10-Q 1 bdco_10q.htm QUARTERLY REPORT bdco_10q
 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
(Mark One)
[ √ ]
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended June 30, 2020
or
[ ]
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from             to
 
Commission File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
 
Delaware
 
73-1268729
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)
 
 
 
801 Travis Street, Suite 2100, Houston, Texas
 
77002
(Address of principal executive offices)
 
(Zip Code)
 
713-568-4725
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
 
Title of Each Class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock
BDCO
OTCQX
 
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒ No ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer 
Accelerated filer
Non-accelerated filer  
Smaller reporting company
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No ☒
 
Number of shares of common stock, par value $0.01 per share outstanding as of August 14, 2020: 12,693,514
 

 
Blue Dolphin Energy Company
June 30, 2020
 

Table of Contents
 
 
 
 
 
 
TABLE OF CONTENTS
 
 
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
2
Glossary of Terms
 
 
 
Glossary of Terms
 
Throughout this Quarterly Report on Form 10-Q, we have used the following terms:
 
Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including 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; original line of credit amount was $13.0 million.
 
Amended and Restated Operating Agreement. Affiliate agreement dated April 1, 2020 between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s operation and management of those companies’ assets.
 
ARO. Asset retirement obligations.
 
ASU. Accounting Standards Update.
 
AGO. Atmospheric gas oil, which is the heaviest product boiled by a crude distillation tower operating at atmospheric pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or blended with cracked stocks. Certain ethylene plants, called heavy oil crackers, can take AGO as feedstock.
 
bbl. Barrel; a unit of volume equal to 42 U.S. gallons.
 
BDPC. Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue Dolphin.
 
BDPL. Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue Dolphin.
 
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.
 
CDC. Centers for Disease Control and Prevention.
 
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. Blue Dolphin has 20,000,000 shares of Common Stock authorized.
 
Complexity. A numerical score that denotes, for a given refinery, the extent, capability, and capital intensity of the refining processes downstream of the crude distillation tower. Refinery complexities range from the relatively simple crude distillation tower (“topping unit”), which has a complexity of 1.0, to the more complex deep conversion (“coking”) refineries, which have a complexity of 12.0.
 
Condensate. Liquid hydrocarbons that are produced in conjunction with natural gas. Although condensate is sometimes like crude oil, it is usually lighter.
 
Cost of goods sold. Reflects the cost of crude oil and condensate, fuel use, and chemicals.
 
Crude distillation tower. A tall column-like vessel in which crude oil and condensate is heated and its vaporized components are distilled by means of distillation trays. This process 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; also referred to herein as the Nixon refinery.)
 
Crude oil. A mixture of thousands of chemicals and compounds, primarily hydrocarbons. Crude oil quality is measured in terms of density (light to heavy) and sulfur content (sweet to sour). Crude oil must be broken down into its various components by distillation before these chemicals and compounds can be used as fuels or converted to more valuable products.
 
Depropanizer unit. A distillation column that is used to isolate propane from a mixture containing butane and other heavy components.
 
Distillates. The result of crude distillation and therefore any refined oil product. Distillate is more commonly used as an abbreviated form of middle distillate. There are mainly four (4) types of distillates: (i) very light oils or light distillates (such as naphtha), (ii) light oils or middle distillates (such as our jet fuel), (iii) medium oils, and (iv) heavy oils (such as our low-sulfur diesel and 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.
 
Freeport facility. Encompasses processing units for: (i) crude oil and natural gas separation and dehydration, (ii) natural gas processing, treating, and redelivery, and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of land in Freeport, Texas.
 
GEL. GEL Tex Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis Energy, LLC.
 
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.
 
 
Blue Dolphin Energy Company
June 30, 2020
 
3
Glossary of Terms
 
 
 
 
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.
 
Gross profit (deficit). Calculated as total revenue less cost of goods sold; reflected as a dollar ($) amount.
 
HOBM. Heavy oil-based mud blendstock; see also “distillates.”
 
HUBZone. Historically Underutilized Business Zones program established by the SBA to help small businesses in both urban and rural communities.
 
IBLA. Interior Board of Land Appeals.
 
INC. Incident of Noncompliance issued by BOEM and/or BSEE.
 
Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan Carroll.
 
Intermediate petroleum products. A petroleum product that might require further processing before it is saleable to the ultimate consumer. This further processing might be done by the producer or by another processor. Thus, an intermediate petroleum product might be a final product for one company and an input for another company that will process it further.
 
IRC Section 382. Title 26, Internal Revenue Code, Subtitle A – Income Taxes, Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, § 382. Limits NOL carryforwards and certain built-in losses following ownership change.
 
IRS. Internal Revenue Service.
 
Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1) has a carbon number distribution between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel (including Jet B) has between 5 and 15 carbon atoms per molecule.
 
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 all consolidated operating costs, excluding crude costs, depreciation, amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC; previously reflected within refinery operating expenses in our consolidated statements of operations.
 
Leasehold interest. The interest of a lessee under an oil and gas lease.
 
Light crude. A liquid petroleum that has a low density and flows freely at room temperature. It has a low viscosity, low specific gravity, and a high American Petroleum Institute gravity due to the presence of a high proportion of light hydrocarbon fractions.
 
LMT. Lazarus Marine Terminal I, LLC, an affiliate of LEH.
 
LRM. Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue Dolphin.
 
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.
 
Nixon facility. Encompasses the 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and 56 acres of land in Nixon, Texas.
 
Nixon refinery. The 15,000-bpd crude distillation tower and associated processing units in Nixon, Texas.
 
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.
 
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.
 
OPEC. Organization of Petroleum Exporting Countries.
 
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. Blue Dolphin has 2,500,000 shares of Preferred Stock authorized and no shares of Preferred Stock issued and outstanding.
 
Product slate. Represents type and quality of products produced.
 
Propane. A by-product of natural gas processing and petroleum refining. Propane is one of a group of liquified petroleum gases. Others include butane, propylene, butadiene, butylene, isobutylene and mixtures thereof.
 
Refined products. Hydrocarbon compounds, such as jet fuel and residual fuel, that are produced by a refinery.
 
Refinery. Within the oil and gas industry, a refinery is an industrial processing plant where crude oil, condensate, and intermediate feeds are separated and transformed into petroleum products.
 
Refining gross profit (deficit) per bbl. Calculated as refinery operations revenue less total cost of goods sold divided by the volume, in bbls, of refined products sold during the period; reflected as a dollar ($) amount per bbl.
 
RCRA. Federal Resource Conservation and Recovery Act.
 
RFS2. Second Renewable Fuels Standard.
 
ROU. Right-of-use.
 
 
Blue Dolphin Energy Company
June 30, 2020
 
4
Glossary of Terms
 
 
 
 
SEC. Securities and Exchange Commission.
 
Securities Act. The Securities Act of 1933, as amended.
 
Segment margin (deficit). 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.
 
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.
 
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.
 
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.
 
WHO. World Health Organization.
 
WSJ prime rate. A measure of the U.S. prime rate as defined by the Wall Street Journal.
 
XBRL. eXtensible Business Reporting Language.
 
Yield. The percentage of refined products that is produced from crude oil and other feedstocks.

 
 
Blue Dolphin Energy Company
June 30, 2020
 
5
Important Information Regarding Forward Looking Statements
 
 
 
Important Information Regarding Forward-Looking Statements
 
This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, including, but not limited to, those under “Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals and expectations concerning our market position, future operations and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe our assumptions concerning future events are reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those projected, including but not limited to:
 
Business and Industry
 
● 
Our going concern status.
● 
Inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration, and historic net losses and working capital deficits.
● 
Substantial debt in current liabilities, 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 and customers in West Texas, creating significant exposure to regional economy risks and other conditions.
● 
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.
● 
The effects of public health threats, pandemics and epidemics, such as the ongoing outbreak of COVID-19, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand for our products, industry demand generally, crude oil supply, margins, production and throughput capacity, utilization, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally.
 
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 regain 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.
● 
The effect, impact, potential duration, or other implications of the ongoing outbreak of COVID-19 and global crude oil production levels, and any expectations we may have with respect thereto.
 
Pipeline and Facilities and Oil and Gas Assets
 
● 
Assessment of civil penalties by BOEM for our failure to satisfy orders to provide additional financial assurance (supplemental pipeline bonds) within the time period prescribed.
● 
Assessment of civil penalties by BSEE for our failure to decommission pipeline and platform assets, as well as complete structural platform surveys, within the time periods prescribed.
 
Common Stock
 
● 
Decline in stock price due to share sales by Affiliates.
● 
Issuance of additional shares of Common Stock and Preferred Stock, which significantly dilute the equity ownership of current holders.
 
See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Report on Form 10-Q for the quarterly period ended March 31, 2020 as filed with the SEC. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.
 
Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its consolidated subsidiaries, or all of them taken as a whole.
 
Blue Dolphin Energy Company
June 30, 2020
 
6
Financial Statements
 
 
 
 
PART I
 
ITEM 1. 
FINANCIAL STATEMENTS
 
Consolidated Balance Sheets (Unaudited)
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
(in thousands except share amounts)
 
 
 
 
 
 
 
 
 ASSETS
 
 
 
 
 
 
 CURRENT ASSETS
 
 
 
 
 
 
 Cash and cash equivalents
 $4 
 $72 
 Restricted cash
  49 
  49 
 Accounts receivable, net
  138 
  446 
 Accounts receivable, related party
  - 
  1,364 
 Prepaid expenses and other current assets
  1,912 
  2,276 
 Deposits
  224 
  158 
 Inventory
  3,558 
  1,645 
 Refundable federal income tax
  100 
  65 
 Total current assets
  5,985 
  6,075 
 
    
    
 LONG-TERM ASSETS
    
    
 Total property and equipment, net
  63,601 
  63,893 
 Operating lease right-of-use assets
  576 
  649 
 Restricted cash, noncurrent
  547 
  547 
 Surety bonds
  230 
  230 
 Deferred tax assets, net
  - 
  50 
 Total long-term assets
  64,954 
  65,369 
 
    
    
 TOTAL ASSETS
 $70,939 
 $71,444 
 
    
    
 LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
    
    
 CURRENT LIABILITIES
    
    
 Long-term debt less unamortized debt issue costs, current portion (in default)
 $33,612 
 $33,836 
 Line of credit payable less unamortized debt issue costs (in default)
  10,470 
  11,464 
 Long-term debt, related party, current portion (in default)
  12,573 
  6,001 
 Interest payable (in default)
  4,824 
  3,814 
 Interest payable, related party (in default)
  2,494 
  2,174 
 Accounts payable
  2,985 
  1,877 
 Accounts payable, related party
  149 
  149 
 Current portion of lease liabilities
  313 
  251 
 Asset retirement obligations, current portion
  2,436 
  2,565 
 Accrued expenses and other current liabilities
  2,775 
  3,333 
 Total current liabilities
  72,631 
  65,464 
 
    
    
 LONG-TERM LIABILITIES
    
    
 Long-term lease liabilities, net of current
  470 
  564 
 Deferred revenues
  1,748 
  1,930 
 Total long-term liabilities
  2,218 
  2,494 
 
    
    
 TOTAL LIABILITIES
  74,849 
  67,958 
 
    
    
 Commitments and contingencies (Note 16)
    
    
 
    
    
 STOCKHOLDERS' EQUITY (DEFICIT)
    
    
 Common stock ($0.01 par value, 20,000,000 shares authorized; 12,693,514 and 12,327,365
    
    
 shares issued at June 30, 2020 and December 31, 2019, respectively)
  127 
  123 
 Additional paid-in capital
  38,457 
  38,275 
 Accumulated deficit
  (42,494)
  (34,912)
 TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
  (3,910)
  3,486 
 
    
    
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
 $70,939 
 $71,444 
 
The accompanying notes are an integral part of these consolidated financial statements. 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
7
Financial Statements
 
 
 
 
Consolidated Statements of Operations (Unaudited)
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
(in thousands, except share and per-share amounts)
 
REVENUE FROM OPERATIONS
 
 
 
 
 
 
 
 
 
 
 
 
Refinery operations
 $17,359 
 $77,257 
 $78,256 
 $145,115 
Tolling and terminaling
  1,110 
  1,088 
  2,213 
  2,157 
Total revenue from operations
  18,469 
  78,345 
  80,469 
  147,272 
 
    
    
    
    
COST OF GOODS SOLD
    
    
    
    
    Crude oil, fuel use, and chemicals
  16,783 
  76,364 
  76,503 
  139,551 
    Other conversion costs
  2,893 
  2,192 
  5,261 
  4,521 
        Total cost of goods sold
  19,676 
  78,556 
  81,764 
  144,072 
 
    
    
    
    
Gross profit (deficit)
  (1,207)
  (211)
  (1,295)
  3,200 
 
    
    
    
    
COST OF OPERATIONS
    
    
    
    
LEH operating fee
  190 
  183 
  337 
  333 
Other operating expenses
  47 
  56 
  106 
  113 
General and administrative expenses
  531 
  579 
  1,175 
  1,249 
Depletion, depreciation and amortization
  669 
  633 
  1,302 
  1,223 
 
    
    
    
    
Total cost of operations
  1,437 
  1,451 
  2,920 
  2,918 
 
    
    
    
    
Income (loss) from operations
  (2,644)
  (1,662)
  (4,215)
  282 
 
    
    
    
    
OTHER INCOME (EXPENSE)
    
    
    
    
 
    
    
    
    
Easement, interest and other income
  80 
  1 
  100 
  1 
Interest and other expense
  (1,678)
  (1,638)
  (3,452)
  (2,835)
Total other expense
  (1,598)
  (1,637)
  (3,352)
  (2,834)
 
    
    
    
    
Loss before income taxes
  (4,242)
  (3,299)
  (7,567)
  (2,552)
 
    
    
    
    
Income tax expense
  - 
  - 
  (15)
  - 
 
    
    
    
    
Net loss
 $(4,242)
 $(3,299)
 $(7,582)
 $(2,552)
 
    
    
    
    
 
    
    
    
    
Loss per common share:
    
    
    
    
Basic
 $(0.34)
 $(0.30)
 $(0.61)
 $(0.23)
Diluted
 $(0.34)
 $(0.30)
 $(0.61)
 $(0.23)
 
    
    
    
    
Weighted average number of common shares outstanding:
    
    
    
    
Basic
  12,580,853 
  10,975,514 
  12,454,109 
  10,975,514 
Diluted
  12,580,853 
  10,975,514 
  12,454,109 
  10,975,514 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Blue Dolphin Energy Company
June 30, 2020
 
8
Financial Statements
 
 
 
 
Consolidated Statements of Cash Flows (Unaudited)
 
 
 
Six Months Ended June 30,
 
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
OPERATING ACTIVITIES
 
 
 
 
 
 
Net loss
 $(7,582)
 $(2,552)
Adjustments to reconcile net loss to net cash
used in operating activities:
    
    
Depletion, depreciation and amortization
  1,302 
  1,223 
Deferred income tax
  15 
  - 
Amortization of debt issue costs
  284 
  189 
Guaranty fees paid in kind
  305 
  - 
Deferred revenues and expenses
  (182)
  - 
Gain on issuance of shares
  (80)
  - 
Changes in operating assets and liabilities
    
    
Accounts receivable
  308 
  209 
Accounts receivable, related party
  1,364 
  (492)
Prepaid expenses and other current assets
  364 
  503 
Deposits and other assets
  (66)
  - 
Inventory
  (1,913)
  (287)
Accrued arbitration award
  - 
  (11,600)
Accounts payable, accrued expenses and other liabilities
  1,807 
  1,211 
Accounts payable, related party
  - 
  302 
Net cash used in operating activities
  (4,074)
  (11,294)
 
    
    
INVESTING ACTIVITIES
    
    
Capital expenditures
  (908)
  (494)
Net cash used in investing activities
  (908)
  (494)
 
    
    
FINANCING ACTIVITIES
    
    
Proceeds from line of credit
  - 
  12,402 
Payments on debt
  (1,501)
  (541)
Net activity on related-party debt
  6,415 
  229 
Net cash provided by financing activities
  4,914 
  12,090 
Net change in cash, cash equivalents, and restricted cash
  (68)
  302 

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
  668 
  1,665 
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
 $600 
 $1,967 
 
    
    
Supplemental Information:
    
    
Non-cash investing and financing activities:
    
    
Financing of capital expenditures via accounts payable and finance leases
 $- 
 $86 
Issuance of shares to extinguish debt
 $120 
 $- 
Conversion of related-party notes to common stock
 $148 
 $- 
Line of credit closing costs included in principal balance
 $- 
 $398 
Interest paid
 $1,608 
 $1,174 
Income taxes paid
 $- 
 $- 
 
The accompanying notes are an integral part of these consolidated financial statements.
 
 
Blue Dolphin Energy Company
June 30, 2020
 
9
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 more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Blue Dolphin has 20.0 million shares of Common Stock and 2.5 million shares of Preferred Stock authorized. There are approximately 12.7 million shares of Common Stock and no shares of Preferred Stock issued and outstanding.
 
Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
 
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of them taken as a whole.
 
Affiliates
Affiliates control approximately 82% of the voting power of our Common Stock. An Affiliate operates and manages all Blue Dolphin properties and funds working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements and 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 with Third Parties. Defaults under our secured loan agreements with third parties include loan agreements with Veritex in the original aggregate principal amount of $35.0 million, which are guaranteed 100% by the USDA, and a line of credit agreement with Pilot in the original principal amount of $13.0 million. Certain of our related-party debt is also in default. See “Note (3)” of our consolidated financial statements for disclosures related to related-party debt.
 
Veritex Loan Agreements. In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex regarding events of default under our secured loan agreements, including, but not limited to, the occurrence of the GEL Final Arbitration Award, associated material adverse effect conditions, failure by LE to replenish a $1.0 million payment reserve account, and the occurrence of events of default under our other secured loan agreements with Veritex. Further, Veritex informed obligors that it would consider a final confirmation of the GEL Final Arbitration Award to be a material event of default under the loan agreements. Veritex did not accelerate or call due our secured loan agreements considering then ongoing settlement discussions between GEL and the Lazarus Parties. Instead, Veritex expressly reserved all its rights, privileges and remedies related to events of default.
 
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant defaults and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.
 
In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.
 
At June 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex. As a result, the debt associated with these loans was classified within current portion of long-term debt on our consolidated balance sheets at June 30, 2020 and December 31, 2019.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
10
Notes to Consolidated Financial Statements
 
 
 
 
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements with Veritex permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further, 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.
 
Amended Pilot Line of Credit. On May 4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Obligations”) under the Amended Pilot Line of Credit. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Obligations began to accrue interest at a rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.
 
On June 1, 2020, Pilot notified borrower and guarantors by letter of its intent to apply as a setoff Pilot’s payment obligations owing to or for the credit or the account of borrower under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May, 2019, between borrower and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between the borrower and Pilot, against the Obligations. As of the date of the letter, the amount of such setoff was approximately $0.2 million. The setoff was only in partial satisfaction of the Obligations and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity.
 
The borrower and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue to work with the borrower to settle the Obligations. Borrower and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. Our ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. In the event we are unsuccessful in such endeavors, we may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
 
See “Note (10)” and “Note (11)” to our consolidated financial statements for additional information related to defaults under our secured loan agreements with Veritex and Pilot and their potential effects on our business, financial condition, and results of operations.
 
Margin Deterioration and Volatility. Steps taken to address the ongoing COVID-19 pandemic globally and nationally and the actions of members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets, causing oil prices to decline sharply, as well as other changes to the economic outlook in the near term. Such subsequent developments included, but are not limited to, government-imposed temporary business closures and voluntary shelter-at-home directives as well as developments in production discussions between global oil producers, and the effect thereof. Oil prices as well as demand are expected to continue to be volatile as a result of the near-term over-supply and the ongoing COVID-19 pandemic as changes in oil inventories, industry demand and global and national economic performance are reported, and we cannot predict when prices and demand will improve and stabilize. We are currently unable to estimate the impact these events will have on our future financial position and results of operations. However, we expect margins will likely remain weak for the remainder of 2020 until global demand begins to recover. Accordingly, we can provide no assurances that these events will not have a material adverse effect on our financial position or results of operations.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
11
Notes to Consolidated Financial Statements
 
 
 
 
Net Losses and Working Capital Deficits.
Net Losses. Net loss for the three months ended June 30, 2020 was $4.2 million, or a loss of $0.34 per share, compared to a net loss of $3.3 million, or a loss of $0.30 per share, for the three months ended June 30, 2019. The increase in net loss was the result of less favorable margins per bbl and lower sales volume during the three months ended June 30, 2020 compared to the same period in 2019. Net loss for the six months ended June 30, 2020 was $7.6 million, or a loss of $0.61 per share, compared to a net loss of $2.6 million, or a loss of $0.23 per share, for the six months ended June 30, 2019. The significant increase in net loss was the result of less favorable margins per bbl and lower sales volume during the six-month period ended June 30, 2020 compared to the same period a year earlier.
 
Working Capital Deficits. We had a working capital deficit of $66.6 million and $59.4 million at June 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $20.5 million and $19.6 million at June 30, 2020 and December 31, 2019, respectively. We had cash and cash equivalents and restricted cash (current portion) of less than $0.01 million and $0.05 million, respectively, at June 30, 2020. Comparatively, we had cash and cash equivalents and restricted cash (current portion) of $0.07 million and $0.05 million, respectively, at December 31, 2019.
 
Operating Risks
Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under “Note (1) – Going Concern” above and throughout this report, we are currently unable to estimate the impact the ongoing COVID-19 pandemic will have on our future financial position and results of operations. Our business was deemed as an essential business and, as such, has remained open. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. Management has taken and continues to take all prudent steps, however, there can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
 
(2) 
Principles of Consolidation and Significant Accounting Policies
 
Basis of Presentation
The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.
 
The consolidated balance sheet as of December 31, 2019 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Operating results for the three and six months ended June 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or for any other period. As discussed further below within this “Note (2) – Use of Estimates,” the ongoing COVID-19 pandemic has resulted in significant economic disruption globally. This disruption became more acute in the latter half of March 2020; therefore, our operating results for the three and six months ended June 30, 2020 do not fully reflect the impact this disruption has had, and will likely continue to have, on us.
 
Significant Accounting Policies
The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.
 
Use of Estimates. The ongoing COVID-19 pandemic and certain developments in the global oil markets have impacted and continue to impact our business. Our business was designated as an essential business and, as such, has remained open. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through the remainder of the year and beyond. Given diminished expectations for the global economy, and speculation regarding a prolonged slowdown and recession, we are unable to predict the ultimate economic impact of COVID-19 on our business.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
12
Notes to Consolidated Financial Statements
 
 
 
 
The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so.
 
We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of June 30, 2020 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.
 
Cash and Cash Equivalents. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts.
 
Restricted Cash. Restricted cash, current portion primarily represents a payment reserve account held by Veritex as security for payments under a loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction related expenses to complete building new petroleum storage tanks.
 
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management's judgment, deserve consideration in estimating bad debts.  Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition.  Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio.  We had an allowance for doubtful accounts of $0.1 million at both June 30, 2020 and December 31, 2019.
 
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 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 pipelines and platform 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.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
13
Notes to Consolidated Financial Statements
 
 
 
 
Leases. We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize ROU asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not determinable, we use the incremental borrowing rate to discount lease payments to present value. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
 
We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. We account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. We allocate the consideration in these contracts based on pricing information contained in the lease.
 
Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lease transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in ‘depreciation and amortization expense.’ Interest expense is incurred based on the carrying value of the lease liability and is reflected in ‘interest and other expense.’
 
Revenue Recognition.
Refinery Operations Revenue. Revenue from the sale of refined products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined product is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are met when control is transferred to the customer. Control is transferred to the customer when the product has been lifted or, in cases where the product is not lifted immediately (bill and hold arrangements), when the product is added to the customer’s bulk inventory as stored at the Nixon facility.
 
We consider a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. Transportation, shipping, and handling costs incurred are included in cost of goods sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.
 
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees pursuant to: (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over a period of time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for use of the naphtha stabilizer unit.
 
We typically satisfy performance obligations for tolling and terminaling operations with the passage of time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the term of the agreement. We allocate the transaction price to the single performance obligation that exists under the agreement, and we recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
 
Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer, and the price we charge for such services is not included in the fixed cost under the customer’s tank storage agreement. Ancillary services are considered a separate performance obligation by us under the tank storage agreement. The performance obligation is satisfied when the requested service has been performed in the applicable period.
 
Deferred Revenue. We record deferred revenue when cash payments are received or due in advance of our performance. An increase in the deferred revenue balance reflects cash payments received or due in advance of satisfying our performance obligations, offset by recognized revenue that was included in the deferred revenue balance at the beginning of the period. Deferred revenue represents a liability as of the balance sheet date related to a revenue producing activity for which revenue has not yet been recognized. We record deferred revenue when we receive consideration under a contract before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.
 
Income Taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities, as well as operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which the differences are expected to reverse. We record a valuation allowance against deferred income tax assets if it is more likely than not that those assets will not be realized. The provision for income taxes comprises our current tax liability and change in deferred income tax assets and liabilities.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
14
Notes to Consolidated Financial Statements
 
 
 
 
Significant judgment is required in evaluating uncertain tax positions and determining its provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to determine the realizability of deferred tax assets. We consider whether it is more likely than not that a portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. When we determine that it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets. A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended June 30, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of June 30, 2020 and December 31, 2019. We expect to recover deferred tax assets related to AMT credit carryforwards. In addition, we have NOL carryforwards that remain available for future use.
 
The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At June 30, 2020 and December 31, 2019, there were no uncertain tax positions for which a reserve or liability was necessary. See “Note (14)” to our consolidated financial statements for more information related to income taxes.
 
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we evaluate our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could be necessary. The GEL Final Arbitration Award represented a significant adverse change that could have affected the value of certain of our long-lived assets, and management performed potential impairment testing of our refinery and facilities assets in 2019 and 2018. Upon completion of each testing, no impairment was deemed necessary. In addition, the market volatility of crude oil prices as a result of the ongoing COVID-19 pandemic could have affected the value of certain of our long-lived assets, and management performed impairment testing of our refinery and facilities assets at June 30, 2020. No impairment was deemed necessary based upon June 30, 2020 testing, and we did not record any impairment of our refinery and facilities assets for the periods presented.
 
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred, and we also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.
 
We have concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.
 
We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating, or disposing of our offshore platform, pipeline systems, and related onshore facilities, as well as for plugging and abandoning wells and restoring land and sea-beds. Cost estimates for each of our assets were developed based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current retirement procedures, and construction and engineering consultations. Estimating future costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology, political, and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (12)” to our consolidated financial statements for additional information related to AROs.
 
Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding, which includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the earnings of the entity. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not have issued options, warrants, or similar instruments. See “Note (15)” to our consolidated financial statements for additional information related to EPS.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
15
Notes to Consolidated Financial Statements
 
 
 
 
New Pronouncements Adopted. The FASB issues an ASU to communicate changes to the FASB ASC, including changes to non-authoritative SEC content. Recently adopted ASUs include:
 
Codification Updates to SEC Sections. In July 2019, FASB issued ASU 2019-07, Codification Updates to SEC Sections, which amended certain SEC sections or paragraphs within the FASB ASC. The amendments were made pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). The SEC Final Rule Releases, which required improvements to the XBRL taxonomy, were made to improve, update, and simplify SEC regulations on financial reporting and disclosure. For public companies, the amendments in ASU 2019-07 were effective upon issuance. Adoption of this guidance did not have a significant impact on our consolidated financial statements.
 
Consolidation. In October 2018, FASB issued ASU 2018-17, Consolidation (Topic 810). This ASU provided targeted improvements to related-party guidance for variable interest entities. Indirect interests held through related parties in common control arrangements are considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in ASU 2018-17 were effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of this guidance did not have a significant impact on our consolidated financial statements.
 
New Pronouncements Issued, Not Yet Effective.
Income Taxes. In March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740). This guidance amends SEC paragraphs in ASC 740, Income Taxes, to reflect Staff Accounting Bulletin No. 118, which provides guidance for companies that are not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment.  This guidance also includes amendments to the XBRL taxonomy.  For public business entities, the amendments in ASU 2018-05 are effective for fiscal years ending after December 15, 2020. Early adoption is permitted.  We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.
 
Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Remainder of Page Intentionally Left Blank
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
16
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
04/01/2020
---
1-year term expiring earliest to occur of 03/31/2021 plus 30-day carryover or delivery of maximum jet fuel quantity; LEH bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification
March Carroll Note (in default)
Jonathan Carroll – Blue Dolphin
Debt
03/31/2017
8.00%
Blue Dolphin working capital; matured 01/01/2019; interest still accruing
March Ingleside Note (in default)
Ingleside – Blue Dolphin
Debt
03/31/2017
8.00%
Blue Dolphin working capital; reflects amounts owed to Ingleside under previous Amended and Restated Tank Lease Agreement; matured 01/01/2019; interest still accruing
June LEH Note (in default)
LEH – Blue Dolphin
Debt
03/31/2017
8.00%
Blue Dolphin working capital; reflects amounts owed to LEH under the Amended and Restated Operating Agreement; reflects amounts owed to Jonathan Carroll under guaranty fee agreements; matured 01/01/2019; interest still accruing
Office Sub-Lease Agreement
LEH - BDSC
Operations
01/01/2018
---
68-month term expiring 08/31/2023; office lease Houston, Texas; includes 6-month rent abatement period; rent approximately $0.02 million per month
Amended and Restated Operating Agreement
LEH – Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC
Debt
04/01/2020
---
3-year term; expires 04/01/2023 or notice by either party at any time of material breach or 90 days Board notice; LEH receives management fee of 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC
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) 
On April 30, 2020, we issued an aggregate of 231,065 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52, and the high was $1.07. For the foreseeable future, management does not intend on paying Mr. Carroll the cash portion of guaranty fees due to Blue Dolphin’s working capital deficits. The cash portion will continue to be accrued and added to the principal balance of the March Carroll Note.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
17
Notes to Consolidated Financial Statements
 
 
 
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts receivable, related party. Accounts receivable, related party totaled $0 and $1.4 million at June 30, 2020 and December 31, 2019, respectively. At December 31, 2019, accounts receivable, related party represented amounts owed from LEH for the sale of jet fuel under the Jet Fuel Sales Agreement.  Amounts are settled under normal business terms.  Amounts outstanding relating to the Jet Fuel Sales Agreement can vary significantly period to period based on the timing of the related sales and payments received.  See below for the total amount owed to LEH under the June LEH Note and the BDPL Loan Agreement.
 
Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both June 30, 2020 and December 31, 2019.
 
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
LEH
 
 
 
 
 
 
June LEH Note (in default)
 $6,336 
 $- 
BDPL Loan Agreement
  6,494 
  6,174 
LEH Total
  12,830 
  6,174 
Ingleside
    
    
March Ingleside Note (in default)
  1,039 
  1,004 
Jonathan Carroll
    
    
March Carroll Note (in default)
  1,198 
  997 
 
  15,067 
  8,175 
 
    
    
Less: Long-term debt, related party, current portion, in default
  (12,573)
  (6,001)
Less: Accrued interest payable, related party (in default)
  (2,494)
  (2,174)
 
 $- 
 $- 

Consolidated Statements of Operations.
Total revenue from operations.
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Refinery operations
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LEH
 $4,587 
  24.8%
 $24,173 
  30.2%
 $22,302 
  27.7%
 $44,982 
  30.2%
Third-Parties
  12,772 
  69.2%
  53,084 
  68.3%
  55,954 
  69.5%
  100,133 
  68.3%
Tolling and terminaling
    
    
    
    
    
    
    
    
Third-Parties
  1,110 
  6.0%
  1,088 
  1.5%
  2,213 
  2.8%
  2,157 
  1.5%
 
 $18,469 
  100.0%
 $78,345 
  100.0%
 $80,469 
  100.0%
 $147,272 
  100.0%
 
Interest expense.
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Jonathan Carroll
 
 
 
 
 
 
 
 
 
 
 
 
Guaranty Fee Agreements
 
 
 
 
 
 
 
 
 
 
 
 
First Term Loan Due 2034
 $108 
 $111 
 $216 
 $223 
Second Term Loan Due 2034
  44 
  46 
  89 
  92 
March Carroll Note (in default)
  20 
  28 
  43 
  53 
LEH
    
    
    
    
BDPL Loan Agreement (in default)
  160 
  160 
  320 
  320 
June LEH Note (in default)
  117 
  16 
  142 
  23 
Ingleside
    
    
    
    
March Ingleside Note (in default)
  15 
  26 
  35 
  52 
 
 $464 
 $387 
 $845 
 $763 
 
Blue Dolphin Energy Company
June 30, 2020
 
18
Notes to Consolidated Financial Statements
 
 
 
 
 
Other. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.2 million for the three months ended June 30, 2020 and 2019, respectively. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.4 million for the six months ended June 30, 2020 and 2019, respectively.
 
Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.01 million for both three-month periods ended June 30, 2020 and 2019. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.02 million for both six-month periods ended June 30, 2020 and 2019.
 
The LEH operating fee was flat, totaling approximately $0.2 million for both three-month periods ended June 30, 2020 and 2019. The LEH operating fee was also relatively flat, totaling approximately $0.3 million for both six-month periods ended June 30, 2020 and 2019.
 
(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.
 
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
 
 
 
 
 
 
 
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
19
Notes to Consolidated Financial Statements
 
 
 
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Net revenue (excluding intercompany fees and sales)
 
 
 
 
 
 
 
 
 
 
 
 
Refinery operations
 $17,359 
 $77,257 
 $78,256 
 $145,115 
Tolling and terminaling
  1,110 
  1,088 
  2,213 
  2,157 
Total net revenue
  18,469 
  78,345 
  80,469 
  147,272 
 
    
    
    
    
Intercompany fees and sales
    
    
    
    
Refinery operations
  (406)
  (653)
  (1,023)
  (1,259)
Tolling and terminaling
  406 
  653 
  1,023 
  1,259 
Total intercompany fees
  - 
  - 
  - 
  - 
 
    
    
    
    
Operation costs and expenses(1)
    
    
    
    
Refinery operations
  (19,418)
  (78,376)
  (81,251)
  (143,528)
Tolling and terminaling
  (258)
  (363)
  (513)
  (727)
Corporate and other
  (47)
  (56)
  (106)
  (113)
Total operation costs and expenses
  (19,723)
  (78,795)
  (81,870)
  (144,368)
 
    
    
    
    
Segment contribution margin (deficit)
    
    
    
    
Refinery operations
  (2,465)
  (1,772)
  (4,018)
  328 
Tolling and terminaling
  1,258 
  1,378 
  2,723 
  2,689 
Corporate and other
  (47)
  (56)
  (106)
  (113)
Total segment contribution margin (deficit)
  (1,254)
  (450)
  (1,401)
  2,904 
 
    
    
    
    
General and administrative expenses(2)
    
    
    
    
Refinery operations
  (327)
  (274)
  (631)
  (606)
Tolling and terminaling
  (68)
  (62)
  (136)
  (105)
Corporate and other
  (326)
  (243)
  (745)
  (688)
Total general and administrative expenses
  (721)
  (579)
  (1,512)
  (1,399)
 
    
    
    
    
Depreciation and amortization
    
    
    
    
Refinery operations
  (294)
  (483)
  (582)
  (948)
Tolling and terminaling
  (324)
  (99)
  (618)
  (198)
Corporate and other
  (51)
  (51)
  (102)
  (77)
Total depreciation and amortization
  (669)
  (633)
  (1,302)
  (1,223)
 
    
    
    
    
Interest and other non-operating expenses, net
    
    
    
    
Refinery operations
  (751)
  (823)
  (1,492)
  (1,606)
Tolling and terminaling
  (616)
  (579)
  (1,386)
  (775)
Corporate and other
  (231)
  (235)
  (474)
  (453)
Total interest and other non-operating expenses, net
  (1,598
  (1,637)
  (3,352
  (2,834)
 
    
    
    
    
Income (loss) before income taxes
    
    
    
    
Refinery operations
  (3,837)
  (3,352)
  (6,723)
  (2,832)
Tolling and terminaling
  250 
  638 
  583 
  1,611 
Corporate and other
  (655)
  (585)
  (1,427)
  (1,331)
Total loss before income taxes
  (4,242)
  (3,299)
  (7,567)
  (2,552)
 
    
    
    
    
Income tax expense
  - 
  - 
  (15)
  - 
 
    
    
    
    
Net loss
 $(4,242)
 $(3,299)
 $(7,582)
 $(2,552)
 
(1) 
Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g. insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL.
(2) 
General and administrative expenses within refinery operations include the LEH operating fee.
 
Blue Dolphin Energy Company
June 30, 2020
 
20
Notes to Consolidated Financial Statements
 
 
 
 
 
 
 
 
 Six Months Ended
 
 
 
June 30,
 
 
 
2020
 
 
2019
 
 
 
 (in thousands)
 
Capital expenditures
 
 
 
 
 
 
Refinery operations
 $292 
 $411 
Tolling and terminaling
  616 
  83 
Corporate and other
  - 
  - 
Total capital expenditures
 $908 
 $494 
 
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
 (in thousands)
 
Identifiable assets
 
 
 
 
 
 
Refinery operations
 $50,341 
 $51,317 
Tolling and terminaling
  18,750 
  18,401 
Corporate and other
  1,848 
  1,726 
Total identifiable assets
 $70,939 
 $71,444 
 
(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 both June 30, 2020 and December 31, 2019, we had cash balances (including restricted cash) that exceeded the FDIC insurance limit per depositor of approximately $0.3 million.
 
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. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Either party may terminate the crude supply agreement by providing the other party 60 days prior written notice.
 
Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement. During the second quarter of 2020, Pilot applied as a setoff Pilot’s payment obligations owed to us under the terminal services agreements between us and Pilot. The setoff was in partial satisfaction of our obligations to Pilot under the Amended Pilot Line of Credit. As of June 1, 2020, the amount of such setoff was approximately $0.2 million. See ‘going concern’ within “Note (1)” to our consolidated financial statements for additional disclosures related to defaults in our debt obligations.
 
Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, a sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations.
 
Significant Customers
We routinely assess the financial strength of our customers and have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.
 
 
Number Significant
Customers
% Total Revenue from Operations
 
Portion of Accounts Receivable at Date Indicated
 
 
 
 
Three Months Ended June 30, 2020
3
69%
$0
 
 
 
 
Three Months Ended June 30, 2019
4
97%
$0.6 million
 
 
 
 
Six Months Ended June 30, 2020
4
90%
$0.006 million
 
 
 
 
Six Months Ended June 30, 2019
4
97%
$0.6 million
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
21
Notes to Consolidated Financial Statements
 
 
 
 
 
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. LEH accounted for nearly 25% and 31% of our total revenue from operations for the three months ended June 30, 2020 and 2019, respectively. LEH accounted for nearly 28% and 31% of our total revenue from operations for the six months ended June 30, 2020 and 2019, respectively. LEH represented $0 in accounts receivable at June 30, 2020. LEH represented $0.5 million in accounts receivable at June 30, 2019.
 
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. The amounts are settled under normal business terms. The total amount owed to LEH under the June LEH Note and the BDPL Loan Agreement totaled $12.8 million and $6.2 million at June 30, 2020 and December 31, 2019, respectively. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to transactions with Affiliates.
 
Concentration of Customers. Our operations have a concentration of customers who are refined petroleum product wholesalers. These concentrations of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions including the uncertainties concerning COVID-19 and volatility in the global oil markets. Historically, we have not had any significant problems collecting our accounts receivable.
 
Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
 
 
 
Three Months Ended June 30,
 
 
Six Months Ended Ended June 30,
 
 
 
2020
 
 
2019
 
 
2020
 
 
2019
 
 
 
(in thousands, except percent amounts)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
LPG mix
 $- 
  0.0%
 $1 
  0%
 $- 
  0.0%
 $9 
  0%
Naphtha
  3,160 
  18.2%
  15,416 
  20.3%
  14,675 
  18.8%
  29,211 
  20.1%
Jet fuel
  4,587 
  26.4%
  24,173 
  30.7%
  22,302 
  28.5%
  44,982 
  31.0%
HOBM
  3,691 
  21.3%
  16,747 
  23.8%
  18,882 
  24.1%
  32,907 
  22.7%
AGO
  5,921 
  34.1%
  20,920 
  25.2%
  22,397 
  28.6%
  38,006 
  26.2%
 
 $17,359 
  100.0%
 $77,257 
  100.0%
 $78,256 
  100.0%
 $145,115 
  100.0%
 
An Affiliate, LEH, purchases all of our jet fuel. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate transactions.
 
(6) 
Prepaid Expenses and Other Current Assets
 
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Prepaid insurance
 $1,691 
 $417 
Other prepaids
  111 
  87 
Prepaid easement renewal fees
  110 
  121 
Prepaid crude oil and condensate
  - 
  1,651 
 
 $1,912 
 $2,276 
 
(7) 
Inventory
 
Inventory as of the dates indicated consisted of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
HOBM
 $2,833 
 $- 
Crude oil and condensate
  445 
  959 
Chemicals
  227 
  120 
AGO
  38 
  440 
Propane
  12 
  26 
LPG mix
  3 
  5 
Naphtha
  - 
  95 
 
 $3,558 
 $1,645 
 
Due to fluctuating commodity prices, we recorded a net realizable value adjustment to inventory of approximately $0.2 million and $0.3 million at June 30, 2020 and December 31, 2019, respectively.
 
 
Blue Dolphin Energy Company
June 30, 2020
 
22
Notes to Consolidated Financial Statements
 
 
 
 
(8) 
Property, Plant and Equipment, Net
 
Property, plant and equipment, net, as of the dates indicated consisted of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Refinery and facilities
 $71,254 
 $66,317 
Land
  566 
  566 
Other property and equipment
  833 
  833 
 
  72,653 
  67,716 
 
    
    
Less: Accumulated depletion, depreciation, and amortiation
  (13,938)
  (12,739)
 
  58,715 
  54,977 
 
    
    
CIP
  4,886 
  8,916 
 
 $63,601 
 $63,893 
 
We capitalize interest cost incurred on funds used to construct property, plant, and equipment. Capitalized interest is recorded as part of the asset it relates to and is depreciated over the asset’s useful life. Capitalized interest cost, which is included in CIP, was $0 and $0.7 million at June 30, 2020 and December 31, 2019. Capital expenditures for expansion at the Nixon facility were funded by long-term debt from Veritex, revenue from operations, and working capital from Affiliates. At June 30, 2020, unused amounts for capital expenditures derived from Veritex loans were reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (10)” to our consolidated financial statements for additional disclosures related to working capital deficits and borrowings for capital spending.
 
(9) 
Accrued Expenses and Other Current Liabilities
 
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020
 
 
2019
 
 
 
(in thousands)
 
Insurance
 $1,079 
 $159 
Unearned revenue from contracts with customers
  643 
  1,990 
Unearned contract renewal income
  500 
  500 
Property, fuel and other taxes
  331 
  183 
Other payable
  177 
  228 
Board of director fees payable
  35 
  263 
Customer deposits
  10 
  10 
 
 $2,775 
 $3,333 
 
 
 
 
 
 
 
 
 
Remainder of Page Intentionally Left Blank
 
 
Blue Dolphin Energy Company
June 30, 2020
 
23
Notes to Consolidated Financial Statements
 
 
 
 
 
(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; reduced 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)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and transactions, including long-term debt guarantees.
 
Representations, Warranties, Covenants, and Defaults
The First Term Loan Due 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 June 30, 2020 and December 31, 2019.
 
 
 
Blue Dolphin Energy Company
June 30, 2020
 
24
Notes to Consolidated Financial Statements
 
 
 
 
Events of Default. In September 2017, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex regarding events of default under our secured loan agreements, including, but not limited to, the occurrence of the GEL Final Arbitration Award, associated material adverse effect conditions, failure by LE to replenish a $1.0 million payment reserve account, and the occurrence of events of default under our other secured loan agreements with Veritex. Further, Veritex informed obligors that it would consider a final confirmation of the GEL Final Arbitration Award to be a material event of default under the loan agreements. Veritex did not accelerate or call due our secured loan agreements considering then ongoing settlement discussions between GEL and the Lazarus Parties. Instead, Veritex expressly reserved all its rights, privileges and remedies related to events of default.
 
In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant violations and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.
 
Payment Deferments. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex.
 
Financial Covenant Violations.  At June 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.
 
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Vertitex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements and any exercise by Veritex of its rights and remedies related to such defaults may have a material adverse effect on the trading prices of our common stock and on the value of an investment in our common stock, and holders of our common stock could lose their investment in our common stock in its entirety. See “Note (1)” and “Note (11)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
 
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt (outstanding principal and accrued interest), as of the dates indicated was as follows:
 
 
 
June 30,
 
 
December 31,
 
 
 
2020