BLUE DOLPHIN ENERGY CO
10-Ks and 10-Qs
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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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[ √ ]
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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, 2019
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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z77002
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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
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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
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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
[
√
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No
[
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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 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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Non-accelerated
filer
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[ ]
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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
[
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No
[
√
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The
aggregate market value of shares of common stock held by
non-affiliates of the registrant was $2,100,065 as of June 28, 2019
(the last trading day of the registrant’s most recently
completed second fiscal quarter) based on the number of shares of
common stock held by non-affiliates and the last reported sale
price of the registrant's common stock on June 28,
2019.
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Number
of shares of common stock, par value $0.01 per share, outstanding
at March 30, 2020: 12,327,365
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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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13
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ITEM 1B.
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UNRESOLVED STAFF COMMENTS
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24
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ITEM 2.
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PROPERTIES
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24
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ITEM 3.
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LEGAL PROCEEDINGS
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24
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ITEM 4.
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MINE SAFETY DISCLOSURES
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24
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PART
II
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25
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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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25
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ITEM 6.
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SELECTED FINANCIAL DATA
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25
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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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26
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ITEM 7A.
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
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36
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ITEM 8.
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FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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37
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Report of Independent Registered Public Accounting
Firm
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37
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Consolidated Balance Sheets
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38
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Consolidated Statements of Operations
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39
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Consolidated Statements of Stockholders’ Equity
(Deficit)
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40
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Consolidated Statements of Cash Flows
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41
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Notes to Consolidated Financial Statements
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42
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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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66
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ITEM 9A.
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CONTROLS AND PROCEDURES
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66
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ITEM 9B.
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OTHER INFORMATION
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68
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PART
III
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69
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ITEM 10.
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DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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69
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ITEM 11.
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EXECUTIVE COMPENSATION
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74
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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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76
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ITEM 13.
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CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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77
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ITEM 14.
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PRINCIPAL ACCOUNTING FEES AND SERVICES
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77
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PART
IV
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78
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ITEM 15.
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EXHIBITS, FINANCIAL STATEMENT SCHEDULES
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78
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ITEM 16.
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FORM 10-K SUMMARY
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78
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SIGNATURES
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83
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Glossary of Terms
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Glossary of Terms
Throughout
this Annual Report on Form 10-K, we have used the following
terms:
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Affiliate
.
Refers, either individually or collectively, to certain related
parties including, Jonathan Carroll, Chairman and Chief Executive
Officer of Blue Dolphin, and his affiliates (including C&C,
Ingleside, and Lazarus Capital) and/or LEH and its affiliates
(including Lazarus Midstream, LMT, and LTRI). Together, Jonathan
Carroll and LEH own approximately 82% of Blue Dolphin’s
Common Stock.
AMT
.
Alternative Minimum Tax.
Amended Pilot Line
of Credit
. Line of Credit Agreement dated May 3, 2019,
between Pilot and NPS and subsequently amended on May 9, 2019 and
May 10, 2019 and September 3, 2019, the last amendment being
Amendment No. 1; line of credit amount is $13.0
million.
Amended and
Restated Operating Agreement
. Affiliate agreement dated
April 1, 2017 between Blue Dolphin, LEH, and LE governing
LEH’s operation and management of Blue Dolphin’s
assets; expires on April 1, 2020; the Board plans to extend the
agreement.
ARO
. Asset
retirement obligations.
ASU
.
Accounting Standards Update.
AGO
.
Atmospheric gas oil, which is the heaviest product boiled by a
crude distillation tower operating at atmospheric pressure. This
fraction ordinarily sells as distillate fuel oil, either in pure
form or blended with cracked stocks. Certain ethylene plants,
called heavy oil crackers, can take AGO as
feedstock.
bb
l
.
Barrel; a unit of volume equal to 42 U.S.
gallons.
BDPC
.
Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue
Dolphin.
BDPL
.
Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue
Dolphin.
BDSC
.
Blue Dolphin Services Co., a wholly owned subsidiary of Blue
Dolphin.
bpd
. Barrel
per day;a measure of the bbls of daily output produced in a
refinery or transported through a pipeline.
Board
. Board
of Directors of Blue Dolphin Energy Company.
BOEM
. Bureau
of Ocean Energy Management.
BSEE
. Bureau
of Safety and Environmental Enforcement.
C&C
.
Carroll & Company Financial Holdings, L.P., an affiliate of
Jonathan Carroll.
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 crude
distillation tower, the rate is calculated by dividing total
refinery throughput or total refinery production on a bpd basis by
the total capacity of the crude distillation tower (currently
15,000 bpd).
CAA
. Clean
Air Act.
CERLA
.
Comprehensive Environmental Response, Compensation, and Liability
Act of 1980.
CIP
.
Construction in progress.
COVID-19
. An
infectious disease first identified in 2019 in Wuhan, the capital
of China's Hubei province; the disease has since spread globally,
resulting in the ongoing 2019-2020 coronavirus
pandemic.
CWA
. Clean
Water Act.
Common
Stock
. Blue Dolphin common stock, par value $0.01 per
share.
Complexity
.
A numerical score that denotes, for a given refinery, the extent,
capability, and capital intensity of the refining processes
downstream of the crude distillation tower. Refinery complexities
range from the relatively simple crude distillation tower
(“topping unit”), which has a complexity of 1.0, to the
more complex deep conversion (“coking”) refineries,
which have a complexity of 12.0.
Condensate
.
Liquid hydrocarbons that are produced in conjunction with natural
gas. Although condensate is sometimes like crude oil, it is usually
lighter.
Cost of Goods
Sold
. Reflects the cost of crude oil and condensate, fuel
use, and chemicals.
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Crude distillation
tower
. A tall column-like vessel in which crude oil and
condensate is heated and its vaporized components are distilled by
means of distillation trays. This process turns crude oil and other
inputs into intermediate and finished petroleum products. (Commonly
referred to as a crude distillation unit or an atmospheric
distillation unit.)
Crude
oi
l
. 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 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.
Downtime
.
Scheduled and/or unscheduled periods in which the crude
distillation tower is not operating. Downtime may occur for a
variety of reasons, including bad weather, power failures, and
preventive maintenance.
EIA
. Energy
Information Administration.
EPA
.
Environmental Protection Agency.
Eagle Ford
Shale
. A hydrocarbon-producing geological formation
extending across South Texas from the Mexican border into East
Texas.
Exchange
Act
. Securities Exchange Act of 1934, as
amended.
FASB
.
Financial Accounting Standards Board.
FDIC
.
Federal Deposit Insurance Corporation.
Feedstocks
.
Crude oil and other hydrocarbons, such as condensate and/or
intermediate products, that are used as basic input materials in a
refining process. Feedstocks are transformed into one or more
finished products.
Finished petroleum
products
. Materials or products which have received the
final increments of value through processing operations, and which
are being held in inventory for delivery, sale, or
use.
GEL
. GEL Tex
Marketing, LLC, a Delaware limited liablity company and an
affiliate of Genesis Energy, LLC.
GEL Final
Arbitration Award
.
Damages and attorney fees and related expenses awarded to GEL by an
arbitrator on August 11, 2017.
GEL Interim
Payments
. Cash payments of $0.5 million at the end of each
calendar month by the Lazarus Parties to GEL until the GEL
Settlement Payment was made.
GEL
Settlement
. When all conditions of the GEL Settlement
Agreement were met by the Lazarus Parties under the GEL Settlement
Agreement, and whereby GEL and the Lazarus Parties agreed to
mutually release all claims against each other and to file a
stipulation of dismissal with prejudice in connection with
arbitration proceedings between LE and GEL related to a contractual
dispute involving a crude oil supply and throughput services
agreement, each between LE and GEL dated August 12,
2011.
GEL Settlement
Agreement
. Settlement Agreement dated July 20, 2018, between
the Lazarus Parties and GEL outlining the terms and conditions for
a settlement, including: (i) the GEL Settlement Payment by the GEL
Settlement Date and (ii) GEL Interim Payments.
GEL Settlement
Date
. The effective date of the GEL
Settlement.
GEL Settlement
Payment
. A lump sum cash payment of $10.0 million as paid by
the Lazarus Parties to GEL under the GEL Settlement
Agreement.
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Glossary of Terms
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Gross
Profit
.
Calculated as total revenue less cost of goods
sold; reflected as a dollar ($) amount.
HOBM
. Heavy
oil-based mud blendstock; see also
“distillates.”
HUBZone
.
Historically Underutilized Business Zones program established by
the SBA to help small businesses in both urban and rural
communities.
IBLA
.
Interior Board of Land Appeals.
INC
.
Incident of Noncompliance issued by BOEM and/or
BSEE.
Ingleside
.
Ingleside Crude, LLC, an affiliate of Jonathan
Carroll.
Intermediate
petroleum products
. A petroleum product that might require
further processing before it is saleable to the ultimate consumer.
This further processing might be done by the producer or by another
processor. Thus, an intermediate petroleum product might be a final
product for one company and an input for another company that will
process it further.
IRC Section
382
. Title 26, Internal Revenue Code, Subtitle A –
Income Taxes, Subchapter C – Corporate Distributions and
Adjustments, Part V Carryovers, § 382. Limits NOL
carryforwards and certain built-in losses following ownership
change.
IRS
.
Internal Revenue Service.
Jet fuel
. A
high-quality kerosene product primarily used in aviation.
Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon
number distribution between 8 and 16 carbon atoms per molecule;
wide-cut or naphtha-type jet fuel (including Jet B) has between 5
and 15 carbon atoms per molecule.
Lazarus
Capital
. Lazarus Capital, LLC, an affiliate of Jonathan
Carroll.
Lazarus
Midstream
. Lazarus Midstream Partners, L.P., an affiliate of
LEH.
Lazarus
Parties
.
Blue
Dolphin, C&C, NPS,
LE, LEH, and Jonathan
Carroll.
LE
. Lazarus
Energy, LLC, a wholly owned subsidiary of Blue
Dolphin.
LEH
. Lazarus
Energy Holdings, LLC, an affiliate of Jonathan Carroll and
controlling shareholder of Blue Dolphin.
LEH Operating
Fee
. A management fee paid to LEH under the Amended and
Restated Operating Agreement; calculated as 5% of Blue
Dolphin’s incurred direct operating expenses; previously
reflected within refinery operating expenses in our consolidated
statements of operations.
Leasehold
interest
. The interest of a lessee under an oil and gas
lease.
Light crude
.
A liquid petroleum that has a low density and flows freely at room
temperature. It has a low viscosity, low specific gravity, and a
high American Petroleum Institute gravity due to the presence of a
high proportion of light hydrocarbon fractions.
LMT
. Lazarus
Marine Terminal I, LLC, an affiliate of LEH.
LRM
. Lazarus
Refining & Marketing, LLC, a wholly owned subsidiary of Blue
Dolphin.
LTRI
.
Lazarus Texas Refinery I, an affiliate of LEH.
NAAQS
.
National Ambient Air Quality Standards.
Naphtha
. A
refined or partly refined light distillate fraction of crude oil.
Blended further or mixed with other materials it can make
high-grade motor gasoline or jet fuel. It is also a generic term
applied to the lightest and most volatile petroleum
fractions.
Natural Gas
.
A naturally occurring hydrocarbon gas mixture
consisting primarily of methane, but commonly including varying
amounts of other higher alkanes, and sometimes a small percentage
of carbon dioxide, nitrogen, hydrogen sulfide, or
helium.
NPS
. Nixon
Product Storage, LLC, a wholly owned subsidiary of Blue
Dolphin.
NOL
. Net
operating losses.
NSR/PSD
. New
Source Review/Prevention of Significant
Deterioration.
OPA 90
. Oil
Pollution Act of 1990.
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Operating
Days
. Represents the number of days in a period in which the
crude distillation tower operated. Operating days is calculated by
subtracting downtime in a period from calendar days in the same
period.
OSHA
.
Occupational Safety and Health Administration.
OSRO
. Oil
Spill Response Organization.
Other conversion
costs
. Represents the combination of direct labor costs and
manufacturing overhead costs. These are the costs that are
necessary to convert our raw materials into refined
products.
Other Operating
Expenses
. Represents costs associated with our natural gas
processing, treating, and redelivery facility, as well as our
pipeline assets and leasehold interests in oil and gas
properties.
PCAOB
.
Public Company Accounting Oversight Board.
Petroleum
. A
naturally occurring flammable liquid consisting of a complex
mixture of hydrocarbons of various molecular weights and other
liquid organic compounds. The name petroleum covers both the
naturally occurring unprocessed crude oils and petroleum products
that are made up of refined crude oil.
PHMSA
.
Pipeline and Hazardous Materials Safety Administration of the U.S.
Department of Transportation.
Pilot
. Pilot
Travel Centers LLC, a Delaware limited liability
company.
Preferred
Stock
. Blue Dolphin preferred stock, par value $0.10 per
share.
Product
Slate
. Represents type and quality of products
produced.
Propane
. A
by-product of natural gas processing and petroleum refining.
Propane is one of a group of liquified petroleum gases. Others
include butane, propylene, butadiene, butylene, isobutylene and
mixtures thereof.
Refined
Products
. Hydrocarbon compounds, such as jet fuel and
residual fuel, that are produced by a refinery.
Refinery
.
Within the oil and gas industry, a refinery is an industrial
processing plant where crude oil, condensate,
and
intermediate feeds are
separated and transformed into
petroleum products.
Refining
Gross Profit per Bbl
.
Calculated as refinery operations revenue less total cost of goods
sold divided by the volume, in bbls, of refined products sold
during the period; reflected as a dollar ($) amount per
bbl.
RCRA
.
Federal Resource Conservation and Recovery Act.
RFS2
. Second
Renewable Fuels Standard.
ROU
.
Right-of-use.
SEC
.
Securities and Exchange Commission.
Segment
Contribution Margin
. For our refinery operations and tolling
and terminaling business segments, represents net revenues
(excluding intercompany fees and sales) attributable to the
respective business segment less associated intercompany fees and
sales less associated operation costs and
expenses.
SEMS
. Safety
and Environmental Management System.
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, or 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.
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Glossary of Terms
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Throughput
.
The volume processed through a unit or a refinery or transported
through a pipeline.
Total Refinery
Production
. Refers to the volume processed as output through
the crude distillation tower. Refinery production includes finished
petroleum products, such as jet fuel, and intermediate petroleum
products, such as naphtha, HOBM and AGO.
Total Refinery
Throughput
.
Refers
to the volume processed as input through the crude distillation
tower. Refinery throughput includes crude oil and condensate and
other feedstocks.
TMT
. Texas
margins tax; a form of business tax imposed on an entity’s
gross profit rather than on its net income.
Turnaround
.
Scheduled large-scale maintenance activity wherein an entire
process unit is taken offline for a week or more for comprehensive
revamp and renewal.
USACOE
. U.S.
Army Corps of Engineers.
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USDA
. U.S.
Department of Agriculture.
U.S. GAAP
.
Accounting principles generally accepted in the United States of
America.
Veritex
.
Veritex Community Bank, successor in interest to Sovereign Bank by
merger.
WSJ Prime
Rate
. A measure of the U.S. prime rate as defined by the
Wall Street Journal.
XBRL
.
eXtensible Business Reporting Language.
Yield
.
The percentage of refined products that is produced from crude oil
and other feedstocks.
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Important Information Regarding Forward Looking Statements
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Important Information Regarding Forward-Looking
Statements
This
report (including information incorporated by reference) contains
“forward-looking statements” within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Exchange Act, including, but not limited to, those under
“Item 1. Business,” “Item 1A. Risk
Factors,” and “Item 7. Management’s Discussion
and Analysis of Financial Condition and Results of
Operations.” All statements other than statements of
historical fact, including without limitation statements regarding
expectations regarding revenue, cash flows, capital expenditures,
and other financial items, our business strategy, goals and
expectations concerning our market position, future operations and
profitability, are forward-looking statements. Forward-looking
statements may be identified by use of the words
“anticipate,” “believe,”
“could,” “estimate,” “expect,”
“intend,” “may,” “plan,”
“predict,” “project,” “will,”
“would” and similar terms and phrases. Although we
believe our assumptions concerning future events are reasonable,
several risks, uncertainties, and other factors could cause actual
results and trends to differ materially from those projected,
including but not limited to:
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Business and Industry
●
Our going concern
status.
●
Inadequate
liquidity to sustain operations due to defaults under our secured
loan agreements, historic net losses, and working capital
deficits.
●
Substantial debt in
the current portion of long-term debt, which is currently in
default.
●
Ability to regain
compliance with the terms of our outstanding
indebtedness.
●
Increased costs of
capital or a reduction in the availability of credit.
●
Affiliate common
stock ownership and transactions that could cause conflicts of
interest.
●
Operational hazards
inherent in refining and natural gas processing operations and in
transporting and storing crude oil and condensate and refined
products.
●
Geographic
concentration of our assets, creating significant exposure to
regional economy risks and other conditions.
●
Geographic
concentration of our refining operations and customers within the
Eagle Ford Shale.
●
Competition from
companies having greater financial and other
resources.
●
Federal, state, and
local environmental, economic, health and safety, energy and other
policies and regulations, including those related to climate
change, and any changes therein, and any legal and regulatory
investigations, delays in obtaining necessary approvals and
permits, compliance costs or other factors beyond our
control.
●
Environmental laws
and regulations that could require us to make substantial capital
expenditures to remain in compliance or remediate current or future
contamination that could give rise to material
liabilities.
●
Changes in
insurance markets impacting costs and the level and types of
coverage available.
●
NOL carryforwards
to offset future taxable income for U.S. federal income tax
purposes that are subject to limitation.
●
Direct or indirect
effects on our business resulting from actual or threatened
terrorist or activist incidents, cyber-security breaches, or acts
of war.
●
Outbreak of
COVID-19, or an outbreak of another highly infectious or contagious
disease, could adversely impact our business, financial condition,
and results of operations.
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Refinery
and Tolling and Terminaling Operations
●
Timing and extent
of changes in commodity prices and demand for refined
products.
●
Availability and
costs of crude oil and other feedstocks.
●
Price volatility of
fuel and utility services to operate the Nixon
facility.
●
Disruptions due to
equipment interruption or failure at the Nixon
facility.
●
Changes in our cash
flow from operations and working capital requirements, shortfalls
of which Affiliates may not fund.
●
Ability to remain
in compliance with the terms of our outstanding
indebtedness.
●
Key personnel loss,
labor relations, and workplace safety.
●
Loss of market
share by and a material change in profitability of our key
customers.
●
Contract
cancellation, non-renewal, or failure to perform by those in our
supply and distribution chains, and the ability to replace such
contracts and/or customers.
●
Changes in the cost
or availability of third-party vessels, pipelines, trucks, and
other means of delivering and transporting crude oil and
condensate, feedstocks, and refined products.
●
Sourcing of a
substantial amount, if not all, of our crude oil and condensate
from the Eagle Ford Shale.
●
Geographic
concentration of our refining operations and customers within the
Eagle Ford Shale.
●
Weather conditions,
hurricanes or other natural disasters affecting operations by us or
our key customers or the areas in which our customers
operate.
Pipeline and Facilities and Oil and Gas Assets
●
Assessment of civil
penalties by BOEM for failure to satisfy orders to increase
supplemental pipeline bonds within the time period
prescribed.
●
Assessment of civil
penalties by BSEE for failure to decommission platform and pipeline
assets within the time period prescribed.
Common Stock
●
Our stock price may
decline due to sales of shares by Affiliates.
●
Issuance of
additional shares of Common Stock and Preferred Stock may
significantly dilute the equity ownership of current
holders.
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All
forward-looking statements included in this report are based on
information available to us on the date of this report. We
undertake no obligation to revise or update any forward-looking
statements as a result of new information, future events, or
otherwise.
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Business
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Unless
the context otherwise requires, references in this report to
“Blue Dolphin,” “we,” “us,”
“our,” or “ours” refer to Blue Dolphin
Energy Company, one or more of its consolidated subsidiaries, or
all of them taken as a whole.
Part I
should be read in conjunction with “Part II, Item 7.”
and “Part II, Item 8.”
PART I
ITEM 1.
BUSINESS
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a
Delaware corporation and is traded on the OTCQX under the ticker
symbol “BDCO”.
Our
assets are primarily organized in two segments: refinery operations
(owned by LE) and tolling and terminaling services (owned by LRM
and NPS). Subsidiaries that are reflected in corporate and other
include BDPL (inactive pipeline and facilities assets), BDPC
(inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See "Item 1.,” “Item
2.,” and “Note (4)” to our consolidated financial
statements for more information related to our business segments
and properties.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Item 1A.” and “Note (3)”
to our consolidated financial statements for additional disclosures
related to Affiliate risk factors, Affiliate agreements and
arrangements, and risks associated with working capital
deficits.
Going Concern
See
“Item 1A.” and “Note (1)” to our
consolidated financial statements regarding going concern factors
and associated risks
.
Operating Risks
See
“Note (1)” to our consolidated financial statements
regarding factors that
have negatively
impacted our business plan execution.
Refinery Operations
Our
refinery operations segment consists of the following assets and
operations:
|
Property
|
|
Key
Products
Handled
|
|
Operating
Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
● Crude
distillation tower (15,000 bpd)
● Petroleum
storage tanks
● Loading
and unloading facilities
● Land
(56 acres)
|
|
Crude
Oil
Refined
Products
|
|
LE
|
|
Nixon,
Texas
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See
below under “Refinery Operations Process Summary” for
an overview diagram of our refinery operations.
Capital Improvement Expansion Project
. Since 2015, the Nixon
facility has been undergoing a capital improvement expansion
project. Refinery operations capital improvements have primarily
related to construction of new petroleum storage tanks. However,
smaller efficiency improvements have been made as well. In the
short-term, increased petroleum storage capacity has helped with
de-bottlenecking the refinery. In the long-term, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd.
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7
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Business
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Crude Oil and Condensate Supply
.
Operation of the
Nixon refinery depends on our ability to purchase adequate amounts
of crude oil and condensate. We have a long-term crude supply
agreement in place with Pilot. Under the initial term of the crude
supply agreement, Pilot will sell us approximately 24.8 million net
bbls of crude oil. Thereafter, the crude supply agreement will
continue on a one-year evergreen basis. Pilot may terminate the
crude supply agreement at any time by providing us 60 days prior
written notice. We may terminate the agreement upon the expiration
of the initial term or at any time during a renewal term by giving
Pilot 60 days prior written notice.
Pilot also stores crude oil at the Nixon facility under a terminal
services agreement. Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. The terminal services
agreement has an initial term that expires April 30, 2020.
Thereafter, the terminal services agreement will continue on a
one-year evergreen basis. Either party may terminate the terminal
services agreement by providing the other party 60 days prior
written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude
supply agreement.
Our
financial health could be adversely affected by defaults under our
secured loan agreements, historic net losses, and working capital
deficits, which could impact our ability to acquire crude oil and
condensate. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations. See “Item 1A.” for risks associated with
crude supply.
Refinery Operations Process Summary
. The Nixon refinery is
considered a “topping unit” because it is primarily
comprised of a crude oil distillation tower or unit, the first
stage of the crude oil refining process. The crude distillation
tower separates crude oil and condensate 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 refinery.
Example represents a simplified outut of refined
products.
A
regional electric cooperative supplies electrical power to our
facility in Nixon, Texas. Fuel gas is produced as a by-product at
the Nixon refinery and is primarily used as fuel within the
refinery. In addition, small amounts of propane are occasionally
acquired for use in starting-up the Nixon refinery.
Products and Markets
. Our market is the Gulf Coast region of
the U.S., which is represented by the EIA as Petroleum
Administration for PADD 3. We sell our products primarily in
the U.S. within PADD 3. Occasionally we sell refined products to
customers that export to Mexico.
The
Nixon refinery’s product slate is moderately adjusted based
on market demand. We currently produce a single finished product
– jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an
Affiliate, which is HUBZone certified. Our intermediate products
are primarily sold in nearby markets to wholesalers and refiners as
a feedstock for further blending and processing. See “Note
(3)” and “Note (16)” to our consolidated
financial statements for additional disclosures related to
Affiliates arrangements and transactions.
Customer
s
.
Customers
for our refined products include distributors, wholesalers and
refineries primarily in the lower portion of the Texas Triangle
(the Houston - San Antonio - Dallas/Fort Worth area). We have bulk
term contracts in place with most of our customers, including
month-to-month, six months, and up to one-year terms. Certain of
our contracts require our customers to prepay and us to sell fixed
quantities and/or minimum quantities of finished and intermediate
petroleum products. Many of these arrangements are subject to
periodic renegotiation on a forward-looking basis, which could
result in higher or lower relative prices on future sales of our
refined products. See “Item 1A.” and “Note
(5)” to our consolidated financial statements for disclosures
related to concentration of risk associated with significant
customers.
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Competition
.
Many of our competitors are
substantially larger than us and are engaged on a national or
international level in many segments of the oil and gas industry,
including exploration and production, gathering and transportation,
and marketing. These competitors may have greater flexibility in
responding to or absorbing market changes occurring in one or more
of these business segments. We compete primarily based on cost. Due
to the low complexity of our simple “topping unit”
refinery, we can be relatively nimble in adjusting our refined
products slate because of changing commodity prices, market demand,
and refinery operating costs.
Safety and Downtime
. Our
refinery operations are operated in a manner consistent with
industry safe practices and standards. These operations are subject
to regulations under OSHA, the EPA, and comparable state and local
requirements. Together, these regulations are designed for
personnel safety, process safety management, and risk management,
as well as to prevent or minimize the probability and consequences
of an accidental release of toxic, reactive, flammable, or
explosive chemicals.
Storage tanks used for refinery
operations are designed for crude oil and condensate and refined
products, and most are equipped with appropriate controls that
minimize emissions and promote safety. Our refinery operations have
response and control plans, spill prevention and other programs to
respond to emergencies. See “Government Regulations”
below for specific federal, state and local regulations for which
our refinery operations are subject.
The Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typically reason is excessive
heat or power outages from high winds and thunderstorms. Planned
t
urnarounds are used to repair, restore, refurbish, or
replace refinery equipment. Refineries typically undergo a major
turnaround every three to five years. Since the Nixon refinery was
placed back in service in 2012 (commonly referred to as
“recommissioning”), turnarounds are needed more
frequently for unanticipated maintenance or repairs.
We are particularly vulnerable to disruptions in our operations
because all our refining operations are conducted at a single
facility. Any scheduled or unscheduled downtime will result in lost
margin opportunity, potential increased maintenance expense, and a
reduction of refined products inventory, which could reduce our
ability to meet our payment obligations. See “Item 1A.”
for risks sociated with Nixon refinery downtime.
Tolling and Terminaling Operations
Our
tolling and terminaling segment consists of the following assets
and operations:
|
Property
|
|
Key
Products
Handled
|
|
Operating
Subsidiary
|
|
Location
|
|
|
|
|
|
|
|
|
|
Nixon
facility
● Petroleum
storage tanks
● Loading
and unloading facilities
|
|
Crude
Oil
Refined
Products
|
|
LRM,
NPS
|
|
Nixon,
Texas
|
|
|
|
|
|
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Capital Improvement Expansion Project
. As previously noted,
the Nixon facility has been undergoing a capital improvement
expansion project since 2015. Tolling and terminaling capital
improvements have primarily related to construction of new
petroleum storage tanks to significantly increase petroleum storage
capacity. Increased petroleum storage capacity will provide an
opportunity to generate additional tolling and terminaling
revenue.
Products and Customers
.
The
Nixon facility’s petroleum storage tanks and infrastructure
are primarily suited for crude oil and condensate and refined
products, such as naphtha, jet fuel, diesel and fuel oil. Storage
c
ustomers are typically refiners in the lower portion of the
Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon
facility via pipeline or from third parties via truck. Contract
terms range from month-to-month to three years.
Operations Safety
. Our tolling and terminal operations are
operated in a manner consistent with industry safe practices and
standards. These operations are subject to regulations under OSHA
and comparable state and local regulations. Storage tanks used for
terminal operations are designed for crude oil and condensate and
refined products, and most are equipped with appropriate controls
that minimize emissions and promote safety. Our terminal operations
have response and control plans, spill prevention and other
programs to respond to emergencies. See “Government
Regulations” below for specific federal, state and local
regulations for which our tolling and terminaling operations are
subject.
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Business
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Inactive Operations
We own
certain other pipeline and facilities assets and have leasehold
interests in oil and gas properties. These assets, which are shown
below and included in corporate and other, are not operational and
are fully impaired.
|
Property
|
|
Operating
Subsidiary
|
|
|
Location
|
|
|
|
|
|
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Freeport
facility
● Crude
oil and natural gas separation and dehydration
● Natural
gas processing, treating, and redelivery
● Vapor
recovery unit
● Two
onshore pipelines
● Land
(162 acres)
|
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BDPL
|
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Freeport,
Texas
|
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Offshore
Pipelines (Trunk Line and Lateral Lines)
|
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BDPL
|
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Gulf of
Mexico
|
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Oil and
Gas Leasehold Interests
|
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BDPC
|
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Gulf of
Mexico
|
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We
fully impaired our pipeline assets at December 31, 2016 and our oil
and gas properties at December 31, 2011. Our pipeline and oil and
gas properties had no revenue during the years ended December 31,
2019 and 2018. See “Item 1A.” and “Note
(16)” to our consolidated financial statements related to
idle iron decommissioning requirements and related
risks.
Pipeline and Facilities Safety
.
Although
our pipeline and facility assets are inactive, they require upkeep
and maintenance and are subject to safety regulations under OSHA,
PHMSA, BOEM, BSEE, and comparable state and local regulations. We
have response and control plans, spill prevention and other
programs to respond to emergencies related to these assets. See
“Government Regulations” below for specific federal,
state and local regulations for which our pipeline and facilities
assets are subject.
Personnel
We have
no employees. We rely on an Affiliate to manage our facilities
pursuant to the Amended and Restated Operating Agreement. Services
under the Amended and Restated Operating Agreement include
personnel serving in a variety of capacities, including, but not
limited to corporate executives, operations and maintenance,
environmental, health and safety, and administrative and
professional services. At December 31, 2019, the Affiliate had a
total of 216 employees, 165 full-time and 51 part-time. No
personnel were covered by collective bargaining agreements. See
“Note (3)” to our consolidated financial statements for
additional disclosures related to Affiliate
arrangements.
Insurance and Risk Management
Our
operations are subject to significant hazards and risks inherent in
crude oil and condensate refining operations, as well as the
transportation and storage of crude oil and condensate and refined
products. We have property damage 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 coverages are supported by safety and other
risk management programs.
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.
Website Access to Reports and Other Information
Our
Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q,
Current Reports on Form 8-K, and other public filings with the SEC
are available, free of charge, on our website (
http://www.blue-dolphin-energy.com
)
as soon as reasonably practical after we file them with, or furnish
them to, the SEC. Information contained on our website is not part
of this report. You may also access these reports on the
SEC’s website at
http://www.sec.gov
.
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Government Regulations
General
. Our operations are subject to extensive and
frequently changing federal, state, and local laws, regulations,
permits, and ordinances relating to the protection of the
environment. Among other things, these laws and regulations govern
obtaining and maintaining construction and operating permits, the
emission and discharge of pollutants into or onto the land, air,
and water, the handling and disposal of solid, liquid, and
hazardous wastes and the remediation of contamination. Compliance
with existing and anticipated environmental laws and regulations
increases our overall cost of business, including our capital costs
to construct, maintain, operate and upgrade equipment and
facilities. Failure to comply with these laws and regulations may
trigger a variety of administrative, civil, and criminal
enforcement measures, including the assessment of monetary
penalties. Certain environmental statutes impose strict, joint and
several liability for costs required to clean up and restore sites
where hazardous substances, hydrocarbons or wastes have been
disposed or otherwise released. Moreover, it is not uncommon for
neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by the release
of hazardous substances, hydrocarbons, or other waste products into
the environment. These requirements may also significantly affect
our customers’ operations and may have an indirect effect on
our business, financial condition and results of operations.
However, we do not expect such effects will have a material impact
on our financial position, results of operations, or
liquidity.
Air Emissions and Climate Change Regulations
.
Our operations are
subject to the Clean Air Act and comparable state and local
statutes. Under these laws, we are required to obtain permits, as
well as test, monitor, report, and implement control requirements.
If regulations become more stringent, additional emission control
technologies may be required to be installed at the Nixon facility
and certain emission sources located offshore, and our ability to
secure future permits may become less certain. Any such future
obligations could require us to incur significant additional
capital or operating costs.
The EPA
has undertaken significant regulatory initiatives under authority
of the Clean Air Act’s NSR/PSD program to further reduce
emissions of volatile organic compounds, nitrogen oxides, sulfur
dioxide, and particulate matter. These regulatory initiatives have
been targeted at industries with large manufacturing facilities
that are significant sources of emissions, such as refining, paper
and pulp, and electric power generating industries. The basic
premise of these initiatives is the EPA’s assertion that many
of these industrial establishments have modified or expanded their
operations over time without complying with NSR/PSD regulations
adopted by the EPA that require permits and new emission controls
in connection with any significant facility modifications or
expansions that can result in emission increases above certain
thresholds. As part of this ongoing NSR/PSD regulatory initiative,
the EPA has consent decrees with several refiners that require
refiners to make significant capital expenditures to install
emissions control equipment at selected facilities. We have not
been selected by the EPA to enter a consent decree. If selected, as
a small refiner we do not expect any additional requirements to
have a material impact on our financial position, results of
operations, or liquidity.
The EPA
strengthened the NAAQS for ground-level ozone to 70 parts per
billion in 2015 from the 75-parts per billion level set in 2008. To
implement the revised ozone NAAQS, all states will need to review
their existing air quality management infrastructure State
Implementation Plan for ozone and ensure it is appropriate and
adequate. Where areas remain in ozone non-attainment, or come into
ozone non-attainment as a result of the revised NAAQS, it is likely
that additional planning and control obligations will be required.
States may impose additional emissions control requirements on
stationary sources, changes in fuels specifications, and changes in
fuels mix and mobile source emissions controls. The ongoing and
potential future requirements imposed by states to meet the ozone
NAAQS could have direct impacts on terminaling facilities through
additional requirements and increased permitting costs and could
have indirect impacts through changing or decreasing fuel
demand.
The
Energy Independence and Security Act of 2007 created RFS2 requiring
the total volume of renewable transportation fuels (including
ethanol and advanced biofuels) sold or introduced in the U.S. to
reach 36.0 billion gallons by 2022. We applied for an extension of
the temporary exemption afforded small refineries through December
31, 2010. The EPA granted the Nixon refinery a small refinery
exemption from RFS2 requirements for 2013 and 2014. Since 2014, the
Nixon refinery has solely produced HOBM, a non-transportation
lubricant blend product that does not fall under RFS2.
Currently,
multiple legislative and regulatory measures to address greenhouse
gas emissions are in various phases of discussion or
implementation. These include actions to develop national, state,
or regional programs, each of which would require reductions in our
greenhouse gas emissions or those of our customers. In 2015, the
EPA amended the Petroleum and Natural Gas Systems source category
(Subpart W) of the Greenhouse Gas Reporting Program, to include
among other things a new Onshore Petroleum and Natural Gas
Gathering and Boosting segment that encompasses greenhouse gas
emissions from equipment and sources within the petroleum and
natural gas gathering boosting systems. In 2016, the EPA
promulgated regulations regarding performance standards for methane
emissions from new and modified oil and gas production and natural
gas processing and transmission facilities, and in September 2018,
proposed targeted improvements to these standards to streamline
implementation of the rules. These and other legislative regulatory
measures will impose additional burdens on our business and those
of our customers.
Hazardous Substances and Waste Regulations
.
The CERCLA imposes strict, joint and
several liability on a broad group of potentially responsible
parties for response actions necessary to address a release of
hazardous substances into the environment. The law authorizes
two kinds of response actions: (i) short-term removals, where
actions may be taken to address releases or threatened releases
requiring prompt response, and (ii) long-term remedial response
actions, that permanently and significantly reduce the dangers
associated with releases or threats of releases of hazardous
substances that are serious, but not immediately life threatening.
Neither we nor any of our predecessors have been designated as a
potentially responsible party under CERCLA or a similar state
statute.
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We
generate petroleum product wastes, solid wastes, and ordinary
industrial wastes, such as from paints and solvents, that are
regulated under RCRA and comparable state statues. We are not
currently required to comply with a substantial portion of the RCRA
requirements because we are considered small quantity generators of
hazardous wastes by the EPA and state regulations. However, it is
possible that additional wastes, which could include wastes
currently generated during operations, will in the future be
designated as hazardous wastes. Hazardous wastes are subject to
more rigorous and costly disposal requirements than are
non-hazardous wastes. The Hazardous Waste Generator Improvement
Rule of the EPA provides some additional flexibility for small
generators but also increases certain recordkeeping and
administrative burdens. Several states are now in the process of
adopting this rule. Any additional changes in the regulations could
increase our capital and operating costs.
We
currently own properties where crude oil, refined petroleum
hydrocarbons, and fuel additives have been handled for many years
by previous owners. At some facilities, hydrocarbons or other waste
may have been disposed of or released on or under the properties
owned by us or on or under other locations where these wastes have
been taken for disposal. Although prior owners and operators may
have used operating and waste disposal practices that were standard
in the industry at the time, these properties and wastes disposed
thereon are now subject to CERCLA, RCRA and analogous state laws.
Under these laws, we could be required to remove or remediate
previously disposed or released wastes (including wastes disposed
of or released by prior owners or operators), to clean up
contaminated property (including impacted groundwater), or to
perform remedial operations to prevent future contamination to the
extent we are not indemnified for such matters.
Water Pollution Regulations
.
Our operations can result in the
discharge of pollutants, including chemical components of crude oil
and refined products, into federal and state waters.
The CWA prohibits the discharge of pollutants into
U.S. waters except as authorized by the terms of a permit issued by
the EPA or a state agency with delegated authority. The
transportation and storage of crude oil and refined products over
and adjacent to water involves risks and subjects us to the
provisions of the CWA, OPA 90, and related state
requirements.
Spill
prevention, control, and countermeasure requirements mandate the
use of structures, such as berms and other secondary containment,
to prevent hydrocarbons or other pollutants from reaching a
jurisdictional body of water in the event of a spill or leak. These
requirements prevent pollutant releases and minimize potential
impacts should a release occur. We have federally certified OSROs
available to respond to a spill and, in the case of our offshore
pipelines, we maintain the statutory $35.0 million coverage
required proof of financial responsibility. In the event of an oil
spill into navigable waters, we can be subject to strict, joint,
and potentially unlimited liability for removal costs and other
consequences.
Wastewater
is subject to restrictions and strict controls under the CWA.
Federal and state regulatory agencies can impose administrative,
civil, and criminal penalties for non-compliance with discharge
permits.
Process wastewater from the
Nixon refinery is tested and discharged to a nearby municipal
treatment facility pursuant to applicable process wastewater
permits. Wastewater from our offshore facilities, including our oil
and natural gas pipelines and anchor platform, is tested and
discharged pursuant to applicable produced water permits.
Stormwater at the Nixon facility is tested and discharged pursuant
to applicable stormwater permits.
Offshore “Idle Iron” Decommissioning
Regulations
.
In
2018 BSEE updated its earlier 2010 guidance and regulations on
decommissioning that mandates lessees and rights-of-way holders
permanently abandon and/or remove platforms and other structures
when no longer useful for operations. To cover the various
obligations of lessees and rights-of-way holders operating in
federal waters of the Gulf of Mexico, BOEM evaluates an
operator’s financial ability to carry out present and future
obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
We are
required by BOEM to: (i) maintain acceptable financial assurance
(pipeline bonds) for the decommissioning of our assets offshore in
federal waters and (ii) decommission these assets following a
certain period of inactivity. As of December 31, 2019, we
maintained approximately $0.9 million in credit and cash-backed
pipeline rights-of-way bonds issued to the BOEM. As of December 31,
2019, we maintained $2.6 million in AROs related to abandonment of
these assets. See “Item 1A.,” “Note (12),”
and “Note (16)” to our consolidated financial
statements for additional disclosures related to idle iron
decommissioning requirements for our pipelines and facilities
assets and related risks.
Health, Safety and Maintenance
We are
subject to the requirements of OSHA and other federal and state
agencies that address employee health and safety. In general, we
believe current expenditures are fulfilling the OSHA requirements
and protecting the health and safety of our employees. Based on new
regulatory developments, we may increase expenditures in the future
to comply with higher industry and regulatory safety standards.
However, such increases in our expenditures, and the extent to
which they might be offset, cannot be estimated at this
time.
BSEE
also requires offshore operators to employ a SEMS
plan. SEMS are designed to 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. We have a SEMS program in
place.
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Risk Factors
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ITEM 1A. RISK FACTORS
You should carefully consider the risks described below, in
addition to the other information contained in this document.
Realization of any of the following risks could have a material
adverse effect on our business, financial condition, cash flows and
results of operations.
A.
Risks Related to Our Business and Industry
A1.
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.
Management
has determined that conditions exist that raise substantial doubt
about our ability to continue as a going concern due to defaults
under our secured loan agreements, historic net losses, and working
capital deficits. A ‘going concern’ opinion could
impair our ability to finance our operations through the sale of
equity, incurring debt, or other financing alternatives. Our
ability to continue as a going concern will depend on sustained
positive operating margins and working capital to sustain
operations, including the purchase of crude oil and condensate and
payments on long-term debt. If we are unable to achieve these
goals, our business would be jeopardized, and we may not be able to
continue. If we are unable to make required debt payments, we would
likely have to consider other options, such as selling assets,
raising additional debt or equity capital, cutting costs or
otherwise reducing our cash requirements, or negotiating with our
creditors to restructure our applicable obligations.
A2.
Inadequate liquidity to sustain operations due to defaults under
our secured loan agreements, historic net losses, and working
capital deficits, any of which could have a material adverse effect
on us.
We
currently rely on revenue from operations, Affiliates, and
borrowings under bank facilities to meet our liquidity needs. Our
short-term working capital needs are primarily related to
acquisition of crude oil and condensate to operate the Nixon
refinery, repayment of short-term 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. The Amended Pilot Line of Credit
will mature in May 2020. Our liquidity will affect our ability to
satisfy any of these needs.
We had
a working capital deficit of $59.4 million and $71.9 million at
December 31, 2019 and 2018, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$19.6 million and $30.0 million at December 31, 2019 and 2018,
respectively. We had cash and cash equivalents and restricted cash
(current portion) of $0.07 million and $0.05 million, respectively,
at December 31, 2019. Comparatively, we had cash and cash
equivalents and restricted cash (current portion) of $0.01 million
and $0.05 million, respectively, at December 31, 2018.
While
we believe that we can fund our operations through revenue from
operations and Affiliate financing, we may not be able to, among
other things, (i) maintain our current general and administrative
spending levels; (ii) fund certain obligations as they become due;
and (iii) respond to competitive pressures or unanticipated capital
requirements. We cannot provide any assurance that financing will
be available to us in the future on acceptable terms.
A3.
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 report, we are in default under our
secured loan agreements. Defaults include events of default and
financial covenant violations. Defaults under our secured loan
agreements 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 sheets at December 31, 2019 and
2018.
In
September 2017, Veritex notified obligors of events of default,
including, but not limited to, the occurrence of the GEL Final
Arbitration Award, associated material adverse effect conditions,
failure by LE to replenish a $1.0 million payment reserve account,
and the occurrence of events of default by obligors under our other
secured loan agreements with Veritex, all of which constituted
events of default under our secured loan agreements. Further,
Veritex informed obligors that it would consider a final
confirmation of the GEL Final Arbitration Award to be a material
event of default under the loan agreements. Veritex did not
accelerate or call due our secured loan agreements considering
these factors. Instead, Veritex expressly reserved all its rights,
privileges and remedies related to events of default.
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In
April 2019, obligors were notified by Veritex that the bank agreed
to waive certain covenant defaults and forbear from enforcing its
remedies under our secured loan agreements subject to: (i) the
agreement and concurrence of the USDA and (ii) the replenishment of
the payment reserve account on or before August 31, 2019. Following
the GEL Settlement, the associated mutual releases became effective
and GEL filed a stipulation of dismissal of claims against LE. As
of the date of this report, LE had not replenished the payment
reserve account and obligors were still in default under our
secured loan agreements with Veritex.
At
December 31, 2019, LE and LRM were in violation of the debt service
coverage ratio, current ratio, and debt to net worth ratio
financial covenants under our secured loan agreements with
Veritex.
Any
exercise by Veritex of its rights and remedies under our secured
loan agreements would have a material adverse effect on our
business operations, including crude oil and condensate procurement
and our customer relationships; financial condition; and results of
operations. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under outstanding long-term
debt, either upon maturity or if accelerated, (ii) LE and LRM will
be able to refinance or restructure the payments on the long-term
debt, and/or (iii) Veritex, as first lien holder, will provide
future default waivers. Defaults under our secured loan agreements
and any exercise by Veritex of its rights and remedies related to
such defaults may have a material adverse effect on the trading
prices of our common stock and on the value of an investment in our
common stock, and holders of our common stock could lose their
investment in our common stock in its entirety.
A4.
We
will need to repay or refinance borrowings under the Amended Pilot
Line of Credit.
The
Amended Pilot Line of Credit is scheduled to mature in May 2020. We
will need to repay, refinance, replace or otherwise extend the
maturity of this line of credit. Our ability to repay, refinance,
replace or extend this facility by its maturity date will be
dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. If a financial disruption were to occur at the time that
we are required to repay this indebtedness, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We cannot provide
any assurance that we will be able to consummate any such
transaction on terms that are commercially reasonable, on terms
acceptable to us or at all.
A5.
Our substantial current debt, which is included in the current
portion of long-term debt (in default), the current portion of
long-term debt, related party (in default), and line of credit
payable, could adversely affect our financial health and make us
more vulnerable to adverse economic conditions.
As of
December 31, 2019 and 2018, we had current debt of $51.3 million
and $41.9 million, respectively, consisting of bank debt, related
party debt, and a line of credit payable. Blue Dolphin, as parent
company, has guaranteed the indebtedness of certain subsidiaries.
In addition, Affiliates have guaranteed the indebtedness of Blue
Dolphin and certain of its subsidiaries. This level of debt in
current liabilities and the cross guarantee agreements could have
important consequences, such as: (i) limiting our ability to obtain
additional financing to fund our working capital, capital
expenditures, debt service requirements or potential growth, or for
other purposes; (ii) increasing the cost of future borrowings;
(iii) limiting our ability to use operating cash flow in other
areas of our business because we must dedicate a substantial
portion of these funds to make payments on our debt; (iv) placing
us at a competitive disadvantage compared to competitors with less
debt; and (v) increasing our vulnerability to adverse economic and
industry conditions.
As of
the filing date of this report, we were current with the monthly
payments required under our bank debt and line of credit payable.
Our ability to service our debt is dependent upon, among other
things, business conditions, our financial and operating
performance, our ability to raise capital, and regulatory and other
factors, many of which are beyond our control. If our working
capital is not sufficient to service our debt, and any future
indebtedness that we incur, our business, financial condition, and
results of operations will be materially adversely
affected.
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A6.
Our business, financial condition and operating results may be
adversely affected by increased costs of capital or a reduction in
the availability of credit.
Adverse
changes to the availability, terms and cost of capital, interest
rates or our credit ratings (which would have a corresponding
impact on the credit ratings of our subsidiaries that are party to
any cross-guarantee agreements) could cause our cost of doing
business to increase by limiting our access to capital, including
our ability to refinance maturing or accelerated existing
indebtedness on similar terms. As a result, we cannot provide any
assurance that any financing will be available to us in the future
on acceptable terms or at all. Any such financing could be dilutive
to our existing stockholders. If we cannot raise required funds on
acceptable terms, we may further reduce our expenses and we may not
be able to, among other things, (i) maintain our general and
administrative expenses at current levels; (ii) successfully
implement our business strategy; (iii) fund certain obligations as
they become due; (iv) respond to competitive pressures or
unanticipated capital requirements; or (v) repay our indebtedness.
Based on the historical negative cash flows and the continued
limited cash inflows in the period subsequent to year end there is
substantial doubt about our ability to continue as a going
concern.
A7.
Affiliates hold a significant ownership interest in us and exert
significant influence over us, and their interests may conflict
with the interests of our other stockholders; Affiliate
transactions may cause conflicts of interest that may adversely
affect us.
Affiliates control
approximately 82% of the voting power of our Common Stock
and, by virtue of such stock ownership, can control or exert
substantial influence over us, including:
●
Election and
appointment of directors;
●
Business strategy
and policies;
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Mergers and other
business combinations;
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Acquisition or
disposition of assets;
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Future issuances of
Common Stock or other securities; and
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Incurrence of debt
or obtaining other sources of financing.
The
existence of a controlling stockholder may have the effect of
making it difficult for, or may discourage or delay, a third party
from seeking to acquire a majority of our outstanding Common Stock,
which may adversely affect the market price of our Common
Stock.
Affiliate interest
may not always be consistent with our interests or with the
interests of our other stockholders. Affiliates may also pursue
acquisitions or business opportunities in industries in which we
compete, and there is no requirement that any additional business
opportunities be presented to us. We also have and may in the
future enter transactions to purchase goods or services with
Affiliates. To the extent that conflicts of interest may arise
between us and Affiliates, those conflicts may be resolved in a
manner adverse to us or its other stockholders.
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 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.
A8.
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 result in substantial losses to us from
injury and loss of life, damage to and destruction of property and
equipment, pollution and other environmental damage and suspension
of operations. Offshore operations are also subject to a variety of
operating risks peculiar to the marine environment, such as
hurricanes or other adverse weather conditions and more extensive
governmental regulation. These regulations may, in certain
circumstances, impose strict liability for pollution damage or
result in the interruption or termination of operations. 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.
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Risk Factors
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A9.
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 assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined products in a single, relatively
limited geographic area. In addition, we have facilities and
related onshore pipeline assets in Freeport, Texas, and offshore
pipelines and oil and gas properties are in 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.
A10.
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.
A11.
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 and natural resources, 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.
A12.
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, SEMS, and comparable state
statutes that regulate the protection, health, and safety of
workers, and the proper design, operation and maintenance of our
equipment. In addition, OSHA and certain other 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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A13.
Our insurance policies do not cover all losses, costs, or
liabilities that we may experience, and insurance companies that
currently insure companies in the energy industry may cease to do
so or substantially increase premiums.
Our
insurance program may not cover all operational risks and costs and
may not provide sufficient coverage in the event of a claim. We do
not maintain insurance coverage against all potential losses and
could suffer losses for uninsurable or uninsured risks or in
amounts in excess of existing insurance coverage. Losses in excess
of our insurance coverage could have a material adverse effect on
our business, financial condition, and results of
operations.
Changes
in the insurance markets subsequent to certain hurricanes and
natural disasters have made it more difficult and more expensive to
obtain certain types of coverage. The occurrence of an event that
is not fully covered by insurance, or failure by one or more of our
insurers to honor its coverage commitments for an insured event,
could have a material adverse effect on our business, financial
condition, and results of operations. Insurance companies may
reduce the insurance capacity they are willing to offer or may
demand significantly higher premiums or deductibles to cover our
assets. If significant changes in the number or financial solvency
of insurance underwriters for the energy industry occur, we may be
unable to obtain and maintain adequate insurance at a reasonable
cost. There is no assurance that our insurers will renew their
insurance coverage on acceptable terms, if at all, or that we will
be able to arrange for adequate alternative coverage in the event
of non-renewal. The unavailability of full insurance coverage to
cover events in which we suffer significant losses could have a
material adverse effect on our business, financial condition and
results of operations.
A14.
Our ability to use NOL carryforwards to offset future taxable
income for U.S. federal income tax purposes is subject to
limitation.
Under
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. If the IRS were to
challenge our NOLs in an audit, we cannot assure that we would
prevail against such challenge. If the IRS were successful in
challenging our NOLs, all or some portion of our NOLs would not be
available to offset any future consolidated income, which would
negatively impact our results of operations and cash flows. Certain
provisions of the Tax Cuts and Jobs Act, enacted in 2017, may also
limit our ability to utilize our net operating tax loss
carryforwards.
At
December 31, 2019 and 2018, 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, 2019 and
2018.
A15.
We may not be able to keep pace with technological developments in
our industry.
The oil
and natural gas industry is characterized by rapid and significant
technological advancements and introductions of new products and
services using new technologies. As others use or development new
technologies, we may be placed at a competitive disadvantage or may
be forced by competitive pressures to implement those new
technologies at substantial costs. We may not be able to respond do
these competitive pressures or implement new technologies on a
timely basis or at an acceptable cost. If one or more of the
technologies we use now or in the future were to become obsolete,
our business, financial condition or results of operations could be
materially and adversely affected.
A16.
A terrorist attack or armed conflict could harm our
business.
Terrorist
activities, anti-terrorist efforts and other armed conflicts
involving the United States or other countries may adversely affect
the United States and global economies and could prevent us from
meeting our financial and other obligations. If any of these events
occur, the resulting political instability and societal disruption
could reduce overall demand for oil and natural gas, potentially
putting downward pressure on demand for our production and causing
a reduction in our revenues. Oil and natural gas related facilities
could be direct targets of terrorist attacks, and our operations
could be adversely impacted if infrastructure integral to our
customers’ operations is destroyed or damaged. Costs for
insurance and other security may increase as a result of these
threats, and some insurance coverage may become more difficult to
obtain, if available at all.
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A17.
Our business could be negatively affected by security
threats.
A
cyberattack or similar incident could occur and result in
information theft, data corruption, operational disruption, damage
to our reputation or financial loss. Our industry has become
increasingly dependent on digital technologies to conduct certain
exploration, development, production, processing and financial
activities. Our technologies, systems, networks, or other
proprietary information, and those of our vendors, suppliers and
other business partners, may become the target of cyberattacks or
information security breaches that could result in the unauthorized
release, gathering, monitoring, misuse, loss or destruction of
proprietary and other information, or could otherwise lead to the
disruption of our business operations. Cyberattacks are becoming
more sophisticated and certain cyber incidents, such as
surveillance, may remain undetected for an extended period and
could lead to disruptions in critical systems or the unauthorized
release of confidential or otherwise protected information. These
events could lead to financial loss from remedial actions, loss of
business, disruption of operations, damage to our reputation or
potential liability. Also, computers control nearly all the oil and
gas distribution systems in the United States and abroad, which are
necessary to transportation our production to market. A cyberattack
directed at oil and gas distribution systems could damage critical
distribution and storage assets or the environment, delay or
prevent delivery of production to markets and make it difficult or
impossible to accurately account for production and settle
transactions. Cyber incidents have increased, and the United States
government has issued warnings indicating that energy assets may be
specific targets of cybersecurity threats. Our systems and
insurance coverage for protecting against cybersecurity risks may
not be sufficient. Further, as cyberattacks continue to evolve, we
may be required to expend significant additional resources to
continue to modify or enhance our protective measures or to
investigate and remediate any vulnerability to
cyberattacks.
A18.
We face various risks associated with increase activism against oil
and natural gas exploration and development
activities.
Opposition toward
oil and natural gas drilling and development activity has been
growing globally and is particularly pronounced in the United
States. Companies in the oil and natural gas industry are often the
target of activist efforts from both individuals and
non-governmental organizations regarding safety, human rights,
environmental matters, sustainability, and business practices.
Anti-development activists are working to, among other things,
reduce access to federal and state government lands and delay or
cancel certain operations such as drilling and
development.
A19.
The outbreak of COVID-19, or an outbreak of another highly
infectious or contagious disease, could adversely affect the
combined company’s business, financial condition, and results
of operations.
Our
business will be dependent upon the willingness and ability of our
customers to conduct transactions. The spread of a highly
infectious or contagious disease, such as COVID-19, could cause
severe disruptions in the worldwide economy, which could in turn
disrupt our business, activities, and operations, as well as that
of our customers. Moreover, since the beginning of January 2020,
the COVID-19 outbreak has caused significant disruption in the
financial markets both globally and in the United States. The
spread of COVID-19, or an outbreak of another highly infectious or
contagious disease, may result in a significant decrease in
business and/or cause customers to be unable to meet existing
payment or other obligations. A spread of COVID-19, or an outbreak
of another contagious disease, could also negatively impact the
availability of key personnel necessary to conduct our business.
Such a spread or outbreak could also negatively impact the business
and operations of third-party providers who perform critical
services for our business. If COVID-19, or another highly
infectious or contagious disease, spreads or the response to
contain COVID-19 is unsuccessful, we could experience a material
adverse effect on our business, financial condition, and results of
operations.
B.
Risks Related to Our Operations
B1.
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 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 products depend
upon numerous factors beyond our control. The prices at which we
sell refined 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
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.
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B2.
The price volatility of crude oil, other feedstocks, refined
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 products) at which we can
sell refined 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 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 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 products, typically there is a time lag between the
comparable increase or decrease in prices for refined 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 product prices adjust to reflect these
changes.
Prices
of crude oil, other feedstocks and refined products depend on
numerous factors beyond our control, including the supply of and
demand for crude oil, other feedstocks, and refined products. Such
supply and demand are affected by, among other things:
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changes
in foreign, domestic, and local economic conditions;
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foreign
and domestic demand for fuel products;
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worldwide
political conditions, particularly in significant oil producing
regions;
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foreign
and domestic production levels of crude oil, other feedstocks, and
refined products and the volume of crude oil, feedstocks, and
refined products imported into the U.S.;
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availability
of and access to transportation infrastructure;
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capacity
utilization rates of refineries in the U.S.;
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Organization
of Petroleum Exporting Countries’ influence on oil
prices;
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development
and marketing of alternative and competing fuels;
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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.
|
B3.
Our future success depends on our ability to acquire sufficient
levels of crude oil on favorable terms to operate the Nixon
refinery.
Operation of the
Nixon refinery depends on our ability to purchase adequate amounts
of crude oil and condensate. We have a long-term crude supply
agreement in place with Pilot. Under the initial term of the crude
supply agreement, Pilot will sell us approximately 24.8 million net
bbls of crude oil. Thereafter, the crude supply agreement will
continue on a one-year evergreen basis. Pilot may terminate the
crude supply agreement at any time by providing us 60 days prior
written notice. We may terminate the agreement upon the expiration
of the initial term or at any time during a renewal term by giving
Pilot 60 days prior written notice.
Pilot also stores
crude oil at the Nixon facility under a terminal services
agreement. Under the terminal services agreement, Pilot stores
crude oil at the Nixon facility at a specified rate per bbl of the
storage tank’s shell capacity. The terminal services
agreement has an initial term that expires April 30, 2020.
Thereafter, the terminal services agreement will continue on a
one-year evergreen basis. Either party may terminate the terminal
services agreement by providing the other party 60 days prior
written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude
supply agreement.
Our
financial health could be adversely affected by defaults under our
secured loan agreements, historic net losses, and working capital
deficits, which could impact our ability to acquire crude oil and
condensate. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations.
B4.
Downtime at the Nixon refinery could result in lost margin
opportunity, increased maintenance expense, increased inventory,
and a reduction in cash available for payment of our
obligations.
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Unplanned shutdowns can occur for a variety of
reasons, including voluntary regulatory compliance measures,
cessation or suspension by regulatory authorities, or disabled
equipment. However, in Texas the most typically reason is excessive
heat or power outages from high winds and thunderstorms. Planned
turnarounds are used to repair, restore, refurbish, or replace
refinery equipment. Refineries typically undergo a major turnaround
every three to five years. Since the Nixon refinery is still in the
recommissioning phase, turnarounds are needed more frequently for
unanticipated maintenance or repairs.
|
19
|
|
Risk Factors
|
|
|
We are
particularly vulnerable to disruptions in our operations because
all our refining operations are conducted at a single facility.
Refinery downtime in 2019 totaled 21 days compared to 30 days in
2018, an improvement of 9 days. Refinery downtime in 2019 related
to a maintenance turnaround (March 2019) and intermittent crude
heater issues while refinery downtime in 2018 was for repair and
maintenance of the naphtha stabilizer unit and two maintenance
turnarounds (January and March 2018). Any scheduled or unscheduled
downtime will result in lost margin opportunity, potential
increased maintenance expense, and a reduction of refined products
inventory, which could reduce our ability to meet our payment
obligations.
B5.
We may have capital needs for which our internally generated cash
flows and other sources of liquidity may not be adequate. Further,
Affiliates 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. We currently rely on revenue from operations, including
sales of refined products and rental of petroleum storage tanks,
Affiliates, and borrowings under bank facilities to meet our
liquidity needs. At December 31, 2019 and 2018, accounts payable,
related party totaled $0.1 million and $1.5 million, respectively.
At December 31, 2019 and 2018, long-term debt and accrued interest,
related party was $8.2 and $8.6 million, 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 refinery, 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.
B6.
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.
B7.
Loss of market share by a key customer, one of which is an
Affiliate, or consolidation among our customer base could harm our
operating results.
One of
our significant customers is an Affiliate. The Affiliate purchases
our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification. The Affiliate accounted for 31.3% and 28.9% of total
revenue from operations in 2019 and 2018, respectively. The
Affiliate represented approximately $1.4 million and $0 in accounts
receivable at December 31, 2019 and 2018, respectively. The amounts
will be paid under normal business terms. Amounts outstanding
relating to the Jet Fuel Sales Agreement can vary significantly
period to period based on the timing of the related sales and
payments received. Amounts we owed to LEH under various long-term
debt, related-party agreements totaled $6.2 million and $6.1
million at December 31, 2019 and 2018, respectively.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31,
|
|
|
|
|
|
|
2019
|
4
|
96.5
%
|
$1.7
million
|
|
|
|
|
|
|
2018
|
4
|
90.3
%
|
$0.1
million
|
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.
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 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.
|
20
|
|
Risk Factors
|
|
|
B8.
The sale of refined products to the wholesale market is our primary
business, and if we fail to maintain and grow the market share of
our refined 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 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 products offered by our
competitors.
B9.
We are dependent on third parties for the transportation of crude
oil and condensate into and refined 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
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 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
products because of acts of God, accidents, government regulation,
terrorism or other events, our revenue and net income would be
materially and adversely affected.
B10.
We will continue to pursue acquisitions in the future.
Although we
regularly engage in discussions with, and submit proposals to,
acquisition candidates, suitable acquisitions may not be available
in the future on reasonable terms. If we do identify an appropriate
acquisition candidate, we may be unable to successfully negotiate
the terms of an acquisition, finance the acquisition, or, if the
acquisition occurs, effectively integrate the acquired business
into our existing businesses. Negotiations of potential
acquisitions and the integration of acquired business operations
may require a disproportionate amount of management’s
attention and our resources. Even if we complete additional
acquisitions, continued acquisition financing may not be available
or available on reasonable terms, any new businesses may not
generate the anticipated level of revenues, the anticipated cost
efficiencies, or synergies may not be realized, and these
businesses may not be integrated successfully or operated
profitably. Our inability to successfully identify, execute, or
effectively integrate future acquisitions may negatively affect our
results of operations.
B11.
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.
B12.
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 assets are in Nixon, Texas in the Eagle Ford
Shale, and we market our refined 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 products to customers outside of our current operating
region and thus incur considerably higher transportation costs,
resulting in lower refining margins.
B13.
Climate change and related legislation or regulation reducing
emissions of greenhouse gases could require us to incur significant
costs or could result in a decrease in demand for our refined
products, which could adversely affect our business.
Currently, various
legislative and regulatory measures to address reporting or
reduction of greenhouse gas emissions have been adopted or are in
various phases of discussion or implementation. Requiring
reductions in greenhouse gas emissions could cause us to incur
substantial costs to: (i) operate and maintain the Nixon facility,
(ii) install new emission controls at the Nixon facility, and (iii)
administer and manage any greenhouse gas emissions programs,
including the acquisition or maintenance of emission credits or
allowances. These requirements may also adversely affect our
suppliers and customers, leading to an indirect adverse effect on
our business, financial condition and results of our
operations.
|
21
|
|
Risk Factors
|
|
|
Requiring a
reduction in greenhouse gas emissions and the increased use of
renewable fuels could decrease demand for refined products, which
could have an indirect, but material, adverse effect on our
business, financial condition and results of operations. For
example, the EPA has promulgated rules establishing greenhouse gas
emission standards for new-model passenger cars, light-duty trucks
and medium duty passenger vehicles. Concerns over climate change
and related greenhouse gas emissions could affect demand for
petroleum products as well as new energy technologies including
electric vehicles, fuel cells and battery storage systems and
transportation alternatives. Any of these developments, or new
taxes or fees imposed on crude oil, natural gas or refined products
to fund clean energy initiatives at the state or federal level,
could have an indirect adverse effect on our business due to
reduced demand for refined products.
Scientific studies
have indicated that increasing concentrations of greenhouse gases
in the atmosphere can produce changes in climate with significant
physical effects, including increased frequency and severity of
storms, floods and other extreme weather events that could affect
our operations. Increased concern over the effects of climate
change may also affect our customers’ energy strategies,
consumer consumption patterns, and government and private sector
alternative energy initiatives, any of which could adversely affect
demand for petroleum products and have a material adverse effect on
our business, financial condition and results of
operations.
C.
Risks Related to Pipeline and Facilities Assets, as well as our
Pipelines and Oil and Gas Properties
C1.
Assessment of civil penalties by BOEM for failure to satisfy orders
to increase supplemental pipeline bonds and by BSEE for failure to
decommission platform and pipeline assets within the time period
prescribed could significantly impact our operations, liquidity,
and financial condition.
We have
pipelines and facilities assets that are subject to BSEE’s
idle iron regulations. BSEE mandates lessees and rights-of-way
holders to permanently abandon and/or remove platforms and other
structures when they are no longer useful for operations. To cover
the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
supplemental pipeline bonds totaling $4.8 million for five (5)
existing pipeline rights-of-way within sixty (60) calendar days. In
June 2018, BOEM issued BDPL INCs for each right-of-way that failed
to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted
multiple extension requests that extended BDPL’s deadline for
filing a statement of reasons for the appeal with the IBLA. In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101.
On
August 9, 2019, BDPL timely filed its statement of reasons for the
appeal with the IBLA. Management met with the BOEM and BSEE on
August 15, 2019. BSEE proposed that Blue Dolphin submit permit
applications for decommissioning and removal of its offshore assets
within six (6) months (no later than February 15, 2020), and
develop and implement a safe boarding plan for submission with such
permit applications. BDPL timely submitted permit applications for
decommissioning and removal of the subject offshore assets on
February 11, 2020. Further, BSEE proposed that Blue Dolphin conduct
approved, permitted work in a safe manner within 12 months (no
later than August 15, 2020). Considering BDPL’s August 2019
meeting with BOEM and BSEE, BDPL requested a stay in the IBLA
matter until August 2020. The Office of the Solicitor of the U.S.
Department of the Interior was agreeable to a 10-day extension
while it conferred with BOEM on BDPL’s stay request. In late
October 2019, BDPL filed a motion to request the 10-day extension,
which motion was subsequently granted by the IBLA. The
solicitor’s office consented to an additional 14-day
extension for BDPL to file its reply, and BDPL filed a motion to
request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs.
BDPL
reasonably expects that successful completion of its
decommissioning obligations prior to BSEE’s August 2020
deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs. BDPL expects to complete approved,
permitted decommission work by the BSEE August 2020 deadline. If
decommissioning of the assets is not completed by the allowable
deadline, BDPL will be subject to vigorous regulatory oversight and
enforcement, including but not limited to failure to correct an
INC, civil penalties, and revocation of BDPL’s operator
designation, which may have a material adverse effect on our
earnings, cash flows and liquidity.
|
22
|
|
Risk Factors
|
|
|
BDPL’s
pending appeal of the INCs does not relieve BDPL of its obligations
to provide additional financial assurance or of BOEM’s
authority to impose financial penalties. If BDPL is required by
BOEM to provide significant additional financial assurance or is
assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition. We are currently unable to
predict the outcome of the INCs. Accordingly, we have not recorded
a liability on our consolidated balance sheet as of December 31,
2019.
At
December 31, 2019 and 2018, BDPL maintained approximately $0.9
million in credit and cash-backed pipeline rights-of-way bonds
issued to BOEM. As of December 31, 2019, we maintained $2.6 million
in AROs related to abandonment of these assets.
D.
Risks Related to Our Common Stock
D1.
Our stock price may decline due to sales of shares by
Affiliates.
Affiliates sales of
substantial amounts of our Common Stock, or the perception that
these sales may occur, may adversely affect the price of our Common
Stock and impede our ability to raise capital through the issuance
of equity securities in the future. Affiliates could elect in the
future to request that we file a registration statement to them to
sell shares of our Common Stock. If Affiliates were to sell a large
number of shares into the public markets, Affiliates could cause
the price of our Common Stock to decline.
D2.
We are authorized to issue up to a total of 20 million shares of
our Common Stock and 2.5 million shares of preferred stock,
potentially diluting equity ownership of current holders and the
share price of our Common Stock.
We
believe that it is necessary to maintain a sufficient number of
available authorized shares of our Common Stock and Preferred Stock
to provide us with the flexibility to issue Common Stock or
Preferred Stock for business purposes that may arise as deemed
advisable by our Board. These purposes could include, among other
things, (i) future stock dividends or stock splits, which may
increase the liquidity of our shares; (ii) the sale of stock to
obtain additional capital or to acquire other companies or
businesses, which could enhance our growth strategy or allow us to
reduce debt if needed; and (iii) for other bona fide purposes. Our
Board may authorize us to issue the available authorized shares of
Common Stock or Preferred Stock without notice to, or further
action by, our stockholders, unless stockholder approval is
required by law or the rules of the OTCQX. The issuance of
additional shares of Common Stock or Preferred Stock may
significantly dilute the equity ownership of the current holders of
our Common Stock.
Remainder
of Page Intentionally Left Blank
|
23
|
|
Properties and Legal Proceedings
|
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
An
Affiliate operates and manages all our properties under the Amended
and Restated Operating Agreement. Our owned facilities have been
constructed or acquired over a period of years and vary in age and
operating efficiency. We believe that all our properties and
facilities are adequate for our operations and that are facilities
are adequately maintained. At our corporate headquarters, BDSC
leases 7,675 square feet of office space in Houston, Texas. The
location and general description of our other properties are
described within the refinery operations, tolling and terminaling,
and inactive operations discussions in “Item
1.”
See
“Item 1.,” “Note (4),” “Note
(10),” “Note (12),” “Note (13),” and
“Note (16)” to our consolidated financial statements
for additional disclosures related to our properties, leases,
decommissioning obligations, and assets pledged as
collateral.
ITEM 3. LEGAL PROCEEDINGS
Resolved - GEL Settlement
As
previously disclosed, GEL was awarded the GEL Final Arbitration
Award in the aggregate amount of $31.3 million. In July 2018, the
Lazarus Parties and GEL entered into the GEL Settlement Agreement.
The GEL Settlement Agreement was subsequently amended five (5)
times to extend the GEL Settlement Payment Date and/or modify
certain terms related to the GEL Interim Payments or the GEL
Settlement Payment. During the period September 2017 to August
2019, GEL received the following amounts from the Lazarus Parties
to reduce the outstanding balance of the GEL Final Arbitration
Award:
|
|
(in
millions)
|
|
|
|
|
Initial payment
(September 2017)
|
$
3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$
22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed a stipulation of dismissal of claims against LE, and
(iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At December 31, 2019
and 2018, accrued arbitration award payable was $0 and
$21.1million, respectively.
Other Legal Matters
We are
involved in lawsuits, claims, and proceedings incidental to the
conduct of our business, including mechanic’s liens,
contract-related disputes, administrative proceedings, and
financial assurance (bonding) requirements with regulatory bodies.
Management is in discussion with all concerned parties and does not
believe that such matters will have a material adverse effect on
our financial position, earnings, or cash flows. However, there can
be no assurance that such discussions will result in a manageable
outcome or that we will be able to meet financial assurance
(bonding) requirements. If Veritex exercises its rights and
remedies due to defaults under our secured loan agreements, our
business, financial condition, and results of operations will be
materially adversely affected.
ITEM 4. MINE SAFETY DISCLOSURES
Not
applicable.
Remainder
of Page Intentionally Left Blank
|
24
|
|
Market for Equity, Stockholder Matters and Purchases of Equity
Securities
|
PART II
ITEM 5.
MARKET FOR REGISTRANTS COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market Information
Our
Common Stock trades on the OTCQX U.S. tier of the OTC Markets under
the ticker symbol “BDCO." The following table sets forth, for
the quarterly periods indicated, the high and low bid prices for
our Common Stock as reported by the OTC Market Report published by
OTC Markets Group Inc. The quotations reflect inter-dealer prices,
without adjustment for retail mark-ups, markdowns or commissions
and may not represent actual transactions.
|
|
High
Bid
|
Low
Bid
|
|
High
Bid
|
Low
Bid
|
|
|
|
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
December
31
|
$
1.16
|
$
0.42
|
December
31
|
$
1.13
|
$
0.40
|
|
September
30
|
$
1.24
|
$
0.95
|
September
30
|
$
1.11
|
$
0.22
|
|
June
30
|
$
1.07
|
$
0.85
|
June
30
|
$
0.59
|
$
0.11
|
|
March
31
|
$
1.25
|
$
0.64
|
March
31
|
$
1.63
|
$
0.53
|
At
December 31, 2019, we had 12,327,365 shares of Common Stock
outstanding. Affiliates control approximately 82% of the
voting power of our Common Stock. See “Item 1A.” for
risks associated with investments in our common stock.
Stockholders
At
March 30, 2020, 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.
Sales of Unregistered Securities
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us for the years ended December 31, 2019 and
2018 that were not registered under the Securities Act of
1933:
●
On November 14,
2019, we issued an aggregate of 1,351,851 restricted shares of
Common Stock to Jonathan Carroll pursuant to guaranty fee
agreements. The issuance represents payment of the common stock
component of the guaranty fees for the period May 2017 through
October 2019, which payments were not permissible under the GEL
Settlement Agreement. We recorded an expense of approximately $0.5
million related to the share issuance. Mr. Carroll will receive
payment of the common stock component of the guaranty fees on a
quarterly basis going forward. The cash portion of guaranty fees
owed to Jonathan Carroll will continue to be accrued and added to
the principal balance of the March Carroll Note.
●
On October 18,
2018, we issued an aggregate of 50,001 restricted shares of Common
Stock to certain of our non-employee, independent directors for
services rendered to the Board for the period January 1, 2018 to
March 31, 2018. At March 31, 2018, the grant date market value cost
basis was $0.60 per share.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
Not
applicable.
|
25
|
|
Management’s Discussion and Analysis
|
ITEM 7.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Management’s
Discussion and Analysis is our analysis of our financial
performance, financial condition, and significant trends that may
affect future performance. All statements in this section, other
than statements of historical fact, are forward-looking statements
that are inherently uncertain. See “Important Information
Regarding Forward-Looking Statements” and “Risk
Factors” for a discussion of the factors that could cause
actual results to differ materially from those projected in these
statements. The following information concerning our business
strategy, results of operations, and financial condition should be
read in conjunction with “Item 1.,” “Item
1A.,” and “Item 8”.
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Our assets are primarily organized in two
segments: refinery operations (owned by LE) and tolling and
terminaling services (owned by LRM and NPS). Active subsidiaries
that are reflected in corporate and other include BDPL (inactive
pipeline assets), BDPC (inactive leasehold interests in oil and gas
wells), and BDSC (administrative services).
Affiliates
control approximately 82% of the voting power of our Common Stock.
An Affiliate operates and manages all Blue Dolphin properties and
funds working capital requirements during periods of working
capital deficits, and an Affiliate is a significant customer of our
refined products. Blue Dolphin and certain of its subsidiaries are
currently parties to a variety of agreements with
Affiliates.
Business Strategy
Our primary business objective is to improve our financial profile.
We intend to accomplish this objective by executing the following
strategies, modified as necessary, to reflect changing economic
conditions and other circumstances:
|
|
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|
|
Optimizing
Existing Asset Base
|
|
● Operating
safely and enhancing health, safety and environmental
systems.
● Planning
and managing turnarounds and downtime.
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|
|
|
|
|
|
|
|
|
Improving
Operational Efficiencies
|
|
● Reducing
or streamlining variable costs incurred in production.
● Increasing
throughput capacity and optimizing product slate.
● Increasing
tolling and terminaling revenue.
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|
|
|
|
|
|
|
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|
Seizing
Market Opportunities
|
|
●
Taking advantage of market opportunities as they
arise.
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|
|
Successful execution of our business strategy depends on several
key factors, including, having adequate working capital to meet
operational needs and regulatory requirements, maintaining safe and
reliable operations at the Nixon facility, meeting contractual
obligations, and having favorable margins on refined
products.
Our results of operations and liquidity are highly
dependent upon the margins that we receive for our refined
products. The dollar per bbl price difference between crude oil and
condensate (input) and refined products (output) is the most
significant driver of refining margins, and they have historically
been subject to wide fluctuations.
There can be no assurance that our business strategy will be
successful, that Affiliates will continue to fund our working
capital needs, or that we will be able to obtain additional
financing or meet financial assurance (bonding) requirements on
commercially reasonable terms or at all. If Veritex exercises its
rights and remedies under our secured loan agreements,
our business, financial condition, and
results of operations will be materially adversely
affected.
We
regularly engage in discussions with third parties regarding the
possible purchase of assets and operations that are strategic and
complementary to our existing operations. However, we do not
anticipate any material acquisition activity in the foreseeable
future.
Management has determined that
conditions exist that raise substantial doubt about our ability to
continue as a going concern due to defaults under our secured loan
agreements, historic net losses, and working capital deficits. A
‘going concern’ opinion could impair our ability to
finance our operations through the sale of equity, incurring debt,
or other financing alternatives. Our ability to continue as a going
concern will depend on sustained positive operating margins and
working capital to sustain operations, including the purchase of
crude oil and condensate and payments on long-term debt. If we are
unable to achieve these goals, our business would be jeopardized,
and we may not be able to continue.
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26
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|
Management’s Discussion and Analysis
|
2019 Successes
Despite a going concern due to defaults under our secured loan
agreements, historic net losses, and working capital deficits,
management took decisive steps in 2019 to further improve our
operations and financial stability. Achieved milestones
include:
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|
|
|
|
May
2019
|
|
●
Long-term crude supply contract with
Pilot.
●
$12.8 million line of credit agreement with
Pilot.
●
Terminal services agreement with
Pilot.
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|
|
|
|
|
|
|
|
August
2019
|
|
●
GEL Settlement.
●
$9.1 million gain on GEL liability
extinguishment.
|
|
|
|
|
|
|
|
|
|
September
2019
|
|
●
Increase of line of credit agreement with Pilot
(to $13.0 million).
●
Third quarter 2019 gross profit of $2.4
million.
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|
|
|
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|
|
|
|
December
2019
|
|
●
Full year 2019 gross profit of $11.4
million.
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|
Results of Operations
A
discussion and analysis of the factors contributing to our
consolidated financial results of operations is presented below.
The financial statements, together with the following information,
are intended to provide investors with a reasonable basis for
assessing our historical operations, but they should not serve as
the only criteria for predicting future performance.
How We Evaluate Our Operations
. Management uses certain
financial and operating measures to analyze segment performance.
These measures are significant factors in assessing our operating
results and profitability and include: segment contribution margin,
and refining gross profit per bbl, tank rental revenue, operation
costs and expenses, refinery throughput and production data, and
refinery downtime. Segment contribution margin and refining gross
profit per bbl are non-GAAP measures.
Segment Contribution Margin and Refining Gross Profit per
Bbl
Segment
contribution margin is used to evaluate both refinery operations
and tolling and terminaling while refining gross profit per bbl is
a refinery operations benchmark. Both measures
supplement our financial information presented in
accordance with U.S. GAAP. Management uses these non-GAAP measures
to analyze our results of operations, assess internal performance
against budgeted and forecasted amounts, and evaluate future
impacts to our financial performance as a result of capital
investments. Non-GAAP measures have important limitations as
analytical tools. These non-GAAP measures, which are defined in our
glossary of terms, should not be considered a substitute for GAAP
financial measures. We believe these measures may help investors,
analysts, lenders, and ratings agencies analyze our results of
operations and liquidity in conjunction with our U.S. GAAP results.
See “Non-GAAP Reconciliations” within this “Item
7.” and the financial statements within “Item 8.”
for a reconciliation of Non-GAAP measures to U.S.
GAAP.
Tank Rental Revenue
Tolling
and terminaling revenue primarily represents tank rental fees
associated with customer storage agreements. As a result, tank
rental revenue is one of the measures management uses to evaluate
the performance of our tolling and terminaling business
segment.
Operation Costs and Expenses
We
manage operating expenses in tandem with meeting environmental and
safety requirements and objectives and maintaining the integrity of
our assets. Operating expenses are comprised primarily of labor
expenses, repairs and other maintenance costs, and utility costs.
Expenses for refinery operations generally remain stable across
broad ranges of throughput volumes, but they can fluctuate from
period to period depending on the mix of activities performed
during that period and the timing of those expenses. Operation
costs for tolling and terminaling operations are relatively
fixed.
Refinery Throughput and Production Data
The
amount of revenue we generate from our refinery operations business
segment primarily depends on the volumes of crude oil and refined
products that we handle through our processing assets and the
volume sold to customers. These volumes are affected by the supply
and demand of, and demand for, crude oil and refined products in
the markets served directly or indirectly by our assets, as well as
refinery downtime.
Refinery Downtime
The
Nixon refinery periodically experiences planned and unplanned
temporary shutdowns. Any scheduled or unscheduled downtime will
result in lost margin opportunity, potential increased maintenance
expense, and a reduction of refined products inventory, which could
reduce our ability to meet our payment obligations.
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27
|
|
Management’s Discussion and Analysis
|
Consolidated
Results
.
Year Ended December 31, 2019 (“2019”) Versus December
31, 2018 (“2018”)
Overview
.
Net
income for 2019 increased by $7.9 million, or $0.71 per share, to
$7.4 million from a net loss of $0.5 million for 2018. The
significant increase mostly related to a gain on the extinguishment
of debt related to the GEL Settlement; provided, however, an
increase in tolling and terminaling revenue of $0.6 million, or
nearly 17%, also contributed to the rise. Excluding this gain, we
would have reported a net loss of $1.8 million, or a loss of $0.16
per share, for 2019.
Total Revenue from Operations
.
Total revenue from operations for
2019 decreased $31.5 million, or approximately 9%, to $309.3
million compared to $340.8 million for 2018. The decrease in
refinery operations revenue was due to lower commodity pricing per
bbl on refined products sold in 2019 compared to 2018. Tolling and
terminaling revenue increased approximately $0.6 million, or nearly
17%, as a result of increased storage fees under new and renewed
customer agreements.
Total Cost of Goods Sold
.
Total cost of goods sold was $297.8
million for 2019 compared to $331.9 million for 2018. The $34.1
million, or 10%, decrease related to lower commodity prices per bbl
for crude oil and chemicals.
Gross Profit
.
Gross
profit for 2019 totaled $11.4 million compared to gross profit of
$8.8 million for 2018. The increase in gross profit primarily
related to improved margins per bbl, slightly increased sales
volume, and increased tank rental revenue in 2019.
General and Administrative Expenses
.
General and administrative expenses
totaled $2.7 million in 2019 compared to $3.3 million in 2018. The
$0.6 million, or nearly 19%, decrease primarily related to lower
legal fees as a result of the GEL Settlement.
Depletion, Depreciation and Amortization
.
We recorded depletion, depreciation
and amortization expenses of $2.5 million in 2019 compared to $1.9
million in 2018, an increase of $0.6 million or nearly 19%. The
increase related to placing a new boiler and petroleum storage
tanks into service.
Total Other Income (Expense)
.
Total
other income totaled $1.9 million in 2019 compared to an expense of
$3.3 million in 2018. Other income in 2019 included a $9.1 million
gain on the extinguishment of debt, which was offset by $6.8
million in interest expense associated with our secured loan
agreements with Veritex, related-party debt, and the line of credit
with Pilot, and a $0.5 million loss on the issuance of debt to
extinguish related-party debt. Interest expense increased in 2019
as a result of completion of certain CIP for which interest was no
longer being capitalized and the addition of the line of credit
with Pilot.
Remainder of Page Intentionally Left Blank
|
28
|
|
Management’s Discussion and Analysis
|
Refinery Operations
. Our refinery operations business
segment is owned by LE. Assets within this segment consist of a
light sweet-crude, 15,000-bpd crude distillation tower, petroleum
storage tanks, loading and unloading facilities, and approximately
56 acres of land. Refinery operations revenue is derived from
refined product sales.
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|
Year
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Refined product
sales
|
$
304,924
|
$
337,038
|
|
Less: Total cost of goods
sold
|
(297,827
)
|
(331,936
)
|
|
Gross profit
|
7,097
|
5,102
|
|
|
|
|
|
Sales (Bbls)
|
4,547
|
4,493
|
|
|
|
|
|
Gross Profit per
Bbl
|
$
1.56
|
$
1.14
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands)
|
|
|
Net
revenue
(2)
|
$
304,924
|
$
337,038
|
|
Intercompany
fees and sales
|
(2,615
)
|
(3,270
)
|
|
Operation
costs and expenses
|
(297,113
)
|
(331,220
)
|
|
Segment Contribution Margin
|
$
5,196
|
$
2,548
|
|
|
|
|
|
|
Year
Ended
December
31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Calendar
|
365
|
365
|
|
Operating
|
(344
)
|
(335
)
|
|
Refinery
Downtime (Days)
|
21
|
30
|
|
|
|
|
|
|
|
|
|
Refinery
Throughput
|
|
|
|
bpd
|
13,417
|
13,748
|
|
bbls
|
4,615,458
|
4,605,705
|
|
Capacity utilization
rate
|
89.4
%
|
91.7
%
|
|
|
|
|
|
Refinery
Production
|
|
|
|
bpd
|
13,096
|
13,372
|
|
bbls
|
4,504,857
|
4,479,701
|
|
Capacity utilization
rate
|
87.3
%
|
89.1
%
|
|
|
|
|
|
Total refinery
production (bbls)
|
4,504,857
|
4,479,701
|
|
Operating days:
|
|
|
|
bpd
|
13,096
|
13,372
|
|
Capacity utilization
rate
|
87.3
%
|
89.1
%
|
|
|
|
|
|
(1)
See “How We
Evaluate Our Operations” and “Non-GAAP
Reconciliations” within “Item 7.” for further
information regarding this non-GAAP measure.
(2)
Net revenue
excludes intercompany crude sales.
|
||
|
2019 Versus 2018
●
Refining gross
profit per bbl was $1.56 for 2019 compared to $1.14 in 2018,
representing an increase of $0.42 per bbl. The significant
increase related to higher margins as a result of market
fluctuations in 2019 compared to 2018.
●
Segment
contribution margin increased approximately $2.7 million to $5.2
million in 2019 compared to $2.5 million in 2018. The increase
related to improved margins per bbl and slightly increased sales
volume.
●
Refinery downtime
in 2019 improved by 9 days compared to 2018; refinery downtime in
2019 related to a maintenance turnaround (March 2019) and
intermittent crude heater issues while refinery downtime in 2018
was for repair and maintenance of the naphtha stabilizer unit and
two maintenance turnarounds (January and March 2018).
●
Although total
refinery throughput bbls increased in 2019 versus 2018, refinery
throughput on a bpd basis decreased as a result of intermittent
crude heater issues.
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|
29
|
|
Management’s Discussion and Analysis
|
|
|
Tolling and Terminaling
. Our tolling and terminaling
business segment is owned by LRM and NPS. Assets within this
segment include petroleum storage tanks and loading and unloading
facilities. Tolling and terminaling revenue is derived from tank
storage rental fees, tolling and reservation fees for use of the
naphtha stabilizer, and fees collected for ancillary services, such
as in-tank blending.
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Net revenue
(2)
|
$
4,338
|
$
3,723
|
|
Intercompany fees
and sales
|
2,615
|
3,270
|
|
Operation costs and
expenses
|
(1,325
)
|
(1,332
)
|
|
Segment
contribution margin
|
$
5,628
|
$
5,661
|
(1)
See “How We
Evaluate Our Operations” and “Non-GAAP
Reconciliations” within “Item 7.” for further
information regarding this non-GAAP measure.
(2)
Net revenue
excludes intercompany crude sales.
2019 Versus 2018
●
Tolling and
terminaling net revenue increased approximately $0.6 million, or
nearly 17%, primarily as a result of increased storage fees under
new and renewed customer agreements.
●
Intercompany fees
and sales, which reflects fees associated with an intercompany
tolling agreement tied to naphtha volumes, decreased $0.7 million
in 2019 compared to 2018.
●
Segment
contribution margin decreased slightly in 2019 compared to 2018.
Increased net revenue was offset by decreased intercompany tolling
fees.
Non-GAAP Reconciliations
.
|
Reconciliation of Segment Contribution Margin
|
|
|
Year Ended
December 31,
|
|||||
|
|
2019
|
2018
|
2019
|
2018
|
2019
|
2018
|
|
|
Refinery
Operations
|
Tolling and
Terminaling
|
Corporate and
Other
|
|||
|
|
(in
thousands)
|
|||||
|
|
|
|
|
|
|
|
|
Segment
contribution margin
|
$
5,196
|
$
2,548
|
$
5,628
|
$
5,661
|
$
(222
)
|
$
(444
)
|
|
General and
administrative expenses, including LEH operating fee
|
(1,252
)
|
(1,232
)
|
(262
)
|
(245
)
|
(1,145
)
|
(1,795
)
|
|
Depreciation and
amortization
|
(1,913
)
|
(1,842
)
|
(396
)
|
(91
)
|
(181
)
|
-
|
|
Interest and other
non-operating income (expenses), net
|
5,668
|
(2,229
)
|
(2,398
)
|
(285
)
|
(1,362
)
|
(829
)
|
|
Income (loss)
before income taxes
|
7,699
|
(2,755
)
|
2,572
|
5,040
|
(2,910
)
|
(3,068
)
|
|
Income tax
benefit
|
-
|
-
|
-
|
-
|
-
|
0
|
|
Income
(loss) before income taxes
|
$
7,699
|
$
(2,755
)
|
$
2,572
|
$
5,040
|
$
(2,910
)
|
$
(3,068
)
|
Remainder
of Page Intentionally Left Blank
|
30
|
|
Management’s Discussion and Analysis
|
|
|
Capital Resources and Liquidity
Our
primary cash requirements relate to: (i) purchasing crude oil and
condensate for the operation of the Nixon refinery, (ii) paying our
direct operating expenses under the Amended and Restated Operating
Agreement, (iii) servicing long-term debt, and (iv) completing
construction in progress. In instances where we experience a
working capital deficit, we have historically relied on Affiliates
to meet our liquidity needs. While we believe that we can fund our
operations through revenue from operations and Affiliate financing,
we may not be able to, among other things, (i) maintain our current
general and administrative spending levels; (ii) fund certain
obligations as they become due; and (iii) respond to competitive
pressures or unanticipated capital requirements. We cannot provide
any assurance that financing will be available to us in the future
on acceptable terms.
We had a working capital deficit of $59.4 million and $71.9 million
at December 31, 2019 and 2018, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$19.6 million and $30.0 at December 31, 2019 and 2018,
respectively.
See “Item 1A.” for risks factors
related to liquidity and working capital.
Debt Overview
.
|
Total Debt
|
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due
2034 (in default)
|
$
21,776
|
$
22,593
|
|
Second Term Loan
Due 2034 (in default)
|
9,031
|
9,353
|
|
Amended Pilot Line
of Credit
|
11,786
|
-
|
|
Notre Dame Debt (in
default)
|
8,617
|
7,821
|
|
Related-Party
Debt
|
|
|
|
BDPL Loan Agreement
(in default)
|
6,174
|
5,534
|
|
March Ingleside
Note (in default)
|
1,004
|
1,283
|
|
March Carroll Note
(in default)
|
997
|
1,147
|
|
June LEH Note (in
default)
|
-
|
611
|
|
Capital
Leases
|
-
|
41
|
|
Total
Debt
|
59,385
|
48,383
|
|
|
|
|
|
Less: Current
portion of long-term debt, net
|
(51,301
)
|
(41,904
)
|
|
Less: Unamortized
debt issue costs
|
(2,096
)
|
(2,006
)
|
|
Less: Accrued
interest payable (in default)
|
(5,988
)
|
(4,473
)
|
|
|
$
-
|
$
-
|
Principal
payments on long-term debt totaled $2.2 million in 2019 compared to
$0.9 million in 2018. As of the filing date of this report, we were
current on required monthly payments under our secured loan
agreements with Veritex. No payments have been made under
subordinated loan agreements.
On
November 14, 2019, Mr. Carroll was issued an aggregate of 1,351,851
restricted shares of Common Stock, which represents payment of the
common stock component of the guaranty fees for the period May 2017
through October 2019. We recorded an expense of approximately $0.5
million related to the share issuance. As previously disclosed,
payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements were prohibited pursuant to the GEL
Settlement Agreement. Following the GEL Settlement, management
resumed payments of the common stock component to Mr. Carroll under
the agreements.
Mr.
Carroll will receive payment of the common stock component of the
guaranty fees on a quarterly basis going forward. Currently,
management does not intend on paying Mr. Carroll the cash portion
due to Blue Dolphin’s working capital deficits in the
foreseeable future. The cash portion of guaranty fees owed to Mr.
Carroll will continue to be accrued and added to the principal
balance of the March Carroll Note. See “Note (3)” to
our consolidated financial statements for additional disclosures
related to Affiliates and working capital deficits.
Debt Defaults
. Except for the Amended Pilot Line of Credit,
all of our debt is in default. Defaults under our secured loan
agreements with Veritex include events of default and financial
covenant violations. In addition, certain of our related-party debt
is in default. Defaults under our secured loan agreements 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. See “Note (3)” and “Note (10)”
to our consolidated financial statements for additional disclosures
related to defaults in our debt obligations.
|
31
|
|
Management’s Discussion and Analysis
|
Contractual Obligations
.
Related-Party
|
Agreement/Transaction
|
Parties
|
Type
|
Effective
Date
|
Interest
Rate
|
Key
Terms
|
|
Amended
and Restated Guaranty Fee Agreement
|
Jonathan
Carroll - LE
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Amended
and Restated Guaranty Fee Agreement
|
Jonathan
Carroll - LRM
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
March
Carroll Note
(in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; matured 01/01/2019; interest still
accruing
|
|
March
Ingleside Note
(in
default)
|
Ingleside
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Ingleside under
previous Amended and Restated Tank Lease Agreement; matured
01/01/2019; interest still accruing
|
|
June
LEH Note
(in
default)
|
LEH
– Blue Dolphin
|
Debt
|
03/312017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under Amended
and Restated Operating Agreement; reflects amounts owed to Jonathan
Carroll under guaranty fee agreements; matured 01/01/2019; interest
still accruing
|
|
Loan
and Security Agreement
(in
default)
|
LEH -
BDPL
|
Debt
|
08/15/2016
|
16.00%
|
2-year
term; $4.0 million principal amount; $0.5 million annual payment;
proceeds used for working capital; no financial maintenance
covenants; secured by certain BDPL property
|
Third-Party Debt
|
Loan
Description
|
Original
Principal Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
USDA-Guaranteed
Loans
|
|
|
|
|
|
|
First
Term Loan Due 2034 (
in
default
)
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ
Prime + 2.75%
|
Refinance
loan; capital improvements
|
|
Second
Term Loan Due 2034 (
in
default
)
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ
Prime + 2.75%
|
Refinance
bridge loan; capital improvements
|
|
Notre
Dame Debt (in default)
|
$11.7
(1)
|
Jan
2018
|
No
payments to date; payment rights subordinated
(2)
|
16.00%
|
Working
capital; reduce balance of GEL Final Arbitration Award
|
|
Amended
Pilot Line of Credit
|
$13.0
|
May
2020
|
----
|
12.00%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
(1)
Original principal
amount was $8.0 million; pursuant to a 2017 sixth amendment, the
Notre Dame Debt was amended to increase the principal amount by
$3.7 million; the additional principal was used to reduce the GEL
Final Arbitration Award by $3.6 million.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their right to payments, as well as any security
interest and liens on the Nixon facility’s business assets,
in favor of Veritex as holder of the First Term Loan Due
2034.
Remainder
of Page Intentionally Left Blank
|
32
|
|
Management’s Discussion and Analysis
|
Offshore Decommissioning
We have
pipelines and facilities assets that are subject to BSEE’s
idle iron regulations. BSEE mandates lessees and rights-of-way
holders to permanently abandon and/or remove platforms and other
structures when they are no longer useful for operations. To cover
the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
In
March 2018, BOEM ordered BDPL to provide supplemental pipeline
bonds totaling $4.8 million related to five (5) existing pipeline
rights-of-way. In June 2018, BOEM issued BDPL INCs for each
right-of-way that failed to comply. BDPL appealed the INCs to the
IBLA, and the IBLA granted multiple extension requests that
extended BDPL’s deadline for filing a statement of reasons
for the appeal with the IBLA. In December 2018, BSEE issued an INC
to BDPL for failure to flush and fill Pipeline Segment No.
13101.
On
August 9, 2019, BDPL timely filed its statement of reasons for the
appeal with the IBLA. Management met with the BOEM and BSEE on
August 15, 2019. BSEE proposed that Blue Dolphin submit permit
applications for decommissioning and removal of its offshore assets
within six (6) months (no later than February 15, 2020), and
develop and implement a safe boarding plan for submission with such
permit applications. BDPL timely submitted permit applications for
decommissioning and removal of the subject offshore assets on
February 11, 2020. Further, BSEE proposed that Blue Dolphin conduct
approved, permitted work in a safe manner within 12 months (no
later than August 15, 2020). Considering BDPL’s August 2019
meeting with BOEM and BSEE, BDPL requested a stay in the IBLA
matter until August 2020. The Office of the Solicitor of the U.S.
Department of the Interior was agreeable to a 10-day extension
while it conferred with BOEM on BDPL’s stay request. In late
October 2019, BDPL filed a motion to request the 10-day extension,
which motion was subsequently granted by the IBLA. The
solicitor’s office consented to an additional 14-day
extension for BDPL to file its reply, and BDPL filed a motion to
request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs.
BDPL
reasonably expects that successful completion of its
decommissioning obligations prior to BSEE’s August 2020
deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs. BDPL expects to complete approved,
permitted decommission work by the BSEE August 2020 deadline. If
decommissioning of the assets is not completed by the allowable
deadline, BDPL will be subject to vigorous regulatory oversight and
enforcement, including but not limited to failure to correct an
INC, civil penalties, and revocation of BDPL’s operator
designation, which may have a material adverse effect on our
earnings, cash flows and liquidity.
BDPL’s
pending appeal of the INCs does not relieve BDPL of its obligations
to provide additional financial assurance or of BOEM’s
authority to impose financial penalties. If BDPL is required by
BOEM to provide significant additional financial assurance or is
assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition. We are currently unable to
predict the outcome of the INCs. Accordingly, we have not recorded
a liability on our consolidated balance sheet as of December 31,
2019.
At
December 31, 2019 and 2018, BDPL maintained approximately $0.9
million in credit and cash-backed pipeline rights-of-way bonds
issued to BOEM. As of December 31, 2019, we maintained $2.6 million
in AROs related to abandonment of these assets.
Remainder
of Page Intentionally Left Blank
|
33
|
|
Management’s Discussion and Analysis
|
|
|
Sources and Use of
Cash
.
|
Components of Cash Flows
|
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands)
|
|
|
Cash
Flows Provided By (Used In):
|
|
|
|
Operating
activities
|
$
(8,351
)
|
$
1,005
|
|
Investing
activities
|
(1,574
)
|
(2,029
)
|
|
Financing
activities
|
8,928
|
543
|
|
Increase (Decrease)
in Cash and Cash Equivalents
|
$
(997
)
|
$
(481
)
|
2019 Versus 2018
We had
a cash flow deficit from operations of $8.4 million for 2019
compared to cash flow from operations of $1.0 million for 2018. The
approximate $9.4 million decrease in cash flow from operations
primarily related to payments to GEL under the GEL Settlement
Agreement in 2019.
Capital Spending
We
account for our capital expenditures in accordance with GAAP. We
also distinguish between capital expenditures that are for
maintenance and those that are for expansion. We classify a capital
expenditure as maintenance if it maintains capacity or throughput.
A classification of expansion is used if the capital expenditure is
expected to increase capacity or throughput. The distinction
between maintenance and expansion is made consistent with our
accounting policies and is generally a straightforward process.
However, in certain circumstances the distinction can be a matter
of management judgment and discretion.
Budgeting
and approval of maintenance capital expenditures is done throughout
the year on a project-by-project basis. We budget for and make
maintenance capital expenditures that are necessary to maintain
safe and efficient operations, meet customer needs and comply with
operating policies and applicable law. We may budget for and make
additional maintenance capital expenditures that we expect to
produce economic benefits such as increasing efficiency and/or
lowering future expenses. Budgeting and approval of expansion
capital expenditures are generally made periodically on a
project-by-project basis in response to specific investment
opportunities identified by our business segments.
Capital Improvement Expansion Project
Since
2015, the Nixon facility has been undergoing a capital improvement
expansion project. Capital improvements have primarily related to
construction of new petroleum storage tanks. However, smaller
efficiency improvements have been made as well. In the short-term,
increased petroleum storage capacity has helped with
de-bottlenecking the refinery. In the long-term, additional
petroleum storage capacity will allow for increased refinery
throughput of up to approximately 30,000 bpd. Increased petroleum
storage capacity for tolling and terminaling operations provides an
opportunity to generate additional tolling and terminaling
revenue.
2019 Capital Expenditures
During
2019, capital expenditures totaled $1.6 million compared to $2.0
million during 2018. Expenses included work on a petroleum storage
tank, engineering work in preparation for a planned turnaround, and
upgrades to the crude heaters, which, when complete will
alleviate bottlenecks and improve capacity.
Future Expected Capital Expenditures
For the
next 12 to 18 months, we expect to continue to incur capital
expenditures related to facility and land improvements,
installation of new and/or refurbished refinery process equipment,
and completion of an unfinished petroleum storage tank. Capital
spending is being funded by cash flow from operations, Affiliates,
and available funding under a loan from Veritex that was secured in
2015. Unused amounts under the Veritex loans are reflected in
restricted cash (current and non-current portions) on our
consolidated balance sheets. See “Note (10)” to our
consolidated financial statements for additional disclosures
related to borrowings for capital spending.
Off-Balance Sheet Arrangements
.
None.
|
34
|
|
Management’s Discussion and Analysis
|
Accounting
Standards
.
Critical Accounting Policies and Estimates
Our
significant accounting policies, recent accounting developments are
described in “Note (2)” to our consolidated financial
statements. We prepare our financial statements in conformity with
U.S. GAAP, which requires us to make estimates and assumptions
about future events that affect the amounts reported in the
financial statements and accompanying footnotes. Actual results
could differ from those estimates. We believe that the policies and
estimates related to long-lived assets, revenue recognition,
inventory, AROs, and income taxes are most important to the
portrayal of our financial condition and results of operations and
require management’s most difficult, subjective and complex
judgments:
New Accounting Standards and Disclosures
New
accounting standards and disclosures are discussed in “Note
(2)” to our consolidated financial statements.
Remainder
of Page Intentionally Left Blank
|
35
|
|
Quantitative and Qualitative Disclosure
|
|
|
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
Not
applicable.
Remainder
of Page Intentionally Left Blank
|
36
|
|
Financial Statements
|
|
|
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report of Independent Registered Public Accounting
Firm
To the
Board of Directors and
Stockholders
of Blue Dolphin Energy Company
Opinion on the Consolidated Financial Statements
We have
audited the accompanying consolidated balance sheets of Blue
Dolphin Energy Company and Subsidiaries (the “Company”)
as of December 31, 2019 and 2018, 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, 2019 and 2018, and the results of
its operations and its cash flows for the years then ended, in
conformity with accounting principles generally accepted in the
United States of America.
Substantial Doubt about the Company’s Ability to Continue as
a Going Concern
The
accompanying consolidated financial statements have been prepared
assuming that the Company will continue as a going concern. As
discussed in Note (1) to the consolidated financial statements, the
Company is in default under secured and related party loan
agreements and has a net working capital deficiency. These
conditions raise substantial doubt about the Company’s
ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note (1). The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
Basis for Opinion
These
consolidated financial statements are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements
based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States)
(“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal
securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement, whether due
to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial
reporting. As part of our audits, we are required to obtain an
understanding of internal control over financial reporting, but not
for the purpose of expressing an opinion on the effectiveness of
the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the consolidated financial statements,
whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures include examining, on a
test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included
evaluating the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation
of the consolidated financial statements. We believe that our
audits provide a reasonable basis for our opinion.
We have
served as the Company’s auditor since 2002.
|
/s/ UHY
LLP
___________
|
|
|
UHY
LLP
|
|
|
Sterling
Heights, Michigan
March
30, 2020
|
|
|
37
|
|
Financial Statements
|
Consolidated Balance Sheets
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
|
(in thousands
except share amounts)
|
|
|
|
|
|
|
ASSETS
|
|
|
|
CURRENT
ASSETS
|
|
|
|
Cash and cash
equivalents
|
$
72
|
$
14
|
|
Restricted
cash
|
49
|
49
|
|
Accounts
receivable, net
|
446
|
379
|
|
Accounts
receivable, related party (Note 3)
|
1,364
|
-
|
|
Prepaid
expenses and other current assets (Note 6)
|
2,276
|
1,786
|
|
Deposits
|
158
|
194
|
|
Inventory
(Note 7)
|
1,645
|
1,510
|
|
Refundable
federal income tax (Note 14)
|
65
|
108
|
|
Total current
assets
|
6,075
|
4,040
|
|
|
|
|
|
LONG-TERM
ASSETS
|
|
|
|
Total
property and equipment, net (Note 8)
|
63,893
|
64,697
|
|
Operating
lease ROU assets (Note 13)
|
649
|
-
|
|
Restricted
cash, noncurrent
|
547
|
1,602
|
|
Surety bonds
(Note 16)
|
230
|
230
|
|
Deferred tax
assets, net (Note 14)
|
50
|
108
|
|
Total
long-term assets
|
65,369
|
66,637
|
|
|
|
|
|
TOTAL
ASSETS
|
71,444
|
70,677
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
CURRENT
LIABILITIES
|
|
|
|
Long-term
debt less unamortized debt issue costs, current portion, in default
(Note 10)
|
33,836
|
34,863
|
|
Line of
credit payable, less umamortized debt issue costs (Note
11)
|
11,464
|
-
|
|
Long-term
debt, related party, current portion, in default (Note
3)
|
6,001
|
7,041
|
|
Interest
payable (in default) (Note 10)
|
3,814
|
2,939
|
|
Interest
payable, related party (in default) (Note 3)
|
2,174
|
1,534
|
|
Accounts
payable
|
1,877
|
2,719
|
|
Accounts
payable, related party (Note 3)
|
149
|
1,529
|
|
Current
portion of lease liabilities (Note 13)
|
251
|
-
|
|
Asset
retirement obligations (Note 12)
|
2,565
|
2,580
|
|
Accrued
expenses and other current liabilities (Note 9)
|
3,333
|
1,571
|
|
Accrued
arbitration award payable (Note 16)
|
-
|
21,128
|
|
Total current
liabilities
|
65,464
|
75,904
|
|
|
|
|
|
LONG-TERM
LIABILITIES
|
|
|
|
Long-term
lease liabilities, net of current portion (Note 13)
|
564
|
-
|
|
Deferred
revenue
|
1,930
|
-
|
|
Total
long-term liabilities
|
2,494
|
-
|
|
|
|
|
|
TOTAL
LIABILITIES
|
67,958
|
75,904
|
|
|
|
|
|
Commitments
and contingencies (Note 16)
|
|
|
|
|
|
|
|
STOCKHOLDERS'
EQUITY (DEFICIT)
|
|
|
|
Common Stock
shares issued and outstanding (12,327,365 in 2019 and 10,975,514 in
2018)
(1)
|
123
|
110
|
|
Additional
paid-in capital
|
38,275
|
36,936
|
|
Accumulated
deficit
|
(34,912
)
|
(42,273
)
|
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
3,486
|
(5,227
)
|
|
|
|
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
$
71,444
|
$
70,677
|
(1)
Blue Dolphin has
20,000,000 shares of common stock, par value $0.01 per share, and
2,500,000 shares of preferred stock, par value $0.10 per share,
authorized. There are no shares of preferred stock issued and
outstanding.
The
accompanying notes are an integral part of these consolidated
financial statements.
|
38
|
|
Financial Statements
|
Consolidated Statements of Operations
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
|
(in thousands except share and per-share amounts)
|
|
|
|
|
|
|
REVENUE
FROM OPERATIONS
|
|
|
|
Refinery
operations (Note 4)
|
$
304,924
|
$
337,038
|
|
Tolling
and terminaling (Note 4)
|
4,338
|
3,723
|
|
Total
revenue from operations
|
309,262
|
340,761
|
|
|
|
|
|
COST
OF GOODS SOLD
|
|
|
|
Crude
oil, fuel use, and chemicals
|
289,273
|
322,297
|
|
Other
conversion costs
|
8,554
|
9,639
|
|
Total
costs of goods sold
|
297,827
|
331,936
|
|
|
|
|
|
Gross
profit
|
11,435
|
8,825
|
|
|
|
|
|
COST
OF OPERATIONS
|
|
|
|
LEH
operating fee (Note 3)
|
611
|
614
|
|
Other
operating expenses
|
222
|
180
|
|
General
and administrative expenses
|
2,659
|
3,272
|
|
Depletion,
depreciation and amortization
|
2,490
|
1,933
|
|
Accretion
of AROs (Note 12)
|
-
|
266
|
|
Total
cost of operations
|
5,982
|
6,265
|
|
|
|
|
|
Income
from operations
|
5,453
|
2,560
|
|
|
|
|
|
OTHER
INCOME (EXPENSE)
|
|
|
|
|
|
|
|
Easement,
interest and other income
|
4
|
20
|
|
Interest
and other expense
|
(6,750
)
|
(3,363
)
|
|
Loss
on issuance of shares to extinguish related-party debt
|
(474
)
|
-
|
|
Gain
on extinguishment of debt
|
9,128
|
-
|
|
Total
other income (expense) (Note 3)
|
1,908
|
(3,343
)
|
|
|
|
|
|
Income
(loss) from operations
|
7,361
|
(783
)
|
|
|
|
-
|
|
Income
tax benefit
|
-
|
260
|
|
|
|
|
|
Net
income (loss)
|
$
7,361
|
$
(523
)
|
|
|
|
|
|
|
|
|
|
Income
(loss) per common share (Note 15):
|
|
|
|
Basic
|
$
0.66
|
$
(0.05
)
|
|
Diluted
|
$
0.66
|
$
(0.05
)
|
|
|
|
|
|
Weighted
average number of common shares outstanding (Note 15):
|
11,156,995
|
10,935,787
|
|
Basic
|
11,156,995
|
10,935,787
|
|
Diluted
|
|
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
39
|
|
Financial Statements
|
Consolidated Statements of Stockholders’ Equity
(Deficit)
|
|
Common
Stock
|
|
|
||
|
|
|
|
Additional
|
|
Total
|
|
|
|
|
Paid-In
|
Accumulated
|
Stockholders’
|
|
|
Shares
Issued
|
Par
Value
|
Capital
|
Deficit
|
Equity
(Deficit)
|
|
|
(in thousands
except share amounts)
|
||||
|
|
|
|
|
|
|
|
Balance at December
31, 2017
|
10,925,513
|
$
109
|
$
36,907
|
$
(41,750
)
|
$
(4,734
)
|
|
|
|
|
|
|
|
|
Common stock issued
for services
|
50,001
|
1
|
29
|
|
30
|
|
Net
loss
|
-
|
-
|
-
|
(523
)
|
(523
)
|
|
|
|
|
|
|
|
|
Balance at December
31, 2018
|
10,975,514
|
$
110
|
$
36,936
|
$
(42,273
)
|
$
(5,227
)
|
|
|
|
|
|
|
|
|
Common stock issued
for extinguishment
|
|
|
|
|
|
|
of related-party
debt
|
1,351,851
|
13
|
1,339
|
|
1,352
|
|
Net
income
|
-
|
-
|
-
|
7,361
|
7,361
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2019
|
12,327,365
|
$
123
|
$
38,275
|
$
(34,912
)
|
$
3,486
|
The
accompanying notes are an integral part of these consolidated
financial statements.
Remainder
of Page Intentionally Left Blank
|
40
|
|
Financial Statements
|
Consolidated Statements of Cash Flows
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
OPERATING
ACTIVITIES
|
|
|
|
Cash flows provided
by (used in) operating activities:
|
|
|
|
Net income
(loss)
|
$
7,361
|
$
(523
)
|
|
Adjustments to
reconcile net income (loss) to net cash from operating
activities:
|
|
|
|
Depletion,
depreciation and amortization
|
2,490
|
1,933
|
|
Deferred income
tax
|
-
|
(216
)
|
|
Amortization of
debt issue costs
|
629
|
128
|
|
Guaranty fees paid
in kind
|
625
|
-
|
|
Accretion of asset
retirement obligations
|
-
|
266
|
|
Loss on issuance of
shares for extinguishment of related-party debt
|
474
|
-
|
|
Common stock issued
for services
|
-
|
30
|
|
Gain on
extinguishment of debt
|
(9,128
)
|
-
|
|
Changes in accounts
receivable
|
(67
)
|
978
|
|
Changes in accounts
receivable, related party
|
(1,364
)
|
653
|
|
Changes in prepaid
expenses and other current assets
|
(389
)
|
(579
)
|
|
Changes in deposits
and other assets
|
36
|
(65
)
|
|
Changes in
inventory
|
(135
)
|
1,579
|
|
Changes in accrued
arbitration award
|
(12,000
)
|
(6,000
)
|
|
Changes in accounts
payable, accrued expenses and other liabilities
|
4,497
|
2,266
|
|
Changes in accounts
payable, related party
|
(1,380
)
|
555
|
|
Net cash from
operating activities
|
(8,351
)
|
1,005
|
|
|
|
|
|
INVESTING
ACTIVITIES
|
|
|
|
Cash flows from
(used in) investing activities:
|
|
|
|
Capital
expenditures
|
(1,574
)
|
(2,029
)
|
|
Net cash used in
investing activities
|
(1,574
)
|
(2,029
)
|
|
|
|
|
|
FINANCING
ACTIVITIES
|
|
|
|
Cash flows from
(used in) financing activities:
|
|
|
|
Proceeds from line
of credit payable
|
12,402
|
-
|
|
Payments on
debt
|
(2,241
)
|
(890
)
|
|
Payments of debt
issuance costs
|
(322
)
|
-
|
|
Net activity on
related-party debt
|
(911
)
|
1,433
|
|
Net cash from
financing activities
|
8,928
|
543
|
|
|
|
|
|
Increase (Decrease)
in cash and cash equivalents
|
(997
)
|
(481
)
|
|
|
|
|
|
CASH, CASH
EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF
PERIOD
|
1,665
|
2,146
|
|
CASH, CASH
EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
|
$
668
|
$
1,665
|
|
|
|
|
|
Supplemental
Information:
|
|
|
|
Non-cash investing
and financing activities:
|
|
|
|
Financing of
capital expenditures via capital lease
|
$
86
|
$
4
|
|
Financing of
guaranty fees via long-term debt, related party
|
$
625
|
$
644
|
|
Payment of
related-party debt via fixed asset exchange
|
$
474
|
$
-
|
|
Issuance of shares
to settle related-party debt
|
$
878
|
$
-
|
|
Line of credit
closing costs included in principal balance
|
$
398
|
$
-
|
|
Interest
paid
|
$
3,474
|
$
2,823
|
|
Income taxes paid
(received)
|
$
(101
)
|
$
-
|
The
accompanying notes are an integral part of these consolidated
financial statements.
|
41
|
|
Notes to Consolidated Financial Statements
|
|
Notes to Consolidated Financial Statements
|
(1)
Organization
Overview
Blue
Dolphin is an independent downstream energy company operating in
the Gulf Coast region of the United States. Our subsidiaries
operate a light sweet-crude, 15,000-bpd crude distillation tower
with approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a
Delaware corporation and is traded on the OTCQX under the ticker
symbol “BDCO”.
Our
assets are primarily organized in two segments: refinery operations
(owned by LE) and tolling and terminaling services (owned by LRM
and NPS). Subsidiaries that are reflected in corporate and other
include BDPL (inactive pipeline and facilities assets), BDPC
(inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See “Note (4)” to our
consolidated financial statements for more information about our
business segments.
Unless
the context otherwise requires, references in this report to
“we,” “us,” “our,” or
“ours,” refer to Blue Dolphin, one or more of its
consolidated subsidiaries or all of them taken as a
whole.
Affiliates
Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Note (3)” to our consolidated
financial statements for additional disclosures related to
Affiliate risk factors, Affiliate agreements and arrangements, and
working capital deficits.
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:
Defaults Under Secured Loan Agreements
. LE and LRM each have
loans with Veritex in the original aggregate amount of $35.0
million. These loans are guaranteed 100% by the USDA. As described
in “Note (10)” to our consolidated financial
statements, we are in default under our secured loan agreements.
Defaults include events of default and financial covenant
violations. Defaults under our secured loan agreements 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 sheets at December 31, 2019 and 2018.
Events of Default
. In September 2017, Veritex notified
obligors of events of default, including, but not limited to, the
occurrence of the GEL Final Arbitration Award, associated material
adverse effect conditions, failure by LE to replenish a $1.0
million payment reserve account, and the occurrence of events of
default by obligors under our other secured loan agreements with
Veritex, all of which constituted events of default under our
secured loan agreements. Further, Veritex informed obligors that it
would consider a final confirmation of the GEL Final Arbitration
Award to be a material event of default under the loan agreements.
Veritex did not accelerate or call due our secured loan agreements
considering these factors. Instead, Veritex expressly reserved all
its rights, privileges and remedies related to events of
default.
In
April 2019, obligors were notified by Veritex that the bank agreed
to waive certain covenant defaults and forbear from enforcing its
remedies under our secured loan agreements subject to: (i) the
agreement and concurrence of the USDA and (ii) the replenishment of
the payment reserve account on or before August 31, 2019. Following
the GEL Settlement, the associated mutual releases became effective
and GEL filed a stipulation of dismissal of claims against LE. As
of the date of this report, LE had not replenished the payment
reserve account and obligors were still in default under our other
secured loan agreements with Veritex.
Financial Covenant Violations
. At December 31, 2019, LE and
LRM were in violation of the debt service coverage ratio, current
ratio, and debt to net worth ratio financial covenants under our
secured loan agreements with Veritex.
Any
exercise by Veritex of its rights and remedies under our secured
loan agreements would have a material adverse effect on our
business operations, including crude oil and condensate procurement
and our customer relationships; financial condition; and results of
operations. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
|
42
|
|
Notes to Consolidated Financial Statements
|
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under outstanding long-term
debt, either upon maturity or if accelerated, (ii) LE and LRM will
be able to refinance or restructure the payments on the long-term
debt, and/or (iii) Veritex, as first lien holder, will provide
future default waivers. Defaults under our secured loan agreements
and any exercise by Veritex of its rights and remedies related to
such defaults may have a material adverse effect on the trading
prices of our common stock and on the value of an investment in our
common stock, and holders of our common stock could lose their
investment in our common stock in its entirety. See “Note
(1)” and “Note (10)” to our consolidated
financial statements for additional information related to defaults
under our secured loan agreements and their potential effects on
our business, financial condition, and results of
operations.
Net Losses and Working Capital Deficits
. Net income for 2019
increased by $7.9 million, or $0.71 per share, to $7.4 million from
a net loss of $0.5 million for 2018. The significant increase
mostly related to a gain on the extinguishment of debt related to
the GEL Settlement, provided, however, an increase in tolling and
terminaling revenue of $0.6 million, or nearly 17%, also
contributed to the rise. Excluding this gain, we would have
reported a net loss of $1.8 million, or a loss of $0.16 per share,
for 2019.
We had
a working capital deficit of $59.4 million and $71.9 million at
December 31, 2019 and 2018, respectively. Excluding the current
portion of long-term debt, we had a working capital deficit of
$19.6 million and $30.0 million at December 31, 2019 and 2018,
respectively. We had cash and cash equivalents and restricted cash
(current portion) of $0.07 million and $0.05 million, respectively,
at December 31, 2019. Comparatively, we had cash and cash
equivalents and restricted cash (current portion) of $0.01 million
and $0.05 million, respectively, at December 31, 2018.
Operating Risks
Successful
execution of our business strategy depends on several key factors,
including, having adequate working capital to meet operational
needs and regulatory requirements, maintaining safe and reliable
operations at the Nixon facility, meeting contractual obligations,
and having favorable margins on refined products. During the third
quarter of 2019, management achieved the GEL Settlement and
realized a $9.1 million gain on the extinguishment of the
liability. Management believes that it is continuing to take other
steps to further improve operations and financial stability.
However, there can be no assurance that our business strategy will
be successful, that Affiliates will continue to fund our working
capital needs, or that we will be able to obtain additional
financing or meet financial assurance (bonding) requirements on
commercially reasonable terms or at all. If Veritex exercises its
rights and remedies under our secured loan agreements, our
business, financial condition, and results of operations will be
materially adversely affected.
The
Amended Pilot Line of Credit is scheduled to mature in May 2020. We
will need to repay, refinance, replace or otherwise extend the
maturity of this line of credit. Our ability to repay, refinance,
replace or otherwise extend this facility by its maturity date will
be dependent on, among other things, business conditions, our
financial performance and the general condition of the financial
markets. If a financial disruption were to occur at the time that
we are required to repay this indebtedness, we could be forced to
undertake alternate financings, including a sale of additional
common stock, negotiate for an extension of the maturity or sell
assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We cannot provide
any assurance that we will be able to consummate any such
transaction on terms that are commercially reasonable, on terms
acceptable to us or at all.
(2)
Principles of Consolidation and Significant Accounting
Policies
Basis of Presentation
The
accompanying consolidated financial statements, which include Blue
Dolphin and its subsidiaries, have been prepared in accordance with
U.S. generally accepted accounting principles and the rules and
regulations of the SEC. These rules and regulations conform to the
accounting principles contained in FASB’s ASC, the single
source of GAAP. All significant intercompany items have been
eliminated in consolidation. Additionally, any material subsequent
events that occurred after the date through which this report
covers have been properly recognized or disclosed in our financial
statements. In management’s opinion, all adjustments
considered necessary for a fair presentation have been included,
disclosures are adequate, and the presented information is not
misleading.
In
2018, Blue Dolphin obtained 100% of the issued and outstanding
membership interest of NPS, a Delaware limited liability company,
from Lazarus Midstream pursuant to an Assignment Agreement. The
transaction represented transfer of a vacant shell entity owned by
Lazarus Midstream to Blue Dolphin for the nominal fee of $10.00.
The assignment of interest facilitated settlement financing
possibilities under the GEL Settlement Agreement. The assignment
was accounted for as a combination of entities under common
control. Accordingly, the recognized assets and liabilities of NPS
were transferred at their carrying amounts at the date of transfer
and the results of operations are included for 2019 and 2018. NPS
did not have significant assets, liabilities or results of
operations prior to the assignment. NPS holds a leasehold interest
in petroleum storage tanks at the Nixon facility. NPS’
revenues and expenses are included in our Tolling and Terminaling
business segment.
Significant Accounting Policies
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 U.S. GAAP. We review our estimates on an ongoing
basis using currently available information. Changes in facts and
circumstances may result in revised estimates and actual results
could differ from those estimates.
|
43
|
|
Notes to Consolidated Financial Statements
|
Cash and Cash Equivalents
. Cash and cash equivalents
represent liquid investments with an original maturity of three
months or less. Cash balances are maintained in depository and
overnight investment accounts with financial institutions that, at
times, may exceed insured deposit limits. We monitor the financial
condition of the financial institutions and have experienced no
losses associated with these accounts.
Restricted Cash
. Restricted cash, current portion primarily
represents a payment reserve account held by Veritex as security
for payments under a loan agreement. Restricted cash,
noncurrent represents funds held in the Veritex disbursement
account for payment of construction related expenses to complete
building new petroleum storage tanks.
Accounts Receivable and Allowance for Doubtful Accounts
.
Accounts receivable are presented net of any necessary allowance(s)
for doubtful accounts. Receivables are recorded at the invoiced
amount and generally do not bear interest. An allowance for
doubtful accounts is established, when necessary, based
on prior experience and other factors which, in management's
judgment, deserve consideration in estimating bad debts.
Management assesses collectability of the customer’s account
based on current aging status, collection history, and financial
condition. Based on a review of these factors,
management establishes or adjusts the allowance for specific
customers and the entire accounts receivable
portfolio. We had an allowance for doubtful accounts of
$0.1 million at both December 31, 2019 and 2018.
Inventory
. Inventory primarily consists of refined products,
crude oil and condensate, and chemicals. Inventory is valued at
lower of cost or net realizable value with cost determined by the
average cost method, and net realizable value determined based on
estimated selling prices less associated delivery costs. If the net
realizable value of our refined products inventory declines to an
amount less than our average cost, we record a write-down of
inventory and an associated adjustment to cost of goods sold. See
“Note (7)” to our consolidated financial statements for
additional disclosures related to inventory.
Property and Equipment
.
Refinery and Facilities
. We plan to continue making
improvements to the crude distillation tower based on operational
needs and technological advances. Additions to refinery and
facilities assets are capitalized, and expenditures for repairs and
maintenance are expensed as incurred. We record refinery and
facilities at cost less any adjustments for depreciation or
impairment. Adjustment of the asset and the related accumulated
depreciation accounts are made for the refinery and facilities
asset’s retirement and disposal, with the resulting gain or
loss included in the consolidated statements of operations. For
financial reporting purposes, depreciation of refinery and
facilities assets is computed using the straight-line method using
an estimated useful life of 25 years beginning when the refinery
and facilities assets are placed in service. We did not record any
impairment of our refinery and facilities assets for the periods
presented.
Pipelines and Facilities
. Our pipelines and facilities are
recorded at cost less any adjustments for depreciation or
impairment. Depreciation is computed using the straight-line method
over estimated useful lives ranging from 10 to 22 years. In
accordance with FASB ASC guidance we performed periodic impairment
testing of our pipeline and facilities assets in 2016. Upon
completion of that testing, our pipeline assets were fully impaired
at December 31, 2016. All pipeline transportation services to third
parties have ceased, existing third-party wells along our pipeline
corridor have been permanently abandoned, and no new third-party
wells are being drilled near our pipelines. We plan to decommission
the offshore pipeline assets in the third quarter of
2020.
Oil and Gas Properties
. Our oil and gas properties are
accounted for using the full-cost method of accounting, whereby all
costs associated with acquisition, exploration and development of
oil and gas properties, including directly related internal costs,
are capitalized on a cost center basis. Amortization of
such costs and estimated future development costs are determined
using the unit-of-production method. All leases associated with our
oil and gas properties have expired, and our oil and gas properties
were fully impaired in 2011.
CIP
. CIP expenditures, including capitalized interest,
relate to construction and refurbishment activities and equipment
for the Nixon Facility. These expenditures are capitalized as
incurred. Depreciation begins once the asset is placed in service.
See “Note (8)” to our consolidated financial statements
for additional disclosures related to our refinery and facilities
assets, oil and gas properties, pipelines and facilities assets,
and CIP.
Leases.
We evaluate if a contract is or contains a lease at
inception of the contract. If we determine that a contract is or
contains a lease, we recognize ROU asset and lease liability at the
commencement date of the lease based on the present value of lease
payments over the lease term. The present value of the lease
payments is determined by using the implicit rate when readily
determinable. If not determinable, we use the incremental borrowing
rate to discount lease payments to present value. Lease terms
include options to extend or terminate the lease when it is
reasonably certain that we will exercise those
options.
We
recognize ROU assets and lease liabilities for leasing arrangements
with terms greater than one year. We account for lease and
non-lease components in a contract as a single lease component for
all classes of underlying assets. We allocate the consideration in
these contracts based on pricing information contained in the
lease.
|
44
|
|
Notes to Consolidated Financial Statements
|
Expense
for an operating lease is recognized as a single lease cost on a
straight-line basis over the lease term and is reflected in the
appropriate income statement line item based on the leased
asset’s function. Amortization expense of a finance lease ROU
asset is recognized on a straight-line basis over the lesser of the
useful life of the leased asset or the lease term. However, if the
lease transfers ownership of the finance lease ROU asset to us at
the end of the lease term, the finance lease ROU asset is amortized
over the useful life of the leased asset. Amortization expense is
reflected in ‘depreciation and amortization expense.’
Interest expense is incurred based on the carrying value of the
lease liability and is reflected in ‘interest and other
expense.’
Revenue Recognition
.
Refinery Operations Revenue
. Revenue from the sale of
refined products is recognized when the product is sold to the
customer in fulfillment of performance obligations. Each load of
refined product is separately identifiable and represents a
distinct performance obligation to which the transaction price is
allocated. Performance obligations are met when control is
transferred to the customer. Control is transferred to the customer
when the product has been lifted or, in cases where the product is
not lifted immediately (bill and hold arrangements), when the
product is added to the customer’s bulk inventory as stored
at the Nixon facility.
We
consider a variety of facts and circumstances in assessing the
point of control transfer, including but not limited to: whether
the purchaser can direct the use of the refined product, the
transfer of significant risks and rewards, our rights to payment,
and transfer of legal title. In each case, the term between the
sale and when payment is due is not significant. Transportation,
shipping, and handling costs incurred are included in cost of goods
sold. Excise and other taxes that are collected from customers and
remitted to governmental authorities are not included in
revenue.
Tolling and Terminaling Revenue
. Tolling and terminaling
revenue represents fees pursuant to: (i) tank storage agreements,
whereby a customer agrees to pay a certain fee per tank based on
tank size over a period of time for the storage of products and
(ii) tolling agreements, whereby a customer agrees to pay a certain
fee per gallon or barrel for throughput volumes moving through the
naphtha stabilizer unit and a fixed monthly reservation fee for use
of the naphtha stabilizer unit.
We
typically satisfy performance obligations for tolling and
terminaling operations with the passage of time. We determine the
transaction price at agreement inception based on the guaranteed
minimum amount of revenue over the term of the agreement. We
allocate the transaction price to the single performance obligation
that exists under the agreement, and we recognize revenue in the
amount for which we have a right to invoice. Generally,
payment terms do not exceed 30 days.
Revenue
from tank storage customers may, from time to time, include fees
for ancillary services, such as in-tank and tank-to-tank blending.
These services are considered optional to the customer, and the
price we charge for such services is not included in the fixed cost
under the customer’s tank storage agreement. Ancillary
services are considered a separate performance obligation by us
under the tank storage agreement. The performance obligation is
satisfied when the requested service has been performed in the
applicable period.
Deferred Revenue
. We record deferred revenue when cash
payments are received or due in advance of our performance. An
increase in the deferred revenue balance reflects cash
payments received or due in advance of satisfying our performance
obligations, offset by recognized revenue that was included in the
deferred revenue balance at the beginning of the period. Deferred
revenue represents a liability as of the balance sheet date related
to a revenue producing activity for which revenue has not yet been
recognized. We record deferred revenue when we receive
consideration under a contract before achieving certain criteria
that must be met for revenue to be recognized in conformity with
GAAP.
Income Taxes
. Deferred income taxes are determined based on
the differences between the financial reporting and tax basis of
assets and liabilities, as well as operating losses and tax credit
carryforwards using currently enacted tax rates and laws in effect
for the year in which the differences are expected to reverse. We
record a valuation allowance against deferred income tax assets if
it is more likely than not that those assets will not be realized.
The provision for income taxes comprises our current tax liability
and change in deferred income tax assets and
liabilities.
Significant
judgment is required in evaluating uncertain tax positions and
determining its provision for income taxes. As of each reporting
date, we consider new evidence, both positive and negative, to
determine the realizability of deferred tax assets. We consider
whether it is more likely than not that a portion or all the
deferred tax assets will be realized, which is dependent upon the
generation of future taxable income prior to the expiration of any
NOL carryforwards. When we determine that it is more likely than
not that a tax benefit will not be realized, a valuation allowance
is recorded to reduce deferred tax assets. A significant piece of
objective negative evidence evaluated was cumulative losses
incurred over the three-year period ended December 31, 2018. Such
objective evidence limits the ability to consider other subjective
evidence, such as projections for future growth. Based on this
evaluation, we recorded a valuation allowance against the deferred
tax assets for which realization was not deemed more likely than
not as of December 31, 2019 and 2018. We expect to recover deferred
tax assets related to AMT credit carryforwards. In addition, we
have NOL carryforwards that remain available for future
use.
|
45
|
|
Notes to Consolidated Financial Statements
|
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, 2019 and 2018, there were no uncertain tax positions for which
a reserve or liability was necessary. See “Note (14)”
to our consolidated financial statements for more information
related to income taxes.
Impairment or Disposal of Long-Lived Assets
. We periodically
evaluate our long-lived assets for impairment. Additionally, we
evaluate our long-lived assets when events or circumstances
indicate that the carrying value of these assets may not be
recoverable. The carrying value is not recoverable if it exceeds
the sum of the undiscounted cash flows expected to result from the
use and eventual disposition of the asset or group of assets. If
the carrying value exceeds the sum of the undiscounted cash flows,
an impairment loss equal to the amount by which the carrying value
exceeds the fair value of the asset or group of assets is
recognized. Significant management judgment is required in the
forecasting of future operating results that are used in the
preparation of projected cash flows and, should different
conditions prevail or judgments be made, material impairment
charges could be necessary. The GEL Final Arbitration Award
represented a significant adverse change that could affect the
value of a long-lived asset, and management performed potential
impairment testing of our refinery and facilities assets in 2019
and 2018. Upon completion of that testing, no impairment was deemed
necessary and we did not record any impairment of our refinery and
facilities assets for the periods presented.
Asset Retirement Obligations
. We record a liability for the
discounted fair value of an ARO in the period incurred, and we also
capitalize the corresponding cost by increasing the carrying amount
of the related long-lived asset. The liability is accreted towards
its future value each period, and the capitalized cost is
depreciated over the useful life of the related asset. If the
liability is settled for an amount other than the recorded amount,
a gain or loss is recognized.
We have
concluded that there is no legal or contractual obligation to
dismantle or remove the refinery and facilities assets. Further, we
believe that these assets have indeterminate lives because dates or
ranges of dates upon which we would retire these assets cannot
reasonably be estimated at this time. When a legal or contractual
obligation to dismantle or remove the refinery and facilities
assets arises and a date or range of dates can reasonably be
estimated for the retirement of these assets, we will estimate the
cost of performing the retirement activities and record a liability
for the fair value of that cost using present value
techniques.
We
recorded an ARO liability related to future asset retirement costs
associated with dismantling, relocating, or disposing of our
offshore platform, pipeline systems, and related onshore
facilities, as well as for plugging and abandoning wells and
restoring land and sea-beds. Cost estimates for each of our assets
were developed based upon regulatory requirements, structural
makeup, water depth, reservoir characteristics, reservoir depth,
equipment demand, current retirement procedures, and construction
and engineering consultations. Estimating future costs are
difficult and require management to make judgments that are subject
to future revisions based upon numerous factors, including changing
technology, political, and regulatory environments. We review our
assumptions and estimates of future abandonment costs on an annual
basis. See “Note (12)” to our consolidated financial
statements for additional information related to AROs.
Computation of Earnings Per Share
. We present basic and
diluted EPS. Basic EPS excludes dilution and is computed by
dividing net income available to common stockholders by the
weighted-average number of shares of common stock outstanding for
the period. Diluted EPS is computed by dividing net income
available to common stockholders by the diluted weighted average
number of common shares outstanding, which includes the potential
dilution that could occur if securities or other contracts to issue
shares of common stock were converted to common stock that then
shared in the earnings of the entity. The number of shares related
to restricted stock included in diluted EPS is based on the
“Treasury Stock Method.” We do not have issued options,
warrants, or similar instruments. See “Note (15)” to
our consolidated financial statements for additional information
related to EPS.
New Pronouncements Adopted
.
Leases
. Beginning in February 2016, FASB amended its
accounting guidance for leases and subsequently updated the
guidance several times [ASUs 2016-02, Leases (Topic 842), 2018-10,
2018-11, 2018-20, and 2019-01]. The guidance requires a lessee to
recognize assets and liabilities on the balance sheet arising from
leases with terms greater than 12 months. While lessor guidance is
relatively unchanged, certain amendments were made to conform with
changes made to lessee accounting and the amended revenue
recognition guidance. The new guidance continues to classify leases
as either finance or operating, with classification affecting the
presentation and pattern of expense and income recognition, in the
statement of operations. It also requires additional quantitative
and qualitative disclosures about leasing arrangements. We adopted
the new guidance on January 1, 2019 using the modified
retrospective approach, which was applied beginning on the adoption
date. Comparative information has not been restated and continues
to be reported under the accounting guidance in effect for those
periods. The adoption did not have a material effect on our
consolidated statements of operations or cash flows. On the
adoption date we recognized operating lease ROU assets, net of
pre-existing deferred rent, and operating lease liabilities on our
consolidated balance sheet of approximately $0.8 million and $0.9
million, respectively.
|
46
|
|
Notes to Consolidated Financial Statements
|
New Pronouncements Issued, Not Yet Effective
.
Codification Updates to SEC Sections
. In July 2019, FASB
issued ASU 2019-07, Codification Updates to SEC Sections, which
amends certain SEC sections or paragraphs within the FASB ASC. The
amendments are being made pursuant to SEC Final Rule Releases No.
33-10532, Disclosure Update and Simplification, and Nos. 33-10231
and 33-10442, Investment Company Reporting Modernization, and
Miscellaneous Updates (SEC Update). The SEC Final Rule Releases,
which also require improvements to the XBRL taxonomy, were made to
improve, update, and simplify SEC regulations on financial
reporting and disclosure. For public companies, the amendments in
ASU 2019-07 are effective upon issuance. We do not expect adoption
of this guidance to have a significant impact on our consolidated
financial statements.
Consolidation
. In October 2018, FASB issued ASU
2018-17,
Consolidation
(Topic 810). This ASU provides targeted improvements to
related-party guidance for variable interest entities. Indirect
interests held through related parties in common control
arrangements should be considered on a proportional basis for
determining whether fees paid to decision makers and service
providers are variable interests. For entities other than private
companies, the amendments in ASU 2018-17 are effective for fiscal
years beginning after December 15, 2019, and interim periods within
those fiscal years. We do not expect adoption of this guidance to
have a significant impact on our consolidated financial
statements.
Income Taxes
.
In
March 2018, FASB issued ASU 2018-05,
Income Taxes (Topic 740). This
guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect
Staff Accounting Bulletin No. 118, which provides guidance for
companies that are not able to complete their accounting for the
income tax effects of the Tax Cuts and Jobs Act in the period of
enactment. This guidance also includes amendments to the
XBRL taxonomy. For public business entities, the
amendments in ASU 2018-05 are effective for fiscal years ending
after December 15, 2020. Early adoption is permitted. We
do not expect adoption of this guidance to have a significant
impact on our consolidated financial statements.
Other
new pronouncements issued but not yet effective are not expected to
have a material impact on our financial position, results of
operations, or liquidity.
Remainder
of Page Intentionally Left Blank
|
47
|
|
Notes to Consolidated Financial Statements
|
(3)
Related-Party Transactions
Working Capital
Currently,
we depend on Affiliates for financing when revenue from operations
and borrowings under bank facilities are insufficient to meet our
liquidity and working capital needs. Such borrowings are reflected
in our consolidated balance sheets in accounts payable, related
party, and/or long-term debt, related party.
Affiliate Agreements/Transactions
Blue
Dolphin and certain of its subsidiaries are party to several
agreements with Affiliates. Management believes that these
related-party transactions were consummated on terms equivalent to
those that prevail in arm's-length transactions. Related-party
transactions consist of the following:
|
Agreement/Transaction
|
Parties
|
Type
|
Effective
Date
|
Interest
Rate
|
Key
Terms
|
|
Amended
and Restated Guaranty Fee Agreement
(1)
|
Jonathan
Carroll - LE
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LE $25 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Amended
and Restated Guaranty Fee Agreement
(1)
|
Jonathan
Carroll - LRM
|
Debt
|
04/01/2017
|
2.00%
|
Tied to
payoff of LRM $10 million Veritex loan; payments 50% cash, 50%
Common Stock
|
|
Refinery
Equipment Purchase
|
LTRI -
LE
|
Operations
|
07/01/2019
|
---
|
LE
purchase of two (2) refurbished heat exchangers for $0.08 million
each
|
|
Dock
Tolling Agreement
|
LMT -
LE
|
Operations
|
05/24/2016
|
---
|
5-year
term cancellable by either party any time; LE paid flat reservation
fee for tolling volumes up to 84,000 gallons per day; excess
tolling volumes subject to increased per gallon rate; terminated
07/01/2019
|
|
Jet
Fuel Sales Agreement
|
LEH -
LE
|
Operations
|
04/01/2019
|
---
|
1-year
term expiring earliest to occur of 03/01/2020 plus 30-day carryover
or delivery of maximum jet fuel quantity; LEH bids on jet fuel
contracts under preferential pricing terms due to a HUBZone
certification
|
|
March
Carroll Note
(in
default)
|
Jonathan
Carroll – Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; matured 01/01/2019; interest still
accruing
|
|
March
Ingleside Note
(in
default)
|
Ingleside
– Blue Dolphin
|
Debt
|
03/31/2017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to Ingleside under
previous Amended and Restated Tank Lease Agreement; matured
01/01/2019; interest still accruing
|
|
June
LEH Note
(in
default)
|
LEH
– Blue Dolphin
|
Debt
|
03/312017
|
8.00%
|
Blue
Dolphin working capital; reflects amounts owed to LEH under Amended
and Restated Operating Agreement; reflects amounts owed to Jonathan
Carroll under guaranty fee agreements; matured 01/01/2019; interest
still accruing
|
|
Office
Sub-Lease Agreement
|
LEH -
BDSC
|
Operations
|
01/01/2018
|
---
|
68-month
term expiring 08/31/2023; office lease Houston, Texas; includes
6-month rent abatement period; rent approximately $0.02 million per
month
|
|
Amended
and Restated Operating Agreement
|
LEH
– Blue Dolphin / LE
|
Debt
|
04/01/2017
|
---
|
3-year
term; expires 04/01/2020 or notice by either party at any time of
material breach or 90 days Board notice; LEH receives management
fee of our incurred direct operating expenses plus 5%
|
|
Loan
and Security Agreement
(in
default)
|
LEH -
BDPL
|
Debt
|
08/15/2016
|
16.00%
|
2-year
term; $4.0 million principal amount; $0.5 million annual payment;
proceeds used for working capital; no financial maintenance
covenants; secured by certain BDPL property
|
(1)
In November 2019,
Mr. Carroll was issued an aggregate of 1,351,851 restricted shares
of Common Stock, which represents payment of the common stock
component of the guaranty fees for the period May 2017 through
October 2019. We recorded an expense of approximately $0.5 million
related to the share issuance. As previously disclosed, the Lazarus
Parties were prohibited under the GEL Settlement Agreement from
making payments to Jonathan Carroll under the Amended and Restated
Guaranty Fee Agreements. Following the GEL Settlement, management
resumed payments of the common stock component to Jonathan Carroll
under the agreements. r. Carroll will receive payment of the common
stock component of the guaranty fees on a quarterly basis going
forward. Currently, management does not intend on paying Jonathan
Carroll the cash portion due to Blue Dolphin’s working
capital deficits in the foreseeable future. The cash portion of
guaranty fees owed to Jonathan Carroll will continue to be accrued
and added to the principal balance of the March Carroll Note. See
“Note (16)” to our consolidated financial statements
for additional disclosures related to GEL and working capital
deficits.
|
48
|
|
Notes to Consolidated Financial Statements
|
Related-Party Financial Impact
Consolidated Balance Sheets
.
Accounts receivable, related party
.
Accounts receivable, related party
represents amounts owed from LEH for the sale of jet fuel under the
Jet Fuel Sales Agreement and amounted to $1.4 million and $0 at
December 31, 2019 and 2018, respectively. The amounts will be paid
under normal business terms. Amounts outstanding relating to the
Jet Fuel Sales Agreement can vary significantly period to period
based on the timing of the related sales and payments received. See
below for amounts owed to LEH under various long-term debt
agreements.
Accounts payable, related party
.
Accounts payable, related party to LMT
associated with the Dock Tolling Agreement totaled $0 and $1.5
million at December 31, 2019 and 2018, respectively. Accounts
payable, related party to LTRI related to the purchase of refinery
equipment totaled $0.2 million and $0 at December 31, 2019 and
2018, respectively.
Long-term debt, related party, current portion (in
default).
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands)
|
|
|
LEH
|
|
|
|
June
LEH Note (in default)
|
$
-
|
$
611
|
|
BDPL
Loan Agreement
|
6,174
|
5,534
|
|
LEH
Total
|
6,174
|
6,145
|
|
Ingleside
|
|
|
|
March
Ingleside Note (in default)
|
1,004
|
1,283
|
|
Jonathan
Carroll
|
|
|
|
March
Carroll Note (in default)
|
997
|
1,147
|
|
|
8,175
|
8,575
|
|
|
|
|
|
Less:
Long-term debt, related party, current portion, in
default
|
(6,001
)
|
(7,041
)
|
|
Less:
Accrued interest payable, related party (in default)
|
(2,174
)
|
(1,534
)
|
|
|
$
-
|
$
-
|
Consolidated Statements of Operations
.
Total revenue from operations.
|
|
Year Ended December 31,
|
|||
|
|
2019
|
2018
|
||
|
|
(in
thousands, except percent amounts)
|
|||
|
Refinery
operations
|
|
|
|
|
|
LEH
|
$
97,238
|
31.4
%
|
$
98,571
|
28.9
%
|
|
Third-Parties
|
207,686
|
67.2
%
|
238,467
|
70.0
%
|
|
Tolling
and terminaling
|
|
|
|
|
|
Third-Parties
|
4,338
|
1.4
%
|
3,723
|
1.1
%
|
|
|
$
309,262
|
100.0
%
|
$
340,761
|
100.0
%
|
Interest expense.
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Jonathan
Carroll
|
|
|
|
Guaranty
Fee Agreements
|
|
|
|
First
Term Loan Due 2034
|
$
443
|
$
456
|
|
Second
Term Loan Due 2034
|
183
|
188
|
|
March
Carroll Note (in default)
|
103
|
56
|
|
LEH
|
|
|
|
BDPL
Loan Agreement (in default)
|
640
|
631
|
|
June
LEH Note (in default)
|
40
|
17
|
|
Ingleside
|
|
|
|
March
Ingleside Note (in default)
|
63
|
97
|
|
|
$
1,472
|
$
1,445
|
Other.
Fees associated with the Dock Tolling Agreement with
LMT totaled $0.3 million for 2019 compared to $0.6 million for
2018. Lease payments received under the office sub-lease agreement
with LEH totaled $0.03 million for both 2019 and 2018. The LEH
operating fee totaled $0.6 million for both 2019 and
2018.
|
49
|
|
Notes to Consolidated Financial Statements
|
(4)
Revenue and Segment Information
We have
two reportable business segments: (i) refinery operations and (ii)
tolling and terminaling. Refinery operations relate to the refining
and marketing of petroleum products at our 15,000-bpd crude
distillation tower. Tolling and terminaling operations relate to
tolling and storage terminaling services under third-party lease
agreements. Both operations are conducted at the Nixon facility.
Corporate and other includes BDSC, BDPL and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue
. Revenue is presented in the table
below under “Segment Information” disaggregated by
business segment because this is the level of disaggregation that
management has determined to be beneficial to users of our
financial statements.
Receivables from Contracts with Customers
. Our receivables
from contracts with customers are presented as receivables, net on
our consolidated balance sheets.
Contract Liabilities
. Our contract liabilities from
contracts with customers are included in accrued expenses and
presented in “Note (9)” to our consolidated financial
statements. Substantially all the contract liabilities as of
December 31, 2018 were recognized into revenue during the year
ended December 31, 2019.
Remaining Performance Obligations
. Most of our contracts
with customers are spot contracts and therefore have no remaining
performance obligations.
Remainder
of Page Intentionally Left Blank
|
50
|
|
Notes to Consolidated Financial Statements
|
Segment Information
.
Business segment information for the periods indicated (and as of
the dates indicated) was as follows:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Net revenue
(excluding intercompany fees and sales)
|
|
|
|
Refinery
operations
|
$
304,924
|
$
337,038
|
|
Tolling and
terminaling
|
4,338
|
3,723
|
|
Corporate and
other
|
-
|
-
|
|
Total net
revenue
|
309,262
|
340,761
|
|
|
|
|
|
Intercompany fees
and sales
|
|
|
|
Refinery
operations
|
(2,615
)
|
(3,270
)
|
|
Tolling and
terminaling
|
2,615
|
3,270
|
|
Corporate and
other
|
-
|
-
|
|
Total intercompany
fees
|
-
|
-
|
|
|
|
|
|
Operation costs and
expenses
(1)
|
|
|
|
Refinery
operations
|
(297,113
)
|
(331,220
)
|
|
Tolling and
terminaling
|
(1,325
)
|
(1,332
)
|
|
Corporate and
other
|
(222
)
|
(444
)
|
|
Total operation
costs and expenses
|
(298,660
)
|
(332,996
)
|
|
|
|
|
|
Segment
contribution margin
|
|
|
|
Refinery
operations
|
5,196
|
2,548
|
|
Tolling and
terminaling
|
5,628
|
5,661
|
|
Corporate and
other
|
(222
)
|
(444
)
|
|
Total segment
contribution margin
|
10,602
|
7,765
|
|
|
|
|
|
General and
administrative expenses, including LEH operating fee
|
|
|
|
Refinery
operations
|
(1,252
)
|
(1,232
)
|
|
Tolling and
terminaling
|
(262
)
|
(245
)
|
|
Corporate and
other
|
(1,145
)
|
(1,795
)
|
|
Total general and
administrative expenses
|
(2,659
)
|
(3,272
)
|
|
|
|
|
|
Depreciation and
amortization
|
|
|
|
Refinery
operations
|
(1,913
)
|
(1,842
)
|
|
Tolling and
terminaling
|
(396
)
|
(91
)
|
|
Corporate and
other
|
(181
)
|
-
|
|
Total depreciation
and amortization
|
(2,490
)
|
(1,933
)
|
|
|
|
|
|
Interest and other
non-operating income (expenses), net
|
1,908
|
(3,343
)
|
|
|
|
|
|
Income (loss)
before income taxes
|
7,361
|
(783
)
|
|
|
|
|
|
Income tax
benefit
|
-
|
260
|
|
|
|
|
|
Net
income (loss)
|
$
7,361
|
$
(523
)
|
(1)
For the reported
periods, operation costs include cost of goods sold. Also,
operation costs within: (a) tolling and terminaling includes
terminal operating expenses and an allocation of other costs (e.g.
insurance and maintenance) and (b) corporate and other includes
expenses related to BDSC, BDPC and BDPL.
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Capital
expenditures
|
|
|
|
Refinery
operations
|
$
1,453
|
$
1,124
|
|
Tolling and
terminaling
|
121
|
905
|
|
Corporate and
other
|
-
|
-
|
|
Total capital
expenditures
|
1,574
|
2,029
|
|
|
|
|
|
Identifiable
assets
|
|
|
|
Refinery
operations
|
51,317
|
41,116
|
|
Tolling and
terminaling
|
18,401
|
28,446
|
|
Corporate and
other
|
1,726
|
1,115
|
|
Total identifiable
assets
|
$
71,444
|
$
70,677
|
|
51
|
|
Notes to Consolidated Financial Statements
|
(5)
Concentration of Risk
Bank Accounts
Financial
instruments that potentially subject us to concentrations of risk
consist primarily of cash, trade receivables and payables. We
maintain cash balances at financial institutions in Houston, Texas.
The FDIC insures certain financial products up to a maximum of
$250,000 per depositor. At December 31, 2019 and 2018, we had cash
balances (including restricted cash) that exceeded the FDIC
insurance limit per depositor of $0.3 million and $1.2 million,
respectively.
Key Supplier
Operation
of the Nixon refinery depends on our ability to purchase adequate
amounts of crude oil and condensate. We have a long-term crude
supply agreement in place with Pilot. Under the initial term of the
crude supply agreement, Pilot will sell us approximately 24.8
million net bbls of crude oil. Thereafter, the crude supply
agreement will continue on a one-year evergreen basis. Pilot may
terminate the crude supply agreement at any time by providing us 60
days prior written notice. We may terminate the agreement upon the
expiration of the initial term or at any time during a renewal term
by giving Pilot 60 days prior written notice.
Pilot also stores crude oil at the Nixon facility under a terminal
services agreement. Under the terminal services agreement, Pilot
stores crude oil at the Nixon facility at a specified rate per bbl
of the storage tank’s shell capacity. The terminal services
agreement has an initial term that expires April 30, 2020.
Thereafter, the terminal services agreement will continue on a
one-year evergreen basis. Either party may terminate the terminal
services agreement by providing the other party 60 days prior
written notice. However, the terminal services agreement will
automatically terminate upon expiration or termination of the crude
supply agreement.
Our
financial health could be adversely affected by defaults in our
secured loan agreements, historic net losses, and working capital
deficits, which could impact our ability to acquire crude oil and
condensate. A failure to acquire crude oil and condensate when
needed will have a material effect on our business results and
operations.
Significant Customers
We
routinely assess the financial strength of our customers and have
not experienced significant write-downs in accounts receivable
balances. We believe that our accounts receivable credit risk
exposure is limited.
|
|
Number
Significant
Customers
|
% Total Revenue
from Operations
|
Portion of
Accounts Receivable
December
31
|
|
|
|
|
|
|
2019
|
4
|
96.5
%
|
$1.7
million
|
|
|
|
|
|
|
2018
|
4
|
90.3
%
|
$0.1
million
|
One of
our significant customers is an Affiliate. The Affiliate, LEH,
purchases our jet fuel under a Jet Fuel Sales Agreement and bids on
jet fuel contracts under preferential pricing terms due to a
HUBZone certification. The Affiliate accounted for 31.3% and 28.9%
of total revenue from operations in 2019 and 2018, respectively.
LEH represented approximately $1.4 million and $0 in accounts
receivable at December 31, 2019 and 2019, respectively. The amounts
will be paid under normal business terms. Amounts outstanding
relating to the Jet Fuel Sales Agreement can vary significantly
period to period based on the timing of the related sales and
payments received. Amounts owed to LEH under various long-term
debt, related-party agreements totaled $6.2 million and $6.1
million at December 31, 2019 and 2018, respectively. See
“Note (3)” and “Note (16)” to our
consolidated financial statements for additional disclosures
related to transactions with Affiliates.
Refined Product Sales
. We sell our products primarily in the
U.S. within PADD 3. Occasionally we sell refined products to
customers that export to Mexico. Total refined product sales by
distillation (from light to heavy) for the periods indicated
consisted of the following:
|
|
Year Ended
December 31,
|
|||
|
|
2019
|
2018
|
||
|
|
(in thousands,
except percent amounts)
|
|||
|
|
|
|
|
|
|
LPG
mix
|
$
17
|
0.0
%
|
$
3
|
0
%
|
|
Naphtha
|
59,799
|
19.6
%
|
82,982
|
24.6
%
|
|
Jet
fuel
|
97,239
|
31.9
%
|
98,570
|
29.2
%
|
|
HOBM
|
66,891
|
21.9
%
|
80,979
|
24.1
%
|
|
AGO
|
80,978
|
26.6
%
|
74,504
|
22.1
%
|
|
|
$
304,924
|
100.0
%
|
$
337,038
|
100.0
%
|
An
Affiliate, LEH, purchases our jet fuel. See “Note (3)”
and “Note (16)” to our consolidated financial
statements for additional disclosures related to Affiliate
transactions.
|
52
|
|
Notes to Consolidated Financial Statements
|
(6)
Prepaid Expenses and Other Current Assets
Prepaid
expenses and other current assets as of the dates indicated
consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands)
|
|
|
Prepaid crude oil
and condensate
|
$
1,651
|
$
1,166
|
|
Prepaid
insurance
|
417
|
437
|
|
Prepaid eastment
renewal fees
|
121
|
-
|
|
Other
prepaids
|
87
|
183
|
|
|
$
2,276
|
$
1,786
|
(7)
Inventory
Inventory
as of the dates indicated consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Crude oil and
condensate
|
$
959
|
$
861
|
|
AGO
|
440
|
276
|
|
Chemicals
|
120
|
106
|
|
Naphtha
|
95
|
143
|
|
Propane
|
26
|
17
|
|
LPG
mix
|
5
|
5
|
|
HOBM
|
-
|
102
|
|
|
$
1,645
|
$
1,510
|
(8)
Property, Plant and Equipment, Net
Property,
plant and equipment, net, as of the dates indicated consisted of
the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Refinery and
facilities
|
$
66,317
|
$
63,058
|
|
Land
|
566
|
566
|
|
Other property and
equipment
|
833
|
747
|
|
|
67,716
|
64,371
|
|
|
|
|
|
Less: Accumulated
depletion, depreciation, and amortiation
|
(12,739
)
|
(10,429
)
|
|
|
54,977
|
53,942
|
|
|
|
|
|
CIP
|
8,916
|
10,755
|
|
|
$
63,893
|
$
64,697
|
We
capitalize interest cost incurred on funds used to construct
property, plant, and equipment. Capitalized interest is recorded as
part of the asset it relates to and is depreciated over the
asset’s useful life. Capitalized interest cost, which is
included in CIP, was $0.7 million and $1.3 million at December 31,
2019 and 2018, respectively. Capital expenditures for expansion at
the Nixon facility are funded by long-term debt from Veritex,
revenue from operations, and working capital from Affiliates.
Unused amounts for capital expenditures derived from Veritex loans
are reflected in restricted cash (current and non-current portions)
on our consolidated balance sheets. See “Note (10)” to
our consolidated financial statements for additional disclosures
related to working capital deficits and borrowings for capital
spending.
|
53
|
|
Notes to Consolidated Financial Statements
|
(9)
Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities as of the dates indicated
consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Unearned revenue
from contracts with customers
|
$
1,990
|
$
-
|
|
Unearned contract
renewal income
|
500
|
434
|
|
Board of director
fees payable
|
263
|
273
|
|
Other
payable
|
228
|
265
|
|
Taxes
payable
|
183
|
95
|
|
Insurance
|
159
|
61
|
|
Customer
deposits
|
10
|
109
|
|
Easement
payable
|
-
|
223
|
|
Accrued
rent
|
-
|
111
|
|
|
$
3,333
|
$
1,571
|
(10)
Third-Party Long-Term Debt
Loan Agreements
|
Loan
Description
|
Original
Principal Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
USDA-Guaranteed
Loans
|
|
|
|
|
|
|
First
Term Loan Due 2034 (
in
default
)
|
$25.0
|
Jun
2034
|
$0.2
million
|
WSJ
Prime + 2.75%
|
Refinance
loan; capital improvements
|
|
Second
Term Loan Due 2034 (
in
default
)
|
$10.0
|
Dec
2034
|
$0.1
million
|
WSJ
Prime + 2.75%
|
Refinance
bridge loan; capital improvements
|
|
Notre
Dame Debt (
in
default
)
|
$11.7
(1)
|
Jan
2018
|
No
payments to date; payment rights subordinated
(2)
|
16.00%
|
Working
capital; reduce balance of GEL Final Arbitration Award
|
(1)
Original principal
amount was $8.0 million; pursuant to a 2017 sixth amendment, the
Notre Dame Debt was amended to increase the principal amount by
$3.7 million; the additional principal was used to reduce the GEL
Final Arbitration Award by $3.6 million.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their right to payments, as well as any security
interest and liens on the Nixon facility’s business assets,
in favor of Veritex as holder of the First Term Loan Due
2034.
Guarantees and Security
|
Loan
Description
|
Guarantees
|
Security
|
|
USDA-Guaranteed
Loans
|
|
|
|
First
Term Loan Due 2034 (
in
default
)
|
● 100%
USDA-guarantee;
● Jonathan
Carroll personal guarantee
(1)
;
● LEH,
LRM and Blue Dolphin cross-guarantee
|
● first
priority lien on Nixon facility’s business assets (excluding
accounts receivable and inventory);
● assignment
of all Nixon facility contracts, permits, and
licenses;
● absolute
assignment of Nixon facility rents and leases, including tank
rental income;
● $1.0
million payment reserve account held by Veritex; and
● $5.0
million life insurance policy on Jonathan Carroll.
|
|
Second
Term Loan Due 2034 (
in
default
)
|
● 100%
USDA-guarantee;
● Jonathan
Carroll personal guarantee
(1)
;
● LEH,
LE and Blue Dolphin cross-guarantee
|
● second
priority lien on rights of LE in crude distillation tower and other
collateral of LE;
● first
priority lien on real property interests of LRM;
● first
priority lien on all LRM fixtures, furniture, machinery and
equipment;
● first
priority lien on all LRM contractual rights, general intangibles
and instruments, except with respect to LRM rights in its leases of
certain specified tanks for which Veritex has second priority lien;
and
● all
other collateral as described in the security
documents.
|
|
Notre
Dame Debt (
in
default
)
|
---
|
● Subordinated
deed of trust that encumbers the crude distillation tower and
general assets of LE
(2).
|
(1)
As a condition of
the First Term Loan Due 2034 and Second Term Loan Due 2034,
Jonathan Carroll was required to personally guarantee repayment
borrowed funds and accrued interest.
(2)
Pursuant to a 2015
subordination agreement, the holder of the Notre Dame Debt agreed
to subordinate their right to payments, as well as any security
interest and liens on the Nixon facility’s business assets,
in favor of Veritex as holder of the First Term Loan Due
2034.
The
USDA, acting through its agencies, administers a federal rural
credit program that makes direct loans and guarantees portions of
loans made and serviced by USDA-qualified lenders for various
purposes. Each USDA guarantee is a full faith and credit obligation
of the U.S. with the USDA guaranteeing up to 100% of the principal
amount. The lender for a USDA-guaranteed loan, in our case Veritex,
is required by regulations to retain both the guaranteed and
unguaranteed portions of the loan, to service the entire underlying
loan, and to remain mortgage and/or secured party of record. Both
the guaranteed and unguaranteed portions of the loan are to be
secured by the same collateral with equal lien priority. The
USDA-guaranteed portion of a loan cannot be paid later than, or in
any way be subordinated to, the related unguaranteed portion. See
“Note (3)” to our consolidated financial statements for
additional disclosures related to Affiliate agreements and
transactions, including long-term debt guarantees.
|
54
|
|
Notes to Consolidated Financial Statements
|
Representations, Warranties, Covenants, and Defaults
The
First Term Loan Due 2034 and Second Term Loan Due 2034 contain
representations and warranties, affirmative and negative covenants,
and events of default that we consider usual and customary for bank
facilities of this type. Specifically, the First Term Loan Due 2034
and Second Term Loan Due 2034 contain debt service coverage ratio,
current ratio, and debt to net worth ratio financial covenants. The
First Term Loan Due 2034 also requires that a $1.0 million payment
reserve account be maintained. There are no financial maintenance
covenants associated with the Notre Dame Debt.
Proceeds
available for use under the First Term Loan Due 2034 and Second
Term Loan Due 2034 were placed in a disbursement account whereby
Veritex makes payments for construction related expenses. Amounts
held in the disbursement account are reflected as restricted cash
(current portion) and restricted cash, noncurrent in our
consolidated balance sheets.
As
described elsewhere in this report, we are in default under our
secured loan agreements. Defaults include events of default and
financial covenant violations. Defaults under our secured loan
agreements 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 sheets at December 31, 2019 and
2018.
Events of Default
. In September 2017, Veritex notified
obligors of events of default, including, but not limited to, the
occurrence of the GEL Final Arbitration Award, associated material
adverse effect conditions, failure by LE to replenish a $1.0
million payment reserve account, and the occurrence of events of
default by obligors under our other secured loan agreements with
Veritex, all of which constituted events of default under our
secured loan agreements. Further, Veritex informed obligors that it
would consider a final confirmation of the GEL Final Arbitration
Award to be a material event of default under the loan agreements.
Veritex did not accelerate or call due our secured loan agreements
considering these factors. Instead, Veritex expressly reserved all
its rights, privileges and remedies related to events of
default.
In
April 2019, obligors were notified by Veritex that the bank agreed
to waive certain covenant violations and forbear from enforcing its
remedies under our secured loan agreements subject to: (i) the
agreement and concurrence of the USDA and (ii) the replenishment of
the payment reserve account on or before August 31, 2019. Following
the GEL Settlement, the associated mutual releases became effective
and GEL filed a stipulation of dismissal of claims against LE. As
of the date of this report, LE had not replenished the payment
reserve account and obligors were still in default under our other
secured loan agreements with Veritex.
Financial Covenant Violations
.
At December 31, 2019, LE and LRM
were in violation of the debt service coverage ratio, current
ratio, and debt to net worth ratio financial covenants under our
secured loan agreements with Veritex.
Any
exercise by Veritex of its rights and remedies under our secured
loan agreements would have a material adverse effect on our
business operations, including crude oil and condensate procurement
and our customer relationships; financial condition; and results of
operations. In such a case, the trading price of our common stock
and the value of an investment in our common stock could
significantly decrease, which could lead to holders of our common
stock losing their investment in our common stock in its
entirety.
We can
provide no assurance that: (i) our assets or cash flow will be
sufficient to fully repay borrowings under outstanding long-term
debt, either upon maturity or if accelerated, (ii) LE and LRM will
be able to refinance or restructure the payments on the long-term
debt, and/or (iii) Veritex, as first lien holder, will provide
future default waivers. Defaults under our secured loan agreements
and any exercise by Veritex of its rights and remedies related to
such defaults may have a material adverse effect on the trading
prices of our common stock and on the value of an investment in our
common stock, and holders of our common stock could lose their
investment in our common stock in its entirety. See “Note
(1)” and “Note (10)” to our consolidated
financial statements for additional information regarding defaults
under our secured loan agreements and their potential effects on
our business, financial condition, and results of
operations.
Remainder
of Page Intentionally Left Blank
|
55
|
|
Notes to Consolidated Financial Statements
|
Outstanding Principal, Debt Issue Costs, and Accrued
Interest
Third-party
long-term debt (outstanding principal and accrued interest), as of
the dates indicated was as follows:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due
2034 (in default)
|
$
21,776
|
$
22,593
|
|
Second Term Loan
Due 2034 (in default)
|
9,031
|
9,353
|
|
Notre Dame Debt (in
default)
|
8,617
|
7,821
|
|
Capital
lease
|
-
|
41
|
|
|
39,424
|
39,808
|
|
|
|
|
|
Less: Current
portion of long-term debt, net
|
(33,836
)
|
(34,863
)
|
|
Less: Unamortized
debt issue costs
|
(1,877
)
|
(2,006
)
|
|
Less: Accrued
interest payable (in default)
|
(3,711
)
|
(2,939
)
|
|
|
$
-
|
$
-
|
Unamortized
debt issue costs associated with USDA-guaranteed loans as of the
dates indicated consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due
2034 (in default)
|
$
1,674
|
$
1,674
|
|
Second Term Loan
Due 2034 (in default)
|
768
|
768
|
|
|
|
|
|
Less: Accumulated
amortization
|
(565
)
|
(436
)
|
|
|
$
1,877
|
$
2,006
|
Amortization
expense was $0.1 million for both 2019 and 2018.
Accrued
interest related to third-party long-term debt, reflected as
accrued interest payable in our consolidated balance sheets, as of
the dates indicated consisted of the following:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Notre Dame Debt (in
default)
|
$
3,639
|
$
2,843
|
|
USDA-Guaranteed
Loans
|
|
|
|
First Term Loan Due
2034 (in default)
|
25
|
43
|
|
Second Term Loan
Due 2034 (in default)
|
47
|
53
|
|
|
3,711
|
2,939
|
|
Less: Accrued
interest payable (in default)
|
(3,711
)
|
(2,939
)
|
|
Long-term Interest
Payable, Net of Current Portion
|
$
-
|
$
-
|
As a
result of new ASU guidance related to leases, capital leases are
now reported in “Note (13)” as finance leases. See
“Note (2),” “Note (3),” and “Note
(12”) to our consolidated financial statements for
information related to the new lease accounting standard,
related-party debt, and debt obligations associated with
Pilot.
Future
annual third-party long-term debt payments, including interest,
which are reflected as current due to defaults under our secured
loan agreements:
|
|
Principal and
|
Debt Issue
|
|
|
Years
Ending December 31,
|
Accrued Interest
|
Costs
|
Total
|
|
|
(in
thousands)
|
||
|
2020
|
$
39,424
|
$
(1,877
)
|
$
37,547
|
|
2021
|
-
|
-
|
-
|
|
2022
|
-
|
-
|
-
|
|
2023
|
-
|
-
|
-
|
|
Thereafter
|
-
|
-
|
-
|
|
|
$
39,424
|
$
(1,877
)
|
$
37,547
|
|
56
|
|
Notes to Consolidated Financial Statements
|
(11)
Line of Credit Payable
Line of Credit Agreement
|
Line of Credit
Description
|
Principal
Amount
(in
millions)
|
Maturity
Date
|
Monthly
Principal and Interest Payment
|
Interest
Rate
|
Loan
Purpose
|
|
|
|
|
|
|
|
|
Amended
Pilot Line of Credit
|
$13.0
|
May
2020
|
----
|
12.00%
|
GEL
Settlement Payment, NPS purchase of crude oil from Pilot, and
working capital
|
|
|
|
|
|
|
|
Under
the Amended Pilot Line of Credit, NPS was required to make a
monthly payment to Pilot in each of September and October 2019 in
the amount of $0.1 million. The required payments were
made.
Guarantees and Security
|
Loan
Description
|
Guarantees
|
Security
|
|
Amended
Pilot Line of Credit
|
● Blue
Dolphin pledged its equity interests in NPS to Pilot to secure
NPS’ obligations;
● Blue
Dolphin, LE, LRM, and LEH have each guaranteed NPS’
obligations.
|
● NPS
receivables;
● NPS
assets, including a tank lease (the “Tank
Lease”);
● LRM
receivables.
|
Representations, Warranties, and Covenants
The
Amended Pilot Line of Credit contains customary affirmative and
negative covenants and events of default. In a May 10, 2019,
Subordination and Attornment Agreement between Veritex, LE, NPS,
and Pilot, Veritex in its capacity as a secured lender of LE and
LRM, agreed to permit the continued performance of obligations
under a certain tank lease agreement if it were to foreclose on LE
property that NPS was leasing from LE so long as certain conditions
were met. The effectiveness of the Subordination and Attornment
Agreement is subject to certain conditions, including the agreement
and concurrence of the USDA.
Line of
credit payable, which represents outstanding principal and accrued
interest, as of the dates indicated was as follows:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Amended
Pilot Line of Credit
|
$
11,786
|
$
-
|
|
|
|
|
|
Less:
Unamortized debt issue costs
|
(219
)
|
-
|
|
Less:
Interest payable, short-term
|
(103
)
|
-
|
|
|
$
11,464
|
$
-
|
(12)
AROs
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, and we
depreciated the amount added to property and equipment and
recognized accretion expense relating to the discounted liability
over the remaining life of the asset. At December 31, 2019 and
2018, the liability was fully accreted. See “Note (16)”
to our consolidated financial statements for disclosures related to
idle iron decommissioning of our pipeline and facilities assets and
related risks.
|
57
|
|
Notes to Consolidated Financial Statements
|
There
was no change to our ARO liability from December 31, 2018 to
December 31, 2019, as reflected below:
|
|
December
31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
AROs,
at the beginning of the period
|
$
2,565
|
$
2,315
|
|
Accretion
expense
|
-
|
265
|
|
|
2,565
|
2,580
|
|
Less:
AROs, current portion
|
(2,565
)
|
(2,580
)
|
|
Long-term
AROs, at the end of the period
|
$
-
|
$
-
|
(13)
Lease Obligations
Adoption of New ASU Guidance
Effective
January 1, 2019, we adopted ASU No. 2016-02 “Leases (Topic
842)” and the series of related Accounting Standards Updates
that followed. The most significant changes under the new guidance
include clarification of the definition of a lease, and the
requirements for lessees to recognize a ROU asset and a lease
liability for all qualifying leases with terms longer than twelve
months in the consolidated balance sheet. Additional disclosures
are also required to meet the objective of enabling users of
financial statements to assess the amount, timing, and uncertainty
of cash flows arising from leases.
We
adopted the new lease accounting guidance using the modified
retrospective method and applied it to all leases with terms
greater than 12 months based on the contract terms in effect as of
January 1, 2019. For existing contracts, we carried forward our
historical assessment of: (i) whether contracts are or contain
leases, (ii) lease classification, and (iii) initial direct costs.
For operating leases, we recognized a ROU asset and lease liability
as the present value of the fixed lease payments over the lease
term. Our finance leases were immaterial prior to the adoption of
this guidance, and no change was made to the classification for
these leases. Since the leases do not provide a readily
determinable discount rate, we use the incremental borrowing rate
to discount lease payments to present value.
Lease Obligations
Operating Lease
Office Lease
. BDSC has an office lease related to our
headquarters office in Houston, Texas. The 68-month operating lease
expires in 2023. BDSC has the option to extend the lease term for
one additional five (5) year period if notice of intent to extend
is provided to the lessor at least twelve (12) months before the
end of the current term. An Affiliate, LEH, subleases a portion of
this office space. Sublease income received from LEH
totaled $0.03 million for both 2019 and 2018. See “Note
(3)” to our consolidated financial statements for additional
disclosures related to the Affiliate sub-lease.
Finance Lease
Crane
. In January 2018, LE entered a 24-month lease for the
purchase of a 20-ton crane for use at the Nixon facility. The lease
required a negligible monthly payment and matured in January
2020.
Backhoe Rent-to-Own Agreement
.
In May 2019,
LE entered into a 12-month
equipment rental agreement with the option to purchase the backhoe
at maturity. The backhoe is being used at the Nixon
facility.
Remainder
of Page Intentionally Left Blank
|
58
|
|
Notes to Consolidated Financial Statements
|
The
following table presents the lease-related assets and liabilities
recorded on the consolidated balance sheet:
|
|
|
December 31,
|
|
|
Balance Sheet Location
|
2019
|
|
|
|
(in thousands)
|
|
Assets
|
|
|
|
Operating
lease ROU assets
|
Operating
lease ROU assets
|
$
787
|
|
Less:
Accumulated amortization on operating lease assets
|
Operating
lease ROU assets
|
(138
)
|
|
|
649
|
|
|
|
|
|
|
Finance
lease assets
|
Property
and equipment, net
|
180
|
|
Less:
Accumulated amortization on finance lease assets
|
Property
and equipment, net
|
(34
)
|
|
|
146
|
|
|
|
|
|
|
Total
lease assets
|
|
795
|
|
|
|
|
|
Liabilities
|
|
|
|
Current
|
|
|
|
Operating
lease
|
Current
portion of lease liabilities
|
175
|
|
Finance
leases
|
Current
portion of lease liabilities
|
76
|
|
|
251
|
|
|
Noncurrent
|
|
|
|
Operating
lease
|
Long-term
lease liabilities, net of current
|
564
|
|
Total
lease liabilities
|
|
$
815
|
|
Weighted
average remaining lease term in years
|
|
|
Operating
lease
|
3.67
|
|
Finance
leases
|
0.41
|
|
Weighted
average discount rate
|
|
|
Operating
lease
|
8.25
%
|
|
Finance
leases
|
8.25
%
|
The
following table presents information related to lease costs for
operating and finance leases:
|
|
Year
Ended
|
|
|
December
31,
|
|
|
2019
|
|
|
(in
thousands)
|
|
|
|
|
Operating
lease costs
|
$
206
|
|
Finance
lease costs:
|
|
|
Depreciation
of leased assets
|
21
|
|
Interest
on lease liabilities
|
6
|
|
Total
lease cost
|
$
233
|
The
table below presents supplemental cash flow information related to
leases as follows:
|
|
Year Ended
|
|
|
December 31,
|
|
|
2019
|
|
|
(in thousands)
|
|
Cash
paid for amounts included in the measurement of lease
liabilities:
|
|
|
Operating
cash flows for operating lease
|
$
190
|
|
Operating
cash flows for finance leases
|
$
6
|
|
Financing
cash flows for finance leases
|
$
45
|
|
59
|
|
Notes to Consolidated Financial Statements
|
As of
December 31, 2019, maturities of lease liabilities for the periods
indicated were as follows:
|
December 31,
|
Operating
Lease
|
Financing
Leases
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
2020
|
$
175
|
$
76
|
$
251
|
|
2021
|
194
|
-
|
194
|
|
2022
|
215
|
-
|
215
|
|
2023
|
155
|
-
|
155
|
|
|
|
|
|
|
|
$
739
|
$
76
|
$
815
|
Future
minimum annual lease commitments that are
non-cancelable:
|
|
Operating
|
|
December 31,
|
Lease
|
|
|
(in
thousands)
|
|
2020
|
$
230
|
|
2021
|
233
|
|
2022
|
237
|
|
2023
|
161
|
|
|
$
861
|
(14)
Income Taxes
Tax Provision
The
provision for income tax benefit for the periods indicated was as
follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Current
|
|
|
|
Federal
|
$
-
|
$
108
|
|
State
|
-
|
43
|
|
Deferred
|
|
|
|
Change
in valuation allowance
|
-
|
109
|
|
|
|
|
|
Total
provision for income taxes
|
$
-
|
$
260
|
The
state of Texas, TMT is treated as an income tax for financial
reporting purposes.
Effective Tax Rate
Our
effective tax rate was as follows:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Expected
tax rate
|
21.00
%
|
(21.00
%)
|
|
Permanent
differences
|
0.00
%
|
0.00
%
|
|
State
tax
|
0.00
%
|
(5.10
%)
|
|
Federal
tax
|
0.00
%
|
(28.10
%)
|
|
Change
in valuation allowance
|
(21.00
%)
|
21.00
%
|
|
|
0.00
%
|
(33.20
%)
|
|
60
|
|
Notes to Consolidated Financial Statements
|
Beginning
in 2018, our effective tax rate differed from the U.S. federal
statutory rate primarily due to AMT credits made refundable by the
Tax Cuts and Jobs Act. At the date of enactment of the Tax Cuts and
Jobs Act, we re-measured our deferred tax assets and liabilities
using a rate of 21%, which is the rate expected to be in place when
such deferred assets and liabilities are expected to reverse in the
future. The re-measurement was offset by a change in our valuation
allowance, resulting in there being no impact on our net deferred
tax assets.
Deferred
income taxes as of the dates indicated consisted of the
following:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
Deferred
tax assets:
|
|
|
|
NOL
and capital loss carryforwards
|
$
12,463
|
$
11,260
|
|
Accrued
arbitration award payable
|
-
|
2,850
|
|
Business
interest expense
|
1,923
|
704
|
|
Start-up
costs (crude oil and condensate processing facility)
|
594
|
678
|
|
ARO
liability/deferred revenue
|
539
|
542
|
|
AMT
credit and other
|
50
|
108
|
|
Total
deferred tax assets
|
15,569
|
16,142
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
Basis
differences in property and equipment
|
(6,066
)
|
(5,153
)
|
|
Total
deferred tax liabilities
|
(6,066
)
|
(5,153
)
|
|
|
9,503
|
10,989
|
|
|
|
|
|
Valuation
allowance
|
(9,453
)
|
(10,881
)
|
|
|
|
|
|
Deferred
tax assets, net
|
$
50
|
$
108
|
Deferred Income Taxes
Deferred
income tax balances reflect the effects of temporary differences
between the carrying amounts of assets and liabilities and their
tax basis, as well as from NOL carryforwards. We state those
balances at the enacted tax rates we expect will be in effect when
taxes are paid. NOL carryforwards and deferred tax assets represent
amounts available to reduce future taxable income.
NOL Carryforwards
. Under IRC Section 382, a corporation that
undergoes an “ownership change” is subject to
limitations on its use of pre-change NOL carryforwards to offset
future taxable income. Within the meaning of IRC Section 382, an
“ownership change” occurs when the aggregate stock
ownership of certain stockholders (generally 5% shareholders,
applying certain look-through rules) increases by more than fifty
(50) percentage points over such stockholders' lowest percentage
ownership during the testing period (generally three years). For
income tax purposes, we experienced ownership changes in 2005,
relating to a series of private placements, and in 2012, because of
a reverse acquisition, that limit the use of pre-change NOL
carryforwards to offset future taxable income. In general, the
annual use limitation equals the aggregate value of common stock at
the time of the ownership change multiplied by a specified
tax-exempt interest rate. The 2012 ownership change will subject
approximately $16.3 million in NOL carryforwards that were
generated prior to the ownership change to an annual use limitation
of approximately $0.6 million per year. Unused portions of the
annual use limitation amount may be used in subsequent years.
Because of the annual use limitation, approximately $6.7 million in
NOL carryforwards that were generated prior to the 2012 ownership
change will expire unused. NOL carryforwards that were generated
after the 2012 ownership change and prior to 2018 are not subject
to an annual use limitation under IRC Section 382 and may be used
for a period of 20 years in addition to available amounts of NOL
carryforwards generated prior to the ownership change. NOL
carryforwards that were generated after 2017 may only be used to
offset 80% of taxable income and are carried forward
indefinitely.
|
61
|
|
Notes to Consolidated Financial Statements
|
NOL Carryforwards
. NOL carryforwards that remained available
for future use for the periods indicated were as follow (amounts
shown are net of NOLs that will expire unused because of the IRC
Section 382 limitation):
|
|
Net Operating
Loss Carryforward
|
|
|
|
|
Pre-Ownership
Change
|
Post-Ownership
Change
|
Total
|
|
|
(in
thousands)
|
||
|
|
|
|
|
|
Balance
at December 31, 2017
|
$
9,614
|
$
30,219
|
$
39,833
|
|
|
|
|
|
|
Net
operating losses
|
-
|
7,116
|
7,116
|
|
|
|
|
|
|
Balance
at December 31, 2018
|
9,614
|
37,335
|
46,949
|
|
|
|
|
|
|
Net
operating losses
|
-
|
5,723
|
5,723
|
|
|
|
|
|
|
Balance at December 31, 2019
|
$
9,614
|
$
43,058
|
$
52,672
|
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, 2019 and 2018, management
determined that cumulative losses incurred over the prior
three-year period provided significant objective evidence that
limited the ability to consider other subjective evidence, such as
projections for future growth. Based on this evaluation, we
recorded a valuation allowance against the deferred tax assets for
which realization was not deemed more likely than not as of
December 31, 2019 and 2018.
(15)
Earnings Per Share
A
reconciliation between basic and diluted income per share for the
periods indicated was as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
(in thousands, except share and per
share amounts)
|
|
|
|
|
|
|
Net
income (loss)
|
$
7,361
|
$
(523
)
|
|
|
|
|
|
Basic
and diluted income (loss) per share
|
$
0.66
|
$
(0.05
)
|
|
|
|
|
|
Basic
and Diluted
|
|
|
|
Weighted
average number of shares of
|
|
|
|
common
stock outstanding and potential
|
|
|
|
dilutive
shares of common stock
|
11,156,995
|
10,935,787
|
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 2019 and 2018 was the same as
basic EPS as there were no stock options or other dilutive
instruments outstanding.
|
62
|
|
Notes to Consolidated Financial Statements
|
|
|
(16)
Commitments and Contingencies
Legal Matters
Resolved - GEL Settlement
. As previously disclosed, GEL was
awarded the GEL Final Arbitration Award in the aggregate amount of
$31.3 million. In July 2018, the Lazarus Parties and GEL entered
into the GEL Settlement Agreement. The GEL Settlement Agreement was
subsequently amended five (5) times to extend the GEL Settlement
Payment Date and/or modify certain terms related to the GEL Interim
Payments or the GEL Settlement Payment. During the period September
2017 to August 2019, GEL received the following amounts from the
Lazarus Parties to reduce the outstanding balance of the GEL Final
Arbitration Award:
|
|
(in
millions)
|
|
Initial payment
(September 2017)
|
$
3.7
|
|
GEL Interim
Payments (July 2018 to April 2019)
|
8.0
|
|
Settlement Payment
(Multiple Payments May 7 to 10, 2019)
|
10.0
|
|
Deferred Interim
Installment Payments (June 2019 to August 2019)
|
0.5
|
|
|
|
|
|
$
22.2
|
The GEL
Settlement Effective Date occurred on August 23, 2019. As a result
of the GEL Settlement: (i) the mutual releases became effective,
(ii) GEL filed a stipulation of dismissal of claims against LE, and
(iii) Blue Dolphin recognized a $9.1 million gain on the
extinguishment of debt on its consolidated statements of operations
in the third quarter of 2019. Until the GEL Settlement occurred,
the debt was reflected on Blue Dolphin’s consolidated balance
sheets as accrued arbitration award payable. At December 31, 2019
and 2018, accrued arbitration award payable was $0 and
$21.1million, respectively.
Other Legal Matters
. We are involved in lawsuits, claims,
and proceedings incidental to the conduct of our business,
including mechanic’s liens, contract-related disputes,
administrative proceedings, and financial assurance (bonding)
requirements with regulatory bodies. Management is in discussion
with all concerned parties and does not believe that such matters
will have a material adverse effect on our financial position,
earnings, or cash flows. However, there can be no assurance that
such discussions will result in a manageable outcome or that we
will be able to meet financial assurance (bonding) requirements. If
Veritex exercises its rights and remedies due to defaults under our
secured loan agreements, our business, financial condition, and
results of operations will be materially adversely
affected.
Defaults Under Secured Loan Agreements
See
“Note (1)” and “Note (10)” to our
consolidated financial statements for additional disclosures
related to defaults under our secured loan agreements.
Amended and Restated Operating Agreement
See
“Note (3)” to our consolidated financial statements for
additional disclosures related to operation and management of all
Blue Dolphin properties by an Affiliate under the Amended and
Restated Operating Agreement.
Financing Agreements and Guarantees
Indebtedness
. See “Note (3),” “Note
(10),” and “Note (11)” to our consolidated
financial statements for disclosures related to Affiliate and
third-party indebtedness.
Guarantees
. Affiliates provided guarantees on certain debt
of Blue Dolphin and its subsidiaries. The maximum amount of any
guarantee is equal to the principal amount and accrued interest,
which amounts are reduced as payments are made. See “Note
(3),” “Note (10),” and “Note (11)” to
our consolidated financial statements for additional disclosures
related to Affiliate and third-party guarantees associated with
indebtedness and associated risk factors.
Health, Safety and Environmental Matters
Our
operations are subject to extensive federal, state, and local
environmental, health, and safety regulations governing, among
other things, the generation, storage, handling, use and
transportation of petroleum products and hazardous substances; the
emission and discharge of materials into the environment; waste
management; characteristics and composition of jet fuel and other
products; and the monitoring, reporting and control of air
emissions. 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 will continue to make capital and efficiency improvements
at the Nixon facility. Therefore, we incurred and will continue to
incur capital expenditures related to these improvements, which
include, among other things, facility and land improvements,
installation of new and/or refurbished refinery process equipment,
and completion of a petroleum storage tank.
|
63
|
|
Notes to Consolidated Financial Statements
|
Idle Iron
BDPL
has pipeline and facilities assets that are subject to BSEE’s
idle iron regulations. BSEE mandates lessees and rights-of-way
holders to permanently abandon and/or remove platforms and other
structures when they are no longer useful for operations. To cover
the various obligations of lessees and rights-of-way holders
operating in federal waters of the Gulf of Mexico, BOEM evaluates
an operator’s financial ability to carry out present and
future obligations to determine whether the operator must provide
additional security beyond the minimum bonding requirements. Such
obligations include the cost of plugging and abandoning wells and
decommissioning and removing platforms and pipelines at the end of
production or service activities. Once plugging and abandonment
work has been completed, the collateral backing the financial
assurance is released by BOEM.
BDPL
has historically maintained $0.9 million in financial assurance to
BOEM for the decommissioning of its trunk pipeline offshore in
federal waters. Following an agency restructuring of the financial
assurance program, in March 2018 BOEM ordered BDPL to provide
supplemental pipeline bonds totaling $4.8 million for five (5)
existing pipeline rights-of-way within sixty (60) calendar days. In
June 2018, BOEM issued BDPL INCs for each right-of-way that failed
to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted
multiple extension requests that extended BDPL’s deadline for
filing a statement of reasons for the appeal with the IBLA. In
December 2018, BSEE issued an INC to BDPL for failure to flush and
fill Pipeline Segment No. 13101.
On
August 9, 2019, BDPL timely filed its statement of reasons for the
appeal with the IBLA. Management met with BOEM and BSEE on August
15, 2019. BSEE proposed that BDPL re-submit permit applications for
pipeline and platform decommissioning, along with a safe boarding
plan for the platform, within six (6) months (no later than
February 15, 2020), and develop and implement a safe boarding plan
for submission with such permit applications. BDPL timely submitted
permit applications for decommissioning and removal of the subject
offshore assets on February 11, 2020. Further, BSEE proposed that
BDPL complete approved, permitted work within 12 months (no later
than August 15, 2020). Considering BDPL’s August 2019
meeting with BOEM and BSEE, BDPL requested a stay in the IBLA
matter until August 2020. The Office of the Solicitor of the U.S.
Department of the Interior was agreeable to a 10-day extension
while it conferred with BOEM on BDPL’s stay request. In late
October 2019, BDPL filed a motion to request the 10-day extension,
which motion was subsequently granted by the IBLA. The
solicitor’s office consented to an additional 14-day
extension for BDPL to file its reply, and BDPL filed a motion to
request the 14-day extension in November 2019. The
solicitor’s office indicated that BOEM would not consent to
further extensions. However, the solicitor’s office signaled
that BDPL’s adherence to the milestones identified in the
August 15, 2019 meeting may help in future discussions with BOEM
related to the INCs. BDPL reasonably expects that successful
completion of its decommissioning obligations will significantly
reduce or eliminate the amount of financial assurance required,
which may serve to partially or fully resolve the
INCs.
BDPL
reasonably expects that successful completion of its
decommissioning obligations prior to BSEE’s August 2020
deadline will significantly reduce or eliminate the amount of
financial assurance required by BOEM, which may serve to partially
or fully resolve the INCs. BDPL expects to complete approved,
permitted decommissioning work by the BSEE August 2020 deadline. If
decommissioning of the assets is not completed by the allowable
deadline, BDPL will be subject to vigorous regulatory oversight and
enforcement, including but not limited to failure to correct an
INC, civil penalties, and revocation of BDPL’s operator
designation, which may have a material adverse effect on our
earnings, cash flows and liquidity.
BDPL’s
pending appeal of the INCs does not relieve BDPL of its obligations
to provide additional financial assurance or of BOEM’s
authority to impose financial penalties. If BDPL is required by
BOEM to provide significant additional financial assurance or is
assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations,
liquidity, and financial condition. We are currently unable to
predict the outcome of the INCs. Accordingly, we have not recorded
a liability on our consolidated balance sheet as of December 31,
2019.
At
December 31, 2019 and 2018, BDPL maintained approximately $0.9
million in credit and cash-backed pipeline rights-of-way bonds
issued to BOEM. As of December 31, 2019, we maintained $2.6 million
in AROs related to abandonment of these assets.
(17)
Subsequent Events
In
early March 2020, crude oil prices declined significantly in
response to worldwide oil demand concerns due to the economic
impacts of COVID-19, which has also negatively impacted numerous
other industries, domestic and international. The extent to which
these events may impact our business will depend on future
developments, which are highly uncertain and cannot be predicted at
this time. Further, the duration and intensity of these impacts and
resulting disruption to our operations is uncertain and we will
continue to assess the financial impact.
|
64
|
|
Internal Controls and Procedures
|
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other
procedures that are designed to ensure that information required to
be disclosed by us in the reports we file or submit under the
Exchange Act is recorded, processed, summarized and reported within
the time periods specified by SEC rules and forms. Disclosure
controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be
disclosed by us in the reports we file or submit under the Exchange
Act is accumulated and communicated to our Chief Executive Officer
(principal executive officer, principal financial officer, and
principal accounting officer) to allow timely decisions regarding
required disclosure. Under the supervision of, and with the
participation of our management, including our Chief Executive
Officer, we conducted an evaluation of the effectiveness of our
disclosure controls and procedures, as defined in Rules 13a-15(e)
and 15d-15(e) under the Exchange Act, as of the end of the period
covered by this report. Based on our evaluation, our Chief
Executive Officer (principal executive officer, principal financial
officer, and principal accounting officer) concluded that our
disclosure controls and procedures were effective as of the end of
the period covered by this report to ensure that information
required to be disclosed by us in reports that we file or submit
under the Exchange Act, are recorded, processed, summarized and
reported within the time periods specified in the SEC’s rules
and forms.
Management’s Report on Internal Control over Financial
Reporting
Management’s Responsibility
. Management is responsible for establishing and
maintaining adequate internal control over financial reporting, as
such term is defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act. A company’s internal control over financial
reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in
accordance with generally accepted accounting principles in the
U.S.
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, principal
financial officer, and principal accounting officer), assessed the
effectiveness of our internal controls over financial reporting at
December 31, 2019. 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 ineffective at
December 31, 2019 due to certain material weaknesses and/or
significant deficiencies as described below:
|
●
|
Significant deficiency – There is currently not a process in
place for formal review of manual journal entries.
|
|
●
|
Material weakness – The company currently lacks resources to
handle complex accounting transactions. This can result in errors
related to the recording, disclosure and presentation of
consolidated financial information in quarterly, annual, and other
filings. Current year audit procedures resulted in significant
adjustments related to the accounting for a certain stock issuance
in payment of related party debt, as well as deferred revenue
relating to consideration received from a supplier.
|
We intend to take the necessary measures to implement formal
policies, improve processes, document procedures, and better define
segregation of duties to improve financial reporting. These actions
will be subject to ongoing senior management review, as well as
Audit Committee oversight. Although we plan to complete remediation
as quickly as possible, we cannot at this time estimate how long it
will take, and our initiatives may not prove to be successful in
fully remediating the identified weakness and
deficiency.
Changes in Internal Control over Financial
Reporting
.
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.
Exemption from Management's Report on Internal Control over
Financial Reporting
. This
report does not include an attestation report of our registered
public accounting firm regarding internal control over financial
reporting. Management’s report was not subject to attestation
by our registered public accounting firm pursuant to rules of the
SEC for smaller reporting companies that permit us to provide only
management’s attestation in this report.
|
65
|
|
Other Information
|
|
|
ITEM 9B. OTHER INFORMATION
Sales of Unregistered Securities
Set
forth below is information regarding the sale or issuance of shares
of Common Stock by us for the years ended December 31, 2019 and
2018 that were not registered under the Securities Act of
1933:
●
On November 14,
2019, we issued an aggregate of 1,351,851 restricted shares of
Common Stock to Jonathan Carroll pursuant to guaranty fee
agreements. The issuance represents payment of the common stock
component of the guaranty fees for the period May 2017 through
October 2019, which payments were not permissible under the GEL
Settlement Agreement. We recorded an expense of approximately $0.5
million related to the share issuance. Mr. Carroll will receive
payment of the common stock component of the guaranty fees on a
quarterly basis going forward. The cash portion of guaranty fees
owed to Jonathan Carroll will continue to be accrued and added to
the principal balance of the March Carroll Note.
●
On October 18,
2018, we issued an aggregate of 50,001 restricted shares of Common
Stock to certain of our non-employee, independent directors for
services rendered to the Board for the period January 1, 2018 to
March 31, 2018. At March 31, 2018, the grant date market value cost
basis was $0.60 per share.
The
sale and issuance of the securities were exempt from registration
under the Securities Act in reliance on Section 4(a)(2) of the
Securities Act.
Remainder
of Page Intentionally Left Blank
|
66
|
|
Directors and Officers and Corporate Governance
|
|
|
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
Overview
Blue
Dolphin was formed in 1986 as a Delaware corporation and is traded
on the OTCQX under the ticker symbol “BDCO”. Affiliates
control approximately 82% of the voting power of our
Common Stock. An Affiliate operates and manages all Blue Dolphin
properties and funds working capital requirements during periods of
working capital deficits, and an Affiliate is a significant
customer of our refined products. Blue Dolphin and certain of its
subsidiaries are currently parties to a variety of agreements with
Affiliates and a counterparty. See “Item 1A.” and
“Note (3)” to our consolidated financial statements for
additional disclosures related to Affiliate risk factors, Affiliate
agreements and arrangements, and risks associated with working
capital deficits.
Board Composition
The amended and restated bylaws of Blue Dolphin provide that the
Board shall consist of five (5) 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 (5)
directors, each serving until the next annual meeting of
stockholders to be held by Blue Dolphin.
The following sets forth, at March 30, 2020, 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
, 58
Blue
Dolphin
Chairman of the Board
(since 2014)
Chief Executive Officer, President,
Assistant Treasurer and Secretary
(since 2012)
LEH
President
(since 2006)
and
Majority Owner
Together,
LEH and Jonathan Carroll owned approximately 82% of our outstanding
Common Stock as of the filing date of this report.
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.
|
|
Ryan A. Bailey
, 44
Pacenote
Capital
Managing Partner
(since August 2019)
and Co-founder
Children’s
Health System of Texas
Head of Investments
(2014 to August 2019)
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.
|
|
67
|
|
Directors and Officers and Corporate Governance
|
|
|
|
Name, Age
Principal Occupation and Directorships During Past 5
Years
|
Knowledge and Experience
|
|
|
|
|
Amitav Misra
, 42
Arundo
Analytics, Inc.
General Manager Americas (
since 2018
)
Vice President of Marketing
(since 2017)
Cardinal
Advisors
Partner
(2014 to 2017)
and
Founder
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
, 58
Impact
Partners LLC
President
(since 2017)
Tatum
(a Randstad Company)
New York Managing Partner
(2013 to 2017)
MPact
Partners LLC
President
(2011 to 2013)
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.
|
|
|
|
|
Herbert N. Whitney
, 79
Wildcat
Consulting, LLC
President
(since 2006)
and
Founder
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.
|
|
|
|
|
68
|
|
Directors and Officers and Corporate Governance
|
This table shows, as of March 30, 2020, 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
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
|
2012
|
58
|
|
Mr. 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 82.1% of Blue
Dolphin’s Common Stock as of the Record
Date. 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.
|
Mr. Tommy L. Byrd served as our Chief Financial Officer from 2015
to 2018 and as our Interim Chief Financial Officer from 2012 to
2015. He served as our Treasurer and Assistant Secretary from 2012
to 2018. Mr. Byrd resigned effective December 31,
2018.
Family Relationships between Directors and Officers
At
March 30, 2020, there were no family relationships between any of
our directors or executive officers.
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 2019, the
Board met three (3) times. The Board has two standing committees,
the Audit Committee and the Compensation Committee.
Audit Committee
The
Audit Committee consists of Messrs. Morris, Bailey, and Misra, with
Mr. Morris serving as Chairman. During 2019, the Audit Committee
met four (4) times. The Board has affirmatively determined that all
members of the Audit Committee are independent under OTCQX and SEC
rules and that each of Messrs. Morris and Bailey qualifies as an
Audit Committee Financial Expert. The Audit Committee's duties
include overseeing financial reporting and internal control
functions. The Audit Committee’s written charter is available
on our 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 2019, the
Compensation Committee did not meet. The Board has affirmatively
determined that all members of the Compensation Committee are
independent under OTCQX rules. 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
).
Nominating Committee
Given
the small size of the Board, the Board adopted a ‘Board
Nomination Procedures’ policy in lieu of appointing a
standing nominating committee. The Audit Committee uses the policy
to perform in a similar function as a standing nominating
committee. The policy is used by the independent directors when
choosing nominees to stand for election. The Board will consider
for possible nomination qualified nominees recommended by
stockholders in accordance with Blue Dolphin’s Certificate of
Incorporation. As addressed in the ‘Board Nomination
Procedures’ policy, the manner in which 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, be able to 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.
|
69
|
|
Directors and Officers and Corporate Governance
|
|
|
Director Attendance at Annual Meeting
Given
the small size of the Board, director attendance at our annual
meeting of stockholders is encouraged but not required. Mr. Carroll
was the only director present at the 2019 annual meeting of
stockholders.
Leadership Structure
Blue
Dolphin is led by Mr. Carroll, who has served as our Chief
Executive Officer and President since 2012 and as our Chairman of
the Board since 2014. Having a single leader is commonly used by
other public companies in the United States, 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
it 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 upon the
performance of the Board.
Risk Oversight
Our
Board is involved in overseeing Blue Dolphin’s risk
management. The two standing Board committees provide appropriate
risk oversight. The Audit Committee oversees the accounting and
financial reporting processes, as well as compliance, internal
control, legal and risk matters. The Compensation Committee
oversees compensation policies, including the approval of
compensation for directors and management. We believe that the
processes established to report and monitor systems for material
risks applicable to us are appropriate and effective.
Code of Ethics and Code of Conduct
In
compliance with the Sarbanes-Oxley Act of 2002, the Board adopted a
code of ethics policy and a code of conduct policy. The Audit
Committee established procedures to enable anyone who has a concern
about our conduct, policies, accounting, internal control over
financial reporting, and/or auditing matters to communicate that
concern directly to the Chairman of 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 or such other contact
information for the Audit Committee Chairman that we may post on
our website from time to time. Our code of ethics and code of
conduct policies are also available on our website (
http://www.blue-dolphin-energy.com
).
Any amendments or waivers to provisions of our code of ethics or
code of conduct will be disclosed on Form 8-K as filed with the SEC
and/or posted on our website.
Communicating with Directors
As the
Board does not receive a large volume of correspondence from
stockholders, at this time, there is no formal process by which
stockholders can communicate with the Board. 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 and/or posted on our
website (
http://www.blue-dolphin-energy.com
).
Remainder
of Page Intentionally Left Blank
|
70
|
|
Executive Compensation
|
|
|
ITEM 11. EXECUTIVE COMPENSATION
Executive Compensation Policy and Procedures
An
Affiliate operates and manages all Blue Dolphin properties pursuant
to the Amended and Restated Operating Agreement. Services under the
Amended and Restated Operating Agreement include personnel serving
in a variety of capacities, including, but not limited to corporate
executives. All personnel work for and are paid by the Affiliate.
See “Note (3)” to our consolidated financial statements
for additional disclosures related to Affiliate
arrangements.
Compensation for Named Executives
Under
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
|
Total
|
|
|
|
(in
thousands)
|
|
|
|
|
|
|
|
Jonathan
P. Carroll
|
2019
|
$
-
|
$
-
|
|
Chief
Executive Officer and President
|
2018
|
-
|
-
|
|
|
|
|
|
|
Tommy L. Byrd
(1)
|
2019
|
-
|
-
|
|
Chief
Financial Officer
|
2018
|
$
177
|
$
177
|
(1)
Mr. Byrd resigned
effective December 31, 2018.
Compensation Risk Assessment
The
Affiliate’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. The Affiliate 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
Although
Jonathan Carroll is a director of Blue Dolphin, his services as
Chief Executive Officer are provided under the Amended and Restated
Operating Agreement (see above under “Executive Compensation
Policy and Procedures.”) Therefore, we do not have any
directors that are also employed by Blue Dolphin. The Compensation
Committee reviews and recommends to the Board for its approval all
compensation for the directors.
Compensation for Non-Employee Directors
Non-employee,
independent directors receive compensation for their service on the
Board of $40,000 per year. Compensation is earned in Common Stock
and cash on a quarterly rotating basis, as follow:
|
Fair Market
Value
|
|
Period Services
Rendered
|
|
Payment
Method
|
|
|
|
|
|
|
|
$10,000
|
|
January
1 – March 31 (First Quarter)
|
|
Common
stock
|
|
$10,000
|
|
April 1
– June 30 (Second Quarter)
|
|
Cash
|
|
$10,000
|
|
July 1
– September 30 (Third Quarter)
|
|
Common
stock
|
|
$10,000
|
|
October
1 – December 31 (Fourth Quarter)
|
|
Cash
|
|
71
|
|
Executive Compensation
|
For the
first and third quarters, the number of shares of Common Stock to
be issued is determined by the closing price of Blue
Dolphin’s Common Stock on the last trading day in the
respective quarterly period and such closing price is the cost
basis for such issuance. The shares of Common Stock are subject to
resale restrictions applicable to restricted securities and
securities held by affiliates under federal securities
laws.
Non-employee,
independent directors also 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. Non-employee, independent directors serving on the
Compensation Committee do not earn any additional compensation for
their service as directors. Non-employee, independent directors are
reimbursed for reasonable out-of-pocket expenses related to
in-person meeting attendance.
At
December 31, 2019, non-employee, independent directors had not been
paid the cash portion of their compensation since 2015 and the
common stock portion of their compensation following the first
quarter 2018 service period due to defaults under our secured loan
agreements, historic net losses, and working capital. However, as
of the filing date of this report, non-employee, independent
directors had been paid the outstanding cash portion of accrued
director fees. Non-employee, independent directors will receive
payment of the common stock portion of director fees going forward.
Unpaid cash fees are reflected within accrued expenses and other
current liabilities on our consolidated balance sheets. See
“Note (9) Accrued Expenses and Other Current
Liabilities” to our consolidated financial statements for
additional disclosures related to board of director fees
payable.
|
Accrued and Unpaid Non-Employee, Independent Director
Compensation
|
|
|
Years Ended December 31,
|
|||||
|
|
2019
|
2018
|
||||
|
|
(in thousands)
|
|||||
|
Name
|
Cash
|
Stock
(1)(2)
|
Total
(3)
|
Cash
|
Stock
(1)(2)
|
Total
(3)
|
|
|
|
|
|
|
|
|
|
Christopher
T. Morris
|
$
25,000
|
$
20,000
|
$
45,000
|
$
25,000
|
$
20,000
|
$
45,000
|
|
Ryan
A. Bailey
|
22,500
|
20,000
|
42,500
|
22,500
|
20,000
|
42,500
|
|
Amitav
Misra
|
22,500
|
20,000
|
42,500
|
22,500
|
20,000
|
42,500
|
|
|
|
|
|
|
|
|
|
|
$
70,000
|
$
60,000
|
$
130,000
|
$
70,000
|
$
60,000
|
$
130,000
|
|
(1)
|
At
December 31, 2019 and 2019, Messrs. Morris, Bailey, Misra and
Whitney had total restricted awards of Common Stock outstanding of
75,026, 60,676, 66,767 and 9,683, respectively.
|
|
(2)
|
At March 31, 2018, the grant date market value cost basis was $0.60
per share.
|
|
(3)
|
At December 31, 2019 and 2018, Messrs. Morris, Bailey and Misra
were collectively owed $263,000 and $273,000, respectively, in
accrued and unpaid compensation for director fees.
|
Remainder of Page
Intentionally Left Blank
|
72
|
|
Security Ownership and Related Stockholder Matters
|
ITEM 12.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security Ownership of Certain Beneficial Owners
The
table below sets forth information at December 31, 2019 with
respect to persons or groups known to us to be the beneficial
owners of more than five percent (5%) of our common stock. 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
|
LEH
|
8,426,456
|
68.4
%
|
|
|
801
Travis Street, Suite 2100
|
|
|
|
|
Houston,
Texas 77002
|
|
|
(1)
Based upon
12,327,365 shares of Common Stock issued and outstanding at
December 31, 2019.
Security Ownership of Management
The
table below sets forth information at December 31, 2019 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)
|
10,115,151
|
82.1
%
|
|
Common
Stock
|
Christopher
T. Morris
|
75,026
|
*
|
|
Common
Stock
|
Amitav
Misra
|
66,767
|
*
|
|
Common
Stock
|
Ryan
A. Bailey
|
60,676
|
*
|
|
Common
Stock
|
Herbert
N. Whitney
|
9,683
|
*
|
|
|
|
|
|
|
Directors/Nominees
and Executive Officers as a Group (5 Persons)
|
10,327,303
|
83.8
%
|
|
(1)
Based
upon 12,327,365 shares of Common Stock issued and outstanding at
December 31, 2019. At December 31, 2019, 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 LEH. Jonathan Carroll has an approximate 60%
ownership interest in LEH.
* Less
than 1%.
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 2019 and 2018.
Equity Compensation Plan Information
None.
|
73
|
|
Related Party Transactions, Director Independence and Accounting
Fees
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND
DIRECTOR INDEPENDENCE
Related-Party Transactions
See
“Note (3)” to our consolidated financial statements for
disclosures related to relationships we have with
Affiliates.
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 currently serves as a consultant to an
Affiliate.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees we
paid to UHY related to accounting fees and services for the periods
indicated were as follow:
|
|
Year Ended
December 31,
|
|
|
|
2019
|
2018
|
|
|
(in
thousands)
|
|
|
|
|
|
|
Audit
fees
|
$
247
|
$
138
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
|
$
247
|
$
138
|
Audit
fees for 2019 and 2018 related to the audit of our consolidated
financial statements and the review of our quarterly reports that
are filed with the SEC. Each year the Audit Committee pre-approves
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
|
74
|
|
Exhibit List
|
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules
Following
is a list of documents filed as part of this report:
●
Consolidated
balance sheets, consolidated statements of operations, consolidated
statements of shareholders’ equity (deficit), and
consolidated statements of cash flows, which appear in “Item
8.”
●
Exhibits as listed
in the exhibit index of this report, which is incorporated herein
by reference.
ITEM 16. FORM 10-K SUMMARY
Not
applicable.
Exhibits Index
|
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)
|
|
|
|
|
|
4.4
|
Description
of company securities.
|
|
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)
|
|
|
|
|
|
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)
|
|
|
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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)
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75
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Exhibit List
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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76
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Exhibit List
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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77
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Exhibit List
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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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)
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Line of
Credit, Guarantee and Security Agreement among Pilot Travel Centers
LLC, Nixon Product Storage, LLC and the other loan parties hereto
dated as of May 3, 2019 (as amended and restated as of May 9, 209
and May 10, 2019) (incorporated by reference to Exhibit 10.2 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
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Pledge Agreement
between Pilot Travel Centers LLC and Blue Dolphin Energy Company
dated as of May 3, 2019
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(incorporated
by reference to Exhibit 10.3 filed with Blue Dolphin’s Form
10-Q on August 14, 2019, Commission File No.
000-15905)
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First
Amendment and Restatement Agreement among Pilot Travel Centers LLC,
Nixon Product Storage, LLC and the other loan parties hereto dated
as of May 9, 2019 (incorporated by reference to Exhibit 10.4 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
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10.53
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Second
Amendment and Restatement Agreement among Pilot Travel Centers LLC,
Nixon Product Storage, LLC and the other loan parties hereto dated
as of May 10, 2019 (incorporated by reference to Exhibit 10.5 filed
with Blue Dolphin’s Form 10-Q on August 14, 2019, Commission
File No. 000-15905)
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10.54
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Pledge
Agreement between Pilot Travel Centers LLC and Blue Dolphin Energy
Company dated as of May 3, 2019
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(incorporated
by reference to Exhibit 10.6 filed with Blue Dolphin’s Form
10-Q on August 14, 2019, Commission File No.
000-15905)
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10.55
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Notice
from Veritex Community Bank to Lazarus Energy, LLC, Blue Dolphin
Energy Company, Lazarus Refining & Marketing, LLC, Lazarus
Energy Holdings, LLC, Lazarus Marine Terminal I, LLC and Jonathan
Pitts Carroll, Sr. dated April 30, 2019 (incorporated by reference
to Exhibit 10.7 filed with Blue Dolphin’s Form 10-Q on August
14, 2019, Commission File No. 000-15905)
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10.56
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Amendment
No. 1 to Line of Credit, Guarantee and Security Agreement among
Pilot Travel Centers LLC, Nixon Product Storage, LLC and the other
loan parties hereto dated as of September 3, 2019 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q
on November 14, 2019, Commission File No. 000-15905)
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78
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Exhibit List
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14.1
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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)
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21.1**
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List of
Subsidiaries of Blue Dolphin
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23.1**
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Consent
of UHY LLP
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31.1**
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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
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32.1**
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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
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99.1
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Amended
and Restated Audit Committee Charter as reviewed by the Board of
Directors of Blue Dolphin on November 15, 2018 (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy
Statement on Form DEF 14A on November 15, 2018, Commission File No.
000-15905)
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99.2
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Compensation
Committee Charter as reviewed by the Board of Directors of Blue
Dolphin on November 15, 2018 (incorporated by reference to Appendix
B filed with Blue Dolphin’s Proxy Statement on Form DEF 14A
on November 15, 2018, Commission File No. 000-15905)
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101.INS**
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XBRL
Instance Document
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101.SCH**
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XBRL
Taxonomy Schema Document
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101.CAL**
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XBRL
Calculation Linkbase Document
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101.LAB**
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XBRL
Label Linkbase Document
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101.PRE**
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XBRL
Presentation Linkbase Document
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101.DEF**
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XBRL
Definition Linkbase Document
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_______________
*
Management Compensation Plan
**
Filed herewith
Remainder
of Page Intentionally Left Blank
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79
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Signature Page
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SIGNATURES
Pursuant to the
requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly
authorized.
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BLUE DOLPHIN ENERGY COMPANY
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(Registrant)
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March
30, 2020
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By:
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/s/
JONATHAN P. CARROLL
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Jonathan
P. Carroll
Chief
Executive Officer, President,
Assistant
Treasurer and Secretary
(Principal
Executive Officer, Principal Financial Officer, and Principal
Accounting Officer)
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Pursuant
to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates
indicated.
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Signature
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Title
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Date
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/s/
JONATHAN P. CARROLL
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Jonathan
P. Carroll
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Chairman
of the Board, Chief Executive Officer, President, Assistant
Treasurer and Secretary (Principal Executive Officer, Principal
Financial Officer, and Principal Accounting Officer)
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March
30, 2020
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/s/
RYAN A. BAILEY
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Ryan A.
Bailey
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Director
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March
30, 2020
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/s/
AMITAV MISRA
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Amitav
Misra
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Director
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March
30, 2020
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/s/
CHRISTOPHER T. MORRIS
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Christopher
T. Morris
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Director
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March
30, 2020
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/s/
HERBERT N. WHITNEY
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Director
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March
30, 2020
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Herbert
N. Whitney
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80
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TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Registrants Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 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