10-Q 1 bdco20230930_10q.htm FORM 10-Q bdco20230930_10q.htm
0000793306 BLUE DOLPHIN ENERGY CO false --12-31 Q1 2024 0.01 0.01 20,000,000 20,000,000 14,921,968 14,921,968 0 0 0 0 1 1 1 12 1 0.01 0.3 0.1 January 31, 2018 0.5 October 31, 2031 0.1 June 30, 2051 0.01 August 31, 2050 0.0007 August 31, 2050 0.0007 October 31, 2025 0.0013 0.05 0 0 0.01 0 0 0 0 false false false false Restricted cash, noncurrent totaled $1.0 and $0.0 at March 31, 2024 and December 31, 2023, respectively. Restricted cash, noncurrent reflects amounts held by Veritex in a payment reserve account, which is required to have a balance of $1.0 million. Although the amount at December 31, 2023 was $0, the payment reserve account was fully replenished on January 2, 2024. Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At March 31, 2024 and December 31, 2023, there were no shares of preferred stock issued and outstanding. Fees associated with an intercompany tolling agreement related to naphtha volumes. General and administrative expenses within refinery operations includes the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations. Payments deferred for thirty (30) months; first payment made in February 2023; interest accrued during deferral period; loan not forgivable. Original principal amount was $8.0 million; pursuant to a 2017 sixth amendment, principal under the Kissick Debt increased by $3.7 million. Loan requires monthly interest-only payments for the first thirty-six (36) months. Afterwards, principal and interest payments are due monthly through loan maturity. First payment due in November 2024. Original principal amount was $0.5 million; the Blue Dolphin Term Loan Due 2051 was modified to increase the principal amount by $1.5 million. Payments deferred for thirty (30) months; first payment due and paid in November 2023; interest accrues during deferral period; loan not forgivable. In May 2019, LE entered into 12-month equipment rental agreement with an 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. 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Table of Contents



 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

 

For the quarterly period ended March 31, 2024

 

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

pic01.jpg

 

Blue Dolphin Energy Company


(Exact name of registrant as specified in its charter)

 

 

 

Delaware

 

73-1268729

 
 

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 
     
 

801 Travis Street, Suite 2100, Houston, Texas

 

77002

 
 

(Address of principal executive offices)

 

(Zip Code)

 

 

713-568-4725

(Registrant’s telephone number, including area code)

 

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

 

 

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

 

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

 

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

 

Large accelerated filer 

Accelerated filer

Non-accelerated filer  

Smaller reporting company

 

Emerging growth company

 

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

 

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

 

Number of shares of common stock, par value $0.01 per share, outstanding as of May 15, 2024: 14,921,968

 



 

   

 
 
 

 

TABLE OF CONTENTS

 

PART I  FINANCIAL INFORMATION

 
   

ITEM 1.

FINANCIAL STATEMENTS

13

     
 

Consolidated Balance Sheets (Unaudited)

13

 

Consolidated Statements of Income (Unaudited)

14

 

Consolidated Statements of Stockholders Equity (Unaudited)

15

 

Consolidated Statements of Cash Flows (Unaudited)

16

 

Notes to Consolidated Financial Statements

17

     

ITEM 2.

MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

40

     

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

57

     

ITEM 4.

CONTROLS AND PROCEDURES

57

     

PART II - OTHER INFORMATION

 
   

ITEM 1.

LEGAL PROCEEDINGS

58

     

ITEM 1A.

RISK FACTORS

59

     

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

60

     

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

60

     

ITEM 4.

MINE SAFETY DISCLOSURES

60

     

ITEM 5.

OTHER INFORMATION

60

     

ITEM 6.

EXHIBITS

61

     

SIGNATURES

62

 

Blue Dolphin Energy Company
March 31, 2024 │Page 2

 

Glossary of Terms

 

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

 

Affiliate. Refers, either individually or collectively, to certain related parties including Jonathan Carroll, Chairman and Chief Executive Officer of Blue Dolphin, and his affiliates (including Ingleside and Lazarus Capital) and/or LEH and its affiliates (including LMT and LTRI). Together, Jonathan Carroll and LEH owned 83% of the Common Stock as of the filing date of this report.

 

Affiliate Revolving Credit Agreement. A credit agreement between LEH and its affiliates and Blue Dolphin and its subsidiaries effective April 1, 2024; extends credit to Blue Dolphin and its subsidiaries, at LEH's sole discretion, for working capital purposes up to a maximum of $5.0 million in the aggregate; initial term expires on April 30, 2025; automatically renews for one year periods unless sooner terminated by the parties; interest accrues at the WSJ Prime rate plus 2.00%, compounded annually, and paid quarterly.

 

AMT. Alternative Minimum Tax.

 

Amended and Restated Jet Fuel Sales Agreement. Product agreement for the sale of jet fuel by LE to LEH; effective April 1, 2023; one-year automatic renewals; currently renewed through March 31, 2025; LEH purchases all jet fuel produced by LE; LEH sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.

 

ARO.  Asset retirement obligations.

 

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.

 

BDEX. Blue Dolphin Exploration Company, a wholly owned subsidiary of Blue Dolphin.

 

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; as of the filing date of this report, in forbearance related to past defaults pursuant to the LEH Payment Agreement.

 

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

 

BDSC-LEH Amended Office Space Agreement.  Office sublease agreement in Houston, Texas between BDSC and LEH; extended term effective September 1, 2023 and expiring August 31, 2024; rent approximately $0.003 million per month; management is currently exploring leasing options.

 

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.

 

Blue Dolphin Guaranty Fee Agreement. Guaranty Fee Agreement (as modified) effective January 1, 2023, between Blue Dolphin and Jonathan Carroll; related to payoff of Blue Dolphin Term Loan Due 2051; fee paid equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051; fees payable 100% in cash.

 

Blue Dolphin 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 and paid in 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).

 

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.

 

CDC.  Centers for Disease Control and Prevention.

 

CERLA.  Comprehensive Environmental Response, Compensation, and Liability Act of 1980.

 

CIP.  Construction in progress.

 

COVID-19.  An infectious disease 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.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 3

 

Glossary of Terms (Continued)

 

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.

 

CWA.  Clean Water Act.

 

Depropanizer unit. A distillation column that isolates 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.

 

DLA.  Defense Logistics Agency.

 

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

 

EIA.  Energy Information Administration.

 

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

 

EPA.  Environmental Protection Agency.

 

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

 

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

 

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

 

FASB.  Financial Accounting Standards Board.

 

FDIC. Federal Deposit Insurance Corporation.

 

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

 

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

 

Freeport facility.  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.

 

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 to 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 Purchase Agreements.  Product agreements for the purchase of jet fuel from LEH by LE; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE sold the products back to LEH under a prior jet fuel sales agreement between the parties.

 

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 (the “Kissick Noteholder”) 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; subject to the Kissick Subordination Agreement;  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; as of the filing date of this report, in forbearance related to past defaults pursuant to the Kissick Forbearance Agreement.

 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 4

 

Glossary of Terms (Continued)

 

Kissick Forbearance Agreement.  Payment agreement between LE and Kissick Noteholder effective April 30, 2023; under the payment agreement, Kissick Noteholder and LE agreed to modify the payment terms of the Kissick Debt to satisfy in full LE’s $11.2 million obligation to Kissick Noteholder under the Kissick Debt by March 2025. Effective April 30, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the Kissick Debt decreased from 16.00% to 6.25% per year.

 

Kissick Subordination Agreement. Subordination Agreement between the Kissick Noteholder and Sovereign Bank (predecessor to Veritex) dated June 22, 2015. Under the agreement, Kissick Noteholder agreed, and LE consented, to: (i) subordinate Kissick Noteholder’s right to payments in favor of Pilot and (ii) subordinate its rights to security interest and liens in favor of Sovereign (now Veritex) as holder of the LE Term Loan Due 2034.

 

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

 

Lazarus Entities. LEH, NPS, LE, LRM, Lazarus San Antonio Refinery LLC, and Blue Dolphin.

 

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

 

LE Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LE and Jonathan Carroll; 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 Amended and Restated Master Service Agreement.  Master Service Agreement between LE and Ingleside executed May 11, 2023 (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; in forbearance at December 31, 2023 and through March 29, 2024; currently in default.

 

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.

 

LEH.  Lazarus Energy Holdings, LLC, an affiliate of Jonathan Carroll and controlling shareholder of Blue Dolphin as of the date of this report.

 

LEH Payment Agreement.  Payment agreement between LEH and BDPL effective May 9, 2023; under the payment agreement, LEH and BDPL agreed to modify the payment terms of the BDPL-LEH Loan Agreement to satisfy in full BDPL’s $8.3 million obligation to LEH under the BDPL-LEH Loan Agreement by April 2027. Effective May 9, 2023, the interest rate for outstanding principal and accrued and unpaid interest under the BDPL-LEH Loan Agreement decreased from 16.00% to 8.00% per year.

 

LEH operating fee.  A management fee paid to LEH under the Third Amended and Restated Operating Agreement; calculated as 5.00% of all consolidated operating costs, excluding crude costs, depreciation, amortization, and interest, of Blue Dolphin and its subsidiaries; previously reflected within refinery operating expenses in our consolidated statements of operations.

 

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

 

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

 

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

 

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

 

LRM Amended and Restated Guaranty Fee Agreement. Amended and Restated Guaranty Fee Agreement dated April 1, 2017, between LRM and Jonathan Carroll; 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; in forbearance at December 31, 2023 and through March 29, 2024; currently in default.

 

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

 

MVP.  MV Purchasing, LLC. 

 

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 for the lightest and most volatile petroleum fractions.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 5

 

Glossary of Terms (Continued)

 

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

 

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

 

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

 

NOL.  Net operating losses.

 

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

 

NPS 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; enables LEH to store its jet fuel, which LEH lifts as needed; one-year term with one-year automatic renewals; tank rental approximately $0.2 million per month.

 

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.

 

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.

 

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.

 

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.

 

PADD. Petroleum Administration for Defense Districts; PADD regions enable regional analysis of petroleum product supply and movements by the EIA.

 

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.

 

Pilot Entities.  Pilot, Starlight Relativity Holdings LLC, Starlight Relativity Acquisition Company LLC, Tartan, The San Antonio Refinery LLC, and Falls City Terminal, LP.

 

Pilot Forbearance and Accommodation Agreement. Forbearance and Accommodation Agreement dated January 12, 2023 between NPS and Pilot regarding the sale of in-tank jet fuel following Pilot’s termination of a terminal services agreement. Under the Pilot Forbearance and Accommodation Agreement, the parties agreed to explore a potential compromise to the dispute; the forbearance period terminated on February 28, 2023, but was followed by the Pilot Forbearance Agreement. Under the Pilot Forbearance and Accommodation Agreement, Pilot paid NPS approximately $1.5 million in January 2023.

 

Pilot Forbearance Amendment. An amendment to the Pilot Forbearance and Accommodation Agreement dated March 31, 2023; the amendment extended the forbearance period and all deadlines associated with unresolved legal claims to June 15, 2023. Under the Pilot Forbearance Amendment, Pilot paid NPS approximately $1.1 million and $0.2 million in April and June 2023, respectively. The parties also negotiated the sale of all stored jet fuel in April 2023. On June 16, 2023, following the expiration of the Pilot Forbearance and Accommodation Agreement, the parties extended the deadline for responses to outstanding discovery requests related to legal claims to August 31, 2023. On August 28, 2023 the parties filed a joint motion to stay this case. The parties attended mediation in December 2023 to settle all outstanding disputes.  See "Pilot Settlement Agreement."

 

Pilot Settlement Agreement.  A confidential Settlement Agreement by and among the Lazarus Entities and Pilot Entities executed on December 29, 2023. Among other matters addressed, NPS' and LRM’s contract-related disputes with Pilot and Tartan were fully resolved and the parties agreed to mutually release all claims against each other. Pursuant to the Settlement Agreement, the Texas litigation was dismissed with prejudice on January 3, 2024. 

 

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.

 

Product slate.  Represents type and quality of products produced.

 

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

 

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

 

Blue Dolphin Energy Company
March 31, 2024 │Page 6

 

Glossary of Terms (Continued)

 

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.

 

Refinery operations gross profit (deficit).  Calculated as refinery operations revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.

 

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

 

ROU.  Right-of-use.

 

SBA.  Small Business Administration.

 

SEC. Securities and Exchange Commission.

 

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.  See "Third Amended and Restated Operating Agreement."

 

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.

 

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 less than 0.5%.

 

Tartan.  Tartan Oil LLC, an affiliate of Pilot.

 

Tartan 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.  Terminated by Tartan effective December 31, 2023. There were no penalties associated with the termination.

 

TCEQ.  Texas Commission on Environmental Quality.

 

Texas First.  Texas First Rentals, LLC.

 

Third Amended and Restated Operating Agreement.  Affiliate agreement between Blue Dolphin and its subsidiaries and LEH governing LEH’s operation and management of those companies’ assets; one-year term effective April 1, 2024 expiring April 1, 2025 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 and its subsidiaries.

 

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

 

Tolling and terminaling gross profit (deficit).  Calculated as tolling and terminaling revenue less intercompany processing fees less cost of goods sold during the period; reflected as a dollar ($) amount.

 

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

 

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

 

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

 

Turnaround. Scheduled large-scale maintenance activity wherein an entire process unit, 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.

 

Veritex First Amended Forbearance Agreement. Amendment to the Veritex Forbearance Agreement dated and effective September 30, 2023 between LE, LRM, Veritex, and guarantors (as defined therein); pursuant to the Veritex First Amended Forbearance Agreement, Veritex agreed to forbear existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through and including December 29, 2023; additionally, Veritex agreed to forbear from testing borrower’s compliance with financial covenants under the loans.

 

Veritex Second Amended Forbearance Agreement. Amendment to the Veritex Forbearance Agreement dated and effective December 29, 2023 between LE, LRM, Veritex, and guarantors (as defined therein); pursuant to the Veritex Second Amended Forbearance Agreement, Veritex agreed to forbear existing defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 through and including March 29, 2024; additionally, Veritex agreed to forbear from testing borrower’s compliance with financial covenants under the loans; expired on March 29, 2024.

 

WHO.  World Health Organization.

 

WSJ Prime rate.  The base rate on corporate loans posted by at least 70% of the ten largest U.S. as published by the Wall Street Journal.  Effective July 27, 2023, the WSJ Prime rate increased to 8.50%.

 

XBRL.  eXtensible Business Reporting Language.

 

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

 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 7

 

Important Information Regarding Forward Looking Statements

 

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

 

Business and Industry

•  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.

•  Industry technological developments that outpace our ability to keep up.

 

Downstream and Midstream Operations

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

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

•  Effects of geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and any spread or expansion thereof, including with respect to impacts to commodity prices and other markets.

•  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.

 

•  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

 

•  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, including the U.S., and other authorities in response to military conflicts.

•  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 ability to to resolve the bond dispute with RLI.

•  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.

 

Security

•  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

•  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 “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2023 as filed with the SEC and elsewhere in our subsequent quarterly and periodic reports, including this report.  All forward-looking statements included in this report are based on information available to us on the date of this report.  We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

 

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

 

Blue Dolphin Energy Company
March 31, 2024 │Page 8

 

 

PART I FINANCIAL INFORMATION

 

ITEM 1.  FINANCIAL STATEMENTS

 

Consolidated Balance Sheets (Unaudited)

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
         
  

(in thousands except share amounts)

 
         

ASSETS

        

CURRENT ASSETS

        

Cash and cash equivalents

 $11,123  $18,713 

Accounts receivable, net

  104   116 

Accounts receivable, related party

  11,722   4,184 

Prepaid expenses and other current assets

  1,122   1,591 

Deposits

  110   110 

Inventory

  28,657   24,576 

Total current assets

  52,838   49,290 
         

LONG-TERM ASSETS

        

Total property and equipment, net

  54,316   54,958 

Operating lease right-of-use assets, net

  100   158 

Restricted cash, noncurrent

  1,000   5 

Surety bonds

  230   230 

Deferred tax assets, net

  -   1,436 

Total long-term assets

  55,646   56,787 
         

TOTAL ASSETS

 $108,484  $106,077 
         

LIABILITIES AND STOCKHOLDERS' EQUITY

        

CURRENT LIABILITIES

        

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

 $40,581  $39,440 

Interest payable

  1,182   2,596 

Accounts payable

  2,349   1,814 

Accounts payable, related party

  5   889 

Current portion of lease liabilities

  93   147 

Income taxes payable

  1,247   951 

Asset retirement obligations, current portion

  2,999   4,504 

Accrued expenses and other current liabilities

  4,079   5,084 

Total current liabilities

  52,535   55,425 
         

LONG-TERM LIABILITIES

        

Deferred tax liabilities, net

  109   - 

Long-term debt, net of current portion

  2,309   3,745 

Long-term debt, related party, net of current portion

  4,000   4,000 

Long-term interest payable, related party, net of current portion

  1,308   1,308 

Total long-term liabilities

  7,726   9,053 
         

TOTAL LIABILITIES

  60,261   64,478 
         

Commitments and contingencies (Note 15)

          
         

STOCKHOLDERS' EQUITY

        

Common stock ($0.01 par value, 20,000,000 shares authorized; 14,921,968 shares issued at March 31, 2024 and December 31, 2023) (1)

  149   149 

Additional paid-in capital

  39,758   39,758 

Retained earnings

  8,316   1,692 

TOTAL STOCKHOLDERS' EQUITY

  48,223   41,599 
         

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY

 $108,484  $106,077 

 

(1)

Blue Dolphin has 2,500,000 shares of preferred stock, par value $0.10 per share, authorized. At March 31, 2024 and December 31, 2023, 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
March 31, 2024 │Page 9

 

Financial Statements (Continued)
 

Consolidated Statements of Income (Unaudited)

 

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

 

  

Three Months Ended March 31,

 
         
  

2024

  

2023

 
  

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

 

REVENUE FROM OPERATIONS

        

Refinery operations

 $89,915  $114,640 

Tolling and terminaling

  1,107   2,021 

Total revenue from operations

  91,022   116,661 
         

COST OF GOODS SOLD

        

Crude oil, fuel use, and chemicals

  76,911   93,987 

Other conversion costs

  2,281   2,170 

Total cost of goods sold

  79,192   96,157 
         

Gross profit

  11,830   20,504 
         

COST OF OPERATIONS

        

LEH operating fee, related party

  172   144 

Other operating expenses

  140   91 

General and administrative expenses

  983   1,207 

Depreciation and amortization

  704   698 

Accretion of asset retirement obligations

  -   35 
         

Total cost of operations

  1,999   2,175 
         

Income from operations

  9,831   18,329 
         

OTHER INCOME (EXPENSE)

        
         

Interest and other income

  148   2 

Interest and other expense

  (1,514)  (1,332)

Total other income (expense)

  (1,366)  (1,330)
         

Income before income taxes

  8,465   16,999 
         

Income tax expense

  (1,841)  (246)
         

Net Income

 $6,624  $16,753 
         

Income per common share:

        

Basic

 $0.44  $1.12 

Diluted

 $0.44  $1.12 
         

Weighted average number of common shares outstanding:

        

Basic

  14,921,968   14,921,968 

Diluted

  14,921,968   14,921,968 

 

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

 

Blue Dolphin Energy Company
March 31, 2024 │Page 10

 

Financial Statements (Continued)
 

Consolidated Statements of Stockholders Equity (Unaudited)

 

  

Common Stock

         
  Shares Issued     Additional     Total 
  and     Paid-In  Retained  Stockholders' 
  

Outstanding

  

Par Value

  

Capital

  

Earnings

  

Equity

 
      

(in thousands except share amounts)

 
                     

Balance at December 31, 2023

  14,921,968  $149  $39,758  $1,692  $41,599 
                     

Net income

  -   -   -   6,624   6,624 
                     

Balance at March 31, 2024

  14,921,968  $149  $39,758  $8,316  $48,223 

 

  

Common Stock

      

Total

 
          

Additional

      

Stockholders'

 
          

Paid-In

  

Accumulated

  

Equity

 
  

Shares Issued

  

Par Value

  

Capital

  

Deficit

  

(Deficit)

 
      

(in thousands except share amounts)

 
                     

Balance at December 31, 2022

  14,921,968  $149  $39,758  $(29,319) $10,588 
                     

Net income

  -   -   -   16,753   16,753 
                     

Balance at March 31, 2023

  14,921,968  $149  $39,758  $(12,566) $27,341 

 

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

 

Blue Dolphin Energy Company
March 31, 2024 │Page 11

 

Financial Statements (Continued)
 

Consolidated Statements of Cash Flows (Unaudited)

 

BLUE DOLPHIN ENERGY COMPANY & SUBSIDIARIES 

CONSOLIDATED CASH FLOW STATEMENT

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 
  

(in thousands)

 

OPERATING ACTIVITIES

        

Net income

 $6,624  $16,753 

Adjustments to reconcile net income to net cash used in operating activities:

        

Depreciation and amortization

  704   698 

Accretion of asset retirement obligations

  -   35 

Deferred income tax

  1,545   - 

Amortization of debt issue costs

  50   51 

Deferred revenues and expenses

  -   (102)

Changes in operating assets and liabilities

        

Accounts receivable

  12   424 

Accounts receivable, related party

  (7,538)  (11,555)

Prepaid expenses and other current assets

  469   (2,410)

Inventory

  (4,081)  11,204 

Asset retirement obligations

  (1,505)  - 

Accounts payable, accrued expenses and other liabilities

  (1,646)  (1,415)

Accounts payable, related party

  (884)  100 

Net cash provided by (used in) operating activities

  (6,250)  13,783 
         

FINANCING ACTIVITIES

        

Payments on debt principal

  (345)  (560)

Net activity on related-party debt

  -   (1,211)

Net cash used in financing activities

  (345)  (1,771)

Net change in cash, cash equivalents, and restricted cash

  (6,595)  12,012 
         

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

  18,718   1,521 

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

 $12,123  $13,533 
         

Supplemental Information:

        

Non-cash investing and financing activities:

        

Interest paid

 $2,674  $678 

 

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

 

Blue Dolphin Energy Company
March 31, 2024 │Page 12

 

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 1.25 million bbls of petroleum storage tank capacity in Nixon, Texas.  Blue Dolphin trades on the OTCQX under the ticker symbol “BDCO.”

 

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

 

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

 

Jonathan Carroll, our Chief Executive Officer, and an Affiliate together controlled 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 Assessment

Certain conditions and events were noted that initially caused management to evaluate our ability to continue as a going concern.  These conditions and events include historical working capital deficits and significant current debt in default. We had positive working capital of $0.3 million at  March 31, 2024 compared to a working capital deficit of $6.1 million at  December 31, 2023, representing a $6.4 million improvement. Our significant current debt is primarily the result of bank debt to Veritex and GNCU being in default. Excluding accrued interest, the current portion of long-term debt on our consolidated balance sheets totaled $40.6 million and $39.4 million at at March 31, 2024 and  December 31, 2023, respectively.  The $1.1 million increase in current debt between the periods primarily related to the Kissick Debt falling within the current portion of long-term debt on our consolidated balance sheet at March 31, 2024

 

Our current assets totaled $52.8 million at March 31, 2024 compared to $49.3 million at  December 31, 2023, representing a $3.5 million increase.  Our current liabilities totaled $52.5 million at March 31, 2024 compared to $55.4 million at  December 31, 2023, representing a $2.9 million decrease.  Excluding the current portion of long-term debt, our current liabilities totaled $12.0 million at March 31, 2024 compared to $16.0 million at  December 31, 2023, representing a $4.0 million decrease. 

 

Management believes that we have sufficient liquidity to meet our obligations as they become due through the generation of cash flows from operations and liquidation of current working capital amounts for a reasonable period (defined as one year from the issuance of these financial statements).  To bolster working capital reserves, management continues efforts to restructure debt obligations and reduce cash requirements.  Management acknowledges that uncertainty remains related to future operating margins.  However, management has a reasonable expectation of Blue Dolphin's ability to generate adequate working capital for, amongst other requirements, purchasing crude oil and condensate and making payments on our long-term debt.  Our consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business.

 

Forbearance Agreements

Veritex Forbearance Agreements. Under 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. The Veritex Forbearance Agreement expired on September 30, 2023, and was superseded by the Veritex First Amended Forbearance Agreement. The First Amended Forbearance Agreement expired on December 29, 2023, and was superseded by the Veritex Second Amended Forbearance Agreement.  The Veritex Second Amended Forbearance Agreement expired on March 29, 2024.  During each of these forbearance periods, 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. 

 

Kissick Forbearance Agreement. Pursuant to the Kissick Forbearance Agreement, Kissick Noteholder agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the Kissick Debt.  Under the terms of the Kissick Forbearance Agreement, LE agreed to make monthly principal and interest payments totaling $0.5 million beginning in April 2023, continuing on the first of each month through February 2025, with a final payment of $0.4 million to Kissick Noteholder on March 1, 2025. LE paid Kissick Noteholder $1.5 million and $0 for the three months ended March 31, 2024 and 2023. As of the filing date of this report, the Kissick Debt was in forbearance related to past defaults prior to April 2023.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 13

 
Notes to Consolidated Financial Statements (Continued)

 

LEH Payment Agreement.  Pursuant to the LEH Payment Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement.  Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million and $0 for the three months ended March 31, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults prior to May 2023.

 

Defaults. As of March 31, 2024 and through the filing date of this report, we were in default under the NPS Term Loan Due 2031 due to covenant violations.  The Veritex Second Amended Forbearance Agreement expired on March 29, 2024.  The LE Term Loan Due 2034 and LRM Term Loan Due 2034 were in default due to covenant violations for the period March 30, 2024 through the filing date of this report. Defaults may permit lenders 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 could 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.  If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.

 

Refining Margins

Our results of operations and liquidity are highly dependent upon the margins 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. The general outlook for the oil and natural gas industry for 2024 remains unclear given uncertainties surrounding general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and COVID-19.

 

Net income for the three months ended March 31, 2024 totaled $6.6 million, or $0.44 per share, compared to net income of $16.8 million, or $1.12 per share, for the three months ended March 31, 2023. The $10.1 million, or $0.68 per share, decrease in net income between the periods resulted from less favorable refining margins on lower refinery throughput, production, and sales volumes. We cannot assure investors that refining margins will remain positive and demand will increase.

 

Working Capital Improvements

We had working capital o$0.3 million at  March 31, 2024 and a working capital deficit of $6.1 million at  December 31, 2023, representing a $6.4 million improvement.  Excluding the current portion of long-term debt, we had $40.9 million and $33.3 million in working capital at  March 31, 2024 and  December 31, 2023, respectively, representing a $7.6 million increase. The significant increase in working capital between the periods was primarily due to increases in accounts receivable - related party and inventory. We continue to actively explore additional funding to refinance and restructure debt and further improve working capital.

 

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. 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 Third 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 the 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.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 14

 
Notes to Consolidated Financial Statements (Continued)

 

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.

 

General macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and COVID-19 continue to evolve, and the extent to which these factors impact our working capital, commodity prices, refined product demand, 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, our business, financial condition, and results of operations will be materially adversely affected.  If we are unable to manage this, we may have to consider other options, such as selling assets, raising additional debt or equity capital, filing bankruptcy, or ceasing operating.

 

 

(2)   Principles of Consolidation and Significant Accounting Policies

 

Basis of Presentation

The accompanying unaudited consolidated financial statements, which include Blue Dolphin and its subsidiaries, have been prepared in accordance with GAAP for interim consolidated financial information pursuant to the rules and regulations of the SEC under Article 10 of Regulation S-X and the instructions to Form 10-Q. Accordingly, certain information and footnote disclosures normally included in our audited financial statements have been condensed or omitted pursuant to the SEC’s rules and regulations. Significant intercompany transactions have been eliminated in the consolidation. In management’s opinion, all adjustments considered necessary for a fair presentation have been included, disclosures are adequate, and the presented information is not misleading.

 

The consolidated balance sheet as of  December 31, 2023 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended  December 31, 2023 as filed with the SEC. Operating results for the three months ended March 31, 2024 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2024, or for any other period.

 

Significant Accounting Policies

A summary of significant Blue Dolphin accounting policies 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, recession and inflation, armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products, 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 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 March 31, 2024 and through the filing date of this report.  The accounting matters assessed included, but not limited to, our allowance for credit losses, inventory and related reserves, and the carrying value of long-lived assets, assessing Blue Dolphin's ability to continue as a going concern and evaluating the need for a valuation allowance on deferred tax assets.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 15

 
Notes to Consolidated Financial Statements (Continued)

 

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. Although management historically deemed this a normal business risk, options to limit risk are being evaluated given current capital, credit, and commodity markets and financial institution health.  Restricted cash, non-current portion at March 31, 2024 and December 31, 2023 reflected amounts held in a payment reserve account by Veritex as security for payments under the LE Term Loan Due 2034. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

 

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

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 
         

Cash and cash equivalents

 $11,123  $18,713 

Restricted cash, noncurrent

  1,000   5 
  $12,123  $18,718 

 

Accounts Receivable and Allowance for Credit Losses.  Accounts receivable are presented net of any necessary allowance(s) for credit losses.  Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for credit losses 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 credit losses of $0 and $0.06 million at March 31, 2024 and December 31, 2023, respectively.

 

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.

 

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.

 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 16

 
Notes to Consolidated Financial Statements (Continued)

 

Construction in Progress (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 “Notes (8) and (11)” 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, 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) terminal services 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.

 

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.

 

Contract Balances. The timing of revenue recognition, billings, and cash collections results in billed accounts receivable and customer pre-payments and deposits (contract liabilities) on our consolidated balance sheet. Amounts are billed as products are lifted and sold or upon signing of bulk sales contracts. Generally, billing occurs subsequent to revenue recognition, resulting in a short-term liability. We sometimes receive advances or deposits from our customers before revenue is recognized, resulting in contract liabilities. These deposits are liquidated when revenue is recognized. 

 

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.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 17

 
Notes to Consolidated Financial Statements (Continued)

 

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. Our effective tax rate  may be different than expected if the federal and state statutory rates were applied to income from continuing operations due to certain items that are deductible or included in income for tax purposes that are not deductible or included for financial statement purpose.

 

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, 2023 and 2022, there were no uncertain tax positions for which a reserve or liability was 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 their 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 general macroeconomic conditions related to inflation, interest rates, and capital and credit markets, geopolitical tensions, including military conflicts in Ukraine and Israel and escalations in the Middle East, and COVID-19 could affect the value of certain of our long-lived assets.   As of March 31, 2024 and December 31, 2023, we did not record any impairment of our long-lived assets. However, impairment may be required in the future if external events or circumstances change or if internal conditions shift materially.

 

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 of certain physical assets, plugging and abandoning wells, and restoring land and sea beds. Factors considered include regulatory permitting requirements, asset structural integrity, water depth, third-party equipment availability, and mobilization/demobilization costs.  We review our assumptions and estimates of future abandonment costs on an annual basis.  See “Note (11)” to our consolidated financial statements for additional information related to AROs.

 

Computation of Earnings Per Share. We present basic and diluted EPS.  Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding for the period.  We calculate diluted EPS by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding.  Diluted EPS includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the entity’s earnings.  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 three months ended March 31, 2024, we did not adopt any ASUs.

 

New Pronouncements Issued, Not Yet Effective

 

ASU 2023-09Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"). In December 2023, the FASB issued ASU 2023-09, requiring us to disclose specified additional information in its income tax rate reconciliation and provide additional information for reconciling items that meet a quantitative threshold. ASU 2023-09 will also require us to disaggregate our income taxes paid disclosure by federal and state taxes, with further disaggregation required for significant individual jurisdictions. We will adopt ASU 2023-09 in the fourth quarter of 2025. ASU 2023-09 allows for adoption using either a prospective or retrospective transition method.

 

ASU 2023-07Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures (ASU 2023-07). In November 2023, the FASB issued ASU No. 2023-07, requiring us to disclose significant segment expenses regularly provided to our chief operating decision maker (“CODM”). In addition, ASU 2023-07 will require us to disclose the title and position of our CODM and how the CODM uses segment profit or loss information in assessing segment performance and deciding how to allocate resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within physical years beginning after December 15, 2024.  Early adoption is permitted.  We will adopt ASU 2023-07 in our fourth quarter of 2024 using a retrospective transition method.

   

 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 18

    
Notes to Consolidated Financial Statements (Continued)
 

(3) Related-Party Transactions

 

Affiliate Agreements

Financial and Operational Agreements.  Blue Dolphin and certain of its subsidiaries are currently parties to several financial and operational agreements with Affiliates.

 

Agreement/Transaction

Parties

Effective Date

Key Terms

Blue Dolphin Guaranty Fee Agreement

Blue Dolphin

Jonathan Carroll

01/01/2023

Related to payoff of Blue Dolphin $2.0 million SBA loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under Blue Dolphin Term Loan Due 2051 as consideration for providing his personal guarantee.

Jet Fuel Purchase Agreements

LE

LEH

04/21/2023

Product agreements for the purchase of jet fuel by LE from LEH; first transaction dated April 21, 2023 for approximately 1.9 million gallons of jet fuel; second transaction dated May 10, 2023 for approximately 2.0 million gallons of jet fuel; the jet fuel was priced at LEH’s product cost; LE sold the products back to LEH under a prior jet fuel sales agreement between the parties.

Amended and Restated Jet Fuel Sales Agreement

LE

LEH

04/01/2023

Jet fuel sales by LE to LEH; 1-year automatic renewals; LEH lifts the jet fuel from LE as needed and sells it to the DLA under preferential pricing terms due to LEH's HUBZone certification.
Affiliate Revolving Credit Agreement

Blue Dolphin and subsidiaries

LEH and affiliates

04/01/2024Credit agreement for working capital purposes up to a maximum of $5.0 million in the aggregate; advances are at LEH's sole discretion; initial term expires on  April 30, 2025; automatically renews for one year periods unless sooner terminated by the parties; interest accrues at the WSJ Prime rate plus 2.00%, compounded annually, and paid quarterly.

LE Amended and Restated Guaranty Fee Agreement

LE

Jonathan Carroll

01/01/2023

Related to payoff of LE $25.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LE Term Loan Due 2034 as consideration for providing his personal guarantee.

LE Amended and Restated Master Services Agreement

LE

Ingleside

03/01/2023

For storage of products intended for customer receipt by barge; tank rental fee $0.1 million per month.

LRM Amended and Restated Guaranty Fee Agreement

LRM

Jonathan Carroll

01/01/2023

Related to payoff of LRM $10.0 million Veritex loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under LRM Term Loan Due 2034 as consideration for providing his personal guarantee.

NPS Guaranty Fee Agreement

NPS

Jonathan Carroll

01/01/2023

Related to payoff of NPS $10.0 million GNCU loan; Jonathan Carroll receives a cash fee equal to 2.00% per annum of outstanding principal balance owed under NPS Term Loan Due 2031 as consideration for providing his personal guarantee.

NPS Terminal Services Agreement

NPS

LEH

11/01/2022

For LEH storage of jet fuel at the Nixon facility; tank rental fee $0.2 million per month; 1-year term on an evergreen basis; either party may cancel upon 60 days’ prior written notice.

Office Sub-Lease Agreement

BDSC

LEH

05/31/23

12-month extension of prior office sublease; term expires 08/31/2024; office lease Houston, Texas; rent approximately $0.003 million per month; management is currently exploring leasing options.

Third Amended and Restated Operating Agreement

Blue Dolphin

LE         LRM

NPS      BDPL

BDPC   BDSC

LEH

04/01/2024

1-year term; expires 04/01/2025 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

 

Debt Agreements.  BDPL was a party to the BDPL-LEH Loan Agreement with LEH at March 31, 2024 and December 31, 2023.  Summaries of the debt agreements follow:

 

Loan Description

 

Parties

 

Maturity Date

 

Interest Rate

 

Loan Purpose

         

BDPL-LEH Loan Agreement (in forbearance)

 

BDPL

 

Aug 2018

 

16.00%

 

Original principal amount of $4.0 million; Blue Dolphin working capital

  

LEH

      

 

 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 19

 
Notes to Consolidated Financial Statements (Continued)

 

Forbearance and Defaults.

LEH Payment Agreement.  Pursuant to the LEH Payment Agreement, LEH agreed to forbear from exercising any of its rights and remedies related to existing defaults pertaining to payment violations under the BDPL-LEH Loan Agreement.  Under the terms of the LEH Payment Agreement, BDPL agreed to make interest-only monthly payments approximating $0.05 million beginning in May 2023, continuing on the fifteenth of each month through April 2025. Beginning in May 2025, BDPL agreed to make principal and interest monthly payments approximating $0.4 million through April 2027. Interest will be incurred throughout the agreement term, including the interest-only payment period. BDPL paid LEH approximately $0.1 million and $0 for the three months ended March 31, 2024 and 2023. As of the filing date of this report, the BDPL-LEH Loan Agreement was in forbearance related to past defaults.

 

Covenants, Guarantees and Security.

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.  Certain BDPL property serves as collateral under the BDPL-LEH Loan Agreement.

 

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.

 

Related-Party Financial Impact

Consolidated Balance Sheets.

Accounts receivable, related party.  Accounts receivable—related party for the sale of jet fuel to LEH totaled $11.7 million and $4.2 at March 31, 2024 and December 31, 2023, respectively. Amounts Blue Dolphin owed to LEH under the Third Amended and Restated Operating Agreement were net settled against amounts LEH owed to LE under the Amended and Restated Jet Fuel Sales Agreement. Excess amounts owed by LEH to LE were reflected in accounts receivable—related party on our consolidated balance sheet.

 

Accounts payable, related party.  Accounts payable, related party totaled approximately $0.0 million and $0.9 million at March 31, 2024 and December 31, 2023.  Accounts payable, related party at December 31, 2023 reflected tank rental fees owed by LE to Ingleside under the LE Amended and Restated Master Services Agreement plus amounts owed to LTRI for previously purchased refinery equipment.

 

Long-term debt, related party, net of current portion and accrued interest payable, related party, net of current portion.

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 

LEH

        

BDPL-LEH Loan Agreement (in forbearance)

 $5,308  $5,308 

LEH Total

  5,308   5,308 
         

Less: Long-term debt, related party, current portion

  -   - 

Less: Accrued interest payable, related party, current portion

  -   - 
  $5,308  $5,308 

 

Consolidated Statements of Operations.

Total revenue from operations.

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 
  

(in thousands, except percent amounts)

 

Refinery operations

                

LEH

 $27,394   30.1% $35,345   30.3%

Third-Parties

  62,521   68.7%  79,295   68.0%

Tolling and terminaling

                

LEH

  540   0.6%  540   0.5%

Third-Parties

  567   0.6%  1,481   1.3%
                 
  $91,022   100.0% $116,661   100.0%

 

Blue Dolphin Energy Company
March 31, 2024 │Page 20

 
Notes to Consolidated Financial Statements (Continued)

 

Interest expense.

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Jonathan Carroll

        

Guaranty Fee Agreements

        

Tied to First Term Loan Due 2034

 $98  $102 

Tied to NPS Term Loan Due 2031

  50   50 

Tied to Second Term Loan Due 2034

  41   43 

Tied to Blue Dolphin Term Loan Due 2051

  10   10 

LEH

        

BDPL-LEH Loan Agreement (in forbearance)

  106   160 
  $305  $365 

 

Other.  BDSC received sublease income from LEH totaling $0.01 million for both three-month periods ended March 31, 2024 and 2023.

 

The LEH operating fee, related party totaled $0.2 million for the three-month period ended March 31, 2024 compared to approximately $0.1 million for the three-month period ended March 31, 2023. The increase between the periods related to higher manufacturing overhead costs including insurance.

 

Lease expense associated with the LE Amended and Restated Master Services Agreement totaled $0.3 million and $0.1 million for the three months ended March 31, 2024 and 2023, respectively.

 

(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.

 

Contract Balances

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 

Accounts receivable (including related-party), beginning of period

 $4,300  $1,148 

Accounts receivable (including related-party), end of period

  11,826   4,300 
         

Unearned revenue, beginning of period

 $3,243  $3,888 

Unearned revenue, end of period

  2,805   3,243 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 21

 
Notes to Consolidated Financial Statements (Continued)

 

Segment Information

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

 

  

Three Months Ended

 
  

March 31,

 
  

2024

  

2023

 
  

(in thousands)

 
         

Refinery operations

 $89,915  $114,640 

Tolling and terminaling

  1,107   2,021 

Total revenue from operations

  91,022   116,661 
         

Intercompany processing fees(1)

        

Refinery operations

  (503)  (576)

Tolling and terminaling

  503   576 

Total intercompany processing fees

  -   - 
         

Costs of good sold(2)

        

Refinery operations

  (78,782)  (95,799)

Tolling and terminaling

  (410)  (358)

Total costs of goods sold

  (79,192)  (96,157)
         

Gross profit

        

Refinery operations

  10,630   18,265 

Tolling and terminaling

  1,200   2,239 

Total gross profit

  11,830   20,504 
         

Other operating and general and administrative expenses(3)

        

Refinery operations

  (409)  (478)

Tolling and terminaling

  (23)  (470)

Corporate and other

  (863)  (530)

Total other operating and general and administrative expenses

  (1,295)  (1,478)
         

Depreciation and amortization

        

Refinery operations

  (301)  (304)

Tolling and terminaling

  (342)  (342)

Corporate and other

  (61)  (52)

Total depreciation and amortization

  (704)  (698)
         

Interest and other non-operating expenses, net

        

Refinery operations

  (734)  (677)

Tolling and terminaling

  (496)  (470)

Corporate and other

  (136)  (183)

Total interest and other non-operating expenses, net

  (1,366)  (1,330)
         

Income before income taxes

        

Refinery operations

  9,186   16,806 

Tolling and terminaling

  339   957 

Corporate and other

  (1,060)  (764)

Total income before income taxes

  8,465   16,999 
         

Income tax expense

  (1,841)  (246)
         

Net income

 $6,624  $16,753 

 

(1)

Fees associated with an intercompany tolling agreement related to naphtha volumes.

(2)

Cost of goods sold within tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g., insurance and maintenance).

(3)

General and administrative expenses within refinery operations includes the LEH operating fee, related party, other operating expenses, and accretion of asset retirement obligations.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 22

 
Notes to Consolidated Financial Statements (Continued)

 

  

Three Months Ended

 
  

March 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Capital expenditures

        

Refinery operations

 $-  $- 

Tolling and terminaling

  -   - 

Corporate and other

  -   - 

Total capital expenditures

 $-  $- 

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Identifiable assets

        

Refinery operations

 $88,959  $86,565 

Tolling and terminaling

  17,948   16,464 

Corporate and other

  1,577   3,048 

Total identifiable assets

 $108,484  $106,077 

     

 

(5) Concentration of Risk

 

Bank Accounts

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor.  At March 31, 2024 and December 31, 2023, our cash balances (including restricted cash) exceeded the FDIC insurance limit per depositor by $11.4 million and $18.2 million, respectively. Instability and volatility in the capital, credit, and commodity markets, as well as with financial institutions, could adversely affect our cash balances (including restricted cash) in excess of FDIC insurance limits per depositor. In the event that banks in which we maintain our cash balances (including restricted cash) fail, there can be no assurance that the federal government and the Federal Reserve would intervene.

 

Key Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. On  December 29, 2023, we entered a new crude supply agreement with MVP, effective  January 1, 2024. This agreement provides a firm source of light-sweet Eagle Ford crude oil to the Nixon facility under improved credit terms, and management believes that MVP can provide us with adequate amounts of crude oil and condensate for the foreseeable future.  Related to the crude supply agreement, MVP stores crude oil at the Nixon facility under a terminal services agreement. At March 31, 2024, accounts payable for crude oil and condensate was $1.3 million.

 

During 2023, we operated under a crude supply agreement with Tartan.  Tartan also stored crude oil at the Nixon facility under a terminal services agreement.  In a letter dated October 31, 2023, Tartan provided LE and NPS the required 60 days’ notice of its intention to terminate the crude supply agreement and terminal services agreement. The effective date of the termination was December 31, 2023.  During Q1 2023, the vast majority of our crude was sourced from Tartan under the crude supply agreement.  At March 31, 2023, accounts payable for crude oil and condensate was $0.

 

Our financial health has been materially and adversely affected by significant current debt, certain of which is in default, historical net losses, working capital deficits, and margin volatility. If we are required to obtain our crude oil and condensate without the benefit of a long-term crude supply agreement, our exposure to the risks associated with volatile crude oil prices  may increase, crude oil transportation costs could increase, and our liquidity  may be reduced. Similarly, 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 could result in refinery downtime and could materially affect our business, financial condition, and results of operations.

 

Blue Dolphin Energy Company
March 31, 2024 │Page 23

 
Notes to Consolidated Financial Statements (Continued)

 

Customers

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.

 

          

Portion of

 
          

Accounts

 
  

Number

  

% Total

  

Receivable at

 
  

Significant

  

Revenue from

  

March 31,

 

Three Months Ended

 

Customers

  

Operations

  

(in millions)

 
             

March 31, 2024

  3   81.3% $11.7 

March 31, 2023

  3   65.7% $11.6 

 

One of our significant customers is LEH, an Affiliate. The Affiliate purchases our jet fuel under the Amended and Restated Jet Fuel Sales Agreement and sells the jet fuel to the DLA under preferential pricing terms due to its HUBZone certification.  The jet fuel, which is stored at the Nixon Facility, is lifted by the Affiliate as needed.  For the three months ended March 31, 2024 and 2023, the Affiliate accounted for 30.7% and 30.3% of total revenue from operations, respectively.

 

Customer Concentration.  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 uncertainties related to commodity price volatility, recession and inflation, and armed conflicts in the Middle East and Europe and associated sanctions on Russian crude products.  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 naphtha and distillate to Mexico.  Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

 

  

Three Months Ended March 31,

 
  

2024

  

2023

 
  

(in thousands, except percent amounts)

 
                 

LPG mix

 $61   0.1% $55   0.0%

Naphtha

  18,113   20.1%  20,729   20.7%

Jet fuel

  27,394   30.5%  35,345   35.9%

HOBM

  20,535   22.8%  33,488   18.3%

AGO

  23,812   26.5%  25,023   25.1%
  $89,915   100.0% $114,640   100.0%

 

An Affiliate, LEH, purchases all our jet fuel.  See “Note (3)” 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:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Prepaid insurance

 $623  $1,168 

Other prepaids

  473   230 

Prepaid easement renewal fees

  26   32 

Prepaid crude oil and condensate

  -   161 
  $1,122  $1,591 

 

Blue Dolphin Energy Company
March 31, 2024 │Page 24

  
Notes to Consolidated Financial Statements (Continued)
  
 

(7) Inventory

 

Inventory as of the dates indicated consisted of the following:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Naphtha

 $12,680  $8,782 

Jet fuel

  9,409   8,570 

HOBM

  4,316   5,144 

Crude oil and condensate

  1,889   1,494 

Chemicals

  196   160 

AGO

  125   392 

Propane

  29   24 

LPG mix

  13   10 
  $28,657  $24,576 

 

 

(8) Property, Plant and Equipment, Net

 

Property, plant and equipment, net, as of the dates indicated consisted of the following:

 

  

March 31,

  

December 31,

 
  

2024

  

2023

 
  

(in thousands)

 

Refinery and facilities

 $72,675  $72,675 

Land

  566   566 

Other property and equipment

  913   913 
   74,154   74,154 
         

Less: Accumulated depreciation and amortiation

  (23,608)  (22,966)
   50,546   51,188 
         

Construction in progress