UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission File No. 0-15905
BLUE DOLPHIN ENERGY COMPANY
(Exact name of registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation or organization)
73-1268729
(I.R.S. Employer Identification No.)
801 Travis Street, Suite 2100, Houston, Texas
(Address of principal executive offices)
77002
(Zip Code)
713-568-4725
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90
days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically 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 emerging growth
company. See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Act.
Large accelerated filer
Non-accelerated filer
☐
☐
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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C.7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the
correction of an error to previously issued financial statements. Yes ☐ No ☐
Indicate by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the
registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b). Yes ☐ No ☒
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of shares of common stock held by non-affiliates of the registrant was $2,919,215 as of June 30, 2022 (the last trading day of the registrant’s
most recently completed second fiscal quarter) based on the number of shares of common stock held by non-affiliates and the last reported sale price of the registrant's
common stock on June 30, 2022.
Number of shares of common stock, par value $0.01 per share, outstanding at April 3, 2023: 14,921,968
Table of Contents
PART I
ITEM 1.
ITEM 1A.
ITEM 1B.
ITEM 2.
ITEM 3.
ITEM 4.
PART II
ITEM 5.
ITEM 6.
ITEM 7.
ITEM 7A.
ITEM 8.
ITEM 9.
ITEM 9A.
ITEM 9B.
ITEM 9C.
PART III
ITEM 10.
ITEM 11.
ITEM 12.
ITEM 13.
ITEM 14.
PART IV
ITEM 15.
ITEM 16.
SIGNATURES
BUSINESS
RISK FACTORS
UNRESOLVED STAFF COMMENTS
PROPERTIES
LEGAL PROCEEDINGS
MINE SAFETY DISCLOSURES
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF
EQUITY SECURITIES
SELECTED FINANCIAL DATA
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders’ Equity (Deficit)
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
CONTROLS AND PROCEDURES
OTHER INFORMATION
DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
EXECUTIVE COMPENSATION
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
PRINCIPAL ACCOUNTING FEES AND SERVICES
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
FORM 10-K SUMMARY
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Blue Dolphin Energy Company
December 31, 2022 │Page 2
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Table of Contents
Glossary of Terms
Glossary of Terms
Throughout this Annual Report on Form 10-K, we have used the following terms:
Affiliate. Refers, either individually or collectively, to certain related parties
including Jonathan Carroll, Chairman and Chief Executive Officer of Blue
Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH
and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH
owned approximately 83% of the Common Stock as of the filing date of this
report.
AMT. Alternative Minimum Tax.
Amended Pilot Line of Credit. Line of Credit Agreement dated May 3, 2019,
between Pilot and NPS and subsequently amended on May 9, 2019, May 10,
2019, and September 3, 2019, the last amendment being Amendment No. 1;
original line of credit amount was $13.0 million; NPS repaid all obligations owed
to Pilot in October 2021.
Amended and Restated Operating Agreement. Affiliate agreement between
Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH governing LEH’s
operation and management of those companies’ assets; three-year term effective
April 1, 2020 expiring April 1, 2023 or notice by either party at any time of
material breach or 90 days Board notice; LEH receives management fee of 5% of
all consolidated operating costs, excluding crude costs, depreciation,
amortization, and interest, of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and
BDSC.
Following expiration of the Amended and Restated Operating
Agreement, the Second Amended and Restated Operating Agreement will
become effective April 1, 2023.
ARO. Asset retirement obligations.
BDEC Term Loan Due 2051 (as modified). An EIDL dated May 4, 2021
between Blue Dolphin and the SBA in the original principal amount of $0.5
million; the note was modified in February 2022 to increase the principal amount
by $1.5 million to $2.0 million; additional principal used for working capital;
interest accrues at 3.75%; maturity date May 2051; monthly principal and interest
payment $0.01 million; payments deferred first thirty (30) months; interest
accrues during deferral period; first payment due November 2023; loan not
forgivable; security includes all tangible and intangible personal property,
including, but not limited to inventory, equipment, instruments, chattel paper,
documents, letter of credit rights, accounts, deposit accounts, commercial tort
claims, general intangibles, and as-extracted collateral; contains representations
and warranties, affirmative and negative covenants, and events of default that are
usual and customary for a credit facility of this type.
Board. Board of Directors of Blue Dolphin.
BOEM. Bureau of Ocean Energy Management.
BSEE. Bureau of Safety and Environmental Enforcement.
CAA. Clean Air Act.
Capacity utilization rate. A percentage measure that indicates the amount of
available capacity used in the Nixon refinery. With respect to the crude
distillation tower, the rate is calculated by dividing total refinery throughput or
total refinery production on a bpd basis by the total capacity of the crude
distillation tower (currently 15,000 bpd).
Assignment Agreement. Pursuant to an Assignment Agreement effective
between LEH, Ingleside, and Lazarus Capital, the March Carroll Note and March
Ingleside Note were assigned to LEH under the June LEH Note effective
December 31, 2022.
CARES Act. Coronavirus Aid, Relief and Economic Security Act, which was
passed by Congress in March 2020, to provide economic assistance related to the
onset of the COVID-19 pandemic.
ASU. Accounting Standards Update.
AGO. Atmospheric gas oil (also known as atmospheric tower bottoms) is the
heaviest product boiled by a crude distillation tower operating at atmospheric
pressure. This fraction ordinarily sells as distillate fuel oil, either in pure form or
blended with cracked stocks. Certain ethylene plants, called heavy oil crackers,
can take AGO as feedstock.
bbl. Barrel; a unit of volume equal to 42 U.S. gallons.
BDPC. Blue Dolphin Petroleum Company, a wholly owned subsidiary of Blue
Dolphin.
BDPL. Blue Dolphin Pipe Line Company, a wholly owned subsidiary of Blue
Dolphin.
BDPL-LEH Loan Agreement. Loan Agreement dated August 15, 2016,
between BDPL and LEH in the original principal amount of $4.0 million; interest
accrues at 16.00% annually; guaranteed by certain BDPL property; contains
representations and warranties, affirmative and negative covenants, and events of
default that are usual and customary for a credit facility of this type; matured
August 2018; currently in default for failing to pay past due obligations at
maturity.
BDSC. Blue Dolphin Services Co., a wholly owned subsidiary of Blue Dolphin.
BDSC-LEH Office Sub-Lease Agreement. Office sublease agreement in
Houston, Texas between BDSC and LEH; sixty-eight-month (68) term effective
January 1, 2018 expiring August 31, 2023; includes 6-month rent abatement
period; rent approximately $0.003 million per month.
Blue Dolphin. Blue Dolphin Energy Company, one or more of its consolidated
subsidiaries, or all of them taken as a whole.
bpd. Barrel per day; a measure of the bbls of daily output produced in a refinery
or transported through a pipeline.
BDEC Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1,
2023, between Blue Dolphin and Jonathan Carroll; related to payoff of BDEC
Term Loan Due 2051; fee paid equal to 2.00% per annum of outstanding
principal balance owed under BDEC Term Loan Due 2051; fees payable 100% in
cash.
CDC. Centers for Disease Control and Prevention.
CERLA.
Liability Act of 1980.
Comprehensive Environmental Response, Compensation, and
CIP. Construction in progress.
COVID-19. An infectious disease caused by a coronavirus called SARS-CoV-2;
first identified in 2019 in Wuhan, the capital of China's Hubei province; the
disease spread globally, resulting in a pandemic.
Common Stock. Blue Dolphin common stock, par value $0.01 per share. Blue
Dolphin has 20,000,000 shares of Common Stock authorized and 14,921,968
shares of Common Stock issued and outstanding as of the filing date of this
report.
Complexity. A numerical score that denotes, for a given refinery, the extent,
capability, and capital intensity of the refining processes downstream of the crude
distillation tower. Refinery complexities range from the relatively simple crude
distillation tower (“topping unit”), which has a complexity of 1.0, to the more
complex deep conversion (“coking”) refineries, which have a complexity of 12.0.
Condensate. Liquid hydrocarbons that are produced in conjunction with natural
gas. Although condensate is sometimes like crude oil, it is usually lighter.
Cost of goods sold. Reflects the cost of crude oil and condensate, fuel use, and
chemicals.
Crude distillation tower. A tall column-like vessel in which crude oil and
condensate is heated and its vaporized components are distilled by means of
distillation trays. This process refines crude oil and other inputs into intermediate
and finished petroleum products; commonly referred to as a crude distillation
unit or an atmospheric distillation unit.
Crude oil. A mixture of thousands of chemicals and compounds, primarily
hydrocarbons. Crude oil quality is measured in terms of density (light to heavy)
and sulfur content (sweet to sour). Crude oil must be broken down into its
various components by distillation before use as fuels or conversion to other
products.
Crude Supply Agreement. Crude Supply Agreement between Pilot and LE
dated May 7, 2019, as amended on November 11, 2019, which agreement was
assigned by Pilot to Tartan pursuant to an Assignment of Contract dated March
20, 2020.
Blue Dolphin Energy Company
December 31, 2022 │Page 3
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Table of Contents
Glossary of Terms
CWA. Clean Water Act.
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 are heated at atmospheric pressure in the base of a distillation tower.
As the temperature increases, the various compounds vaporize in succession at
their various boiling points and then rise to prescribed levels within the tower
based on their densities (from lightest to heaviest). They then condense in
distillation trays and are drawn off individually for further refining. Distillation is
also used at other points in the refining process to remove impurities.
Downtime. Scheduled and/or unscheduled periods in which the crude distillation
tower is not operating. Downtime may occur for a variety of reasons, including
severe weather, power failures, and preventive maintenance.
EIA. Energy Information Administration.
Intercompany processing fees. Fees associated with an intercompany tolling
agreement related to naphtha volumes.
Intermediate petroleum products. A petroleum product that might require
further processing before being saleable to the ultimate consumer; further
processing might be done by the producer or by another processor. Thus, an
intermediate petroleum product might be a final product for one company and an
input for another company that will process it further.
IRC Section 382. Title 26, Internal Revenue Code, Subtitle A – Income Taxes,
Subchapter C – Corporate Distributions and Adjustments, Part V Carryovers, §
382. Limits NOL carryforwards and certain built-in losses following ownership
change.
IRS. Internal Revenue Service.
Jet fuel. A high-quality kerosene product primarily used in aviation. Kerosene-
type jet fuel (including Jet A and Jet A-1) has a carbon number distribution
between 8 and 16 carbon atoms per molecule; wide-cut or naphtha-type jet fuel
(including Jet B) has between 5 and 15 carbon atoms per molecule.
Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel between LE
and LEH; one-year term effective April 1, 2023 expiring earliest to occur of
March 31, 2024, plus 30-day carryover, or delivery of maximum jet fuel quantity;
LEH bids on jet fuel contracts under preferential pricing terms due to a
EIDL. Economic Injury Disaster Loan; provides economic relief to businesses
that experienced a temporary loss of revenue due to COVID-19.
EPA. Environmental Protection Agency.
Eagle Ford Shale. A hydrocarbon-producing geological formation extending
across South Texas from the Mexican border into East Texas.
Equipment Loan Due 2025. Installment sales contract dated October 13, 2020
between LE and Texas First in the original principal amount of $0.7 million; loan
represents conversion of prior equipment (backhoe) rental agreement with option
to purchase at maturity; interest accrues at 4.50%; maturity date October 2025;
monthly principal and interest payment $0.0013 million; security includes first
priority
the equipment; contains representations and warranties,
affirmative and negative covenants, and events of default that are usual and
customary for a credit facility of this type.
lien
in
Exchange Act. Securities Exchange Act of 1934, as amended.
FASB. Financial Accounting Standards Board.
FDIC. Federal Deposit Insurance Corporation.
HUBZone certification; company expects contract to renew at substantially
similar terms.
June LEH Note. June 2017 promissory note between Blue Dolphin and LEH;
for Blue Dolphin working capital; reflects amounts owed to LEH under the
Amended and Restated Operating Agreement; interest accrues at 8.00%
compounded annually; no covenants; matured January 2019; currently in default
for failing to pay past due obligations at maturity; pursuant to the Assignment
Agreement, balances previously due under the March Carroll Note and March
Ingleside Note were added to the balance due under the June LEH Note.
Kissick Debt. Loan agreement originally entered into between LE and Notre
Dame Investors, Inc. in the original principal amount of $8.0 million; debt held
by John Kissick as of the date of this report; pursuant to a 2017 sixth amendment,
the Kissick Debt was amended to increase the principal amount by $3.7 million;
the additional principal was used to reduce LE’s prior obligation to GEL Tex
Marketing, LLC, a Delaware limited liability company and an affiliate of Genesis
Energy, LLC; under a 2015 subordination agreement, John Kissick agreed to
subordinate his right to payments and security interest, as well as liens on the
Nixon facility’s business assets, in favor of Veritex as holder of the LE Term
Loan Due 2034; security includes subordinated deed of trust that encumbers the
crude distillation tower and general assets of LE; interest accrues at 16.00%; no
covenants; matured January 2019.
Feedstocks. Crude oil and other hydrocarbons, such as condensate and/or
intermediate products, that are used as basic input materials in a refining process.
Feedstocks are transformed into one or more finished products.
Lazarus Capital. Lazarus Capital, LLC, an affiliate of Jonathan Carroll.
LE. Lazarus Energy, LLC, a wholly owned subsidiary of Blue Dolphin.
Finished petroleum products. Materials or products which have received the
final increments of value through processing operations, and which are being
held in inventory for delivery, sale, or use.
Freeport facility. Consists of processing units for: (i) crude oil and natural gas
separation and dehydration, (ii) natural gas processing, treating, and redelivery,
and (iii) vapor recovery; also includes two onshore pipelines and 162 acres of
land in Freeport, Texas; facility is currently inactive.
GNCU. Greater Nevada Credit Union.
Greenhouse gases. Molecules in the Earth’s atmosphere such as carbon dioxide,
methane, and chlorofluorocarbons that warm the atmosphere because they absorb
some of the thermal radiation emitted from the Earth’s surface.
Gross profit (deficit). Calculated as total revenue less cost of goods sold;
reflected as a dollar ($) 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.
LE Amended and Restated Guaranty Fee Agreement. Amended and Restated
Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll;
related to payoff of LE Term Loan Due 2034; fee paid equal to 2.00% per annum
of outstanding principal balance owed under LE Term Loan Due 2034; pursuant
to an amendment effective January 1, 2023, fees payable 100% in cash.
LE-Ingleside Master Service Agreement. Master Service Agreement between
LE and Ingleside effective March 1, 2023 for storage of product intended for
customer receipt by barge; three-year term; tank rental $0.50 per bbl per month.
LE Term Loan Due 2034. Loan Agreement dated June 22, 2015, between LE,
Veritex, and guarantors in the original principal amount of $25.0 million;
Jonathan Carroll required to provide personal guarantee; interest accrues at WSJ
Prime rate plus 2.75%; maturity date June 2034; monthly principal and interest
payment $0.2 million; purpose of loan was loan refinance and Nixon facility
capital improvements; security includes first priority lien on Nixon facility’s
business assets (excluding accounts receivable and inventory), assignment of all
Nixon facility contracts, permits, and licenses, absolute assignment of Nixon
facility rents and leases, including storage tank rental income, and a $0.5 million
life
insurance policy on Jonathan Carroll; contains representations and
warranties, affirmative and negative covenants, and events of default that are
usual and customary for a credit facility of this type; currently under Veritex
Forbearance Agreement.
LE Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and
the SBA in the original principal amount of $0.15 million; principal used for
working capital; interest accrues at 3.75%; maturity date August 2050; monthly
principal and interest payment $0.0007 million; payments deferred first thirty
(30) months; interest accrued during deferral period; first payment made
February 2023; loan not forgivable; security includes business assets (e.g.,
machinery and equipment, furniture, fixtures, etc.) as more fully described in the
security agreement; contains representations and warranties, affirmative and
negative covenants, and events of default that are usual and customary for a
credit facility of this type.
Blue Dolphin Energy Company
December 31, 2022 │Page 4
Table of Contents
Glossary of Terms
4
LEH. Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and
controlling shareholder of Blue Dolphin as of the date of this report.
NPS. Nixon Product Storage, LLC, a wholly owned subsidiary of Blue Dolphin.
LEH Operating Fee. A management fee paid to LEH under the Amended and
Restated Operating Agreement; calculated as 5.00% 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.
NPS Guaranty Fee Agreement. Guaranty Fee Agreement effective January 1,
2023, between NPS and Jonathan Carroll; related to payoff of NPS Term Loan
Due 2031; fee paid equal to 2.00% per annum of outstanding principal balance
owed under NPS Term Loan Due 2031; fees payable 100% in cash.
NPS-LEH Terminal Services Agreement. Terminal Services Agreement
between NPS and LEH effective November 1, 2022 for the storage of jet fuel by
LEH; one-year term with one-year automatic renewals; tank rental approximately
$0.2 million per month.
Light crude. A liquid petroleum that has a low density and flows freely at room
temperature. It has a low viscosity, low specific gravity, and a high American
Petroleum Institute gravity due to the presence of a high proportion of light
hydrocarbon fractions.
LMT. Lazarus Marine Terminal I, LLC, an affiliate of LEH.
LRM. Lazarus Refining & Marketing, LLC, a wholly owned subsidiary of Blue
Dolphin.
LRM Amended and Restated Guaranty Fee Agreement. Amended and
Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and
Jonathan Carroll; related to payoff of LRM Term Loan Due 2034; fee paid equal
to 2.00% per annum of outstanding principal balance owed under LRM Term
Loan Due 2034; pursuant to an amendment effective January 1, 2023, fees
payable 100% in cash.
LRM Term Loan Due 2034. Loan Agreement dated December 4, 2015,
between LRM, Veritex, and guarantors in the original principal amount of $10.0
million; Jonathan Carroll required to provide personal guarantee; interest accrues
at WSJ Prime rate plus 2.75%; maturity date December 2034; monthly principal
and interest payment $0.1 million; purpose of loan to refinance bridge loan and
Nixon facility capital improvements; security includes second priority lien on
rights of LE in crude distillation tower and other collateral of LE, first priority
lien on real property interests of LRM, first priority lien on all LRM fixtures,
furniture, machinery, and equipment, first priority lien on all LRM contractual
rights, general intangibles, and instruments, except with respect to LRM rights in
its leases of certain specified storage tanks for which Veritex has a second
priority lien, and all other collateral as described in the security agreements;
contains representations and warranties, affirmative and negative covenants, and
events of default that are usual and customary for a credit facility of this type;
currently under Veritex Forbearance Agreement.
LTRI. Lazarus Texas Refinery I, an affiliate of LEH.
March Carroll Note. March 2017 promissory note between Blue Dolphin and
Lazarus Capital; reflects amounts owed to Jonathan Carroll under LE Amended
and Restated Guaranty Fee Agreement and LRM Amended and Restated
Guaranty Fee Agreement; interest accrues at 8.00% compounded annually; no
covenants; matured January 2019; note assigned to LEH; see “Assignment
Agreement.”
March Ingleside Note. March 2017 promissory note between Blue Dolphin and
Ingleside; represents periodic working capital to Blue Dolphin through
conversion of accounts payable; interest accrues at 8.00% compounded annually;
no covenants; matured January 2019; note assigned to LEH; see “Assignment
Agreement.”
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.
NAAQS. National Ambient Air Quality Standards.
Natural gas. A naturally occurring hydrocarbon gas mixture consisting primarily
of methane, but commonly including varying amounts of other higher alkanes,
and sometimes a small percentage of carbon dioxide, nitrogen, hydrogen sulfide,
or helium.
Nixon facility. Encompasses the Nixon refinery, petroleum storage tanks,
loading and unloading facilities, and 56 acres of land in Nixon, Texas.
Nixon refinery. The 15,000-bpd crude distillation tower and associated
processing units in Nixon, Texas.
NOL. Net operating losses.
Blue Dolphin Energy Company
Table of Contents
Glossary of Terms
NPS Term Loan Due 2031. Loan Agreement dated September 20, 2021,
between NPS, GNCU, and guarantors in the original principal amount of $10.0
million; Jonathan Carroll required to provide personal guarantee; interest accrues
at 5.75%; maturity date October 2031; monthly principal and interest payment
$0.1 million; interest-only payments first thirty-six (36) months; first principal
payment due November 2024; purpose of loan working capital; security includes
deed of trust lien on approximately 56 acres of land and improvements owned by
LE, leasehold deed of trust lien on certain property leased by NPS from LE, and
assignment of leases and rents and certain personal property; contains
representations and warranties, affirmative and negative covenants, and events of
default that are usual and customary for a credit facility of this type; currently in
default; covenant violations relate to debt service coverage ratio, current ratio,
and debt to net worth ratio.
NPS Term Loan Due 2050. An EIDL dated August 29, 2020 between NPS and
the SBA in the original principal amount of $0.15 million; principal used for
working capital; interest accrues at 3.75%; maturity date August 2050; monthly
principal and interest payment $0.0007 million; payments deferred first thirty
(30) months; interest accrued during deferral period; first payment made
February 2023; loan not forgivable; security includes business assets (e.g.,
related machinery and equipment, furniture, fixtures, etc.) as more fully
described in the security agreement; contains representations and warranties,
affirmative and negative covenants, and events of default that are usual and
customary for a credit facility of this type.
NSR/PSD. New Source Review/Prevention of Significant Deterioration.
OPA 90. Oil Pollution Act of 1990.
OPEC. Organization of Petroleum Exporting Countries.
Operating days. Represents the number of days in a period in which the crude
distillation tower operated. Operating days are calculated by subtracting
downtime in a period from calendar days in the same period.
OSHA. Occupational Safety and Health Administration.
OSRO. Oil Spill Response Organization.
Other conversion costs. Represents the combination of direct labor costs and
manufacturing overhead costs. These are the costs that are necessary to convert
our raw materials into refined products.
Other operating expenses. Represents costs associated with our natural gas
processing, treating, and redelivery facility, as well as our pipeline assets and
leasehold interests in oil and gas properties.
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 as of the filing date of this report.
5
December 31, 2022 │Page 5
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.
Topping unit. A type of petroleum refinery that engages in only the first step of
the refining process -- crude distillation. A topping unit uses atmospheric
distillation to separate crude oil and condensate into constituent petroleum
products. A topping unit has a refinery complexity range of 1.0 to 2.0.
Total refinery production. Refers to the volume processed as output through the
crude distillation tower. Refinery production includes finished petroleum
products, such as jet fuel, and intermediate petroleum products, such as naphtha,
HOBM and AGO.
Turnaround. Scheduled large-scale maintenance activity wherein an entire
process unit, and sometimes the entire plant, 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.
Veritex Forbearance Agreement. Forbearance Agreement dated and effective
November 18, 2022 between LE, LRM, Veritex, and guarantors (as defined
therein); the forbearance period terminates September 30, 2023.
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.
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). Calculated as refinery operations revenue less
total cost of goods sold during the period; reflected as a dollar ($) amount.
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.
RFS. First Renewable Fuels Standard.
RFS2. Second Renewable Fuels Standard.
ROU. Right-of-use.
SBA. Small Business Administration.
SEC. Securities and Exchange Commission.
Second Amended and Restated Operating Agreement. Affiliate agreement
between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH
governing LEH’s operation and management of those companies’ assets; one-
year term effective April 1, 2023 expiring April 1, 2024 or notice by either party
at any time of material breach or 90 days Board notice; LEH receives
management fee of 5.00% of all consolidated operating costs, excluding crude
costs, depreciation, amortization, and interest, of Blue Dolphin, LE, LRM, NPS,
BDPL, BDPC and BDSC.
Securities Act. The Securities Act of 1933, as amended.
Segment contribution margin (deficit). For the refinery operations segment,
represents refined product sales minus intercompany processing fees minus
refinery operations costs and expenses. For the tolling and terminaling segment,
represents storage tank rental and ancillary services fees plus intercompany
processing fees minus tolling and terminaling costs and expenses. Intercompany
processing fees are associated with an intercompany tolling agreement related to
naphtha volumes.
Significant customer. A customer who represents more than 10% of our total
revenue from operations.
Sour crude. Crude oil containing sulfur content of more than 0.5%.
Stabilizer unit. A distillation column intended to remove the lighter boiling
compounds, such as butane or propane, from a product.
Sulfur. Present at various levels of concentration in many hydrocarbon deposits,
such as petroleum, coal, or natural gas. Also, produced as a by-product of
removing sulfur-containing contaminants from natural gas and petroleum. Some
of the most commonly used hydrocarbon deposits are categorized based on their
sulfur content, with lower sulfur fuels selling at a higher, premium price and
higher sulfur fuels selling at a lower, discounted price.
Sweet crude. Crude oil containing sulfur content of less than 0.5%.
Tartan. Tartan Oil LLC, an affiliate of Pilot.
Texas First. Texas First Rentals, LLC.
TCEQ. Texas Commission on Environmental Quality.
Throughput. The volume processed through a unit or a refinery or transported
through a pipeline.
TMT. Texas margins tax; a form of business tax imposed on an entity’s gross
profit rather than on its net income.
Blue Dolphin Energy Company
December 31, 2022 │Page 6
Table of Contents
Important Information Regarding Forward-Looking Statements
6
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Important Information Regarding Forward-Looking Statements
This report (including information incorporated by reference) contains “forward-looking statements” within the meaning of Section 27A of the Securities Act, and Section
21E of the Exchange Act, including, but not limited to, those under “Part I, Item 1. Business” and “Part I, Item 1A. Risk Factors,” as well as “Part II, Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.” All statements other than statements of historical fact, including without
limitation statements regarding expectations regarding revenue, cash flows, capital expenditures, and other financial items, our business strategy, goals, and expectations
concerning our market position, future operations, and profitability, are forward-looking statements. Forward-looking statements may be identified by use of the words
“anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “predict,” “project,” “will,” “would” and similar terms and phrases. Although we believe
our assumptions concerning future events are reasonable, several risks, uncertainties, and other factors could cause actual results and trends to differ materially from those
projected, including but not limited to:
Business and Industry
Our going concern status.
Substantial debt in current liabilities, all of which is currently in default.
Continued inability to meet financial covenants under secured loan
agreements.
Restrictive covenants in our debt instruments that limit our ability to
undertake certain types of transactions.
Increased costs of capital or a reduction in the availability of credit.
Public health threats, pandemics, and epidemics, such as COVID-19, and
the adverse impacts on our business, financial condition, results of
operations, and liquidity.
Affiliate Common Stock ownership and transactions that could cause
conflicts of interest.
Operational hazards inherent in transporting, processing, and storing crude
oil and condensate and refined products.
Geographical concentration of our assets and customers in West Texas.
Competition from companies with more significant financial and other
resources.
Market changes in insurance that impact premium costs and available
coverages.
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Severe weather or other climate-related events that affect our facilities or
those of our vendors, suppliers, or customers.
Failing to effectively execute new business strategies, such as renewable
fuels.
Our ability to effect and integrate potential acquisitions.
Legal, Government, and Regulatory
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Environmental laws and regulations that may require us to make
substantial capital improvements to remain compliant or remediate current
or future contamination that could lead to material liabilities.
Strict laws and regulations regarding personnel and process safety.
Uncertainty regarding the impact of current and future sanctions imposed
by governments and other authorities, including the United States, the
European Union, and the United Kingdom in response to the Russian
military conflict with Ukraine.
General economic, political, or regulatory developments, including
recession, inflation, interest rates, or changes in governmental policies
relating to refined petroleum products, crude oil, or taxation.
Assessment of penalties by regulatory agencies, such as BOEM, BSEE,
OSHA and the TCEQ for violations.
Our estimates of future AROs related to our pipeline and facilities assets,
which may increase.
Regulatory changes and other measures related to greenhouse gas
emissions, climate change, and an ongoing desire to transition to greater
renewable energy solutions.
NOL carryforwards to offset future taxable income for U.S. federal income
tax purposes that are subject to limitation.
Industry technological developments that outpace our ability to keep up.
Security
Downstream and Midstream Operations
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Commodity price and refined product demand volatility, which can
adversely affect our refining margins.
Crude oil, other feedstocks, and fuel and utility services price volatility.
Availability and cost of crude oil and other feedstocks to operate the Nixon
facility.
Equipment failure and maintenance, which lead to operational downtime.
Potential impairment in the carrying value of long-lived assets, which
could negatively affect our operating results.
Adverse changes in operational cash flow and working capital, shortfalls
for which Affiliates may not fund.
Critical personnel loss, labor actions, and workplace safety issues.
Market share loss, an unfavorable financial condition shift, or the
bankruptcy or insolvency of a significant customer.
Increases in the cost or availability of third-party vessels, pipelines, trucks,
and other means of delivering and transporting our crude oil and
condensate, feedstocks, and refined products.
Sourcing of a substantial amount, if not all, of our crude oil and
condensate from the Eagle Ford Shale.
Geographical concentration of our refining operations and customers
within the Eagle Ford Shale.
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A terrorist attack or armed conflict.
Increased activism against oil and gas companies.
Actual or potential cybersecurity threats or loss of data privacy.
Common Stock
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Fluctuations in our stock price that may result in a substantial investment
loss.
Increasing attention to environmental, social, and governance (ESG)
matters.
Declines in our stock price due to share sales.
Dilution of the equity of current stockholders and the potential decline of
our stock price due to the issuance of new Common Stock or Preferred
Stock from the large pool of authorized shares that we have available to
issue.
The potential sale of shares in accordance with Rule 144, which may
adversely affect the market.
The lack of dividend payments.
Failing to maintain adequate internal controls under Section 404(a) of the
Sarbanes-Oxley Act.
See also the risk factors described in greater detail under “Part I, Item 1A. Risk Factors” of this report.
All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update
any forward-looking statements as a result of new information, future events, or otherwise.
Unless the context otherwise requires, references in this report to “Blue Dolphin,” “we,” “us,” “our,” or “ours” refer to Blue Dolphin Energy Company, one or more of its
consolidated subsidiaries, or all of them taken as a whole.
Part I should be read in conjunction with “Part II, Item 7. Management’s Discussion and Analysis and Results of Operations” and “Part II, Item 8. Financial Statements
and Supplementary Data”.
Blue Dolphin Energy Company
December 31, 2022 │Page 7
Table of Contents
Business
ITEM 1. BUSINESS
7
PART I
The following section of this Annual Report on Form 10-K generally refers to business developments during the twelve months ended December 31, 2022. Discussion of,
or references to, prior period business developments that are not included in this Form 10-K can be found in “Part I, Item 1. Business” of our Annual Report on Form
10-K for the year ended December 31, 2021.
Company Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the
United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol "BDCO."
Assets are organized in two business segments: 'refinery operations' (owned by LE) and 'tolling and terminaling services' (owned by LRM and NPS). 'Corporate and other'
includes subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). For
more information related to our business segments, see “Part I. Item 1. Business—Refinery Operations,—Tolling and Terminaling Operations, and — Inactive
Operations” and “Part I. Item 2. Properties” in this report.
An Affiliate, combined with Jonathan Carroll, controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate
also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party
secured debt, and 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 “Part I, Item 1A. Risk Factors” and “Part II, Item 8. Financial Statements and Supplementary Data – Note (3)” for additional disclosures related to
Affiliate agreements, arrangements, and risks associated with working capital deficits.
Going Concern
In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our
ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations were significantly
improved for the twelve months ended December 31, 2022 versus the prior twelve month period, management determined that certain factors continue to present
substantial doubt about our ability to continue as a going concern. These factors include significant current debt, which impacts our ability to meet debt covenants, and
historical net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments
that might result from this uncertainty. Management is working to alleviate these factors by entering into forbearance agreements with lenders, maximizing operation of
the Nixon refinery given favorable refining margins, and pursuing opportunities to obtain capital and/or refinance debt.
Our significant current debt is the result of certain third-party and related-party loan agreements being classified within the current portion of long-term debt on our
consolidated balance sheets at December 31, 2022 and 2021. Excluding accrued interest, we had current debt of $47.4 million and $63.0 million, respectively, as of
December 31, 2022 and 2021. Our significant current debt consists of bank debt to Veritex and GNCU, investor debt to John Kissick, and related party debt to LEH.
Forbearance Agreement
Pursuant to the November 2022 Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies related to existing defaults
pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18, 2022 through September
30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in the LE Term Loan Due
2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial covenants. As part of the
Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million
into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. In the event that LE and LRM pay off all amounts due under the LE Term Loan Due 2034
and LRM Term Loan Due 2034 on or before September 30, 2023, Veritex also agreed to waive late fees totaling approximately $0.4 million in the aggregate. The Veritex
Forbearance Agreement shall terminate on the first to occur: September 30, 2023, failing to make a payment when due, breach, or any new event of default. As of
December 31, 2022 and the filing date of this report, LE and LRM were in compliance with the Veritex Forbearance Agreement.
Blue Dolphin Energy Company
December 31, 2022 │Page 8
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Business
8
Other Defaults
We are in default under the NPS Term Loan Due 2031 due to covenant violations. We are also in default under the Kissick Debt, June LEH Note, and BDPL-LEH Loan
agreement related to past due obligations at maturity. Defaults permit the lender to declare the amounts owed under the related loan agreements immediately due and
payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available.
Favorable Refining Margins
The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting $32.9 million in net income
for the twelve months ended December 31, 2022. Comparatively, we reported a net loss of $12.8 million for the twelve months ended December 31, 2021. Our operating
results for 2022, including operating results by segment, can be found within ‘Results of Operations’ in “Part II, Item 7. Management’s Discussion and Financial Analysis
of Financial Condition and Results of Operations” in this report.
Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference
between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide
fluctuations. While refining margins and liquidity improved significantly during 2022, the general outlook for the oil and natural gas industry for 2023 remains unclear
given uncertainty surrounding the Russian military conflict with Ukraine, COVID-19, recession, and inflation. We can provide no assurances that refining margins and
demand will remain at current levels.
Working Capital Improvements
Historically, we experienced net losses during three of the last five years. We had $45.2 million and $78.5 million in working capital deficits at December 31, 2022 and
2021, respectively. Excluding the current portion of long-term debt, we had $2.1 million in working capital and $15.5 million in working capital deficits at December 31,
2022 and 2021, respectively. The significant improvement in working capital between the twelve-month periods ended December 31, 2022 and 2021 was primarily due to
favorable refining margins and increased gross profit. Continued favorable market conditions will enable us to continue meeting our needs through cash flow from
operations. We also continue to explore opportunities to obtain capital and/or refinance debt. During the twelve months ended December 31, 2022 and 2021, we
successfully secured $1.5 million and $10.5 million, respectively, in working capital through CARES Act loans. In October 2021, NPS repaid all obligations owed to Pilot
under the Amended Pilot Line of Credit.
Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing
crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required
debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash
requirements, restructuring debt obligations, or filing bankruptcy.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and maintaining
operation of the Nixon refinery.
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Working Capital – As noted above, we have historically had working capital deficits primarily due to having significant current debt. Having sufficient working
capital is necessary to meet contractual, operational, regulatory, and safety needs. Our short-term working capital needs are primarily related to: (i) purchasing
crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended
and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory
compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. To avoid business disruptions and
manage cash flow, we optimize receivables and payables by prioritizing payments, optimize inventory levels based on demand, monitor discretionary spending,
and carefully manage capital expenditures.
Refining Margins – Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will
adversely affect the amount of cash we will have available for working capital. Crude oil refining is primarily a margin-based business. To improve margins, we
must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these
commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks
generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of
crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market
adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. To remain competitive in a
volatile commodity price environment, we adjust throughput and production based on market conditions and adjust our product slate based on commodities
pricing.
Blue Dolphin Energy Company
December 31, 2022 │Page 9
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Business
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Nixon Refinery Operation – We maintain relationships with suppliers that source and repair key components of the Nixon refinery. We expect our suppliers to
maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases,
increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to
mitigate supply-based risks that could cause a business disruption.
The Russian military conflict with Ukraine, COVID-19, recession, and inflation continue to evolve, and the extent to which these factors may impact working capital,
commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future
developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will
continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance
(supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or
margins on our refined products will be favorable. Further, if third parties exercise their rights and remedies under secured loan agreements that are in default, or if Tartan
terminates the Crude Supply Agreement, our business, financial condition, and results of operations will be materially adversely affected.
Downstream Operations
The refinery operations business segment consists of the following assets and operations:
Property
Key Products
Handled
Operating Subsidiary
Nixon facility
· Crude distillation tower (15,000 bpd)
Crude Oil
Refined Products
LE
Location
Nixon, Texas
· Petroleum storage tanks
· Loading and unloading facilities
· Land (56 acres)
Crude Oil and Condensate Supply. Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-
term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that,
the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60
days before the expiration of any renewal term. For the twelve months ended December 31, 2022 and 2021, we received approximately 4.5 million bbls, or 18.4%, and
4.2 million bbls, or 17.0%, respectively, of the contracted volume under the Crude Supply Agreement. As of December 31, 2022, we received approximately 13.6 million
bbls, or 54.8%, of the total allowable contracted volume under the Crude Supply Agreement. At December 31, 2022, accounts payable for crude oil and condensate was
$0. As of December 31, 2022, 100% of our crude oil was sourced from Tartan under the Crude Supply Agreement.
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal
services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a
one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the terminal services
agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses and working capital deficits,
and margin volatility. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely
affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient
amounts to meet our needs, which would result in refinery downtime and could materially affect our business, financial condition, and results of operations. To mitigate
this risk, we are exploring other crude supply sources.
Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for PADD 3. We sell our products
primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as low sulfur diesel to Mexico.
The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a one-year
term expiring the earliest to occur of March 31, 2024 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold
in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.
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December 31, 2022 │Page 10
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Business
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Customers. Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San
Antonio – Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms.
Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many
of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined
products.
Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry,
including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market
changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we
can be nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state
and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of
toxic, reactive, flammable, or explosive chemicals. Most of our storage tanks are equipped with leak detection devices. We also have response and control plans in place
for spill prevention and emergencies.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore,
refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned
shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled
equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages. In 2021, the Nixon refinery did not incur significant damage due
to Winter Storm Uri; however, the facility lost external power for 10 days due to the storm. In December 2022, the Nixon refinery was idled for 5 days due to an
unnamed winter ice storm.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in
lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment
obligations.
Midstream Operations
Our tolling and terminaling segment consists of the following assets and operations:
Property
Nixon facility
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Petroleum storage tanks (third-party leasing)
Loading and unloading facilities
Key Products
Handled
Crude Oil
Refined Products
Operating Subsidiary
Location
LRM, NPS
Nixon, Texas
Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as
naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to
three years.
Operations Safety. Our midstream operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to
OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products,
and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention
and other programs to respond to emergencies.
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Business
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Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in
‘corporate and other.’ Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline
assets and oil and gas leasehold interests had no revenue during the twelve months ended December 31, 2022 and 2021.
Property
Crude oil and natural gas separation and dehydration
Natural gas processing, treating, and redelivery
Vapor recovery unit
Two onshore pipelines
Land (162 acres)
Freeport facility
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Offshore Pipelines (Trunk Line and Lateral Lines)
Oil and Gas Leasehold Interests
Operating Subsidiary Location
BDPL
Freeport, Texas
BDPL
BDPC
Gulf of Mexico
Gulf of Mexico
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE,
and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.
Insurance and Risk Management
Our operations are subject to significant hazards and risks inherent in crude oil and condensate refining operations, as well as the transportation and storage of crude oil
and condensate and refined products. We have property damage, business interruption, and pollution liability coverages at the Nixon facility. Business interruption
coverage is for 24 months from the date of the loss, subject to a deductible with a 45-day waiting period. Pollution liability provides coverage due to named perils for
claims involving pollutants where the discharge is sudden, accidental, and first commences at a specific day and time during the policy period. The pollution policy is
subject to a retention and deductible and contains discovery requirements, reporting requirements, exclusions, definitions, conditions, and limitations that could apply to a
particular pollution claim. As a result, there can be no assurance such claim will be adequately insured for all potential damages.
Additional coverage includes umbrella, excess liability, workers’ compensation, directors’ and officers’ liability, environmental liability, and other business risks. These
coverages are supported by safety and other risk management programs. Our insurance program may not cover all operational risks and costs and may not provide
sufficient coverage in the event of a claim. We do not maintain insurance coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or
in amounts in excess of existing insurance coverage. Losses in excess of our insurance coverage or cancellation of policies could have a material adverse effect on our
business, financial condition, and results of operations.
Intellectual Property
We rely on intellectual property laws to protect our brand, as well as those of our subsidiaries. “Blue Dolphin Energy Company” is a registered trademark in the U.S. in
name and logo form. “Petroport, Inc.” is a registered trademark in the U.S. in name form. In addition, “www.blue-dolphin-energy.com” is a registered domain name.
Website Access to Reports and Other Information
We make certain filings with the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments and
exhibits to those reports, which are available free of charge through the SEC’s website (http://www.sec.gov) or through our website (http://www.blue-dolphin-
energy.com), as soon as reasonably practicable after they are filed with the SEC. We have also posted our Code of Business Ethics, board committee charters and other
corporate governance documents on our website. Our website and the information contained on that site, or connected to that site, are not incorporated by reference into
this report.
Human Capital Management
General. Our operations and activities are managed by an Affiliate. We do not have any employees. As of December 31, 2022, 116 employees of the Affiliate provided
support for our operations pursuant to the Amended and Restated Operating Agreement. None of these employees were covered by collective bargaining agreements.
Under the Amended and Restated Operating Agreement, the Affiliate operates and manages all of our properties.
We believe that our personnel provide a competitive advantage for our success. We seek to foster a culture that supports diversity and inclusion, and we strive to provide a
safe, healthy, and rewarding work environment for our personnel.
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Safety, Health, and Wellness. We must comply with a number of federal and state laws and regulations related to safety that protect the health and safety of our
workforce. We operate a safety and health program with participation by personnel at all levels of the organization. In 2022, we implemented eCompliance, a mobile
software solution that increases frontline adoption of health and safety policies and reduces on-site risks. Despite our efforts to achieve excellence in our safety and health
performance, there can be no assurances that there will not be accidents resulting in injuries or even fatalities.
We have developed and implemented a COVID-19 mitigation plan based on CDC and state health guidelines. This plan includes the implementation of health-screening
protocols, elevated cleaning measures, reduced shared spaces, the purchase of masks for all personnel for use when social-distancing measures are not possible, and
providing work-from-home support to facilitate remote working. Although vaccines have not been mandated, we have actively communicated updates to our workforce
regarding vaccine availability and have encouraged eligible personnel to get vaccinated.
Inclusion and Diversity. We continue to evaluate measures to put in place and track our progress with regard to diversity and inclusion. As of December 31, 2022,
employees of the Affiliate self-identified as 38% White, 37% Hispanic Latino, 18% Black or African American, and 1% Asian.
Government Regulations
General. Our operations are subject to extensive and frequently changing federal, state, and local laws, regulations, permits, and ordinances relating to the protection of
the environment. Among other things, these laws and regulations govern obtaining and maintaining construction and operating permits, the emission and discharge of
pollutants into or onto the land, air, and water, the handling and disposal of solid, liquid, and hazardous wastes and the remediation of contamination. Compliance with
existing and anticipated environmental laws and regulations increases our overall cost of business, including our capital costs to construct, maintain, operate, and upgrade
equipment and facilities. Failing to comply with these laws and regulations may trigger a variety of administrative, civil, and criminal enforcement measures, including
the assessment of monetary penalties. Certain environmental statutes impose strict, joint and several liability for costs required to clean up and restore sites where
hazardous substances, hydrocarbons or wastes have been disposed or otherwise released. Moreover, it is not uncommon for neighboring landowners and other third
parties to file claims for personal injury and property damage allegedly caused by the release of hazardous substances, hydrocarbons, or other waste products into the
environment. These requirements may also significantly affect our customers’ operations and may have an indirect effect on our business, financial condition, and results
of operations. However, we do not expect such effects will have a material impact on our financial position, results of operations, or liquidity.
Air Emissions and Climate Change Regulations. Our operations are subject to the CAA and comparable state and local statutes. Under these laws, we are required to
obtain permits, as well as test, monitor, report, and implement control requirements. If regulations become more stringent, additional emission control technologies may
be required to be installed at the Nixon facility and certain emission sources located offshore, and our ability to secure future permits may become less certain. Any such
future obligations could require us to incur significant additional capital or operating costs.
The EPA has undertaken significant regulatory initiatives under authority of the CAA’s NSR/PSD program to further reduce emissions of volatile organic compounds,
nitrogen oxides, sulfur dioxide, and particulate matter. These regulatory initiatives have been targeted at industries with large manufacturing facilities that are significant
sources of emissions, such as refining, paper and pulp, and electric power generating industries. The basic premise of these initiatives is the EPA’s assertion that many of
these industrial establishments have modified or expanded their operations over time without complying with NSR/PSD regulations, which result in emission increases
above threshold limits. As part of this ongoing NSR/PSD regulatory initiative, the EPA has consent decrees with several refiners that require refiners to make significant
capital expenditures to install emissions control equipment at selected facilities. We are not under a consent decree. If selected, as a small refiner we do not expect any
additional requirements to have a material impact on our financial position, results of operations, or liquidity.
The EPA strengthened the NAAQS for ground-level ozone to 70 parts per billion in 2015 from the 75-parts per billion level set in 2008. To implement the revised ozone
NAAQS, all states will need to review their existing air quality management infrastructure State Implementation Plan for ozone and ensure it is appropriate and adequate.
Where areas remain in ozone non-attainment or come into ozone non-attainment as a result of the revised NAAQS, it is likely that additional planning and control
obligations will be required. States may impose additional emissions control requirements on stationary sources, changes in fuels specifications, and changes in fuels mix
and mobile source emissions controls. The ongoing and potential future requirements imposed by states to meet the ozone NAAQS could have direct impacts on
terminaling facilities through additional requirements and increased permitting costs and could have indirect impacts through changing or decreasing fuel demand.
Pursuant to the Energy Policy Act of 2005 and Energy Independence and Security Act of 2007, the EPA promulgated RFS and RFS2, respectively, which requires
obligated parties, defined by the EPA as refiners or importers of transportation fuels, to either blend “renewable fuels,” such as ethanol and biofuels, into their
transportation fuels or purchase renewable fuel credits, known as renewable identification numbers, in lieu of blending. The EPA granted the Nixon refinery a small
refinery exemption from RFS2 requirements for 2013 and 2014. In 2014, the Nixon refinery began producing HOBM, a non-transportation lubricant blend product that
does not fall under RFS or RFS2 compared to low sulfur diesel.
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Currently, multiple legislative and regulatory measures to address greenhouse gas emissions are in various phases of discussion or implementation. These include actions
to develop national, state, or regional programs, each of which would require reductions in our greenhouse gas emissions or those of our customers. In 2015, the EPA
amended the Petroleum and Natural Gas Systems source category (Subpart W) of the Greenhouse Gas Reporting Program, to include among other things a new Onshore
Petroleum and Natural Gas Gathering and Boosting segment that encompasses greenhouse gas emissions from equipment and sources within the petroleum and natural
gas gathering boosting systems. In 2016, the EPA promulgated regulations regarding performance standards for methane emissions from new and modified oil and gas
production and natural gas processing and transmission facilities, and in September 2018, proposed targeted improvements to these standards to streamline
implementation of the rules. These and other legislative regulatory measures will impose additional burdens on our business and those of our customers.
In 2021, the Biden Administration signaled that it will take steps intended to address climate change. In January 2021, the White House issued an Executive Order titled
“Protecting Public Health and the Environment and Restoring Science to Tackle the Climate Crisis,” as well as a formal notification re-accepting the United States’ re-
entry into the Paris Agreement. Also in January 2021, the White House issued another climate-related Executive Order, titled “Tackling the Climate Crisis at Home and
Abroad.” In April 2021, the Biden Administration announced a new target for the United States to achieve a 50 to 52 percent reduction from 2005 levels in economy-wide
net greenhouse gas emissions in 2030. The EPA’s approach to regulating GHG emissions may change, including under future administrations. Therefore, future impact of
the Biden Administration’s executive orders and future GHG regulations on our operations and financial condition is unknown.
Hazardous Substances and Waste Regulations. The CERCLA imposes strict, joint and several liability on a broad group of potentially responsible parties for response
actions necessary to address a release of hazardous substances into the environment. The law authorizes two kinds of response actions: (i) short-term removals, where
actions may be taken to address releases or threatened releases requiring prompt response, and (ii) long-term remedial response actions, that permanently and significantly
reduce the dangers associated with releases or threats of releases of hazardous substances that are serious, but not immediately life threatening. Neither we nor any of our
predecessors have been designated as a potentially responsible party under CERCLA or a similar state statute.
We are subject to RCRA requirements for the generation, transportation, treatment, storage, and disposal of solid and hazardous wastes. When feasible, RCRA-regulated
materials are recycled instead of being disposed of on-site or off-site. RCRA establishes standards for the management of solid and hazardous wastes. We generate
petroleum product wastes, solid wastes, and ordinary industrial wastes, such as from paints and solvents, that are regulated under RCRA and comparable state statues.
Besides governing current waste disposal practices, RCRA also addresses the environmental effects of certain past waste disposal practices. We currently own properties
where crude oil, refined petroleum hydrocarbons, and fuel additives have been handled for many years by previous owners. At some sites, hydrocarbons or other waste
may have been disposed of or released on or under the properties owned by us or on or under other locations where these wastes have been taken for disposal. Although
prior owners and operators may have used operating and waste disposal practices that were standard in the industry at the time, these properties and wastes disposed
thereon are now subject to CERCLA, RCRA and analogous state laws. Under these laws, we could be required to remove or remediate previously disposed or released
wastes (including wastes disposed of or released by prior owners or operators), to clean up contaminated property (including impacted groundwater), or to perform
remedial operations to prevent future contamination to the extent we are not indemnified for such matters.
Water Pollution Regulations. Our operations can result in the discharge of pollutants, including chemical components of crude oil and refined products, into federal and
state waters. The CWA prohibits the discharge of pollutants into U.S. waters except as authorized by the terms of a permit issued by the EPA or a state agency with
delegated authority. The transportation and storage of crude oil and refined products over and adjacent to water involves risks and subjects us to the provisions of the
CWA, OPA 90, and related state requirements.
Spill prevention, control, and countermeasure requirements mandate the use of structures, such as berms and other secondary containment, to prevent hydrocarbons or
other pollutants from reaching a jurisdictional body of water in the event of a spill or leak. These requirements prevent pollutant releases and minimize potential impacts
should a release occur. We have federally certified OSROs available to respond to a spill and, in the case of our offshore pipelines, we maintain the statutory $35.0
million coverage required proof of financial responsibility. In the event of an oil spill into navigable waters, we can be subject to strict, joint, and potentially unlimited
liability for removal costs and other consequences.
Wastewater is subject to restrictions and strict controls under the CWA. Federal and state regulatory agencies can impose administrative, civil, and criminal penalties for
non-compliance with discharge permits. Process wastewater from the Nixon refinery is tested and discharged to a nearby municipal treatment facility pursuant to
applicable process wastewater permits. Wastewater from our offshore facilities, including our oil and natural gas pipelines and anchor platform, is tested and discharged
pursuant to applicable produced water permits. Stormwater at the Nixon facility is tested and discharged pursuant to applicable stormwater permits.
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Offshore “Idle Iron” Decommissioning Regulations. In 2018 BSEE updated its guidance and regulations on decommissioning that mandates lessees and rights-of-way
holders permanently abandon and/or remove platforms and other structures when no longer useful for operations. To cover the various obligations of lessees and rights-
of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine
whether the operator must provide additional security beyond the minimum bonding requirements. Such obligations include the cost of plugging and abandoning wells
and decommissioning and removing platforms and pipelines at the end of production or service activities. Once plugging and abandonment work has been completed, the
collateral backing the financial assurance is released by BOEM.
We are required by BOEM to: (i) maintain acceptable financial assurance (pipeline bonds) for the decommissioning of our assets offshore in federal waters and (ii)
decommission these assets following a certain period of inactivity. As of December 31, 2022, we maintained approximately $0.9 million in credit and cash-backed
pipeline rights-of-way bonds issued to the BOEM. At December 31, 2022 and 2021, BDPL maintained $3.7 and $3.5 million, respectively, in AROs related to
abandonment of these assets. See “Part I, Item 1A. Risk Factors” for additional disclosures related to idle iron decommissioning requirements for our pipelines and
facilities assets and related risks.
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ITEM 1A. RISK FACTORS
15
You should carefully consider the risks described below, in addition to the other information contained in this document. Realization of any of the following risks could
have a material adverse effect on our business, financial condition, cash flows and results of operations.
A.
Risks Related to Our Business and Industry
A1.
Management has determined that there is, and the report of our independent registered public accounting firm expresses, substantial doubt about our ability to
continue as a going concern.
In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt
about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations
were significantly improved for the twelve months ended December 31, 2022 versus the prior twelve month period, management determined that certain factors
continue to present substantial doubt about our ability to continue as a going concern. These factors include significant current debt, which impacts our ability to
meet debt covenants, and historic net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do
not include any adjustments that might result from the outcome of this uncertainty. Management is working to alleviate these factors by entering into forbearance
agreements with lenders, maximizing operation of the Nixon refinery given favorable refining margins, and pursing opportunities to obtain capital and/or refinance
debt. However, a ‘going concern’ opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing
alternatives. Our ability to continue as a going concern depends on sustained positive operating margins and having working capital for, amongst other
requirements, purchasing crude oil and condensate and making payments on long-term debt. Without positive operating margins and working capital, our business
will be jeopardized, and we may not be able to continue. If we are unable to make required debt payments, we would likely have to consider other options, such as
selling assets, raising additional debt or equity capital, cutting costs, or otherwise reducing our cash requirements, or negotiating with our creditors to restructure
our applicable obligations, including potentially filing for bankruptcy.
As discussed in Risk Factor A2, we have significant current debt. Our significant current debt is the result of certain third-party and related-party loan agreements
being classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2022 and 2021. Excluding accrued interest, we
had current debt of $47.4 million and $63.0 million, respectively, as of December 31, 2022 and 2021. Our significant current debt consists of bank debt to Veritex
and GNCU, investor debt to John Kissick, and related-party debt to LEH. As discussed in Risk Factor A3, we are in default under the NPS Term Loan Due 2031
due to covenant violations. We are also in default under the Kissick Debt, June LEH Note, and BDPL-LEH Loan Agreement related to past due obligations at
maturity. Defaults permit the lender to declare the amounts owed immediately due and payable, exercise their rights with respect to collateral securing obligors’
obligations under these loan agreements, and/or exercise any other rights and remedies available.
We currently rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our
liquidity needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii)
reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv)
maintaining and expanding the Nixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-term working capital needs
are primarily related to repayment of long-term debt obligations.
Due to significant current debt, which impacts our ability to meet debt covenants, and historic net losses and working capital deficits, we may have inadequate
liquidity to sustain operations. We continue to explore opportunities to obtain capital and/or refinance debt. During the twelve months ended December 31, 2022
and 2021, we successfully secured $1.5 million and $10.5 million, respectively, in working capital through CARES Act loans. In October 2021, NPS repaid all
obligations owed to Pilot under the Amended Pilot Line of Credit. There can be no assurance that we will be able to raise additional capital on acceptable terms, or
at all. If we are unable to raise sufficient additional capital, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment
obligations. In the long term, we may not be able to withstand business disruptions, such as from the Russian-Ukrainian war, COVID-19, recession, and inflation or
execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seek bankruptcy protection, or
cease operating.
A2. Our significant current debt could adversely affect our financial health and make us more vulnerable to adverse economic conditions.
As described elsewhere in this report, our significant current debt is the result of certain third-party and related-party loan agreements being in default. As a result,
these debt obligations were classified within the current portion of long-term debt on our consolidated balance sheets at December 31, 2022 and 2021. Excluding
accrued interest, we had current debt of $47.4 million and $63.0 million, respectively, as of December 31, 2022 and 2021. Our significant current debt consists of
bank debt to Veritex and GNCU, investor debt to John Kissick, and related-party debt to LEH.
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Blue Dolphin, as parent company, has guaranteed the indebtedness of certain subsidiaries. In addition, Affiliates have guaranteed the indebtedness of Blue Dolphin
and certain of its subsidiaries. This level of debt in current liabilities and the cross guarantee agreements could have important consequences, such as: (i) limiting
our ability to obtain additional financing to fund our working capital, capital expenditures, debt service requirements or potential growth, or for other purposes; (ii)
increasing the cost of future borrowings; (iii) limiting our ability to use operating cash flow in other areas of our business because we must dedicate a substantial
portion of these funds to make payments on our debt; (iv) placing us at a competitive disadvantage compared to competitors with less debt; and (v) increasing our
vulnerability to adverse economic and industry conditions.
Our ability to service our debt is dependent upon, among other things, business conditions, our financial and operating performance, our ability to raise capital, and
regulatory and other factors, many of which are beyond our control. If our working capital is not sufficient to service our debt, and any future indebtedness that we
incur, our business, financial condition, and results of operations will be materially adversely affected.
A3. Our continued inability to meet financial covenants under certain of our secured loan agreements could adversely impact our ability to obtain new debt,
refinance, or restructure existing debt.
As described elsewhere in this report, certain of our secured loan agreements with third parties are in default related to financial covenants. Financial covenants
applicable to our secured loan agreements with Veritex and GNCU require us to maintain covenants related to debt to tangible net worth, current assets to current
liabilities, debt service coverage, and current ratio. Defaults permit lenders to declare the amounts owed immediately due and payable, exercise their rights with
respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Our significant current
debt impacts our ability to meet debt covenants.
Our ability to meet financial covenants depends on numerous factors, including our ability to generate sufficient cash flow from operations to service debt
obligations or refinance or restructure debt. This depends on, among other things, business conditions, our financial performance, and the general condition of the
financial markets. Given uncertainties related to the Russian-Ukrainian military conflict, COVID-19, recession, and inflation and the extent to which these factors
may impact working capital, commodity prices, refined product demand, and our supply chain, we can provide no assurance that we can successfully generate
sufficient cash from operations to repay our outstanding debt or otherwise restructure or refinance the debt. We could be forced to undertake alternate financings,
including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds
that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are
commercially reasonable, on terms acceptable to us or at all. If new debt or other liabilities are added to our current consolidated debt levels, the related risks that it
now faces could intensify. If new debt or other liabilities are added to LE, LRM, or NPS’ current debt levels, their inability to meet financial covenants could
intensify.
A4. Restrictive covenants in our debt instruments may limit our ability to undertake certain types of transactions, which could adversely affect our business,
financial condition, results of operations, and our ability to service our indebtedness.
Various covenants in our debt instruments restrict our financial flexibility in a number of ways. Our current indebtedness subjects us to significant financial and
other restrictive covenants, including restrictions on our ability to incur additional indebtedness, place liens upon assets, pay dividends or make certain other
restricted payments and investments, consummate certain asset sales or asset swaps, conduct businesses other than our current businesses, or sell, assign, transfer,
lease, convey or otherwise dispose of all or substantially all of our assets. Some of our debt instruments also require us to satisfy or maintain certain financial
condition tests in certain circumstances. Our ability to meet these financial condition tests can be affected by events beyond our control and we may not meet such
tests. In addition, failing to comply with the provisions of our existing debt could result in a further event of default that could enable our lenders, subject to the
terms and conditions of such debt, to declare the outstanding principal, together with accrued interest, to be immediately due and payable. Events beyond our
control, including the impact of the COVID-19 pandemic and related governmental responses, volatility in commodity prices, and extreme weather resulting from
climate change may affect our ability to comply with our covenants. If we are unable to repay the accelerated amounts, our lenders could proceed against the
collateral granted to them to secure such debt. If the payment of our debt is accelerated, defaults under our other debt instruments, if any, may be triggered, and our
assets may be insufficient to repay such debt in full. In addition, loans provided or guaranteed by the U.S. government, including pursuant to the CARES Act,
subject us to additional restrictions on our operations, including limitations on personnel headcount and compensation reductions and other cost reduction activities
that could adversely affect us.
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A5. Our business, financial condition, and operating results may be adversely affected by increased costs of capital or a reduction in the availability of credit.
Adverse changes to the availability, terms, cost of capital, interest rates, or our credit ratings (which would have a corresponding impact on the credit ratings of our
subsidiaries that are party to any cross-guarantee agreements) could cause our cost of doing business to increase by limiting our access to capital, including our
ability to refinance maturing or accelerated existing indebtedness on similar terms. In addition, increased crude acquisition costs could adversely impact our
working capital. As a result, we cannot provide any assurance that any financing will be available to us in the future on acceptable terms or at all. Any such
financing could be dilutive to our existing stockholders. If we cannot raise required funds on acceptable terms, we may further reduce our expenses and we may
not be able to, among other things, (i) maintain our general and administrative expenses at current levels; (ii) successfully implement our business strategy; (iii)
fund certain obligations as they become due; (iv) respond to competitive pressures or unanticipated capital requirements; (v) repay our indebtedness, or (vi)
purchase crude oil to operate the Nixon facility. Based on the historical negative cash flows and the continued limited cash inflows in the period subsequent to year
end there is substantial doubt about our ability to continue as a going concern.
A6.
Impacts from the resurgence of COVID-19 or the outbreak of another highly infectious or contagious disease could adversely affect our business, financial
condition, and operating results.
The economic, business, and oil and gas industry impacts from the COVID-19 pandemic and the disruption to capital markets have been far reaching. While the oil
and gas industry has witnessed a substantial recovery of commodity prices and demand for products, there continues to be uncertainty and unpredictability about
the impact of the COVID-19 pandemic on our financial and operating results in future periods. The extent to which the COVID-19 pandemic adversely impacts our
future financial and operating results, and for what duration and magnitude, depends on several factors that are continuing to evolve, are difficult to predict and, in
many instances, are beyond our control. Such factors include the duration and scope of the pandemic, including any further resurgences of the COVID-19 virus and
its variants, and the impact on our workforce and operations; the negative impact of the pandemic on the economy and economic activity, including travel
restrictions and prolonged low demand for our products; the ability of our affiliates and suppliers to successfully navigate the impacts of the pandemic; the actions
taken by governments, businesses and individuals in response to the pandemic; the actions of OPEC and other countries that otherwise impact supply and demand
and, correspondingly, commodity prices; the extent and duration of recovery of economies and demand for our products after the pandemic subsides; and our
ability to keep our cost model in line with changing demand for our products. In-country conditions, including potential future waves of the COVID-19 virus and
its variants in countries that appear to have reduced their infection rates, could impact logistics and material movement, and remain a risk to business continuity. In
light of the significant uncertainty around the duration and extent of the impact of the COVID-19 pandemic, management is currently unable to develop with any
level of confidence estimates and assumptions that may have a material impact on the company’s consolidated financial statements and financial or operational
performance in any given period. In addition, the unprecedented nature of such market conditions could cause current management estimates and assumptions to be
challenged in hindsight. In addition, further resurgences of the pandemic or the outbreak of another highly infectious or contagious disease could precipitate or
aggravate the other risk factors identified in this report, which in turn could materially and adversely affect our business, financial condition, liquidity, results of
operations and profitability, including in ways not currently known or considered by us to present significant risks.
A7. Affiliates hold a significant ownership interest in us and exert significant influence over us, and their interests may conflict with the interests of our other
stockholders; and affiliate transactions may cause conflicts of interest that may adversely affect us.
We have an indirect controlling stockholder. As a related party of an Affiliate, Jonathan Carroll indirectly owned approximately 83% of the voting power of our
Common Stock as of the filing date of this report, and by virtue of such stock ownership, Mr. Carroll can control or exert substantial influence over us, including:
·
·
·
·
·
·
Election and appointment of directors;
Business strategy and policies;
Mergers and other business combinations;
Acquisition or disposition of assets;
Future issuances of Common Stock or other securities; and
Incurrence of debt or obtaining other sources of financing.
The existence of a controlling stockholder may have the effect of making it difficult for, or may discourage or delay, a third party from seeking to acquire a
majority of our outstanding Common Stock, which may adversely affect the market price of our Common Stock.
Affiliate interest may not always be consistent with our interests or with the interests of our other stockholders. Affiliates may also pursue acquisitions or
business opportunities in industries in which we compete, and there is no requirement that any additional business opportunities be presented to us. We also have
and may in the future enter transactions to purchase goods or services with Affiliates. To the extent that conflicts of interest may arise between us and Affiliates,
those conflicts may be resolved in a manner adverse to us or its other stockholders.
These relationships could create, or appear to create, potential conflicts of interest when our Board is faced with decisions that could have different implications
for us and Affiliates. The appearance of conflicts, even if such conflicts do not materialize, might adversely affect the public’s perception of us, as well as our
relationship with other companies and our ability to enter new relationships in the future, which may have a material adverse effect on our ability to do business.
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A8.
The dangers inherent in oil and gas operations could expose us to potentially significant losses, costs, or liabilities, and reduce our liquidity.
Oil and gas operations are inherently subject to significant hazards and risks. We process, store, and handle crude oil and condensate, which, under certain
circumstances, can be extremely dangerous. Hazards and risks related to the Nixon facility include, but are not limited to, catastrophic events caused by fires,
explosions, pressure vessel ruptures, spills, third-party interference, electricity, and mechanical breakdown, any of which could result in interruption or termination
of operations, pollution, personal injury and death, or damage to our assets and the property of others.
Offshore operations are also subject to a variety of operating risks peculiar to the marine environment. Although our pipeline assets and leasehold interests in oil
and gas wells are inactive, natural disasters and other events, such as hurricanes, can result in blowouts, cratering, explosions, and loss of well control. These
hazards can cause injury to persons, loss of life, and damage to property or the environment.
Any of these risks could result in substantial losses to us from a significant decrease in operations, significant additional costs to replace, repair, and insure assets,
and from potential civil lawsuits, fines, penalties, and regulatory enforcement proceedings. We may also become subject to more extensive governmental
regulation. These regulations may, in certain circumstances, impose strict liability for pollution damage or result in the interruption or termination of operations.
These risks could also harm our reputation and business, result in claims against us, and have a material adverse effect on our results of operations and financial
condition.
A9.
The geographic concentration of our assets creates a significant exposure to the risks of the regional economy and other regional adverse conditions.
Our primary operating assets are in Nixon, Texas in the Eagle Ford Shale, and we market our refined products in a single, relatively limited geographic area. In
addition, we have facilities and related onshore pipeline assets in Freeport, Texas, and offshore pipelines and oil and gas properties in the Gulf of Mexico. As a
result, our operations are more susceptible to regional economic conditions than our more geographically diversified competitors. Any changes in market
conditions, unforeseen circumstances, or other events affecting the area in which our assets are located could have a material adverse effect on our business,
financial condition, and results of operations. These factors include, among other things, changes in the economy, weather, demographics, and population.
A10. Competition from companies having greater financial and other resources could materially and adversely affect our business and results of operations.
The refining industry is highly competitive. Our refining operations compete with domestic refiners and marketers in PADD 3 (Gulf Coast), domestic refiners in
other PADD regions, and foreign refiners that import products into the U.S. Certain of our competitors have larger, more complex refineries and may be able to
realize higher margins per barrel of product produced. Several of our principal competitors are integrated national or international oil companies that are larger and
have greater resources than we do and have access to proprietary sources of controlled crude oil production. Unlike these competitors, we obtain all our feedstocks
from a single supplier. Because of their integrated operations and larger capitalization, larger, more complex refineries may be more flexible in responding to
volatile industry or market conditions, such as crude oil and other feedstocks supply shortages or commodity price fluctuations. If we are unable to compete
effectively, we may lose existing customers or fail to acquire new customers.
A11. Our insurance policies do not cover all losses, costs, or liabilities that we may experience, and insurance companies that currently insure companies in the
energy industry may cease to do so or substantially increase premiums.
Our insurance program may not cover all operational risks and costs and may not provide sufficient coverage in the event of a claim. We do not maintain insurance
coverage against all potential losses and could suffer losses for uninsurable or uninsured risks or in amounts in excess of existing insurance coverage. The
occurrence of an event that is not fully covered by insurance, failure by one or more of our insurers to honor its coverage commitments for an insured event, or
losses in excess of our insurance coverage could have a material adverse effect on our business, financial condition, and results of operations.
There is finite capacity in the commercial insurance industry engaged in underwriting energy industry risk, and factors impacting cost and availability include: (i)
losses in our industries, (ii) natural disasters, (iii) specific losses incurred by us, and (iv) inadequate investment returns earned by the insurance industry. If the
supply of commercial insurance is curtailed, we may not be able to continue our present limits of insurance coverage, obtain sufficient insurance capacity to
adequately insure our risks, or we may be unable to obtain and maintain adequate insurance at a reasonable cost. There is no assurance that our insurers will renew
their insurance coverage on acceptable terms, if at all, or that we will be able to arrange for adequate alternative coverage in the event of non-renewal. The
unavailability of full insurance coverage to cover events in which we suffer significant losses or cancellation of insurance policies could have a material adverse
effect on our business, financial condition, and results of operations.
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A12. Our ability to use NOL carryforwards to offset future taxable income for U.S. federal income tax purposes is subject to limitation.
Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its ability to utilize its pre-change NOL carryforwards to
offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders
(generally 5% shareholders, applying certain look-through rules) increases by more than 50 percentage points over such stockholders' lowest percentage ownership
during the testing period (generally three years).
Blue Dolphin experienced ownership changes in 2005 because of a series of private placements, and in 2012 because of a reverse acquisition. The 2012 ownership
change limits our ability to utilize NOLs following the 2005 ownership change that were not previously subject to limitation. Limitations imposed on our ability to
use NOLs to offset future taxable income could cause U.S. federal income taxes to be paid earlier than otherwise would be paid if such limitations were not in
effect, and could cause such NOLs to expire unused, in each case reducing or eliminating the benefit of such NOLs. Similar rules and limitations may apply for
state income tax purposes. NOLs generated after the 2012 ownership change are not subject to limitation. If the IRS were to challenge our NOLs in an audit, we
cannot assure that we would prevail against such challenge. If the IRS were successful in challenging our NOLs, all or some portion of our NOLs would not be
available to offset any future consolidated income, which would negatively impact our results of operations and cash flows. Certain provisions of the Tax Cuts and
Jobs Act, enacted in 2017, may also limit our ability to utilize our net operating tax loss carryforwards.
At December 31, 2022 and 2021, management determined that losses incurred in three out of five prior year periods provided significant objective evidence that
limited the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a full valuation allowance
against the deferred tax assets as of December 31, 2022 and 2021.
A13. We may not be able to keep pace with technological developments in our industry.
The oil and natural gas industry is characterized by rapid and significant technological advancements and introductions of new products and services using new
technologies. As others use or develop new technologies, we may be placed at a competitive disadvantage or may be forced by competitive pressures to implement
those new technologies at substantial costs. We may not be able to respond to these competitive pressures or implement new technologies on a timely basis or at an
acceptable cost. If one or more of the technologies we use now or in the future were to become obsolete, our business, financial condition or results of operations
could be materially and adversely affected.
B.
Downstream and Midstream Operations
B1. Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect
the amount of cash we will have available for working capital.
Historically, refining margins have been volatile, and they are likely to continue to be volatile in the future. Our financial results are primarily affected by the
relationship between our crude oil and condensate acquisition costs, the commodity prices at which we ultimately sell our refined products, and the volume of
refined products that we sell, all of which depend upon numerous factors beyond our control. The commodity prices at which we sell our refined products are
strongly influenced by the commodity price of crude oil. If crude oil commodity prices increase, our ‘refinery operations’ business segment margins will fall
unless we can pass along these commodity price increases to our wholesale customers. Increases in the selling prices for refined products typically trail the rising
crude oil cost and may be difficult to implement when crude oil costs increase dramatically over a short period. Sharp decreases in refined product market demand,
such as the record low demand that has occurred because of widespread COVID-19 related travel restrictions, can adversely affect our refining margins.
B2.
The commodity price volatility of crude oil, other feedstocks, refined products, and fuel and utility services may have a material adverse effect on our earnings,
cash flows, and liquidity.
Crude oil refining is primarily a margin-based business. To improve margins, we must maximize yields of higher value finished petroleum products and minimize
costs of feedstocks and operating expenses. When the spread between these commodity prices decreases, our margins are negatively affected. Although an
increase or decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished
petroleum products, typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity
prices therefore depends, in part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse
effect on our earnings, cash flows, and liquidity.
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The markets and commodity prices for crude oil and condensate and our finished products have historically been volatile, are likely to continue to be volatile, and
depend on factors beyond our control. These factors include:
·
·
·
·
·
·
·
·
·
the level of domestic and offshore production;
the availability of crude oil and U.S. and global demand for this commodity;
a general downturn in economic conditions;
the impact of weather, including abnormally mild or extreme winter or summer weather that cause lower or higher energy usage for heating or cooling
purposes, respectively, or extreme weather that may disrupt our operations or related upstream or downstream operations;
actions taken by foreign oil and gas producing and importing nations, including the ability or willingness of OPEC and OPEC+ to set and maintain pricing
and production levels for oil, which, for example, had a pronounced effect on global commodity prices for crude oil and the volatility thereof in 2020 during
the onset and spread of the COVID-19 pandemic;
the availability of local, intrastate, and interstate transportation systems;
conflicts, such as Russia’s invasion of Ukraine;
the availability and marketing of competitive fuels; and
the extent of governmental regulation and taxation.
B3. Our future success depends on our ability to acquire sufficient levels of crude oil to operate the Nixon refinery on favorable terms when needed.
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. Although we have no crude oil reserves and are
not engaged in the exploration or production of crude oil, we believe that we can obtain adequate crude oil and other feedstocks at competitive commodity prices
for the foreseeable future. We have a long-term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we
receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement automatically renews for successive one-year terms. Tartan must provide notice
of non-renewal at least 60 days before the expiration of any renewal term. For the twelve months ended December 31, 2022 and 2021, we received approximately
4.5 million bbls, or 18.4%, and 4.2 million bbls, or 17.0%, respectively, of the contracted volume under the Crude Supply Agreement. As of December 31, 2022,
we received approximately 13.6 million bbls, or 54.8%, of the total allowable contracted volume under the Crude Supply Agreement. At December 31, 2022,
accounts payable for crude oil and condensate was $0. As of December 31, 2022, 100% of our crude oil was sourced from Tartan under the Crude Supply
Agreement.
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the
terminal services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement
renews on a one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the
terminal services agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, significant current debt, margin volatility, historical net
losses and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil
and condensate could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may
rise, or we may not receive sufficient amounts to meet our needs.
Given the large dollar amount required to make crude oil purchases, liquidity constraints could cause us to delay purchases of crude oil or otherwise acquire less
than the desired amounts. This, in turn, could cause us to operate the Nixon facility at a lower rate on a bpd basis to meet customer demand. During the twelve-
month periods ended December 31, 2022 and 2021, the refinery experienced 4 and 13 days of downtime due to lack of crude associated with cash constraints.
Failing to operate the Nixon facility at the desired run rate, or at all, could adversely affect our profitability and cash flows.
B4. Downtime at the Nixon refinery could result in lost margin opportunity, increased maintenance expense, increased inventory, and a reduction in cash available
for payment of our obligations.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned annual turnaround to repair, restore,
refurbish, or replace refinery equipment. Occasionally, unplanned shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common
reasons for unplanned downtime include repair/replacement of disabled equipment, crude deficiencies associated with cash constraints, high temperatures, and
power outages. We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled
downtime results in lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability
to meet our payment obligations.
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During the twelve-month period ended December 31, 2022, the refinery experienced 22 days of downtime – 13 days for maintenance, 5 days due to an unnamed
winter ice storm, and 4 days due to lack of crude associated with cash constraints. During the twelve-month period ended December 31, 2021, the refinery
experienced 23 days of downtime – 13 days due to lack of crude associated with cash constraints and 10 days related to utility failure during Winter Storm Uri.
Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products
inventory, which could reduce our ability to meet our payment obligations.
B5.
Potential impairment in the carrying value of long-lived assets could negatively affect our operating results.
We have a significant amount of long-lived assets on our consolidated balance sheet. Under generally accepted accounting principles, long-lived assets are
required to be reviewed for impairment annually or whenever adverse events or changes in circumstances indicate a possible impairment. If business conditions
or other factors cause the undiscounted estimated pretax cash flows for long-lived assets to fall below their carrying value, we may be required to record non-cash
impairment charges. Events and conditions that could result in impairment in the value of our long-lived assets include lower realized refining margins, decreased
refinery production, other factors leading to a reduction in expected long-term sales or profitability, or significant changes in the manner of use for the assets or
the overall business strategy.
In this challenging business environment, we continuously monitor our assets for impairment, as well as optimization opportunities. We recorded an impairment
of $0.1 million and $1.1 million related to asset retirement costs for our pipeline/platform assets as of December 31, 2022 and 2021, respectively. An additional
impairment may be required in future periods if instabilities in the market continue long-term, losses continue to be material, or as new opportunities arise, such
as reconfiguration of the Nixon refinery into a renewable fuels facility.
Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows. As a result,
there can be no assurance that the estimates and assumptions made for purposes of our impairment analysis will prove to be an accurate prediction of the future.
Should our assumptions significantly change in future periods, it is possible we may later determine the carrying values of our refinery and facilities assets exceed
the undiscounted estimated pretax cash flows, which would result in a future impairment charge.
B6. We may have capital needs for which internally generated cash flows and external financing are inadequate. Affiliates may, but are not required to, fund our
working capital requirements in such instances.
We have historically relied on Affiliates for funding when revenue from operations and availability under bank facilities were insufficient to meet our liquidity
and working capital needs. We reflect such borrowings in our consolidated balance sheets in accounts payable, related party, or long-term debt, related party. At
both December 31, 2022 and 2021, accounts payable, related party totaled $0.2 million. At December 31, 2022 and 2021, long-term debt, related party, current
portion (in default) and accrued interest payable, related party totaled $9.3 million and $23.5 million, respectively.
If we are unable to generate sufficient cash flows or otherwise secure sufficient liquidity from Affiliates or external financing, we may not be able to meet our
short- and long-term working capital needs. Our short-term working capital needs are primarily related to: (i) purchasing crude oil and condensate to operate the
Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement,
(iii) servicing debt, (iv) maintaining and expanding the Nixon facility through capital expenditures, and (v) meeting regulatory compliance mandates. Our long-
term working capital needs are primarily related to repayment of long-term debt obligations.
There can be no assurance that Affiliates will continue to fund our working capital requirements. If we are unable to generate sufficient working capital or raise
additional capital on acceptable terms, or at all, we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In
the long term, we may not be able to withstand business disruptions, such as from COVID-19, or execute our business strategy. We may have to consider other
options, such as selling assets, raising additional debt or equity capital, seek bankruptcy protection, or cease operating.
B7. Our business may suffer if any of the executive officers or other key personnel discontinue employment with us. Furthermore, a shortage of skilled labor or
disruptions in our labor force may make it difficult for us to maintain productivity.
Our future success depends on the services of the executive officers and other key personnel and on our continuing ability to recruit, train and retain highly
qualified personnel in all areas of our operations. In particular, Jonathan Carroll currently serves as our principal executive, principal financial and principal
accounting officer. We are highly dependent on his continued services to execute our business plan and strategy. Furthermore, our operations require skilled and
experienced personnel with proficiency in multiple tasks. Competition for skilled personnel with industry-specific experience is intense, and the loss of these
executives or personnel could harm our business. If any of these executives or other key personnel resign or become unable to continue in their present roles and
are not adequately replaced, our business could be materially adversely affected.
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B8.
Loss of business from, or the bankruptcy or insolvency of, one or more of our significant customers, one of which is an Affiliate, could have a material adverse
effect on our financial condition, results of operations, liquidity, and cash flows.
We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts
require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these
arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative commodity prices on future sales of
our refined products.
Our customers have a variety of suppliers to choose from. As a result, they can make substantial demands on us, including demands for more favorable product
pricing or contractual terms. Our ability to maintain strong relationships with our principal customers is essential to our future performance. Our operating results
could be harmed if a key customer is lost, reduces their order quantity, requires us to reduce our commodity prices, is acquired by a competitor, or suffers
financial hardship. Additionally, our profitability could be adversely affected if there is consolidation among our customer base and our customers command
increased leverage in negotiating commodity prices and other terms of sale. We could decide not to sell our refined products to a certain customer if, because of
increased leverage, the customer pressures us to reduce our pricing such that our gross profits are diminished, which could result in a decrease in our revenue.
Consolidation may also lead to reduced demand for our products, replacement of our products by the combined entity with those of our competitors, and
cancellations of orders, each of which could harm our operating results. Loss of business from, or the bankruptcy or insolvency of, one or more of our major
customers could similarly affect our financial condition, results of operations, liquidity, and cash flows.
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and
bids on jet fuel contracts under preferential pricing terms. The Affiliate accounted for 35.6% and 29.9% total revenue from operations for the twelve months
ended December 31, 2022, and 2021, respectively. The Affiliate represented $0 in accounts receivable at both December 31, 2022, and 2021.
Twelve Months Ended
Number
Significant
% Total
Portion of
Accounts
December 31, 2022
December 31, 2021
Customers
Revenue from
Operations
Receivable
at December
31,
2
3
60.4% $
71.9% $
0
0
B9. We are dependent on third parties for the transportation of crude oil and condensate into and refined products out of our Nixon facility; if these third parties
become unavailable to us, our ability to process crude oil and condensate and sell refined products to wholesale markets could be materially and adversely
affected.
We rely on trucks for the receipt of crude oil and condensate into and the sale of refined products out of our Nixon facility. Since we do not own or operate any of
these trucks, their continuing operation is not within our control. If any of the third-party trucking companies that we use, or the trucking industry in general,
become unavailable to transport crude oil, condensate, and/or our refined products because of acts of God, accidents, government regulation, terrorism or other
events, our revenue and net income would be materially and adversely affected.
B10. Our suppliers source a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale and may experience interruptions of supply
from that region.
Our suppliers source a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. Consequently, we may be disproportionately
exposed to the impact of delays or interruptions of supply from that region caused by transportation capacity constraints, curtailment of production, unavailability
of equipment, facilities, personnel or services, significant governmental regulation, severe weather, plant closures for scheduled maintenance, or the interruption
of oil or natural gas being transported from wells in that area.
B11. Our refining operations and customers are primarily located within the Eagle Ford Shale and changes in the supply/demand balance in this region could
result in lower refining margins.
Our primary operating assets are in Nixon, Texas in the Eagle Ford Shale, and we market our refined products in a single, limited geographic area. Therefore, we
are more susceptible to regional economic conditions than our more geographically diversified competitors. Should the supply/demand balance shift in our region
due to changes in the local economy, an increase in refining capacity or other reasons, resulting in supply in the PADD 3 (Gulf Coast) region to exceed demand,
we would have to deliver refined products to customers outside of our current operating region and thus incur considerably higher transportation costs, resulting
in lower refining margins.
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B12. Severe weather or other events affecting our facilities, or those of our vendors, suppliers, or customers could have a material adverse effect on our liquidity,
business, financial condition, and results of operations.
Our operations are subject to all of the risks and operational hazards inherent in receiving, handling, storing, and transferring crude oil and petroleum products,
including: damages to facilities, related equipment and surrounding properties caused by severe weather (such as extreme cold or hot temperatures, hurricanes,
floods, and other natural disasters) or other events (such as equipment malfunctions, mechanical or structural failures, explosions, fires, spills, or acts of
terrorism) at our facilities or at third-party facilities on which our operations are dependent could result in severe damage or destruction to our assets or the
temporary or permanent shut-down of our operations. If we are unable to operate, our liquidity, business, financial condition, and results of operations could be
materially affected.
B13. Our new business strategy may not materialize or underperform expectations.
Our business strategy to leverage existing infrastructure and capitalize on green energy growth depends on our ability to find commercial partners and
government loans as vehicles to enter the renewable energy space. The plans are subject to business, economic and competitive uncertainties, many of which are
beyond our control. Additionally, we may be forced to develop or implement new technologies at substantial costs to achieve our strategy. These uncertainties
and costs could cause us to not be able to fully implement or realize the anticipated results and benefits of our business strategy.
C.
Legal, Government, and Regulatory
C1. Environmental laws and regulations could require us to make substantial capital expenditures to remain in compliance or to remediate current or future
contamination that could give rise to material liabilities.
Our operations are subject to a variety of federal, state, and local environmental laws and regulations relating to the protection of the environment and natural
resources, including those governing the emission or discharge of pollutants into the environment, product specifications and the generation, treatment, storage,
transportation, disposal, and remediation of solid and hazardous wastes. Violations of these laws and regulations or permit conditions can result in substantial
penalties, injunctive orders compelling installation of additional controls, civil and criminal sanctions, permit revocations and/or facility shutdowns.
In addition, new environmental laws and regulations, new interpretations of existing laws and regulations, increased governmental enforcement of laws and
regulations, or other developments could require us to make additional unforeseen expenditures. Many of these laws and regulations are becoming increasingly
stringent, and the cost of compliance with these requirements can be expected to increase over time. The requirements to be met, as well as the technology and
length of time available to meet those requirements, continue to develop and change. Expenditures or costs for environmental compliance could have a material
adverse effect on our results of operations, financial condition, and profitability. For example, President Biden has issued an executive order seeking to adopt new
regulations and policies to address climate change and to consider suspending, revising, or rescinding prior agency actions that are identified as conflicting with
the Biden Administration’s climate policies. The current administration may take further actions that could restrict or limit operations as currently conducted at
the Nixon Facility.
The Nixon facility operates under several federal and state permits, licenses, and approvals with terms and conditions that contain a significant number of
prescriptive limits and performance standards. These permits, licenses, approvals, limits, and standards require a significant amount of monitoring, record
keeping and reporting to demonstrate compliance with the underlying permit, license, approval, limit or standard. Non-compliance or incomplete documentation
of our compliance status may result in the imposition of fines, penalties, and injunctive relief. Additionally, there may be times when we are unable to meet the
standards and terms and conditions of our permits, licenses, and approvals due to operational upsets or malfunctions, which may lead to the imposition of fines
and penalties or operating restrictions that may have a material adverse effect on our ability to operate our facilities, and accordingly our financial performance.
C2. We are subject to strict laws and regulations regarding personnel and process safety, and failing to comply with these laws and regulations could have a
material adverse effect on our results of operations, financial condition, and profitability.
We are subject to the requirements of OSHA, and comparable state statutes that regulate the protection, health, and safety of workers, and the proper design,
operation, and maintenance of our equipment. In addition, OSHA and certain other environmental regulations require that we maintain information about
hazardous materials used or produced in our operations and that we provide this information to personnel and state and local governmental authorities. Failing to
comply with these requirements, including general industry standards, record keeping requirements and monitoring and control of occupational exposure to
regulated substances, may result in significant fines or compliance costs, which could have a material adverse effect on our results of operations, financial
condition, and cash flows.
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C3. Uncertainty exists regarding the impact of current and future sanctions imposed by governments and other authorities, including the United States, the
European Union, and the United Kingdom in response to Russia’s invasion of Ukraine.
In February 2022, Russia initiated significant military action against Ukraine. In response, the U.S. and certain other countries imposed significant sanctions and
export controls against Russia, and the U.S. and certain other countries could impose further sanctions, trade restrictions, and other retaliatory actions should the
conflict continue or worsen. It is not possible to predict the broader consequences of the conflict, including related geopolitical tensions, and the measures and
retaliatory actions taken by the U.S. and other countries in respect thereof as well as any counter measures or retaliatory actions by Russia in response, including,
for example, potential cyberattacks or the disruption of energy exports, is likely to cause regional instability, geopolitical shifts, and could materially adversely
affect global trade, currency exchange rates, regional economies and the global economy. On year later, the situation remains uncertain, and while it is difficult to
predict the impact of any of the foregoing, the conflict and actions taken in response to the conflict could increase our costs for crude oil, disrupt our supply
chain, reduce our sales and earnings, impair our ability to raise additional capital when needed on acceptable terms, if at all, or otherwise adversely affect our
business, financial condition, and results of operations.
C4. General economic, political, or regulatory developments, including recession, inflation, interest rates, or changes in governmental policies relating to refined
petroleum products, crude oil, or taxation could adversely affect our business, operating results, and financial condition.
Economic slowdowns may have serious negative consequences for our business and operating results because our performance is subject to domestic economic
conditions and their impact on levels of consumer spending (e.g., consumer airline travel relating to jet fuel). Some of the factors affecting consumer spending
include general economic conditions, unemployment, consumer debt, recession, inflation, reductions in net worth based on declines in equity markets and
residential real estate values, adverse developments in mortgage markets, taxation, energy prices, interest rates, consumer confidence and other macroeconomic
factors. Political instability and global health crises, such as COVID-19, can also impact the global economy and decrease worldwide demand for oil and refined
products. During a period of economic weakness or uncertainty, current or potential customers may travel less, reduce, or defer purchases, go out of business, or
have insufficient funds to buy or pay for our products and services. Moreover, a financial market crisis may have a material adverse impact on financial
institutions and limit access to capital and credit. This could, among other things, make it more difficult for us to obtain (or increase our cost of obtaining) capital
and financing for our operations. Our access to additional capital may not be available on terms acceptable to us or at all.
Because our refinery is located in the Gulf Coast Region, we primarily market our refined products in a relatively limited geographic area. As a result, we are
more susceptible to regional economic conditions compared to our more geographically diversified competitors, and any unforeseen events or circumstances that
affect the Gulf Coast Region could also materially and adversely affect our revenues and cash flows. The primary factors include, among other things, changes in
the economy, weather conditions, demographics and population, increased supply of refined products from competitors and reductions in the supply of crude oil
or other feedstocks. In the event of a shift in the supply/demand balance in the Gulf Coast Region due to changes in the local economy, an increase in aggregate
refining capacity or other reasons, resulting in supply exceeding the demand in the region, our refinery may have to deliver refined products to more customers
outside of the Gulf Coast Region and thus incur considerably higher transportation costs, resulting in lower refining margins, if any.
C5. Assessment of penalties by regulatory agencies, such as BOEM, BSEE, OSHA, and TCEQ for failing to meet regulatory requirements could adversely affect
our business, operating results, and financial condition.
Failing to Satisfy Financial Assurance (Supplemental Pipeline Bond) Requirements (BOEM). To cover the various obligations of lessees and rights-of-way
holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine
whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning
wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the
collateral backing the financial assurance is released by BOEM.
BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an
agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately
$4.8 million for five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the
INCs to the IBLA. Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM
would not consent to further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between
management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate
the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs.
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BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose
financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is
required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will
experience a significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of December
31, 2022 and 2021. At both December 31, 2022 and 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM
through RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
Failing to Decommission Pipeline and Platform Assets (BSEE). BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron
regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for
operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with
regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failing to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to
address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform
decommissioning permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the
USACOE in March 2020. In April 2020, BSEE issued another INC to BDPL for failing to perform the required structural surveys for the GA-288C Platform.
BDPL completed the required platform surveys in June 2020.
In August 2022, BSEE issued an INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a
September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. BDPL is examining the
feasibility of completing decommissioning operations by BSEE’s deadline. In March 2023, BSEE issued an INC to BDPL for failing to perform the required
structural surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. BDPL is obtaining vendor quotes for
the performance of the required surveys and intends to submit a corrective action plan to BSEE. If BDPL fails to complete decommissioning of the offshore
pipeline and platform assets and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement,
including but not limited to failing to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect
on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to
potential penalties on our consolidated balance sheets as of December 31, 2022 and 2021. At December 31, 2022 and 2021, BDPL maintained $3.7 million and
$3.5 million, respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Process Safety Management Violations (OSHA). In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety
management violations at the Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in November 2022. We remediated a significant
portion of identified violations prior to December 31, 2022. Most of the remaining violations were remediated prior to March 31, 2023. Work on the final
violation is in progress, and we expect to complete the work in April 2023. Failing to abide by the terms of the agreed could result in additional fines.
Alleged Hazardous Waste Violations (TCEQ). In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste
violations discovered during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4
million and identified actions needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. In May 2022, management
met with the TCEQ to review the alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in
a June 2022 letter. On March 29, 2023, TCEQ requested a meeting in April 2023 to review LRM's submissions to date. We recorded a liability for the maximum
proposed amount of $0.4 million on our consolidated balance sheets within accrued expenses and other current liabilities as of December 31, 2022 and 2021. We
cannot currently estimate when the TCEQ hazardous waste matter will be resolved or predict the outcome of the violations.
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C6. Our estimates of future AROs related to our pipeline and facilities assets may increase.
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 seabeds. We based asset retirement cost estimates on
regulatory requirements and then current market rates for decommissioning and removal of assets with our given structural and water depth specifications.
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. In addition, market rates for dive operations are subject to fluctuations based on season, fuel costs,
insurance rates, equipment availability, and industry changes. A significant change in any of these factors could increase our ARO liability, which could have a
material adverse effect on our business, financial condition, and results of operations.
C7. Regulatory changes, as well as proposed measures that are reasonably likely to be enacted, related to greenhouse gas emissions, climate change, and an
ongoing desire to transition to greater renewable energy solutions could require us to incur significant costs or could result in a decrease in demand for our
refined products, which could adversely affect our business.
Scientific studies conclusively show that, in the absence of human intervention, the rate of increase of carbon dioxide in the atmosphere will significantly increase
in the next 100 years. This increase in carbon dioxide has enhanced the Earth’s natural greenhouse effect, resulting in global warming. Higher concentrations of
greenhouse gases (including carbon dioxide, methane, and nitrous oxides) in the atmosphere can produce changes in climate with significant physical effects,
including increased frequency and severity of storms, floods, and other extreme weather events that could affect our operations. Increased concern over the
effects of climate change have begun to affect our competition and customers’ energy strategies, consumer consumption patterns, and government and private
sector alternative energy initiatives. More aggressive efforts by governments and non-governmental organizations to put in place laws requiring or otherwise
driving reductions in greenhouse gas emissions appear likely and any such future laws and regulations could result in increased compliance costs or additional
operating restrictions applicable to our customers and/or us, and any increase in the prices of refined products resulting from such increased costs, greenhouse gas
cap-and-trade programs or taxes on greenhouse gases, could result in reduced demand for our refined petroleum products. Additionally, changing customer
sentiment towards renewable and sustainable energy products may reduce demand for our products, and an excess of supply over demand could reduce fossil fuel
prices. If we fail to stay in step with the pace and extent of the market shift, we could impact future earnings; if we move too fast, we risk investing in
technologies, markets, and low-carbon products that will be unsuccessful. These factors could also have a material adverse effect on our business, financial
condition, and results of operations.
Reducing greenhouse gas emissions has been a focus of the Biden Administration. In February 2021, the United States rejoined the Paris Agreement, and in April
2021 the Biden Administration announced a new target for the United States to achieve a 50-52 percent reduction from 2005 levels in economy-wide net
greenhouse gas pollution in 2030. These and similar regulations could require us to incur costs to monitor, report, and reduce greenhouse gas emissions
associated with our operations.
Federal and state requirements to reduce greenhouse gas emissions could result in increased costs to operate and maintain the Nixon facility as well as implement
and manage new emission controls and programs. Cap-and-trade places a cap on greenhouse gases and refiners are required to acquire a sufficient number of
credits to cover emissions from their refinery and in-state sales of gasoline and diesel. Similarly, low carbon fuel standards require an established percentage
reduction in the carbon intensity of gasoline and diesel by a specified time period. Compliance with the low carbon fuel standard is achieved through blending
lower carbon intensity biofuels into gasoline and diesel or by purchasing credits. Compliance with each of these programs is facilitated through a market-based
credit system. If sufficient credits are unavailable for purchase or refiners are unable to pass through costs to their customers, they must pay a higher price for
credits. It is currently uncertain how the Biden Administration or future administrations will address greenhouse gas emissions and climate change. In the event
we do incur increased costs as a result of increased efforts to control greenhouse gas emissions, we may not be able to pass on any of these costs to our
customers. Regulatory requirements also could adversely affect demand for the refined petroleum products that we produce. Any increased costs or reduced
demand could materially and adversely affect our business and results of operations.
D.
Security
D1. A terrorist attack or armed conflict could harm our business.
Terrorist activities, anti-terrorist efforts and other armed conflicts involving the United States or other countries may adversely affect the United States and global
economies and could prevent us from meeting our financial and other obligations. For example, Russia’s recent invasion of Ukraine and resulting sanctions and
export controls by the United States and other countries could have wide-ranging impacts that have yet to be identified. Given the evolving geopolitical situation,
there are many unknown factors and events that could materially impact our operations, which may be temporary or permanent in nature. These tensions also
create heightened risk of a terrorist attack or armed conflict involving the United States. If any of these events occur, the resulting political instability and societal
disruption could reduce overall demand for oil and natural gas, potentially putting downward pressure on demand for our production and causing a reduction in
our revenues. Oil and natural gas related facilities could be direct targets of terrorist attacks, and our operations could be adversely impacted if infrastructure
integral to our operations or the operations of our customers’ is destroyed or damaged. Costs for insurance and other security may increase as a result of these
threats, and some insurance coverage may become more difficult to obtain, if available at all.
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D2. We face various risks associated with increased activism against oil and natural gas companies.
Opposition toward oil and natural gas companies has been growing globally and is particularly pronounced in the United States. Companies in the oil and natural
gas industry are often the target of activist efforts from both individuals and non-governmental organizations regarding safety, human rights, environmental
matters, sustainability, and business practices. Anti-development activists are working to, among other things, reduce access to federal and state government lands
and delay or cancel certain operations such as drilling and development. Any restrictions or limitations on our business or operations resulting from such
opposition could have a material adverse effect on our financial condition and results of operations.
D3. Our business could be negatively affected by cyber security threats.
A cyberattack or similar incident could occur and result in information theft, data corruption, loss of data privacy, operational disruption, damage to our
reputation or financial loss. Our industry has become increasingly dependent on digital technologies to conduct certain exploration, development, production,
processing, and financial activities. Our technologies, systems, networks, or other proprietary information, and those of our vendors, suppliers, and other business
partners, may become the target of cyberattacks or information security breaches that could result in the unauthorized release, gathering, monitoring, misuse, loss,
or destruction of proprietary and other information, or could otherwise lead to the disruption of our business operations. Cyberattacks are becoming more
sophisticated and certain cyber incidents, such as surveillance, may remain undetected for an extended period and could lead to disruptions in critical systems or
the unauthorized release of confidential or otherwise protected information. These events could lead to financial loss from remedial actions, loss of business,
disruption of operations, damage to our reputation or potential liability. Also, computers control nearly all the oil and gas distribution systems in the United States
and abroad, which are necessary to transportation our production to market. A cyberattack directed at oil and gas distribution systems could damage critical
distribution and storage assets or the environment, delay or prevent delivery of production to markets and make it difficult or impossible to accurately account for
production and settle transactions. Cyber incidents have increased, and the United States government has issued warnings indicating that energy assets may be
specific targets of cybersecurity threats. Our systems and insurance coverage for protecting against cybersecurity risks may not be sufficient. Further, as
cyberattacks continue to evolve, we may be required to expend significant additional resources to continue to modify or enhance our protective measures or to
investigate and remediate any vulnerability to cyberattacks.
E.
Common Stock
E1. Our stock price has experienced fluctuations and may continue to do so, resulting in a substantial loss in your investment.
The market for our Common Stock has been characterized by volatile prices. As a result, investors in our Common Stock may experience a decrease in the value
of their securities, including decreases unrelated to our operating performance or prospects. The market price of our Common Stock is likely to be highly
unpredictable and subject to wide fluctuations in response to various factors, many of which are beyond our control. These factors include:
·
·
·
·
·
·
·
Quarterly variations in our operating results and achievement of key business metrics.
Changes in the global economy and the local economies in which we operate.
Our ability to obtain working capital financing.
Changes in the federal, state, and local laws and regulations to which we are subject.
Market reaction to any acquisitions, joint ventures or strategic investments announced by us or our competitors.
The departure of any of our key executive officers and directors.
Future sales of our securities.
E2.
Increasing attention to environmental, social, and governance (ESG) matters may impact our business.
Increasing attention to ESG matters, including those related to climate change and sustainability, increasing societal, investor and legislative pressure on
companies to address ESG matters, may result in increased costs, reduced demand for our products, reduced profits, increased investigations and litigation or
threats thereof, negative impacts on our stock price and access to capital markets, and damage to our reputation. Some investors have been divesting and
promoting divestment of or screening out of fossil fuel equities and urging lenders to limit funding to companies engaged in the extraction of fossil fuel reserves.
Further, voluntary carbon-related and target-setting frameworks have developed, and continue to develop, that limit the ability of certain sectors, including the oil
and gas sector, from participating, and may result in exclusion of our equity from being included as an investment option in portfolios. In addition, organizations
that provide information to investors on corporate governance and related matters have developed ratings processes for evaluating companies on their approach to
ESG matters, including climate change and climate-related risks (including entities commonly referred to as “raters and rankers”). Such ratings are used by some
investors to inform their investment and voting decisions. Unfavorable ESG ratings and investment community divestment initiatives, among other actions, may
lead to negative investor sentiment toward us and to the diversion of investment to other industries, which could have a negative impact on our stock price and
our access to and costs of capital. Additionally, evolving expectations on various ESG matters, including biodiversity, waste, and water, may increase costs,
require changes in how we operate and lead to negative shareholder sentiment.
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Risk Factors
E3. Our stock price may decline due to sales of shares.
28
Affiliates sales of substantial amounts of our Common Stock, or the perception that these sales may occur, may adversely affect the price of our Common Stock
and impede our ability to raise capital through the issuance of equity securities in the future. Affiliates could elect in the future to request that we file a
registration statement to them to sell shares of our Common Stock. If Affiliates were to sell a large number of shares into the public markets, Affiliates could
cause the price of our Common Stock to decline.
E4. We are authorized to issue up to a total of 20 million shares of our Common Stock and 2.5 million shares of preferred stock; issuance of additional shares
would further dilute the equity ownership of current holders and potentially dilute the share price of our Common Stock.
We periodically issue Common Stock to non-employee directors for services rendered to the Board and to Jonathan Carroll pursuant to the Guaranty Fee
Agreements. In the past, we have also issued Common Stock, Preferred Stock, convertible securities (such as convertible notes), and warrants in order to raise
capital. We believe that it is necessary to maintain a sufficient number of available authorized shares of our Common Stock and Preferred Stock to provide us
with the flexibility to issue Common Stock or Preferred Stock for business purposes that may arise as deemed advisable by our Board. These purposes could
include, among other things, (i) future stock splits, which may increase the liquidity of our shares; (ii) the sale of stock to obtain additional capital or to acquire
other companies or businesses, which could enhance our growth strategy or allow us to reduce debt if needed; and (iii) for other bona fide purposes. Our Board
may authorize us to issue the available authorized shares of Common Stock or Preferred Stock without notice to, or further action by, our stockholders, unless
stockholder approval is required by law or the rules of the OTCQX. The issuance of additional shares of Common Stock or new shares of Preferred Stock,
convertible securities, and/or warrants may significantly dilute the equity ownership of the current holders of our Common Stock, affect the rights of our
stockholders, or could reduce the market price of our Common Stock. In addition, the issuance or sale of large amounts of our Common Stock, or the potential for
issuance or sale even if they do not actually occur, may have the effect of depressing the market price of our Common Stock.
E5.
Shares eligible for future sale pursuant to Rule 144 may adversely affect the market.
From time to time, certain of our stockholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in
the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, stockholders who
have been non-affiliates for the preceding three months may sell shares of our Common Stock freely after six months subject only to the current public
information requirement. Affiliates may sell shares of our Common Stock after six months subject to the Rule 144 volume, manner of sale, current public
information, and notice requirements. Any substantial sales of our Common Stock pursuant to Rule 144 may have a material adverse effect on the market price of
our Common Stock.
E6. We do not expect to pay cash dividends in the foreseeable future and therefore investors should not anticipate cash dividends on their investment.
Under certain of our secured loan agreements, we are restricted from declaring or paying any dividend on our Common Stock without the prior written consent of
the lender. We have historically not declared any dividends on our Common Stock and there can be no assurance that cash dividends will ever be paid on our
Common Stock.
E7. We do not currently have a chief financial officer; and failing to maintain effective internal controls in accordance with Section 404(a) of the Sarbanes-Oxley
Act could result in material weaknesses in our internal controls and have a material adverse effect on our business and stock price.
As a publicly traded company, we are required to comply with the SEC’s rules implementing Sections 302 and 404(a) of the Sarbanes-Oxley Act, which requires
management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of
controls over financial reporting. Jonathan Carroll, our Chief Executive Officer, also serves as our principal financial and principal accounting officer. Although
we review our internal controls over financial reporting in order to ensure compliance with Section 404 requirements, having a chief financial officer would
reduce the likelihood of errors related to the recording, disclosure, and presentation of consolidated financial information in quarterly, annual, and other filings.
Material weaknesses could result in an adverse reaction in the financial marketplace due to a loss of investor confidence in the reliability of our financial
statements, which ultimately could negatively impact our stock price.
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of
controls and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective
control system can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, management does
not expect that the control system can prevent or detect all errors or fraud. Further, projections of any evaluation or assessment of effectiveness of a control
system to future periods are subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or
deterioration in the degree of compliance with policies or procedures.
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Properties and Legal Proceedings
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
An Affiliate operates and manages all our properties under the Amended and Restated Operating Agreement. Our owned facilities have been constructed or acquired over
a period of years and vary in age and operating efficiency. We believe that all our properties and facilities are adequate for our operations and that our facilities are
adequately maintained. At our corporate headquarters, BDSC leases 7,675 square feet of office space in Houston, Texas. The location and general description of our other
properties are described within refinery operations, tolling and terminaling, and inactive operations discussions in “Part I, Item 1. Business”.
BDSC Office Lease Default
In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement
to cure BDSC’s office lease default. Under a Fourth Amendment to Lease dated May 27, 2021 (the “Fourth Amendment”), Building Lessor agreed to defer BDSC’s past
due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning
in June 2021, and continuing through lease expiration. The Past Due Obligations were subject to an annual percentage rate of 4.50%. As revised under the Fourth
Amendment, BDSC’s base rent including the prorated portion of the Past Due Obligations was $0.02 million per month. Subsequent to the Fourth Amendment, Building
Lessor notified BDSC of a new default under the office lease due to non-payment of rent. As a result of the subsequent default, Building Lessor deemed the Fourth
Amendment invalid. On June 9, 2022, BDSC paid all past due amounts totaling approximately $0.2 million to Building Lessor and Building Lessor considered the office
lease default cured. The 68-month operating lease expires in August 2023. BDSC had an option to extend the lease term for an additional five (5) year period. However,
BDSC is considering the economic advantages of alternative locations.
See “Part I, Item 1. Business” for additional disclosures related to our properties, leases, decommissioning obligations, and assets pledged as collateral.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related
disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters.
Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot
provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position,
or consolidated results of operations.
Unresolved Matters
Pilot Dispute Related to Terminal Services Agreement. Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS
agreed to store jet fuel purchased by Pilot at the Nixon facility. On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal
Services Agreement, which became effective on October 24, 2022. As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet
fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas
Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day.
On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and
Commerce Code (“TBCC”) of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS
agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential compromise of the dispute. The parties entered a Forbearance and
Accommodation Agreement on January 12, 2023, with the forbearance period terminating on February 28, 2023. As part of the Forbearance and Accommodation
Agreement, Pilot paid NPS approximately $1.481 million on January 13, 2023.
On March 31, 2023, NPS and Pilot executed an Amendment to the Forbearance and Accommodation Agreement (“March 31 Amendment") with the forbearance term
extending to June 15, 2023. The March 31 Amendment requires an additional payment by Pilot to NPS of approximately $1.08 million on April 3, 2023 and a conditional
payment of $0.18 million on June 1, 2023.
Pursuant to the March 31 Amendment all deadlines in the Texas Action have been tolled through June 15, 2023.
As of the filing date of this report, no settlement has been reached.
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Properties and Legal Proceedings
30
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal
waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide
additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and
platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is
released by BOEM.
BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency
restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for
five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.
Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to
further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by
BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial
penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by
BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of December 31,
2022 and 2021. At both December 31, 2022 and 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through
RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at
the Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations prior to
December 31, 2022. Most of the remaining violations were remediated prior to March 31, 2023. Work on the final violation is in progress, and we expect to complete the
work in April 2023. Failing to abide by the terms of the agreed could result in additional fines.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered
during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions
needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. In May 2022, management met with the TCEQ to review the
alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in a June 2022 letter. On March 29, 2023,
TCEQ requested a meeting in April 2023 to review LRM's submissions to date. We recorded a liability for the maximum proposed amount of $0.4 million on our
consolidated balance sheets within accrued expenses and other current liabilities as of December 31, 2022 and 2021. We cannot currently estimate when the TCEQ
hazardous waste matter will be resolved or predict the outcome of the violations.
Pilot Dispute Related to Set-Off Payments. In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from
NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the
amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes
(1), (3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential
effects of such defaults on our business, financial condition, and results of operations. If third parties exercise their rights and remedies due to defaults under our secured
loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-
arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably; however, the potential outcome is unknown. Management
does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance
that management’s efforts will result in a manageable outcome.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
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Market for Equity, Stockholder Matters and Purchases of Equity Securities
31
PART II
December 31, 2022 │Page 31
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY
SECURITIES
Market Information
Our Common Stock trades on the OTCQX U.S. tier of the OTC Markets under the ticker symbol “BDCO.” The quotations reflect inter-dealer prices, without adjustment
for retail mark-ups, markdowns or commissions and may not represent actual transactions.
We had 14,921,968 shares and 12,693,514 shares of Common Stock outstanding at December 31, 2022 and 2021, respectively. Affiliates controlled
approximately 83% of the voting power of our Common Stock as of the filing date of this report. See “Part I, Item 1A. Risk Factors” for risks associated with
investments in our Common Stock.
Stockholders
We had 272 and 270 record holders at December 31, 2022 and 2021, respectively. We had approximately 3,000 beneficial holders of our Common Stock at both
December 31, 2022 and 2021.
Dividends
Shareholders are entitled to receive such dividends as may be declared by our Board out of funds legally available for such purpose. However, no dividend may be
declared or paid unless after-tax profit was made in the preceding fiscal year, we are in compliance with covenants in our secured loan agreements, we are current on all
required debt payments, and we have received prior written concurrence from certain of our lenders.
Common Stock Issuances
Set forth below is information regarding the issuance of Common Stock by us for the twelve months ended December 31, 2022 and 2021:
Services.
·
On October 27, 2022, we issued an aggregate of 24,591 restricted shares of Common Stock to certain of our non-employee, independent directors, which
represents payment for services rendered to the Board for the three-month period ended September 30, 2022. The cost basis was $1.22.
·
On May 12, 2022, we issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents
payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The
average cost basis was $0.55, the low was $0.33, and the high was $0.91.
Payment of Debt.
·
On September 6, 2022, we issued an aggregate of 98,336 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2022 to June 2022. The average cost basis was $0.86, the low was $0.58, and the high was $1.26.
·
On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2020 through March 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64.
The issuance of these securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act.
ITEM 6. SELECTED FINANCIAL DATA
[Reserved]
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Management’s Discussion and Analysis
32
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis is management’s perspective of our current financial condition and results of operations and should be read in conjunction
with “Important Information Regarding Forward-Looking Statements,” “Part I, Item 1A. Risk Factors,” and “Part II, Item 8. Financial Statements and
Supplementary Data” included in this report.
This discussion and analysis includes the years ended December 31, 2022 and 2021 and comparison between such periods. The discussions of the year ended
December 31, 2020 and year-to-year comparisons between the years ended December 31, 2021 and 2020 that are not included in this report can be found in “Part II,
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021, which was filed on April 1, 2022, and such discussions are incorporated by reference into this report.
Overview and Outlook
Company Overview. Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a
light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Our assets are primarily
organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in
corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). Blue Dolphin
was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.
An Affiliate, combined with Jonathan Carroll, controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate
also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party
secured debt, and 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 “Part II, Item 8. Financial Statements and Supplementary Data – Note (3)” for additional disclosures related to Affiliate agreements, arrangements, and
risks associated with working capital deficits.
Going Concern. In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise
substantial doubt about our ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of
operations were significantly improved for the twelve months ended December 31, 2022 versus the prior twelve month period, management determined that certain
factors continue to present substantial doubt about our ability to continue as a going concern. Factors include significant current debt, which impacts our ability to meet
debt covenants, and historical net losses and working capital and equity deficits. Our consolidated financial statements assume we will continue as a going concern and do
not include any adjustments that might result from this uncertainty. Management is working to alleviate these factors by entering into forbearance agreements with
lenders, maximizing operation of the Nixon refinery given favorable refining margins, and pursuing opportunities to obtain capital and/or refinance debt. Our ability to
continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing crude oil and
condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required debt payments,
we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash requirements,
restructuring debt obligations, or filing a petition for bankruptcy.
Business Operations Update. Our results for the year ended December 31, 2022 were favorably impacted by the ongoing recovery in the worldwide demand for
petroleum-based transportation fuels, particularly jet fuel, while the worldwide supply of those products remained constrained. This supply and demand imbalance
contributed to increases in the market prices of petroleum-based transportation fuels (as well as crude oil and other feedstocks that are processed to make these products)
and thus in refining margins. Supply has remained constrained for a variety of reasons, including, but not limited to, effects from refinery closures and disruptions in the
crude oil and petroleum-based products markets resulting from the Russian-Ukrainian military conflict. Some refineries closed over the past two years and other refineries
ceased crude oil processing in favor of transitioning to renewable fuel production. In addition, these negative impacts to the supply of petroleum-based products were
exacerbated during the second quarter of 2022 by the Russian-Ukrainian military conflict. Due to the conflict, countries and private market participants responded by
refraining from purchasing and transporting Russian crude oil and petroleum-based products; however, some of the uncertainties and related impacts began dissipating
during the second half of 2022.
The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting $32.9 million in net income
for the twelve months ended December 31, 2022. Our operating results for 2022, including operating results by segment, can be found within this “Management’s
Discussion and Financial Analysis of Financial Condition and Results of Operations” within ‘Results of Operations.’
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33
Our operations generated $16.3 million in cash for the twelve months ended December 31, 2022. We used cash from operations to pay $7.0 million to Veritex and GNCU,
our largest lenders, during the same period [as described in “Part II, Item 8. Financial Statements and Supplementary Data – Note (10)”] and made $0.1 million in capital
improvements to the Nixon facility. At December 31, 2022, we had $0.5 million in liquidity. The components of our liquidity and descriptions of our cash flows, capital
investments, and other matters impacting our liquidity and capital resources can be found within this “Management’s Discussion and Financial Analysis of Financial
Condition and Results of Operations” within ‘Liquidity and Capital Resources.’
General Trends and Outlook. The economic effects from the COVID-19 pandemic on our business were and may again be significant. Although our business has
recovered since the onset of the pandemic in March 2020, there continues to be uncertainty and unpredictability about the lingering impacts of COVID-19 to the
worldwide economy, including in connection with the spread of variants and resulting restrictions, that could negatively affect our business, financial condition, results of
operations , and liquidity in future periods. Additionally, many uncertainties remain with respect to the supply and demand imbalance in the petroleum-based products
market worldwide due to the Russian-Ukrainian military conflict and a global economic recession. While it is difficult to predict the ultimate economic impacts of
COVID-19, the Russian-Ukrainian military conflict, recession, and inflation may have on us, we have noted key factors below that impacted our results of operations in
2022 and will likely impact our results of operations during 2023:
·
·
Jet fuel commodity pricing and demand.
Light crude oil commodity pricing and demand.
Liquidity and Access to Capital Markets. We continue to actively explore additional financing to meet working capital needs or refinance and restructure debt. During
the twelve months ended December 31, 2022 and 2021, we secured $1.5 million and $10.5 million, respectively, in working capital from CARES Act loans. There can be
no assurance that we will be able to raise additional capital on acceptable terms, or at all, or refinance existing debt. If we are unable to raise sufficient additional capital,
we may not, in the short term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business
disruptions, such as those related to COVID-19, or execute our business strategy. We may have to consider other options, such as selling assets, raising additional debt or
equity capital, seeking bankruptcy protection, or ceasing operations.
Changes in Regulations. Our operations and the operations of our customers have been, and will continue to be, affected by political developments and federal, state,
tribal, local, and other laws and regulations that are increasing in number and becoming more stringent and complex. These laws and regulations include, among other
things, permitting requirements, environmental protection measures such as limitations on methane and other GHG emissions, and renewable fuels standards. The number
and scope of the regulations with which we and our customers must comply has a meaningful impact on our and their businesses, and new or revised regulations,
reinterpretations of existing regulations, and permitting delays or denials could adversely affect the profitability of our assets.
Business Strategy and Accomplishments
Our primary business objectives are to improve our financial profile and refining margins by executing the below strategies, modified as necessary, to reflect changing
economic conditions and other circumstances:
Optimize
Existing Asset
Base
Improve
Operational
Efficiencies
Seize Market
Opportunities
·
·
·
·
·
·
·
Maintain safe operations and enhance health, safety, and environmental systems.
Plan and manage turnarounds and downtime.
Reduce or streamline variable costs incurred in production.
Increase throughput capacity and optimize product slate.
Increase tolling and terminaling revenue.
Leverage existing infrastructure to engage in renewable energy projects.
Take advantage of market opportunities as they arise.
Optimize Existing Asset Base. Given continued favorable refining margins, we delayed performing the Nixon facility’s maintenance turnaround until the second quarter
of 2023 in order to maximize refinery runs. Although the refinery experienced a similar amount of downtime during the twelve months ended December 31, 2022 (22
days) compared to the twelve months ended December 31, 2021 (23 days), we experienced fewer days of crude deficiencies associated with cash constraints during the
2022 period. During 2022, we focused on improvements in day-to-day plant operations, identifying safety and mechanical process improvements to optimize plant
operations.
Improve Operational Efficiencies. We carefully managed product mix, product inventory levels, and crude acquisition to maintain improvements to refinery throughput,
production, and sales during the twelve months ended December 31, 2022 compared to the same period in 2021. Refinery charge and production capacity utilization rates
improved more than 5% each to 87.7% and 85.5%, respectively, during the twelve months ended December 31, 2022 from 81.8% and 79.8%, respectively, during the
twelve months ended December 30, 2021.
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34
Seize Market Opportunities. As a result of higher commodity prices and increased capacity utilization rates, we experienced a significant improvement in gross profits.
Gross profit totaled $46.1 million for the twelve months ended December 31, 2022 compared to $0.9 million for the twelve months ended December 31, 2021.
In 2021, we announced plans to leverage our existing infrastructure to establish adjacent lines of business, capture growing market opportunities, and capitalize on green
energy growth. Rising demand for green energy is attributable to a variety of factors, including growing public support, U.S. governmental actions to increase energy
independence, and environmental concerns related to climate change. Our initial focus includes commercialization opportunities in hydrogen, carbon capture and storage,
carbon offsets and emerging technologies. During the twelve months ended December 31, 2022, management had discussions with several potential commercial partners
and explored project-based opportunities through government loans as vehicles to enter the renewable energy space. Management expects these efforts to continue in
2023. As discussed throughout this report, our ‘going concern’ opinion may impact our renewable energy endeavors. Furthermore, reductions or modifications to, or the
elimination of, governmental incentives or policies that support renewable energy or the imposition of additional taxes, tariffs, duties, or other assessments on renewable
energy projects, could result in, among other things, the lack of a satisfactory market for the development and/or financing of new renewable energy projects and us
abandoning the development of renewable energy projects.
Successful execution of our business strategy depends on multiple factors. These factors include (i) having adequate working capital to meet operational needs and
regulatory requirements, (ii) maintaining safe and reliable operations at the Nixon facility, (iii) meeting contractual obligations, (iv) having favorable margins on refined
products, and (v) collaborating with new partners to develop and finance clean energy projects. Our business strategy involves risks. Accordingly, we cannot assure
investors that our plans will be successful. If we are unsuccessful, we would likely have to consider other options, such as selling assets, raising additional debt or equity
capital, cutting costs or otherwise reducing our cash requirements, negotiating with our creditors to restructure our applicable obligations, or seeking 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.
Downstream Operations
Our refinery operations segment consists of the following assets and operations:
Property
Nixon facility
·
·
·
·
Crude distillation tower (15,000 bpd)
Petroleum storage tanks (operations support)
Loading and unloading facilities
Land (56 acres)
Key Products
Handled
Operating Subsidiary
Location
Crude Oil
Refined Products
LE
Nixon, Texas
Crude Oil and Condensate Supply. Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-
term crude supply agreement in place with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that,
the Crude Supply Agreement automatically renews for successive one-year terms (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60
days before the expiration of any renewal term. For the twelve months ended December 31, 2022 and 2021, we received approximately 4.5 million bbls, or 18.4%, and
4.2 million bbls, or 17.0%, respectively, of the contracted volume under the Crude Supply Agreement. As of December 31, 2022, we received approximately 13.6 million
bbls, or 54.8%, of the total allowable contracted volume under the Crude Supply Agreement. At December 31, 2022, accounts payable for crude oil and condensate was
$0. As of December 31, 2022, 100% of our crude oil was sourced from Tartan under the Crude Supply Agreement.
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal
services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a
one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the terminal services
agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by defaults in our secured loan agreements, significant current debt, margin volatility, historical net losses
and working capital and equity deficits. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate
could be adversely affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not
receive sufficient amounts to meet our needs.
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35
Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for PADD 3. We sell our products
primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to other countries, such as low sulfur diesel to Mexico.
The Nixon refinery’s product slate is adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products,
including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. The product sales agreement with the Affiliate has a one-year
term expiring the earliest to occur of March 31, 2024 plus 30-day carryover or delivery of the maximum quantity of jet fuel. Our intermediate products are primarily sold
in nearby markets to wholesalers and refiners as a feedstock for further blending and processing.
Customers. Customers for our refined products include distributors, wholesalers, and refineries primarily in the lower portion of the Texas Triangle (the Houston – San
Antonio – Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms.
Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many
of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined
products.
Competition. Many of our competitors are larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including
exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes
occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be
relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.
Safety and Downtime. We operate the refinery in a manner that is materially consistent with industry safety practices and standards. EPA, OSHA, and comparable state
and local regulatory agencies provide oversight for personnel safety, process safety management, and risk management to prevent or minimize the accidental release of
toxic, reactive, flammable, or explosive chemicals. Most of our storage tanks are equipped with leak detection devices. We also have response and control plans in place
for spill prevention and emergencies.
The Nixon refinery periodically undergoes planned and unplanned temporary shutdowns. We typically complete a planned turnaround annually to repair, restore,
refurbish, or replace refinery equipment. However, the timing of planned turnarounds is adjusted to capitalize on favorable market conditions. Occasionally, unplanned
shutdowns occur. Unplanned downtime can occur for a variety of reasons; however, common reasons for unplanned downtime include repair/replacement of disabled
equipment, crude deficiencies associated with cash constraints, high temperatures, and power outages. In 2021, the Nixon refinery did not incur significant damage due
to Winter Storm Uri; however, the facility lost external power for 10 days due to the storm. In December 2022, the Nixon refinery was idled for 5 days due to an unnamed
winter ice storm.
We are particularly vulnerable to operation disruptions because all our refining operations occur at a single facility. Any scheduled or unscheduled downtime results in
lost margin opportunity, reduced refined products inventory, and potential increased maintenance expense, all of which could reduce our ability to meet our payment
obligations.
Midstream Operations
Our tolling and terminaling segment consists of the following assets and operations:
Property
Key Products
Operating Subsidiary
Nixon facility
·
·
Petroleum storage tanks (third-party leasing)
Loading and unloading facilities
Handled
Crude Oil
Refined Products
Location
LRM, NPS
Nixon, Texas
Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as
naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston – San Antonio – Dallas/Fort Worth
area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to
three years.
Operations Safety. Our midstream operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to
OSHA regulations and comparable state and local regulators. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products,
and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention
and other programs to respond to emergencies.
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36
Inactive Operations
We own other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets are inactive. We account for these inactive operations in
‘corporate and other.’ Our pipeline assets have been fully impaired since 2016 and our oil and gas leasehold interests have been fully impaired since 2011. Our pipeline
assets and oil and gas leasehold interests had no revenue during the twelve months ended December 31, 2022 and 2021. See “Part II, Item 8. Financial Statements and
Supplementary Data – Note (15)” related to pipelines and platform decommissioning requirements and related risks.
Property
Crude oil and natural gas separation and dehydration
Natural gas processing, treating, and redelivery
Vapor recovery unit
Two onshore pipelines
Land (162 acres)
Freeport facility
·
·
·
·
·
Offshore Pipelines (Trunk Line and Lateral Lines)
Oil and Gas Leasehold Interests
Operating Subsidiary
Location
BDPL
Freeport, Texas
BDPL
BDPC
Gulf of Mexico
Gulf of Mexico
Pipeline and Facilities Safety.
Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE,
and comparable state and local regulators. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.
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Management’s Discussion and Analysis
37
Results of Operations
A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below and should be read in conjunction with our
financial statements in “Part I, Item 1. Financial Statements”. The financial statements, together with the following information, are intended to provide investors with a
reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.
Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The
dollar per bbl commodity price difference between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and
they have historically been subject to wide fluctuations. When the spread between these commodity prices decreases, our margins are negatively affected. To improve
margins, we must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. Although an increase or
decrease in the commodity price for crude oil and other feedstocks generally results in a similar increase or decrease in commodity prices for finished petroleum products,
typically there is a time lag between the two. The effect of crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in
part, on how quickly and how fully the market adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and
liquidity.
While refining margins improved significantly during 2022 primarily due to increased commodity prices and demand, the general outlook for the oil and natural gas
industry for 2023 remains unclear given uncertainty surrounding the Russian military conflict with Ukraine, recession, inflation, and COVID-19. We can provide no
assurances that refining margins and demand will remain at current levels.
How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors
in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, storage tank rental
revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit
(deficit) per bbl are non-GAAP measures.
Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl
We use segment contribution margin (deficit) to evaluate the performance of our downstream and midstream operations. We use refining gross profit (deficit) per bbl as a
downstream benchmark. Both measures supplement GAAP financial information presented. Management uses segment contribution margin (deficit) and refining gross
profit (deficit) per bbl to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate impacts to our financial
performance considering potential capital investments. These non-GAAP measures have important limitations as analytical tools. They should not be considered a
substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and
liquidity in conjunction with our GAAP financial results. See “Non-GAAP Reconciliations” for a reconciliation of Non-GAAP measures to U.S. GAAP.
Storage Tank Rental Revenue and Ancillary Services Fees
Tolling and terminaling revenue primarily represents storage tank rental fees and ancillary services fees associated with customer tank rental agreements. As a result, tank
rental revenue and ancillary services fees combined are one of the measures management uses to evaluate the performance of our tolling and terminaling business
segment.
Operation Costs and Expenses
We manage operating costs and expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets.
Operating costs and expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally
remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and
the timing of those expenses. Operation costs and expenses for tolling and terminaling operations are relatively fixed.
Refinery Throughput and Production Data
The amount of revenue we generate from the refinery operations business segment primarily depends on the volumes of crude oil that we process into refined products
and the volume of refined products sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the
markets served directly or indirectly by our assets, as well as refinery downtime.
Refinery Downtime
The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime will result in lost margin
opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.
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38
Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and
therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.
Twelve Months Ended December 31, 2022 (“2022”) Versus December 31, 2021 (“2021”)
Overview. Net income for 2022 was $32.9 million, or income of $2.34 per share, compared to a net loss of $12.8 million, or a loss of $1.01 per share, in 2021. The $45.7
million, or $3.35 per share, increase in net income between the periods was the result of favorable refining margins and improved product demand. The net loss in 2021
was also due to lower refinery margins, 23 days of refinery downtime; of the 23 days, 13 days related to crude deficiencies associated with cash constraints and 10 days
were associated with Winter Storm Uri. Although 2022 refinery downtime totaled 22 days (5 of which related to an unnamed winter ice storm), margins were higher.
Total Revenue from Operations. Total revenue from operations increased 62% to $487.5 million for 2022 from $300.8 million for 2021. Increased commodity prices
primarily drove refinery operations revenue higher in 2022; however, higher volume sales also contributed to the increase. Tolling and terminaling revenue increased
nearly 20% between the periods to $4.4 million.
Total Cost of Goods Sold. Total cost of goods sold increased approximately 47% to $441.4 million for 2022 from $299.9 million for 2021. The significant increase
related to higher crude acquisition costs and higher throughput.
Gross Profit. Gross profit totaled $46.1 million for 2022 compared to gross profit of $0.9 million for 2021. Higher commodity prices and improved refinery uptime
positively impacted refinery margins in 2022 compared to 2021.
General and Administrative Expenses. General and administrative expenses decreased $0.1 million, or nearly 4%, from $3.0 million in 2021 to $2.9 million in 2022.
The decrease primarily related to lower legal fees.
Depreciation and Amortization. Depreciation and amortization expenses remained flat at $2.8 million for both 2022 and 2021.
Total Other Income (Expense). Total other expense in 2022 totaled $5.9 million compared to total other expense of $6.2 million in 2021, representing a decrease of
approximately $0.3 million. The decrease was due to lower related party interest expense in 2022 compared to 2021. Total other expense primarily relates to interest
expense associated with third-party and related party secured loan agreements.
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Downstream Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude
distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined
product sales.
2022 Versus 2021
Refinery Downtime. Refinery downtime decreased from 23 days in 2021 to 22 days in 2022. Refinery downtime in 2021 related to crude deficiencies associated with
cash constraints (13 days) and downtime associated with Winter Storm Uri (10 days). Refinery downtime in 2022 related to maintenance (13 days), weather associated
with an unnamed ice storm (5 days), and crude deficiencies associated with cash constraints (4 days).
Refining Gross Profit (Deficit). Refining gross profit was $41.6 million for 2022 compared to gross deficit of $2.8 million in 2021, representing a significant increase of
$44.4 million. The significant increase in 2022 related to higher refining margins, improved product demand, and improved throughput. Refining gross deficit in 2021
was the result of lower margins and COVID-19 market fluctuations.
Refining Gross Profit (Deficit) per Bbl. On a per bbl basis, refining gross profit was $9.78 for 2022 compared to a gross deficit of $0.69 for 2021, representing a
significant increase of $10.47 per bbl. The increase related to favorable commodity prices and increased refined product demand.
Segment Contribution Margin (Deficit). Refinery operations segment contribution margin improved $44.6 million from a deficit of $3.4 million in 2021 to $41.2
million in 2022 due to higher refining margins.
Refined product sales
Less: total cost of goods sold(1)
Refining gross profit (deficit)
Sales (Bbls)
Refining gross profit (deficit) per bbl
Refined product sales
Less: intercompany processing fees(1)
Less: operation costs and expenses
Segment contribution margin (deficit)
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
483,061 $
(441,433)
41,628
297,103
(299,906)
(2,803)
4,256
4,071
$
9.78 $
(0.69)
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
$
483,061 $
(2,583)
(439,292)
41,186 $
297,103
(2,457)
(298,082)
(3,436)
(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.
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40
Midstream Operations. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and
loading and unloading facilities. Tolling and terminaling revenue is derived from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling
and reservation fees for use of the naphtha stabilizer.
2022 Versus 2021
Tolling and Terminaling Revenue. Storage tank rental and ancillary services fees increased $0.7 million from $3.7 million in 2021 to $4.4 million in 2022.
Intercompany processing fees increased 5% from $2.5 million in 2021 to $2.6 million in 2022. Processed naphtha volumes increased nearly 34% between the two periods.
Segment Contribution Margin. Tolling and terminaling segment contribution margin increased 12% from $4.3 million in 2021 to $4.9 million in 2022. The increase
related to higher tank rental and ancillary service fees and slightly higher operation costs and expenses.
Tank storage rental and ancillary services fees
Intercompany processing fees(1)
Less: operation costs and expenses
Segment contribution margin
(1) Fees associated with an intercompany tolling agreement related to naphtha volumes.
Non-GAAP Reconciliations.
Reconciliation of Segment Contribution Margin (Deficit)
Twelve Months Ended
December 31,
2022
2021
$
$
(in thousands)
4,443 $
2,583
(2,142)
4,884 $
3,717
2,457
(1,825)
4,349
2022
2021
Refinery Operations
2022
2021
2022
2021
2022
2021
Tolling and Terminaling Corporate and Other
(in thousands)
Total
Twelve Months Ended December 31,
Segment contribution margin (deficit)
General and administrative expenses(1)
Depreciation and amortization
Interest and other non-operating expenses, net
Income (loss) before income taxes
Income tax expense
Net income (loss)
$
$
41,186 $
(1,682)
(1,224)
(2,753)
35,527
-
35,527 $
(3,436) $
(1,549)
(1,214)
(2,779)
(8,978)
-
(8,978) $
4,884 $
(427)
(1,368)
(1,433)
1,656
-
1,656 $
4,349 $
(343)
(1,362)
(1,649)
995
-
995 $
(221) $
(1,860)
(206)
(1,697)
(3,984)
(224)
(4,208) $
(197) $
(2,742)
(204)
(1,715)
(4,858)
-
(4,858) $
45,849 $
(3,969)
(2,798)
(5,883)
33,199
(307)
32,892 $
716
(4,634)
(2,780)
(6,143)
(12,841)
-
(12,841)
(1) General and administrative expenses within refinery operations include the LEH operating fee, related party and accretion of asset retirement obligations.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company
December 31, 2022 │Page 41
Table of Contents
Management’s Discussion and Analysis
41
Capital Resources and Liquidity
We generally rely on revenue from operations, including sales of refined products and rental of petroleum storage tanks, Affiliates, and financing to meet our liquidity
needs. Profitability from favorable refining margins and increased product demand in 2022 improved cash flow from operations. Continued liquidity improvement related
to favorable market conditions will enable us to increasingly meet our needs through cash flow from operations. Our short-term working capital needs are primarily
related to: (i) purchasing crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee
under the Amended and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v)
meeting regulatory compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations.
During 2022 and 2021, we successfully secured an additional $1.5 million and $10.5 million, respectively, in working capital through CARES Act loans. In October
2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. We also continue to actively explore additional financing to meet working capital
needs or refinance and restructure debt. However, there can be no assurance that we will be able to raise additional capital on acceptable terms, or at all.
Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will adversely affect the amount
of cash we will have available for working capital. Similarly, the Russian military conflict with Ukraine, COVID-19, recession, and inflation continue to evolve, and the
extent to which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which
cannot be predicted with any degree of confidence.
If refining margins become unfavorable for an extended period, reducing available working capital, and we are unable to raise additional capital, we may not, in the short
term, be able to purchase crude oil and condensate or meet debt payment obligations. In the long term, we may not be able to withstand business disruptions or execute
our business strategy. We may have to consider other options, such as selling assets, raising additional debt or equity capital, seeking bankruptcy protection, or ceasing
operating.
Working Capital
We had $45.2 million and $78.5 million in working capital deficits at December 31, 2022 and 2021, respectively. Excluding the current portion of long-term debt, we had
$2.1 million in working capital and $15.5 million in working capital deficits at December 31, 2022 and 2021, respectively. The significant improvement in working
capital between the twelve-month periods was primarily due to favorable refining margins and increased gross profit. During the twelve months ended December 31,
2022, continued liquidity improvement related to favorable market conditions enabled us to increasingly meet our needs through cash flow from operations.
Cash and cash equivalents totaled $0.5 million and $0.01 million at December 31, 2022 and 2021, respectively. Restricted cash (current portion) totaled $0 and $0.05
million at December 31, 2022 and 2021, respectively. Restricted cash, noncurrent totaled $1.0 million and $0 at December 31, 2022 and 2021, respectively.
Sources and Use of Cash
Components of Cash Flows
Cash Flows Provided By (Used In):
Operating activities
Investing activities
Financing activities
Increase in Cash and Cash Equivalents
Twelve Months Ended
December 31,
2022
2021
$
$
16,272 $
(102)
(14,706)
1,464 $
(6,056)
-
5,002
(1,054)
Cash Flow from Operations
We had cash flow from operations of $16.3 million for 2022 compared to a cash flow deficit from operations of $6.1 million for 2021. The $22.3 million improvement in
cash flow from operations between the periods was due to profit from operations, which was offset by a buildup in inventory.
Capital Expenditures
Capital expenditures totaled $0.1 million and $0 in 2022 and 2021, respectively. Capital expenditures in 2022 related to the addition of a portable cooling tower to combat
increased summer temperatures and new fire equipment. Due to continued uncertainties surrounding commodity pricing and refined product demand, the Russian military
conflict with Ukraine, recession, inflation, and COVID-19, we anticipate limited capital expenditures over the next twelve months. However, to the extent we are able to
capitalize on green energy growth opportunities, we may finance capital expenditures through project-based government loans.
Blue Dolphin Energy Company
December 31, 2022 │Page 42
Table of Contents
Management’s Discussion and Analysis
42
We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if the expenditure maintains capacity or
throughput or as ‘expansion’ if the expenditure increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain
circumstances the determination is a matter of management judgment and discretion. We budget for maintenance capital expenditures throughout the year on a project-
by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable
law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.
Debt Activities
Net proceeds from the issuance of debt totaled $1.5 million and $10.5 million in 2022 and 2021, respectively. Proceeds in 2022 represented additional principal under the
BDEC Term Loan Due 2051; proceeds in 2021 reflected the original principal under the NPS Term Loan Due 2031.
A summary of payment activities to third parties and related parties follow:
Third-Party
·
Veritex Loans (in default) – Principal, interest, late fees, and other payments (described below) to Veritex totaled $6.8 million in 2022. Interest and late fee
payments to Veritex totaled $0.6 million in 2021. Pursuant to the November 2022 Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of
its rights and remedies related to existing defaults and non-compliance with the financial covenants, as well as testing borrowers’ future compliance with financial
covenants under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through September 30, 2023. As part of the Veritex Forbearance Agreement, LE and
LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding late fees), (ii) $1.0 million into a payment reserve account,
and (iii) $0.04 million in Veritex attorney fees. In the event that LE and LRM pay off all amounts due under the LE Term Loan Due 2034 and LRM Term Loan Due
2034 on or before September 30, 2023, Veritex also agreed to waive late fees totaling approximately $0.4 million in the aggregate. As of December 31, 2022 and
the filing date of this report, LE and LRM were in compliance with the Veritex Forbearance Agreement.
GNCU Loan (in default) – Required interest only payments to GNCU totaled $0.7 million and $0.01 million in 2022 and 2021, respectively. As of the filing date of
this report, NPS was in default under the NPS Term Loan Due 2031 for failing to satisfy financial covenants.
Kissick Debt (in default) – Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and
liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. As of the filing date of this report, LE was in default
under the Kissick Debt related to past due payment obligations.
SBA Loans – No payments were required under the BDEC Term Loan Due 2051, LE Term Loan Due 2050, or the NPS Term Loan Due 2050 for the twelve
months ended December 31, 2022 and 2021 due to COVID-related payment deferrals.
Equipment Loan Due 2025 – Principal and interest payments to Texas First totaled $0.02 million in both 2022 and 2021.
Amended Pilot Line of Credit – As described elsewhere in this report, in October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of
Credit. From June 2020 to October 2021, Pilot applied payments owed to NPS under two terminal services agreements against NPS’ payment obligations to Pilot
under the Amended Pilot Line of Credit. The tank lease payment setoff totaled $1.9 million in 2021. However, in a NPS letter to Pilot in October 2021, NPS
disputed approximately $0.3 million in Pilot setoff payments. As of the filing date of this report, the amount remained in dispute between the parties.
·
·
·
·
·
Related-Party
·
June LEH Note and BDPL-LEH Loan Agreement (in default) – Net activity on related-party debt totaled $15.2 million in 2022; related party debt settled through
related-party accounts receivable totaled $21.1 million in 2022. Comparatively, net activity on related-party debt totaled $0.01 million in 2021; related party debt
settled through related-party accounts receivable totaled $2.8 million in 2021.
An Affiliate, combined with Jonathan Carroll, controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An
Affiliate also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain
of our third-party secured debt, and is a significant customer of our refined products.
We can provide no assurance that: (i) our assets or cash flow from operations and financing activities will be sufficient to fully repay borrowings under secured
loan agreements that are in default, either upon maturity or if accelerated, (ii) LE, LRM, or NPS will be able to refinance or restructure their respective debt, and/or
(iii) lenders will provide future default waivers. Defaults under our secured loan agreements and any exercise by third parties of their rights and remedies related to
such defaults may have a material adverse effect on our business, the trading price of our Common Stock, and on the value of an investment in our Common Stock,
and holders of our Common Stock could lose their investment in our Common Stock in its entirety. Management maintains ongoing dialogue with lenders
regarding defaults and potential restructuring and refinance opportunities.
See “Part II, Item 8. Financial Statements and Supplementary Data – Notes (3) and (10)” for additional disclosures related to related-party and third-party debt.
Blue Dolphin Energy Company
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Table of Contents
Management’s Discussion and Analysis
43
Total Debt and Lease Obligations
The table below summarizes our principal contractual debt and lease obligations at December 31, 2022, by expected settlement period.
Long-term debt less unamortized debt issue costs(1)(2)
Third-party
Related-party
Total long-term debt less debt issue costs
Lease obligations
Less than
1 Year
(in thousands)
$
42,155 $
5,211
47,366
156
Between
1 and 3
Years
Between
3 and 5
Years
5 Years
and Later
Total
190 $
-
190
-
140 $
-
140
-
1,992 $
-
1,992
44,477
5,211
49,688
-
156
$
47,522 $
190 $
140 $
1,992 $
49,844
(1)
(2)
See “Part II, Item 8. Financial Statements and Supplementary Data – Notes (3) and (10)” for additional disclosures related to third-party and related-party debt.
Excludes interest payable; at December 31, 2022, interest payable and interest payable, related party was estimated to be 9.7 million (less than 1 year), $0.1 million
(between 1 and 3 years), $0.1 million (between 3 and 5 years), and $0.5 million (5 years and later).
Concentration of Customers Risk. We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts
receivable balances. We believe that our accounts receivable credit risk exposure is limited.
Twelve Months Ended
Number
Significant
Customers
% Total
Revenue from
Operations
Portion of
Accounts
Receivable
December 31, 2022
December 31, 2021
at December
31,
2
3
60.4% $
71.9% $
0
0
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on
jet fuel contracts under preferential pricing terms. For the twelve months ended December 31, 2022 and 2021, the Affiliate accounted for approximately 35.6% and
29.9% of total revenue from operations, respectively.
See “Part II, Item 8. Financial Statements and Supplementary Data – Notes (3) and (15)” for additional disclosures related to Affiliate agreements and arrangements for
additional disclosures related to Affiliate risk.
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)
To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to
conduct present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations
include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and
abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.
BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency
restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for
five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.
Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to
further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by
BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial
penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by
BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations, liquidity, and financial condition.
Blue Dolphin Energy Company
December 31, 2022 │Page 44
Table of Contents
Management’s Discussion and Analysis
44
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of December 31,
2022 and 2021. At both December 31, 2022 and 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through
RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently
abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-
of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failing to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address
BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning
permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020.
In April 2020, BSEE issued another INC to BDPL for failing to perform the required structural surveys for the GA-288C Platform. BDPL completed the required
platform surveys in June 2020.
In August 2022, BSEE issued an INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a
September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. BDPL is examining the
feasibility of completing decommissioning operations by BSEE’s deadline. In March 2023, BSEE issued an INC to BDPL for failing to perform the required structural
surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. BDPL is obtaining vendor quotes for the performance of
the required surveys and intends to submit a corrective action plan to BSEE. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets
and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to
correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential
penalties on our consolidated balance sheets as of December 31, 2022 and 2021. At December 31, 2022 and 2021, BDPL maintained $3.7 million and $3.5 million,
respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Off-Balance Sheet Arrangements. None.
Accounting Standards.
Critical Accounting Policies and Estimates
Significant Accounting Policies. Our significant accounting policies relate to use of estimates, cash and cash equivalents, restricted cash, accounts receivable and
allowance for doubtful accounts, inventory, property and equipment, leases, revenue recognition, income taxes, impairment or disposal of long-lived assets, asset
retirement obligations, and computation of earnings per share.
Estimates. 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. Although commodity price volatility, the Russian-Ukrainian military conflict, COVID-19, recession, inflation, and
severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to
which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot
be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of
December 31, 2022 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for doubtful accounts,
inventory, and related reserves, and the carrying value of long-lived assets.
New Accounting Standards and Disclosures
New Pronouncements Adopted. During the twelve months ended December 31, 2022, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our
financial position, results of operations, or liquidity.
Blue Dolphin Energy Company
December 31, 2022 │Page 45
Table of Contents
Quantitative and Qualitative Disclosure
45
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company
December 31, 2022 │Page 46
46
Table of Contents
Financial Statements
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Stockholders of Blue Dolphin Energy Company
Opinion on the Consolidated Financial Statements
We have audited the accompanying consolidated balance sheets of Blue Dolphin Energy Company and Subsidiaries (the “Company”) as of December 31, 2022 and 2021,
and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to
as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the
Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles
generally accepted in the United States of America.
Substantial Doubt about the Company’s Ability to Continue as a Going Concern
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note (1) to the
consolidated financial statements, the Company is in default under secured and related party loan agreements and has a net working capital deficiency. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern. Management's plans in regard to these matters are also described in Note (1). The
consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated
financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and
are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance
about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we
engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over
financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we
express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and
performing procedures that respond to those risks. Such procedures include examining, on a test basis, evidence regarding the amounts and disclosures in the
consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as
evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required
to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved
especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial
statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts
or disclosures to which it relates.
Blue Dolphin Energy Company
December 31, 2022 │Page 47
Table of Contents
Financial Statements
Related Party Transactions
47
As described in Note 3 to the consolidated financial statements, Lazarus Energy Holdings (LEH) is a controlling stockholder of Blue Dolphin Energy Company. In
addition, there is an overlapping director and executive officer between the companies. Each of these entities has been identified as a related party at December 31, 2022.
The Company has entered into a number of transactions with related parties, including but not limited to, agreements for management of the operating facility, sale of jet
fuel, and various credit facilities.
We identified the evaluation of the Company’s identification of related parties and related party transactions as a critical audit matter. This required a high degree of
auditor judgment and subjectivity in performing procedures to evaluate the reasonableness of management’s procedures performed to identify related parties and related
party transactions.
Our audit procedures included, among others (i) inquiring of executive officers, key members of management, the Audit Committee of the Board of Directors, and others
within the Company regarding related party relationships and transactions, (ii) receiving confirmations from related parties and compared responses to the Company’s
records, (iii) comparing the Company’s reconciliation of applicable accounts to related parties’ records of transactions and balances, (iv) reading agreements and contracts
with related parties and evaluated whether authorization and approvals were obtained and the terms and other information about transactions are consistent with
explanations from inquiries and other audit evidence obtained about the business purpose of the transactions, (v) reading the Company’s minutes from meetings of the
Board of Directors, and (vi) evaluating the completeness and accuracy of disclosures surrounding related party transactions.
/s/ UHY LLP
UHY LLP
Sterling Heights, Michigan
April 3, 2023
PCAOB Number: 01195
We have served as the Company’s auditor since 2002.
Blue Dolphin Energy Company
December 31, 2022 │Page 48
48
Table of Contents
Financial Statements
Consolidated Balance Sheets
ASSETS
CURRENT ASSETS
Cash and cash equivalents
Restricted cash
Accounts receivable, net
Prepaid expenses and other current assets
Deposits
Inventory
Total current assets
LONG-TERM ASSETS
Total property and equipment, net
Operating lease right-of-use assets, net
Restricted cash, noncurrent
Surety bonds
Total long-term assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Long-term debt less unamortized debt issue costs, current portion (in default)
Long-term debt, related party, current portion (in default)
Interest payable (in default)
Interest payable, related party (in default)
Accounts payable
Accounts payable, related party
December 31,
2022
2021
(in thousands except share amounts)
$
520 $
-
1,148
3,466
110
19,844
25,088
57,436
149
1,001
230
58,816
9
48
126
2,433
110
3,098
5,824
59,923
332
-
230
60,485
$
83,904 $
66,309
$
42,155 $
5,211
6,271
4,094
2,161
155
42,953
20,042
8,689
3,454
2,548
155
Current portion of lease liabilities
Income taxes payable
Asset retirement obligations, current portion
Accrued expenses and other current liabilities
Total current liabilities
LONG-TERM LIABILITIES
Asset retirement obligations
Long-term lease liabilities, net of current
Unearned contract renewal income, net of current
Long-term debt, net of current portion
Total long-term liabilities
TOTAL LIABILITIES
Commitments and contingencies (Note 15)
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock ($0.01 par value, 20,000,000 shares authorized; 14,921,968 and 12,693,514
shares issued at December 31, 2022 and 2021, respectively)(1)
Additional paid-in capital
Accumulated deficit
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)
156
307
3,710
6,114
70,334
-
-
660
2,322
2,982
215
-
-
6,225
84,281
3,461
156
1,200
838
5,655
73,316
89,936
149
39,758
(29,319)
10,588
127
38,457
(62,211)
(23,627)
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
$
83,904 $
66,309
(1) Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At both December 31, 2022 and 2021, there were no shares of preferred
stock issued and outstanding.
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
December 31, 2022 │Page 49
49
Table of Contents
Financial Statements
Consolidated Statements of Operations
REVENUE FROM OPERATIONS
Refinery operations
Tolling and terminaling
Total revenue from operations
COST OF GOODS SOLD
Crude oil, fuel use, and chemicals
Other conversion costs
Total cost of goods sold
Gross profit
COST OF OPERATIONS
LEH operating fee, related party
Other operating expenses
General and administrative expenses
Depreciation and amortization
Impairment of assets
Bad debt expense
Accretion of asset retirement obligations
Total cost of operations
Income (loss) from operations
OTHER INCOME (EXPENSE)
Easement, interest and other income
Interest and other expense
Gain on extinguishment of debt
Total other income (expense)
Twelve Months Ended December
31,
2022
2021
(in thousands, except share and per-
share amounts)
$
483,061 $
4,443
297,103
3,717
487,504
300,820
429,723
11,710
441,433
292,438
7,468
299,906
46,071
914
744
221
2,915
2,798
114
62
134
6,988
522
198
3,021
2,780
1,092
-
-
7,613
39,083
(6,699)
1
(5,885)
-
(5,884)
2
(6,199)
55
(6,142)
Income (loss) before income taxes
Income tax expense
Net Income (loss)
Income (loss) per common share:
Basic
Diluted
Weighted average number of common shares outstanding:
Basic
Diluted
33,199
(12,841)
(307)
-
32,892 $
(12,841)
2.34 $
2.34 $
(1.01)
(1.01)
$
$
$
14,079,327
14,079,327
12,693,514
12,693,514
The accompanying notes are an integral part of these consolidated financial statements.
Blue Dolphin Energy Company
December 31, 2022 │Page 50
Table of Contents
Financial Statements
Consolidated Statements of Stockholders’ Equity (Deficit)
50
Common Stock
Shares Issued
Par Value
In Capital
Deficit
Additional Paid-
Accumulated
(in thousands except share amounts)
Total
Stockholders'
Equity (Deficit)
Balance at December 31 2020
12,693,514 $
127 $
38,457 $
(49,370) $
(10,786)
Net income (loss)
(12,841)
(12,841)
Balance at December 31, 2021
12,693,514 $
127 $
38,457 $
(62,211) $
(23,627)
Common stock issued for payment of debt
Common stock issued for services
Net income
1,951,416
277,038
-
20
2
-
1,142
159
-
-
-
32,892
1,162
161
32,892
Balance at December 31, 2022
14,921,968 $
149 $
39,758 $
(29,319) $
10,588
The accompanying notes are an integral part of these consolidated financial statements.
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December 31, 2022 │Page 51
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Table of Contents
Financial Statements
Consolidated Statements of Cash Flows
OPERATING ACTIVITIES
Net income (loss)
Adjustments to reconcile net income (loss) to net cash
used in operating activities:
Depletion, depreciation and amortization
Accretion of asset retirement obligations
Amortization of debt issue costs
Guaranty fees paid in kind
Related-party interest expense paid in kind
Deferred revenues and expenses
Loss on issuance of shares
Bad debt
Impairment of assets
Gain on extinguishment of debt
Changes in operating assets and liabilities
Accounts receivable
Prepaid expenses and other current assets
Deposits and other assets
Twelve Months Ended December
31,
2022
2021
(in thousands)
$
32,892 $
(12,841)
2,798
134
204
605
598
(540)
357
62
114
-
(1,084)
(1,033)
-
2,780
-
147
608
1,116
(320)
-
-
1,092
(55)
88
1,131
14
Inventory
Accounts payable, accrued expenses and other liabilities
Net cash provided by (used in) operating activities
INVESTING ACTIVITIES
Capital expenditures
Net cash used in investing activities
FINANCING ACTIVITIES
Proceeds from debt
Payments on debt principal
Payments of debt issuance costs
Net activity on related-party debt
Net cash provided by (used in) financing activities
Net change in cash, cash equivalents, and restricted cash
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD
Supplemental Information:
Non-cash investing and financing activities:
Financing of line of credit via related-party debt
Issuance of shares for services and/or to extinguish debt
Line of credit financed by offsetting tank leases less interest
Interest paid
Income taxes paid (refunded)
(16,746)
(2,089)
16,272
(102)
(102)
1,500
(1,017)
-
(15,189)
(14,706)
1,464
57
1,521 $
- $
966 $
- $
5,534 $
- $
(2,036)
2,220
(6,056)
-
-
10,500
(4,738)
(750)
(10)
5,002
(1,054)
1,111
57
2,331
-
289
1,252
-
$
$
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements.
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Table of Contents
Notes to Consolidated Financial Statements
Notes to Consolidated Financial Statements
(1) Organization
Company Overview
Blue Dolphin was formed in 1986 as a Delaware corporation. The company is an independent downstream energy company operating in the Gulf Coast region of the
United States. Operations primarily consist of a light sweet-crude, 15,000-bpd crude distillation tower, and approximately 1.2 million bbls of petroleum storage tank
capacity in Nixon, Texas. Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”
Assets are organized in two business segments: ‘refinery operations’ (owned by LE) and ‘tolling and terminating services’ (owned by LRM and NPS). ‘Corporate and
other’ includes Blue Dolphin subsidiaries BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC
(administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.
Unless the context otherwise requires, references in this report to “we,” “us,” “our,” or “ours,” refer to Blue Dolphin, one or more of its consolidated subsidiaries or all of
them taken as a whole.
An Affiliate, combined with Jonathan Carroll, controlled approximately 83% of the voting power of our Common Stock as of the filing date of this report. An Affiliate
also operates and manages all Blue Dolphin properties, funds working capital requirements during periods of working capital deficits, guarantees certain of our third-party
secured debt, and is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with
Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements, arrangements, and risks associated with
working capital deficits.
Going Concern
In accordance with GAAP accounting standards, we evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our
ability to continue as a going concern within one year after the date that our consolidated financial statements are issued. While results of operations were significantly
improved for the twelve months ended December 31, 2022 versus the prior twelve month period, management determined that certain factors continue to present
substantial doubt about our ability to continue as a going concern. These factors include significant current debt, which impacts our ability to meet debt covenants, and
historical net losses and working capital deficits. Our consolidated financial statements assume we will continue as a going concern and do not include any adjustments
that might result from this uncertainty. Management is working to alleviate these factors by entering into forbearance agreements with lenders, maximizing operation of
the Nixon refinery given favorable refining margins, and pursuing opportunities to obtain capital and/or refinance debt.
Our significant current debt is the result of certain third-party and related-party loan agreements being classified within the current portion of long-term debt on our
consolidated balance sheets at December 31, 2022 and 2021. Excluding accrued interest, we had current debt of $47.4 million and $63.0 million, respectively, as of
December 31, 2022 and 2021. Our significant current debt consists of bank debt to Veritex and GNCU, investor debt to John Kissick, and related party debt to LEH.
Forbearance Agreement. Pursuant to the November 2022 Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies
related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18,
2022 through September 30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in
the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial
covenants. As part of the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding
late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. In the event that LE and LRM pay off all amounts due under
the LE Term Loan Due 2034 and LRM Term Loan Due 2034 on or before September 30, 2023, Veritex also agreed to waive late fees totaling approximately $0.4 million
in the aggregate. The Veritex Forbearance Agreement shall terminate on the first to occur: September 30, 2023, failing to make a payment when due, breach, or any new
event of default. As of December 31, 2022 and the filing date of this report, LE and LRM were in compliance with the Veritex Forbearance Agreement.
Other Defaults. We are in default under the NPS Term Loan Due 2031 due to covenant violations. We are also in default under the Kissick Debt, June LEH Note, and
BDPL-LEH Loan agreement related to past due obligations at maturity. Defaults permit the lender to declare the amounts owed under the related loan agreements
immediately due and payable, exercise their rights with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available.
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Notes to Consolidated Financial Statements
53
Favorable Refining Margins. The strong demand for our products, particularly jet fuel, and the increase in refining margins were the primary contributors to us reporting
$32.9 million in net income for the twelve months ended December 31, 2022. Comparatively, we reported a net loss of $12.8 million for the twelve months ended
December 31, 2021. Our operating results for 2022, including operating results by segment, can be found within ‘Results of Operations’ in “Part II, Item 7. Management’s
Discussion and Financial Analysis of Financial Condition and Results of Operations” in this report.
Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl commodity price difference
between crude oil and condensate (input) and refined products (output) is the most significant driver of refining margins, and they have historically been subject to wide
fluctuations. While refining margins and liquidity improved significantly during 2022, the general outlook for the oil and natural gas industry for 2023 remains unclear
given uncertainty surrounding the Russian military conflict with Ukraine, COVID-19, recession, and inflation. We can provide no assurances that refining margins and
demand will remain at current levels.
Working Capital Improvements. Historically, we experienced net losses during three of the last five years. We had $45.2 million and $78.5 million in working capital
deficits at December 31, 2022 and 2021, respectively. Excluding the current portion of long-term debt, we had $2.1 million in working capital and $15.5 million in
working capital deficits at December 31, 2022 and 2021, respectively. The significant improvement in working capital between the twelve-month periods ended
December 31, 2022 and 2021 was primarily due to favorable refining margins and increased gross profit. Continued favorable market conditions will enable us to
continue meeting our needs through cash flow from operations. We also continue to explore opportunities to obtain capital and/or refinance debt. During the twelve
months ended December 31, 2022 and 2021, we successfully secured $1.5 million and $10.5 million, respectively, in working capital through CARES Act loans. In
October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit.
Our ability to continue as a going concern depends on sustained positive operating margins and adequate working capital for, amongst other requirements, purchasing
crude oil and condensate and making payments on long-term debt. If we are unable to process crude oil and condensate into sellable refined products or make required
debt payments, we may consider other options. These options could include selling assets, raising additional debt or equity capital, cutting costs, reducing cash
requirements, restructuring debt obligations, or filing bankruptcy.
Operating Risks
Successful execution of our business strategy depends on several critical factors, including having adequate working capital, favorable refining margins, and maintaining
operation of the Nixon refinery.
·
·
·
Working Capital – As noted above, we have historically had working capital deficits primarily due to having significant current debt. Having sufficient working
capital is necessary to meet contractual, operational, regulatory, and safety needs. Our short-term working capital needs are primarily related to: (i) purchasing
crude oil and condensate to operate the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended
and Restated Operating Agreement, (iii) servicing debt, (iv) maintaining and improving the Nixon facility through capital expenditures, and (v) meeting regulatory
compliance requirements. Our long-term working capital needs are primarily related to repayment of long-term debt obligations. To avoid business disruptions and
manage cash flow, we optimize receivables and payables by prioritizing payments, optimize inventory levels based on demand, monitor discretionary spending,
and carefully manage capital expenditures.
Refining Margins – Refining margins, which are affected by commodity prices and refined product demand, are volatile, and a reduction in refining margins will
adversely affect the amount of cash we will have available for working capital. Crude oil refining is primarily a margin-based business. To improve margins, we
must maximize yields of higher value finished petroleum products and minimize costs of feedstocks and operating expenses. When the spread between these
commodity prices decreases, our margins are negatively affected. Although an increase or decrease in the commodity price for crude oil and other feedstocks
generally results in a similar increase or decrease in commodity prices for finished petroleum products, typically there is a time lag between the two. The effect of
crude oil commodity price changes on our finished petroleum product commodity prices therefore depends, in part, on how quickly and how fully the market
adjusts to reflect these changes. Unfavorable margins may have a material adverse effect on our earnings, cash flows, and liquidity. To remain competitive in a
volatile commodity price environment, we adjust throughput and production based on market conditions and adjust our product slate based on commodities
pricing.
Nixon Refinery Operation – We maintain relationships with suppliers that source and repair key components of the Nixon refinery. We expect our suppliers to
maintain an adequate supply of component products and, when components are sent out for repair, to timely deliver components. However, in some cases,
increases in demand or supply chain disruptions have led to part and component constraints. We use several suppliers and monitor supplier financial viability to
mitigate supply-based risks that could cause a business disruption.
The Russian military conflict with Ukraine, COVID-19, recession, and inflation continue to evolve, and the extent to which these factors may impact working capital,
commodity prices, refined product demand, our supply chain, financial condition, liquidity, results of operations, and future prospects will depend on future
developments, which cannot be predicted with any degree of confidence. We can provide no guarantees that: our business strategy will be successful, Affiliates will
continue to fund our working capital needs when we experience working capital deficits, we will meet regulatory requirements to provide additional financial assurance
(supplemental pipeline bonds) and decommission offshore pipelines and platform assets, we can obtain additional financing on commercially reasonable terms or at all, or
margins on our refined products will be favorable. Further, if third parties exercise their rights and remedies under secured loan agreements that are in default, or if Tartan
terminates the Crude Supply Agreement, our business, financial condition, and results of operations will be materially adversely affected.
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Notes to Consolidated Financial Statements
54
(2) Principles of Consolidation and Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with U.S. generally accepted
accounting principles and the rules and regulations of the SEC. These rules and regulations conform to the accounting principles contained in FASB’s ASC, the single
source of GAAP. All significant intercompany items have been eliminated in consolidation. Additionally, any material subsequent events that occurred after the date
through which this report covers have been properly recognized or disclosed in our financial statements. In management’s opinion, all adjustments considered necessary
for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.
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 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. Although commodity price volatility, the Russian-Ukrainian military conflict, COVID-19, recession, inflation, and
severe weather resulting from climate change have impacted these estimates and assumptions, we are continually working to mitigate future risks. However, the extent to
which these factors may impact our business, financial condition, liquidity, results of operations, and future prospects will depend on future developments, which cannot
be predicted with any degree of certainty.
We assessed certain accounting matters that require consideration of forecasted financial information in context with information reasonably available to us as of
December 31, 2022 and through the filing date of this report. The accounting matters assessed included, but not limited to, our allowance for doubtful accounts,
inventory, and related reserves, and the carrying value of long-lived assets.
Cash, Cash Equivalents, and Restricted Cash. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances
are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. Management has deemed this
a normal business risk. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts. Restricted cash,
non-current portion at December 31, 2022 and current portion at December 31, 2021 reflects amounts held in a payment reserve account by Veritex as security for
payments under the LE Term Loan Due 2034.
The following table provides a reconciliation of cash, cash equivalents, and restricted cash as reported in the consolidated statements of cash flows:
Cash and cash equivalents
Restricted cash
Restricted cash, noncurrent
December 31,
2022
2021
(in thousands)
$
$
520 $
-
1,001
1,521 $
9
48
-
57
Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables
are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and
other factors which, in management’s judgment, deserve consideration in estimating bad debts. Management assesses collectability of the customer’s account based on
current aging status, collection history, and financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific
customers and the entire accounts receivable portfolio. We had an allowance for doubtful accounts of $0.06 million and $0 at December 31, 2022 and 2021.
Financial Instruments. Our financial instruments are comprised of cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. The carrying
value of cash and cash equivalents, accounts receivable, and accounts payable approximate fair value due to their short maturities. The carrying value of long-term debt
approximates fair value as it carries interest rates that fluctuate with the prime rate.
Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at the lower of cost or net realizable value with
cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable
value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of
goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.
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Notes to Consolidated Financial Statements
55
Property and Equipment.
Refinery and Facilities. We typically make ongoing improvements to the Nixon facility based on operational needs, technological advances, and safety and regulatory
requirements. We capitalize additions to refinery and facilities assets, and we expense costs for repairs and maintenance as incurred. We record refinery and facilities at
cost less any adjustments for depreciation or impairment. We adjust the asset and the related accumulated depreciation accounts for the refinery and facilities asset’s
retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, we compute refinery and
facilities assets depreciation using the straight-line method with an estimated useful life of 25 years; we depreciate refinery and facilities assets when placed in service.
We did not record any impairment of our refinery and facilities assets for the periods presented.
Pipelines and Facilities. We record our pipelines and facilities at cost less any adjustments for depreciation or impairment. We computed depreciation using the straight-
line method over estimated useful lives ranging from 10 to 22 years. Per FASB ASC guidance, we performed impairment testing of our pipeline and facilities assets in
2016. Upon completion of testing, we fully impaired our pipeline assets at December 31, 2016. During the twelve months ended December 31, 2021, we recorded an
additional impairment of $1.1 million due to a change in the estimated future cost and timing of decommissioning these assets. During the twelve months ended
December 31, 2022, we recorded an additional impairment of $0.1 million due to an additional change in the timing of decommissioning these assets. Our pipelines and
facilities assets are inactive. Decommissioning of these assets was delayed due to cash constraints associated with historical net losses and the impact of COVID-19.
BSEE mandated that decommissioning occur prior to June 1, 2023. BDPL is examining the feasibility of completing decommissioning operations by BSEE’s deadline.
Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration
and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future
development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties
have been fully impaired since 2011.
CIP. CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are
capitalized as incurred. Depreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related
to refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.
Leases. We determine whether a contract or agreement is or contains a lease at inception. If the contract is or includes a lease and has a term greater than one year, we
recognize a ROU asset and lease liability as of the commencement date based on the present value of the lease payments over the lease term. We determine the present
value of the lease payments by using the implicit rate when readily determinable. If the implicit rate is not defined, we use the incremental borrowing rate to discount
lease payments to present value. We adjust lease terms to include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.
For operating leases, we record lease cost on a straight-line basis over the lease term; we record lease expenses in the appropriate line on the income statement based on
the leased asset’s intended use. For finance leases (previously referred to under GAAP as capital leases), we amortize lease payments for the ROU asset on a straight-line
basis over the lesser of the leased asset’s useful life or the lease term; we record amortization expenses on the income statement in ‘depreciation and amortization
expense;’ we record interest expense on the income statement in ‘interest and other expense.’
Revenue Recognition.
Refinery Operations Revenue. We recognize revenue from refined products sales when we meet our performance obligation to the customer. We meet our performance
obligation when the customer receives control of the product. The customer accepts control of the product when the product is lifted. Under bill and hold arrangements,
the customer takes control of the product when added to the customer’s bulk inventory as stored at the Nixon facility. We allocate a transaction price to each separately
identifiable refined product load.
We consider a variety of facts and circumstances in assessing the point of a control transfer, including but not limited to: whether the purchaser can direct the use of the
refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is
due is not significant. We include incurred transportation, shipping, and handling costs in the cost of goods sold. We do not include excise and other taxes collected from
customers and remitted to governmental authorities in revenue.
Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees under (i) storage tank agreements, whereby a customer agrees to pay a certain fee per
storage tank based on tank size over time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for
throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for the use of the naphtha stabilizer unit.
We typically satisfy performance obligations for tolling and terminaling operations over time. We determine the transaction price at agreement inception based on the
guaranteed minimum amount of revenue over the agreement term. We allocate the transaction price to the single performance obligation that exists under the agreement.
We recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.
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56
Revenue from storage tank customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered
optional to the customer. The fixed cost under the customer’s storage tank agreement does not include ancillary services fees. We consider ancillary services as a
separate performance obligation under the storage tank agreement. We satisfy the performance obligation and recognize the associated fee when we complete the
requested service.
Deferred Revenue. Deferred revenue represents a liability related to a revenue-producing activity as of the balance sheet date. We record unearned revenue, which usually
consists of customer prepayments when we receive the cash payment. Once we satisfy the performance obligation, we recognize revenue in conformity with GAAP.
Unearned Contract Renewal Income. We recognize deferred revenue from suppliers for upfront payments received but not yet earned as a reduction of cost of sales on a
straight-line basis over the term of the supply contract.
Income Taxes. Income tax expense includes federal and state taxes currently payable and deferred taxes arising from temporary differences between income for financial
reporting and income tax purposes.
Income taxes are calculated utilizing the applicable rates on items included in the determination of income for income tax purposes. Our effective tax rate may be
different than what would be expected if the federal and state statutory rates were applied to income from continuing operations primarily because of amounts expensed
for financial reporting that are not deductible for tax purposes.
The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether
it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position
is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be
realized upon its ultimate settlement. At December 31, 2022 and 2021, there were no uncertain tax positions for which a reserve or liability is necessary.
Deferred Taxes. Deferred income tax assets and liabilities are recorded for the estimated future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and its respective tax basis. Deferred income tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary differences are expected to be realized. The effect on deferred income tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred income tax assets are reduced by a valuation allowance when we
are unable to conclude that realization of the deferred income tax assets is more likely than not.
Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we reassess our long-lived assets when
events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the
undiscounted cash flows expected from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash
flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Management uses
significant judgment in forecasting future operating results and projected cash flows. If conditions or assumptions change, material impairment charges could be
necessary.
Commodity price market volatility associated with the Russian military conflict with Ukraine, recession, inflation, and COVID-19 could affect the value of certain of our
long-lived assets. Management evaluated refinery and facilities assets for impairment as of December 31, 2022. We did not record any impairment of our long-lived
assets for the periods presented. However, impairment may be required in the future if losses are material, or as new opportunities arise, such as reconfiguration of the
Nixon refinery into a renewable fuels facility.
Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred. We also capitalize the corresponding cost by
increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and we depreciate the capitalized cost over
the useful life of the related asset. We recognize a gain or loss if we settle the liability for an amount other than the amount recorded.
Refinery and Facilities. We believe we have no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these
assets have indeterminate lives because we cannot reasonably estimate the dates or ranges of dates upon which we would retire these assets. Management will record an
asset retirement obligation for these assets when a definitive obligation arises, and retirement dates are evident.
Pipeline and Facilities; Oil and Gas Properties. Management uses significant judgment to estimate future asset retirement costs for our pipelines, related facilities, and
oil and gas properties. These costs relate to dismantling and disposing certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors
considered include regulatory requirements, structural integrity, water depth, reservoir depth, equipment availability, and mobilization efforts. We review our assumptions
and estimates of future abandonment costs on an annual basis. See “Note (11)” to our consolidated financial statements for additional information related to AROs.
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57
Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common
stockholders by the weighted average number of shares of common stock outstanding for the period. We calculate diluted EPS by dividing net income available to
common stockholders by the diluted weighted average number of common shares outstanding. Diluted EPS includes the potential dilution that could occur if securities or
other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings. We do not currently have issued options,
warrants, or similar instruments. Convertible shares, if granted, are not included in the computation of earnings per share if anti-dilutive. See “Note (14)” to our
consolidated financial statements for additional information related to EPS.
New Pronouncements Adopted. During the twelve months ended December 31, 2022, we did not adopt any ASUs.
New Pronouncements Issued, Not Yet Effective. No new pronouncements that have been issued, but are not yet effective, are expected to have a material impact on our
financial position, results of operations, or liquidity.
(3) Related-Party Transactions
Affiliate Financial and Operational Agreements
Blue Dolphin and certain of its subsidiaries are parties to several financial and operational agreements with Affiliates. Management believes that these related-party
agreements are arm's-length transactions.
Agreement/Transaction
Jet Fuel Sales Agreement(1)
Office Sub-Lease Agreement
Amended and Restated Operating Agreement(2)
LE Amended and Restated Guaranty Fee
Agreement(3)
Parties
LEH
LE
LEH
BDSC
LEH Blue
Dolphin
LE LRM
NPS BDPL
BDPC BDSC
LE
Jonathan Carroll
Effective Date
04/01/2022
01/01/2018
04/01/2020
04/01/2017
LRM Amended and Restated Guaranty Fee
Agreement(3)
LRM
Jonathan Carroll
04/01/2017
Key Terms
1-year term expiring earliest to occur of 03/31/2024 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
68-month term expiring 08/31/2023; office lease Houston, Texas; includes
6-month rent abatement period; rent approximately $0.01 million per
month
1-year term; expires 04/01/2024 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
Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll
receives fee equal to 2.00% per annum of outstanding principal balance
owed under LE Term Loan Due 2034
Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll
receives fee equal to 2.00% per annum of outstanding principal balance
owed under LRM Term Loan Due 2034
(1)
(2)
(3)
See “Note (16)” for additional disclosures related to renewal of the Jet Fuel Sales Agreement; renewed at substantially similar terms.
See “Note (16)” for additional disclosures related to renewal of the Amended and Restated Operating Agreement; renewed for one-year term; all other terms
substantially similar.
Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. See “Note (16)” for disclosures related to
modification of the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement; as modified, Jonathan
Carroll receives fee payable 100% in cash instead of 50% in stock and 50% in cash.
See “Note (16)” for additional disclosures related to new related-party agreements approved subsequent to December 31, 2022.
Working Capital
We historically relied on Affiliates for funding during periods of working capital deficits. We reflect such borrowings in our consolidated balance sheets in accounts
payable, related party, or long-term debt, related party. During the twelve months ended December 31, 2022, continued liquidity improvement related to favorable market
conditions enabled us to increasingly meet our needs through cash flow from operations.
Affiliate Long-Term Debt
Blue Dolphin and certain of its subsidiaries are parties to the following debt agreements with Affiliates:
Loan Description
June LEH Note (in default)
Parties
LEH
Maturity Date
Jan 2019
Interest Rate
8.00%
Loan Purpose
Blue Dolphin working capital; reflects amounts
BDPL-LEH Loan Agreement (in default)
Blue Dolphin
LEH
BDPL
Aug 2018
16.00%
owed to LEH under the Second Amended and
Restated Operating Agreement
Original principal amount of $4.0 million; Blue
Dolphin working capital
Pursuant to the Assignment Agreement, the March Ingleside Note and March Carroll Note were assigned to LEH under the June LEH Note effective December 31, 2022.
See “Note (16) Subsequent Events” for additional disclosures related to related-party debt. See “Notes (1) and (10)” to our consolidated financial statements for
additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.
Blue Dolphin Energy Company
December 31, 2022 │Page 58
Table of Contents
Notes to Consolidated Financial Statements
Guarantees, Security, and Defaults
58
Loan Description
June LEH Note (in default)
BDPL-LEH Loan Agreement (in
default)
Guarantees
---
---
Security
---
Certain BDPL property
Event(s) of Default
Failure to pay past due obligations at maturity (loan matured January 2019)
Failure to pay past due obligations at maturity (loan matured August 2018)
Covenants
The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary
for a credit facility of this type. There are no covenants associated with the June LEH Note.
Related-Party Financial Impact
Consolidated Balance Sheets.
Accounts payable, related party. Accounts payable, related party reflects a one-time purchase of refinery equipment from LTRI. Accounts payable, related party totaled
$0.2 million at both December 31, 2022 and 2021.
Long-term debt, related party, current portion (in default) and accrued interest payable, related party.
LEH
June LEH Note (in default)
BDPL-LEH Loan Agreement (in default)
LEH Total
Ingleside
March Ingleside Note
Jonathan Carroll
March Carroll Note
Less: Long-term debt, related party, current portion (in default)
Less: Accrued interest payable, related party (in default)
Balance at December 31, 2021
Related-party receivables settled against related-party provided working capital
Blue Dolphin operating costs and related LEH management fee under
Amended and Restated Operating Agreement
Balance at December 31, 2022
December 31,
2022
2021
(in thousands)
$
$
1,211 $
8,094
9,305
12,672
7,454
20,126
-
1,066
-
9,305
(5,211)
(4,094)
- $
2,304
23,496
(20,042)
(3,454)
-
June LEH
Note
(in default)
(in thousands)
$
12,672
(21,076)
9,615
$
1,211
The amount owed under the June LEH Note reflects amounts net settled against related-party accounts receivable derived from the Jet Fuel Sales Agreement and the
Amended and Restated Operating Agreement, as well as long-term debt.
Blue Dolphin Energy Company
December 31, 2022 │Page 59
Table of Contents
Notes to Consolidated Financial Statements
Consolidated Statements of Operations.
59
Total revenue from operations.
Refinery operations
LEH
Third-Parties
Tolling and terminaling
LEH
Third-Parties
Interest expense.
Jonathan Carroll
Guaranty Fee Agreements
First Term Loan Due 2034 (in default)
Second Term Loan Due 2034 (in default)
March Carroll Note
LEH
BDPL-LEH Loan Agreement (in default)
June LEH Note (in default)
Ingleside
March Ingleside Note
Twelve Months Ended December 31,
2022
2021
(in thousands, except percent amounts)
$
173,646
309,415
35.6% $
63.5%
90,062
207,041
360
4,083
0.1%
0.8%
-
3,717
29.9%
68.8%
-
1.2%
$
487,504
100.0% $
300,820
100.0%
Twelve Months Ended
December 31,
2022
(in thousands)
2021
$
428 $
177
146
480
383
430
178
132
640
928
69
1,683 $
56
2,364
$
Other. BDSC received sublease income from LEH totaling $0.03 million for both twelve-month periods ended December 31, 2022 and 2021. The LEH operating fee,
related party was $0.7 million for the twelve-month period ended December 31, 2022 compared to $0.5 million for the twelve-month period ended December 31, 2021.
The increase between the comparative periods coincided with increased cost of goods sold during the same periods.
(4) Revenue and Segment Information
We have two reportable business segments: (i) refinery operations, which derives revenue from refined product sales, and (ii) tolling and terminaling, which derives
revenue from storage tank rental fees, ancillary services fees (such as for in-tank blending), and tolling and reservation fees for use of the naphtha stabilizer at the Nixon
refinery. ‘Corporate and other’ as presented in the segment information includes BDSC, BDPL, and BDPC.
Revenue from Contracts with Customers
Disaggregation of Revenue. We present revenue in the table below under ‘Segment Information’ separated by business segment because management believes this
presentation is beneficial to users of our financial information.
Receivables from Contracts with Customers. We present accounts receivable from contracts with customers as accounts receivable, net on our consolidated balance
sheets.
Contract Liabilities. Our contract liabilities consist of unearned revenue from customers in the form of prepayments. We include unearned revenue in accrued expenses
and other current liabilities on our consolidated balance sheets. See “Note (9)” to our consolidated financial statements for more information related to unearned revenue.
Remaining Performance Obligations. Most of our customer contracts are settled immediately and therefore have no remaining performance obligations.
Blue Dolphin Energy Company
December 31, 2022 │Page 60
Table of Contents
Notes to Consolidated Financial Statements
Contract Balances.
60
Accounts receivable (including related-party), beginning of year
Accounts receivable (including related-party), end of year
Unearned revenue, beginning of year
Unearned revenue, end of year
December 31,
2022
2021
126 $
1,148
4,388 $
3,888
214
126
3,421
4,388
$
$
Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:
Twelve Months Ended
December 31,
2022
2021
(in thousands)
Refinery operations
Tolling and terminating
Total revenue from operations
Intercompany processing fees(1)
Refinery operations
Tolling and terminating
Total intercompany processing fees
Operation costs and expenses(2)
Refinery operations
Tolling and terminating
Corporate and other
Total operation costs and expenses
Segment contribution margin (deficit)
Refinery operations
Tolling and terminating(3)
Corporate and other
Total segment contribution margin (deficit)
General and administrative expenses(4)
Refinery operations
Tolling and terminating
Corporate and other
Total general and administrative expenses
Depreciation and amortization
Refinery operations
Tolling and terminating
Corporate and other
Total depreciation and amortization
Interest and other non-operating expenses, net(5)
Refinery operations
Tolling and terminating
Corporate and other
Total interest and other non-operating expenses, net
Income (loss) before income taxes
Refinery operations
Tolling and terminating
Corporate and other
Total income (loss) before income taxes
Income tax expense
Net income (loss)
$
483,061 $
4,443
487,504
297,103
3,717
300,820
(2,583)
2,583
-
(2,457)
2,457
-
(439,292)
(2,142)
(221)
(441,655)
(298,082)
(1,825)
(197)
(300,104)
41,186
4,884
(221)
45,849
(1,682)
(427)
(1,860)
(3,969)
(1,224)
(1,368)
(206)
(2,798)
(2,753)
(1,433)
(1,697)
(5,883)
35,527
1,656
(3,984)
33,199
(3,436)
4,349
(197)
716
(1,549)
(343)
(2,742)
(4,634)
(1,214)
(1,362)
(204)
(2,780)
(2,779)
(1,649)
(1,715)
(6,143)
(8,978)
995
(4,858)
(12,841)
(307)
-
$
32,892 $
(12,841)
(1)
(2)
(3)
(4)
(5)
Fees associated with an intercompany tolling agreement related to naphtha volumes.
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.
Tolling and terminaling segment contribution margin is based on fees associated with an intercompany tolling agreement related to naphtha volumes.
General and administrative expenses within refinery operations include the LEH operating fee, impairment expense, and bad debt expense.
Corporate and other within interest and other non-operating expenses, net primarily reflects interest expense for the LE Amended and Restated Guaranty Fee
Agreement, LRM Amended and Restated Guaranty Fee Agreement, June LEH Note, March Carroll Note, and March Ingleside Note. See “Note (3)” and “Note
(15)” to our consolidated financial statements for additional information regarding guaranty fee agreements.
Blue Dolphin Energy Company
December 31, 2022 │Page 61
Table of Contents
Notes to Consolidated Financial Statements
61
Capital expenditures
Refinery operations
Tolling and terminating
Corporate and other
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
102 $
-
-
-
-
-
Total capital expenditures
Identifiable assets
Refinery operations
Tolling and terminating
Corporate and other
Total identifiable assets
(5) Concentration of Risk
$
102 $
-
December 31,
2022
2021
(in thousands)
$
$
64,359 $
17,836
1,709
83,904 $
47,047
17,594
1,668
66,309
Bank Accounts
Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial
institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At December 31, 2022 and 2021, our cash
balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $0.9 million and $0, respectively.
Key Supplier
Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place
with Tartan. The volume-based Crude Supply Agreement expires when we receive 24.8 million net bbls of crude oil. After that, the Crude Supply Agreement
automatically renews for successive one-year terms (each such term, a renewal term). Tartan must provide notice of non-renewal at least 60 days before the expiration of
any renewal term. For the twelve months ended December 31, 2022 and 2021, we received approximately 4.5 million bbls, or 18.4%, and 4.2 million bbls, or 17.0%,
respectively, of the contracted volume under the Crude Supply Agreement. As of December 31, 2022, we received approximately 13.6 million bbls, or 54.8%, of the total
allowable contracted volume under the Crude Supply Agreement. At December 31, 2022, accounts payable for crude oil and condensate was $0. As of December 31,
2022, 100% of our crude oil was sourced from Tartan under the Crude Supply Agreement.
Related to the Crude Supply Agreement, Tartan stores crude oil at the Nixon facility under a terminal services agreement dated as of June 1, 2019. Under the terminal
services agreement, crude oil is stored at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. The terminal services agreement renews on a
one-year evergreen basis. Tartan must provide notice of non-renewal at least 60 days before the expiration of any renewal term. However, the terminal services
agreement will automatically terminate upon expiration or termination of the Crude Supply Agreement.
Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses and working capital deficits,
and margin volatility. If Tartan terminates the Crude Supply Agreement or terminal services agreement, our ability to acquire crude oil and condensate could be adversely
affected. If producers experience crude supply constraints and increased transportation costs, our crude acquisition costs may rise, or we may not receive sufficient
amounts to meet our needs, which would result in refinery downtime and could materially affect our business, financial condition, and results of operations. To mitigate
this risk, we are exploring other crude supply sources.
Significant Customers
We routinely assess the financial strength of our customers. To date, we have not experienced significant write-downs in accounts receivable balances. We believe that
our accounts receivable credit risk exposure is limited.
Twelve Months Ended
December 31, 2022
December 31, 2021
Number
Significant
Customers
% Total
Revenue from
Operations
Portion of
Accounts
Receivable
at December
31,
2
3
60.4% $
71.9% $
0
0
One of our significant customers is LEH, an Affiliate. Due to a HUBZone certification, the Affiliate purchases our jet fuel under a Jet Fuel Sales Agreement and bids on
jet fuel contracts under preferential pricing terms. For the twelve months ended December 31, 2022 and 2021, the Affiliate accounted for approximately 35.6% and
29.9% of total revenue from operations, respectively.
Blue Dolphin Energy Company
December 31, 2022 │Page 62
Table of Contents
Notes to Consolidated Financial Statements
62
Concentration of Customers. Our customer base consists of refined petroleum product wholesalers. Economic changes similarly affect our customers positively or
negatively, which impacts our overall exposure to credit risk. Economic changes include the uncertainties related to the Russian military conflict with Ukraine, COVID-
19, recession, inflation, and the associated volatility in the global commodities markets. Historically, we have had no significant problems collecting our accounts
receivable.
Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to other countries,
such as low sulfur diesel to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:
LPG mix
Naphtha
Jet fuel
HOBM
AGO
Twelve Months Ended December 31,
2022
2021
(in thousands, except percent amounts)
$
$
122
99,946
173,646
88,472
120,875
483,061
0.0% $
20.7%
35.9%
18.3%
25.1%
100.0% $
21
74,683
90,062
65,386
66,951
297,103
0.0%
25.2%
30.3%
22.0%
22.5%
100.0%
An Affiliate, LEH, purchases all of our jet fuel. See “Notes (3) and (15)” to our consolidated financial statements for additional disclosures related to Affiliate
agreements and arrangements.
(6) Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets as of the dates indicated consisted of the following:
Prepaid crude oil and condensate
Prepaid insurance
Other prepaids
Prepaid easement renewal fees
(7) Inventory
Inventory as of the dates indicated consisted of the following:
HOBM
Crude oil and condensate
Naphtha
AGO
Chemicals
Propane
LPG mix
Blue Dolphin Energy Company
63
Table of Contents
Notes to Consolidated Financial Statements
(8) Property, Plant and Equipment, Net
Property, plant and equipment, net, as of the dates indicated consisted of the following:
Refinery and facilities
Land
Other property and equipment
Less: Accumulated depreciation and amortiation
CIP
(9) Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities as of the dates indicated consisted of the following:
Unearned revenue from contracts with customers
Insurance
Unearned contract renewal income
Accrued fines and penalties
Other payable
Board of director fees payable
Customer deposits
Taxes payable
(10) Third-Party Long-Term Debt
Loan Agreements Summary
$
$
$
$
$
December 31,
2022
2021
(in thousands)
2,183 $
1,066
163
54
3,466 $
1,368
953
36
76
2,433
December 31,
2022
2021
(in thousands)
14,879 $
3,458
1,056
301
116
27
7
19,844 $
1,749
660
189
338
121
27
14
3,098
December 31, 2022 │Page 63
December 31,
2022
2021
(in thousands)
72,675 $
566
913
74,154
72,583
566
903
74,052
(20,387)
53,767
(17,795)
56,257
3,669
57,436 $
3,666
59,923
$
December 31,
2022
2021
(in thousands)
3,888 $
568
480
407
324
210
173
64
6,114 $
$
$
4,388
273
400
407
218
230
173
136
6,225
Loan Description
Veritex Loans
Parties
Principal
(in millions)
Origination /
Maturity
Monthly Principal and
Interest Payment
Interest Rate
Loan Purpose
LE Term Loan Due 2034 (in default) (1) LE
LRM Term Loan Due 2034 (in default)
(1)
Kissick Debt (in default)(2)(3)
GNCU Loan (in default)
NPS Term Loan Due 2031(4)
SBA EIDLs
BDEC Term Loan Due 2051
(as modified)(5)
LE Term Loan Due 2050(6)
NPS Term Loan Due 2050(6)
Equipment Loan Due 2025(7)
Veritex
LRM
Veritex
LE
Kissick
NPS
GNCU
Blue Dolphin
SBA
LE
SBA
NPS
SBA
LE
Texas First
$25.0
$10.0
$11.7
$10.0
$2.0
$0.15
$0.15
$0.07
Jun 2015/
Jun 2034
Dec 2015/
Dec 2034
June 2006/
Jan 2018
Oct 2021/
Oct 2031
May 2021/
Jun 2051
Aug 2020/
Aug 2050
Aug 2020/
Aug 2050
Oct 2020/
Oct 2025
$0.2 million
$0.1 million
No payments to date;
payment rights subordinated
WSJ Prime +
2.75%
WSJ Prime +
2.75%
16.00%
Refinance loan; capital
improvements
Refinance bridge loan;
capital improvements
Working capital; reduced
GEL obligation
$0.1 million
5.75%
Working capital
$0.01 million
$0.0007 million
$0.0007 million
$0.0013 million
3.75%
3.75%
3.75%
4.50%
Working capital
Working capital
Working capital
Equipment Lease
Conversion
(1)
(2)
(3)
(4)
(5)
(6)
(7)
At December 31, 2022 and 2021, restricted cash, noncurrent was $1.0 million and $0, respectively; restricted cash, noncurrent represents amounts held by Veritex
in a payment reserve account.
Original principal amount was $8.0 million; debt currently held by John Kissick. Pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased
by $3.7 million.
Under a 2015 subordination agreement, John Kissick agreed to subordinate his right to payments, as well as any security interest and liens on the Nixon facility’s
business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.
Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments due monthly through loan maturity.
First payment due in November 2024.
Original principal amount was $0.5 million; the BDEC Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for
thirty (30) months; first payment due December 2023; interest accrues during deferral period; loan not forgivable.
Payments deferred for thirty (30) months; first payment due March 2023; interest accrued during deferral period; loan not forgivable.
In May 2019, LE entered into 12-month equipment rental agreement with option to purchase backhoe at maturity; equipment rental agreement matured in May
2020; in October 2020, LE entered into the Equipment Loan Due 2025 to finance the backhoe purchase; backhoe used at the Nixon facility.
Blue Dolphin Energy Company
December 31, 2022 │Page 64
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Notes to Consolidated Financial Statements
64
Outstanding Principal, Debt Issue Costs, and Accrued Interest
Third-party long-term debt, including outstanding principal and accrued interest, as of the dates indicated was as follows:
Veritex Loans
LE Term Loan Due 2034 (in default)
LRM Term Loan Due 2034 (in default)
Kissick Debt (in default)
GNCU Loan
NPS Term Loan Due 2031 (in default)
SBA EIDLs
BDEC Term Loan Due 2051
LE Term Loan Due 2050
NPS Term Loan Due 2050
Equipment Loan Due 2025
Less: Current portion of long-term debt, net
Less: Unamortized debt issue costs
Less: Accrued interest payable
December 31,
2022
2021
(in thousands)
$
20,801 $
8,671
11,006
23,789
9,861
10,210
9,975
10,094
2,082
162
162
38
52,897
(42,155)
(2,149)
(6,271)
2,322 $
512
156
156
53
54,831
(42,953)
(2,351)
(8,689)
838
$
Unamortized debt issue costs associated with the Veritex and GNCU loans as of the dates indicated consisted of the following:
December 31,
2022
2021
(in thousands)
Veritex Loans
LE Term Loan Due 2034 (in default)
LRM Term Loan Due 2034 (in default)
GNCU Loan
NPS Term Loan Due 2031 (in default)
Less: Accumulated amortization
$
$
1,674 $
768
1,674
768
730
730
(1,023)
2,149 $
(821)
2,351
Amortization expense was $0.2 million and $0.1 million for twelve-month periods ended December 31, 2022 and 2021, respectively.
Accrued interest related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the
following:
Kissick Debt (in default)
Veritex Loans
LE Term Loan Due 2034 (in default)
LRM Term Loan Due 2034 (in default)
GNCU Loan
NPS Term Loan Due 2031 (in default)
SBA EIDLs
BDEC Term Loan Due 2051
LE Term Loan Due 2050
NPS Term Loan Due 2053
Equipment Loan Due 2025
Less: Accrued interest payable (in default)
Long-term Interest Payable, Net of Current Portion
December 31,
2022
2021
$
(in thousands)
6,028 $
53
66
17
82
12
12
1
6,271
(6,271)
- $
$
5,232
2,338
959
136
12
6
6
-
8,689
(8,689)
-
The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, NPS Term Loan Due 2031, and Kissick Debt was classified within the current portion
of long-term debt on our consolidated balance sheets at December 31, 2022 and 2021.
Blue Dolphin Energy Company
December 31, 2022 │Page 65
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Notes to Consolidated Financial Statements
65
Forbearance and Defaults
Forbearance Agreement. Pursuant to the November 2022 Veritex Forbearance Agreement, Veritex agreed to forbear from exercising any of its rights and remedies
related to existing defaults pertaining to covenant violations under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 for a period beginning on November 18,
2022 through September 30, 2023. During the forbearance period, Veritex agreed to forbear from testing borrowers’ compliance with financial covenants as specified in
the LE Term Loan Due 2034 and LRM Term Loan Due 2034 and forbear from exercising its rights or remedies with respect to non-compliance with the financial
covenants. As part of the Veritex Forbearance Agreement, LE and LRM paid Veritex: (i) $4.3 million in past due principal and interest at the non-default rate (excluding
late fees), (ii) $1.0 million into a payment reserve account, and (iii) $0.04 million in Veritex attorney fees. In the event that LE and LRM pay off all amounts due under
the LE Term Loan Due 2034 and LRM Term Loan Due 2034 on or before September 30, 2023, Veritex also agreed to waive late fees totaling approximately $0.4 million
in the aggregate. The Veritex Forbearance Agreement shall terminate on the first to occur: September 30, 2023, failing to make a payment when due, breach, or any new
event of default. As of December 31, 2022 and the filing date of this report, LE and LRM were in compliance with the Veritex Forbearance Agreement.
Other Defaults. We are in default under the NPS Term Loan Due 2031 due to covenant violations. We are also in payment default under the Kissick Debt related to past
due payment obligations. Defaults permit the lender to declare the amounts owed under the related loan agreements immediately due and payable, exercise their rights
with respect to collateral securing obligors’ obligations, and/or exercise any other rights and remedies available. Any exercise by third parties of their rights and remedies
under secured loan agreements that are in default will have a material adverse effect on our business operations, including crude oil and condensate procurement and our
customer relationships; financial condition; and results of operations. In such a case, the trading price of our Common Stock and the value of an investment in our
Common Stock could significantly decrease, which could lead to holders of our Common Stock losing their investment in our Common Stock in its entirety.
We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under secured loan agreements that are in default, either upon
maturity or if accelerated, (ii) LE, LRM, and NPS will be able to refinance or restructure the debt, and/or (iii) third parties will provide future default waivers. Defaults
under our secured loan agreements and any exercise by third parties of their rights and remedies related to such defaults may have a material adverse effect on our
business, the trading price of our Common Stock, and on the value of an investment in our Common Stock, and holders of our Common Stock could lose their investment
in our Common Stock in its entirety. See “Notes (1) and (3)” to our consolidated financial statements for additional information regarding defaults under our secured loan
agreements and their potential effects on our business, financial condition, and results of operations.
Guarantees and Security
Loan Description
Veritex Loans
LE Term Loan Due 2034 (in
default)
Guarantees
· USDA
· Jonathan Carroll(1)
· Affiliate cross-guarantees
LRM Term Loan Due 2034 (in
default)
· USDA
Security
·
·
·
·
·
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
$5.0 million life insurance policy on Jonathan Carroll
Second priority lien on rights of LE in crude distillation tower and other collateral of LE
· Jonathan Carroll(1)
· Affiliate cross-guarantees
Kissick Debt (in default)(2)
---
GNCU Loan
NPS Term Loan Due 2031 (in
default)
· USDA
· Jonathan Carroll(1)
· Affiliate cross-guarantees
SBA EIDLs
BDEC Term Loan Due 2051
LE Term Loan Due 2050
NPS Term Loan Due 2050
Equipment Loan Due 2025
---
---
---
---
·
·
·
·
·
·
·
·
·
·
·
·
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
Substantially all assets
Subordinated deed of trust that encumbers the crude distillation tower and general assets of
LE
Deed of trust lien on approximately 56 acres of land and improvements owned by LE
Leasehold deed of trust lien on certain property leased by NPS from LE
Assignment of leases and rents and certain personal property
Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
Business assets (e.g., machinery and equipment, furniture, fixtures, etc.)
First priority security interest in the equipment (backhoe).
(1)
(2)
Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest.
Pursuant to a 2015 subordination agreement, the holder of the Kissick Debt agreed to subordinate their right to payments, as well as any security interest and
liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.
Blue Dolphin Energy Company
December 31, 2022 │Page 66
Table of Contents
Notes to Consolidated Financial Statements
Representations, Warranties, and Covenants
66
The First Term Loan Due 2034, Second Term Loan Due 2034, NPS Term Loan Due 2031, BDEC Term Loan Due 2051, LE Term Loan Due 2050, and NPS Term Loan
Due 2050 contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for bank facilities of
these types. Specifically, the First Term Loan Due 2034 contains quarterly debt service coverage and total combined current assets ratios and annual current and debt to
net worth ratios; in addition, LE must maintain quarterly total combined debt and total combined tangible net worth ratios. The First Term Loan Due 2034 also requires
that a $1.0 million payment reserve account be maintained. The Second Term Loan Due 2034 contains quarterly total combined current assets, total combined current
liabilities, and total combined debt ratios and annual current and debt to net worth ratios. The NPS Term Loan Due 2031 requires annual maintenance of debt service
coverage and current ratios. There are no covenants associated with the Kissick Debt, BDEC Term Loan Due 2051, LE Term Loan Due 2050, NPS Term Loan Due 2050,
and the Equipment Loan Due 2025.
Future annual third-party long-term debt payments, certain of which are reflected as current due to defaults, are as follows:
Years Ending December 31,
2023
2024
2025
2026
2027
Subsequent to 2027
(11) AROs
Principal
Debt Issue
Costs
(in thousands)
Total
$
$
44,304 $
16
5
-
35
2,266
46,626 $
(2,149) $
-
-
-
-
-
(2,149) $
42,155
16
5
-
35
2,266
44,477
Refinery and Facilities
Management has concluded that there is no legal or contractual obligation to dismantle or remove refinery and facilities assets. Management believes that refinery and
facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot
reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove refinery and facilities assets arises and a date or range of dates can
reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that
cost using present value techniques.
Pipelines and Facilities and Oil and Gas Properties
We have AROs associated with decommissioning our pipelines and facilities assets, as well as plugging and abandoning our oil and gas properties. We recorded a
discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or
placed in service, and we depreciated the amount added to property and equipment. During the twelve months ended December 31, 2021, we determined that the
estimated future cost and timing of decommissioning these assets changed. As a result, we recorded an increase in liability at December 31, 2021. We recorded an
additional increase in liability during the twelve months ended December 31, 2022 due to a further change in timing; BSEE mandated that decommissioning must occur
prior to June 1, 2023. We will recognize accretion expense through the anticipated decommissioning date.
ARO liability as of the dates indicated was as follows:
AROs, at the beginning of the period
Changes in estimates of existing obligations
Accretion expense
December 31,
2022
2021
(in thousands)
$
3,461 $
114
135
2,370
1,091
-
Less: AROs, current portion
Long-term AROs, at the end of the period
-
(3,710)
- $
3,461
-
3,461
$
See “Note (15)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.
Blue Dolphin Energy Company
December 31, 2022 │Page 67
67
Table of Contents
Notes to Consolidated Financial Statements
(12) Lease Obligations
Lease Obligations
Office Lease. We maintain our corporate headquarters in Houston, Texas. The 68-month operating lease, with BDSC as lessee, expires in August 2023. BDSC had an
option to extend the lease term for an additional five (5) year period. However, BDSC is considering the economic advantages of alternative locations.
In March 2021, BDSC defaulted on the office lease due to non-payment of rent. In May 2021, BDSC and TR 801 Travis LLC (“Building Lessor”) reached an agreement
to cure BDSC’s office lease default. Under a Fourth Amendment to Lease dated May 27, 2021 (the “Fourth Amendment”), Building Lessor agreed to defer BDSC’s past
due obligations, including rent installments and other charges totaling approximately $0.1 million (the “Past Due Obligations”), in equal monthly installments beginning
in June 2021, and continuing through lease expiration The Past Due Obligations were subject to an annual percentage rate of 4.50%. As revised under the Fourth
Amendment, BDSC’s base rent including the prorated portion of the Past Due Obligations was $0.02 million per month.
Subsequent to the Fourth Amendment, Building Lessor notified BDSC of a new default under the office lease due to non-payment of rent. As a result of the subsequent
default, Building Lessor deemed the Fourth Amendment invalid. On June 9, 2022, BDSC paid all past due amounts totaling approximately $0.2 million to Building
Lessor and Building Lessor considered the office lease default cured.
An Affiliate, LEH, subleases a portion of the Houston office space. BDSC received sublease income from LEH totaling $0.03 million for both twelve-month periods
ended December 31, 2022 and 2021. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.
The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:
Assets
Operating lease ROU assets
Less: Accumulated amortization on operating lease assets
Operating lease ROU assets
Operating lease ROU assets
$787
(638)
$787
(455)
Balance Sheet Location
December 31,
2022
(in thousands)
2021
Total lease assets
Liabilities
Current
Operating lease
Noncurrent
Operating lease
Weighted average remaining lease term in years
Operating lease
Weighted average discount rate
Operating lease
149
332
Current portion of lease
liabilities
156
215
Long-term lease liabilities,
net of current
-
$156
156
$371
0.67
8.25%
The following table presents information related to lease costs incurred for operating and finance leases:
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
$
206 $
206 $
206
206
December 31, 2022 │Page 68
Operating lease costs
Total lease cost
Blue Dolphin Energy Company
Table of Contents
Notes to Consolidated Financial Statements
The table below presents supplemental cash flow information related to leases as follows:
68
Cash paid for amounts included in the measurement
of lease liabilities:
Operating cash flows for operating lease
As of December 31, 2022, maturities of lease liabilities for the periods indicated were as follows:
December 31,
2023
Future minimum annual lease commitments that are non-cancelable:
December 31,
2023
(13) Income Taxes
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
237 $
233
Operating
Lease
(in
thousands)
$
$
156
156
Operating
Lease
(in
thousands)
$
$
161
161
The Inflation Reduction Act ("IRA") was enacted into law in August 2022. The IRA imposes a 15% alternative minimum tax on corporations whose average annual
adjusted financial statement income during the most recently completed three-year period exceeds $1.0 billion. We do not fall within the category of “applicable
corporations” and are therefore exempt from payment of an alternative minimum tax.
Tax Provision
The provision for income tax benefit (expense) for the periods indicated was as follows:
Current
Federal
State
Deferred
Federal
State
Change in valuation allowance
Total provision for income taxes
Twelve Months Ended
December 31,
2022
2021
(in thousands)
$
- $
307
7,223
-
(7,223)
-
-
2,335
-
(2,335)
$
307 $
-
GAAP treats Texas margins tax, a form of business tax imposed on an entity’s gross profit rather than its net income, like an income tax for financial reporting purposes.
Blue Dolphin Energy Company
December 31, 2022 │Page 69
Table of Contents
Notes to Consolidated Financial Statements
Effective Tax Rate
Our effective tax rate was as follows:
Expected tax rate
Permanent differences
State tax
Federal tax
Change in valuation allowance
69
$
2022
7,223
-
307
(7,223)
307
December 31,
21.00% $
0.00%
0.92%
0.00%
(21.00%)
0.92%
2021
2,335
(2,335)
-
21.00%
0.00%
0.00%
0.00%
(21.00%)
0.00%
Our effective tax rate differed from the U.S. federal statutory rate primarily due to AMT credits made refundable by the Tax Cuts and Jobs Act. At the date of enactment
of the Tax Cuts and Jobs Act, we re-measured our deferred tax assets and liabilities using a rate of 21%, which is the rate expected to be in place when such deferred
assets and liabilities are expected to reverse in the future. The re-measurement was offset by a change in our valuation allowance, resulting in there being no impact on
our net deferred tax assets.
Deferred income taxes as of the dates indicated consisted of the following:
Deferred tax assets:
NOL and capital loss carryforwards
Business interest expense
Start-up costs (crude oil and condensate processing facility)
ARO liability/deferred revenue
Other
Total deferred tax assets
Deferred tax liabilities:
Basis differences in property and equipment
Total deferred tax liabilities
Valuation allowance
Deferred tax assets, net
$
December 31,
2022
2021
(in thousands)
11,088 $
3,524
339
779
43
15,773
(8,216)
(8,216)
7,557
16,818
4,680
424
727
12
22,661
(7,945)
(7,945)
14,716
(7,557)
(14,716)
$
- $
-
Deferred Income Taxes
Balances for deferred income tax represent the effects of temporary differences between carrying amounts and the actual income tax basis of our assets and liabilities; the
balances also reflect NOL carryforwards. We record the balances based on tax rates we expect to be in effect when paid. NOL carryforwards and deferred tax assets
represent amounts available to reduce future taxable income.
NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards
to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of stockholders who own
more than 5% (after applying certain look-through rules) increase by more than fifty percent (50% over such stockholders’ lowest percentage ownership during the testing
period (generally three years). Based on the tax rule, ownership changes occurred in 2005 and 2012. The 2005 ownership change related to a series of private placements;
the 2012 ownership change related to a reverse acquisition.
The 2005 and 2012 ownership changes limit the use of pre-change NOL carryforwards to offset future taxable income. The annual use limitation generally equals the
value of the common stock, on an aggregate basis, when the ownership change occurred multiplied by a specified tax-exempt interest rate. The 2012 ownership change
will subject approximately $16.3 million in NOL carryforwards generated before the ownership change to an annual use limitation of roughly $0.6 million per year. We
may use any unused portions of the limitation in subsequent years. Because of the yearly restriction, approximately $6.7 million in NOL carryforwards generated before
the 2012 ownership change will expire unused. NOL carryforwards generated after the 2012 ownership change but before 2018 are not subject to an annual use
limitation; we can use these NOL carryforwards for 20 years in addition to NOL carryforward amounts generated before the ownership change. NOL carryforwards that
were generated beginning in 2018 may only be used to offset 80% of taxable income and are carried forward indefinitely.
Blue Dolphin Energy Company
December 31, 2022 │Page 70
Table of Contents
Notes to Consolidated Financial Statements
70
NOL Carryforwards. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire
unused because of the IRC Section 382 limitation):
Balance at December 31, 2020
Net operating losses used and expired
Net Operating Loss
Carryforward
Pre-
Ownership
Change
Post-
Ownership
Change
(in thousands)
Total
9,614
56,363
65,977
(1,717)
9,148
7,431
Balance at December 31, 2021
$
7,897 $
65,511 $
73,408
Net operating losses used and expired
(6,127)
(22,384)
(28,511)
Balance at December 31, 2022
$
1,770 $
43,127 $
44,897
Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets.
This assessment (of whether there is more than a 50% probability that our deferred tax asset is realizable) depends on the generation of future taxable income before the
expiration of any NOL carryforwards. At December 31, 2022 and 2021, management determined that realization of the deferred tax assets from NOLs is unlikely based
on negative evidence of three-year cumulative net losses. Cumulative net losses represent significant negative objective evidence, limiting the ability to consider other
subjective evidence, such as projections for future growth. Based on management’s evaluation, we recorded a valuation allowance against the deferred tax assets as of
December 31, 2022 and 2021.
We have NOL carryforwards that remain available for future use. At December 31, 2022 and 2021, there were no uncertain tax positions for which a reserve or liability
was necessary.
(14) Earnings and Dividends Per Share
A reconciliation between basic and diluted income per share for the periods indicated was as follows:
Net income (loss)
Earnings per share
Basic and diluted income (loss) per share
Basic and diluted shares used in computing
earnings per share
Twelve Months Ended
December 31,
2022
2021
(in thousands,
except share and per share
amounts)
$
32,892 $
(12,841)
$
2.34 $
(1.01)
14,079,327 12,693,514
Diluted EPS for the twelve months ended December 31, 2022 and 2021 was the same as basic EPS as there were no stock options or other dilutive instruments
outstanding. Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock
outstanding.
Shareholders are entitled to receive such dividends as may be declared by our Board out of funds legally available for such purpose. However, no dividend may be
declared or paid unless after-tax profit was made in the preceding fiscal year, we are in compliance with covenants in our secured loan agreements, we are current on all
required debt payments, and we have received prior written concurrence from certain of our lenders.
Blue Dolphin Energy Company
December 31, 2022 │Page 71
Table of Contents
Notes to Consolidated Financial Statements
(15) Commitments and Contingencies
71
Amended and Restated Operating Agreement
See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin assets by an Affiliate under the
Amended and Restated Operating Agreement.
BSEE Offshore Pipelines and Platform Decommissioning
BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently
abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-
of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.
In December 2018, BSEE issued an INC to BDPL for failing to flush and fill Pipeline Segment No. 13101. Management met with BSEE in August 2019 to address
BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit pipeline and platform decommissioning
permit applications, including a safe boarding plan, by February 2020. BDPL submitted permit applications to BSEE in February 2020 and the USACOE in March 2020.
In April 2020, BSEE issued another INC to BDPL for failing to perform the required structural surveys for the GA-288C Platform. BDPL completed the required
platform surveys in June 2020.
In August 2022, BSEE issued an INC to BDPL for failing to complete decommissioning its main offshore pipeline and anchor platform. In addition, pursuant to a
September 2022 letter, BSEE ordered BDPL to complete pipeline decommissioning and removal of the anchor platform by June 1, 2023. BDPL is examining the
feasibility of completing decommissioning operations by BSEE’s deadline. In March 2023, BSEE issued an INC to BDPL for failing to perform the required structural
surveys for the GA-288C platform for 2021 and 2022, and for failing to provide BSEE with such survey results. BDPL is obtaining vendor quotes for the performance of
the required surveys and intends to submit a corrective action plan to BSEE. If BDPL fails to complete decommissioning of the offshore pipeline and platform assets
and/or remedy the INCs within the timeframe mandated by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failing to
correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows, and liquidity.
We cannot currently estimate when decommissioning may occur or predict the outcome of the BSEE INCs. Accordingly, we did not record a liability related to potential
penalties on our consolidated balance sheets as of December 31, 2022 and 2021. At December 31, 2022 and 2021, BDPL maintained $3.7 million and $3.5 million,
respectively, in AROs related to abandonment of these assets, which amount does not include potential penalties.
Defaults Under Secured Loan Agreements with Third Parties and Related Parties
See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.
Financing Agreements and Guarantees
Indebtedness. See “Notes (1), (3), and (10)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.
Guarantees. Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount
and accrued interest, which amounts are reduced as payments are made. See “Notes (1), (3), and (10)” to our consolidated financial statements for additional disclosures
related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.
Health, Safety and Environmental Matters
The operations of certain Blue Dolphin subsidiaries are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other
things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the
environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. These
operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failing to obtain and comply with
these permits or environmental, health, or safety laws could result in fines, penalties or other sanctions, or a revocation of our permits.
Blue Dolphin Energy Company
December 31, 2022 │Page 72
72
Table of Contents
Notes to Consolidated Financial Statements
Share Issuances
We are obligated to issue shares of our Common Stock to: (i) Jonathan Carroll pursuant to the Guaranty Fee Agreements and (ii) non-employee directors for services
rendered to the Board. Set forth below is information regarding the issuance of Common Stock related to these obligations during the twelve months ended December 31,
2022 and 2021:
Services.
·
·
·
Payment of Debt.
·
On October 27, 2022, we issued an aggregate of 24,591 restricted shares of Common Stock to certain of our non-employee, independent directors, which
represents payment for services rendered to the Board for the three-month period ended September 30, 2022. The cost basis was $1.22.
On May 12, 2022, we issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents
payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The
average cost basis was $0.55, the low was $0.33, and the high was $0.91.
On September 6, 2022, we issued an aggregate of 98,336 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2022 to June 2022. The average cost basis was $0.86, the low was $0.58, and the high was $1.26.
On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2020 through March 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64.
The securities issuances were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. We recognized a loss on the issuance
of shares of approximately $0.4 million and $0 for the twelve months ended December 31, 2022 and 2021, respectively. See “Notes (1), (3) and (15)” to our consolidated
financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the LE Amended and Restated
Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement.
Legal Matters
In the ordinary course of business, we are involved in legal matters incidental to the routine operation of our business, such as mechanic’s liens and contract-related
disputes. We may also become party to lawsuits, administrative proceedings, and governmental investigations, including environmental, regulatory, and other matters.
Large, and sometimes unspecified, damages or penalties may be sought from us in some matters and certain matters may require years to resolve. Although we cannot
provide assurance, we believe that an adverse resolution of the matters described below would not have a material impact on our liquidity, consolidated financial position,
or consolidated results of operations.
Unresolved Matters.
Pilot Dispute Related to Terminal Services Agreement.
Effective May 9, 2019, NPS and Pilot entered into a Terminal Services Agreement, pursuant to which NPS agreed to store jet fuel purchased by Pilot at the Nixon facility.
On August 25, 2022, Pilot provided the required 60-days’ notice of its intent to terminate the Terminal Services Agreement, which became effective on October 24, 2022.
As of the Terminal Services Agreement termination date, approximately 185,000 bbls of Pilot’s jet fuel remained at the Nixon facility.
On October 28, 2022, Pilot commenced an action and application for a temporary restraining order (“TRO”) against NPS in Harris County District Court (the “Texas
Action”). After a hearing on the application on October 28, 2022, Pilot’s application for the TRO was denied the same day.
On December 2, 2022, NPS filed its answer in the Texas Action. On December 6, 2022, NPS provided notice under Section 7.206(a) of the Texas Business and
Commerce Code (“TBCC”) of its intent to sell the remaining inventory of Pilot’s jet fuel at the Nixon facility by January 7, 2023. After a series of negotiations, NPS
agreed to forbear from exercising its remedies under the TBCC while the parties explored a potential compromise of the dispute. The parties entered a Forbearance and
Accommodation Agreement on January 12, 2023, with the forbearance period terminating on February 28, 2023. As part of the Forbearance and Accommodation
Agreement, Pilot paid NPS approximately $1.481 million on January 13, 2023.
On March 31, 2023, NPS and Pilot executed an Amendment to the Forbearance and Accommodation Agreement (“March 31 Amendment”) with the forbearance term
extending to June 15, 2023. The March 31 Amendment requires an additional payment by Pilot to NPS of approximately $1.08 million on April 3, 2023 and a conditional
payment of $0.18 million on June 1, 2023.
Pursuant to the March 31 Amendment all deadlines in the Texas Action have been tolled through June 15, 2023.
As of the filing date of this report, no settlement has been reached.
Blue Dolphin Energy Company
December 31, 2022 │Page 73
Table of Contents
Notes to Consolidated Financial Statements
73
BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal waters
of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide
additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and
platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is
released by BOEM.
BDPL historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency
restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for
five (5) existing pipeline rights-of-way. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA.
Although the IBLA granted multiple extension requests, the Office of the Solicitor of the U.S. Department of the Interior indicated that BOEM would not consent to
further extensions. The solicitor’s office signaled that BDPL’s adherence to milestones identified in an August 2019 meeting between management and BSEE may help in
future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by
BOEM, which may serve to partially or fully resolve the INCs.
BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial
penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by
BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a
significant and material adverse effect on our operations, liquidity, and financial condition.
We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we did not record a liability on our consolidated balance sheets as of December 31,
2022 and 2021. At both December 31, 2022 and 2021, BDPL maintained approximately $0.9 million in pipeline rights-of-way surety bonds issued to BOEM through
RLI Corp. Of the pipeline rights-of-way bonds, $0.7 million was credit-backed and $0.2 million was cash-backed.
OSHA Settlement Agreement. In September 2022, we entered into an Informal Settlement Agreement with OSHA related to process safety management violations at the
Nixon refinery. Under the agreement, we paid penalties totaling $0.05 million in November 2022. We remediated a significant portion of identified violations prior to
December 31, 2022. Most of the remaining violations were remediated on a progressive schedule prior to March 31, 2023. Work on the final violation is in progress, and
we expect to complete the work in April 2023. Failing to abide by the terms of the agreed could result in additional fines.
TCEQ Proposed Agreed Order. In October 2021, LRM received a proposed agreed order from the TCEQ for alleged solid and hazardous waste violations discovered
during an investigation from January to March 2020. The proposed agreed order assessed an administrative penalty of approximately $0.4 million and identified actions
needed to correct the alleged violations. We are currently seeking to negotiate a reduced penalty amount. In May 2022, management met with the TCEQ to review the
alleged solid hazardous waste violations. As follow-up to the meeting, LRM provided additional documentation to the TCEQ in a June 2022 letter. On March 29, 2023,
TCEQ requested a meeting in April 2023 to review LRM's submissions to date. We recorded a liability for the maximum proposed amount of $0.4 million on our
consolidated balance sheets within accrued expenses and other current liabilities as of December 31, 2022 and 2021. We cannot currently estimate when the TCEQ
hazardous waste matter will be resolved or predict the outcome of the violations.
Pilot Dispute Related to Set-Off Payments. In October 2021, NPS repaid all obligations owed to Pilot under the Amended Pilot Line of Credit. However, in a letter from
NPS to Pilot dated October 28, 2021, NPS disputed approximately $0.3 million in set-off payments between Pilot and NPS. As of the filing date of this report, the
amount remained in dispute between the parties.
Defaults under Secured Loan Agreements. We are currently in default under certain of our secured loan agreements with third parties and related parties. See “Notes (1),
(3), and (10)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential
effects of such defaults on our business, financial condition, and results of operations. If third parties exercise their rights and remedies due to defaults under our secured
loan agreements, our business, financial condition, and results of operations will be materially adversely affected.
Counterparty Contract-Related Dispute. As of the filing date of this report, we were involved in a contract-related dispute with Tartan involving a revenue sharing-
arrangement for the storage and sale of crude oil. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management
does not believe that the contract-related dispute will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance
that management’s efforts will result in a manageable outcome.
Blue Dolphin Energy Company
December 31, 2022 │Page 74
Table of Contents
Notes to Consolidated Financial Statements
(16) Subsequent Events
74
Second Amended and Restated Operating Agreement
The Second Amended and Restated Operating Agreement was renewed with an effective date of April 1, 2023, and was executed on March 14, 2023. The renewal term
begins on the effective date and expires upon the earliest to occur of the following: (a) upon the first anniversary of the effective date, which termination date shall be
April 1, 2024, (b) upon written notice of either party upon the material breach of the agreement by the other party, or (c) upon 90 days’ notice by the Board if the Board
determines that the Second Amended and Restated Operating Agreement is not in the best interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and/or BDSC. With
the exception of the term length, terms of the Second Amended and Restated Operating Agreement were the same as the Amended and Restated Operating Agreement.
For services rendered: (a) Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC shall reimburse LEH at cost for all direct expenses, either paid directly by LEH or
financed with LEH’s credit card. Amounts payable to LEH shall be invoiced by LEH weekly but may be reimbursed sooner and (b) Blue Dolphin shall also pay to LEH a
management fee equal to 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest.
Guaranty Fee Agreements
Jonathan Carroll was required to provide his personal guarantee on certain of our secured loan agreements.
·
·
·
·
BDEC Guaranty Fee Agreement – The BDEC Guaranty Fee Agreement, with an effective date of January 1, 2023, was executed on March 14, 2023. Under the
BDEC Guaranty Fee Agreement, Jonathan Carroll shall receive a fee equal to 2.00% per annum of the outstanding principal balance owed under the BDEC Term
Loan Due 2051, payable 100% in cash.
NPS Guaranty Fee Agreement – The NPS Guaranty Fee Agreement, with an effective date of January 1, 2023, was executed on March 14, 2023. Under the NPS
Guaranty Fee Agreement, Jonathan Carroll shall receive a fee equal to 2.00% per annum of the outstanding principal balance owed under the NPS Term Loan Due
2031, payable 100% in cash.
LE Amended and Restated Guaranty Fee Agreement – The LE Amended and Restated Guaranty Fee Agreement was further amended and restated with an
effective date of January 1, 2023; the agreement was executed on March 14, 2023. As further amended and restated, Jonathan Carroll shall receive a fee equal to
2.00% per annum of the outstanding principal balance owed under the LE Term Loan Due 2034, payable 100% in cash.
LRM Amended and Restated Guaranty Fee Agreement – The LRM Amended and Restated Guaranty Fee Agreement was further amended and restated with an
effective date of January 1, 2023; the agreement was executed on March 14, 2023. As further amended and restated, Jonathan Carroll shall receive a fee equal to
2.00% per annum of the outstanding principal balance owed under the LRM Term Loan Due 2034, payable 100% in cash.
The amounts expensed related to the guaranty fee agreements are reflected within interest and other expense in our consolidated statements of operations.
Master Services Agreement
Effective March 1, 2023, LE entered a Master Services Agreement with Ingleside for storage of products intended for customer receipt by barge. The agreement has a
three-year term. The tank rental fee is $0.50 per bbl per month. The agreement was executed on March 14, 2023.
Jet Fuel Sales Agreement
Effective April 1, 2023, LE entered into a renewed Jet Fuel Sales Agreement with LEH. The agreement has a one year term expiring on the earliest to occur of March 31,
2024 plus a 30-day carryover or delivery of the maximum jet fuel quantity. The agreement was executed on March 24, 2023.
Together, Jonathan Carroll and LEH own approximately 83% of Blue Dolphin’s Common Stock. See “Note (3)” of our consolidated financial statements for additional
disclosures related to agreements with Affiliates.
Terminal Services Agreement
Effective November 1, 2022, NPS entered a Terminal Services Agreement with LEH for the storage of jet fuel by LEH. The agreement has a one year term with one-year
automatic renewals. The tank rental fee is approximately $0.2 million per month. The agreement was ratified by the Board on March 7, 2023.
Master Service Agreement
Effective March 1, 2023, LE entered a Master Service Agreement with Ingleside for the storage of product intended for customer receipt by barge. The agreement has a
three-year term. The tank rental fee is $0.50 per bbl per month. The agreement was approved by the Board on March 7, 2023.
Blue Dolphin Energy Company
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Table of Contents
Internal Controls and Procedures
75
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports we file or
submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified by SEC rules and forms. Disclosure controls and
procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under
the Exchange Act is accumulated and communicated to our Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting
officer) to allow timely decisions regarding required disclosure. Under the supervision of, and with the participation of our management, including our Chief Executive
Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act,
as of the end of the period covered by this report. Based on our evaluation, our Chief Executive Officer (principal executive officer, principal financial officer, and
principal accounting officer) concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act, are recorded, processed, summarized, and reported within the time
periods specified in the SEC’s rules and forms.
Management’s Report on Internal Control over Financial Reporting
Management’s Responsibility. Management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in
Rules 13a-15(f) and 15d-15(f) under the Exchange Act. A company’s internal control over financial reporting is a process designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting
principles in the U.S.
There are inherent limitations in the effectiveness of any control system, including the potential for human error and the possible circumvention or overriding of controls
and procedures. Additionally, judgments in decision-making can be faulty and breakdowns can occur because of a simple error or mistake. An effective control system
can provide only reasonable, not absolute, assurance that the control objectives of the system are adequately met. Accordingly, management does not expect that the
control system can prevent or detect all errors or fraud. Further, projections of any evaluation or assessment of effectiveness of a control system to future periods are
subject to the risks that, over time, controls may become inadequate because of changes in an entity’s operating environment or deterioration in the degree of compliance
with policies or procedures.
Management’s Assessment. Management, under the supervision and with the participation of our Chief Executive Officer (principal executive officer, principal financial
officer, and principal accounting officer), assessed the effectiveness of our internal controls over financial reporting at December 31, 2022. In making this assessment,
management used the criteria set forth by the 2013 Committee of Sponsoring Organizations of the Treadway Commission Framework and SOX Compliance.
Management determined that our internal controls over financial reporting were effective for the twelve months ended December 31, 2022.
Changes in Internal Control over Financial Reporting. There have been no changes in our internal control over financial reporting that materially affected, or is
reasonably likely to materially affect, our internal control over financial reporting.
Exemption from Management's Report on Internal Control over Financial Reporting. This report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant
to rules of the SEC for smaller reporting companies that permit us to provide only management’s attestation in this report.
Blue Dolphin Energy Company
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Table of Contents
Other Information
ITEM 9B. OTHER INFORMATION
76
Common Stock Issuances
Set forth below is information regarding the issuance of Common Stock by us for the years ended December 31, 2022 and 2021:
Services.
·
·
On October 27, 2022, we issued an aggregate of 24,591 restricted shares of Common Stock to certain of our non-employee, independent directors, which
represents payment for services rendered to the Board for the three-month period ended September 30, 2022. The cost basis was $1.22.
On May 12, 2022, we issued an aggregate of 252,447 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents
payment for services rendered to the Board for the three-month periods ended September 30, 2020, March 31, 2021, September 30, 2021, and March 31, 2022. The
average cost basis was $0.55, the low was $0.33, and the high was $0.91.
Payment of Debt.
·
On September 6, 2022, we issued an aggregate of 98,336 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2022 to June 2022. The average cost basis was $0.86, the low was $0.58, and the high was $1.26.
On May 12, 2022, we issued an aggregate of 1,853,080 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock
component under the LE Amended and Restated Guaranty Fee Agreement and LRM Amended and Restated Guaranty Fee Agreement for monthly periods from
April 2020 through March 2022. The average cost basis was $0.42, the low was $0.27, and the high was $0.64.
·
The issuance of these securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. See “Part II, Item 5. Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities,” “Part II, Item 9B. Other Information,” and “Note (15)” to our
consolidated financial statements for additional disclosures related to share issuances.
Second Amended and Restated Operating Agreement
The Second Amended and Restated Operating Agreement was renewed with an effective date of April 1, 2023, and was executed on March 14, 2023. The renewal term
begins on the effective date and expires upon the earliest to occur of the following: (a) the first anniversary of the effective date, which termination date shall be April 1,
2024, (b) upon written notice of either party upon the material breach of the agreement by the other party, or (c) upon 90 days’ notice by the Board if the Board
determines that the Second Amended and Restated Operating Agreement is not in the best interest of Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and/or BDSC. With
the exception of the term length, terms of the Second Amended and Restated Operating Agreement were the same as the Amended and Restated Operating Agreement.
For services rendered: (a) Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and BDSC shall reimburse LEH at cost for all direct expenses, either paid directly by LEH or
financed with LEH’s credit card. Amounts payable to LEH shall be invoiced by LEH weekly but may be reimbursed sooner and (b) Blue Dolphin shall also pay to LEH a
management fee equal to 5% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest.
The foregoing summarizes the material terms of the Second Amended and Restated Operating Agreement, which is filed as Exhibit 10.42 to this report.
Guaranty Fee Agreements
Jonathan Carroll was required to provide his personal guarantee on certain of our secured loan agreements.
·
·
·
·
BDEC Guaranty Fee Agreement – The BDEC Guaranty Fee Agreement, with an effective date of January 1, 2023, was executed on March 14, 2023. Under the
BDEC Guaranty Fee Agreement, Jonathan Carroll shall receive a fee equal to 2.00% per annum of the outstanding principal balance owed under the BDEC Term
Loan Due 2051, payable 100% in cash.
NPS Guaranty Fee Agreement – The NPS Guaranty Fee Agreement, with an effective date of January 1, 2023, was executed on March 14, 2023. Under the NPS
Guaranty Fee Agreement, Jonathan Carroll shall receive a fee equal to 2.00% per annum of the outstanding principal balance owed under the NPS Term Loan Due
2031, payable 100% in cash.
LE Amended and Restated Guaranty Fee Agreement – The LE Amended and Restated Guaranty Fee Agreement was further amended and restated with an
effective date of January 1, 2023; the agreement was executed on March 14, 2023. As further amended and restated, Jonathan Carroll shall receive a fee equal to
2.00% per annum of the outstanding principal balance owed under the LE Term Loan Due 2034, payable 100% in cash.
LRM Amended and Restated Guaranty Fee Agreement – The LRM Amended and Restated Guaranty Fee Agreement was further amended and restated with an
effective date of January 1, 2023; the agreement was executed on March 14, 2023. As further amended and restated, Jonathan Carroll shall receive a fee equal to
2.00% per annum of the outstanding principal balance owed under the LRM Term Loan Due 2034, payable 100% in cash.
Blue Dolphin Energy Company
December 31, 2022 │Page 77
Table of Contents
Other Information
77
The amounts expensed related to the guaranty fee agreements are reflected within interest and other expense in our consolidated statements of operations.
The foregoing summarizes the material terms of the BDEC Guaranty Fee Agreement, NPS Guaranty Fee Agreement, LE Amended and Restated Guaranty Fee
Agreement, and LRM Amended and Restated Guaranty Fee Agreement, which are filed as Exhibit 10.43, Exhibit 10.44, Exhibit 10.45, and Exhibit 10.46, respectively, to
this report.
Master Services Agreement
Effective March 1, 2023, LE entered a Master Services Agreement with Ingleside for storage of products intended for customer receipt by barge. The agreement has a
three-year term. The tank rental fee is $0.50 per bbl per month. The agreement was executed on March 14, 2023.
Jet Fuel Sales Agreement
Effective April 1, 2023, LE entered into a renewed Jet Fuel Sales Agreement with LEH. The agreement has a one year term expiring on the earliest to occur of March 31,
2024 plus a 30-day carryover or delivery of the maximum jet fuel quantity. The agreement was executed on March 24, 2023.
Together, Jonathan Carroll and LEH own approximately 83% of Blue Dolphin’s Common Stock. See “Note (3)” and “Note 16”) of our consolidated financial statements
for additional disclosures related to agreements with Affiliates.
ITEM 9C. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
Remainder of Page Intentionally Left Blank
Blue Dolphin Energy Company
December 31, 2022 │Page 78
Table of Contents
Directors and Officers Compensation and Beneficial Stockholder Information
78
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
PART III
The information required in response to this Item 10 is incorporated herein by reference to our definitive proxy statement relating to our 2023 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 11. EXECUTIVE COMPENSATION
The information required in response to this Item 11 is incorporated herein by reference to our definitive proxy statement relating to our 2023 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information required in response to this Item 12 is incorporated herein by reference to our definitive proxy statement relating to our 2023 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required in response to this Item 13 is incorporated herein by reference to our definitive proxy statement relating to our 2023 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required in response to this Item 14 is incorporated herein by reference to our definitive proxy statement relating to our 2023 Annual Meeting of
Stockholders to be filed with the SEC pursuant to Regulation 14A, not later than 120 days after the end of our fiscal year covered by this report.
Blue Dolphin Energy Company
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Table of Contents
Exhibits
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Exhibits and Financial Statement Schedules
Following is a list of documents filed as part of this report:
79
PART IV
·
·
Consolidated balance sheets, consolidated statements of operations, consolidated statements of shareholders’ equity (deficit), and consolidated statements of cash
flows, which appear in “Part II, Item 8.Financial Statements and Supplementary Data”.
Exhibits as listed in the exhibit index of this report, which is incorporated herein by reference.
ITEM 16. FORM 10-K SUMMARY
Not applicable.
Exhibits Index
No.
3.1
3.2
4.1
Description
Amended and Restated Certificate of Incorporation of Blue Dolphin (incorporated by reference to Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on June
2, 2009, Commission File No. 000-15905)
Amended and Restated By-Laws of Blue Dolphin (incorporated by reference to Exhibit 3.1 filed with Blue Dolphin’s Form 8-K on December 26, 2007,
Commission File No. 000-15905)
Specimen Stock Certificate (incorporated by reference to exhibits filed with Blue Dolphin’s Form 10-K on March 30, 1990, Commission File No. 000-
15905)
4.2
Description of company securities.
10.1*
10.2*
10.3*
10.4*
10.5
Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix 1 filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on April
20, 2000, Commission File No. 000-15905)
First Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix B filed with Blue Dolphin’s Proxy Statement on
Form DEF 14A on April 16, 2003, Commission File No. 000-15905)
Second Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Appendix A filed with Blue Dolphin’s Proxy Statement
on Form DEF 14A on April 27, 2006, Commission File No. 000-15905)
Fourth Amendment to the Blue Dolphin 2000 Stock Incentive Plan (incorporated by reference to Exhibit B filed with Blue Dolphin’s Proxy Statement on
Form DEFA on December 28, 2011, Commission File No. 000-15905)
Promissory Note between Lazarus Energy LLC as maker and Notre Dame Investors Inc. as Payee in the Principal Amount of $8,000,000 dated June 1,
2006 (incorporated by reference to Exhibit 10.6 filed with Blue Dolphin’s Form 10-Q on March 31, 2012, Commission File No. 000-15905)
10.6**
Subordination Agreement dated June 3, 2015 by and among John H. Kissick and Sovereign Bank
10.7
10.8
First Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of July 1, 2013 (incorporated by reference to
Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on November 14, 2013, Commission File No. 000-15905)
Second Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March 31, 2015, Commission File No. 000-15905)
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Exhibits
80
10.9
10.10
10.11
10.12
10.13
10.14
10.15
10.16
10.17
10.18
10.19
10.20
10.21
10.22
10.23
10.24
10.25
10.26
10.27
Second Amendment to Promissory Note by and between Lazarus Energy, LLC and John H. Kissick effective as of October 1, 2014 (incorporated by
reference to Exhibit 10.48 filed with Blue Dolphin’s Form 10-K on March 31, 2015, Commission File No. 000-15905)
Loan Agreement among Sovereign Bank, Lazarus Energy, LLC and Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus Refining &
Marketing, LLC, and Lazarus Energy Holdings dated June 22, 2015 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on
June 26, 2015, Commission File No. 000-15905)
Promissory Note between Lazarus Energy, LLC and Sovereign Bank for the principal sum of $25,000,000 dated June 22, 2015 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Energy, LLC in favor of Sovereign Bank dated June 22, 2015 (incorporated by reference to Exhibit 10.3 filed with Blue
Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Lazarus Energy, LLC dated
June 22, 2015 (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Energy, LLC for the benefit of Lazarus Refining & Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.5 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Loan and Security Agreement between Sovereign Bank and Lazarus Refining & Marketing, LLC dated June 22, 2015 (incorporated by reference to
Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Pledge Agreement by Lazarus Refining & Marketing, LLC in favor of Sovereign Bank dated June 22, 2015 (incorporated by reference to Exhibit 10.8
filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Collateral Assignment executed by Blue Dolphin Pipe Line Company for the benefit of Sovereign Bank dated June 22, 2015 (incorporated by reference to
Exhibit 10.9 filed with Blue Dolphin’s Form 8-K on June 26, 2015, Commission File No. 000-15905)
Loan Agreement among Sovereign Bank, Lazarus Refining & Marketing, LLC, Jonathan Pitts Carroll, Sr., Blue Dolphin Energy Company, Lazarus
Energy, LLC, and Lazarus Energy Holdings dated December 4, 2015 (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
Promissory Note between Lazarus Refining & Marketing, LLC and Sovereign Bank for the principal sum of $10,000,000 dated December 4, 2015
(incorporated by reference to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Security Agreement of Lazarus Refining & Marketing, LLC in favor of Sovereign Bank dated December 4, 2015 (incorporated by reference to Exhibit
10.3 filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Lazarus Refining &
Marketing, LLC dated December 4, 2015 (incorporated by reference to Exhibit 10.4 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
Absolute Assignment of Leases and Rents dated December 4, 2015 (incorporated by reference to Exhibit 10.6 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
Indemnification Agreement dated December 4, 2015 (incorporated by reference to Exhibit 10.7 filed with Blue Dolphin’s Form 8-K on December 10,
2015, Commission File No. 000-15905)
Pledge Agreement by Lazarus Energy Holdings, LLC in favor of Sovereign Bank dated December 4, 2015 (incorporated by reference to Exhibit 10.8 filed
with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
Collateral Assignment of Key Agreements dated December 4, 2015 (incorporated by reference to Exhibit 10.9 filed with Blue Dolphin’s Form 8-K on
December 10, 2015, Commission File No. 000-15905)
First Amendment to Lazarus Energy, LLC Loan Agreement and Loan Documents dated December 4, 2015 (incorporated by reference to Exhibit 10.10
filed with Blue Dolphin’s Form 8-K on December 10, 2015, Commission File No. 000-15905)
First Amendment to Lazarus Energy, LLC Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and
Fixture Filing dated December 4, 2015 (incorporated by reference to Exhibit 10.11 filed with Blue Dolphin’s Form 8-K on December 10, 2015,
Commission File No. 000-15905)
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Exhibits
81
10.28
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
10.39
10.40
10.41
Loan and Security Agreement by and between Lazarus Energy Holdings, LLC and Blue Dolphin Pipe Line Company dated August 15, 2016 (incorporated
by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No. 000-15905)
Promissory Note by and between Lazarus Energy Holdings, LLC and Blue Dolphin Pipe Line Company dated August 15, 2016 (incorporated by reference
to Exhibit 10.2 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No. 000-15905)
Deed of Trust, Mortgage, Security Agreement, Assignment of Leases and Rents, Financing Statement and Fixture Filing for Blue Dolphin Pipe Line
Company dated August 15, 2016 (incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 8-K on August 19, 2016, Commission File No.
000-15905)
Amended and Restated Promissory Note dated March 31, 2017, of Blue Dolphin Energy Company in favor of Ingleside Crude, LLC (incorporated by
reference to Exhibit 10.2 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-15905)
Amended and Restated Promissory Note dated March 31, 2017, of Blue Dolphin Energy Company in favor of Lazarus Capital, LLC (Jonathan Carroll)
(incorporated by reference to Exhibit 10.3 filed with Blue Dolphin’s Form 10-Q on May 15, 2017, Commission File No. 000-15905)
Amended and Restated Promissory Note dated June 30, 2017, of Blue Dolphin Energy Company in favor of Lazarus Energy Holdings, LLC (incorporated
by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on October 12, 2017, Commission File No. 000-15905)
Notice from Veritex Community Bank to Lazarus Energy, LLC, Blue Dolphin Energy Company, Lazarus Refining & Marketing, LLC, Lazarus Energy
Holdings, LLC, Lazarus Marine Terminal I, LLC and Jonathan Pitts Carroll, Sr. dated April 30, 2019 (incorporated by reference to Exhibit 10.7 filed with
Blue Dolphin’s Form 10-Q on August 14, 2019, Commission File No. 000-15905)
Loan Authorization and Agreement between Blue Dolphin Energy Company and the Small Business Administration effective May 4, 2021 (incorporated
by reference to Exhibit 10.1 filed with Blue Dolphin’s Form 10-Q on August 17, 2021, Commission File No. 000-15905).
Loan Authorization and Agreement between Blue Dolphin Energy Company and the Small Business Administration dated May 11, 2021 (incorporated by
reference to Exhibit 10.1 filed with Blue Dolphin’s Form 8-K on May 17, 2021, Commission File No. 000-15905).
Loan Agreement between Greater Nevada Credit Union, Nixon Product Storage, LLC, and Guarantors (as defined therein) dated September 20, 2021
(incorporated by reference to Exhibit 10.52 filed with Blue Dolphin’s Form 10-K on April 1, 2022, Commission File No. 000-15905).
Guaranteed Note between Nixon Product Storage, LLC and Greater Nevada Credit Union dated September 20, 2021. (incorporated by reference to Exhibit
10.53 filed with Blue Dolphin’s Form 10-K on April 1, 2022, Commission File No. 000-15905).
Non-Guaranteed Note between Nixon Product Storage, LLC and Greater Nevada Credit Union dated September 20, 2021. (incorporated by reference to
Exhibit 10.54 filed with Blue Dolphin’s Form 10-K on April 1, 2022, Commission File No. 000-15905).
1st Loan Modification of Note between Blue Dolphin Energy Company and the Small Business Administration dated February 18, 2022. (incorporated by
reference to Exhibit 10.55 filed with Blue Dolphin’s Form 10-K on April 1, 2022, Commission File No. 000-15905).
Forbearance Agreement dated November 18, 2022 among Lazarus Energy LLC, Lazarus Refining & Marketing LLC, Blue Dolphin Energy Company,
Lazarus Energy Holdings LLC, Jonathan Carroll and Veritex Community Bank (incorporated by reference to Exhibit 10.1 filed with Blue Dolphin’s Form
8-K on November 25, 2022, Commission File No. 000-15905).
10.42**
Second Amended and Restated Operating Agreement effective as of April 1, 2023 by and between Lazarus Energy Holdings, LLC, Blue Dolphin Energy
Company, Lazarus Energy, LLC, Lazarus Refining & Marketing, LLC, Nixon Product Storage, LLC, Blue Dolphin Pipe Line Company, Blue Dolphin
Petroleum Company, and Blue Dolphin Services Co.
10.43**
Guaranty Fee Agreement dated January 1, 2023 between Blue Dolphin Energy Company and Jonathan P. Carroll.
10.44**
Guaranty Fee Agreement dated January 1, 2023 between Nixon Product Storage, LLC and Jonathan P. Carroll.
10.45**
Amended and Restated Guaranty Fee Agreement dated January 1, 2023 between Lazarus Energy, LLC and Jonathan P. Carroll.
Blue Dolphin Energy Company
December 31, 2022 │Page 82
Table of Contents
Exhibits
82
10.46**
Amended and Restated Guaranty Fee Agreement dated January 1, 2023 between Lazarus Refining & Marketing, LLC and Jonathan P. Carroll.
14.1
Code of Ethics applicable to the Chairman, Chief Executive Officer and Senior Financial Officer (incorporated by reference to Exhibit 14.1 filed with Blue
Dolphin’s Form 10-KSB on March 25, 2005, Commission File No. 000-15905)
21.1**
List of Subsidiaries of Blue Dolphin
23.1**
Consent of UHY LLP
31.1**
Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1**
Jonathan P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002
99.1
99.2
Amended and Restated Audit Committee Charter as reviewed by the Board of Directors of Blue Dolphin on November 15, 2018 (incorporated by
reference to Appendix A filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on November 15, 2018, Commission File No. 000-15905)
Compensation Committee Charter as reviewed by the Board of Directors of Blue Dolphin on November 15, 2018 (incorporated by reference to Appendix
B filed with Blue Dolphin’s Proxy Statement on Form DEF 14A on November 15, 2018, Commission File No. 000-15905)
101.INS** XBRL Instance Document
101.SCH** XBRL Taxonomy Schema Document
101.CAL** XBRL Calculation Linkbase Document
101.LAB** XBRL Label Linkbase Document
101.PRE** XBRL Presentation Linkbase Document
101.DEF** XBRL Definition Linkbase Document
_______________
* Management Compensation Plan
** Filed herewith
Blue Dolphin Energy Company
Table of Contents
Signatures Pages
December 31, 2022 │Page 83
83
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
April 3, 2023
BLUE DOLPHIN ENERGY COMPANY
(Registrant)
By:
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President,
Assistant Treasurer and Secretary
(Principal Executive Officer, Principal Financial Officer,
and Principal Accounting Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
Date
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
/s/ RYAN A. BAILEY
Ryan A. Bailey
/s/ AMITAV MISRA
Amitav Misra
/s/ CHRISTOPHER T. MORRIS
Christopher T. Morris
/s/ HERBERT N. WHITNEY
Herbert N. Whitney
Chairman of the Board, Chief Executive Officer, President, Assistant
Treasurer and Secretary (Principal Executive Officer, Principal Financial
Officer, and Principal Accounting Officer)
April 3, 2023
Director
Director
Director
Director
84
April 3, 2023
April 3, 2023
April 3, 2023
April 3, 2023
EXHIBIT 10.6
EXHIBIT 10.42
EXHIBIT 10.43
EXHIBIT 10.44
EXHIBIT 10.45
EXHIBIT 10.46
EXHIBIT 21.1
List of subsidiaries of Blue Dolphin Energy Company (“Blue Dolphin”):
·
·
·
·
·
·
·
·
Lazarus Energy, LLC, a Delaware limited liability company;
Lazarus Refining & Marketing, LLC, a Delaware limited liability company
Nixon Product Storage, LLC, a Delaware limited liability company
Blue Dolphin Pipe Line Company, a Delaware corporation;
Blue Dolphin Petroleum Company, a Delaware corporation;
Blue Dolphin Services Co., a Texas corporation;
Blue Dolphin Exploration Company, a Delaware corporation; and
Petroport, Inc., a Delaware corporation.
EXHIBIT 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (Nos. 333-134156, 333-38606 and 333-124908) of Blue Dolphin Energy
Company of our report dated March 31, 2023, relating to our audit of the consolidated financial statements, which appear in this Annual Report on Form 10-K for the
year ended December 31, 2022.
/s/ UHY LLP
UHY LLP
Sterling Heights, Michigan
April 3, 2023
EXHIBIT 31.1
I, Jonathan P. Carroll, certify that:
1.
2.
3.
4.
I have reviewed this annual report on Form 10-K of Blue Dolphin Energy Company (the “Registrant”).
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the periods covered by this annual report;
Based on my knowledge, the financial statements and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this annual report;
I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal
control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and I have:
a)
b)
c)
d)
Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that
material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly
during the period in which this annual report is being prepared;
Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles;
Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this annual report my conclusions about the effectiveness
of the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and
Disclosed in this annual report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal
quarter (the Registrant’s fourth fiscal quarter in the case of this annual report) that has materially affected, or is reasonably likely to materially affect, the
Registrant’s internal control over financial reporting; and
5.
I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the Audit Committee of the
Registrant’s Board of Directors:
(a)
(b)
All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to
adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over
financial reporting.
Date: April 3, 2023
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President, Assistant Treasurer and Secretary
(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)
CERTIFICATION OF
PRINCIPAL EXECUTIVE OFFICER AND
PRINCIPAL FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906
OF THE SARBANES-OXLEY ACT OF 2002
EXHIBIT 32.1
In connection with the Annual Report of Blue Dolphin Energy Company (the “Blue Dolphin”) on Form 10-K for the period ended December 31, 2022 (the “Report”), as
filed with the Securities and Exchange Commission on the date hereof, I, Jonathan P. Carroll, Chief Executive Officer, President, Assistant Treasurer and Secretary
(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer) of Blue Dolphin, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to
§906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:
1.
2.
The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Blue Dolphin.
/s/ JONATHAN P. CARROLL
Jonathan P. Carroll
Chief Executive Officer, President, Assistant Treasurer and Secretary
(Principal Executive Officer, Principal Financial Officer, and Principal Accounting Officer)
April 3, 2023