
oil.
3
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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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.
MMcf
.
One
million cubic feet; a measurement of gas volume only.
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.
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.
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 petroleum
products
. Refined petroleum products are derived from crude
oil and condensate that have been processed through various
refining methods. The resulting products include gasoline, home
heating oil, jet fuel, diesel, lubricants and the raw materials for
fertilizer, chemicals, and pharmaceuticals.
Refinery
.
Within the oil and gas industry, a refinery is an industrial
processing plant where crude oil and condensate is separated and
transformed into petroleum products.
Sour crude
.
Crude oil containing sulfur content of more than 0.5%.
Stabilizer
unit
. A distillation column intended to remove the lighter
boiling compounds, such as butane or propane, from a
product.
Sweet crude
.
Crude oil containing sulfur content of less than 0.5%.
Sulfur
.
Present at various levels of concentration in many hydrocarbon
deposits, such as petroleum, coal, or natural gas. Also, produced
as a by-product of removing sulfur-containing contaminants from
natural gas and petroleum. Some of the most commonly used
hydrocarbon deposits are categorized per their sulfur content, with
lower sulfur fuels usually selling at a higher, premium price and
higher sulfur fuels selling at a lower, or discounted,
price.
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.
Throughput
. The
volume processed through a unit or a refinery or transported
through a pipeline.
Turnaround
.
Scheduled large-scale maintenance activity wherein an entire
process unit is taken offline for a week or more for comprehensive
revamp and renewal.
Yield
. The
percentage of refined petroleum products that is produced from
crude oil and other feedstocks.
Financial and Performance Measures
Arbitration award
and associated fees
.
Damages and GEL’s attorneys’ fees and related expenses
awarded to GEL Tex Marketing, LLC in arbitration
proceedings.
Capacity
Utilization Rate
. A percentage measure that indicates the
amount of available capacity that is being used in a refinery or
transported through a pipeline. With respect to the
Nixon Facility, the rate is calculated by dividing total refinery
throughput or total refinery production on a bpd basis by the total
capacity of the Nixon Facility (currently 15,000 bpd).
Cost of Refined
Products Sold
.
Primarily includes purchased crude oil and condensate costs, as
well as transportation, freight and storage costs.
Depletion,
Depreciation and Amortization
. Represents property and
equipment, as well as intangible assets that are depreciated or
amortized based on the straight-line method over the estimated
useful life of the related asset.
Downtime
.
Scheduled and/or unscheduled periods in which the Nixon Facility is
not operating. Downtime may occur for a variety of
reasons, including bad weather, power failures, preventive
maintenance, equipment inspection, equipment repair due to
mechanical failure, voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, and inventory
management.
Easement, Interest
and Other Income
.
Reflects land easement fees received from FLNG Land II, Inc., a
Delaware corporation (“FLNG”), pursuant to a Master
Easement Agreement; fees recognized monthly as earned and recorded
as land easement revenue within other income.
EBITDA
.
Reflects earnings before: (i) interest income (expense), (ii)
income taxes, and (iii) depreciation and amortization.
-
Refinery Operations
EBITDA
. Reflects EBITDA for our refinery operations business
segment.
-
Total
EBITDA
. Reflects EBITDA for our refinery operations business
segment, as well as corporate and other.
General and
Administrative Expenses
.
Primarily include corporate costs,
such as accounting and legal fees, office lease expenses, and
administrative expenses.
Gross
Profit
.
Calculated as total revenue less
cost of refined products sold, reflected as a dollar ($)
amount.
Gross
Margin
. Calculated as total revenue less cost of
refined products sold, reflected as a percentage (%).
Gross Margin per
Bbl
. Calculated as gross profit divided by the
volume, in bbls, of refined petroleum products sold during the
period.
Income Tax
Expense
.
Includes
federal and state taxes, as well as deferred taxes, arising from
temporary differences between income for financial reporting and
income tax purposes.
JMA Profit
Share
. Represents the GEL Profit Share plus the Performance
Fee for the period under the Joint Marketing Agreement; an indirect
operating expense. If Gross Profits were positive, then the JMA
Profit Share reflected an expense. If Gross Profits were
negative, then the JMA Profit Share reflected a
credit.
Net Income
(Loss)
. Represents total revenue from operations less total
cost of operations, total other expense, and income tax
expense.
Operating
Days
. Represents the number of days in a period in which the
Nixon Facility operated. Operating days is calculated by
subtracting downtime in a period from calendar days in the same
period.
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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Other Income
(Expense)
. Reflects working capital loan
interest, guaranty fees earned by Jonathan Carroll, expensed
interest related to long-term debt, and non-recurring income
items.
Other Operating
Expenses
. Represents costs associated with our pipeline
assets and leasehold interests in oil and gas
properties.
Refinery Operating
Expenses
.
Direct
operating expenses of the Nixon Facility, including direct costs of
labor, maintenance materials and services, chemicals and catalysts
and utilities. Includes fees paid to: (i) LEH to manage
and operate the Nixon Facility pursuant to the Amended and Restated
Operating Agreement and (ii) Ingleside Crude, LLC to lease
petroleum storage tanks to meet periodic, additional storage needs
under the Amended and Restated Tank Lease Agreement.
Revenue from
Operations
. Primarily consists of refined petroleum product
sales, but also includes tank rental revenue. Excise and other
taxes that are collected from customers and remitted to
governmental authorities are not included in
revenue. Other operations revenue relates to fees
received from pipeline transportation services, which ceased in
2016.
Total Refinery
Production
. Refers to the volume processed as output through
the Nixon Facility. Refinery production includes finished petroleum
products, such as jet fuel, and intermediate petroleum products,
such as naphtha, HOBM and AGO.
Total Refinery
Throughput
.
Refers
to the volume processed as input through the Nixon
Facility. Refinery throughput includes crude oil and
condensate and other feedstocks.
Remainder of Page
Intentionally Left Blank
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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TABLE OF CONTENTS
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GLOSSARY OF SELECTED ENERGY AND FINANCIAL
TERMS
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3
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PART I
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7
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ITEM
1.
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BUSINESS
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7
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ITEM
1A.
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RISK
FACTORS
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19
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ITEM
1B.
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UNRESOLVED STAFF
COMMENTS
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29
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ITEM
2.
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PROPERTIES
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30
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ITEM
3.
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LEGAL
PROCEEDINGS
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31
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ITEM
4.
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MINE AND SAFETY
DISCLOSURES
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31
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PART II
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32
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ITEM
5.
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MARKET FOR
REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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32
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ITEM
6.
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SELECTED
FINANCIAL DATA
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32
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ITEM
7.
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MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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33
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ITEM
7A.
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QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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46
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ITEM
8.
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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46
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ITEM
9.
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CHANGES IN AND
DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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77
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ITEM
9A.
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CONTROLS AND
PROCEDURES
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77
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ITEM
9B.
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OTHER
INFORMATION
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78
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PART III
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79
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ITEM
10.
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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79
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ITEM
11.
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EXECUTIVE
COMPENSATION
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84
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ITEM
12.
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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86
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ITEM
13.
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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87
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ITEM
14.
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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87
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PART
IV
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88
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ITEM
15.
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EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
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88
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ITEM
16.
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FORM 10-K
SUMMARY
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88
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SIGNATURES
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95
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6
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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ITEM 1.
BUSINESS
Company Overview
Blue Dolphin, a
Delaware corporation formed in 1986, is an independent refiner and
marketer of petroleum products. We also conduct
petroleum storage and terminaling operations under third-party
lease agreements. Our primary operating asset is a 15,000-bpd crude
oil and condensate processing facility in Nixon, Texas (the
“Nixon Facility”). Blue Dolphin maintains a
website at
http://www.blue-dolphin-energy.com
. Information
on or accessible through Blue Dolphin’s website is not
incorporated by reference in or otherwise made a part of this
Annual Report.
Structure and Management
Corporate
Structure
Blue Dolphin
operates a single business segment – Refinery
Operations. Refinery operations are conducted at the
Nixon Facility through the following subsidiaries:
●
Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”).
●
Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”).
Blue Dolphin owns
pipeline assets and has leasehold interests in oil and gas
wells. These assets, which are not operational, are
included in Corporate and Other. Corporate and Other
includes the following subsidiaries:
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”).
●
Blue Dolphin
Petroleum Company, a Delaware corporation
(“BDPC”).
●
Blue Dolphin
Services Co., a Texas corporation
(“BDSC”).
See "Part I, Item
2. Properties” for additional information regarding our
operating subsidiaries, facilities, and assets.
Management
Blue Dolphin is
controlled by Lazarus Energy Holdings, LLC (“LEH”). LEH
operates and manages all Blue Dolphin properties pursuant to an
Amended and Restated Operating Agreement (the “Amended and
Restated Operating Agreement”). Jonathan Carroll
is Chairman of the Board of Directors (the “Board”),
Chief Executive Officer, and President of Blue Dolphin, as well as
a majority owner of LEH. Together LEH and Jonathan Carroll own
80.2% of our common stock, par value $0.01 per share (the
“Common Stock). (See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (8) Related Party
Transactions, Note (10) Long-Term Debt, Net and Note (19)
Commitments and Contingencies – Financing Agreements”
for additional disclosures related to LEH, the Amended and Restated
Operating Agreement, and Jonathan Carroll.)
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
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Going Concern
Management has
determined that certain factors raise substantial doubt about our
ability to continue as a going concern. These factors
include the following:
●
Final GEL
Arbitration Award – As previously disclosed, LE was involved
in arbitration proceedings (the “GEL Arbitration”) with
GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis
Energy, LP (“Genesis”), related to a contractual
dispute involving a Crude Oil Supply and Throughput Services
Agreement (the “Crude Supply Agreement”) and a Joint
Marketing Agreement (the “Joint Marketing Agreement”),
each between LE and GEL and dated August 12, 2011. On
August 11, 2017, the arbitrator delivered its final award in the
GEL Arbitration (the “Final Arbitration
Award”). The Final Arbitration Award denied all
LE’s claims against GEL and granted substantially all the
relief requested by GEL in its counterclaims. Among
other matters, the Final Arbitration Award awarded damages and
GEL’s attorneys’ fees and related expenses to GEL in
the aggregate amount of approximately $31.3
million.
As previously
disclosed, a hearing on confirmation of the Final Arbitration Award
was scheduled to occur on September 18, 2017 in state district
court in Harris County, Texas. Prior to the scheduled hearing, LE
and GEL jointly notified the court that the hearing would be
continued for a period of no more than 90 days after September 18,
2017 (the “Continuance Period”), to facilitate
settlement discussions between the parties. On September 26, 2017,
LE and Blue Dolphin, together with LEH and Jonathan Carroll,
entered into a Letter Agreement with GEL, effective September 18,
2017 (the “GEL Letter Agreement”), confirming the
parties’ agreement to the continuation of the confirmation
hearing during the Continuance Period, subject to the terms of the
GEL Letter Agreement.
The GEL Letter
Agreement has been amended to extend the Continuance Period through
April 30, 2018. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
pre-payments on indebtedness, other than in the ordinary course of
business as described in the GEL Letter Agreement, and from making
any payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements between November 1, 2017 and the end of the
Continuance Period. (Jonathan Carroll has received no
cash payments since August 2016 and no common stock payments since
May 2017 under the Amended and Restated Guaranty Fee
Agreements.) If the parties are unable to reach an
acceptable settlement with Genesis and GEL, and GEL seeks to
confirm and enforce the Final Arbitration Award against LE, our
business, financial condition, and results of operations will be
materially affected, and LE would likely be required to seek
protection under bankruptcy laws.
●
Veritex Secured
Loan Agreement Event of Default – Veritex Community Bank
(“Veritex”), as successor in interest to Sovereign Bank
by merger, delivered to obligors notices of default under secured
loan agreements with Veritex, stating that the Final Arbitration
Award constitutes an event of default under the secured loan
agreements. The occurrence of an event of default
permits Veritex to declare the amounts owed under these loan
agreements immediately due and payable, exercise its rights with
respect to collateral securing obligors’ obligations under
these loan agreements, and/or exercise any other rights and
remedies available. Veritex informed obligors that it is
not currently exercising its rights and remedies under the secured
loan agreements considering the ongoing settlement discussions with
GEL and the continuance of the hearing on confirmation of the Final
Arbitration Award and to allow Veritex to evaluate any proposed
settlement agreement related to the Final Arbitration Award, which
would require Veritex’s approval. However, Veritex expressly
reserved all its rights, privileges and remedies related to events
of default under the secured loan agreements and informed obligors
that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements. Any exercise by Veritex of its rights and remedies
under the secured loan agreements would have a material adverse
effect on our business, financial condition, and results of
operations and would likely require us to seek protection under
bankruptcy laws. The debt associated with loans under secured loan
agreements was classified within the current portion of long-term
debt on our consolidated balance sheet at December 31, 2017 due to
existing events of default related to the Final Arbitration Award
as well as the uncertainty of LE and LRM’s ability to meet
financial covenants in the secured loan agreements in the
future.
We are currently
evaluating the effects of the Final Arbitration Award on our
business, financial condition, and results of
operations. In addition to the matters described above,
the Final Arbitration Award could materially and adversely affect
our ability to procure adequate amounts of crude oil and condensate
or our relationships with our customers. The
contract-related dispute has negatively affected our customer
relationships, prevented us from taking advantage of business
opportunities, disrupted refinery operations, diverted
management’s focus away from running the business, and
impacted our ability to obtain financing.
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We can provide no
assurance as to whether negotiations with GEL will result in a
settlement, the potential terms of any such settlement, or whether
Veritex would approve any such settlement. If LE is
unable to reach an acceptable settlement with GEL or Veritex does
not approve any such settlement and GEL seeks to confirm and
enforce the Final Arbitration Award, our business, financial
condition, and results of operations will be materially adversely
affected and LE would likely be required to seek protection under
bankruptcy laws.
Operating Risks
Successful
execution of our business plan depends on several key factors,
including reaching an acceptable settlement with GEL, having
adequate crude oil and condensate supplies, , maintaining the safe
and reliable operation of the Nixon Facility, improving margins on
refined petroleum products, and meeting contractual obligations.
(See “Business Strategies” within this Part I, Item 1.
Business for information related to our business
plan.) For the year ended December 31, 2017, execution
of our business plan was negatively impacted by several factors,
including:
●
Net Losses –
For the year ended December 31, 2017, we reported a net loss of
$22,328,390, or a loss of $2.09 per share, compared to a net loss
of $15,767,448, or a loss of $1.51 per share, for the year ended
December 31, 2016. The $0.58 per share increase in net
loss between the periods was the result of the Final Arbitration
Award, which was partially offset by improved margins for refined
petroleum products and increased sales volume. The amount expensed
in the period related to the Final Arbitration Award was
$24,338,628, which represented $2.28 per
share. Excluding the Final Arbitration Award, we would
have reported net income of $0.19 per share.
●
Working Capital
Deficits – We had a working capital deficit of $69,512,829 at
December 31, 2017 compared to a working capital deficit of
$37,812,263 at December 31, 2016. Excluding long-term debt, we had
a working capital deficit of $29,968,427 at December 31, 2017,
compared to working capital of $5,599,927 at December 31, 2016. The
significant increase in working capital deficit between the periods
primarily related to the Final Arbitration Award and a decrease in
cash and cash equivalents.
●
Crude Supply Issues
– We currently have in place a month-to-month evergreen crude
supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil
and condensate, and we expect the supplier to continue to do so for
the foreseeable future. However, our ability to purchase
adequate amounts of crude oil and condensate is dependent on our
liquidity and access to capital, which have been adversely affected
by the contract-related dispute with GEL and other factors, as
noted above. The Final Arbitration Award could have a
material adverse effect on our ability to procure adequate amounts
of crude oil and condensate from our current supplier or
otherwise.
●
Financial Covenant
Defaults – In addition to existing events of default related
to the Final Arbitration Award, at December 31, 2017, LE and LRM
were in violation of certain financial covenants in secured loan
agreements with Veritex. Covenant defaults under the secured loan
agreements would permit Veritex to declare the amounts owed under
these loan agreements immediately due and payable, exercise its
rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available. The debt associated with these loans
was classified within the current portion of long-term debt on our
consolidated balance sheet at December 31, 2017 due to existing
events of default related to the Final Arbitration Award as well as
the uncertainty of LE and LRM’s ability to meet the financial
covenants in the future. There can be no assurance that Veritex
will provide a waiver of events of default related to the Final
Arbitration Award, consent to any proposed settlement with GEL or
provide future waivers of any financial covenant defaults, which
may have an adverse impact on our financial position and results of
operations.
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During the year
ended December 31, 2017, we continued aggressive actions to improve
operations and liquidity. We began selling certain of
our refined petroleum products immediately following production,
which minimizes inventory, improves cash flow, and reduces
commodity risk/exposure. We completed construction on several new
petroleum storage tanks at the Nixon Facility. Increased petroleum
storage capacity: (i) assists with de-bottlenecking the facility,
(ii) supports increased refinery throughput up to approximately
30,000 bpd, and (iii) provides an opportunity to generate
additional tank rental revenue by leasing to third-parties. We also
reduced our working capital requirements in a rising cost
environment by decreasing costs, reducing inventory levels,
improving our sales cycle, and requiring pre-payments from certain
customers. Management believes that it is taking the
appropriate steps to improve operations at the Nixon Facility and
our overall financial stability. However, there can be
no assurance that our business plan will be successful, LEH and its
affiliates will continue to fund our working capital needs, or that
we will be able to obtain additional financing on commercially
reasonable terms or at all. Among other factors, the
Final Arbitration Award could prevent us from successfully
executing our business plan.
For additional
disclosures related to the contract-related dispute with GEL, the
Final Arbitration Award, the GEL Letter Agreement (as amended),
defaults under secured loan agreements, and risk factors that could
materially affect our future business, financial condition and
results of operations, refer to the following sections in this
Annual Report:
●
Part I, Item 1A.
Risk Factors
●
Part I, Item 3.
Legal Proceedings
●
Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations:
-
GEL
Contract-Related Dispute and Final Arbitration
Award
-
Results of
Operations
-
Liquidity and
Capital Resources
●
Part II, Item 8.
Financial Statements and Supplementary Data, Notes to Consolidated
Financial Statements:
-
Note (8) Related
Party Transactions
-
Note (10) Long-Term
Debt, Net
-
Note (19)
Commitments and Contingencies – Legal
Matters
-
Note (20)
Subsequent Events
Refining Industry Overview
Crude oil refining
is the process of separating the hydrocarbons present in crude oil
into usable or refined petroleum products such as naphtha, diesel,
jet fuel and other products. Crude oil refining is primarily a
margin-based business where both crude oil and refined petroleum
products are commodities with prices that can fluctuate
independently for short periods due to supply, demand,
transportation and other factors. To increase profitability, or
improve margins, it is important for a crude oil refinery to
maximize the yields of higher value petroleum products and to
minimize the costs of feedstocks and operating expenses. There are
also several operational efficiencies that can be deployed to
improve margins. These include selecting the appropriate crude oil
or condensate to fulfill anticipated product demand, increasing the
amount and value of refined petroleum products processed from the
crude oil or condensate, reducing downtime for maintenance, repair
and investment, developing valuable by-products or production
inputs out of materials that are typically discarded, and adjusting
utilization rates.
A refinery's
product slate depends on the refinery's configuration and the type
of crude oil and/or condensate being refined, and can be adjusted
based on market demand. Although an increase or decrease in the
price for crude oil generally results in a similar increase or
decrease in prices for refined petroleum products, typically there
is a time lag between the comparable increase or decrease in prices
for refined petroleum products. The effect of changes in crude oil
prices on a refinery’s results of operations depends, in
part, on how quickly and how fully refined petroleum products
prices adjust to reflect these changes.
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Refinery Operations
Nixon
Facility
The Nixon Facility
is comprised of assets owned by LE and LRM. LE owns the
land, crude oil distillation unit, certain refined petroleum
product storage tanks and related piping, and loading and unloading
facilities and utilities. LRM owns the naphtha
stabilizer and depropanizer units, as well as certain petroleum
product storage tanks and related piping. Together, LE
and LRM own more than 1,000,000 bbls of crude oil, condensate, and
refined petroleum product storage capacity at the Nixon Facility.
Since 2015, the Nixon Facility has been undergoing a capital
improvement expansion project to construct over 800,000 bbls of
petroleum storage tankage. Increased petroleum storage
capacity: (i) assists with de-bottlenecking the facility, (ii)
supports increased refinery throughput up to approximately 30,000
bpd, and (iii) provides an opportunity to generate additional tank
rental revenue by leasing to third-parties. The Nixon
Facility is pledged as collateral under certain of our long-term
debt as discussed in “Part II, Item 8. Financial Statements
and Supplementary Data – Note (10) Long-Term Debt,
Net”.
A regional electric
cooperative supplies electrical power to the Nixon Facility. Fuel
gas that is produced at the Nixon Facility is primarily used as
fuel within the refinery. In addition, small amounts of
propane are occasionally acquired for use in starting-up the Nixon
Facility.
Nixon
Facility Process Summary
The Nixon Facility
is considered a “topping unit” because it is primarily
comprised of a crude oil distillation unit, the first stage of the
crude oil refining process. The Nixon Facility’s current
level of complexity allows crude oil and condensate to be refined
into finished and intermediate petroleum products. The
below diagram represents a high-level overview of the current crude
oil and condensate refining process at the Nixon
Facility.
Example represents a
simplified plant configuration. The specific
configuration will vary based on various market and operational
factors.
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Turnaround
and Refinery Reliability
We are committed to
the safe and efficient operation of the Nixon
Facility. Turnarounds are used to repair, restore,
refurbish or replace refinery equipment such as vessels, tanks,
reactors, piping, rotating equipment, instrumentation, electrical
equipment, heat exchangers and fired heaters. Typically,
a refinery undergoes a major facility turnaround every three to
five years. Since the Nixon Facility is still in the
recommissioning phase, one or more of the units may require
additional unscheduled downtime for unanticipated maintenance or
repairs that are more frequent than our scheduled
turnarounds.
Crude Oil and Condensate Supply
Operation of the
Nixon Facility depends on our ability to purchase adequate amounts
of crude oil and condensate on favorable terms. We
currently have in place a month-to-month evergreen crude supply
contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate, and we expect the
supplier to continue to do so for the foreseeable
future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital,
which have been adversely affected by net losses, working capital
deficits, the contract-related dispute with GEL, and financial
covenant defaults in secured loan agreements.
Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial
stability. If our business plan is unsuccessful, it
could affect our ability to acquire adequate supplies of crude oil
and condensate under the existing contract or
otherwise. Among other factors, the Final Arbitration
Award could prevent us from successfully executing our business
plan and could have a material adverse effect on our ability to
procure adequate amounts of crude oil and condensate from our
current supplier or otherwise. Further, because our
existing crude supply contract is a month-to-month arrangement,
there can be no assurance that crude oil and condensate supplies
will continue to be available under this contract in the
future.
Products and Markets
Products
The Nixon
Facility’s product slate can be moderately adjusted based on
market demand. We currently produce a single finished product
– jet fuel. We produce several intermediate products,
including naphtha, HOBM, and AGO.
Markets
The Nixon Facility
is in the Gulf Coast region of the U.S., which is represented by
the Energy Information Administration as Petroleum Administration
for Defense District 3 (“PADD 3”). Our products
are primarily sold in the U.S. within PADD 3. However,
with the opening of the Mexican refined products market to private
companies, we occasionally sell refined products to customers that
export to Mexico. LEH, which is HUBZone certified, purchases our
jet fuel and resells the jet fuel to a government
agency. Our intermediate products are primarily sold in
nearby markets to wholesalers and refiners as a feedstock for
further blending and processing. (See “Part I,
Item 1. Business – Management” and “Part II, Item
8. Financial Statements and Supplementary Data – Note (8)
Related Party Transactions, Note (10) Long-Term Debt, Net, and Note
(19) Commitments and Contingencies – Financing
Agreements” for additional disclosures related to
LEH.)
Customers
Customers for our
refined petroleum products include distributors, wholesalers and
refineries primarily in the lower portion of the Texas Triangle
(the Houston - San Antonio - Dallas/Fort Worth area). We have bulk
term contracts, including month-to-month, six months, and up to
one-year terms, in place with most of our customers. Certain of our
contracts require us to sell fixed quantities and/or minimum
quantities of finished and intermediate petroleum products and many
of these arrangements are subject to periodic renegotiation, which
could result in higher or lower relative prices for our refined
petroleum products. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (14) Concentration
of Risk” of this Annual Report for disclosures related to
significant customers.
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Competition
Many of our
competitors are substantially larger than us and are engaged on a
national or international basis in many segments of the petroleum
products business, including exploration and production, refining,
transportation and marketing. These competitors may have greater
flexibility in responding to or absorbing market changes occurring
in one or more of these business segments. We compete primarily
based on cost. Due to the low complexity of our simple
“topping unit” refinery, we can be relatively nimble in
adjusting our refined petroleum products slate because of changing
commodity prices, market demand, and refinery operating
costs.
Business Strategy
Our overall
business strategy is to improve operations, increase refinery
throughput, improve refining margins, and continue the safe and
reliable operation of the Nixon Facility. Successful
execution of our business strategy depends on several key factors,
including reaching an acceptable settlement with GEL, having
adequate crude oil and condensate supplies and continuing to meet
contractual obligations.
Nixon
Facility Capital and Efficiency Improvements
In 2015, LE and LRM
secured $35.0 million in the aggregate in 19-year financing to
expand the Nixon Facility. Since 2015, the Nixon Facility has been
undergoing a capital improvement expansion project to construct
over 800,000 bbls of petroleum storage tankage. At December
31, 2017, the refinery had more than 1,000,000 bbls of crude oil,
condensate, and refined petroleum product storage capacity in 27
tanks. Overall improvements at the Nixon Facility will position us
for long-term growth by: (i) having crude and product storage to
support refinery throughput and future expansion of up to 30,000
bpd; (ii) increasing the processing capacity and complexity of the
Nixon Facility for expanded refined product opportunities; and
(iii) generating additional revenue from leasing product and crude
storage to third parties. Capital expenditures at the
Nixon Facility are being funded primarily through borrowings under
credit bank facilities that were secured in 2015.
See “Part II,
Item 8. Financial Statements and Supplementary Data – Note
(10) Long-Term Debt, Net” for additional disclosures related
to borrowings for capital spending.
Improved
Financial Stability
As noted elsewhere
in this Annual Report, we began selling certain of our refined
petroleum products immediately following production, which
minimizes inventory, improves cash flow, and reduces commodity
risk/exposure. We also reduced our working capital
requirements in a rising cost environment by decreasing costs,
reducing inventory levels, improving our sales cycle, and receiving
pre-payments from certain customers. Management believes
that these efforts, combined with favorable margins, will improve
operations and liquidity. (See “Part I, Item 1.
Business – Going Concern” for certain factors that
raise substantial doubt about our ability to continue as a going
concern.)
Pipeline Transportation
Our pipeline
transportation operations involve the gathering and transportation
of oil and natural gas for producers/shippers operating offshore
near our pipelines, as well as leasehold interests in oil and
natural gas properties, in the Gulf of Mexico. We derived no
revenue from our Pipeline Transportation operations for the year
ended December 31, 2017. Our pipeline transportation
operations represented less than 1% of total revenue for the year
ended December 31, 2016.
We fully impaired
our pipeline assets at December 31, 2016. All pipeline
transportation services to third-parties have ceased, existing
third-party wells along our pipeline corridor are being permanently
abandoned, and no new third-party wells are being drilled near our
pipelines. However, management believes our pipeline assets have
future value based on large-scale, third-party production facility
expansion projects near the pipelines. Our oil and gas properties
had no production during the years ended December 31, 2017 and
2016. All leases associated with our oil and gas properties have
expired, and our oil and gas properties were fully impaired in
2011.
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Acquisition, Disposition and Restructuring
Activities
We regularly engage
in discussions with third-parties regarding the possible purchase
of assets and operations that are strategic and complementary to
our existing operations. However, we do not anticipate any material
acquisition activity in the foreseeable future.
In 2013, the Board
established a Master Limited Partnership (“MLP”)
Conversion Special Committee to oversee a potential conversion of
Blue Dolphin from a Delaware “C” corporation to a
Delaware MLP. Due to a shift in market conditions over the past
three years, the MLP Conversion Special Committee was dissolved in
March 2018.
Insurance and Risk Management
Our operations are
subject to significant hazards and risks inherent in crude oil and
condensate refining operations, as well as in the transportation
and storage of crude oil and condensate and finished and
intermediate petroleum products. We have property damage and
business interruption coverage at the Nixon Facility. Business
interruption coverage is for 24 months from the date of the loss,
subject to a deductible with a 45-day waiting period. Our property
damage insurance has deductibles ranging from $5,000 to $500,000.
In addition, we have a full suite of insurance policies covering
workers’ compensation, general liability, directors’
and officers’ liability, environmental liability, and other
business risks. These are supported by safety and other risk
management programs. See also, “Part I, Item 1A. Risk Factors
– Risks Related to Our Business” in this Annual
Report.
Governmental Regulation
Our operations and
properties are subject to extensive and complex federal, state, and
local environmental, health, and safety statutes, regulations, and
ordinances. These rules govern, among other things, the
generation, storage, handling, use and transportation of petroleum,
solid wastes, hazardous wastes, and hazardous substances; the
emission and discharge of materials into the environment and
environmental protection; waste management; characteristics and
composition of diesel and other fuels; and the monitoring,
reporting and control of greenhouse gas emissions. These laws
impose costly obligations on our operations, including requiring
the acquisition of permits and authorizations to conduct regulated
activities, restricting the way regulated activities are conducted,
limiting the quantities and types of materials that may be released
into the environment, and requiring the monitoring of releases of
materials into the environment.
Failure to comply
with environmental, health or safety laws and our existing permits
or other authorizations issued under such laws could result in
fines, civil or criminal penalties or other sanctions, injunctive
relief compelling the installation of additional controls, a
revocation of our permits, and/or the shutdown of our
facilities.
We cannot predict
the extent to which additional environmental, health, and safety
laws will be enacted in the future, or how existing or future laws
will be interpreted with respect to our operations. Many
environmental, health, and safety laws and regulations are becoming
increasingly stringent. The cost of compliance with and
governmental enforcement of environmental, health, and safety laws
may increase in the future. We may be required to make significant
capital expenditures or incur increased operating costs to achieve
or sustain compliance with applicable environmental, health, and
safety laws. This Governmental Regulation section should
be read in conjunction with “Part I, Item 1A. Risk
Factors” of this Annual Report, which discusses our
expectations regarding future events based on currently available
information.
Air
Emissions
Toxic Air
Pollutants
. The federal Clean Air Act (the
“CAA”)
is
a comprehensive law that regulates toxic air pollutants from
stationary and mobile sources. Among other things, the law
authorizes the Environmental Protection Agency (the
“EPA”) to establish National Ambient Air Quality
Standards to protect public health and public welfare and to
regulate emissions of hazardous air pollutants. The CAA, as well as
corresponding state laws and regulations regarding emissions of
pollutants into the air, affect our crude oil and condensate
processing operations and impact certain emissions sources located
offshore. Under the CAA, facilities that emit volatile organic
compounds (“VOCs”) or nitrogen oxides face increasingly
stringent regulations.
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Refineries, which
are major stationary sources of hazardous air pollutants, have
historically been high-visibility targets for enforcement by the
EPA under the CAA. Petroleum refineries are subject to
the EPA’s National Standards for Hazardous Air Pollutants.
These standards require petroleum refineries to meet emission
standards reflecting the application of the maximum achievable
control technology. The affected sources at petroleum refineries
are defined to include all process vents, storage vessels, marine
tank vessel loading operations, gasoline rack operations, equipment
leaks, and wastewater treatment systems located at the
refinery. To meet emission standards, we are required to
obtain permits, as well as test, monitor, report, and implement
control requirements.
Under the
EPA’s Mobile Source Air Toxics regulations most refineries
are required to produce transportation fuels for highway use at or
below 15 ppm sulfur for “on-road” and
“off-road” diesel and 30 ppm sulfur for gasoline. The
Nixon Facility does not produce gasoline, and the facility ceased
production of nonroad, locomotive, and marine, a
transportation-related diesel fuel product in 2014 – when the
new regulations took effect. Since 2014, the Nixon
Facility has produced HOBM, a non-transportation lubricant blend
product. “Topping units,” like the Nixon
Facility, typically lack a desulfurization process unit to lower
sulfur content levels within the range required by the EPA’s
sulfur control standards, and integration of such a desulfurization
unit generally requires additional permitting and significant
capital upgrades. We can produce and sell diesel with sulfur
content levels above the EPA’s sulfur control standards: (i)
in the U.S. as a feedstock to other refineries and blenders and
(ii) to other countries as a finished petroleum
product.
The EPA issued
three (3) final rules to cut emissions of methane from the oil and
gas industry. These final rules curb emissions of
methane, VOC’s, and air toxics from new, reconstructed and
modified oil and gas sources, while providing greater certainty
about CAA permitting requirements for the industry. The
EPA also issued an Information Collection Request
(“ICR”) to operators in the oil and natural gas
industry to obtain extensive information for developing regulations
to reduce methane emissions from existing oil and gas sources.
In March
2017, the EPA withdrew the ICR
request, effectively
immediately. As a result, responses to the ICR were no
longer required.
Greenhouse Gas Emissions
.
Emission of Greenhouse Gases (“GHGs”) is regulated by
the EPA under the CAA. By allowing the regulation of GHGs under the
CAA, the EPA’s findings also indirectly impacted many other
carbon-intensive industries, which would potentially become subject
to federal New Source Review Prevention of Significant
Deterioration and Title V permitting requirements under the CAA
(the “CAA Permitting Requirements”).
The EPA established
GHG emissions thresholds to define when permits under the CAA
Permitting Requirements are required for new and existing
industrial facilities (the “Tailoring Rule”). Emissions
from small farms, restaurants, and all but the very largest
commercial facilities are not covered by the Tailoring Rule. The
Tailoring Rule established a schedule that: (i) initially focused
on the largest stationary sources with the most CAA permitting
experience, (ii) then expanded to cover the largest stationary
sources of GHG that may not have been previously covered by the CAA
for other pollutants, and (iii) finally described the EPA’s
plan for any additional steps in this process. Without this
tailoring rule, the lower emissions thresholds would have taken
effect automatically for GHGs in 2011, leading to dramatic
increases in the number of required permits. The EPA implemented
the Tailoring Rule in phases.
In 2016, the EPA
updated New Source Performance Standards by setting emission limits
for methane, covering additional sources, such as hydraulically
fractured oil wells, and requiring owners/operators to find and
repair leaks. The EPA also updated the Source
Determination rules to clarify when multiple pieces of equipment
and activities must be deemed a single source when determining
whether major source permitting programs apply.
Although we are not
currently subject to reporting requirements under GHG-related
regulations, the future adoption of any regulations that require
reporting of GHGs or otherwise limit emissions of GHGs from the
Nixon Facility could require us to incur significant costs and
expenses or changes in operations, which could adversely affect our
operations and financial condition.
Renewable
Fuels
Pursuant to the
Energy Policy Act of 2005 and the Energy Independence and Security
Act of 2007, the EPA issued Renewable Fuels Standards
(“RFS”) that require the blending of biofuels into
transportation fuel. Since the compliance mechanism for RFS -
Renewable Identification Numbers – would have created a
burden on the Nixon Facility related to its nonroad, locomotive,
and marine production through 2014, LE applied for an extension of
the temporary exemption afforded small refineries through December
31, 2010 under the CAA Section 211(o)(9)(B). The EPA
granted the Nixon Facility a small refinery exemption from RFS
requirements for 2013 and 2014. In 2014, the Nixon
Facility began producing HOBM, a non-transportation lubricant blend
product that does not fall under RFS.
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BLUE DOLPHIN ENERGY
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FORM 10-K
12/31/17
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Hazardous
Waste
The Comprehensive
Environmental Response, Compensation, and Liability Act
(“CERCLA”) imposes strict, joint and several liability
on responsible parties with uncontrolled or abandoned hazardous
waste sites, as well as accidents, spills, and other emergency
releases of pollutants and contaminants into the
environment. The law authorizes two kinds of response actions:
(i) short-term removals, where actions may be taken to address
releases or threatened releases requiring prompt response, and (ii)
long-term remedial response actions, that permanently and
significantly reduce the dangers associated with releases or
threats of releases of hazardous substances that are serious, but
not immediately life threatening. As of the filing of this Annual
Report, neither we nor any of our predecessors have been designated
as a potentially responsible party under CERCLA or a similar state
statute.
The Resource
Conservation and Recovery Act (“RCRA”) and comparable
state and local laws impose requirements related to the handling,
storage, treatment and disposal of solid and hazardous wastes. Our
refining operations generate petroleum product wastes, solid
wastes, and ordinary industrial wastes, such as from paint and
solvents, that are regulated under RCRA and state law. Certain
wastes generated by the Nixon Facility are currently exempt from
regulation as hazardous wastes, but are subject to non-hazardous
waste regulations. In the future, these wastes could be designated
as hazardous wastes under RCRA or other applicable statutes and
therefore may become subject to more rigorous and costly
requirements.
The Nixon Facility
has been used for refining activities for many years. Although
prior owners and operators may have used operating and waste
disposal practices that were standard in the industry at the time,
petroleum hydrocarbons and various wastes may have been released on
or under the Nixon Facility site. A 2008 third-party environmental
study determined that petroleum hydrocarbon and VOC concentrations
were below Tier 1 protective concentration levels
(“PCLs”). However, RCRA-8 metals were found
to be above Tier 1 PCLs. An additional third-party study
determined that metal concentrations from the soil would not leach
beyond groundwater concentrations exceeding their respective
PCLs. As a result, groundwater resources were not
threatened, and no further reporting was required.
Water
Discharges
Stormwater from the
Nixon Facility is tested and discharged pursuant to applicable
stormwater permits. Process wastewater from the Nixon
Facility is tested and discharged to a nearby municipal treatment
facility pursuant to applicable process wastewater permits.
Wastewater from our offshore facilities, including our oil and
natural gas pipelines and anchor platform, are tested and
discharged pursuant to applicable produced water
permits.
Spill
Prevention and Control
The Clean Water Act
(the “CWA”) and analogous state laws impose
restrictions and stringent controls on the discharge of pollutants,
including oil, into federal and state waters. These laws affect our
crude oil and condensate processing operations and petroleum
storage and terminaling operations, as well as our pipeline,
facilities, and exploration and production assets. The CWA
prohibits the discharge of pollutants into U.S. waters except as
authorized by the terms of a permit issued by the EPA or a state
agency with delegated authority. Spill prevention, control, and
countermeasure requirements mandate the use of structures, such as
berms and other secondary containment, to prevent hydrocarbons or
other pollutants from reaching a jurisdictional body of water in
the event of a spill or leak. Federal and state regulatory agencies
can impose administrative, civil, and criminal penalties for
non-compliance with discharge permits or other requirements of the
CWA or analogous state laws and regulations.
The EPA covers
inland oil spills. In 2015, the EPA published a final rule
expanding the definition of “Waters of the United
States” under the CWA. Waters that are
specifically excluded from the EPA’s jurisdiction include,
among others, depressions incidental to mining or construction that
may become filled with water, puddles, groundwater, and stormwater
control features constructed to convey, treat, or store stormwater
on dry land. See “Offshore Safety and Environmental
Oversight” within this governmental regulation section for
information on o
il spills that occur in
coastal waters.
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Offshore
Safety and Environmental Oversight
In addition to the
CAA, our pipeline, exploration and production assets are also
subject to the requirements of the Outer Continental Shelf Lands
Act (the “OCSLA”). The OCSLA is administered by the
Bureau of Ocean Energy Management (the “BOEM”) and the
Bureau of Safety and Environmental Enforcement (the
“BSEE”) and the Office of Natural Resources Revenue.
The BSEE has partnered with the U.S. Coast Guard for oil spill
response. The BOEM and the BSEE have been more aggressive in
proposing and implementing several reforms to offshore oil and gas
regulations.
Spill Liability
. The
Oil Pollution Act of 1990 (the “OPA”) and the CWA,
combined with the OCSLA, impose liability on owners or operators of
vessels and facilities that discharge oil into the navigable waters
of the U.S., adjoining shorelines, waters of the contiguous zone,
or when the discharge may affect natural resources of the U.S. With
limited exceptions, responsible parties are liable for all removal
costs and damages arising from oil spills. Damages may
include: injury or economic losses resulting from destruction of
real or personal property, damages or loss of use of natural
resources used for subsistence, lost tax revenue, royalties, rents,
or net profit shares suffered by federal, state, or local
governments due to injury to real or personal property, lost
profits or impaired earning power because of injury to real or
personal property or natural resources, and the net costs of
providing increased or additional public services during or after
removal activities.
The BOEM has
increased the offshore limit of liability for damages under the OPA
from $75 million to $133.65 million, plus all clean-up costs, to
reflect the significant increase in the Consumer Price
Index. The onshore facilities limit of liability for
damages under the OPA is $350 million plus all clean-up
costs. A party cannot take advantage of the liability
limits if the spill is caused by gross negligence or willful
misconduct or resulted from a violation of federal safety,
construction or operating regulations. If a party fails to report a
spill or cooperate in the clean-up, liability limits do not
apply. The OPA requires responsible parties to provide
proof of financial responsibility for potential spills. The amount
required for certain types of offshore facilities located seaward
of the seaward boundary of a state, including properties used for
oil transportation, is $35 million. BDPL currently maintains the
statutory $35 million coverage.
Spill
Response
. Pursuant to the OPA, the National Oil
and Hazardous Substances Pollution Contingency Plan, more commonly
called the National Contingency Plan, provides a blueprint for
responding to both oil spills and hazardous substance
releases. The National Contingency Plan requires, among
other things, that responsible parties have an oil spill response
plan in place. We have an oil spill response plan in
place.
Decommissioning
Requirements
. To cover the various obligations of
lessees and rights-of-way holders operating in federal waters of
the Gulf of Mexico, the BOEM generally requires that lessees and
rights-of-way holders demonstrate financial strength and
reliability per regulations or post bonds or other acceptable
assurances that such obligations will be satisfied, unless the BOEM
exempts the lessee or rights-of-way holder from such financial
assurance requirements. Such obligations include the
cost of plugging and abandoning wells and decommissioning and
removing platforms and pipelines at the end of production or
service activities. Once plugging and abandonment work has been
completed, the collateral backing the financial assurance is
released by the BOEM.
Under a newer
financial assurance program model, the BOEM no longer: (i) grants
waivers from additional security obligations and (ii) considers the
combined strength and reliability of co-lessees when determining a
lessee’s additional security requirements. Also,
provided guidance and clarification regarding submission of
certified decommissioning cost expenditure summaries following
permanent plugging of any well, removal of any platform or other
facility, and clearance of any site.
The BOEM requested
that BDPL provide additional supplemental bonds or acceptable
financial assurance of approximately $4.6 million related to five
(5) existing pipeline rights-of-way. At December 31, 2017 and 2016,
BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to the
BOEM. Of the five (5) existing pipeline rights-of-ways
related to BOEM’s request, the pipeline associated with one
(1) right-of-way was decommissioned in 1997. The BSEE approved BDPL
permit requests to decommission in place the pipelines for three
(3) of these rights-of-way. As a result, management is
seeking a reduction in the amount of BOEM’s request for
additional financial assurance. There can be no
assurance that the BOEM will accept a reduced amount of
supplemental financial assurance or not require additional
supplemental pipeline bonds related to our existing pipeline
rights-of-way. If BDPL is required by the BOEM to
provide significant additional supplemental bonds or acceptable
financial assurance, we may experience a significant and material
adverse effect on our operations, liquidity, and financial
condition.
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Offshore
Safety
. Under the Workplace Safety Rule, BSEE
requires operators to employ a comprehensive safety and
environmental management system
(“SEMS”). SEMS and a subsequent revision to
SEMS (“SEMS II”) reduce human and organizational errors
as root causes of work-related accidents and offshore spills,
develop protocols as to who at the facility has the ultimate
operational safety and decision-making authority, and establish
procedures to provide all personnel with “stop work”
authority. SEMS II must be periodically audited by an independent
third-party auditor approved by the BSEE. BDPL has a
SEMS II plan in place.
Health,
Safety and Maintenance
We are subject to
several federal and state laws and regulations related to the
health and safety of workers pursuant to the Occupational Safety
and Health Act of 1970. These laws and regulations are administered
by the Occupational Safety and Health Administration (the
“OSHA”) and, in states not participating in
OSHA-approved s
tate
safety plans, comparable state regulatory
bodies.
Our refinery
operations are also subject to OSHA process safety management
regulations and the National Emphasis Program for Petroleum
Refineries (the “RNEP”). RNEP requires
refineries to be inspected for compliance with process safety
management regulations. Inspections may last from two to six
months, including one to three months onsite. Inspectors primarily
focus on process safety management implementation and
recordkeeping. The Nixon Facility was inspected by OSHA in 2013 and
again in June 2016. Following the 2013 inspection, LE
was assessed a civil penalty of $38,500. Following the 2016
inspection, LE was assessed a civil penalty of
$6,006. Citations issued by OSHA primarily related to
failure to comply with documentation and notice posting
requirements.
We operate a
comprehensive safety, health and security program, with
participation by personnel at all levels of the organization.
Despite our efforts to achieve excellence in our safety and health
performance, there can be no assurances that there will not be
accidents resulting in injuries or even fatalities. We routinely
monitor our programs and consider improvements in our management
systems.
Intellectual Property
We rely on
intellectual property laws to protect our brand, as well as those
of our subsidiaries. “Blue Dolphin Energy Company” is a
registered trademark in the U.S. in name and logo form.
“Petroport, Inc.” is a registered trademark in the U.S.
in name form. In addition,
“www.blue-dolphin-energy.com” is a registered domain
name.
Personnel
We rely on the
services of LEH pursuant to the Amended and Restated Operating
Agreement to manage our property and the property of our
subsidiaries, including the Nixon Facility, in the ordinary course
of business. LEH provides us with the following
personnel services under the Amended and Restated Operating
Agreement:
●
Personnel serving
in the capacities of corporate executive officers, including Chief
Executive Officer and Chief Financial Officer, as well as general
manager, operations, maintenance, environmental, and health and
safety personnel; and
●
Personnel providing
administrative and professional services, including accounting,
human resources, insurance, and regulatory
compliance.
All personnel work
for and are paid by LEH. Blue Dolphin is billed by LEH
at cost plus a 5% markup. See “Part II, Item 8.
Financial Statements and Supplementary Data - Note (8), Related
Party Transactions” of this Annual Report for additional
disclosures related to LEH.
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BLUE DOLPHIN ENERGY
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FORM 10-K
12/31/17
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Available Information
We are subject to
the informational requirements of the Exchange Act. We
file financial and other information with the SEC as required,
including but not limited to, proxy statements on Schedule 14A,
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, and
Current Reports on Form 8-K. The public may read and copy any
materials we file with the SEC at the SEC’s Public Reference
Room at 100 F Street, NE, Washington, D.C. 20549, on official
business days during the hours of 10:00 a.m. to 3:00
p.m. The public may obtain information on the operation
of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC also maintains an internet
website at
http:///www.sec.gov
that
contains reports, proxy information and information statements, and
other information regarding issuers, including us, that file
electronically with the SEC.
We also make our
SEC filings available through our website (
http://www.blue-dolphin-energy.com
)
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
ITEM
1A. RISK FACTORS
An investment in our Common Stock involves risks. In addition to
the other information in this Annual Report and our other filings
with the SEC, you should carefully consider the following risk
factors in evaluating us and our business. The risks described
below are not the only risks we face. Additional risks and
uncertainties not specified herein, not currently known to us, or
currently deemed to be immaterial may also materially adversely
affect our business, financial condition, operating results and/or
cash flows.
Any one of these
factors or a combination of these factors could materially affect
our future results of operations and could influence whether any
forward-looking statements ultimately prove to be accurate. Our
forward-looking statements are not guarantees of future
performance, and actual results and future performance may differ
materially from those suggested in any forward-looking statements.
We do not intend to update these statements unless we are required
to do so.
Risks Related to Our Business and Industry
The adverse outcome in the arbitration of the contract-related
dispute with GEL had a material adverse effect on our business,
financial condition, and results of operations and could materially
adversely affect the value of an investment in our common
stock.
As previously
disclosed, LE was involved in the GEL Arbitration with GEL, an
affiliate of Genesis, related to a contractual dispute involving
the Crude Supply Agreement and the Joint Marketing
Agreement. On August 11, 2017, the arbitrator delivered
the Final Arbitration Award. The Final Arbitration Award
denied all LE’s claims against GEL and granted substantially
all the relief requested by GEL in its
counterclaims. Among other matters, the Final
Arbitration Award awarded damages and GEL’s attorneys’
fees and related expenses to GEL in the aggregate amount of
approximately $31.3 million.
As previously
disclosed, a hearing on confirmation of the Final Arbitration Award
was scheduled to occur on September 18, 2017 in state district
court in Harris County, Texas. Prior to the scheduled hearing, LE
and GEL jointly notified the court that the hearing would be
continued for the Continuance Period to facilitate settlement
discussions between the parties. On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into the
GEL Letter Agreement, effective September 18, 2017, confirming the
parties’ agreement to the continuation of the confirmation
hearing during the Continuance Period, subject to the terms of the
GEL Letter Agreement.
The GEL Letter
Agreement has been amended to extend the Continuance Period through
April 30, 2018. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
pre-payments on indebtedness, other than in the ordinary course of
business as described in the GEL Letter Agreement, and from making
any payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements between November 1, 2017 and the end of the
Continuance Period. (Jonathan Carroll has received no
cash payments since August 2016 and no common stock payments since
May 2017 under the Amended and Restated Guaranty Fee
Agreements.) If the parties are unable to reach an
acceptable settlement with Genesis and GEL, and GEL seeks to
confirm and enforce the Final Arbitration Award, our business,
financial condition, and results of operations will be materially
affected, and LE would likely be required to seek protection under
bankruptcy laws.
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Veritex notified
obligors that the Final Arbitration Award constitutes an event of
default under secured loan agreements with Veritex. The
occurrence of events of default under the secured loan agreements
permits Veritex to declare the amounts owed under these loan
agreements immediately due and payable, exercise its rights with
respect to collateral securing our obligations under these loan
agreements, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not currently
exercising its rights, privileges and remedies under the secured
loan agreements considering the ongoing settlement discussions with
GEL and the continuance of the hearing on confirmation of the Final
Arbitration Award and to allow Veritex to evaluate any proposed
settlement agreement related to the Final Arbitration Award, which
would require Veritex’s approval. However, Veritex expressly
reserved all its rights, privileges and remedies related to events
of default under the secured loan agreements and informed obligors
that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements.
We can provide no
assurance as to whether negotiations with GEL will result in a
settlement, as to potential terms of any such settlement, whether
Veritex would approve of any such settlement, or whether Veritex
will exercise its rights and remedies under secured loan
agreements. If: (i) we are unable to reach an acceptable settlement
with GEL or Veritex does not approve any such settlement, (ii) GEL
seeks to confirm and enforce the Final Arbitration Award, or (iii)
Veritex exercises its rights and remedies under the secured loan
agreements, our business, financial condition, and results of
operations will be materially adversely affected, and LE would
likely be required to seek protection under bankruptcy
laws. In addition, our ability to procure adequate
amounts of crude oil and condensate and our relationships with our
customers could materially and adversely be affected, and the
trading prices 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.
For additional
information regarding the Final Arbitration Award, the GEL Letter
Agreement (as amended), and their potential effects on our
business, financial condition, and results of operations, see
“Part I, Item 3. Legal Proceedings,” Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations,” and the notes to our consolidated
financial statements in “Part II, Item 8. Financial
Statements and Supplementary Data.”
We may not have sufficient liquidity to sustain operations because
of net losses, working capital deficits, and other factors,
including the Final Arbitration Award, crude supply issues, and
financial covenant defaults in secured loan
agreements.
For the year ended
December 31, 2017, we reported a net loss of $22,328,390, or a loss
of $2.09 per share, compared to a net loss of $15,767,448, or a
loss of $1.51 per share, for the year ended December 31,
2016. The $0.58 per share increase in net loss between
the periods was the result of the Final Arbitration Award, which
was partially offset by improved margins for refined petroleum
products and increased sales volume. The amount expensed
in the period related to the Final Arbitration Award was
$24,338,628, which represented $2.28 per
share. Excluding the Final Arbitration Award, we would
have reported net income of $0.19 per share.
We had a working
capital deficit of $69,512,829 at December 31, 2017 compared to a
working capital deficit of $37,812,263 at December 31, 2016.
Excluding long-term debt, we had a working capital deficit of
$29,968,427 at December 31, 2017, compared to working capital of
$5,599,927 at December 31, 2016. The significant increase in
working capital deficit between the periods primarily related to
the Final Arbitration Award and a decrease in cash and cash
equivalents.
We had cash and
cash equivalents and restricted cash (current portion) of $495,296
and $48,980, respectively, at December 31,
2017. Comparatively, we had cash and cash equivalents
and restricted cash (current portion) of $1,152,628 and $3,347,835,
respectively, at December 31, 2016.
The Final
Arbitration Award awarded damages and GEL’s attorneys’
fees and related expenses to GEL in the aggregate amount of
approximately $31.3 million. We can provide no assurance
as to whether negotiations with GEL will result in a settlement, as
to potential terms of any such settlement, whether Veritex would
approve of any such settlement, or whether Veritex will exercise
its rights and remedies under secured loan agreements. If: (i) we
are unable to reach an acceptable settlement with GEL or Veritex
does not approve any such settlement, (ii) GEL seeks to confirm and
enforce the Final Arbitration Award, or (iii) Veritex exercises its
rights and remedies under the secured loan agreements, our
business, financial condition, and results of operations will be
materially adversely affected, and LE would likely be required to
seek protection under bankruptcy laws.
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Following the
cessation of crude supplies under the Crude Supply Agreement with
GEL, we put in place a month-to-month evergreen crude supply
contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate and having crude
supply continuity has boosted our customers’ confidence in
our performance ability and enabled us to slowly rebuild
counter-party relationships. However, we are currently
evaluating the effects of the Final Arbitration Award on our
business, financial condition, and results of
operations. In addition to the matters described above,
the Final Arbitration Award could materially and adversely affect
our ability to procure adequate amounts of crude oil and condensate
and our relationships with our customers.
As described
elsewhere in this Annual Report, Veritex notified obligors that the
Final Arbitration Award constitutes an event of default under
secured loan agreements with Veritex. (Within this
“Item 1A. Risk Factors” section, see also “Risks
Related to Our Business and Industry” for a discussion of
risks related to our financial covenant defaults with
Veritex.)
Currently, we rely
on revenue from operations, LEH and its affiliates (including
Jonathan Carroll), and borrowings under bank facilities to meet our
liquidity needs. During the year ended December 31, 2017, we
continued aggressive actions to improve operations and liquidity.
We began selling certain of our refined petroleum products
immediately following production, which minimizes inventory,
improves cash flow, and reduces commodity risk/exposure. We
completed construction on several new petroleum storage tanks at
the Nixon Facility. Increased petroleum storage capacity: (i)
assists with de-bottlenecking the facility, (ii) supports increased
refinery throughput up to approximately 30,000 bpd, and (iii)
provides an opportunity to generate additional tank rental revenue
by leasing to third-parties. We also reduced our working capital
requirements in a rising cost environment by decreasing costs,
reducing inventory levels, improving our sales cycle, and requiring
pre-payments from certain customers. Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial stability. However,
there can be no assurance that our business plan will be
successful, LEH and its affiliates will continue to fund our
working capital needs, or that we will be able to obtain additional
financing on commercially reasonable terms or at
all. Among other factors, the Final Arbitration Award
could prevent us from successfully executing our business
plan.
Our short-term
working capital needs are primarily related to acquisition of crude
oil and condensate to operate the Nixon Facility, repayment of debt
obligations, and capital expenditures for maintenance, upgrades,
and refurbishment of equipment at the Nixon Facility. Our long-term
working capital needs are primarily related to repayment of
long-term debt obligations. In addition, we continue to
utilize capital to reduce operational, safety and environmental
risks. We may incur substantial compliance costs relating to any
new environmental, health and safety regulations. Our liquidity
will affect our ability to satisfy any of these needs.
The dangers inherent in oil and gas operations could expose us to
potentially significant losses, costs or liabilities and reduce our
liquidity.
Oil and gas
operations are inherently subject to significant hazards and risks.
These hazards and risks include, but are not limited to, fires,
explosions, ruptures, blowouts, spills, third-party interference
and equipment failure, any of which could result in interruption or
termination of operations, pollution, personal injury and death, or
damage to our assets and the property of others. These risks could
harm our reputation and business, result in claims against us, and
have a material adverse effect on our results of operations and
financial condition.
The geographic concentration of our assets creates a significant
exposure to the risks of the regional economy and other regional
adverse conditions.
Our primary
operating asset, the Nixon Facility, is in Nixon, Texas in the
Eagle Ford Shale and we market our refined petroleum products in a
single, relatively limited geographic area. In addition,
our onshore facilities assets are in Freeport, Texas, and all our
pipelines, offshore facilities and oil and gas properties are
located within the Gulf of Mexico. As a result, our
operations are more susceptible to regional economic conditions
than our more geographically diversified
competitors. Any changes in market conditions,
unforeseen circumstances, or other events affecting the area in
which our assets are located could have a material adverse effect
on our business, financial condition, and results of operations.
These factors include, among other things, changes in the economy,
weather conditions, demographics, and population.
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Competition from companies having greater financial and other
resources could materially and adversely affect our business and
results of operations.
The refining
industry is highly competitive. Our refining operations
compete with domestic refiners and marketers in PADD 3 (Gulf
Coast), domestic refiners in other PADD regions, and foreign
refiners that import products into the U.S. Certain of our
competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. Several of
our principal competitors are integrated national or international
oil companies that are larger and have substantially greater
resources than we do and have access to proprietary sources of
controlled crude oil production. Unlike these competitors, we
obtain all our feedstocks from a single
supplier. Because of their integrated operations and
larger capitalization, larger, more complex refineries may be more
flexible in responding to volatile industry or market conditions,
such as crude oil and other feedstocks supply shortages or
commodity price fluctuations. If we are unable to
compete effectively, we may lose existing customers or fail to
acquire new customers.
Environmental laws and regulations could require us to make
substantial capital expenditures to remain in compliance or to
remediate current or future contamination that could give rise to
material liabilities.
Our operations are
subject to a variety of federal, state and local environmental laws
and regulations relating to the protection of the environment,
including those governing the emission or discharge of pollutants
into the environment, product specifications and the generation,
treatment, storage, transportation, disposal and remediation of
solid and hazardous wastes. Violations of these laws and
regulations or permit conditions can result in substantial
penalties, injunctive orders compelling installation of additional
controls, civil and criminal sanctions, permit revocations and/or
facility shutdowns.
In addition, new
environmental laws and regulations, new interpretations of existing
laws and regulations, increased governmental enforcement of laws
and regulations, or other developments could require us to make
additional unforeseen expenditures. Many of these laws and
regulations are becoming increasingly stringent, and the cost of
compliance with these requirements can be expected to increase over
time. The requirements to be met, as well as the technology and
length of time available to meet those requirements, continue to
develop and change. Expenditures or costs for environmental
compliance could have a material adverse effect on our results of
operations, financial condition, and profitability.
The Nixon Facility
operates under several federal and state permits, licenses, and
approvals with terms and conditions that contain a significant
number of prescriptive limits and performance standards. These
permits, licenses, approvals, limits, and standards require a
significant amount of monitoring, record keeping and reporting to
demonstrate compliance with the underlying permit, license,
approval, limit or standard. Non-compliance or incomplete
documentation of our compliance status may result in the imposition
of fines, penalties and injunctive relief. Additionally, there may
be times when we are unable to meet the standards and terms and
conditions of our permits, licenses and approvals due to
operational upsets or malfunctions, which may lead to the
imposition of fines and penalties or operating restrictions that
may have a material adverse effect on our ability to operate our
facilities, and accordingly our financial performance.
We are subject to strict laws and regulations regarding personnel
and process safety, and failure to comply with these laws and
regulations could have a material adverse effect on our results of
operations, financial condition and profitability.
We are subject to
the requirements of OSHA and comparable state statutes that
regulate the protection of the health and safety of workers, and
the proper design, operation and maintenance of our equipment. In
addition, OSHA and certain environmental regulations require that
we maintain information about hazardous materials used or produced
in our operations and that we provide this information to personnel
and state and local governmental authorities. Failure to comply
with these requirements, including general industry standards,
record keeping requirements and monitoring and control of
occupational exposure to regulated substances, may result in
significant fines or compliance costs, which could have a material
adverse effect on our results of operations, financial condition
and cash flows.
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Our insurance policies may be inadequate or expensive.
Our insurance
coverage does not cover all potential losses, costs or liabilities.
We could suffer losses for uninsurable or uninsured risks or in
amounts more than our existing insurance coverage. Our ability to
obtain and maintain adequate insurance may be affected by
conditions in the insurance market over which we have no control.
In addition, if we experience insurable events, we may experience
an increase in annual premiums, a limit on coverage, or loss of
coverage. Inadequate insurance or loss of coverage could
have a material adverse effect on our business, financial
condition, and results of operations.
LEH holds a significant interest in us, and our related party
transactions with LEH and its affiliates may cause conflicts of
interest that may adversely affect us.
Jonathan Carroll,
our Chief Executive Officer, President, Assistant Treasurer and
Secretary, is also a majority owner of LEH. Together LEH and
Jonathan Carroll own 80.2% of our Common Stock, and, pursuant to
the Amended and Restated Operating Agreement, manages and operates
all Blue Dolphin properties. LEH and Jonathan Carroll
have significant influence over matters such as the election of the
Board, control over our business, policies and affairs and other
matters submitted to our stockholders. LEH and Jonathan Carroll are
entitled to vote the Common Stock owned by LEH in accordance with
its interests, which may be contrary to the interests of other
stockholders. LEH has interests that may differ from the interests
of other stockholders and, as a result, there is a risk that
important business decisions will not be made in the best interest
of some of our stockholders.
LEH and its
affiliates are not limited in their ability to compete with us and
are not obligated to offer us business opportunities. We believe
that the transactions and agreements that we have entered with LEH
and its affiliates are on terms that are at least as favorable as
could reasonably have been obtained at such time from
third-parties. However, these relationships could create, or appear
to create, potential conflicts of interest when our Board is faced
with decisions that could have different implications for us and
LEH or its affiliates. The appearance of conflicts, even if such
conflicts do not materialize, might adversely affect the
public’s perception of us, as well as our relationship with
other companies and our ability to enter new relationships in the
future, which may have a material adverse effect on our ability to
do business.
Defaults under our secured loan agreements could have a material
adverse effect on our business, financial condition, and results of
operations and materially adversely affect the value of an
investment in our common stock.
As described
elsewhere in this Annual Report, Veritex notified obligors that the
Final Arbitration Award constitutes an event of default under
secured loan agreements with Veritex. In addition to
existing events of default related to the Final Arbitration Award,
at December 31, 2017, LE and LRM were in violation of the debt
service coverage ratio, the current ratio, and debt to net worth
ratio financial covenants related to the secured loan
agreements. LE also failed to replenish a payment
reserve account as required. The occurrence of events of
default under the secured loan agreements permits Veritex to
declare the amounts owed under the secured loan agreements
immediately due and payable, exercise its rights with respect to
collateral securing obligors’ obligations under the loan
agreements, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not
currently exercising its rights, privileges and remedies under the
secured loan agreements considering the ongoing settlement
discussions with GEL and the continuance of the hearing on
confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final
Arbitration Award, which would require Veritex’s
approval. However, Veritex expressly reserved all its
rights, privileges and remedies related to events of default under
the secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan
agreements. Any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material
adverse effect on our business, financial condition, and results of
operations and would likely require us to seek protection under
bankruptcy laws.
There can be no
assurance that: (i) our assets or cash flow would be sufficient to
fully repay borrowings under outstanding long-term debt, either
upon maturity or if accelerated, (ii) LE and LRM would be able to
refinance or restructure the payments on the long-term debt, and/or
(iii) Veritex will provide future waivers. Defaults under secured
loan agreements and any exercise by Veritex of its rights and
remedies related to such defaults may have a material adverse
effect on the trading prices of our common stock and on the value
of an investment in our common stock, and holders of our common
stock could lose their investment in our common stock in its
entirety, particularly if LE is required to seek bankruptcy
protection because of the exercise by Veritex of such rights and
remedies.
23
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BLUE DOLPHIN ENERGY
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|
FORM 10-K
12/31/17
|
For additional
information regarding defaults under our secured loan agreements
and their potential effects on our business, financial condition,
and results of operations, see “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations” and “Part II and the notes
to our financial statements in “Part II, Item 8. Financial
Statements and Supplementary Data.”
Our ability to use net operating loss (“NOL”)
carryforwards to offset future taxable income for U.S. federal
income tax purposes is subject to limitation.
Under Section 382
of the Internal Revenue Code of 1986, as amended (“IRC
Section 382”), a corporation that undergoes an
“ownership change” is subject to limitations on its
ability to utilize its pre-change NOL carryforwards to offset
future taxable income. Within the meaning of IRC Section 382, an
“ownership change” occurs when the aggregate stock
ownership of certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than 50
percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three
years).
Blue Dolphin
experienced ownership changes in 2005 because of a series of
private placements, and in 2012 because of a reverse
acquisition. The 2012 ownership change limits our
ability to utilize NOLs following the 2005 ownership change that
were not previously subject to limitation. Limitations imposed on
our ability to use NOLs to offset future taxable income could cause
U.S. federal income taxes to be paid earlier than otherwise would
be paid if such limitations were not in effect, and could cause
such NOLs to expire unused, in each case reducing or eliminating
the benefit of such NOLs. Similar rules and limitations may apply
for state income tax purposes. NOLs generated after the 2012
ownership change are not subject to limitation.
At December 31,
2017 and 2016, management determined that cumulative losses
incurred over the prior three-year period provided significant
objective evidence that limited the ability to consider other
subjective evidence, such as projections for future growth. Based
on this evaluation, we recorded a full valuation allowance against
the deferred tax assets as of December 31, 2017 and
2016.
Terrorist attacks, cyber-attacks, threats of war, or actual war may
negatively affect our operations, financial condition, results of
operations, and cash flows.
Energy-related
assets in the U.S. may be at a greater risk for future terrorist
attacks than other potential targets. A direct attack on our assets
or assets used by us could have a material adverse effect on our
operations, financial condition, results of operations, and cash
flows. In addition, any terrorist attack in the U.S. could have an
adverse impact on energy prices, including prices for crude oil and
refined petroleum products, and refining margins. Disruption or
significant increases in energy prices could result in
government-imposed price controls. While we currently maintain some
insurance that provides coverage against terrorist attacks, such
insurance has become increasingly expensive and difficult to
obtain. As a result, insurance providers may not continue to offer
this coverage to us on terms that we consider affordable, or at
all.
Our operations are
dependent on our technology infrastructure, which includes a data
network, telecommunications system, internet access, and various
computer hardware equipment and software applications. Our
technology infrastructure is subject to damage or interruption from
several potential sources, including natural disasters, software
viruses or other malware, power failures, cyber-attacks, and/or
other events. To the extent that our technology infrastructure is
under our control, we have implemented measures such as virus
protection software and emergency recovery processes to address
identified risks. However, there can be no assurance that a
security breach or cyber-attack will not compromise confidential,
business critical information, cause a disruption in our
operations, or harm our reputation, any of which could have a
material adverse effect on our business, financial condition,
results of operations and cash flows.
24
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BLUE DOLPHIN ENERGY
COMPANY
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|
FORM 10-K
12/31/17
|
Risks Related to Our Refining Operations
Management has determined that there is, and the report of our
independent registered public accounting firm expresses,
substantial doubt about our ability to continue as a going
concern.
Our auditors, UHY
LLP, have indicated in their report on our financial statements for
the year ended December 31, 2017, that conditions exist that raise
substantial doubt about our ability to continue as a going concern
due to the Final Arbitration Award, defaults in secured loan
agreements, recurring losses from operations, and the substantial
decline in working capital. A “going concern” opinion
could impair our ability to finance our operations through the sale
of equity, incurring debt, or other financing alternatives. Our
ability to continue as a going concern will depend upon reaching a
settlement agreement with GEL related to the Final Arbitration
Award, sustained positive operating margins, and financing at
commercially reasonable terms for working capital to operate the
Nixon Facility, purchase crude oil and condensate, and fund capital
expenditures. If we are unable to achieve these goals, our
business would be jeopardized, and we may not be able to
continue.
Refining margins are volatile, and a reduction in refining margins
will adversely affect the amount of cash we will have available for
working capital.
Historically,
refining margins have been volatile, and they are likely to
continue to be volatile in the future. Our financial results are
primarily affected by the relationship, or margin, between our
refined petroleum product sales prices and our crude oil and
condensate costs. Our crude oil and condensate
acquisition costs and the prices at which we can ultimately sell
our refined petroleum products depend upon numerous factors beyond
our control. The prices at which we sell refined petroleum products
are strongly influenced by the commodity price of crude oil. If
crude oil prices increase, our “refinery operations”
business segment margins will fall unless we can pass along these
price increases to our wholesale customers. Increases in the
selling prices for refined petroleum products typically trail the
rising cost of crude oil and may be difficult to implement when
crude oil costs increase dramatically over a short
period.
The price volatility of crude oil, other feedstocks, refined
petroleum products, and fuel and utility services may have a
material adverse effect on our earnings, cash flows and
liquidity.
Our refining
earnings, cash flows and liquidity from operations depend primarily
on the margin above operating expenses (including the cost of
refinery feedstocks, such as crude oil and condensate that are
processed and blended into refined petroleum products) at which we
can sell refined petroleum products. Crude oil refining is
primarily a margin-based business. To improve margins, it is
important for a crude oil refinery to maximize the yields of high
value finished petroleum produces and to minimize the costs of
feedstocks and operating expenses. When the margin between refined
petroleum product prices and crude oil and other feedstock costs
decreases, our margins are negatively affected. Crude oil refining
margins have historically been volatile, and are likely to continue
to be volatile, because of a variety of factors, including
fluctuations in the prices of crude oil, other feedstocks, refined
petroleum products, and fuel and utility services. Although an
increase or decrease in the price for crude oil generally results
in a similar increase or decrease in prices for refined petroleum
products, typically there is a time lag between the comparable
increase or decrease in prices for refined petroleum products. The
effect of changes in crude oil and condensate prices on our
refining margins therefore depends, in part, on how quickly and how
fully refined petroleum product prices adjust to reflect these
changes.
Prices of crude
oil, other feedstocks and refined petroleum products depend on
numerous factors beyond our control, including the supply of and
demand for crude oil, other feedstocks, and refined petroleum
products. Such supply and demand are affected by, among other
things:
●
changes in
foreign, domestic, and local economic conditions;
●
foreign and
domestic demand for fuel products;
●
worldwide
political conditions, particularly in significant oil producing
regions;
●
foreign and
domestic production levels of crude oil, other feedstocks, and
refined petroleum products and the volume of crude oil, feedstocks,
and refined petroleum products imported into the U.S.;
25
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BLUE DOLPHIN ENERGY
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FORM 10-K
12/31/17
|
●
availability of
and access to transportation infrastructure;
●
capacity
utilization rates of refineries in the U.S.;
●
Organization of
Petroleum Exporting Countries’ influence on oil
prices;
●
development and
marketing of alternative and competing fuels;
●
commodities
speculation;
●
natural
disasters (such as hurricanes and tornadoes), accidents,
interruptions in transportation, inclement weather or other events
that can cause unscheduled shutdowns or otherwise adversely affect
our refineries;
●
federal and
state governmental regulations and taxes; and
●
local factors,
including market conditions, weather conditions and the level of
operations of other refineries and pipelines in our
markets.
Our future success depends on our ability to acquire sufficient
levels of crude oil on favorable terms to operate the Nixon
Facility.
Operation of the
Nixon Facility depends on our ability to purchase adequate crude
supplies on favorable terms. Following the cessation of
crude supplies under the Crude Supply Agreement with GEL, we put in
place a month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently
provides us with adequate amounts of crude oil and condensate and
having crude supply continuity has boosted our customers’
confidence in our performance ability and enabled us to slowly
rebuild counter-party relationships. However, we are
currently evaluating the effects of the Final Arbitration Award on
our business, financial condition, and results of
operations. In addition to the matters described above,
the Final Arbitration Award could materially and adversely affect
our ability to procure adequate amounts of crude oil and condensate
and our relationships with our customers.
We are pursuing
alternative sources to finance crude oil and condensate acquisition
costs, including commodity sale and repurchase programs, inventory
financing, debt financing, equity financing, or other
means. We may not be successful in consummating suitable
financing transactions in the time required or at all, securing
financing on terms favorable to us, or obtaining crude oil and
condensate at the levels needed to earn a profit and/or safely
operate the Nixon Facility, any of which could adversely affect our
business, results of operations and financial
condition.
Downtime at the Nixon Facility could result in lost margin
opportunity, increased maintenance expense, increased inventory,
and a reduction in cash available for payment of our
obligations.
The safe and
reliable operation of the Nixon Facility is key to our financial
performance and results of operations, and we are particularly
vulnerable to disruptions in our operations because all our
refining operations are conducted at a single facility. Although
operating at anticipated levels, the Nixon Facility is still in a
recommissioning phase and may require unscheduled downtime for
unanticipated reasons, including maintenance and repairs, voluntary
regulatory compliance measures, or cessation or suspension by
regulatory authorities. Occasionally, the Nixon Facility
experiences a temporary shutdown due to power outages because of
high winds and thunderstorms. In the case of such a shutdown, the
refinery must initiate a standard start-up process, and such
process can last several days although we are typically able to
resume normal operations the next day. Any scheduled or
unscheduled downtime may result in lost margin opportunity,
increased maintenance expense and a build-up of refined petroleum
products inventory, which could reduce our ability to meet our
payment obligations.
For the year ended
December 31, 2017, the Nixon Facility operated for a total of 348
days, reflecting 17 days of refinery downtime. For the
year ended December 31, 2016, the Nixon Facility operated for a
total of 291 days, reflecting 75 days of refinery downtime. The
significant amount of refinery downtime during 2016 was primarily
the result of significant under-delivery of crude oil and
condensate by GEL, which resulted in 59 of the 75 days of refinery
downtime. (See “Part I, Item 3. Legal
Proceedings” and “Part II, Item 8. Financial Statements
and Supplementary Data – Note (19) Commitments and
Contingencies – Legal Matters” for disclosures related
to the GEL contract-related dispute and Final Arbitration
Award.)
26
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BLUE DOLPHIN ENERGY
COMPANY
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FORM 10-K
12/31/17
|
We may have capital needs for which our internally generated cash
flows and other sources of liquidity may not be
adequate. Further, LEH and its affiliates (including
Jonathan Carroll) may, but are not required to, fund our working
capital requirements in the event our internally generated cash
flows and other sources of liquidity are inadequate.
If we are unable to
generate sufficient cash flows or otherwise secure sufficient
liquidity to support our short-term and long-term capital
requirements, we may not be able to meet our payment obligations or
pursue our business strategies, any of which could have a material
adverse effect on our results of operations or
liquidity. Currently, we rely on revenue from
operations, including sales of refined petroleum products and
rental of petroleum storage tanks, LEH and its affiliates
(including Jonathan Carroll), and borrowings under bank facilities
to meet our liquidity needs. At December 31, 2017 and 2016,
accounts payable, related party was $974,400 and $369,600,
respectively.
In the event our
working capital requirements are inadequate, or we are otherwise
unable to secure sufficient liquidity to support our short term
and/or long-term capital requirements, we may not be able to meet
our payment obligations, comply with certain deadlines related to
environmental regulations and standards, or pursue our business
strategies, any of which may have a material adverse effect on our
results of operations or liquidity. Our short-term working capital
needs are primarily related to acquisition of crude oil and
condensate to operate the Nixon Facility, repayment of debt
obligations, and capital expenditures for maintenance, upgrades,
and refurbishment of equipment at the Nixon Facility. Our long-term
working capital needs are primarily related to repayment of
long-term debt obligations. Our liquidity will affect our ability
to satisfy all these needs.
Our business may suffer if any of the executive officers or other
key personnel discontinue employment with us. Furthermore, a
shortage of skilled labor or disruptions in our labor force may
make it difficult for us to maintain productivity.
Our future success
depends on the services of the executive officers and other key
personnel and on our continuing ability to recruit, train and
retain highly qualified personnel in all areas of our
operations. Furthermore, our operations require skilled
and experienced personnel with proficiency in multiple
tasks. Competition for skilled personnel with
industry-specific experience is intense, and the loss of these
executives or personnel could harm our business. If any of these
executives or other key personnel resign or become unable to
continue in their present roles and are not adequately replaced,
our business could be materially adversely affected.
Loss of market share by a key customer or consolidation among our
customer base that could harm our operating results.
For the year ended
December 31, 2017, we had 3 customers that accounted for
approximately 70% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and
accounted for approximately 33% of our refined petroleum product
sales. At December 31, 2017, these 3 customers
represented approximately $1.3 million in accounts
receivable. LEH represented approximately $0.7 million
in accounts receivable. LEH, which is HUBZone certified,
purchases our jet fuel and resells the jet fuel to a government
agency. (See “Part I, Item 1. Business –
Management” and “Part II, Item 8. Financial Statements
and Supplementary Data – Note (8) Related Party Transactions,
Note (10) Long-Term Debt, Net, and Note (19) Commitments and
Contingencies – Financing Agreements” for additional
disclosures related to LEH.)
For the year ended
December 31, 2016, we had 4 customers that accounted for
approximately 67% of our refined petroleum product
sales. LEH was one of these 4 significant customers and
accounted for approximately 27% of our refined petroleum product
sales. At December 31, 2016, these 4 customers represented
approximately $1.6 million in accounts receivable. LEH
represented approximately $1.6 million in accounts
receivable.
Our customers have
a variety of suppliers to choose from and therefore can make
substantial demands on us, including demands on product pricing and
on contractual terms, which often results in the allocation of risk
to us as the supplier. Our ability to maintain strong relationships
with our principal customers is essential to our future
performance. Our operating results could be harmed if a key
customer is lost, reduces their order quantity, requires us to
reduce our prices, is acquired by a competitor, or suffers
financial hardship.
27
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FORM 10-K
12/31/17
|
Additionally, our
profitability could be adversely affected if there is consolidation
among our customer base and our customers command increased
leverage in negotiating prices and other terms of sale. We could
decide not to sell our refined petroleum products to a certain
customer if, because of increased leverage, the customer pressures
us to reduce our pricing such that our gross profits are
diminished, which could result in a decrease in our revenue.
Consolidation may also lead to reduced demand for our products,
replacement of our products by the combined entity with those of
our competitors, and cancellations of orders, each of which could
harm our operating results.
The sale of refined petroleum products to the wholesale market is
our primary business, and if we fail to maintain and grow the
market share of our refined petroleum products, our operating
results could suffer.
Our success in the
wholesale market depends in large part on our ability to maintain
and grow our image and reputation as a reliable operator and to
expand into and gain market acceptance of our refined petroleum
products. Adverse perceptions of product quality, whether
justified, or allegations of product quality issues, even if false
or unfounded, could tarnish our reputation and cause our wholesale
customers to choose refined petroleum products offered by our
competitors.
We are dependent on third-parties for the transportation of crude
oil and condensate into and refined petroleum products out of our
Nixon Facility, and if these third-parties become unavailable to
us, our ability to process crude oil and condensate and sell
refined petroleum products to wholesale markets could be materially
and adversely affected.
We rely on trucks
for the receipt of crude oil and condensate into and the sale of
refined petroleum products out of our Nixon Facility. Since we do
not own or operate any of these trucks, their continuing operation
is not within our control. If any of the third-party trucking
companies that we use, or the trucking industry in general, become
unavailable to transport crude oil, condensate, and/or our refined
petroleum products because of acts of God, accidents, government
regulation, terrorism or other events, our revenue and net income
would be materially and adversely affected.
Our suppliers source a substantial amount, if not all, of our crude
oil and condensate from the Eagle Ford Shale and may experience
interruptions of supply from that region.
Our suppliers
source a substantial amount, if not all, of our crude oil and
condensate from the Eagle Ford Shale. Consequently, we may be
disproportionately exposed to the impact of delays or interruptions
of supply from that region caused by transportation capacity
constraints, curtailment of production, unavailability of
equipment, facilities, personnel or services, significant
governmental regulation, natural disasters, adverse weather
conditions, plant closures for scheduled maintenance or
interruption of transportation of oil or natural gas produced from
the wells in that area.
Our refining operations and customers are primarily located within
the Eagle Ford Shale and changes in the supply/demand balance in
this region could result in lower refining margins.
Our primary
operating asset, the Nixon Facility, is in the Eagle Ford Shale and
we market our refined petroleum products in a single, relatively
limited geographic area. Therefore, we are more susceptible to
regional economic conditions than our more geographically
diversified competitors. Should the supply/demand
balance shift in our region due to changes in the local economy, an
increase in refining capacity or other reasons, resulting in supply
in the PADD 3 (Gulf Coast) region to exceed demand, we would have
to deliver refined petroleum products to customers outside of our
current operating region and thus incur considerably higher
transportation costs, resulting in lower refining
margins.
Regulation of GHG emissions could increase our operational costs
and reduce demand for our products.
Continued political
focus on climate change, human activities contributing to the
release of large amounts of carbon dioxide and other GHGs into the
atmosphere, and potential mitigation through regulation could have
a material impact on our operations and financial
results. International agreements and federal, state and
local regulatory measures to limit GHG emissions are currently in
various stages of discussion and implementation. These and other
GHG emissions-related laws, policies, and regulations may result in
substantial capital, compliance, operating, and maintenance costs.
The level of expenditure required to comply with these laws and
regulations is uncertain and is expected to vary depending on the
laws enacted in each jurisdiction, our activities in the particular
jurisdiction, and market conditions. The effect of regulation on
our financial performance will depend on many factors including,
among others, the sectors covered, the GHG emissions reductions
required by law, the extent to which we would be entitled to
receive emission allowance allocations, our ability to acquire
compliance related equipment, the price and availability of
emission allowances and credits, and our ability to recover
incurred regulatory compliance costs through the pricing of our
products. Material price increases or incentives to conserve or use
alternative energy sources could also reduce demand for products we
currently sell and adversely affect our sales volumes, revenues and
margins.
28
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BLUE DOLPHIN ENERGY
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FORM 10-K
12/31/17
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Risks Related to Our Pipelines and Oil and Gas
Properties
Requests by the BOEM to increase bonds or other sureties to
maintain compliance with the BOEM’s regulations could
significantly impact our liquidity and financial
condition.
To cover the
various obligations of lessees on the Outer Continental Shelf, such
as the cost to plug and abandon wells and decommission and remove
platforms and pipelines at the end of production, the BOEM
generally requires that lessees demonstrate financial strength and
reliability per regulations or post bonds or other acceptable
assurances that such obligations will be satisfied.
The BOEM requested
that BDPL provide additional supplemental bonds or acceptable
financial assurance of approximately $4.6 million related to five
(5) existing pipeline rights-of-way. At December 31, 2017 and 2016,
BDPL maintained approximately $0.9 million in credit and
cash-backed pipeline rights-of-way bonds issued to the
BOEM. Of the five (5) existing pipeline rights-of-ways
related to BOEM’s request, the pipeline associated with one
(1) right-of-way was decommissioned in 1997. The BSEE approved BDPL
permit requests to decommission in place the pipelines for three
(3) of these rights-of-way. As a result, management is
seeking a reduction in the amount of BOEM’s request for
additional financial assurance. There can be no
assurance that the BOEM will accept a reduced amount of
supplemental financial assurance or not require additional
supplemental pipeline bonds related to our existing pipeline
rights-of-way. If BDPL is required by the BOEM to
provide significant additional supplemental bonds or acceptable
financial assurance, we may experience a significant and material
adverse effect on our operations, liquidity, and financial
condition.
More stringent requirements imposed by the BOEM and the BSEE
related to the decommissioning, plugging, and abandonment of wells,
platforms, and pipelines could materially increase our estimate of
future AROs.
The BOEM has
established a more stringent regimen for the timely decommissioning
of what is known as “idle iron” – wells,
platforms, and pipelines that are no longer producing or serving
exploration or support functions related to an operator’s
lease. Any well that has not been used during the past
five years for exploration or production on active leases and is no
longer capable of producing in paying quantities must be
permanently plugged or temporarily abandoned within three years.
Plugging or abandonment of wells may be delayed by two years if all
the well’s hydrocarbon and sulfur zones are appropriately
isolated. Similarly, platforms or other facilities which are no
longer useful for operations must be removed within five years of
the cessation of operations. The triggering of these plugging,
abandonment, and removal activities under what may be viewed as an
accelerated schedule in comparison to historical decommissioning
efforts could cause an increase, perhaps materially, in our future
plugging, abandonment, and removal costs, which may translate into
a need to increase our estimate of future AROs.
Although management
has used its best efforts to determine future AROs, assumptions and
estimates can be influenced by many factors beyond
management’s control. Such factors include, but are not
limited to, changes in regulatory requirements, changes in costs
for abandonment related services and technologies, which could
increase or decrease based on supply and demand, and/or extreme
weather conditions, such as hurricanes, which may cause structural
or other damage to pipeline and related assets and oil and gas
properties. At December 31, 2017 and 2016, our estimated future
asset retirement obligations were approximately $2.3
million. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (11) Asset
Retirement Obligations” of this Annual Report for additional
information regarding asset retirement obligations.
ITEM
1B. UNRESOLVED STAFF COMMENTS
None.
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FORM 10-K
12/31/17
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ITEM
2. PROPERTIES
LEH manages and
operates all Blue dolphin properties pursuant to the Amended and
Restated Operating Agreement. Management believes that
our properties are generally adequate for our operations and are
maintained in a good state of repair in the ordinary course of
business. Following is a summary of our principal
facilities and assets:
|
Property
|
|
Operating
Subsidiary
|
|
Owned /
Leased
|
|
Location
|
|
|
|
|
|
|
|
|
|
Refinery Operations
|
|
|
|
|
|
|
|
●
Nixon Facility (56
acres)
|
|
LE,
LRM
|
|
owned
|
|
Nixon,
Texas
|
|
|
|
|
|
|
|
|
|
Corporate and Other
|
|
|
|
|
|
|
|
●
Freeport Facility
(162 acres)
|
|
BDPL
|
|
owned
|
|
Freeport,
Texas
|
|
|
|
|
|
|
|
|
|
●
Pipelines and oil
and gas working interests in wells
|
|
BDPL,
BDPC
|
|
Owned and leasehold
interests
|
|
Gulf of
Mexico
|
|
|
|
|
|
|
|
|
|
●
Corporate
headquarters
|
|
BDSC
|
|
leased
|
|
Houston,
Texas
|
Nixon Facility
. See “Part
I, Item 1. Business – Company Overview and Refinery
Operations” for a description of the Nixon Facility. The
Nixon Facility is pledged as collateral under certain of our
long-term debt as discussed in “Part II, Item 8. Financial
Statements and Supplementary Data – Note (10) Long-Term Debt,
Net”.
Freeport Facility
. The Freeport
Facility includes pipeline easements and rights-of-way, crude oil
and natural gas separation and dehydration facilities, a vapor
recovery unit and two onshore pipelines. The two onshore pipelines
consist of approximately 4 miles of the 20-inch Blue Dolphin
Pipeline and a 16-inch natural gas pipeline that connects the
Freeport Facility to the Dow Chemical Plant Complex in Freeport,
Texas. In February 2017, BDPL sold approximately 15
acres of property located in Brazoria County, Texas to FLIQ Common
Facilities, LLC, an affiliate of FLNG.
Pipelines and Oil and Gas
Assets
. The following provides a summary of our pipeline and
oil and gas assets, all of which are in the Gulf of
Mexico:
|
|
|
|
Natural Gas
|
|
|
|
|
Capacity
|
|
Pipeline
|
Ownership
|
Miles
|
(MMcf/d)
|
|
Blue Dolphin Pipeline
(1)
|
100
%
|
38
|
180
|
|
GA 350 Pipeline
(1)
|
100
%
|
13
|
65
|
|
Omega Pipeline
(2)
|
100
%
|
18
|
110
|
_____________________
(1)
Currently
inactive.
(2)
Currently abandoned
in place.
●
Blue Dolphin
Pipeline – The Blue Dolphin Pipeline consists of 16-inch and
20-inch offshore pipeline segments, including a trunk line and
lateral lines, that run from an offshore anchor platform in
Galveston Area Block 288 to our Freeport
Facility;
●
GA 350 Pipeline
– The GA 350 Pipeline is an 8-inch offshore pipeline
extending from Galveston Area Block 350 to a subsea interconnect
and tie-in with a transmission pipeline in Galveston Area Block
391; and
●
Omega Pipeline
– The Omega Pipeline is a 12-inch offshore pipeline that
originates in the High Island Area, East Addition Block A-173 and
extends to West Cameron Block 342, where it was previously
connected to the High Island Offshore System.
30
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management
performed periodic impairment testing of our pipeline and
facilities assets in the fourth quarter of 2016. Upon completion of
that testing, we recorded an impairment expense of $968,684 related
to our pipeline assets at December 31, 2016. All
pipeline transportation services to third-parties have ceased,
existing third-party wells along our pipeline corridor have been
permanently abandoned, and no new third-party wells are being
drilled near our pipelines. However, management believes
our pipeline assets have future value based on large-scale,
third-party production facility expansion projects near the
pipelines.
Oil and gas
properties include a 2.5% working interest and a 2.008% net revenue
interest in High Island Block 115, a 0.5% overriding royalty
interest in Galveston Area Block 321, and a 2.88% working interest
and 2.246% net revenue interest in High Island Block
37. Our oil and gas properties had no production during
the years ended December 31, 2017 and 2016, and all leases
associated with our oil and gas properties have
expired. Accordingly, our oil and gas properties were
fully impaired in 2011.
Corporate Headquarters
. We
lease 7,675 square feet of office space in Houston, Texas. Our
office lease is discussed more fully in “Part II, Item 8.
Financial Statements and Supplementary Data – Note (15)
Leases” of this Annual Report.
ITEM
3. LEGAL PROCEEDINGS
GEL Contract-Related Dispute and Final Arbitration
Award
As previously
disclosed, LE was involved in the GEL Arbitration with GEL, an
affiliate of Genesis, related to a contractual dispute involving
the Crude Supply Agreement and the Joint Marketing Agreement, each
between LE and GEL and dated August 12, 2011. On August
11, 2017, the arbitrator delivered the Final Arbitration
Award. The Final Arbitration Award denied all LE’s
claims against GEL and granted substantially all the relief
requested by GEL in its counterclaims. Among other
matters, the Final Arbitration Award awarded damages and
GEL’s attorneys’ fees and related expenses to GEL in
the aggregate amount of approximately $31.3 million.
As previously
disclosed, a hearing on confirmation of the Final Arbitration Award
was scheduled to occur on September 18, 2017 in state district
court in Harris County, Texas. Prior to the scheduled hearing, LE
and GEL jointly notified the court that the hearing would be
continued for the Continuance Period to facilitate settlement
discussions between the parties. On September 26, 2017, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into the
GEL Letter Agreement, confirming the parties’ agreement to
the continuation of the confirmation hearing during the Continuance
Period, subject to the terms of the GEL Letter
Agreement.
The GEL Letter
Agreement has been amended to extend the Continuance Period through
April 30, 2018. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
pre-payments on indebtedness, other than in the ordinary course of
business as described in the GEL Letter Agreement, and from making
any payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements between November 1, 2017 and the end of the
Continuance Period. (Jonathan Carroll has received no
cash payments since August 2016 and no common stock payments since
May 2017 under the Amended and Restated Guaranty Fee
Agreements.) If the parties are unable to reach an
acceptable settlement with Genesis and GEL, and GEL seeks to
confirm and enforce the Final Arbitration Award against LE, our
business, financial condition, and results of operations will be
materially affected, and LE would likely be required to seek
protection under bankruptcy laws.
Other Legal Matters
From time to time
we are involved in routine lawsuits, claims, and proceedings
incidental to the conduct of our business, including
mechanic’s liens and administrative
proceedings. Management does not believe that such
matters will have a material adverse effect on our financial
position, earnings, or cash flows.
ITEM 4. MINE AND SAFETY DISCLOSURES
Not
applicable.
31
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
PART II
ITEM
5. MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER
MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our Common Stock
currently trades on the OTCQX U.S. tier of the OTC Markets under
the ticker symbol “BDCO." The following table sets
forth, for the periods indicated, the high and low bid prices for
our Common Stock as reported by the OTC Markets. The quotations
reflect inter-dealer prices, without adjustment for retail
mark-ups, markdowns or commissions and may not represent actual
transactions.
|
Quarter Ended
|
High
|
Low
|
|
2017
|
|
|
|
December 31
|
$
0.90
|
$
0.06
|
|
September
30
|
$
1.77
|
$
0.02
|
|
June
30
|
$
2.75
|
$
1.25
|
|
March
31
|
$
4.00
|
$
3.00
|
|
|
|
|
|
2016
|
|
|
|
December
31
|
$
3.90
|
$
2.62
|
|
September
30
|
$
4.10
|
$
1.69
|
|
June
30
|
$
4.30
|
$
4.00
|
|
March
31
|
$
5.01
|
$
3.60
|
Stockholders
At April 2, 2018,
we had 271 record holders of our Common Stock. We have
approximately 3,000 beneficial holders of our Common
Stock.
Dividends
Under certain of
our secured loan agreements, we are restricted from declaring or
paying any dividend on our Common Stock without the prior written
consent of the lender. We have not declared any
dividends on our Common Stock during the last two fiscal
years.
Not
applicable.
Remainder of Page
Intentionally Left Blank
32
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
You should read the following discussion together with the
financial statements and the notes thereto included elsewhere in
this Annual Report. This discussion contains forward-looking
statements that are based on management’s current
expectations, estimates, and projections about our business and
operations. The cautionary statements made in this Annual Report
should be read as applying to all related forward-looking
statements wherever they appear in this Annual Report. Our actual
results may differ materially from those currently anticipated and
expressed in such forward-looking statements due to many factors,
including those we discuss under “Part I, Item 1A.
Risk Factors” and elsewhere in this Annual Report. You should
read such risk factors
and
forward-looking statements in this Annual
Report.
Company Overview
See
“Part I, Item 1. Business” for detailed
information related to our business and operations.
Major Influences on Results of Operations
As a margin-based
business, our refinery operations are primarily affected by gross
margin per bbl, product slate, and refinery downtime.
Price
Differentials per Bbl
The per bbl price
of crude oil and condensate (input) and refined petroleum products
(output) are the most significant driver of margins, and they have
historically been subject to wide fluctuations. Our per bbl cost to
acquire crude oil and condensate and the per bbl price for which
our refined petroleum products are ultimately sold depend on the
economics of supply and demand. Supply and demand are affected by
numerous factors, most, if not all, of which are beyond our
control, including:
●
Domestic and
foreign market conditions, political affairs, and economic
developments;
●
Import supply
levels and export opportunities;
●
Existing domestic
inventory levels;
●
Operating and
production levels of competing refineries;
●
Expansion and/or
upgrades of competitors’ facilities;
●
Governmental
regulations (e.g., mandated renewable fuels standards, proposed
climate change laws and regulations, and increased mileage
standards for vehicles);
●
Weather
conditions;
●
Availability of and
access to transportation infrastructure;
●
Availability of
competing fuels (e.g., renewables); and
●
Seasonal
fluctuations.
For the year ended
December 31, 2017 (the “Current Year”), gross margin
per bbl was $3.98 compared to $1.67 for the year ended December 31,
2016 (the “Prior Year”), reflecting an increase of
$2.31. Our gross profit increased from $6,140,790 in the Prior Year
to $17,344,629 in the Current Year, reflecting an increase of
$11,203,839. The increase between the periods was
because of improved margins on refined petroleum products and
increased sales volume.
33
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Product
Slate
Management
periodically determines whether to change the Nixon
Facility’s product mix, as well as maintain, increase, or
decrease inventory levels based on various
factors. These factors include the crude oil pricing
market in the U.S. Gulf Coast region, the refined petroleum
products market in the same region, the relationship between these
two markets, fulfilling contract demands, and other factors that
may impact our operations, financial condition, and cash
flows.
Refinery
Downtime
The safe and
reliable operation of the Nixon Facility is key to our financial
performance and results of operations, and we are particularly
vulnerable to disruptions in our operations because all our
refining operations are conducted at a single facility. Although
operating at anticipated levels, the Nixon Facility is still in a
recommissioning phase and may require unscheduled downtime for
unanticipated reasons, including maintenance and repairs, voluntary
regulatory compliance measures, or cessation or suspension by
regulatory authorities.
Occasionally, the
Nixon Facility experiences a temporary shutdown due to power
outages from high winds and thunderstorms. In such cases, we must
initiate a standard refinery start-up process, which can last
several days. We are typically able to resume normal operations the
next day. Any scheduled or unscheduled downtime may
result in lost margin opportunity, increased maintenance expense
and a build-up of refined petroleum products inventory, which could
reduce our ability to meet our payment obligations.
Key Relationships
Relationship
with LEH
Blue Dolphin and
certain of its subsidiaries are currently party to a variety of
agreements with LEH. Related party agreements with LEH
include: (i) an Amended and Restated Operating Agreement with Blue
Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE, (iii) a
Loan and Security Agreement with BDPL, (iv) an Amended and Restated
Promissory Note with Blue Dolphin, and (v) a Debt Assumption
Agreement with LE. In addition, we currently rely on advances from
LEH and its affiliates (including Jonathan Carroll) to fund our
working capital requirements. There can be no assurances that LEH
and its affiliates will continue to fund our working capital
requirements. (See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (8) Related Party
Transactions” for additional disclosures related to
agreements that we have in place with LEH and its
affiliates.)
Relationship
with Crude Supplier
Operation of the
Nixon Facility depends on our ability to purchase adequate amounts
of crude oil and condensate on favorable terms. We
currently have in place a month-to-month evergreen crude supply
contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate, and we expect the
supplier to continue to do so for the foreseeable
future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital,
which have been adversely affected by net losses, working capital
deficits, the contract-related dispute with GEL, and financial
covenant defaults in secured loan agreements. Management
believes that it is taking the appropriate steps to improve
operations at the Nixon Facility and our overall financial
stability. If our business plan is unsuccessful, it
could affect our ability to acquire adequate supplies of crude oil
and condensate under the existing contract or
otherwise. Further, because our existing crude supply
contract is a month-to-month arrangement, there can be no assurance
that crude oil and condensate supplies will continue to be
available under this contract in the future.
34
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Results of Operations
Effective January
1, 2017, we began reporting a single business segment –
Refinery Operations. Business activities related to our
Refinery Operations business segment are conducted at the Nixon
Facility. Due to their small size, amounts associated
with Pipeline Transportation operations for the Current Year were
reclassified to Corporate and Other. Pipeline Transportation
operations diminished significantly as services to third-parties
ceased and third-party wells along our pipeline corridor were
permanently abandoned.
In this Results of
Operations section, we review:
●
Consolidated
results (for our Refinery Operations business segment and Corporate
and Other);
●
Non-GAAP financial
measures; and
●
Refinery Operations
business segment results.
Consolidated
Results
Current Year Compared to Prior
Year
.
Total Revenue from Operations
. For the
Current Year, we had total revenue from operations of $258,449,579
compared to total revenue from operations of $167,855,316 for the
Prior Year, an increase of approximately
54%. Approximately 64% of the increase between the
periods was the result of improved margins for refined petroleum
products while approximately 36% of the increase was due to
increased sales volume.
Cost of Refined Products Sold
. Cost of
refined products sold was $241,104,950 for the Current Year
compared to $161,714,526 for the Prior Year. The
approximate 49% increase in cost of refined products sold was the
result of higher crude oil prices and increased sales volume in the
Current Year compared to the Prior Year.
Gross Profit
. For the Current Year,
gross profit totaled $17,344,629 compared to gross profit of
$6,140,790 for the Prior Year. The $11,203,839 increase
between the periods related to improved margin for refined
petroleum products and increased sales volume in the Current Year
compared to the Prior Year.
Refinery Operating
Expenses
. We recorded refinery operating expenses
of $8,145,553 in the Current Year compared to $12,040,676 in the
Prior Year, a decrease of approximately 32%. Refinery
operating expenses per bbl of throughput were $1.81 in the Current
Year compared to $3.35 in the Prior Year. The $1.54
decrease in refinery operating expenses per bbl of throughput
between the periods was the result of: (i) significantly lower
refinery operating expenses under the Amended and Restated
Operating Agreement, which was restructured following cessation of
crude supply and marketing activities under the Crude Supply
Agreement and Joint Marketing Agreement with GEL and (ii) a
decrease in off-site tank leasing expense under an Amended and
Restated Tank Lease Agreement. (See “Part II, Item 8.
Financial Statements and Supplementary Data – Note (8)
Related Party Transactions” for additional disclosures
related to components of refinery operating expenses, the Amended
and Restated Operating Agreement, and the Amended and Restated Tank
Lease Agreement.)
JMA Profit Share.
For the
Current Year, the JMA Profit Share was $0 compared to an expense of
$359,260 for the Prior Year. Elimination of the JMA
Profit Share between the periods was the result of cessation of
marketing activities under the Joint Marketing
Agreement. (See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (19) Commitments and
Contingencies – Legal Matters” for further discussion
related to the Joint Marketing Agreement, JMA Profit Share, Gross
Profits and the contract-related dispute with GEL.)
Arbitration Award and Associated
Fees
. For the Current Year, we recorded
$24,338,668 in expenses associated with the Final Arbitration
Award. There were no such expenses in the Prior
Year.
General and Administrative Expenses
. We
incurred general and administrative expenses of $4,021,962 in the
Current Year compared to $2,708,594 in the Prior
Year. The 51% increase in general and administrative
expenses in the Current Year compared to the Prior Year primarily
related to an increase in legal fees. Legal fees, the majority of
which were associated with the contract-related dispute with GEL,
totaled $2,142,478 in the Current Year compared to $1,093,050 in
the Prior Year.
35
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Depletion, Depreciation and
Amortization
. We recorded depletion, depreciation
and amortization expenses of $1,810,134 in the Current Year
compared to $1,935,644 in the Prior Year. The
approximate 6% decrease in depletion, depreciation and amortization
expenses for the Current Year compared to the Prior Year was
primarily due to lower depreciation related to our pipeline assets,
which were fully impaired in December 2016.
Impairment
Expense
. Impairment expense totaled $303,346 for
the Current Year compared to $968,684 for the Prior
Year. We fully impaired our trade name intangible asset
at December 31, 2017, resulting in the impairment expense of
$303,346. The impairment expense in the Prior Year related to our
pipeline fixed assets.
Other Income
(Expense).
Total other income (expense) was
expense of $457,026 in the Current Year compared to income of
$70,326 in the Prior Year. During the Current Year, a
gain on the disposal of property was offset by an increase in
working capital loan interest and lower easement income. In
February 2017, BDPL sold approximately 15 acres of property located
in Brazoria County Texas to FLIQ Common Facilities, LLC, an
affiliate of FLNG. In conjunction with the sale of real
estate, the Master Easement Agreement was terminated.
Income Tax Benefit
. We
recognized an income tax benefit of $0 in the Current Year compared
to an income tax expense of $3,607,237 in the Prior
Year. Income tax expense in the Prior Year primarily
related to a full valuation allowance against deferred tax assets
as of December 31, 2016. (See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (16) Income
Taxes” for additional disclosures related to income
taxes.)
Net Loss
. For the Current
Year, we reported a net loss of $22,328,390, or loss of $2.09 per
share, compared to a net loss of $15,767,448, or loss of $1.51 per
share, for the Prior Year. The $0.58 per share increase in net loss
between the periods was the result of the Final Arbitration Award,
which was partially offset by improved margins for refined
petroleum products and increased sales volume. The
amount expensed in the period related to the Final Arbitration
Award was $24,338,628, which represented $2.28 per
share. Excluding the Final Arbitration Award, we would
have reported net income of $0.19 per share.
Remainder of Page
Intentionally Left Blank
36
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Non-GAAP
Financial Measures
To supplement our
consolidated results, management uses EBITDA, a non-GAAP financial
measures, to help investors evaluate our ongoing operating results
and allow for greater transparency in reviewing our overall
financial, operational and economic performance. EBITDA is
reconciled to GAAP-based results below. EBITDA should not be
considered an alternative for GAAP results. EBITDA is provided to
enhance an overall understanding of our financial performance for
the applicable periods and is an indicator management believes is
relevant and useful. EBITDA may differ from similar calculations
used by other companies within the petroleum industry, thereby
limiting its usefulness as a comparative measure. (See “Part
I, Item 1. Financial Statements” for comparative GAAP
results.)
EBITDA Current Year Compared to Prior
Year
.
Refinery Operations
EBITDA.
Refinery operations EBITDA for the
Current Year was a loss of $17,988,895 compared to a loss of
$7,919,750 for the Prior Year. The significant decrease
in refinery operations EBITDA between the periods was the result of
the Final Arbitration Award.
EBITDA Reconciliation to GAAP –
Current Year Compared to Prior Year
.
|
|
Years
Ended December 31,
|
|||||
|
|
2017
|
2016
|
||||
|
|
Segment
|
|
Segment
|
|
||
|
|
Refinery
|
Corporate
&
|
|
Refinery
|
Corporate
&
|
|
|
|
Operations
|
Other
|
Total
|
Operations
|
Other
|
Total
|
|
Revenue from operations
|
$
258,449,579
|
$
-
|
$
258,449,579
|
$
167,780,326
|
$
74,990
|
$
167,855,316
|
|
Less: cost of operations
(1)
|
(252,099,846
)
|
(1,768,989
)
|
(253,868,835
)
|
(175,340,816
)
|
(2,450,133
)
|
(177,790,949
)
|
|
Other non-interest income
(2)
|
-
|
1,912,905
|
1,912,905
|
-
|
1,914,607
|
1,914,607
|
|
Less: JMA Profit Share
(3)
|
-
|
-
|
-
|
(359,260
)
|
-
|
(359,260
)
|
|
Less: Arbitration award
(3)
|
(24,338,628
)
|
-
|
-
|
-
|
-
|
-
|
|
EBITDA
|
$
(17,988,895
)
|
$
143,916
|
$
(17,844,979
)
|
$
(7,919,750)
|
$
(460,536)
|
$
(8,380,286)
|
|
|
|
|
|
|
|
|
|
Depletion, depreciation and
|
|
|
|
|
|
|
|
amortization
|
|
|
(1,810,134
)
|
|
|
(1,935,644
)
|
|
Interest expense, net
|
|
|
(2,673,277
)
|
|
|
(1,844,281
)
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
(22,328,390
|
|
|
(12,160,211
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
|
-
|
|
|
(3,607,237
)
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
|
$
(22,328,390
)
|
|
|
$
(15,767,448)
|
_____________________
(1)
Operation
cost within the Refinery Operations segment includes related
general and administrative expenses. Operation cost within
Corporate and Other includes general and administrative expenses
associated with corporate maintenance costs (such as accounting
fees, director fees, and legal expense), as well as expenses
associated with our pipeline assets and oil and/or gas leasehold
interests (such as accretion and impairment expenses).
(2)
Other
non-interest income reflects FLNG easement revenue.
(3)
The
JMA Profit Share represents the GEL Profit Share plus the
Performance Fee for the period pursuant to the Joint Marketing
Agreement, under which marketing activities have ceased. (See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (1) Organization – Going Concern – Final
GEL Arbitration Award” for further discussion of the
contract-related dispute with GEL.)
(4)
Arbitration
award reflects damages and GEL’s attorneys’ fees and
related expenses awarded to GEL as part of the Final Arbitration
Award.
37
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Refinery
Operations Business Segment Results
For the Current
Year, gross margin per bbl was $3.98 compared to $1.67 for the
Prior Year, reflecting an increase of $2.31. Our gross profit
increased from $6,140,790 in the Prior Year to $17,344,629 in the
Current Year, reflecting an increase of $11,203,839. The
increase between the periods was because of improved margins on
refined petroleum products and increased sales volume.
Refinery Throughput and Production
Data
.
Following are
refinery operational metrics for the Nixon
Facility:
|
|
Years
Ended December 31,
|
|
|
|
2017
|
2016
|
|
Calendar
Days
|
365
|
366
|
|
Refinery
downtime
|
(17
)
|
(75
)
|
|
Operating
Days
|
348
|
291
|
|
|
|
|
|
Total
refinery throughput (bbls)
|
4,488,658
|
3,594,231
|
|
Operating
days:
|
|
|
|
bpd
|
12,898
|
12,351
|
|
Capacity
utilization rate
|
86.0
%
|
82.3
%
|
|
Calendar
days:
|
|
|
|
bpd
|
12,298
|
9,820
|
|
Capacity
utilization rate
|
82.0
%
|
65.5
%
|
|
|
|
|
|
Total
refinery production (bbls)
|
4,352,745
|
3,496,011
|
|
Operating
days:
|
|
|
|
bpd
|
12,508
|
12,014
|
|
Capacity
utilization rate
|
83.4
%
|
80.1
%
|
|
Calendar
days:
|
|
|
|
bpd
|
11,925
|
9,552
|
|
Capacity
utilization rate
|
79.5
%
|
63.7
%
|
_____________________
|
Note:
|
The small
difference between total refinery throughput (volume processed as
input) and total refinery production (volume processed as output)
represents a combination of multiple factors including refinery
fuel use, elimination of some impurities originally present in the
crude oil, loss, and other factors.
|
In the Current
Year, the Nixon Facility experienced 17 days of refinery downtime
related to throughput management, repairs, and Hurricane
Harvey. In the Prior Year, the Nixon Facility
experienced 75 days of refinery downtime primarily due to the
contract-related dispute with GEL. Total refinery throughput bbls
and total refinery production bbls increased approximately 25% in
the Current Year compared to the Prior Year because of improved
refinery uptime associated with crude oil and condensate
delivery.
Refined Petroleum Product Sales
Summary
.
See “Part II,
Item 8. Financial Statements and Supplementary Data - Note (14)
Concentration of Risk” for a discussion of refined petroleum
product sales.
38
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Refined Petroleum Products Economic
Hedges
.
During 2017, we
began selling certain of our refined petroleum products immediately
following production, which minimizes inventory, improves cash
flow, and reduces commodity risk/exposure. Previously,
Genesis/GEL used commodity futures contracts to mitigate the
volatile change in value for certain of our refined petroleum
products inventory.
We had no open
commodity contracts in the Current Year. For the Prior
Year, our refinery operations business segment recognized a loss of
$2,629,298 on settled transactions and a gain of $183,400 on the
change in value of open contracts from December 31, 2015 to
December 31, 2016.
Liquidity
and Capital Resources
Overview
.
Historically, we
relied on the profit share distribution and operations payments
under a Joint Marketing Agreement with GEL, as well as LEH, to fund
our liquidity needs. As disclosed elsewhere in this
Annual Report, beginning in the second quarter of 2016, LE
experienced an adverse change in its relationship with Genesis/GEL
involving a contract-related dispute. This shift in the
relationship negatively affected our customer relationships,
prevented us from taking advantage of business opportunities,
disrupted refinery operations, diverted management’s focus
away from running the business, and impacted our ability to obtain
financing. Combined with decreased commodity prices
throughout 2016, our resultant financial state raised substantial
doubt about our ability to continue as a going concern, which, in
conjunction with the Final Arbitration Award, has continued into
2018. (As discussed elsewhere within this
“Liquidity and Capital Resources” section, management
has determined that there is substantial doubt about our ability to
continue as a going concern due to consecutive quarterly net
losses, inadequate working capital, the Final Arbitration Award,
crude supply issues tied to access to capital, and defaults under
secured loan agreements. See “Part I, Item 1. Business
– Going Concern,” “Part I, Item 1. Business --
Operating Risks,” and “Part II, Item 8. Financial
Statements and Supplementary Data – Note (1) Organization
– Going Concern” for additional disclosures related to
the contract-related dispute with GEL, the Final Arbitration Award,
the GEL Letter Agreement (as amended), defaults under secured loan
agreements, and going concern.)
Currently, we rely
on revenue from operations, LEH and its affiliates (including
Jonathan Carroll), and borrowings under bank facilities to meet our
liquidity needs. Primary uses of cash include: (i)
reimbursement of LEH for refinery operating expenses under the
Amended and Restated Operating Agreement, (ii) payments on
long-term debt and the Final Arbitration Award, and (iii) purchase
of crude oil and condensate.
During the Current
Year, we continued aggressive actions to improve operations and
liquidity. We began selling certain of our refined petroleum
products immediately following production, which minimizes
inventory, improves cash flow, and reduces commodity risk/exposure.
We completed construction on several new petroleum storage tanks at
the Nixon Facility. Increased petroleum storage capacity: (i)
assists with de-bottlenecking the facility, (ii) supports increased
refinery throughput up to approximately 30,000 bpd, and (iii)
provides an opportunity to generate additional tank rental revenue
by leasing to third-parties. We also reduced our working capital
requirements in a rising cost environment by decreasing costs,
reducing inventory levels, improving our sales cycle, and requiring
pre-payments from certain customers. Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial stability. However,
there can be no assurance that our business plan will be
successful, LEH and its affiliates will continue to fund our
working capital needs, or that we will be able to obtain additional
financing on commercially reasonable terms or at
all. Among other factors, the Final Arbitration Award
could prevent us from successfully executing our business
plan.
39
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Crude Oil and Condensate
Supply
.
Operation of the
Nixon Facility depends on our ability to purchase adequate amounts
of crude oil and condensate on favorable terms. We
currently have in place a month-to-month evergreen crude supply
contract with a major integrated oil and gas
company. This supplier currently provides us with
adequate amounts of crude oil and condensate, and we expect the
supplier to continue to do so for the foreseeable
future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital,
which have been adversely affected by net losses, working capital
deficits, the contract-related dispute with GEL, and financial
covenant defaults in secured loan agreements.
Management believes
that it is taking the appropriate steps to improve operations at
the Nixon Facility and our overall financial
stability. However, there can be no assurance that our
business plan will be successful, LEH and its affiliates (including
Jonathan Carroll) will continue to fund our working capital needs,
or that we will be able to obtain additional financing on
commercially reasonable terms or at all. If our business
plan is unsuccessful, it could affect our ability to acquire
adequate supplies of crude oil and condensate under the existing
contract or otherwise. Among other factors, the Final
Arbitration Award could prevent us from successfully executing our
business plan and could have a material adverse effect on our
ability to procure adequate amounts of crude oil and condensate
from our current supplier or otherwise. Further, because
our existing crude supply contract is a month-to-month arrangement,
there can be no assurance that crude oil and condensate supplies
will continue to be available under this contract in the
future.
Cash Flow
.
Our cash flow from
operations for the periods indicated was as
follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Beginning
cash, cash equivalents, and restricted cash
|
$
6,082,768
|
$
20,645,652
|
|
|
|
|
|
Cash
flow from operations
|
|
|
|
Adjusted
loss from operations
|
(19,657,847
)
|
(9,257,921
)
|
|
Change
in assets and current liabilities
|
14,714,278
|
5,378,581
|
|
|
|
|
|
Total
cash flow from operations
|
(4,943,569
)
|
(3,879,340
)
|
|
|
|
|
|
Cash
inflows (outflows)
|
|
|
|
Proceeds
from issuance of debt
|
3,677,953
|
7,118,969
|
|
Payments
on debt
|
(1,364,031
)
|
(3,701,616
)
|
|
Net
activity on related-party debt
|
1,124,803
|
-
|
|
Capital
expenditures
|
(2,431,701
)
|
(14,100,897
)
|
|
|
|
|
|
Total
cash inflows (outflows)
|
1,007,024
|
(10,683,544
)
|
|
|
|
|
|
Total
change in cash flows
|
(3,936,545
)
|
(14,562,884
)
|
|
|
|
|
|
Ending
cash, cash equivalents, and restricted cash
|
$
2,146,223
|
$
6,082,768
|
For the Current
Year, we experienced negative cash flow from operations of
$4,943,569 compared to negative cash flow from operations of
$3,879,340 for the Prior Year. The $1,064,229 decline in cash flow
from operations between the periods was primarily the result of
expenses related to the Final Arbitration Award.
40
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Working Capital
.
For the Current
Year, net cash provided by financing activities totaled $3,438,725
compared to net cash provided by financing activities totaling
$3,417,353 for the Prior Year. Working capital provided
by financing activities represented advances from LEH and its
affiliates (including Jonathan Carroll) under promissory
notes. (See “Part II, Item 8. Financial Statements
and Supplementary Data – Note (8) Related Party Transactions
and Note (10) Long-Term Debt, Net,” as well as
“Contractual Obligations – Related Party” within
the Liquidity and Capital Resources section for additional
disclosures with respect to related party promissory
notes.)
We had a working
capital deficit of $69,512,829 at December 31, 2017 compared to a
working capital deficit of $37,812,263 at December 31, 2016.
Excluding long-term debt, we had a working capital deficit of
$29,968,427 at December 31, 2017, compared to a working capital
deficit of $5,599,927 at December 31, 2016. The significant
increase in working capital deficit between the periods primarily
related to the Final Arbitration Award and a decrease in cash and
cash equivalents.
As discussed
elsewhere within this “Liquidity and Capital Resources”
section, the contract-related dispute with GEL and the Final
Arbitration Award has affected our ability to obtain working
capital through financing. Although LE is currently in
settlement discussions with GEL, we expect this to continue for the
foreseeable future. We currently rely on LEH and its
affiliates (including Jonathan Carroll) to fund our working capital
requirements. There can be no assurance that LEH and its
affiliates (including Jonathan Carroll) will continue to fund our
working capital requirements.
Capital Spending
.
Capital
improvements primarily relate to construction of new petroleum
storage tanks to add to existing petroleum storage capacity. Since
2015, the Nixon Facility has been undergoing a capital improvement
expansion project to construct over 800,000 bbls of petroleum
storage tankage. During the Current Year, we completed
several new tanks for which construction began during 2016.
Increased petroleum storage capacity: (i) assists with
de-bottlenecking the facility, (ii) supports increased refinery
throughput up to approximately 30,000 bpd, and (iii) provides an
opportunity to generate additional tank rental revenue by leasing
to third-parties. Due to the Final Arbitration Award,
capital spending in the Current Year was minimal.
Capital
expenditures at the Nixon Facility are being funded by Veritex
through long-term debt that was secured in
2015. Available funds under these loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets. Restricted cash (current
portion) represents funds to pay outstanding construction invoices
and to fund construction contingencies. Restricted cash
(current portion) totaled $48,980 and $3,347,835 at December 31,
2017 and 2016, respectively. Restricted cash,
non-current represents funds held in our disbursement account with
Veritex to complete construction of new petroleum storage tanks.
Restricted cash, noncurrent totaled $1,601,947 and $1,582,305 at
December 31, 2017 and 2016, respectively.
Total capital
expenditures for the periods indicated were as
follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Capital expenditures financed by:
|
||
|
Cash disbursements
|
$
2,431,701
|
$
14,100,897
|
|
Accounts payable
(1)
|
1,650,910
|
2,286,082
|
|
|
$
4,082,611
|
$
16,386,979
|
_____________________
(1)
Represents
construction-related vendor invoices awaiting payment from the loan
disbursement account.
See “Part II,
Item 8. Financial Statements and Supplementary Data – Note
(10) Long-Term Debt, Net” for additional disclosures related
to borrowings for capital spending.
41
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Contractual
Obligations
.
Related Party
. See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (8) Related Party Transactions” for a summary of
the agreements we have in place with related parties.
GEL
. See “Part I, Item
1A. Risk Factors,” as well as “Part II, Item 8.
Financial Statements and Supplementary Data – Note (1)
Organization – Going Concern – Final GEL Arbitration
Award” for disclosures related to the contract-related
dispute with GEL and the Final Arbitration Award.
Supplemental Pipeline
Bonds
. See “Part II, Item 8. Financial
Statements and Supplementary Data – Note (1) Organization
– Going Concern – Final GEL Arbitration Award and Note
(19) Commitments and Contingencies – Supplemental Pipeline
Bonds” for a discussion of supplemental pipeline bonding
requirements.
Indebtedness
.
The principal
balances outstanding on our long-term debt, net (including related
party) for the periods indicated were as follow:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
First
Term Loan Due 2034 (in default)
|
$
23,199,031
|
$
23,924,607
|
|
Second
Term Loan Due 2034 (in default)
|
9,501,930
|
9,729,853
|
|
Notre
Dame Debt (in default)
|
4,977,953
|
1,300,000
|
|
LEH
Loan Agreement
|
4,000,000
|
4,000,000
|
|
March
Ingleside Note
|
1,168,748
|
722,278
|
|
March
Carroll Note
|
439,733
|
592,412
|
|
Term
Loan Due 2017
|
-
|
184,994
|
|
Capital
Leases
|
-
|
135,879
|
|
|
43,287,395
|
40,590,023
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(39,544,402
)
|
(32,212,336
)
|
|
|
|
|
|
Less:
Unamoritized debt issue costs
|
(2,134,512
)
|
(2,262,997
)
|
|
|
|
|
|
|
$
1,608,481
|
$
6,114,690
|
Payments on
long-term debt totaled $1,364,031 in the Current Year compared to
$3,701,616 in the Prior Year.
As described
elsewhere in this Annual Report, Veritex notified obligors that the
Final Arbitration Award constitutes an event of default under the
First Term Loan Due 2034 and Second Term Loan Due
2034. In addition to existing events of default related
to the Final Arbitration Award, at December 31, 2017, LE and LRM
were in violation of the debt service coverage ratio, the current
ratio, and debt to net worth ratio financial covenants related to
the secured loan agreements. LE also failed to replenish
a payment reserve account as required. The occurrence of
events of default under the secured loan agreements permits Veritex
to declare the amounts owed under the secured loan agreements
immediately due and payable, exercise its rights with respect to
collateral securing obligors’ obligations under the loan
agreements, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not
currently exercising its rights, privileges and remedies under the
secured loan agreements considering the ongoing settlement
discussions with GEL and the continuance of the hearing on
confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final
Arbitration Award, which would require Veritex’s
approval. However, Veritex expressly reserved all its
rights, privileges and remedies related to events of default under
the secured loan agreements and informed obligors that it would
consider a final confirmation of the Final Arbitration Award to be
a material event of default under the loan
agreements. Any exercise by Veritex of its rights and
remedies under the secured loan agreements would have a material
adverse effect on our business, financial condition, and results of
operations and would likely require us to seek protection under
bankruptcy laws.
42
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
|
||
See “Part II,
Item 8. Financial Statements and Supplementary Data – Note
(1) Organization – Going Concern and Operating Risks, as well
as Note (10) Long-Term Debt, Net” for additional disclosures
related to long-term debt financial covenant violations and events
of default.
See
“Contractual Obligations – Related Party” within
the Liquidity and Capital Resources section for additional
disclosures with respect to related party
indebtedness.
Off-Balance
Sheet Arrangements
None.
Critical
Accounting Policies
Long-Lived Assets
.
Refinery and Facilities
. Management
expects to continue making improvements to the Nixon Facility based
on operation needs and technological advances. Additions
to refinery and facilities assets are capitalized. Expenditures for
repairs and maintenance are expensed as incurred and included as
operating expenses under the Amended and Restated Operating
Agreement.
We record refinery
and facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of
operations. For financial reporting purposes,
depreciation of refinery and facilities assets is computed using
the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities assets are placed in
service. As a result of the Final Arbitration Award,
which represents a significant adverse change that could affect the
value of a long-lived asset, management performed potential
impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the year ended December 31,
2016.
Pipelines and Facilities Assets
. Our
pipelines and facilities are recorded at cost less any adjustments
for depreciation or impairment. Depreciation is computed
using the straight-line method over estimated useful lives ranging
from 10 to 22 years. In accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards
Codification (“ASC”) guidance on accounting for the
impairment or disposal of long-lived assets, management performed
periodic impairment testing of our pipeline and facilities assets
in the fourth quarter of 2016. Upon completion of that testing, our
pipeline assets were fully impaired. All pipeline
transportation services to third-parties have ceased, existing
third-party wells along our pipeline corridor were permanently
abandoned, and no new third-party wells are being drilled near our
pipelines. However, management believes our pipeline assets have
future value based on large-scale, third-party production facility
expansion projects near the pipelines.
Oil and Gas Properties
. Our oil and gas
properties are accounted for using the full-cost method of
accounting, whereby all costs associated with acquisition,
exploration and development of oil and gas properties, including
directly related internal costs, are capitalized on a cost center
basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production
method. All leases associated with our oil and gas
properties have expired, and our oil and gas properties were fully
impaired in 2011.
Construction in Progress
. Construction
in progress expenditures, which relate to construction and
refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in
service.
Revenue
Recognition
.
Refined Petroleum Products
Revenue
. Revenue from the sale of refined
petroleum products is recognized when sales prices are fixed or
determinable, collectability is reasonably assured, and title
passes. Title passage occurs when refined petroleum products are
delivered in accordance with the terms of the respective sales
agreements, and customers assume the risk of loss when title is
transferred. Transportation, shipping and handling costs
incurred are included in cost of refined products sold. Excise and
other taxes that are collected from customers and remitted to
governmental authorities are not included in revenue.
43
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
Tank Rental Revenue
. We
lease petroleum storage tanks to third-parties. Tank
rental fees are invoiced monthly in accordance with the terms of
the related lease agreement. Tank rental revenue is
recognized on a straight-line basis as earned.
Inventory
.
Our inventory
primarily consists of refined petroleum products, crude oil and
condensate, and chemicals. Inventory is valued at lower
of cost or net realizable value with cost being determined by the
average cost method, and net realizable value being determined
based on estimated selling prices less any associated delivery
costs. If the net realizable value of our refined
petroleum 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 refined products sold.
Asset Retirement
Obligations
.
FASB ASC guidance
related to AROs requires that a liability for the discounted fair
value of an ARO be recorded in the period in which it is incurred
and the corresponding cost capitalized by increasing the carrying
amount of the related long-lived asset. The liability is accreted
towards its future value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the
liability is settled for an amount other than the recorded amount,
a gain or loss is recognized.
Management has
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facility assets arises and
a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We recorded an ARO
liability related to future asset retirement costs associated with
dismantling, relocating or disposing of our offshore platform,
pipeline systems and related onshore facilities, as well as
plugging and abandoning wells and restoring land and sea beds. We
developed these cost estimates for each of our assets based upon
regulatory requirements, structural makeup, water depth, reservoir
characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering
consultations. Because these costs typically extend many
years into the future, estimating future costs are difficult and
require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis.
Income Taxes
.
We account for
income taxes under FASB ASC guidance related to income taxes, which
requires recognition of income taxes based on amounts payable with
respect to the current reporting period and the effects of deferred
taxes for the expected future tax consequences of events that have
been included in our financial statements or tax
returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that some portion or all the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any NOL carryforwards. At
December 31, 2017 and 2016, management determined that cumulative
losses incurred over the prior three-year period provided
significant objective evidence that limited the ability to consider
other subjective evidence, such as projections for future growth.
Based on this evaluation, we recorded a full valuation allowance
against the deferred tax assets as of December 31, 2017 and
2016.
44
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
(Continued)
FASB ASC guidance
related to income taxes also prescribes a recognition threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return, as well as guidance on de-recognition, classification,
interest and penalties, accounting in interim periods, disclosures,
and transition.
See “Part II,
Item 8. Financial Statements and Supplementary Data - Note (16)
Income Taxes” for further information related to income
taxes.
Recently
Adopted Accounting Guidance
The Financial
Accounting Standards Board (“FASB”) issues an
Accounting Standards Update (“ASU”) to communicate
changes to the FASB Accounting Standards Codification, including
changes to non-authoritative SEC content. Recently
adopted ASUs include:
ASU 2015-11,
Inventory (Topic 330):
Simplifying the Measurement of
Inventory
. In July 2015, FASB issued ASU 2015-11, which
requires an entity to measure inventory at the lower of cost or net
realizable value. We adopted this accounting
pronouncement effective January 1, 2017. The adoption of
ASU 2015-11 did not have a significant impact on our consolidated
financial statements.
New
Pronouncements Issued, Not Yet Effective
The following are
recently issued, but not yet effective, ASU’s that may
influence our consolidated financial position, results of
operations, or cash flows:
ASU 2018-05, Income Taxes (Topic
740)
. In March 2018, FASB issued ASU 2018-05.
This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not
able to complete their accounting for the income tax effects of the
Tax Cuts and Jobs Act in the period of enactment. This
guidance also includes amendments to the XBRL Taxonomy.
For public business
entities, t
he amendments in ASU 2018-05 are effective for
fiscal years ending after December 15, 2020. Early adoption is
permitted. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
ASU 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency
and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. For a public
business entity, the amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is
permitted. We do not expect adoption of this guidance to have a
significant impact on our consolidated balance sheets.
ASU 2014-09, Revenue from Contracts with
Customers
. In May 2014, FASB issued ASU 2014-09
and has since amended the standard with ASU 2015-14
,
R
evenue from Contracts with Customers (Topic
606): Deferral of the Effective Date
;
ASU 2016-08,
Revenue from Contracts with Customers (Topic
606): Principal Versus Agent Considerations (Reporting Revenue
Gross Versus Net)
;
ASU 2016-10,
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
; ASU
2016-11,
Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815): Rescission of
SEC Guidance Because of Accounting Standards Updates 2014-09 and
2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF
Meeting (SEC Update)
; ASU 2016-12,
Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical
Expedients
; ASU 2016-20,
Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers
; and ASU
2017-14,
Income Statement –
Reporting Comprehensive Income (Topic 220), Revenue Recognition
(Topic 605), and Revenue from Contracts with Customers (Topic
606)
. These standards replace existing revenue
recognition rules with a single comprehensive model to use in
accounting for revenue arising from contracts with
customers. We do not expect the adoption of ASU 2014-09
to have a material impact on our consolidated financial position,
results of operations, or cash flows.
Other new
pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
45
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
ITEM
8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
|
Report of
Independent Registered Public Accounting Firm
|
47
|
|
Consolidated
Balance Sheets
|
48
|
|
Consolidated
Statements of Operations
|
49
|
|
Consolidated
Statements of Stockholders’ Equity (Deficit)
|
50
|
|
Consolidated
Statements of Cash Flows
|
51
|
|
Notes to
Consolidated Financial Statements
|
52
|
Remainder of Page
Intentionally Left Blank
46
Report of Independent Registered Public Accounting
Firm
The Board of
Directors and
Stockholders of
Blue Dolphin Energy Company
Opinion on the Consolidated Financial
Statements
We have audited the accompanying
consolidated balance sheets of Blue Dolphin Energy Company and
Subsidiaries (the “Company”) as of December 31, 2017
and 2016, and the related consolidated statements of operations,
stockholders’ equity (deficit) and cash flows for the years
then ended, and the related notes (collectively referred to as the
consolidated financial statements). In our opinion, the
consolidated financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2017 and 2016, and the results of operations and its cash flows for
the years then ended, in conformity with accounting principles
general accepted in the United States of
America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The accompanying
consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note
(1) to the consolidated financial statements, the Company has
received an adverse outcome of arbitration proceedings, has
suffered recurring losses from operations, has a net working
capital deficiency and is in violation of certain financial
covenants in their secured loan agreements. These conditions raise
substantial doubt about the Company’s ability to continue as
a going concern. Management's plans regarding these matters are
also described in Note (1). The consolidated financial statements
do not include any adjustments that might result from the outcome
of this uncertainty.
Basis for Opinion
These consolidated financial statements
are the responsibility of the Company’s
management. Our responsibility is to express an opinion
on the Company’s consolidated financial statements based on
our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we
plan and perform the audit to obtain reasonable assurance about
whether the consolidated financial statements are free of material
misstatement, whether due to error or fraud. The Company is not
required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. As part of our audits,
we are required to obtain an understanding of internal control over
financial reporting, but not for the purpose of expressing an
opinion on the effectiveness of the Company’s internal
control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing
procedures to assess the risks of material misstatement of the
consolidated financial statements, whether due to error or fraud,
and performing procedures that respond to those
risks. Such procedures include examining, on a test
basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also
included evaluating the accounting principles used and significant
estimates made by management, as well as evaluating the overall
presentation of the consolidated financial statements. We believe
that our audits provide a reasonable basis for our
opinion.
We have served as the Company’s
auditor since 2002.
/s/ UHY
LLP
UHY
LLP
Sterling Heights,
Michigan
April 2,
2018
47
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash
and cash equivalents
|
$
495,296
|
$
1,152,628
|
|
Restricted
cash
|
48,980
|
3,347,835
|
|
Accounts
receivable, net
|
1,356,859
|
2,022,166
|
|
Accounts
receivable, related party
|
652,928
|
1,161,589
|
|
Prepaid
expenses and other current assets
|
1,206,971
|
1,046,191
|
|
Deposits
|
129,200
|
138,957
|
|
Inventory
|
3,089,204
|
2,075,538
|
|
Total
current assets
|
6,979,438
|
10,944,904
|
|
|
|
|
|
LONG-TERM ASSETS
|
|
|
|
Total
property and equipment, net
|
64,596,939
|
62,324,463
|
|
Restricted
cash, noncurrent
|
1,601,947
|
1,582,305
|
|
Surety
bonds
|
230,000
|
205,000
|
|
Trade
name
|
-
|
303,346
|
|
Total
long-term assets
|
66,428,886
|
64,415,114
|
|
|
|
|
|
TOTAL
ASSETS
|
$
73,408,324
|
$
75,360,018
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
||
|
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Long-term
debt less unamortized debt issue costs, current
portion
|
$
35,544,402
|
$
31,712,336
|
|
Long-term
debt, related party, current portion
|
4,000,000
|
500,000
|
|
Interest
payable, current portion
|
2,135,327
|
80,200
|
|
Interest
payable, related party, current portion
|
892,444
|
243,556
|
|
Accounts
payable
|
2,343,795
|
14,552,383
|
|
Accounts
payable, related party
|
974,400
|
369,600
|
|
Asset
retirement obligations, current portion
|
2,314,571
|
17,510
|
|
Accrued
expenses and other current liabilities
|
1,159,465
|
1,281,582
|
|
Accrued
arbitration award payable
|
27,127,863
|
-
|
|
Total
current liabilities
|
76,492,267
|
48,757,167
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
Asset
retirement obligations, net of current portion
|
-
|
2,010,129
|
|
Deferred
revenues and expenses
|
41,695
|
83,390
|
|
Long-term
debt less unamortized debt issue costs, net of current
portion
|
-
|
1,300,000
|
|
Long-term
debt, related party, net of current portion
|
1,608,481
|
4,814,690
|
|
Long-term
interest payable, net of current portion
|
-
|
1,691,383
|
|
Total
long-term liabilities
|
1,650,176
|
9,899,592
|
|
|
|
|
|
TOTAL
LIABILITIES
|
78,142,443
|
58,656,759
|
|
|
|
|
|
Commitments
and contingencies (Note 19)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Common
stock ($0.01 par value, 20,000,000 shares authorized; 10,925,513
and
|
||
|
10,624,714
shares issued at December 31,2017 and December 31, 2016,
respectively)
|
109,255
|
106,248
|
|
Additional
paid-in capital
|
36,906,533
|
36,818,528
|
|
Accumulated
deficit
|
(41,749,907
)
|
(19,421,517
)
|
|
Treasury
stock (0 and 150,000 shares at cost at December 31, 2017 and
December 31, 2016, respectively)
|
-
|
(800,000
)
|
|
Total
stockholders' equity (deficit)
|
(4,734,119
)
|
16,703,259
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
73,408,324
|
$
75,360,018
|
See accompanying
notes to consolidated financial statements.
48
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
REVENUE
FROM OPERATIONS
|
|
|
|
Refined
petroleum product sales
|
$
255,547,311
|
$
165,413,778
|
|
Tank
rental revenue
|
2,902,268
|
2,366,548
|
|
Other
operations
|
-
|
74,990
|
|
Total
revenue from operations
|
258,449,579
|
167,855,316
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
Cost
of refined products sold
|
241,104,950
|
161,714,526
|
|
Refinery
operating expenses
|
8,145,553
|
12,040,676
|
|
Joint
Marketing Agreement profit share
|
-
|
359,260
|
|
Other
operating expenses
|
227,791
|
385,593
|
|
Arbitration
award and associated fees
|
24,338,628
|
-
|
|
General
and administrative expenses
|
4,021,962
|
2,708,594
|
|
Depletion,
depreciation and amortization
|
1,810,134
|
1,935,644
|
|
Impairment
of asset
|
303,346
|
968,684
|
|
Bad
debt expense (recovery)
|
81,203
|
(139,868
)
|
|
Accretion
of asset retirement obligations
|
287,376
|
112,744
|
|
Total
cost of operations
|
280,320,943
|
180,085,853
|
|
Loss
from operations
|
(21,871,364
)
|
(12,230,537
)
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
Easement,
interest and other income
|
478,638
|
1,924,893
|
|
Interest
and other expense
|
(2,770,164
)
|
(1,854,567
)
|
|
Gain
on disposal of property
|
1,834,500
|
-
|
|
Total
other income (expense)
|
(457,026
)
|
70,326
|
|
|
|
|
|
Loss
before income taxes
|
(22,328,390
)
|
(12,160,211
)
|
|
|
|
|
|
Income
tax expense
|
-
|
(3,607,237
)
|
|
|
|
|
|
Net
loss
|
$
(22,328,390
)
|
$
(15,767,448
)
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
Basic
|
$
(2.09
)
|
$
(1.51
)
|
|
Diluted
|
$
(2.09
)
|
$
(1.51
)
|
|
|
|
|
|
Weighted
average number of common shares outstanding:
|
||
|
Basic
|
10,689,615
|
10,464,061
|
|
Diluted
|
10,689,615
|
10,464,061
|
See accompanying
notes to consolidated financial statements.
49
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Consolidated Statements of Stockholders’ Equity
(Deficit)
|
|
Common Stock
|
|
|
|
|
||
|
|
|
|
Additional
|
|
|
|
Total
|
|
|
|
|
Paid-In
|
Accumulated
|
Treasury Stock
|
Stockholders’
|
|
|
|
Shares Issued
|
Par Value
|
Capital
|
Deficit
|
Shares
|
Cost
|
Equity (Deficit)
|
|
Balance
at December 31, 2015
|
10,603,802
|
$
106,038
|
$
36,738,737
|
$
(3,654,069
)
|
(150,000
)
|
$
(800,000
)
|
$
32,390,706
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
20,912
|
210
|
79,791
|
-
|
-
|
-
|
80,001
|
|
Net
loss
|
-
|
-
|
-
|
(15,767,448
)
|
-
|
-
|
(15,767,448
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
10,624,714
|
$
106,248
|
$
36,818,528
|
$
(19,421,517
)
|
(150,000
)
|
$
(800,000
)
|
$
16,703,259
|
|
|
|
|
|
|
|
|
|
|
Common
stock issued for services
|
300,799
|
3,007
|
88,005
|
-
|
150,000
|
800,000
|
891,012
|
|
Net
loss
|
-
|
-
|
-
|
(22,328,390
)
|
-
|
-
|
(22,328,390
)
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
10,925,513
|
$
109,255
|
$
36,906,533
|
$
(41,749,907
)
|
-
|
$
-
|
$
(4,734,119
)
|
See accompanying
notes to consolidated financial statements.
Remainder of Page
Intentionally Left Blank
50
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
OPERATING
ACTIVITIES
|
|
|
|
Net
loss
|
$
(22,328,390
)
|
$
(15,767,448
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depletion,
depreciation and amortization
|
1,810,134
|
1,935,644
|
|
Unrealized
gain on derivatives
|
-
|
(183,400
)
|
|
Deferred
income tax
|
-
|
3,607,237
|
|
Amortization
of debt issue costs
|
128,484
|
128,485
|
|
Accretion
of asset retirement obligations
|
287,376
|
112,744
|
|
Common
stock issued for services
|
60,000
|
80,001
|
|
Bad
debt (recovery of bad debt)
|
81,203
|
(139,868
)
|
|
Impairment
of assets
|
303,346
|
968,684
|
|
Changes
in operating assets and liabilities
|
|
|
|
Accounts
receivable
|
584,105
|
3,574,947
|
|
Accounts
receivable, related party
|
508,661
|
(1,161,589
)
|
|
Prepaid
expenses and other current assets
|
(160,780
)
|
95,449
|
|
Deposits
and other assets
|
(15,243
)
|
1,073,457
|
|
Inventory
|
(1,013,666
)
|
5,732,780
|
|
Accrued
arbitration award
|
27,127,863
|
-
|
|
Accounts
payable, accrued expenses and other liabilities
|
(12,921,462
)
|
(4,006,063
)
|
|
Accounts
payable, related party
|
604,800
|
69,600
|
|
Net
cash used in operating activities
|
(4,943,569
)
|
(3,879,340
)
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Capital
expenditures
|
(2,431,701
)
|
(14,100,897
)
|
|
Net
cash used in investing activities
|
(2,431,701
)
|
(14,100,897
)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Proceeds
from issuance of debt
|
3,677,953
|
7,118,969
|
|
Payments
on debt
|
(1,364,031
)
|
(3,701,616
)
|
|
Net
activity on related-party debt
|
1,124,803
|
-
|
|
Net
cash provided by financing activities
|
3,438,725
|
3,417,353
|
|
Net
decrease in cash, cash equivalents, and restricted
cash
|
(3,936,545
)
|
(14,562,884
)
|
|
|
|
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
6,082,768
|
20,645,652
|
|
CASH,
CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
2,146,223
|
$
6,082,768
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash
investing and financing activities:
|
|
|
|
Financing
of capital expenditures via accounts payable
|
$
1,650,910
|
$
2,286,082
|
|
Financing
of guaranty fees via long-term debt, related party
|
$
327,462
|
$
-
|
|
Conversion
of related-party notes to common stock
|
$
831,012
|
$
-
|
|
Interest
paid
|
$
2,688,449
|
$
2,357,237
|
|
Income
taxes paid
|
$
-
|
$
-
|
See accompanying
notes to consolidated financial statements.
51
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Notes
to Consolidated Financial Statements
|
|
|
|
|
|
(1)
|
Organization
|
Nature of
Operations
. Blue Dolphin Energy Company
(“Blue Dolphin,”) is primarily an independent refiner
and marketer of petroleum products. Our primary asset is
a 15,000-bpd crude oil and condensate processing facility located
in Nixon, Texas (the “Nixon Facility”). As
part of our refinery operations business segment, petroleum storage
and terminaling operations under third-party lease agreements are
conducted at the Nixon Facility. We also own pipeline
assets and have leasehold interests in oil and gas properties. The
pipelines and oil and gas wells are not operational. (See
“Note (4) Business Segment Information” for further
discussion of our business segments.)
Structure and
Management
.
Blue
Dolphin is a Delaware corporation that was formed in
1986. Blue Dolphin is controlled by Lazarus Energy
Holdings, LLC (“LEH”). LEH operates and manages all
Blue Dolphin properties pursuant to an Amended and Restated
Operating Agreement (the “Amended and Restated Operating
Agreement”). Jonathan Carroll is Chairman of the
Board of Directors (the “Board”), Chief Executive
Officer, and President of Blue Dolphin, as well as a majority owner
of LEH. Together LEH and Jonathan Carroll own 80.2% of our common
stock, par value $0.01 per share (the “Common Stock). (See
“Note (8) Related Party Transactions,” “Note (10)
Long-Term Debt, Net” and “Note (19) Commitments and
Contingencies – Financing Agreements” for additional
disclosures related to LEH, the Amended and Restated Operating
Agreement, and Jonathan Carroll.)
Our operations are
conducted through the following active subsidiaries:
●
Lazarus Energy,
LLC, a Delaware limited liability company
(“LE”).
●
Lazarus Refining
& Marketing, LLC, a Delaware limited liability company
(“LRM”).
●
Blue Dolphin Pipe
Line Company, a Delaware corporation
(“BDPL”).
●
Blue Dolphin
Petroleum Company, a Delaware corporation.
●
Blue Dolphin
Services Co., a Texas corporation
(“BDSC”).
See "Part I, Item
1. Business and Item 2. Properties” for additional
information regarding our operating subsidiaries, principal
facilities, and assets.
References in this
Annual Report to “we,” “us,” and
“our” are to Blue Dolphin and its subsidiaries unless
otherwise indicated or the context otherwise requires.
Going
Concern
. Management has determined that certain
factors raise substantial doubt about our ability to continue as a
going concern. These factors include the
following:
●
Final GEL
Arbitration Award – As previously disclosed, LE was involved
in arbitration proceedings (the “GEL Arbitration”) with
GEL Tex Marketing, LLC (“GEL”), an affiliate of Genesis
Energy, LP (“Genesis”), related to a contractual
dispute involving a Crude Oil Supply and Throughput Services
Agreement (the “Crude Supply Agreement”) and a Joint
Marketing Agreement (the “Joint Marketing Agreement”),
each between LE and GEL and dated August 12, 2011. On
August 11, 2017, the arbitrator delivered its final award in the
GEL Arbitration (the “Final Arbitration
Award”). The Final Arbitration Award denied all
LE’s claims against GEL and granted substantially all the
relief requested by GEL in its counterclaims. Among
other matters, the Final Arbitration Award awarded damages and
GEL’s attorneys’ fees and related expenses to GEL in
the aggregate amount of approximately $31.3
million.
As previously
disclosed, a hearing on confirmation of the Final Arbitration Award
was scheduled to occur on September 18, 2017 in state district
court in Harris County, Texas. Prior to the scheduled hearing, LE
and GEL jointly notified the court that the hearing would be
continued for a period of no more than 90 days after September 18,
2017 (the “Continuance Period”), to facilitate
settlement discussions between the parties. On September 26, 2017,
LE and Blue Dolphin, together with LEH and Jonathan Carroll,
entered into a Letter Agreement with GEL, effective September 18,
2017 (the “GEL Letter Agreement”), confirming the
parties’ agreement to the continuation of the confirmation
hearing during the Continuance Period, subject to the terms of the
GEL Letter Agreement.
52
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
The GEL Letter
Agreement has been amended to extend the Continuance Period through
April 30, 2018. The GEL Letter Agreement, as amended to
date, prohibits Blue Dolphin and its affiliates from making any
pre-payments on indebtedness, other than in the ordinary course of
business as described in the GEL Letter Agreement, and from making
any payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements between November 1, 2017 and the end of the
Continuance Period. (Jonathan Carroll has received no
cash payments since August 2016 and no common stock payments since
May 2017 under the Amended and Restated Guaranty Fee
Agreements.) If the parties are unable to reach an
acceptable settlement with Genesis and GEL, and GEL seeks to
confirm and enforce the Final Arbitration Award, our business,
financial condition, and results of operations will be materially
affected, and LE would likely be required to seek protection under
bankruptcy laws.
●
Veritex Secured
Loan Agreement Event of Default – Veritex Community Bank
(“Veritex”), as successor in interest to Sovereign Bank
by merger, delivered to obligors notices of default under secured
loan agreements with Veritex, stating that the Final Arbitration
Award constitutes an event of default under the secured loan
agreements. The occurrence of an event of default
permits Veritex to declare the amounts owed under these loan
agreements immediately due and payable, exercise its rights with
respect to collateral securing obligors’ obligations under
these loan agreements, and/or exercise any other rights and
remedies available. Veritex informed obligors that it is
not currently exercising its rights and remedies under the secured
loan agreements considering the ongoing settlement discussions with
GEL and the continuance of the hearing on confirmation of the Final
Arbitration Award and to allow Veritex to evaluate any proposed
settlement agreement related to the Final Arbitration Award, which
would require Veritex’s approval. However, Veritex expressly
reserved all its rights, privileges and remedies related to events
of default under the secured loan agreements and informed obligors
that it would consider a final confirmation of the Final
Arbitration Award to be a material event of default under the loan
agreements. Any exercise by Veritex of its rights and remedies
under the secured loan agreements would have a material adverse
effect on our business, financial condition, and results of
operations and would likely require us to seek protection under
bankruptcy laws. The debt associated with loans under secured loan
agreements was classified within the current portion of long-term
debt on our consolidated balance sheet at December 31, 2017 due to
existing events of default related to the Final Arbitration Award
as well as the uncertainty of LE and LRM’s ability to meet
financial covenants in the secured loan agreements in the
future.
We are currently
evaluating the effects of the Final Arbitration Award on our
business, financial condition, and results of
operations. In addition to the matters described above,
the Final Arbitration Award could materially and adversely affect
our ability to procure adequate amounts of crude oil and condensate
or our relationships with our customers. The
contract-related dispute has negatively affected our customer
relationships, prevented us from taking advantage of business
opportunities, disrupted refinery operations, diverted
management’s focus away from running the business, and
impacted our ability to obtain financing.
We can provide no
assurance as to whether negotiations with GEL will result in a
settlement, the potential terms of any such settlement, or whether
Veritex would approve any such settlement. If LE is
unable to reach an acceptable settlement with GEL or Veritex does
not approve any such settlement and GEL seeks to confirm and
enforce the Final Arbitration Award, our business, financial
condition, and results of operations will be materially adversely
affected, and LE would likely be required to seek protection under
bankruptcy laws.
53
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Operating
Risks
. Successful execution of our business plan
depends on several key factors, including reaching an acceptable
settlement with GEL, having adequate crude oil and condensate
supplies, maintaining the safe and reliable operation of the Nixon
Facility, improving margins on refined petroleum products, and
meeting contractual obligations. (See “Part I, Item 1.
Business – Business Strategies” for
information related to our business plan.) For the year
ended December 31, 2017, execution of our business plan was
negatively impacted by several factors, including:
●
Net Losses –
For the year ended December 31, 2017, we reported a net loss of
$22,328,390, or a loss of $2.09 per share, compared to a net loss
of $15,767,448, or a loss of $1.51 per share, for the year ended
December 31, 2016. The $0.58 per share increase in net
loss between the periods was the result of the Final Arbitration
Award, which was partially offset by improved margins for refined
petroleum products and increased sales volume. The
amount expensed in the period related to the Final Arbitration
Award was $24,338,628, which represented $2.28 per
share. Excluding the Final Arbitration Award, we would
have reported net income of $0.19 per share.
●
Working Capital
Deficits – We had a working capital deficit of $69,512,829 at
December 31, 2017 compared to a working capital deficit of
$37,812,263 at December 31, 2016. Excluding long-term debt, we had
a working capital deficit of $29,968,427 at December 31, 2017,
compared to working capital of $5,599,927 at December 31, 2016. The
significant increase in working capital deficit between the periods
primarily related to the Final Arbitration Award and a decrease in
cash and cash equivalents.
●
Crude Supply Issues
– We currently have in place a month-to-month evergreen crude
supply contract with a major integrated oil and gas company. This
supplier currently provides us with adequate amounts of crude oil
and condensate, and we expect the supplier to continue to do so for
the foreseeable future. However, our ability to purchase
adequate amounts of crude oil and condensate is dependent on our
liquidity and access to capital, which have been adversely affected
by the contract-related dispute with GEL and other factors, as
noted above. The Final Arbitration Award could have a
material adverse effect on our ability to procure adequate amounts
of crude oil and condensate from our current supplier or
otherwise.
●
Financial Covenant
Defaults – In addition to existing events of default related
to the Final Arbitration Award, at December 31, 2017, LE and LRM
were in violation of certain financial covenants in secured loan
agreements with Veritex. Covenant defaults under the secured loan
agreements would permit Veritex to declare the amounts owed under
these loan agreements immediately due and payable, exercise its
rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other
rights and remedies available. The debt associated with these loans
was classified within the current portion of long-term debt on our
consolidated balance sheet at December 31, 2017 due to existing
events of default related to the Final Arbitration Award as well as
the uncertainty of LE and LRM’s ability to meet the financial
covenants in the future. There can be no assurance that Veritex
will provide a waiver of events of default related to the Final
Arbitration Award, consent to any proposed settlement with GEL or
provide future waivers of any financial covenant defaults, which
may have an adverse impact on our financial position and results of
operations.
During the year
ended December 31, 2017, we continued aggressive actions to improve
operations and liquidity. We began selling certain of
our refined petroleum products immediately following production,
which minimizes inventory, improves cash flow, and reduces
commodity risk/exposure. We completed construction on several new
petroleum storage tanks at the Nixon Facility. Increased petroleum
storage capacity: (i) assists with de-bottlenecking the facility,
(ii) supports increased refinery throughput up to approximately
30,000 bpd, and (iii) provides an opportunity to generate
additional tank rental revenue by leasing to third-parties. We also
reduced our working capital requirements in a rising cost
environment by decreasing costs, reducing inventory levels,
improving our sales cycle, and requiring pre-payments from certain
customers. Management believes that it is taking the
appropriate steps to improve operations at the Nixon Facility and
our overall financial stability. However, there can be
no assurance that our business plan will be successful, LEH and its
affiliates will continue to fund our working capital needs, or that
we will be able to obtain additional financing on commercially
reasonable terms or at all. Among other factors, the
Final Arbitration Award could prevent us from successfully
executing our business plan.
54
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
For additional
disclosures related to the contract-related dispute with GEL, the
Final Arbitration Award, the GEL Letter Agreement, defaults under
secured loan agreements, and risk factors that could materially
affect our future business, financial condition and results of
operations, refer to the following sections in this Annual
Report:
●
Part I, Item 1A.
Risk Factors
●
●
-
GEL
Contract-Related Dispute and Final Arbitration
Award
-
Results of
Operations
-
Liquidity and
Capital Resources
●
-
Note (8) Related
Party Transactions
-
Note (10) Long-Term
Debt, Net
-
Note (19)
Commitments and Contingencies – Legal
Matters
-
Note (20)
Subsequent Events
|
(2)
|
Basis
of Presentation
|
Our consolidated
financial statements include Blue Dolphin and its
subsidiaries. Significant intercompany transactions have
been eliminated in consolidation. The accompanying
consolidated financial statements have been prepared in accordance
with U.S. generally accepted accounting principles
(“GAAP”) for consolidated financial information
pursuant to the rules and regulations of the SEC under Regulation
S-X and the instructions to Form 10-K. 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.
|
(3)
|
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
.
We have made several estimates and
assumptions related to the reporting of our consolidated assets and
liabilities and to the disclosure of contingent assets and
liabilities to prepare these consolidated financial statements in
conformity with GAAP. We believe our current estimates are
reasonable and appropriate, however, actual results could differ
from those estimated.
Cash and Cash
Equivalents
.
Cash and cash equivalents
represent liquid investments with an original maturity of three
months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at
times, may exceed insured deposit limits. We monitor the financial
condition of the financial institutions and have experienced no
losses associated with these accounts. Cash and cash
equivalents totaled $495,296 and $1,152,628 at December 31, 2017
and 2016, respectively.
Restricted Cash
.
Restricted cash (current portion)
primarily represents: (i) amounts held in our disbursement account
with Veritex attributable to construction invoices awaiting payment
from that account, (ii) a payment reserve account held by Veritex
as security for payments under a loan agreement, and (iii) a
construction contingency account under which Veritex will fund
contingencies. Restricted cash, noncurrent represents
funds held in the Veritex disbursement account for payment of
future construction related expenses to build new petroleum storage
tanks. At December 31, 2017, total restricted cash was $1,650,927,
comprised of restricted cash (current portion) totaling $48,980 and
restricted cash, noncurrent totaling $1,601,947. At
December 31, 2016, total restricted cash was $4,930,140, comprised
of restricted cash (current portion) totaling $3,347,835 and
restricted cash, noncurrent totaling $1,582,305
(See “Note (10) Long-Term
Debt, Net” for additional disclosures related to our loan
agreements with Veritex.)
55
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Accounts Receivable and Allowance for
Doubtful Accounts
.
Our accounts receivable consists
of customer obligations due in the ordinary course of
business. Since we have a small number of customers with
individually large amounts due on any given date, we evaluate
potential and existing customers’ financial condition, credit
worthiness, and payment history to minimize credit risk. Allowance
for doubtful accounts is based on a combination of current sales
and specific identification methods. If necessary, we establish an
allowance for doubtful accounts to estimate the amount of probable
credit losses. Allowance for doubtful accounts totaled
$0 both at December 31, 2017 and 2016.
Inventory
.
Our inventory primarily consists
of refined petroleum products, crude oil and condensate, and
chemicals. Inventory is valued at lower of cost or net
realizable value with cost being determined by the average cost
method, and net realizable value being determined based on
estimated selling prices less any associated delivery
costs. If the net realizable value of our refined
petroleum 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 refined products sold. (See
“Note (6) Inventory” for additional disclosures related
to our inventory.)
Property and
Equipment
.
Refinery and Facilities
. Management
expects to continue making improvements to the Nixon Facility based
on operational needs and technological
advances. Additions to refinery and facilities assets
are capitalized. Expenditures for repairs and maintenance are
expensed as incurred and included as operating expenses under the
Amended and Restated Operating Agreement.
We record refinery
and facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of
operations. For financial reporting purposes,
depreciation of refinery and facilities assets is computed using
the straight-line method using an estimated useful life of 25 years
beginning when the refinery and facilities assets are placed in
service. As a result of the Final Arbitration Award,
which represents a significant adverse change that could affect the
value of a long-lived asset, management performed potential
impairment testing of our refinery and facilities assets in the
fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the year ended December 31,
2016.
Pipelines and Facilities
. Our pipelines
and facilities are recorded at cost less any adjustments for
depreciation or impairment. Depreciation is computed
using the straight-line method over estimated useful lives ranging
from 10 to 22 years. In accordance with Financial Accounting
Standards Board (“FASB”) ASC guidance on accounting for
the impairment or disposal of long-lived assets, management
performed periodic impairment testing of our pipeline and
facilities assets in the fourth quarter of 2016. Upon completion of
that testing, our pipeline assets were fully
impaired. All pipeline transportation services to
third-parties have ceased, existing third-party wells along our
pipeline corridor have been permanently abandoned, and no new
third-party wells are being drilled near our
pipelines. However, management believes our pipeline
assets have future value based on large-scale, third-party
production facility expansion projects near the
pipelines.
Oil and Gas Properties
. Our oil and gas
properties are accounted for using the full-cost method of
accounting, whereby all costs associated with acquisition,
exploration and development of oil and gas properties, including
directly related internal costs, are capitalized on a cost center
basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production
method. All leases associated with our oil and gas properties have
expired, and our oil and gas properties were fully impaired in
2011.
Construction in Progress
. Construction
in progress expenditures, which relate to construction and
refurbishment activities at the Nixon Facility, are capitalized as
incurred. Depreciation begins once the asset is placed in
service.
(See “Note
(7) Property, Plant and Equipment, Net” for additional
disclosures related to our refinery and facilities assets, oil and
gas properties, pipelines and facilities assets, and construction
in progress.)
56
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BLUE DOLPHIN ENERGY
COMPANY
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|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Intangibles – Other
.
Trade name, an intangible asset, represents the “Blue Dolphin
Energy Company” brand name. We account for
intangible assets under FASB ASC guidance related to intangibles,
goodwill, and other. Under the guidance, we determined trade name
to have an indefinite useful life, and we test intangible assets
with indefinite lives annually for
impairment. Management performed its regular annual
impairment testing of trade name in the fourth quarter of 2017.
Upon completion of that testing, our trade name asset was fully
impaired.
Debt Issue Costs
. We have debt
issue costs related to certain refinery and facilities assets debt.
Debt issue costs are capitalized and amortized over the term of the
related debt using the straight-line method, which approximates the
effective interest method. Debt issue costs are presented net with
the related debt liability. (See “Note (10)
Long-Term Debt, Net” for additional disclosures related to
debt issue costs.)
Revenue
Recognition
.
Refined Petroleum Products Revenue
.
Revenue from the sale of refined petroleum products is recognized
when sales prices are fixed or determinable, collectability is
reasonably assured, and title passes. Title passage occurs when
refined petroleum products are delivered in accordance with the
terms of the respective sales agreements, and customers assume the
risk of loss when title is transferred. Transportation, shipping,
and handling costs incurred are included in cost of refined
products sold. Excise and other taxes that are collected from
customers and remitted to governmental authorities are not included
in revenue.
Tank Rental Revenue
. We lease petroleum
storage tanks to both related parties and
third-parties. Tank rental fees are invoiced monthly in
accordance with the terms of the related lease
agreement. Tank rental revenue is recognized on a
straight-line basis as earned.
Easement Revenue
. Revenue from land
easement fees was associated with a Master Easement Agreement
between BDPL and FLNG Land II, Inc., a Delaware corporation
(“FLNG”). Easement revenue was recognized
monthly as earned and was included in other income. In
February 2017, BDPL sold approximately 15 acres of property located
in Brazoria County Texas to FLIQ Common Facilities, LLC, an
affiliate of FLNG. In conjunction with the sale of real
estate, the Master Easement Agreement was terminated.
Pipeline Transportation Revenue
.
Revenue from our pipeline operations was derived from fee-based
contracts and was typically based on transportation fees per unit
of volume transported multiplied by the volume delivered. Revenue
was recognized when volumes were physically delivered for the
customer through the pipeline. All pipeline
transportation services to third-parties have ceased, existing
third-party wells along our pipeline corridor have been permanently
abandoned, and no new third-party wells are being drilled near our
pipelines. (See “Note (4) Business Segment Information”
for further discussion related to pipeline transportation
revenue.)
Income Taxes
. We account for
income taxes under FASB ASC guidance related to income taxes, which
requires recognition of income taxes based on amounts payable with
respect to the current reporting period and the effects of deferred
taxes for the expected future tax consequences of events that have
been included in our financial statements or tax
returns. Under this method, deferred tax assets and
liabilities are determined based on the differences between the
financial accounting and tax basis of assets and liabilities, as
well as for operating losses and tax credit carryforwards using
enacted tax rates in effect for the year in which the differences
are expected to reverse.
As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that a portion or all the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any net operating loss
(“NOL”) carryforwards. When management
determines that it is more likely than not that a tax benefit will
not be realized, a valuation allowance is recorded to reduce
deferred tax assets. A significant piece of objective
negative evidence evaluated was the cumulative loss incurred over
the three-year period ended December 31, 2017. Such objective
evidence limits the ability to consider other subjective evidence,
such as our projections for future growth. Based on this
evaluation, we recorded a full valuation allowance against the
deferred tax assets as of December 31, 2017.
57
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
The benefit of an
uncertain tax position is recognized in the financial statements if
it meets a minimum recognition threshold. A
determination is first made as to whether it is more likely than
not that the income tax position will be sustained, based upon
technical merits, upon examination by the taxing
authorities. If the income tax position is expected to
meet the more-likely-than-not criteria, the benefit recorded in the
financial statements equals the largest amount that is greater than
50% likely to be realized upon its ultimate
settlement. At December 31, 2017 and 2016, there were no
uncertain tax positions for which a reserve or liability was
necessary. (See “Note (16) Income Taxes” for
further information related to income taxes.)
Impairment or Disposal of Long-Lived
Assets
. In accordance with FASB ASC guidance on accounting
for the impairment or disposal of long-lived assets, we
periodically evaluate our long-lived assets for impairment.
Additionally, we evaluate our long-lived assets when events or
circumstances indicate that the carrying value of these assets may
not be recoverable. The carrying value is not recoverable if it
exceeds the sum of the undiscounted cash flows expected to result
from the use and eventual disposition of the asset or group of
assets. If the carrying value exceeds the sum of the undiscounted
cash flows, an impairment loss equal to the amount by which the
carrying value exceeds the fair value of the asset or group of
assets is recognized. Significant management judgment is required
in the forecasting of future operating results that are used in the
preparation of projected cash flows and, should different
conditions prevail or judgments be made, material impairment
charges could be necessary. As a result of the Final Arbitration
Award, which represents a significant adverse change that could
affect the value of a long-lived asset, management performed
potential impairment testing of our refinery and facilities assets
in the fourth quarter of 2017. Upon completion of that testing, we
determined that no impairment was necessary at December 31,
2017. We did not record any impairment of our refinery
and facilities assets for the year ended December 31,
2016.
Asset Retirement Obligations
.
FASB ASC guidance related to asset retirement obligations
(“AROs”) requires that a liability for the discounted
fair value of an ARO be recorded in the period in which it is
incurred and the corresponding cost capitalized by increasing the
carrying amount of the related long-lived asset. The liability is
accreted towards its future value each period, and the capitalized
cost is depreciated over the useful life of the related asset. If
the liability is settled for an amount other than the recorded
amount, a gain or loss is recognized.
Management has
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further,
management believes that these assets have indeterminate lives
under FASB ASC guidance for estimating AROs because dates or ranges
of dates upon which we would retire these assets cannot reasonably
be estimated at this time. When a legal or contractual obligation
to dismantle or remove the refinery and facilities assets arises
and a date or range of dates can reasonably be estimated for the
retirement of these assets, we will estimate the cost of performing
the retirement activities and record a liability for the fair value
of that cost using present value techniques.
We recorded an ARO
liability related to future asset retirement costs associated with
dismantling, relocating, or disposing of our offshore platform,
pipeline systems, and related onshore facilities, as well as for
plugging and abandoning wells and restoring land and sea beds. We
developed these cost estimates for each of our assets based upon
regulatory requirements, structural makeup, water depth, reservoir
characteristics, reservoir depth, equipment demand, current
retirement procedures, and construction and engineering
consultations. Because these costs typically extend many
years into the future, estimating future costs are difficult and
require management to make judgments that are subject to future
revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis. (See “Note (11) Asset Retirement
Obligations” for additional information related to our
AROs.)
Computation of Earnings Per
Share
. We apply the provisions of FASB ASC guidance for
computing earnings per share (“EPS”). The guidance
requires the presentation of basic EPS, which 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. The guidance requires dual presentation
of basic EPS and diluted EPS on the face of our consolidated
statements of operations and requires a reconciliation of the
denominator of basic EPS and diluted EPS. Diluted EPS is computed
by dividing net income available to common stockholders by the
diluted weighted average number of common shares outstanding, which
includes the potential dilution that could occur if securities or
other contracts to issue shares of common stock were converted to
common stock that then shared in the earnings of the
entity.
The number of
shares related to options, warrants, restricted stock, and similar
instruments included in diluted EPS is based on the “Treasury
Stock Method” prescribed in FASB ASC guidance for computation
of EPS. This method assumes theoretical repurchase of shares using
proceeds of the respective stock option or warrant exercised, and,
for restricted stock, the amount of compensation cost attributed to
future services that has not yet been recognized and the amount of
any current and deferred tax benefit that would be credited to
additional paid-in-capital upon the vesting of the restricted
stock, at a price equal to the issuer’s average stock price
during the related earnings period. Accordingly, the number of
shares includable in the calculation of EPS in respect of the stock
options, warrants, restricted stock, and similar instruments is
dependent on this average stock price and will increase as the
average stock price increases. (See “Note (17)
Earnings Per Share” for additional information related to
EPS.)
Treasury Stock
. We accounted
for treasury stock under the cost method. In May 2017,
our treasury stock was re-issued. The net change in
share price after acquisition of the treasury stock was recognized
as a component of additional paid-in-capital in our consolidated
balance sheets. (See “Note (13) Treasury
Stock” for additional disclosures related to treasury
stock.)
New Pronouncements
Adopted
. The FASB issues an Accounting Standards
Update (“ASU”) to communicate changes to the FASB ASC,
including changes to non-authoritative SEC
content. Recently adopted ASUs include:
ASU 2015-11,
Inventory (Topic 330):
Simplifying the Measurement of
Inventory
. In July 2015, FASB issued ASU 2015-11, which
requires an entity to measure inventory at the lower of cost or net
realizable value. We adopted this accounting
pronouncement effective January 1, 2017. The adoption of
ASU 2015-11 did not have a significant impact on our consolidated
financial statements.
58
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BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
New Pronouncements Issued, Not Yet
Effective
. The following are recently issued, but not yet
effective, ASU’s that may influence our consolidated
financial position, results of operations, or cash
flows:
ASU 2018-05, Income Taxes (Topic
740)
. In March 2018, FASB issued ASU 2018-05.
This guidance amends SEC paragraphs in ASC 740, Income Taxes, to
reflect SAB 118, which provides guidance for companies that are not
able to complete their accounting for the income tax effects of the
Tax Cuts and Jobs Act in the period of enactment. This
guidance also includes amendments to the XBRL Taxonomy.
For public business
entities, t
he amendments in ASU 2018-05 are effective for
fiscal years ending after December 15, 2020. Early adoption is
permitted. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
ASU 2016-02,
Leases (Topic 842)
. In February 2016,
FASB issued ASU 2016-02. This guidance increases transparency
and comparability among organizations by recognizing lease assets
and lease liabilities on the balance sheet and disclosing key
information about leasing arrangements. For a public
business entity, the amendments in ASU 2016-02 are effective for
fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is
permitted. We do not expect adoption of this guidance to have a
significant impact on our consolidated balance sheets.
ASU 2014-09, Revenue from Contracts with
Customers
. In May 2014, FASB issued ASU 2014-09
and has since amended the standard with ASU 2015-14
,
R
evenue from Contracts with Customers (Topic
606): Deferral of the Effective Date
;
ASU 2016-08,
Revenue from Contracts with Customers (Topic
606): Principal Versus Agent Considerations (Reporting Revenue
Gross Versus Net)
;
ASU 2016-10,
Revenue from Contracts with Customers (Topic
606): Identifying Performance Obligations and Licensing
; ASU
2016-11,
Revenue Recognition
(Topic 605) and Derivatives and Hedging (Topic 815): Rescission of
SEC Guidance Because of Accounting Standards Updates 2014-09 and
2014-16 Pursuant to Staff Announcements at the March 3, 2016 EITF
Meeting (SEC Update)
; ASU 2016-12,
Revenue from Contracts with Customers (Topic
606): Narrow-Scope Improvements and Practical
Expedients
; ASU 2016-20,
Technical Corrections and Improvements to
Topic 606, Revenue from Contracts with Customers
; and ASU
2017-14,
Income Statement –
Reporting Comprehensive Income (Topic 220), Revenue Recognition
(Topic 605), and Revenue from Contracts with Customers (Topic
606)
. These standards replace existing revenue
recognition rules with a single comprehensive model to use in
accounting for revenue arising from contracts with
customers. We do not expect the adoption of ASU 2014-09
to have a material impact on our consolidated financial position,
results of operations, or cash flows.
Other new
pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
Reclassification
. Effective
January 1, 2017, we reclassified amounts associated with our
Pipeline Transportation operations to Corporate and
Other. (See “Note (4) Business Segment
Information” for disclosures related to Corporate and
Other.)
|
(4)
|
Business
Segment Information
|
Effective January
1, 2017, we began reporting as a single business segment –
Refinery Operations. Business activities related to our
Refinery Operations business segment are conducted at the Nixon
Facility. Due to their small size, current and prior
year ended amounts associated with Pipeline Transportation
operations were reclassified to Corporate and Other. Pipeline
Transportation operations diminished significantly as services to
third-parties ceased and third-party wells along our pipeline
corridor were permanently abandoned. Business segment
information for the periods indicated (and as of the dates
indicated), was as follows:
|
|
Years Ended December 31,
|
|||||
|
|
2017
|
2016
|
||||
|
|
Segment
|
|
|
Segment
|
|
|
|
|
Refinery
|
|
Refinery
|
|
||
|
|
Operations
|
Corporate &
Other
|
Total
|
Operations
|
Corporate &
Other
|
Total
|
|
Revenue from
operations
|
$
258,449,579
|
$
-
|
$
258,449,579
|
$
167,780,326
|
$
74,990
|
$
167,855,316
|
|
Less: cost of operations
(1)
|
(252,099,846
)
|
(1,768,989
)
|
(253,868,835
)
|
(175,340,816
)
|
(2,450,133
)
|
(177,790,949
)
|
|
Other non-interest income
(2)
|
-
|
1,912,905
|
1,912,905
|
-
|
1,914,607
|
1,914,607
|
|
Less: JMA Profit Share
(3)
|
-
|
-
|
-
|
(359,260
)
|
-
|
(359,260
)
|
|
Less: Arbitration award
(4)
|
(24,338,628
)
|
-
|
(24,338,628
)
|
-
|
-
|
-
|
|
EBITDA
(5)
|
$
(17,988,895
)
|
$
143,916
|
|
$
(7,919,750
)
|
$
(460,536
)
|
|
|
|
|
|
|
|
|
|
|
Depletion,
depreciation and
|
|
|
|
|
|
|
|
amortization
|
|
|
(1,810,134
)
|
|
|
(1,935,644
)
|
|
Interest
expense, net
|
|
|
(2,673,277
)
|
|
|
(1,844,281
)
|
|
Loss before
income taxes
|
|
|
(22,328,390
)
|
|
|
(12,160,211
)
|
|
Income tax
expense
|
|
|
-
|
|
|
(3,607,237
)
|
|
Net
loss
|
|
|
$
(22,328,390
)
|
|
|
$
(15,767,448
)
|
|
Capital
expenditures
|
$
4,082,611
|
$
-
|
$
4,082,611
|
$
15,041,074
|
$
-
|
$
15,041,074
|
|
Identifiable
assets
|
$
71,708,714
|
$
1,699,610
|
$
73,408,324
|
$
74,236,629
|
$
1,123,389
|
$
75,360,018
|
_____________________
|
(1)
|
Operation cost
within the Refinery Operations segment includes related general and
administrative expenses. Operation cost within Corporate
and Other includes general and administrative expenses associated
with corporate maintenance costs (such as accounting fees, director
fees, and legal expense), as well as expenses associated with our
pipeline assets and oil and/or gas leasehold interests (such as
accretion and impairment expenses).
|
|
(2)
|
Other non-interest
income reflects FLNG easement revenue.
|
|
(3)
|
The JMA Profit
Share represents the GEL Profit Share plus the Performance Fee for
the period pursuant to the Joint Marketing Agreement, under which
marketing activities have ceased. (See “Note (1)
Organization – Going Concern – Final GEL Arbitration
Award” for further discussion related to the contract-related
dispute with GEL.)
|
|
(4)
|
Arbitration award
reflects damages and GEL’s attorneys’ fees and related
expenses awarded to GEL as part of the Final Arbitration
Award.
|
|
(5)
|
EBITDA is a
non-GAAP financial measure. See “Part I, Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations – Results of Operations –
Non-GAAP Financial Measures” for additional information
related to EBITDA.
|
59
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
|
(5)
|
Prepaid
Expenses and Other Current Assets
|
Prepaid expenses
and other current assets as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Prepaid
crude oil and condensate
|
$
912,702
|
$
-
|
|
Prepaid
insurance
|
294,269
|
248,853
|
|
Short-term
tax bond
|
-
|
505,000
|
|
Prepaid
exise taxes
|
-
|
292,338
|
|
|
|
|
|
|
$
1,206,971
|
$
1,046,191
|
|
(6)
|
Inventory
|
Inventory as of the
dates indicated consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
HOBM
|
$
1,558,066
|
$
212,987
|
|
Crude
oil and condensate
|
961,571
|
26,123
|
|
AGO
|
213,402
|
143,362
|
|
Naphtha
|
169,591
|
533,580
|
|
Chemicals
|
161,563
|
182,751
|
|
Propane
|
17,450
|
11,318
|
|
LPG
mix
|
7,561
|
1,293
|
|
Jet
fuel
|
-
|
964,124
|
|
|
|
|
|
|
$
3,089,204
|
$
2,075,538
|
|
(7)
|
Property,
Plant and Equipment, Net
|
Property, plant and
equipment, net, as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Refinery
and facilities
|
$
51,432,434
|
$
50,814,309
|
|
Land
|
566,159
|
602,938
|
|
Other
property and equipment
|
652,795
|
652,795
|
|
|
52,651,388
|
52,070,042
|
|
|
|
|
|
Less:
Accumulated depletion, depreciation, and amortization
|
(8,495,378
)
|
(6,685,244
)
|
|
|
44,156,010
|
45,384,798
|
|
|
|
|
|
Construction
in progress
|
20,440,929
|
16,939,665
|
|
|
|
|
|
|
$
64,596,939
|
$
62,324,463
|
We capitalize
interest cost incurred on funds used to construct property, plant,
and equipment. The capitalized interest is recorded as
part of the asset to which it relates and is depreciated over the
asset’s useful life. Interest cost capitalized,
which is currently included in construction in progress, was
$3,857,082 and $2,108,298 at December 31, 2017 and 2016,
respectively.
60
| BLUE DOLPHIN ENERGY COMPANY |
|
FORM 10-K
12/31/17
|
|
Notes to
Consolidated Financial Statements
(Continued)
|
||
|
(8)
|
Related
Party Transactions
|
Blue Dolphin and
certain of its subsidiaries are party to several agreements with
LEH and its affiliates. Management believes that these
related party transactions were consummated on terms equivalent to
those that prevail in arm's-length transactions.
Related Parties
.
LEH
. LEH is our controlling
shareholder. Jonathan Carroll, Chairman of the Board,
Chief Executive Officer, and President of Blue Dolphin, is the
majority owner of LEH. Together LEH and Jonathan Carroll
own 80.2% of our Common Stock. Related party agreements
with LEH include: (i) an Amended and Restated Operating Agreement
with Blue Dolphin and LE, (ii) a Jet Fuel Sales Agreement with LE,
(iii) a Loan and Security Agreement with BDPL, (iv) an Amended and
Restated Promissory Note with Blue Dolphin, and (v) a Debt
Assumption Agreement with LE.
Ingleside Crude, LLC
(“Ingleside”)
. Ingleside is a related
party of LEH and Jonathan Carroll. Blue Dolphin is party
to an Amended and Restated Promissory Note with
Ingleside.
Lazarus Marine Terminal I, LLC
(“LMT”)
. LMT is a related party
of LEH and Jonathan Carroll. LE is party to a Tolling
Agreement with LMT.
Jonathan Carroll
. Jonathan
Carroll is Chairman of the Board, Chief Executive Officer, and
President of Blue Dolphin. Related party agreements with
Jonathan Carroll include: (i) Amended and Restated Guaranty Fee
Agreements with LE and LRM and (ii) an Amended and Restated
Promissory Note with Blue Dolphin.
Currently, we
depend on LEH and its affiliates (including Jonathan Carroll and
Ingleside) for financing when revenue from operations and
borrowings under bank facilities are insufficient to meet our
liquidity needs. Such borrowings are reflected in our
consolidated balance sheets in accounts payable, related party,
and/or long-term debt, related party. Each quarter
amounts owed by the parties are settled with amounts to be paid by
the parties as discussed within this Note (8), Related Party
Transactions. As a result, related-party transactions do
not always reflect cash payments between the parties.
Operations Related
Agreements
.
Amended and Restated Operating
Agreement
. LEH operates and manages all Blue
Dolphin properties pursuant to the Amended and Restated Operating
Agreement. The Amended and Restated Operating Agreement, which was
restructured following cessation of crude supply and marketing
activities under the Crude Supply Agreement and Joint Marketing
Agreement with GEL, expires: (i) April 1, 2020, (ii) upon written
notice by either party to the Amended and Restated Operating
Agreement of a material breach by the other party, or (iii) upon 90
days’ notice by the Board if the Board determines that the
Amended and Restated Operating Agreement is not in our best
interest. Blue Dolphin reimburses LEH at cost plus five percent
(5%) for all reasonable Blue Dolphin expenses incurred while LEH
performs the services. These expenses are reflected
within refinery operating expenses in our consolidated statements
of operations.
Jet Fuel Sales Agreement
. LE
sells jet fuel and other products to LEH pursuant to a Jet Fuel
Sales Agreement. LEH, which is HUBZone certified,
resells these products to a government agency. The Jet
Fuel Sales Agreement terminates on the earliest to occur of: (a) a
one-year term expiring March 31, 2018 plus a 30-day carryover or
(b) delivery of a maximum quantity of jet fuel as defined
therein. LEH believes that it will be awarded a new jet
fuel sales contract following the expiration of the current
agreement. Sales to LEH under the Jet Fuel Sales
Agreement are reflected within refined petroleum product sales in
our consolidated statements of operations. (LRM previously leased
Nixon Facility petroleum storage tanks to LEH for the storage of
the jet fuel under a Terminal Services Agreement. The
Terminal Services Agreement has been terminated as described
below).
Terminal Services
Agreement
. Pursuant to a Terminal Services
Agreement, LEH leased petroleum storage tanks from LRM at the Nixon
Facility for the storage of Blue Dolphin purchased jet fuel under
the Jet Fuel Sales Agreement (as described above). The
Terminal Services Agreement was terminated in June
2017. Rental fees received from LEH under the Terminal
Services Agreement are reflected within tank rental revenue in our
consolidated statements of operations.
61
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Amended and Restated Tank Lease
Agreement
. Pursuant to an Amended and Restated
Tank Lease Agreement with Ingleside, LE leased petroleum storage
tanks to meet periodic, additional storage needs. The
Amended and Restated Tank Lease Agreement was terminated in July
2017. Rental fees owed to Ingleside under the tank lease
agreement are reflected within long-term debt, related party, net
of current portion in our consolidated balance sheets. Amounts
expensed as rental fees to Ingleside under the Amended and Restated
Tank Lease Agreement are reflected within refinery operating
expenses in our consolidated statements of operations.
Tolling Agreement
. In May
2016, LE entered a Tolling Agreement with LMT to facilitate loading
and unloading of petroleum products by barge at LMT’s dock
facility in Ingleside, Texas. The Tolling Agreement has
a five-year term and may be terminated at any time by the agreement
of both parties. LE pays LMT a flat reservation fee
monthly. The reservation fee includes tolling volumes up
to 84,000 gallons per day. Excess tolling volumes are
subject to an increased per gallon rate. Amounts
expensed as tolling fees under the Tolling Agreement are reflected
in cost of refined products sold in our consolidated statements of
operations.
Financial
Agreements
.
Loan and Security
Agreement
. In August 2016, BDPL entered a loan
and security agreement with LEH as evidenced by a promissory note
in the original principal amount of $4.0 million (the “LEH
Loan Agreement”). The LEH Loan Agreement matures
in August 2018 and accrues interest at rate of 16.00%. A
final balloon payment is due at maturity.
The proceeds of the
LEH Loan Agreement were used for working capital. There
are no financial maintenance covenants associated with the LEH Loan
Agreement. The LEH Loan Agreement is secured by certain
property owned by BDPL. Outstanding principal owed to LEH under the
LEH Loan Agreement is reflected in long-term debt, related party,
current portion in our consolidated balance
sheets. Accrued interest under the LEH Loan Agreement is
reflected in interest payable, current portion in our consolidated
balance sheets.
Promissory Notes
. We
currently rely on LEH and its affiliates (including Jonathan
Carroll) to fund our working capital requirements. The
below promissory notes represent non-cash advances, such as
conversions of accounts payable to debt, to fund our working
capital requirements. There can be no assurance that LEH and its
affiliates will continue to fund our working capital
requirements.
●
June LEH Note
– In March 2017,
Blue Dolphin entered a promissory note with LEH (the “March
LEH Note”). In June 2017, the March LEH Note was
amended and restated to increase the principal amount (the
“June LEH Note”). The June LEH Note accrued
interest at a rate of 8.00% and had a maturity date of January
2019. During the second quarter of 2017, principal and
accrued interest balance due under the June LEH Note was settled to
$0 with amounts owed to us by LEH under the Jet Fuel Sales
Agreement.
●
March Ingleside Note
– In March
2017, a promissory note between Blue Dolphin and Ingleside was
amended and restated (the “March Ingleside Note”) to
increase the principal and extend the maturity date to January
2019. Interest under the March Ingleside Note, which is compounded
annually and accrued at a rate of 8.00%, was paid in kind and added
to the outstanding balance. Under the March Ingleside
Note, prepayment, in whole or in part, is permissible at any time
and from time to time, without premium or
penalty.
●
March Carroll Note
– In March
2017, a promissory note between Blue Dolphin and Jonathan Carroll
was amended and restated (the “March Carroll Note”) to
increase the principal amount, revise the payment terms to reflect
payment in cash and shares of Blue Dolphin Common Stock, and extend
the maturity date to January 2019. Interest under the
March Carroll Note, which is compounded annually and accrued at a
rate of 8.00%, was paid in kind and added to the outstanding
balance. Under the March Carroll Note, prepayment, in
whole or in part, is permissible at any time and from time to time,
without premium or penalty.
Outstanding
principal and accrued interest owed to Ingleside and Jonathan
Carroll under the March Ingleside Note and March Carroll Note,
respectively, are reflected in long-term debt, related party, net
of current portion in our consolidated balance sheets.
62
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Debt Assumption Agreement
. On September 18, 2017, LEH
paid, on LE’s behalf, certain obligations totaling $3,648,742
to GEL relating to the GEL Arbitration and the GEL Letter
Agreement. In exchange for such payments, LE agreed to assume
$3,677,953 of LEH’s existing indebtedness pursuant to the
Debt Assumption Agreement, entered on November 14, 2017 and made
effective September 18, 2017, by and among LE, LEH and John
Kissick. Debt held by John Kissick, including the
debt
associated with the Debt Assumption Agreement, is
reported in this Annual Report as the Notre Dame Debt and is
reflected in long-term debt less unamortized debt issue costs,
current portion in our consolidated balance sheets, as it is
currently in default. (See “Note (10) Long-Term
Debt, Net” for further discussion related to the Notre Dame
Debt.)
Amended and
Restated Guaranty Fee Agreements
. Pursuant to
Amended and Restated Guaranty Fee Agreements, Jonathan Carroll
earns fees for providing his personal guarantee on certain LE and
LRM long-term debt. Jonathan Carroll was required to
guarantee repayment of funds borrowed and interest accrued under
certain LE and LRM loan agreements. Amounts owed to
Jonathan Carroll under Amended and Restated Guaranty Fee Agreements
are reflected within long-term debt, related party, net of current
portion in our consolidated balance sheets. Amounts
expensed related to Amended and Restated Guarantee Fee Agreements
are reflected within interest and other expense in our consolidated
statements of operations.
The First
Amendment, Second Amendment, Third Amendment and Fourth Amendment
prohibit Blue Dolphin and its affiliates from making any
pre-payments on indebtedness, other than in the ordinary course of
business as described in the GEL Letter Agreement, and from making
any payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements between November 1, 2017 and the end of the
Continuance Period. (Jonathan Carroll has received no cash payments
since August 2016 and no common stock payments since May 2017 under
the Amended and Restated Guaranty Fee Agreements.) (See
“Note (10) Long-Term Debt, Net” for further discussion
related to these guaranty fee agreements.)
Financial Statements
Impact
.
Consolidated Balance
Sheets
. Accounts receivable, related party to LEH
associated with the Jet Fuel Sales Agreement was $652,928 and
$1,161,589 at December 31, 2017 and 2016,
respectively. Accounts payable, related party to LMT
associated with the Tolling Agreement was $974,400 and $369,600 at
December 31, 2017 and 2016, respectively.
Long-term debt,
related party associated with the LEH Loan Agreement, March
Ingleside Note, and March Carroll Note as of the dates indicated
was as follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
LEH
|
$
4,000,000
|
$
4,000,000
|
|
Ingleside
|
1,168,748
|
722,278
|
|
Jonathan
Carroll
|
439,733
|
592,412
|
|
|
|
|
|
|
5,608,481
|
5,314,690
|
|
|
|
|
|
Less: Long-term debt, related party,
|
|
|
|
current
portion
|
(4,000,000
)
|
(500,000
)
|
|
|
|
|
|
|
$
1,608,481
|
$
4,814,690
|
Accrued interest
associated with the LEH Loan Agreement was $892,444 and $243,556 at
December 31, 2017 and 2016, respectively.
63
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Consolidated Statements of
Operations
. Related party revenue from LEH
associated with:
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Jet
fuel sales
|
$
81,094,419
|
$
37,757,612
|
|
Jet
fuel storage fees
|
||
|
HOBM
sales
|
3,425,455
|
3,322,770
|
|
Other
product sales
|
-
|
2,824,408
|
|
|
|
|
|
|
$
85,194,874
|
$
45,029,790
|
Related party cost
of goods sold associated with the Tolling Agreement with LMT
totaled $604,800 and $369,600 for the years ended December 31, 2017
and 2016, respectively.
Related party
refinery operating expenses associated with the Amended and
Restated Operating Agreement with LEH and the Amended and Restated
Tank Lease Agreement with Ingleside for the periods indicated were
as follows:
|
|
Years Ended December 31,
|
|||
|
|
2017
|
2016
|
||
|
|
Amount
|
Per bbl
|
Amount
|
Per bbl
|
|
LEH
|
$
8,145,553
|
$
1.81
|
$
11,140,676
|
$
3.10
|
|
Ingleside
|
-
|
-
|
900,000
|
0.25
|
|
|
|
|
|
|
|
|
$
8,145,553
|
$
1.81
|
$
12,040,676
|
$
3.35
|
For the year ended
December 31, 2017, refinery operating expenses per bbl decreased
compared to the year ended December 31, 2016 due to the revised
cost-plus expense reimbursement structure. In addition,
refinery operating expenses per bbl were higher during the year
ended December 31, 2016 due to significant refinery
downtime.
Related party
interest expense associated with the LEH Loan Agreement and Amended
and Restated Guaranty Fee Agreements for the periods indicated was
as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Jonathan
Carroll
|
$
663,130
|
$
692,969
|
|
LEH
|
$
706,146
|
243,556
|
|
|
|
|
|
|
$
1,369,276
|
$
936,525
|
64
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
|
(9)
|
Accrued
Expenses and Other Current Liabilities
|
Accrued expenses
and other current liabilities as of the dates indicated consisted
of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Unearned
revenue
|
$
449,800
|
$
408,770
|
|
Board
of director fees payable
|
206,429
|
136,429
|
|
Property
taxes
|
130,736
|
4,694
|
|
Other
payable
|
116,361
|
189,719
|
|
Customer
deposits
|
109,029
|
450,000
|
|
Excise
and income taxes payable
|
79,260
|
24,187
|
|
Insurance
|
67,850
|
67,783
|
|
|
|
|
|
|
$
1,159,465
|
$
1,281,582
|
|
(10)
|
|
Long-term debt, net
represents the outstanding principal of long-term debt less
associated debt issue costs. Long-term debt, net as of
the dates indicated consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
First
Term Loan Due 2034 (in default)
|
$
23,199,031
|
$
23,924,607
|
|
Second
Term Loan Due 2034 (in default)
|
9,501,930
|
9,729,853
|
|
Notre
Dame Debt (in default)
|
4,977,953
|
1,300,000
|
|
Term
Loan Due 2017
|
-
|
184,994
|
|
Capital
Leases
|
-
|
135,879
|
|
|
$
37,678,914
|
$
35,275,333
|
|
|
|
|
|
Less:
Current portion of long-term debt, net
|
(35,544,402
)
|
(31,712,336
)
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(2,134,512
)
|
(2,262,997
)
|
|
|
|
|
|
|
$
-
|
$
1,300,000
|
Unamortized debt
issue costs, which relate to secured loan agreements with Veritex,
as of the dates indicated consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
First
Term Loan Due 2034 (in default)
|
$
1,673,545
|
$
1,673,545
|
|
Second
Term Loan Due 2034 (in default)
|
767,673
|
767,673
|
|
|
|
|
|
Less:
Accumulated amortization
|
(306,706
)
|
(178,221
)
|
|
|
|
|
|
|
$
2,134,512
|
$
2,262,997
|
Amortization
expense was $128,484 and $128,233 for the years ended December 31,
2017 and 2016, respectively.
65
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Accrued interest
associated with long-term debt, net is reflected as interest
payable, current portion and long-term interest payable, net of
current portion in our consolidated balance sheets and includes
related party interest. Accrued interest as of the dates
indicated consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Notre
Dame Debt (in default)
|
$
2,046,083
|
$
1,691,383
|
|
LEH
Loan Agreement (related party)
|
892,444
|
243,556
|
|
Second
Term Loan Due 2034 (in default)
|
49,202
|
44,984
|
|
First
Term Loan Due 2034 (in default)
|
40,042
|
33,866
|
|
Capital
Leases
|
-
|
1,165
|
|
Term
Loan Due 2017
|
-
|
185
|
|
|
|
|
|
|
3,027,771
|
2,015,139
|
|
|
|
|
|
Less:
Interest payable, current portion
|
(3,027,771
)
|
(323,756
)
|
|
|
|
|
|
Long-term
interest payable, net of current portion
|
$
-
|
$
1,691,383
|
At December 31,
2017, our expected future long-term debt payments were as
follow:
Years Ending December
31,
|
|
Principal
|
Debt
Issue Costs
|
Total
|
|
2018
|
$
41,678,914
|
$
(2,134,512
)
|
$
39,544,402
|
|
2019
|
1,608,481
|
-
|
1,608,481
|
|
2020
|
-
|
-
|
-
|
|
2021
|
-
|
-
|
-
|
|
2022
|
-
|
-
|
-
|
|
Subsequent
to 2022
|
-
|
-
|
-
|
|
|
$
43,287,395
|
$
(2,134,512
)
|
$
41,152,883
|
Related Party
. See
“Note (8) Related Party Transactions” for additional
disclosures with respect to related party long-term
debt.
First Term Loan Due 2034 (In
Default)
. LE has a 2015 loan agreement and related security
agreement
with Veritex
as administrative agent and lender. The loan agreement
is for
a term loan in the
principal amount of $25.0 million
(the “First Term
Loan Due 2034”). The First Term Loan Due 2034
matures in June 2034, has a current monthly payment of principal
and interest of $198,786, and accrues interest at a rate based on
the Wall Street Journal Prime Rate plus 2.75%. Pursuant
to a construction rider in the First Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
66
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
As described
elsewhere in this Annual Report, Veritex notified LE that the Final
Arbitration Award constitutes an event of default under the First
Term Loan Due 2034. In addition to existing events of
default related to the Final Arbitration Award, at December 31,
2017, LE was in violation of the debt service coverage ratio, the
current ratio, and debt to net worth ratio financial covenants
related to the first Term Loan Due 2034. LE also failed
to replenish a payment reserve account as required. The
occurrence of events of default under the First Term Loan Due 2034
permits Veritex to declare the amounts owed under the First Term
Loan Due 2034 immediately due and payable, exercise its rights with
respect to collateral securing LE’s obligations under the
loan agreement, and/or exercise any other rights and remedies
available. Veritex informed obligors that it is not
currently exercising its rights, privileges and remedies under the
First Term Loan Due 2034 considering the ongoing settlement
discussions with GEL and the continuance of the hearing on
confirmation of the Final Arbitration Award and to allow Veritex to
evaluate any proposed settlement agreement related to the Final
Arbitration Award, which would require Veritex’s
approval. However, Veritex expressly reserved all its
rights, privileges and remedies related to events of default under
the First Term Loan Due 2034 and informed LE that it would consider
a final confirmation of the Final Arbitration Award to be a
material event of default under the loan agreement. Any
exercise by Veritex of its rights and remedies under the First Term
Loan Due 2034 would have a material adverse effect on our business,
financial condition, and results of operations and would likely
require us to seek protection under bankruptcy
laws. (See “Note (1) Organization – Going
Concern and Operating Risks” for additional disclosures
related to the First Term Loan Due 2034, the Final Arbitration
Award and financial covenant violations.)
As a condition of
the First Term Loan Due 2034, Jonathan Carroll was required to
guarantee r
epayment
of funds borrowed and interest accrued under the
loan. For his personal guarantee, LE entered a Guaranty
Fee Agreement with Jonathan Carroll whereby he earns a fee equal to
2.00% per annum of the outstanding principal balance owed under the
First Term Loan Due 2034. Effective in April 2017, the
Guaranty Fee Agreement associated with the First Term Loan Due 2034
was amended and restated to reflect payment in cash and shares of
Blue Dolphin Common Stock. For the years ended December
31, 2017 and 2016, guaranty fees earned by Jonathan Carroll related
to the First Term Loan Due 2034 totaled $470,610 and $485,463,
respectively. Guaranty fees are recognized monthly as incurred and
are included in interest and other expense in our consolidated
statements of operations. (Jonathan Carroll has received no cash
payments since August 2016 and no common stock payments since May
2017 under the Amended and Restated Guaranty Fee
Agreements.) LEH, LRM and Blue Dolphin also guaranteed
the First Term Loan Due 2034. (See “Note (8) Related Party
Transactions” for additional disclosures related to LEH and
Jonathan Carroll)
A portion of the
proceeds of the First Term Loan Due 2034 were used to refinance
approximately $8.5 million of debt owed under a previous debt
facility with American First National Bank. Remaining
proceeds are being used primarily to construct new petroleum
storage tanks at the Nixon Facility. The First Term Loan Due 2034
is secured by: (i) a first lien on all Nixon Facility business
assets (excluding accounts receivable and inventory), (ii)
assignment of all Nixon Facility contracts, permits, and licenses,
(iii) absolute assignment of Nixon Facility rents and leases,
including tank rental income, (iv) a payment reserve account held
by Veritex, and (v) a pledge of $5.0 million of a life insurance
policy on Jonathan Carroll. The First Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Second Term Loan Due 2034 (In
Default)
. LRM has a 2015 loan agreement and related security
agreement with Veritex as administrative agent and
lender. The loan agreement is for a term loan in the
principal amount of $10.0 million (the “Second Term Loan Due
2034”). The Second Term Loan Due 2034 matures in
December 2034, has a current monthly payment of principal and
interest of $74,111, and accrues interest at a rate based on the
Wall Street Journal Prime Rate plus 2.75%. Pursuant to a
construction rider in the Second Term Loan Due 2034, proceeds
available for use were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
67
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
As described
elsewhere in this Annual Report, Veritex notified LRM that the
Final Arbitration Award constitutes an event of default under the
Second Term Loan Due 2034. In addition to existing
events of default related to the Final Arbitration Award, at
December 31, 2017, LRM was in violation of the debt service
coverage ratio, the current ratio, and debt to net worth ratio
financial covenants related to the Second Term Loan Due
2034. The occurrence of events of default under the
Second Term Loan Due 2034 permits Veritex to declare the amounts
owed under the Second Term Loan Due 2034 immediately due and
payable, exercise its rights with respect to collateral securing
LRM’s obligations under the loan agreement, and/or exercise
any other rights and remedies available. Veritex
informed obligors that it is not currently exercising its rights,
privileges and remedies under the Second Term Loan Due 2034
considering the ongoing settlement discussions with GEL and the
continuance of the hearing on confirmation of the Final Arbitration
Award and to allow Veritex to evaluate any proposed settlement
agreement related to the Final Arbitration Award, which would
require Veritex’s approval. However, Veritex
expressly reserved all its rights, privileges and remedies related
to events of default under the Second Term Loan Due 2034 and
informed LRM that it would consider a final confirmation of the
Final Arbitration Award to be a material event of default under the
loan agreement. Any exercise by Veritex of its rights
and remedies under the Second Term Loan Due 2034 would have a
material adverse effect on our business, financial condition, and
results of operations and would likely require us to seek
protection under bankruptcy laws. (See “Note (1) Organization
– Going Concern and Operating Risks” for additional
disclosures related to the First Term Loan Due 2034, the Final
Arbitration Award and financial covenant violations.)
As a condition of
the Second Term Loan Due 2034, Jonathan Carroll was required to
guarantee repayment of funds borrowed and interest accrued under
the loan. For his personal guarantee, LRM entered a
Guaranty Fee Agreement with Jonathan Carroll whereby he earns a fee
equal to 2.00% per annum of the outstanding principal balance owed
under the Second Term Loan Due 2034. Effective in April
2017, the Guaranty Fee Agreement associated with the Second Term
Loan Due 2034 was amended and restated to reflect payment in cash
and shares of Blue Dolphin Common Stock. For the years
ended December 31, 2017 and 2016, guaranty fees earned by Jonathan
Carroll related to the Second Term Loan Due 2034 totaled $192,108
and $197,024, respectively. Guaranty fees are recognized
monthly as incurred and are included in interest and other expense
in our consolidated statements of
operations. (Jonathan Carroll has received no cash
payments since August 2016 and no common stock payments since May
2017 under the Amended and Restated Guaranty Fee
Agreements.) LEH, LE and Blue Dolphin also guaranteed
the Second Term Loan Due 2034. (See “Note (8)
Related Party Transactions” for additional disclosures
related to LEH and Jonathan Carroll.)
A portion of the
proceeds of the Second Term Loan Due 2034 were used to refinance a
previous bridge loan from Veritex in the amount of $3.0
million. Remaining proceeds are being used primarily to
construct additional new petroleum storage tanks at the Nixon
Facility. The Second Term Loan Due 2034 is secured by: (i) a second
priority lien on the rights of LE in the Nixon Facility and the
other collateral of LE pursuant to a security agreement; (ii) a
first priority lien on the real property interests of LRM; (iii) a
first priority lien on all of LRM’s fixtures, furniture,
machinery and equipment; (iv) a first priority lien on all of
LRM’s contractual rights, general intangibles and
instruments, except with respect to LRM’s rights in its
leases of certain specified tanks, with respect to which Veritex
has a second priority lien in such leases subordinate to a prior
lien granted by LRM to Veritex to secure obligations of LRM under
the Term Loan Due 2017; and (v) all other collateral as described
in the security documents. The Second Term Loan Due 2034
contains representations and warranties, affirmative, restrictive,
and financial covenants, as well as events of default which are
customary for bank facilities of this type.
Notre Dame Debt (In Default)
.
LE entered a loan with Notre Dame Investors, Inc. as evidenced by a
promissory note in the original principal amount of $8.0 million,
which is currently held by John Kissick (the “Notre Dame
Debt”). Pursuant to a Sixth Amendment to the Notre Dame Debt,
entered on November 14, 2017 and made effective September 18, 2017,
the Notre Dame Debt was amended to increase the principal amount by
$3,677,953 (the “Additional Principal”). The Additional
Principal was used to make payments to GEL to reduce the balance of
the Final Arbitration Award in the amount of $3,648,742 in
accordance with the GEL Letter Agreement. Interest on
the principal accrues at a rate of 16.00%. The Notre
Dame Debt matured in January 2018, however, pursuant to a
Subordination Agreement dated June 2015, the holder of the Notre
Dame Debt agreed to subordinate its right to payments, as well as
any security interest and liens on the Nixon Facility, in favor of
Veritex as holder of the First Term Loan Due 2034.
The Notre Dame Debt
is secured by a Deed of Trust, Security Agreement and Financing
Statements (the “Subordinated Deed of Trust”), which
encumbers the Nixon Facility and general assets of
LE. There are no financial maintenance covenants
associated with the Notre Dame Debt.
Term Loan Due 2017
. LRM had a
2014 loan and security agreement with Veritex for a term loan
facility in the principal amount of $2.0 million (the “Term
Loan Due 2017”). The Term Loan Due 2017 was
amended in March 2015, pursuant to a Loan Modification Agreement
(the “March Loan Modification
Agreement”). Under the March Loan Modification
Agreement, the interest rate was modified to be the greater of the
Wall Street Journal Prime Rate plus 2.75% or 6.00%, and the due
date was extended to March 2017. Pursuant to the March
Loan Modification Agreement, the Term Loan Due 2017 had a monthly
principal payment of $61,665 plus interest. The Term Loan Due 2017
was paid off in March 2017.
68
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
As a condition of
the Term Loan Due 2017, Jonathan Carroll was required to guarantee
r
epayment
of funds
borrowed and interest accrued under the loan. For his
personal guarantee, LRM entered a Guaranty Fee Agreement with
Jonathan Carroll whereby he earned a fee equal to 2.00% per annum
of the outstanding principal balance owed under the Term Loan Due
2017. Effective in April 2017, the Guaranty Fee
Agreement associated with the Term Loan Due 2017 was amended and
restated to reflect payment in cash and shares of Blue Dolphin
Common Stock. (Guaranty Fee Agreements associated with the First
Term Loan Due 2034, Second Term Loan Due 2034, and Term Loan Due
2017 are collectively referred to in this Annual Report as the
“Amended and Restated Guaranty Fee
Agreements”). For the years ended December 31,
2017 and 2016, guaranty fees earned by Jonathan Carroll related to
the Term Loan Due 2017 totaled $411 and $10,483, respectively.
Guaranty fees are recognized monthly as incurred and are included
in interest and other expense in our consolidated statements of
operations. (Jonathan Carroll has received no cash payments since
August 2016 and no common stock payments since May 2017 under the
Amended and Restated Guaranty Fee Agreements.)
Capital Leases
. In
2014, LRM entered a 36-month build-to-suit capital lease for the
purchase of new boiler equipment for the Nixon Facility. The lease,
which was guaranteed by Blue Dolphin, required a quarterly payment
in the amount of $44,258. The lease matured in December 2017, and
management is currently evaluating end of lease options. One of the
boilers was placed in service during the second quarter of 2017,
being reclassified on our consolidated balance sheets from
construction in progress to refinery and facilities. The other
boiler remains in construction in progress.
A summary of
equipment held under long-term capital leases as of the dates
indicated follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Boiler
equipment
|
$
538,598
|
$
538,598
|
|
Less:
accumulated depreciation
|
7,655
|
-
|
|
|
|
|
|
|
$
546,253
|
$
538,598
|
At December 31,
2017, there were no future minimum lease commitments under
non-cancelable capital leases.
|
(11)
|
Asset
Retirement Obligations
|
Refinery and Facilities
.
Management has concluded that there is no legal or contractual
obligation to dismantle or remove the refinery and facilities
assets. Management believes that the refinery and facilities assets
have indeterminate lives under FASB ASC guidance for estimating
AROs because dates or ranges of dates upon which we would retire
these assets cannot reasonably be estimated at this time. When a
legal or contractual obligation to dismantle or remove the refinery
and facilities assets arises and a date or range of dates can
reasonably be estimated for the retirement of these assets, we will
estimate the cost of performing the retirement activities and
record a liability for the fair value of that cost using present
value techniques.
Pipelines and Facilities and Oil and
Gas Properties
. We have AROs associated with the
dismantlement and abandonment in place of our pipelines and
facilities assets, as well as the plugging and abandonment of our
oil and gas properties. We recorded a discounted
liability for the fair value of an ARO with a corresponding
increase to the carrying value of the related long-lived asset at
the time the asset was installed or placed in service. We
depreciate the amount added to property and equipment and recognize
accretion expense relating to the discounted liability over the
remaining life of the asset. Plugging and abandonment costs are
recorded during the period incurred or as information becomes
available to substantiate actual and/or probable
costs.
69
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Changes to our ARO
liability for the periods indicated were as follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Asset
retirement obligations, at the beginning of the period
|
$
2,027,639
|
$
1,985,864
|
|
Liabilities
settled
|
(444
)
|
(70,969
)
|
|
Accretion
expense
|
287,376
|
112,744
|
|
|
2,314,571
|
2,027,639
|
|
Less:
asset retirement obligations, current portion
|
(2,314,571
)
|
(17,510
)
|
|
|
|
|
|
Long-term
asset retirement obligations, at the end of the period
|
$
-
|
$
2,010,129
|
Liabilities settled
represents amounts paid for plugging and abandonment costs against
the asset’s ARO liability. At December 31, 2017
and 2016, we recognized $444 and $70,969, respectively, in
liabilities settled. Abandonment expense represents amounts paid
for plugging and abandonment costs that exceed the asset’s
ARO liability. For the years ended December 31, 2017 and
2016, we recognized $0 in abandonment expense.
|
(12)
|
Impairment
|
For the years ended
December 31, 2017 and 2016, we recorded impairment expense of
$303,346 and $968,684, respectively. The impairment
expense for the year ended December 31, 2017 related to trade
name. The impairment expense for the year ended December
31, 2016 related to our pipeline fixed assets.
At the time of the
2012 reverse acquisition, our trade name valuation was tied to
pipeline transportation and exploration and production revenue and
assumed, under the relief-from-royalty approach, a growth rate of
2.2% annually. Although growth in these operations did
not materialize for economic reasons, management believed there was
value associated with Blue Dolphin’s listing as a
publicly-traded company. Given the decline in the price
per share of our common stock following the Final Arbitration
Award, we fully impaired the trade name asset. Trade name is not
associated with, nor is it material to, our refinery operations
business segment.
|
(13)
|
Treasury
Stock
|
At December 31,
2017 and 2016, we had 0 and 150,000 shares of treasury stock,
respectively. In May 2017, we issued 150,000 shares of
treasury stock to Jonathan Carroll as payment for amounts due under
the March Carroll Note. The issuance price of the treasury stock
issued to Mr. Carroll was $2.48 per share, which represents the
preceding 30-day average closing price of the Common Stock, in
accordance with the Amended and Restated Guaranty Fee
Agreements. The shares of treasury stock issued to Mr.
Carroll are restricted per applicable securities holding periods
for affiliates.
|
(14)
|
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 our cash balances at financial institutions located in
Houston, Texas. In the U.S., the Federal Deposit Insurance
Corporation (the “FDIC”) insures certain financial
products up to a maximum of $250,000 per depositor. At
December 31, 2017 and 2016, we had cash balances (including
restricted cash) of more than the FDIC insurance limit per
depositor in the amount of $1,602,045 and $5,372,689,
respectively.
70
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Key Supplier
.
As discussed
elsewhere in this Annual Report, we ceased purchases of crude oil
and condensate from GEL under the Crude Supply Agreement in
November 2016. (See “Part I, Item 1A. Risk
Factors” and “Note (19) Commitments and Contingencies
– Legal Matters” for disclosures related to the Crude
Supply Agreement, the contract-related dispute with GEL, and the
Final Arbitration Award.) We currently have in place a
month-to-month evergreen crude supply contract with a major
integrated oil and gas company. This supplier currently
provides us with adequate amounts of crude oil and condensate, and
we expect the supplier to continue to do so for the foreseeable
future. However, our ability to purchase crude oil and
condensate is dependent on our liquidity and access to capital,
which have been adversely affected by net losses, working capital
deficits, the contract-related dispute with GEL, and financial
covenant defaults in secured loan agreements. The Final
Arbitration Award could have a material adverse effect on our
ability to procure adequate amounts of crude oil and condensate
from our current supplier or otherwise.
Significant Customers
. We
routinely assess the financial strength of our customers and have
not experienced significant write-downs in our accounts receivable
balances. Therefore, we believe that our accounts
receivable credit risk exposure is limited.
For the year ended
December 31, 2017, we had 3 customers that accounted for
approximately 70% of our refined petroleum product
sales. LEH was 1 of these 3 significant customers and
accounted for approximately 33% of our refined petroleum product
sales. At December 31, 2017, these 3 customers
represented approximately $1.3 million in accounts
receivable. LEH represented approximately $0.7 million
in accounts receivable. LEH, which is HUBZone certified,
purchases our jet fuel and resells the jet fuel to a government
agency. (See “Part I, Item 1. Business –
Management” and “Part II, Item 8. Financial Statements
and Supplementary Data – Note (8) Related Party Transactions,
Note (10) Long-Term Debt, Net, and Note (19) Commitments and
Contingencies – Financing Agreements” for additional
disclosures related to LEH.)
For the year ended
December 31, 2016, we had 4 customers that accounted for
approximately 67% of our refined petroleum product
sales. LEH was one of these 4 significant customers and
accounted for approximately 27% of our refined petroleum product
sales. At December 31, 2016, these 4 customers represented
approximately $1.6 million in accounts receivable. LEH
represented approximately $1.6 million in accounts
receivable.
Refined Petroleum Product
Sales
. Our refined petroleum products are primarily sold in
the U.S. However, with the opening of the Mexican diesel market to
private companies, we occasionally sell low-sulfur diesel to
customers that export to Mexico. Total refined
petroleum product sales by distillation (from light to heavy) for
the periods indicated consisted of the following:
|
|
Years Ended December 31,
|
|||
|
|
2017
|
2016
|
||
|
LPG
mix
|
$
122,911
|
0.1
%
|
$
714,285
|
0.4
%
|
|
Naphtha
|
60,407,725
|
23.6
%
|
35,544,394
|
21.5
%
|
|
Jet
fuel
|
81,094,418
|
31.7
%
|
55,459,227
|
33.5
%
|
|
HOBM
|
54,851,030
|
21.5
%
|
35,924,098
|
21.8
%
|
|
Reduced
Crude
|
-
|
0.0
%
|
3,791,919
|
2.3
%
|
|
AGO
|
59,071,227
|
23.1
%
|
33,979,855
|
20.5
%
|
|
|
|
|
|
|
|
|
$
255,547,311
|
100.0
%
|
$
165,413,778
|
100.0
%
|
71
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
|
(15)
|
Leases
|
Our principal
office is in Houston, Texas. The office space is leased
by BDSC, as lessee, under a 2006 lease agreement that expired in
September 2017. Effective January 1, 2018, BDSC entered
an amended lease agreement (the “Lease Amendment”)
that: (i) reduced the leased premises from 13,878 square feet to
7,675 square feet (ii) extended the lease period by sixty-eight
(68) months expiring on August 31, 2023, and (iii) has an initial
monthly base rental of $18,868. Of the 7,675 square feet, 1,186
square feet is used and paid for by LEH. The Lease
Amendment includes an allowance for lessee improvements, rent
abatements, and a five-year renewal option.
For the years ended
December 31, 2017 and 2016, rent expense totaled $161,920 and
$142,604, respectively. Rent expense is recognized on a
straight-line basis.
At December 31,
2017, there were no future minimum lease commitments that were
non-cancelable under our expiring office lease. However,
future minimum lease commitments that were non-cancelable under the
Lease Amendment were as follow:
|
Years Ending December 31,
|
|
|
2018
|
$
113,206
|
|
2019
|
190,276
|
|
2020
|
229,930
|
|
2021
|
233,448
|
|
2022
|
237,285
|
|
2023
|
160,535
|
|
|
$
1,164,680
|
|
(16)
|
Income
Taxes
|
On
December 22, 2017, the Tax Cuts and Jobs Act was signed into
law. The principal element of the Tax Cuts and Jobs Act relevant to
our financial statements is a reduction in the U.S. federal
corporate tax rate from 34% to 21%, effective January 1, 2018.
Other provisions of the Tax Cuts and Jobs Act did not have a
significant impact on our financial statements for the year ended
December 31, 2017.
The provision for
income taxes as of the dates indicated consisted of the
following:
|
|
December
31,
|
|
|
|
2017
|
2016
|
|
Current
|
$
-
|
$
-
|
|
Deferred
|
|
-
|
|
Deferred
provision
|
|
-
|
|
Impact
of change in enacted tax rates
|
6,654,184
|
-
|
|
Change
in valuation allowance
|
(6,654,184
)
|
(3,607,237
)
|
|
Total
provision for income taxes
|
$
0
|
$
(3,607,237
)
|
In 2017, our
effective tax rate differed from the U.S. federal statutory rate
primarily due to re-measuring deferred income taxes at the new
statutory tax rate and the related change of the valuation
allowance over our deferred tax assets. At the date of
enactment of the Tax Cuts and Jobs Act, we re-measured our deferred
tax assets and liabilities using a rate of 21%, which is the rate
expected to be in place when such deferred assets and liabilities
are expected to reverse in the future. The
re-measurement reduced our net deferred tax assets by
$6,654,184. In 2016, our effective tax rate differed
from the U.S. federal statutory rate primarily due to a change in
the valuation allowance of our deferred tax assets.
72
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
The state of Texas
has a Texas margins tax (“TMT”), which is a form of
business tax imposed on gross margin. Although TMT is imposed on an
entity’s gross profit rather than on its net income, certain
aspects of TMT make it like an income tax. Accordingly,
TMT is treated as an income tax for financial reporting
purposes.
Effective Tax
Rate
. Our effective tax rate was as
follows:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Expected
tax rate
|
34.00
%
|
34.00
%
|
|
Permanent
differences
|
0.00
%
|
0.00
%
|
|
State
tax
|
0.00
%
|
0.00
%
|
|
Federal
tax
|
0.00
%
|
0.00
%
|
|
Change
in valuation allowance
|
(34.00
%)
|
(63.66
%)
|
|
|
0.00
%
|
(29.66
%)
|
Deferred income
taxes as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Deferred
tax assets:
|
|
|
|
Net
operating loss and capital loss carryforwards
|
$
9,767,205
|
$
13,550,338
|
|
Accrued
arbitration award payable
|
4,122,187
|
-
|
|
Start-up
costs (Nixon Facility)
|
763,428
|
1,373,363
|
|
Asset
retirement obligations liability/deferred revenue
|
494,816
|
717,751
|
|
AMT
credit and other
|
216,925
|
266,522
|
|
Total
deferred tax assets
|
15,364,561
|
15,907,974
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(4,415,061
)
|
(5,895,943
)
|
|
Total
deferred tax liabilities
|
(4,415,061
)
|
(5,895,943
)
|
|
|
|
|
|
|
10,949,500
|
10,012,031
|
|
|
|
|
|
Valuation
allowance
|
(10,949,500
)
|
(10,012,031
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
-
|
$
-
|
Deferred Income
Taxes
. Deferred income tax balances reflect the
effects of temporary differences between the carrying amounts of
assets and liabilities and their tax basis, as well as from NOL
carryforwards. We state those balances at the enacted
tax rates we expect will be in effect when taxes are
paid. NOL carryforwards and deferred tax assets
represent amounts available to reduce future taxable
income.
NOL Carryforwards
. Under IRC
Section 382, a corporation that undergoes an “ownership
change” is subject to limitations on its use of pre-change
NOL carryforwards to offset future taxable income. Within the
meaning of IRC Section 382, an “ownership change”
occurs when the aggregate stock ownership of certain stockholders
(generally 5% shareholders, applying certain look-through rules)
increases by more than 50 percentage points over such stockholders'
lowest percentage ownership during the testing period (generally
three years). For income tax purposes, we experienced ownership
changes in 2005, relating to a series of private placements, and in
2012, because of a reverse acquisition, that limit the use of
pre-change NOL carryforwards to offset future taxable
income. In general, the annual use limitation equals the
aggregate value of common stock at the time of the ownership change
multiplied by a specified tax-exempt interest rate. The 2012
ownership change will subject approximately $16.3 million in NOL
carryforwards that were generated prior to the ownership change to
an annual use limitation of $638,196 per year. Unused
portions of the annual use limitation amount may be used in
subsequent years. Because of the annual use limitation,
approximately $6.7 million in NOL carryforwards that were generated
prior to the 2012 ownership change will expire
unused. NOL carryforwards that were generated after the
2012 ownership change are not subject to an annual use limitation
under IRC Section 382 and may be used for a period of 20 years in
addition to available amounts of NOL carryforwards generated prior
to the ownership change.
73
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
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
|
|
Balance
at December 31, 2015
|
$
9,614,449
|
$
9,616,941
|
$
19,231,390
|
|
|
|
|
|
|
Net
operating losses
|
-
|
13,945,128
|
13,945,128
|
|
|
|
|
|
|
Balance
at December 31, 2016
|
$
9,614,449
|
$
23,562,069
|
$
33,176,518
|
|
|
|
|
|
|
Net
operating losses
|
-
|
6,656,563
|
6,656,563
|
|
|
|
|
|
|
Balance
at December 31, 2017
|
$
9,614,449
|
$
30,218,632
|
$
39,833,081
|
Valuation Allowance
. As of each
reporting date, management considers new evidence, both positive
and negative, to determine the realizability of deferred tax
assets. Management considers whether it is more likely
than not that some portion or all the deferred tax assets will be
realized, which is dependent upon the generation of future taxable
income prior to the expiration of any NOL carryforwards. At
December 31, 2017 and 2016, management determined that cumulative
losses incurred over the prior three-year period provided
significant objective evidence that limited the ability to consider
other subjective evidence, such as projections for future growth.
Based on this evaluation, we recorded a full valuation allowance
against the deferred tax assets as of December 31, 2017 and
2016.
|
(17)
|
Earnings
Per Share
|
A reconciliation
between basic and diluted income per share for the periods
indicated was as follows:
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Net
loss
|
$
(22,328,390
)
|
$
(15,767,448
)
|
|
|
|
|
|
Basic
and diluted income per share
|
$
(2.09
)
|
$
(1.51
)
|
|
|
|
|
|
Basic and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
|
common
stock outstanding and potential
|
|
|
|
dilutive
shares of common stock
|
10,689,615
|
10,464,061
|
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 years ended December
31, 2017 and 2016 was the same as basic EPS as there were no stock
options or other dilutive instruments outstanding.
74
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
|
(18)
|
Inventory
Risk Management
|
During 2017, we
began selling certain of our refined petroleum products immediately
following production, which minimizes inventory, improves cash
flow, and reduces commodity risk/exposure. Previously,
Genesis/GEL used commodity futures contracts to mitigate the
volatile change in value for our crude oil and refined petroleum
products inventory.
The following table
provides the effect of derivative instruments in our consolidated
statements of operations for the years ended December 31, 2017 and
2016:
|
|
|
|
Gain (Loss) Recognized
|
|
|
|
|
|
Years Ended December 31,
|
|
|
Derivatives
|
|
Statements of Operations Location
|
2017
|
2016
|
|
Commodity
contracts
|
|
Cost
of refined products sold
|
$
-
|
$
(2,445,898
)
|
|
(19)
|
Commitments
and Contingencies
|
Legal Matters
.
GEL Contract-Related Dispute and Final
Arbitration Award
. See “Note (1)
Organization – Going Concern – Final GEL Arbitration
Award” for disclosures related to the GEL contract-related
dispute and Final Arbitration Award. In addition, see
"Part I, Item 3. Legal Proceedings” for additional
information regarding the contract related dispute and Final
Arbitration Award.
Veritex Secured Loan Agreement Event of
Default
. See “Note (1) Organization –
Going Concern – Veritex Secured Loan Agreement Event of
Default” and “Note (10) Long-Term Debt, Net” for
disclosures related to defaults under secured loan
agreements.
Other Legal Matters
. From
time to time we are involved in routine lawsuits, claims, and
proceedings incidental to the conduct of our business, including
mechanic’s liens and administrative
proceedings. Management does not believe that such
matters will have a material adverse effect on our financial
position, earnings, or cash flows.
Amended and Restated Operating
Agreement
. See “Note (8) Related Party
Transactions” for additional disclosures related to the
Amended and Restated Operating Agreement.
Financing Agreements
. See
“Note (10) Long-Term Debt, Net” for additional
disclosures related to financing agreements.
Guarantees
. Blue Dolphin and
certain of its subsidiaries have guarantees for affiliates related
to long-term debt. The maximum amount of any guarantee
is reduced as payments are made by the affiliate. Blue
Dolphin has recorded no liability for these
guarantees. See “Note (10) Long-Term Debt,
Net” for additional disclosures related to
guarantees.
Health, Safety and Environmental
Matters
. All our operations and properties 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 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 greenhouse gas emissions. Our 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.
Nixon Facility Expansion
.
We
have made and
continue to make capital and efficiency improvements to the Nixon
Facility. Therefore, we incurred and will continue to incur capital
expenditures related to these improvements, which include, among
other things, facility and land improvements and completion of
petroleum storage tanks.
75
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Notes to
Consolidated Financial Statements
(Continued)
Supplemental Pipeline Bonds
. In
2016, the Bureau of Ocean Energy Management (the
“BOEM”) requested that BDPL provide additional
supplemental bonds or acceptable financial assurance of
approximately $4.6 million related to five (5) existing pipeline
rights-of-way. At December 31, 2017 and 2016, BDPL maintained
approximately $0.9 million in credit and cash-backed pipeline
rights-of-way bonds issued to the BOEM. Of the five (5)
existing pipeline rights-of-ways related to BOEM’s request,
the pipeline associated with one (1) right-of-way was
decommissioned in 1997. The Bureau of Safety and
Environmental Enforcement (the “BSEE”) approved BDPL
permit requests to decommission in place the pipelines for three
(3) of these rights-of-way. As a result, management is
seeking a waiver of BOEM’s request for additional financial
assurance. There can be no assurance that the BOEM will
accept a reduced amount of supplemental financial assurance or not
require additional supplemental pipeline bonds related to our
existing pipeline rights-of-way. If BDPL is required by
the BOEM to provide significant additional supplemental bonds or
acceptable financial assurance, we may experience a significant and
material adverse effect on our operations, liquidity, and financial
condition.
|
(20)
|
Subsequent
Events
|
BDSC Principal Office
Lease
. See “Note (15) Leases” for
disclosures related to an amendment to the lease agreement for our
principal office.
Sixth Amendment to GEL Letter
Agreement
. On March 26, 2018, LE and Blue
Dolphin, together with LEH and Jonathan Carroll, entered into a
sixth amendment to the GEL Letter Agreement, which extended the
Continuance Period through April 30, 2018, in order to facilitate
ongoing discussions. An additional $500,000.00 was paid
to GEL on March 26, 2018, which amount has been applied to reduce
the balance of the final award. (See “Note (1)
Organization – Going Concern – Final GEL Arbitration
Award” for disclosures related to the GEL contract-related
dispute and Final Arbitration Award.)
Remainder of Page
Intentionally Left Blank
76
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
None.
Disclosure Controls and Procedures
Disclosure controls
and procedures are controls and other procedures that are designed
to ensure that information required to be disclosed by us in the
reports we file or submit under the Securities Exchange Act of
1934, as amended (the “Exchange Act”) is recorded,
processed, summarized and reported within the time periods
specified by SEC rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed by us
in the reports we file or submit under the Exchange Act is
accumulated and communicated to management, including the Chief
Executive Officer (principal executive officer) and the Chief
Financial Officer (principal financial officer), as appropriate to
allow timely decisions regarding required disclosure. Under the
supervision of, and with the participation of our management,
including our Chief Executive Officer (principal executive officer)
and Chief Financial Officer (principal financial officer), we
conducted an evaluation of the effectiveness of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act, as of the end of the period
covered by this Annual Report. Based on our evaluation, our Chief
Executive Officer (principal executive officer) and Chief Financial
Officer (principal financial officer) concluded that our disclosure
controls and procedures were effective as of the end of the period
covered by this report to ensure that information required to be
disclosed by us in reports that we file or submit under the
Exchange Act, are recorded, processed, summarized and reported
within the time periods specified in the SEC’s rules and
forms.
Management’s Report on Internal Control over Financial
Reporting
Management’s
Responsibility
.
Management is responsible for establishing and maintaining adequate
internal control over financial reporting, as such term is defined
in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A
company’s internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally
accepted accounting principles in the United States.
Because of its
inherent limitations, internal control over financial reporting may
not prevent or detect misstatements. Also, projections of any
evaluation of effectiveness to future periods are subject to the
risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Management’s
Assessment
.
Management, under the supervision and with the participation of our
Chief Executive Officer (principal executive officer) and Chief
Financial Officer (principal financial officer), assessed the
effectiveness of our internal controls over financial reporting at
December 31, 2017. In making this assessment, management used
the criteria set forth by the 2013 Committee of Sponsoring
Organizations of the Treadway Commission Framework and SOX
Compliance. Relating to such evaluation, management concluded that
our internal controls over financial reporting were effective at
December 31, 2017.
Changes in Internal Control over
Financial Reporting
. During the period covered by
this report there have been no changes in our internal control over
financial reporting that materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
77
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Exemption from Management's Report on
Internal Control over Financial Reporting
. This Annual
Report does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by our registered public accounting firm pursuant to rules of the
SEC that permit us to provide only management’s attestation
in this Annual Report.
None.
Remainder of Page
Intentionally Left Blank
78
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Structure and Management
Blue Dolphin is a
Delaware corporation that was formed in 1986. Blue
Dolphin is controlled by Lazarus Energy Holdings, LLC
(“LEH”). LEH operates and manages all Blue Dolphin
properties pursuant to an Amended and Restated Operating Agreement
(the “Amended and Restated Operating
Agreement”). Jonathan Carroll is Chairman of the
Board of Directors (the “Board”), Chief Executive
Officer, and President of Blue Dolphin, as well as a majority owner
of LEH. Together LEH and Jonathan Carroll own 80.2% of our common
stock, par value $0.01 per share (the “Common Stock). (See
“Part II, Item 8. Financial Statements and Supplementary Data
– Note (8) Related Party Transactions, Note (10) Long-Term
Debt, Net and Note (19) Commitments and Contingencies –
Financing Agreements” for additional disclosures related to
LEH, the Amended and Restated Operating Agreement, and Jonathan
Carroll.)
Board Composition
The amended and
restated bylaws of Blue Dolphin provide that the Board shall
consist of five members, with the precise number to be determined
from time to time by the Board, except that no decrease in the
number shall have the effect of shortening the term of an incumbent
director. The Board currently has five directors, each serving
until the next annual meeting of stockholders to be held by Blue
Dolphin. The following sets forth, at April 2, 2018, each
director’s name, age, principal occupation and directorships
during the past five (5) years, as well as their relevant knowledge
and experience that led to their appointment to the
Board:
|
Name,
Age
Principal
Occupation and Directorships During Past 5 Years
|
Knowledge
and Experience
|
|
|
|
|
Jonathan P. Carroll
, 56
Blue Dolphin Energy
Company
Chairman of the Board
(since
2014)
Chief Executive Officer, President,
Assistant Treasurer and Secretary
(since 2012)
Lazarus Energy
Holdings, LLC (“LEH”)
President and majority owner
(since
2006)
Together LEH and
Jonathan Carroll own 80.2% of our outstanding Common
Stock.
Mr. Carroll has
served on Blue Dolphin’s Board since 2014. He is
currently Chairman of the Board. Since 2004, he has
served on the Board of Trustees of the Salient Fund Group, and has
served on the compliance, audit and nominating committees of
several of Salient’s private and public closed-end and mutual
funds. Mr. Carroll previously served on the Board of
Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE)
from January 2014 until its merger with Vanguard Natural
Resources, LLC in October 2015.
|
Mr. Carroll earned
a Bachelor of Arts degree in Human Biology and a Bachelor of Arts
degree in Economics from Stanford University, and he completed a
Directed Reading in Economics at Oxford
University. Based on his educational and professional
experiences, Mr. Carroll possesses particular knowledge and
experience in business management, finance and business development
that strengthen the Board’s collective qualifications, skills
and experience.
|
79
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Name,
Age
Principal
Occupation and Directorships During Past 5 Years
|
Knowledge
and Experience
|
|
|
|
|
Ryan A. Bailey
, 42
Children’s
Health System of Texas
Head of Investments
(since
2014)
The Meadows
Foundation
Investment Officer/Interim Chief Investment
Officer
(2006 to 2014)
Mr. Bailey was
appointed to Blue Dolphin’s Board in November
2015. He is currently a member of the Audit and
Compensation Committees. He also serves as an advisor
and mentor to Texas Wall Street Women, a non-profit member
organization; is a member of the advisory board of Solovis, Inc.,
an investment software company; and serves as a Board member for
the Texas Hedge Fund Association.
|
Mr. Bailey earned a
Bachelor of Arts in Economics from Yale University and completed a
graduate course in tax planning from the Yale School of
Management. He holds professional credentialing as a
Chartered Financial Analyst (CFA), Financial Risk Manager (FRM),
Chartered Alternative Investment Analyst (CAIA) and Chartered
Market Technician (CMT). Based on his educational and professional
experiences, Mr. Bailey possesses particular knowledge and
experience in finance, financial analysis and modeling, investment
management, risk assessment and strategic planning that strengthen
the Board’s collective qualifications, skills and
experience.
|
|
|
|
|
|
|
|
Amitav Misra
, 40
Arundo Analytics,
Inc.
Vice President of Marketing
(since June
2017)
Cardinal
Advisors
Founder and Partner
(2014 to
2017)
Taxa,
Inc.
President, Director and Chief Operating
Officer
(2012 to 2014)
EnerNOC,
Inc.
Channel Manager
(2011 to
2012)
Mr. Misra has
served on Blue Dolphin’s Board since 2014. He is
currently a member of the Audit and Compensation
Committees. Mr. Misra serves as an advisor to several
energy technology and private investment companies. He
is also a director of the Houston Center for Literacy, a non-profit
organization.
|
Mr. Misra earned a
Bachelor of Arts in Economics from Stanford University and holds
FINRA Series 79 and Series 63 licenses. Mr. Misra possesses
particular knowledge and experience in economics, business
development, private equity, and strategic planning that strengthen
the Board’s collective qualifications, skills and
experience.
|
|
|
|
|
|
|
|
Christopher T. Morris
, 56
Impact Partners
LLC
President
(since 2017)
Tatum (a Randstad
Company)
New York Managing Partner
(2013 to
2017)
MPact Partners
LLC
President
(2011 to 2013)
Freddie
Mac
Vice President (various divisions)
(2000 to 2010)
Mr. Morris has
served on Blue Dolphin’s Board since 2012; he is currently
Chairman of the Audit and Compensation Committees.
|
Mr. Morris earned a
Bachelor of Arts in Economics from Stanford University and a
Masters in Business Administration from the Harvard Business
School. Based on his educational and professional experiences, Mr.
Morris possesses particular knowledge and experience in business
management, finance, strategic planning and business development
that strengthen the Board’s collective qualifications, skills
and experience.
|
|
|
|
80
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Name,
Age
Principal
Occupation and Directorships During Past 5 Years
|
Knowledge
and Experience
|
|
Herbert N. Whitney
, 77
Wildcat Consulting,
LLC
Founder and President
(since
2006)
Mr. Whitney has
served on Blue Dolphin’s Board since 2012. He previously
served on the Board of Directors of Blackwater Midstream
Corporation, the Advisory Board of Sheetz, Inc., as Chairman of the
Board of Directors of Colonial Pipeline Company, and as Chairman of
the Executive Committee of the Association of Oil
Pipelines.
|
Mr. Whitney has
more than 40 years of experience in pipeline operations, crude oil
supply, product supply, distribution and trading, as well as marine
operations and logistics having served as the President of CITGO
Pipeline Company and in various general manager positions at CITGO
Petroleum Corporation. He earned his Bachelor of Science in Civil
Engineering from Kansas State University. Based on his educational
and professional experiences, he possesses extensive knowledge in
the supply and distribution of crude oil and petroleum products,
which strengthens the Board’s collective qualifications,
skills and expertise.
|
|
|
|
This table shows,
as of April 2, 2018, the name and age of each executive officer, as
well as their principal occupation during the past five (5)
years:
|
Name
|
|
Position
|
|
Since
|
|
Age
|
|
Jonathan
P. Carroll
|
|
Chief
Executive Officer, President, Assistant Treasurer, and
Secretary
|
|
2014
|
|
56
|
|
|
|
|
|
|
|
|
|
Tommy
L. Byrd
|
|
Chief
Financial Officer
|
|
2015
|
|
60
|
|
|
|
Treasurer
and Assistant Secretary
|
|
2012
|
|
|
Jonathan P. Carroll
was appointed
Chairman of the Board of Blue Dolphin in 2014, and he was appointed
Chief Executive Officer, President, Assistant Treasurer and
Secretary of Blue Dolphin in 2012. He has also served as President
of LEH since 2006 and is its majority owner. Together LEH and
Jonathan Carroll own 80.2% of Blue Dolphin’s Common
Stock. Before founding LEH, Mr. Carroll was a private
investor focused on direct debt and equity investments, primarily
in distressed assets. Since 2004, he has served on the
Board of Trustees of Salient Fund Group, and has served on the
compliance, audit and nominating committees of several of
Salient’s private and public closed-end and mutual
funds. Mr. Carroll previously served on the Board of
Directors of the General Partner of LRR Energy, L.P. (NYSE: LRE)
from January 2014 until its merger with Vanguard Natural Resources,
LLC in October 2015. He earned a Bachelor of Arts degree in Human
Biology and a Bachelor of Arts degree in Economics from Stanford
University, and he completed a Directed Reading in Economics at
Oxford University.
Tommy L. Byrd
was appointed Chief
Financial Officer of Blue Dolphin in 2015, having previously served
as Interim Chief Financial Officer from 2012 through 2015 and as
Controller from 2011 to 2012. Mr. Byrd also serves as Treasurer and
Assistant Secretary of Blue Dolphin, positions for which he was
appointed in 2012. He is also an employee of LEH, where
he has served as Chief Financial Officer since 2006. He earned a
Bachelor of Business Administration in Accounting from Stephen F.
Austin State University. Mr. Byrd has extensive
financial management, accounting and internal audit experience in
the energy industry.
Family Relationships between Directors and
Officers
At March 31, 2018,
there were no family relationships between any of our directors or
executive officers.
81
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Structure and Meetings of the Board and Board
Committees
Board
The Board consists
of Messrs. Carroll, Bailey, Misra, Morris and Whitney with Mr.
Carroll serving as Chairman. During 2017, the Board met five (5)
times. The Board has two standing committees, the Audit Committee
and the Compensation Committee. In 2013, the Board formed a Special
Committee of the Board to oversee a potential conversion of Blue
Dolphin from a Delaware “C” corporation to a Delaware
MLP. The Special Committee of the Board was dissolved in
March 2018 (see below).
Audit
Committee
The Audit Committee
consists of Messrs. Morris, Bailey, and Misra with Mr. Morris
serving as Chairman. During 2017, the Audit Committee met five (5)
times. The Board has affirmatively determined that all
members of the Audit Committee are independent and that Messrs.
Morris and Bailey qualify as Audit Committee Financial Experts. The
Audit Committee's duties include overseeing financial reporting and
internal control functions. The Audit Committee’s written
charter is available on our corporate website (
http://www.blue-dolphin-energy.com
).
Compensation
Committee
The Compensation
Committee consists of Messrs. Morris, Bailey, and Misra with Mr.
Morris serving as Chairman. During 2017, the Compensation Committee
did not meet. The Board has affirmatively determined that all
members of the Compensation Committee are independent. The
Compensation Committee’s duties include setting and
overseeing our compensation policies, as well as reviewing and
recommending to the Board for its approval all compensation for the
Chief Executive Officer, other senior executives, and directors.
The Compensation Committee’s written charter is available on
our corporate website (
http://www.blue-dolphin-energy.com
).
Master
Limited Partnership ("MLP") Conversion Special
Committee
The MLP Conversion
Special Committee was formed by the Board in 2013 to determine the
feasibility of optimizing stockholder value by potentially
converting Blue Dolphin from a publicly traded “C”
corporation to a publicly traded MLP. Due to a shift in market
conditions, the MLP Conversion Special Committee was dissolved in
March 2018. The MLP Conversion Special Committee did not meet
during 2016 and 2017.
Nominating
Committee
Given the size of
the Board, the Board adopted a “Board Nomination
Procedures” policy in lieu of appointing a standing
nominating committee. The policy is used by independent members of
the Board when choosing nominees to stand for election. The Board
will consider for possible nomination qualified nominees
recommended by stockholders. As addressed in the “Board
Nomination Procedures” policy, the way independent directors
evaluate nominees for director as recommended by a stockholder is
the same as that for nominees received from other
sources.
The Board endeavors
to nominate qualified directors that will make important
contributions to the Board and to Blue Dolphin. The Board generally
requires that nominees be persons of sound ethical character, can
represent all stockholders fairly, have demonstrated professional
achievements, have meaningful experience, and have a general
appreciation of the major business issues facing Blue Dolphin. The
Board also considers issues of diversity and background in its
selection process, recognizing that it is desirable for its
membership to have differences in viewpoints, professional
experiences, educational backgrounds, skills, race, gender, age and
national origin.
82
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Corporate Governance
Leadership
Structure
Blue Dolphin is led
by Jonathan P. Carroll, who has served as Chairman of the Board
since 2014 and as our Chief Executive Officer and President since
2012. Having a single leader is commonly utilized by other public
companies in the U.S., and we believe it is effective for Blue
Dolphin as well. This leadership structure demonstrates to our
personnel, customers and stockholders that we are under strong
leadership, with a single person setting the tone and having
primary responsibility for managing our operations, and eliminates
the potential for confusion or duplication of efforts. We do not
believe that appointing an independent Board chairman, or a
permanent lead director, would improve the performance of the
Board.
Risk
Oversight
The Board has
responsibility for risk oversight, with reviews of certain areas
being conducted by the relevant committees of the Board. These
committees then provide oral reports to the full board. The
oversight responsibility of the Board and its committees is enabled
by management reporting processes that are designed to provide
visibility to the board about the identification, assessment, and
management of critical risks and management’s risk mitigation
strategies. These areas of focus include strategic, operational,
financial and reporting, compliance, and other risks. The Board and
Audit Committee meet in executive session with representatives of
outside advisors as required.
Code
of Ethics and Code of Conduct
In compliance with
the Sarbanes-Oxley Act of 2002, the Board adopted a code of ethics
policy in 2003 and a code of conduct policy in 2005. The
Audit Committee established procedures to enable anyone who has a
concern about our conduct, policies, accounting, internal controls
over financial reporting, and/or auditing matters to communicate
that concern directly to the Chairman of the Audit Committee. The
code of ethics and code of conduct policies are available to any
stockholder, without charge, upon written request to Blue Dolphin
Energy Company, Attention: Audit Committee Chairman, 801 Travis
Street, Suite 2100, Houston, Texas 77002. Our code of ethics and
code of conduct policies are available on our website (
http://www.blue-dolphin-energy.com
). Any
amendments or waivers to provisions of our code of ethics and code
of conduct policies will be incorporated in revised policies as
posted on our website. During 2017, there were no
substantive amendments to our Code of Ethics and Code of Conduct
policies.
Communicating
with Directors
Since the Board
does not receive a large volume of correspondence from
stockholders, there is no formal process by which stockholders can
communicate directly with the Board at this time. Instead, any
stockholder who desires to contact the Board or specific members of
the Board may do so by writing to: Blue Dolphin Energy Company,
Attention: Secretary for the Board, 801 Travis Street, Suite 2100,
Houston, Texas 77002. Currently, all communications addressed in
such manner are sent directly to the indicated directors. In the
future, if the Board adopts a formal process for determining how
communications are to be relayed to directors, that process will be
disclosed on Form 8-K as filed with the SEC.
Remainder of Page
Intentionally Left Blank
83
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Executive Compensation Policy and Procedures
LEH manages and
operates all Blue Dolphin properties pursuant to an Amended and
Restated Operating Agreement (the “Amended and Restated
Operating Agreement”). Under the Amended and Restated
Operating Agreement, LEH provides us with executive personnel in
the capacities of Chief Executive Officer and Chief Financial
Officer. All personnel work for and are paid directly by LEH. Blue
Dolphin is billed by LEH at cost plus a 5% markup.
Compensation for Named Executives
Pursuant to the
Amended and Restated Operating Agreement, compensation paid to our
principal executive officer, principal financial officer, and the
most highly compensated executive officers other than the principal
executive officer and principal financial officer whose annual
salary exceeded $100,000 (collectively, the “Named Executive
Officers”) for the periods indicated was as
follows:
SUMMARY
COMPENSATION TABLE
|
Name
and Principal Position
|
|
Year
|
Salary
|
Option
Awards
|
Total
|
|
|
|
|
|
|
|
|
Jonathan
P. Carroll
|
|
|
|
|
|
|
Chief
Executive Officer and President
|
|
2017
|
$
-
|
$
-
|
$
-
|
|
|
|
2016
|
$
-
|
$
-
|
$
-
|
|
|
|
|
|
|
|
|
Tommy L. Byrd
(1)
|
|
|
|
|
|
|
Chief
Financial Officer
|
|
2017
|
$
100,000
|
$
-
|
$
100,000
|
|
|
|
2016
|
$
100,000
|
$
-
|
$
100,000
|
_____________________
(1)
A portion of Mr.
Byrd’s compensation is billed to Blue Dolphin at cost plus a
5% markup pursuant to the Amended and Restated Operating
Agreement.
Compensation Risk Assessment
LEH’s
approach to compensation practices and policies applicable for
executive and non-executive personnel throughout our organization
is consistent with the base pay market median for each position.
LEH believes its practices and policies in this regard are not
reasonably likely to have a materials adverse effect on
us.
Outstanding Equity Awards
None.
Director Compensation Policy and Procedures
Under the Amended
and Restated Operating Agreement, LEH provides us with personnel in
the capacities of Chief Executive Officer and Chief Financial
Officer. Therefore, we do not have any directors that are also
personnel of Blue Dolphin. The Compensation Committee reviews and
recommends to the Board for its approval all compensation for the
directors.
84
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Compensation for Non-Employee Directors
The annual retainer
payable to non-employee directors serving on the Board is $40,000
per year. Payments are made in Common Stock and cash on
a quarterly rotating basis.
Cash Fees
. Cash fees
reflect the amount of cash compensation earned for Board and
committee service. For service on the Board, non-employee directors
are entitled to receive cash payments in the amount of $10,000 for
services rendered in the second and fourth quarters of each
year.
Non-employee
directors earn additional compensation for serving on the Audit
Committee. The chairman of the Audit Committee earns an
additional $2,500 in cash in each of the second and fourth quarters
of the year, for a total of $5,000 annually. Members of
the Audit Committee earn an additional $1,250 in cash in each of
the second and fourth quarters of the year, for a total of $2,500
annually. During 2017, no additional compensation was earned by
non-employee directors for serving on the MLP Conversion Special
Committee. Non-employee directors serving on the Compensation
Committee do not earn any additional
compensation. Non-employee directors are reimbursed for
reasonable out-of-pocket expenses related to in-person meeting
attendance.
Stock Awards
. For
service on the Board, non-employee directors earn Blue Dolphin
Common Stock with a fair value of $10,000 for services rendered in
each of the first and third quarters of the year, for a total of
$20,000 annually. The number of shares of Common Stock issued is
determined by the closing price of Blue Dolphin’s Common
Stock on the last trading day in the respective quarterly
period. The shares of Common Stock are subject to resale
restrictions applicable to restricted securities and securities
held by affiliates under federal securities laws.
Compensation that
each independent, non-employee director earned for Board and
committee service for the periods indicated was as
follows:
|
|
Years
Ended December 31,
|
|||||
|
|
2017
|
2016
|
||||
|
Name
|
Stock Awards
(1)(2)
|
Cash Fees
(3)
|
Total
Compensation
|
Stock Awards
(1)(2)
|
Cash Fees
(3)
|
Total
Compensation
|
|
|
|
|
|
|
|
|
|
Christopher
T. Morris
|
$
20,000
|
$
25,000
|
$
15,000
|
$
30,000
|
$
25,000
|
$
55,000
|
|
Amitav
Misra
|
20,000
|
22,500
|
12,500
|
30,000
|
22,500
|
52,500
|
|
Ryan
A. Bailey
|
20,000
|
22,500
|
42,500
|
20,001
|
22,500
|
42,504
|
|
|
|
|
|
|
|
|
|
|
$
60,000
|
$
70,000
|
130,000
|
$
80,001
|
$
70,000
|
$
150,007
|
_____________________
(1)
At
December 31, 2017, Messrs. Morris, Misra, and Bailey had total
restricted awards of Common Stock outstanding of 58,359, 50,100,
and 44,009, respectively.
(2)
In
accordance with SEC rules, the grant date fair value of
independent, non-employee director stock awards is calculated by
multiplying the number of shares of Common Stock awarded by the
closing price of Blue Dolphin’s Common Stock on the grant
date (the “Cost Basis”). The Cost Basis was $3.50 and
$4.75 at March 31, 2017 and 2016, respectively. The Cost
Basis was $0.28 and $3.00 at September 30, 2017 and 2016,
respectively. The aggregate grant date fair value of
non-employee director stock awards for services rendered for the
first and third quarters of 2017 and 2016 was $30,000 each quarter,
or $60,000 annually.
(3)
Cash
fees reflect cash compensation that was earned but not necessarily
paid.
Independent,
non-employee directors have not been paid cash fees since
2015. Unpaid cash fees are reflected within
accrued expenses and other current liabilities on our consolidated
balance sheets. (See “Part II, Item 8. Financial
Statements and Supplementary Data, Note (9) Accrued Expenses and
Other Current Liabilities” within this Annual Report for
additional disclosures related to board of director fees
payable.)
85
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Security Ownership of Certain Beneficial Owners
The table below
sets forth information with respect to persons or groups known to
us to be the beneficial owners of more than five percent (5%) of
our common stock at December 31, 2017. Unless otherwise indicated,
each named party has sole voting and dispositive power with respect
to such shares.
|
Title
of Class
|
Name
of Beneficial Owner
|
Amount
and Nature of Beneficial Ownership
|
Percent of
Class
(1)
|
|
|
|
|
|
|
Common
Stock
|
Lazarus
Energy Holdings, LLC
|
8,426,456
|
77.1%
|
|
|
801
Travis Street, Suite 2100
|
|
|
|
|
Houston,
Texas 77002
|
|
|
(1)
Based upon
10,925,513 shares of Common Stock issued and outstanding at
December 31, 2017.
Security Ownership of Management
The table below
sets forth information at December 31, 2017 with respect to: (i)
directors, (ii) executive officers and (iii) directors and
executive officers as a group beneficially owning our common
stock. Unless otherwise indicated, each of the following
persons has sole voting and dispositive power with respect to such
shares.
|
Title of Class
|
|
Name of Beneficial Owner
|
Amount and Nature of Beneficial Ownership
|
Percent of
Class
(1)
|
|
Common
Stock
|
|
Jonathan P. Carroll
(2)
|
8,763,300
|
80.2
%
|
|
Common
Stock
|
|
Christopher
T. Morris
|
58,359
|
*
|
|
Common
Stock
|
|
Amitav
Misra
|
50,100
|
*
|
|
Common
Stock
|
|
Ryan
A. Bailey
|
44,009
|
*
|
|
Common
Stock
|
|
Herbert
N. Whitney
|
9,683
|
---
|
|
Common
Stock
|
|
Tommy
L. Byrd
|
---
|
---
|
|
|
|
|
|
|
|
|
Directors/Nominees
and Executive Officers as a Group (6 Persons)
|
8,925,451
|
81.7
%
|
|
_____________________
(1)
Based upon
10,925,513 shares of Common Stock issued and outstanding at
December 31, 2017. At December 31, 2017, there were no
options outstanding, no options exercisable or no shares of common
stock reserved for issuance under the 2000 Stock Incentive
Plan.
(2)
Includes 8,426,456
shares issued to Lazarus Energy Holdings, LLC
(“LEH”). Mr. Carroll and his affiliates have
an approximate 60% ownership interest in LEH.
* Less
than 1%.
86
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Section 16(a) Beneficial Ownership Reporting
Compliance
Section 16(a) of
the Exchange Act requires our directors, executive officers and
stockholders who own more than ten percent (10%) of our Common
Stock to file reports of stock ownership and changes in ownership
with the SEC and to furnish us with copies of all such reports as
filed. Based solely on a review of the copies of the Section 16(a)
reports furnished to us, we are unaware of any late filings made
during 2017.
Equity Compensation Plan Information
None.
Related Party Transactions
See “Part II,
Item 8. Financial Statements and Supplementary Data – Note
(8) Related Party Transactions” for disclosures related to
relationships we have with related parties.
Director
Independence
The Board has
affirmatively determined that each of its members, except for
Messrs. Carroll and Whitney, are independent and have no material
relationship with us (either directly or indirectly or as a
stockholder or officer of an organization that has a relationship
with us), and that all members of the Audit and Compensation
Committees are independent, pursuant to OTCQX and SEC
rules. Mr. Whitney has served as a consultant to LEH in
the past.
Fees paid to UHY by
us for the periods indicated were as follow:
|
|
Years Ended December 31,
|
|
|
|
2017
|
2016
|
|
Audit
fees
|
$
268,070
|
$
136,826
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
|
$
268,070
|
$
136,826
|
Audit fees for 2017
and 2016 related to the audit of our consolidated financial
statements and the review of our quarterly reports that are filed
with the SEC. The Audit Committee pre-approves, on an annual basis,
all audit services provided to us by our registered public
accounting firm. Such approval is in the form of an
engagement letter. Non-audit services must also be
pre-approved by the Audit Committee prior to engagement of such
services.
Remainder of Page
Intentionally Left Blank
87
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
Exhibits and Financial Statement Schedules
Following is a list
of documents filed as part of this Annual Report:
●
consolidated
balance sheets, consolidated statements of operations, consolidated
statements of shareholders’ equity, and consolidated
statements of cash flows, which appear in “Part II, Item 8.
Financial Statements and Supplementary Data” of this Annual
Report; and
●
exhibits as listed
in the exhibit index of this Annual Report, which is incorporated
herein by reference.
Not
applicable.
Exhibits Index
|
No.
|
Description
|
|
Amended and
Restated Certificate of Incorporation of Blue Dolphin (incorporated
by reference to Exhibit 3.1 filed with Blue Dolphin’s Form
8-K on June 2, 2009, Commission File No. 000-15905)
|
|
Amended and
Restated By-Laws of Blue Dolphin (incorporated by reference to
Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on December
26, 2007, Commission File No. 000-15905)
|
|
4.1
|
Specimen Stock
Certificate (incorporated by reference to exhibits filed with Blue
Dolphin’s Form 10-K on March 30, 1990, Commission File No.
000-15905)
|
|
Form of Promissory
Note issued pursuant to the Note and Warrant Purchase Agreement
dated September 8, 2004 (incorporated by reference to Exhibit 4.1
filed with Blue Dolphin’s Form 8-K on September 14, 2004,
Commission File No. 000-15905)
|
|
Promissory Note of
Lazarus Louisiana Refinery II, LLC, payable to Blue Dolphin dated
July 31, 2009 (incorporated by reference to Exhibit 10.1 filed with
Blue Dolphin’s Form 8-K on August 6, 2009, Commission File
No. 000-15905)
|
|
Blue Dolphin 2000
Stock Incentive Plan (incorporated by reference to Appendix 1 filed
with Blue Dolphin’s Proxy Statement on Form DEF 14A on April
20, 2000, Commission File No. 000-15905) *
|
|
First Amendment to
the Blue Dolphin 2000 Stock Incentive Plan (incorporated by
reference to Appendix B filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on April 16, 2003, Commission File No.
000-15905) *
|
|
Second Amendment to
the Blue Dolphin 2000 Stock Incentive Plan (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on April 27, 2006, Commission File No.
000-15905) *
|
|
Fourth Amendment to
the Blue Dolphin 2000 Stock Incentive Plan (incorporated by
reference to Exhibit B filed with Blue Dolphin’s Proxy
Statement on Form DEFA on December 28, 2011, Commission File No.
000-15905) *
|
||
|
Master Easement
Agreement effective as of December 11, 2013 by and between Blue
Dolphin Pipe Line Company and FLNG Land, II, Inc. (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K
on November 5, 2014, Commission File No. 000-15905)
|
||
88
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Letter of Intent
effective as of December 11, 2013 by and between Blue Dolphin Pipe
Line Company and Freeport LNG Expansion, L.P (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K
on November 5, 2014, Commission File No. 000-15905)
|
||
|
Management
Agreement by and between Lazarus Energy Holdings, LLC, Lazarus
Energy, LLC and Blue Dolphin effective as of February 15, 2012
(incorporated by reference to Exhibit 10.2 filed with Amendment No.
1 to Blue Dolphin’s Form 8-K on March 14, 2012, Commission
File No. 000-15905)
|
||
|
|
|
|
|
Amendment No. 1 to
Management Agreement dated May 12, 2014 by and among Lazarus Energy
Holdings, LLC, Blue Dolphin and Lazarus Energy, LLC (incorporated
by reference to Exhibit 10.1 filed with Blue Dolphin’s Form
8-K on May 16, 2014, Commission File No. 000-15905)
|
||
|
|
|
|
|
Crude Oil Supply
and Throughput Services Agreement by and between GEL Tex Marketing,
LLC and Lazarus Energy, LLC dated as of August 12, 2011
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on June 30, 2012, Commission File No.
000-15905)
|
||
|
|
|
|
|
Joint Marketing
Agreement by and between GEL Tex Marketing, LLC and Lazarus Energy,
LLC dated as of August 12, 2011 (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on August
14, 2012, Commission File No. 000-15905)
|
||
|
Letter Agreement
dated September 12, 2011 between GEL Tex Marketing, LLC, Milam
Services, Inc., 1st International Bank, Lazarus Energy LLC and
Lazarus Energy Holdings LLC (incorporated by reference to Exhibit
10.4 filed with Blue Dolphin’s Form 10-Q on May 21, 2012,
Commission File No. 000-15905)
|
|
Acknowledgment
Letter between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated
June 1, 2012 (incorporated by reference to Exhibit 10.4 filed with
Blue Dolphin’s Form 10-Q on June 30, 2012, Commission File
No. 000-15905)
|
|
Letter Agreement
between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated June
25, 2012 (incorporated by reference to Exhibit 10.5 filed with Blue
Dolphin’s Form 10-Q on June 30, 2012, Commission File No.
000-15905)
|
|
Letter Agreement
between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated July
30, 2012 (incorporated by reference to Exhibit 10.6 filed with Blue
Dolphin’s Form 10-Q on June 30, 2012, Commission File No.
000-15905)
|
|
Letter Agreement
between Lazarus Energy, LLC and GEL Tex Marketing, LLC dated August
1, 2012 (incorporated by reference to Exhibit 10.7 filed with Blue
Dolphin’s Form 10-Q on June 30, 2012, Commission File No.
000-15905)
|
|
Letter Agreement
dated June 10, 2012 between Lazarus Energy Holdings, LLC and Blue
Dolphin Energy Company (incorporated by reference to Exhibit 10.1
filed with Blue Dolphin’s Form 8-K on June 14, 2012,
Commission File No. 000-15905)
|
|
Letter Agreement
dated December 20, 2012 between Lazarus Energy, LLC, GEL Tex
Marketing, LLC and Milam Services, Inc. (incorporated by reference
to Exhibit 10.35 filed with Blue Dolphin’s Form 10-K on March
30, 2013, Commission File No. 000-15905)
|
|
|
|
|
|
Letter Agreement
between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam
Services, Inc. dated February 21, 2013 (incorporated by reference
to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on August
14, 2013, Commission File No. 000-15905)
|
|
|
|
|
|
Letter Agreement
between Lazarus Energy, LLC, GEL TEX Marketing, LLC and Milam
Services, Inc. dated February 21, 2013 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on May
15, 2013, Commission File No. 000-15905)
|
89
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Letter Agreement
Regarding Certain Advances and Related Agreement between Lazarus
Energy, LLC, GEL TEX Marketing, LLC, and Milam Services, Inc.,
effective October 24, 2013 (incorporated by reference to Exhibit
10.2 filed with Blue Dolphin’s Form 10-Q on November 14,
2013, Commission File No. 000-15905)
|
||
|
|
||
|
Promissory Note
between Lazarus Energy LLC as maker and Notre Dame Investors Inc.
as Payee in the Principal Amount of $8,000,000 dated June 1, 2006
(incorporated by reference to Exhibit 10.6 filed with Blue
Dolphin’s Form 10-Q on March 31, 2012, Commission File No.
000-15905)
|
||
|
|
|
|
|
Subordination
Agreement effective August 21, 2008 by Notre Dame Investors, Inc.
in favor of First International Bank (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on March 31,
2012, Commission File No. 000-15905)
|
||
|
|
|
|
|
Intercreditor and
Subordination Agreement dated September 29, 2008 by and between
Notre Dame Investors, Inc., Richard Oberlin, Lazarus Energy LLC and
First International Bank (incorporated by reference to Exhibit 10.3
filed with Blue Dolphin’s Form 10-Q on March 31, 2012,
Commission File No. 000-15905)
|
||
|
|
|
|
|
Intercreditor and
Subordination Agreement dated August 12, 2011 by and among John H.
Kissick, Lazarus Energy LLC and Milam Services, Inc. (incorporated
by reference to Exhibit 10.7 filed with Blue Dolphin’s Form
10-Q on March 31, 2012, Commission File No. 000-15905)
|
||
|
|
|
|
|
First Amendment to
Promissory Note by and between Lazarus Energy, LLC and John H.
Kissick effective as of July 1, 2013 (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on November
14, 2013, Commission File No. 000-15905)
|
||
|
|
|
|
|
Second Amendment to
Promissory Note by and between Lazarus Energy, LLC and John H.
Kissick effective as of October 1, 2014 (incorporated by reference
to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March
31, 2015, Commission File No. 000-15905)
|
||
|
Loan and Security
Agreement dated March 2, 2014 by and between Lazarus Refining &
Marketing, LLC and Sovereign Bank (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
|
Deed of Trust,
Security Agreement, Assignment of Leases, Assignment of Rents, and
Financing Statement dated May 2, 2014 (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
|
Guaranty Agreement
dated May 2, 2014 by Jonathan P. Carroll and Ingleside Crude LLC
for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
|
Pledge Agreement
dated May 2, 2014 between Sovereign Bank and Lazarus Energy
Holdings, LLC. (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 8-K on May 8, 2014, Commission File
No. 000-15905)
|
|
|
|
|
|
Promissory Note
payable to Sovereign Bank dated May 2, 2014 (incorporated by
reference to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K
on May 8, 2014, Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment dated May 2, 2014 by Lazarus Refining & Marketing,
LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment dated May 2, 2014 by Lazarus Refining & Marketing,
LLC for the benefit of Sovereign Bank (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on May 8,
2014, Commission File No. 000-15905)
|
|
|
|
|
90
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Loan Modification
Agreement dated March 25, 2015, by and between Lazarus Refining
& Marketing, LLC, and Sovereign Bank (incorporated by reference
to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on March
31, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Second Amendment to
Promissory Note by and between Lazarus Energy, LLC and John H.
Kissick effective as of October 1, 2014 (incorporated by reference
to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March
31, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Loan Agreement
among Sovereign Bank, Lazarus Energy, LLC and Jonathan Pitts
Carroll, Sr., Blue Dolphin Energy Company, Lazarus Refining &
Marketing, LLC, and Lazarus Energy Holdings dated June 22, 2015
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Promissory Note
between Lazarus Energy, LLC and Sovereign Bank for the principal
sum of $25,000,000 dated June 22, 2015 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on June
26, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Security Agreement
of Lazarus Energy, LLC in favor of Sovereign Bank dated June 22,
2015 (incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Deed of Trust,
Mortgage, Security Agreement, Assignment of Leases and Rents,
Financing Statement and Fixture Filing for Lazarus Energy, LLC
dated June 22, 2015 (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
|
|
Security Agreement
of Lazarus Energy, LLC for the benefit of Lazarus Refining &
Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on June 26,
2015, Commission File No. 000-15905)
|
|
|
|
|
|
Loan and Security
Agreement between Sovereign Bank and Lazarus Refining &
Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on June 26,
2015, Commission File No. 000-15905)
|
|
|
|
|
|
Promissory Note
between Lazarus Refining & Marketing, LLC and Sovereign Bank
for the principal sum of $3,000,000 dated June 22, 2015
(incorporated by reference to Exhibit 10.7 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Pledge Agreement by
Lazarus Refining & Marketing, LLC in favor of Sovereign Bank
dated June 22, 2015 (incorporated by reference to Exhibit 10.8
filed with Blue Dolphin’s Form 8-K on June 26, 2015,
Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment executed by Blue Dolphin Pipe Line Company for the
benefit of Sovereign Bank dated June 22, 2015 (incorporated by
reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K
on June 26, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Guaranty Agreement
by Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company,
Lazarus Energy, LLC and Sovereign Bank dated June 22, 2015
(incorporated by reference to Exhibit 10.10 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Guaranty Fee
Agreement between Jonathan P. Carroll and Lazarus Energy, LLC dated
June 22, 2015 (incorporated by reference to Exhibit 10.11 filed
with Blue Dolphin’s Form 8-K on June 26, 2015, Commission
File No. 000-15905)
|
|
|
|
|
|
Guaranty Fee
Agreement between Jonathan P. Carroll and Lazarus Refining &
Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on June 26,
2015, Commission File No. 000-15905)
|
91
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Amendment No. 2. to
Operating Agreement by and between Lazarus Energy Holdings, LLC,
Blue Dolphin, and Lazarus Energy, LLC effective as of June 1, 2015
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on August 14, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Loan Agreement
among Sovereign Bank, Lazarus Refining & Marketing, LLC,
Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus
Energy, LLC, and Lazarus Energy Holdings dated December 4, 2015
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Promissory Note
between Lazarus Refining & Marketing, LLC and Sovereign Bank
for the principal sum of $10,000,000 dated December 4, 2015
(incorporated by reference to Exhibit 10.2 filed with Blue
Dolphin’s Form 8-K on December 10, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Security Agreement
of Lazarus Refining & Marketing, LLC in favor of Sovereign Bank
dated December 4, 2015 (incorporated by reference to Exhibit 10.3
filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
|
|
|
|
|
|
Deed of Trust,
Mortgage, Security Agreement, Assignment of Leases and Rents,
Financing Statement and Fixture Filing for Lazarus Refining &
Marketing, LLC dated December 4, 2015 (incorporated by reference to
Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Construction Rider
to Loan Agreement dated December 4, 2015 (incorporated by reference
to Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Absolute Assignment
of Leases and Rents dated December 4, 2015 (incorporated by
reference to Exhibit 10.6 filed with Blue Dolphin’s Form 8-K
on December 10, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Indemnification
Agreement dated December 4, 2015 (incorporated by reference to
Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Pledge Agreement by
Lazarus Energy Holdings, LLC in favor of Sovereign Bank dated
December 4, 2015 (incorporated by reference to Exhibit 10.8 filed
with Blue Dolphin’s Form 8-K on December 10, 2015, Commission
File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment of Key Agreements dated December 4, 2015 (incorporated
by reference to Exhibit 10.9 filed with Blue Dolphin’s Form
8-K on December 10, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
First Amendment to
Lazarus Energy, LLC Loan Agreement and Loan Documents dated
December 4, 2015 (incorporated by reference to Exhibit 10.10 filed
with Blue Dolphin’s Form 8-K on December 10, 2015, Commission
File No. 000-15905)
|
|
|
|
|
|
First Amendment to
Lazarus Energy, LLC Deed of Trust, Mortgage, Security Agreement,
Assignment of Leases and Rents, Financing Statement and Fixture
Filing dated December 4, 2015 (incorporated by reference to Exhibit
10.11 filed with Blue Dolphin’s Form 8-K on December 10,
2015, Commission File No. 000-15905)
|
|
|
|
|
|
Guaranty Fee
Agreement between Jonathan P. Carroll and Lazarus Refining &
Marketing, LLC dated December 4, 2015 (incorporated by reference to
Exhibit 10.12 filed with Blue Dolphin’s Form 8-K on December
10, 2015, Commission File No. 000-15905)
|
|
|
|
|
|
Loan and Security
Agreement by and between Lazarus Energy Holdings, LLC and Blue
Dolphin Pipe Line Company dated August 15, 2016 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K
on August 19, 2016, Commission File No. 000-15905)
|
|
|
|
|
|
Promissory Note by
and between Lazarus Energy Holdings, LLC and Blue Dolphin Pipe Line
Company dated August 15, 2016 (incorporated by reference to Exhibit
10.2 filed with Blue Dolphin’s Form 8-K on August 19, 2016,
Commission File No. 000-15905)
|
92
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
Deed of Trust,
Mortgage, Security Agreement, Assignment of Leases and Rents,
Financing Statement and Fixture Filing for Blue Dolphin Pipe Line
Company dated August 15, 2016 (incorporated by reference to Exhibit
10.3 filed with Blue Dolphin’s Form 8-K on August 19, 2016,
Commission File No. 000-15905)
|
|
|
|
|
|
Collateral
Assignment of Master Easement Agreement by Blue Dolphin Pipe Line
Company for the benefit of Lazarus Energy Holdings, LLC dated
August 15, 2016 (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 8-K on August 19, 2016, Commission
File No. 000-15905)
|
|
|
|
Promissory Note
dated March 31, 2017, of Blue Dolphin Energy Company in favor of
Lazarus Energy Holdings, LLC (incorporated by reference to Exhibit
10.1 filed with Blue Dolphin’s Form 10-Q on May 15, 2017,
Commission File No. 000-15905)
|
|
|
|
|
|
Amended and
Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Ingleside Crude, LLC (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q
on May 15, 2017, Commission File No. 000-15905)
|
|
|
|
|
|
Amended and
Restated Promissory Note dated March 31, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Capital, LLC (Jonathan Carroll)
(incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on May 15, 2017, Commission File No.
000-15905)
|
|
|
|
|
|
Amended and
Restated Operating Agreement effective as of April 1, 2017, between
Lazarus Energy Holdings, LLC, Lazarus Energy, LLC, and Blue Dolphin
Energy Company (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission
File No. 000-15905)
|
|
|
|
|
|
Amended and
Restated Promissory Note dated June 30, 2017, of Blue Dolphin
Energy Company in favor of Lazarus Energy Holdings, LLC
(incorporated by reference to Exhibit 10.1 filed with Blue
Dolphin’s Form 10-Q on October 12, 2017, Commission File No.
000-15905)
|
|
|
|
|
|
Amended and
Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing, LLC (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
|
|
|
|
|
|
Amended and
Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Refining & Marketing LLC (incorporated by reference to
Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on October
12, 2017, Commission File No. 000-15905)
|
|
|
|
|
|
Amended and
Restated Guaranty Fee Agreement between Jonathan Carroll and
Lazarus Energy, LLC (incorporated by reference to Exhibit 10.4
filed with Blue Dolphin’s Form 10-Q on October 12, 2017,
Commission File No. 000-15905)
|
|
|
|
|
|
Letter Agreement
between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue Dolphin
Energy Company, Lazarus Energy Holdings, LLC, and Jonathan Carroll
effective September 18, 2017 (incorporated by reference to Exhibit
10.1 filed with Blue Dolphin’s Form 10-Q on November 16,
2017, Commission File No. 000-15905)
|
|
|
|
|
|
Amendment to Letter
Agreement between GEL Tex Marketing, LLC, Lazarus Energy, LLC, Blue
Dolphin Energy Company, Lazarus Energy Holdings, LLC, and Jonathan
Carroll dated November 1, 2017 (incorporated by reference to
Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on November
16, 2017, Commission File No. 000-15905)
|
|
|
|
|
|
Second Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated November 28, 2017.
|
|
|
|
|
|
10.76
|
Third Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated December 27, 2017.
|
93
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
|
10.77
|
Fourth Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated February 1, 2018.
|
|
|
|
|
10.78
|
Fifth Amendment to
Letter Agreement between GEL Tex Marketing, LLC, Lazarus Energy,
LLC, Blue Dolphin Energy Company, Lazarus Energy Holdings, LLC, and
Jonathan Carroll dated March 1, 2018.
|
|
|
|
|
Debt Assumption
Agreement by and among Lazarus Energy Holdings, LLC, Lazarus
Energy, LLC, and John H. Kissick dated effective September 18, 2017
(incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 10-Q on November 16, 2017, Commission File No.
000-15905)
|
|
|
|
|
|
Sixth Amendment to
Promissory Note by and between Lazarus Energy, LLC and John H.
Kissick effective as of September 18, 2017 (incorporated by
reference to Exhibit 10.4 filed with Blue Dolphin’s Form 10-Q
on November 16, 2017, Commission File No. 000-15905)
|
|
Code of Ethics
applicable to the Chairman, Chief Executive Officer and Senior
Financial Officer (incorporated by reference to Exhibit 14.1 filed
with Blue Dolphin’s Form 10-KSB on March 25, 2005, Commission
File No. 000-15905)
|
|
List of
Subsidiaries of Blue Dolphin **
|
|
Consent of UHY LLP
**
|
|
Jonathan P. Carroll
Certification Pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to section 302 of the Sarbanes-Oxley Act of
2002 **
|
|
Tommy L. Byrd
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 302 of the Sarbanes-Oxley Act of 2002
**
|
|
Jonathan P. Carroll
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
**
|
|
Tommy L. Byrd
Certification Pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to section 906 of the Sarbanes-Oxley Act of 2002
**
|
|
|
|
|
|
Amended and
Restated Audit Committee Charter adopted by the Board of Directors
of Blue Dolphin on November 4, 2015 (incorporated by reference to
Appendix A filed with Blue Dolphin’s Proxy Statement on Form
DEF 14A on November 18, 2015, Commission File No.
000-15905)
|
|
|
|
|
|
Compensation
Committee Charter adopted by the Board of Directors of Blue Dolphin
on November 4, 2015 (incorporated by reference to Appendix B filed
with Blue Dolphin’s Proxy Statement on Form DEF 14A on
November 18, 2015, Commission File No. 000-15905)
|
|
101.INS
|
XBRL Instance
Document **
|
|
101.SCH
|
XBRL Taxonomy
Schema Document **
|
|
101.CAL
|
XBRL Calculation
Linkbase Document **
|
|
101.LAB
|
XBRL Label Linkbase
Document **
|
|
101.PRE
|
XBRL Presentation
Linkbase Document **
|
|
101.DEF
|
XBRL Definition
Linkbase Document **
|
_______________
*
Management Compensation Plan
** Filed
herewith
94
|
BLUE DOLPHIN ENERGY
COMPANY
|
|
FORM 10-K
12/31/17
|
SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this Annual Report to be
signed on its behalf by the undersigned, thereunto duly
authorized.
|
|
|
BLUE
DOLPHIN ENERGY COMPANY
|
|
|
|
|
(Registrant)
|
|
|
|
|
|
|
|
April 2,
2018
|
|
By:
|
/s/ JONATHAN P.
CARROLL
|
|
|
|
|
Jonathan P.
Carroll
Chief Executive
Officer, President,
Assistant Treasurer
and Secretary
(Principal
Executive Officer)
|
Pursuant to the
requirements of the Securities Exchange Act of 1934, this Annual
Report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/ JONATHAN P.
CARROLL
|
|
|
|
|
|
Jonathan P.
Carroll
|
|
Chairman of the
Board, Chief Executive Officer, President, Assistant Treasurer and
Secretary (Principal Executive Officer)
|
|
April 2,
2018
|
|
|
|
|
|
|
|
/s/ TOMMY L.
BYRD
|
|
|
|
|
|
Tommy L.
Byrd
|
|
Chief Financial
Officer,
Treasurer and
Assistant Secretary
(Principal
Financial Officer)
|
|
April 2,
2018
|
|
|
|
|
|
|
|
/s/ RYAN A.
BAILEY
|
|
|
|
|
|
Ryan A.
Bailey
|
|
Director
|
|
April 2,
2018
|
|
|
|
|
|
|
|
/s/ AMITAV
MISRA
|
|
|
|
|
|
Amitav
Misra
|
|
Director
|
|
April 2,
2018
|
|
|
|
|
|
|
|
/s/ CHRISTOPHER T.
MORRIS
|
|
|
|
|
|
Christopher T.
Morris
|
|
Director
|
|
April 2,
2018
|
|
|
|
|
|
|
|
/s/ HERBERT N.
WHITNEY
|
|
|
|
|
|
Herbert N.
Whitney
|
|
Director |
|
April 2, 2018 |
95
TABLE OF CONTENTS
Part I, Item 3. Legal ProceedingsPart Ii, Item 7. Management S Discussion and Analysis Of Financial Condition and Results Of Operations:Part Ii, Item 8. Financial Statements and Supplementary Data, Notes To Consolidated Financial Statements:Item 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits, Financial Statement SchedulesItem 16. Form 10-k Summary