UNITED STATES<br><br><br>SECURITIES AND EXCHANGE COMMISSION<br><br><br>Washington, D.C. 20549

FORM 10-Q

(Mark One)

[ √ ]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<br>EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2020

[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES<br>EXCHANGE ACT OF 1934

For the transition period from to

Commission File No. 0-15905

BLUE DOLPHIN ENERGY COMPANY

(Exact name of registrant as specified in its charter)

Delaware	73-1268729
(State<br>or other jurisdiction of incorporation or<br>organization)	(I.R.S.<br>Employer Identification No.)
801 Travis Street, Suite 2100, Houston, Texas	77002
(Address<br>of principal executive offices)	(Zip<br>Code)
713-568-4725
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(Registrant’s<br>telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class	Trading Symbol(s)	Name of each exchange on which registered
Common<br>Stock	BDCO	OTCQX

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

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

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

Large<br>accelerated filer	☐	Accelerated<br>filer	☐
Non-accelerated<br>filer	☐	Smaller<br>reporting company	☒
		Emerging<br>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 November 16, 2020: 12,693,514

Table of Contents
PART<br>I.		7
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ITEM<br>1.	FINANCIAL<br>STATEMENTS	7
	Consolidated<br>Balance Sheets (Unaudited)	7
	Consolidated<br>Statements of Operations (Unaudited)	8
	Consolidated<br>Statements of Cash Flows (Unaudited)	9
	Notes<br>to Consolidated Financial Statements	10
ITEM<br>2.	MANAGEMENT'S<br>DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF<br>OPERATIONS	35
ITEM<br>3.	QUANTITATIVE<br>AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	50
ITEM<br>4.	CONTROLS<br>AND PROCEDURES	50
PART<br>II.		51
ITEM<br>1.	LEGAL<br>PROCEEDINGS	51
ITEM<br>1A.	RISK<br>FACTORS	52
ITEM<br>2.	UNREGISTERED<br>SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	53
ITEM<br>3.	DEFAULTS<br>UPON SENIOR SECURITIES	53
ITEM<br>4.	MINE<br>SAFETY DISCLOSURES	53
ITEM<br>5.	OTHER<br>INFORMATION	53
ITEM<br>6.	EXHIBITS	53
SIGNATURES		54
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 2
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Glossary of Terms
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Glossary of Terms

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

Affiliate.<br>Refers, either individually or collectively, to certain related<br>parties including Jonathan Carroll, Chairman and Chief Executive<br>Officer of Blue Dolphin, and his affiliates (including C&C,<br>Ingleside, and Lazarus Capital) and/or LEH and its affiliates<br>(including Lazarus Midstream, LMT, and LTRI). Together, Jonathan<br>Carroll and LEH own approximately 82% of Blue Dolphin’s<br>Common Stock.<br><br><br><br><br><br>AMT. Alternative Minimum<br>Tax.<br><br><br><br><br><br>Amended Pilot Line<br>of Credit. Line of Credit Agreement dated May<br>3, 2019, between Pilot and NPS and subsequently amended on May 9,<br>2019 and May 10, 2019 and September 3, 2019, the last amendment<br>being Amendment No. 1; original line of credit amount was $13.0<br>million.<br><br><br><br><br><br>Amended and Restated Operating<br>Agreement. Affiliate agreement dated April 1, 2020<br>between Blue Dolphin, LE, LRM, NPS, BDPL, BDPC, BDSC and LEH<br>governing LEH’s operation and management of those<br>companies’ assets.<br><br><br><br><br><br>ARO. Asset retirement<br>obligations.<br><br><br><br><br><br>ASU. Accounting<br>Standards Update.<br><br><br><br><br><br>AGO. Atmospheric gas<br>oil, which is the heaviest product boiled by a crude distillation<br>tower operating at atmospheric pressure. This fraction ordinarily<br>sells as distillate fuel oil, either in pure form or blended with<br>cracked stocks. Certain ethylene plants, called heavy oil crackers,<br>can take AGO as feedstock.<br><br><br><br><br><br>bbl. Barrel; a unit of<br>volume equal to 42 U.S. gallons.<br><br><br><br><br><br>BDPC. Blue Dolphin<br>Petroleum Company, a wholly owned subsidiary of Blue<br>Dolphin.<br><br><br><br><br><br>BDPL. Blue Dolphin Pipe<br>Line Company, a wholly owned subsidiary of Blue<br>Dolphin.<br><br><br><br><br><br>BDSC. Blue Dolphin<br>Services Co., a wholly owned subsidiary of Blue<br>Dolphin.<br><br><br><br><br><br>bpd. Barrel per day; a<br>measure of the bbls of daily output produced in a refinery or<br>transported through a pipeline.<br><br><br><br><br><br>Board. Board of<br>Directors of Blue Dolphin Energy Company.<br><br><br><br><br><br>BOEM. Bureau of Ocean<br>Energy Management.<br><br><br><br><br><br>BSEE. Bureau of Safety<br>and Environmental Enforcement.<br><br><br><br><br><br>C&C. Carroll &<br>Company Financial Holdings, L.P., an affiliate of Jonathan<br>Carroll.<br><br><br><br><br><br>Capacity utilization<br>rate. A percentage measure that indicates the amount<br>of available capacity that is being used in a refinery or<br>transported through a pipeline. With respect to the crude<br>distillation tower, the rate is calculated by dividing total<br>refinery throughput or total refinery production on a bpd basis by<br>the total capacity of the crude distillation tower (currently<br>15,000 bpd).<br><br><br><br><br><br>CAA. Clean Air<br>Act.<br><br><br><br><br><br>CDC. Centers for Disease<br>Control and Prevention.<br><br><br><br><br><br>CERLA. Comprehensive<br>Environmental Response, Compensation, and Liability Act of<br>1980.<br><br><br><br><br><br>CIP. Construction in<br>progress.<br><br><br><br><br><br>COVID-19.<br>An infectious disease first identified in 2019<br>in Wuhan, the capital of China's Hubei province; the<br>disease has since spread globally, resulting in the<br>ongoing 2019–2020 coronavirus pandemic.<br><br><br><br><br><br>CWA. Clean Water<br>Act.<br><br><br><br><br><br>Common<br>Stock. Blue Dolphin common stock, par value $0.01 per<br>share. Blue Dolphin has 20,000,000 shares of Common Stock<br>authorized.<br><br><br><br><br><br>Complexity. A numerical<br>score that denotes, for a given refinery, the extent, capability,<br>and capital intensity of the refining processes downstream of the<br>crude distillation tower. Refinery complexities range from the<br>relatively simple crude distillation tower (“topping<br>unit”), which has a complexity of 1.0, to the more complex<br>deep conversion (“coking”) refineries, which have a<br>complexity of 12.0.	Condensate. Liquid<br>hydrocarbons that are produced in conjunction with natural gas.<br>Although condensate is sometimes like crude oil, it is usually<br>lighter.<br><br><br><br><br><br>Cost<br>of goods sold. Reflects the cost of crude oil and<br>condensate, fuel use, and chemicals.<br><br><br><br><br><br>Crude<br>distillation tower. A tall column-like vessel in<br>which crude oil and condensate is heated and its vaporized<br>components are distilled by means of distillation trays. This<br>process turns crude oil and other inputs into intermediate and<br>finished petroleum products. (Commonly referred to as a crude<br>distillation unit or an atmospheric distillation unit; also<br>referred to herein as the Nixon refinery.)<br><br><br><br><br><br>Crude<br>oil. A mixture of thousands of chemicals and<br>compounds, primarily hydrocarbons. Crude oil quality is measured in<br>terms of density (light to heavy) and sulfur content (sweet to<br>sour). Crude oil must be broken down into its various components by<br>distillation before these chemicals and compounds can be used as<br>fuels or converted to more valuable products.<br><br><br><br><br><br>Depropanizer unit. A<br>distillation column that is used to isolate propane from a mixture<br>containing butane and other heavy components.<br><br><br><br><br><br>Distillates. The result<br>of crude distillation and therefore any refined oil product.<br>Distillate is more commonly used as an abbreviated form of middle<br>distillate. There are mainly four (4) types of distillates: (i)<br>very light oils or light distillates (such as naphtha), (ii) light<br>oils or middle distillates (such as our jet fuel), (iii) medium<br>oils, and (iv) heavy oils (such as our low-sulfur diesel and HOBM,<br>reduced crude, and AGO).<br><br><br><br><br><br>Distillation. The first<br>step in the refining process whereby crude oil and condensate is<br>heated at atmospheric pressure in the base of a distillation tower.<br>As the temperature increases, the various compounds vaporize in<br>succession at their various boiling points and then rise to<br>prescribed levels within the tower per their densities, from<br>lightest to heaviest. They then condense in distillation trays and<br>are drawn off individually for further refining. Distillation is<br>also used at other points in the refining process to remove<br>impurities.<br><br><br><br><br><br>Downtime. Scheduled<br>and/or unscheduled periods in which the crude distillation tower is<br>not operating. Downtime may occur for a variety of reasons,<br>including bad weather, power failures, and preventive<br>maintenance.<br><br><br><br><br><br>EIA. Energy Information<br>Administration.<br><br><br><br><br><br>EIDL. Economic Injury<br>Disaster Loan; provides economic relief to businesses that<br>experienced a temporary loss of revenue due to<br>COVID-19.<br><br><br><br><br><br>EPA. Environmental<br>Protection Agency.<br><br><br><br><br><br>Eagle<br>Ford Shale. A hydrocarbon-producing geological<br>formation extending across South Texas from the Mexican border into<br>East Texas.<br><br><br><br><br><br>Exchange Act. Securities Exchange Act of 1934, as<br>amended.<br><br><br><br><br><br>FASB. Financial<br>Accounting Standards Board.<br><br><br><br><br><br>FDIC. Federal Deposit Insurance<br>Corporation.<br><br><br><br><br><br>Feedstocks. Crude oil<br>and other hydrocarbons, such as condensate and/or intermediate<br>products, that are used as basic input materials in a refining<br>process. Feedstocks are transformed into one or more finished<br>products.<br><br><br><br><br><br>Finished petroleum<br>products. Materials or products which have received<br>the final increments of value through processing operations, and<br>which are being held in inventory for delivery, sale, or<br>use.<br><br><br><br><br><br>Freeport facility.<br>Encompasses processing units for: (i) crude oil and natural gas<br>separation and dehydration, (ii) natural gas processing, treating,<br>and redelivery, and (iii) vapor recovery; also includes two onshore<br>pipelines and 162 acres of land in Freeport,<br>Texas.<br><br><br><br><br><br>GEL. GEL Tex Marketing,<br>LLC, a Delaware limited liability company and an affiliate of<br>Genesis Energy, LLC.<br><br><br><br><br><br>GEL<br>Final Arbitration Award. Damages and attorney fees<br>and related expenses awarded to GEL by an arbitrator on August 11,<br>2017.<br><br><br><br><br><br>GEL<br>Interim Payments. Cash payments of $0.5 million at<br>the end of each calendar month by the Lazarus Parties to GEL until<br>the GEL Settlement Payment was made.
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 3
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Glossary of Terms
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GEL<br>Settlement. When all conditions of the GEL Settlement<br>Agreement were met by the Lazarus Parties under the GEL Settlement<br>Agreement, and whereby GEL and the Lazarus Parties agreed to<br>mutually release all claims against each other and to file a<br>stipulation of dismissal with prejudice in connection with<br>arbitration proceedings between LE and GEL related to a contractual<br>dispute involving a crude oil supply and throughput services<br>agreement, each between LE and GEL dated August 12,<br>2011.<br><br><br><br><br><br>GEL<br>Settlement Agreement. Settlement Agreement dated July<br>20, 2018, between the Lazarus Parties and GEL outlining the terms<br>and conditions for a settlement, including: (i) the GEL Settlement<br>Payment by the GEL Settlement Date and (ii) GEL Interim<br>Payments.<br><br><br><br><br><br>GEL<br>Settlement Date. The effective date of the GEL<br>Settlement.<br><br><br><br><br><br>GEL<br>Settlement Payment. A lump sum cash payment of $10.0<br>million as paid by the Lazarus Parties to GEL under the GEL<br>Settlement Agreement.<br><br><br><br><br><br>Gross profit<br>(deficit). Calculated as total revenue less cost of goods<br>sold; reflected as a dollar ($) amount.<br><br><br><br><br><br><br><br><br>HOBM. Heavy oil-based<br>mud blendstock; see also<br>“distillates.”<br><br><br><br><br><br><br><br><br>HUBZone. Historically Underutilized Business Zones<br>program established by the SBA to help small businesses in both<br>urban and rural communities.<br><br><br><br><br><br><br><br><br>IBLA. Interior Board of Land<br>Appeals.<br><br><br><br><br><br><br><br><br>INC. Incident of Noncompliance issued by BOEM and/or<br>BSEE.<br><br><br><br><br><br><br><br><br>Ingleside. Ingleside Crude, LLC, an affiliate of Jonathan<br>Carroll.<br><br><br><br><br><br><br><br><br>Intermediate petroleum<br>products. A petroleum product that might require<br>further processing before it is saleable to the ultimate consumer.<br>This further processing might be done by the producer or by another<br>processor. Thus, an intermediate petroleum product might be a final<br>product for one company and an input for another company that will<br>process it further.<br><br><br><br><br><br>IRC<br>Section 382. Title 26, Internal Revenue Code,<br>Subtitle A – Income Taxes, Subchapter C – Corporate<br>Distributions and Adjustments, Part V Carryovers, § 382.<br>Limits NOL carryforwards and certain built-in losses following<br>ownership change.<br><br><br><br><br><br>IRS. Internal Revenue<br>Service.<br><br><br><br><br><br>Jet<br>fuel. A high-quality kerosene product primarily used<br>in aviation. Kerosene-type jet fuel (including Jet A and Jet A-1)<br>has a carbon number distribution between 8 and 16 carbon atoms per<br>molecule; wide-cut or naphtha-type jet fuel (including Jet B) has<br>between 5 and 15 carbon atoms per molecule.<br><br><br><br><br><br>Lazarus Capital. Lazarus<br>Capital, LLC, an affiliate of Jonathan Carroll.<br><br><br><br><br><br>Lazarus Midstream.<br>Lazarus Midstream Partners, L.P., an affiliate of<br>LEH.<br><br><br><br><br><br>Lazarus Parties. Blue<br>Dolphin, C&C, NPS, LE, LEH, and Jonathan<br>Carroll.<br><br><br><br><br><br>LE. Lazarus Energy, LLC,<br>a wholly owned subsidiary of Blue Dolphin.<br><br><br><br><br><br>LEH. Lazarus Energy<br>Holdings, LLC, an affiliate of Jonathan Carroll and controlling<br>shareholder of Blue Dolphin.<br><br><br><br><br><br>LEH<br>Operating Fee. A management fee paid to LEH under the<br>Amended and Restated Operating Agreement; calculated as 5% of all<br>consolidated operating costs, excluding crude costs, depreciation,<br>amortization and interest, of Blue Dolphin, LE, LRM, NPS, BDPL,<br>BDPC and BDSC; previously reflected within refinery operating<br>expenses in our consolidated statements of<br>operations.<br><br><br><br><br><br>Leasehold interest. The<br>interest of a lessee under an oil and gas<br>lease.<br><br><br><br><br><br>Light<br>crude. A liquid petroleum that has a low density and<br>flows freely at room temperature. It has a low viscosity, low<br>specific gravity, and a high American Petroleum Institute gravity<br>due to the presence of a high proportion of light hydrocarbon<br>fractions.<br><br><br><br><br><br>LMT. Lazarus Marine<br>Terminal I, LLC, an affiliate of LEH.<br><br><br><br><br><br>LRM. Lazarus Refining<br>& Marketing, LLC, a wholly owned subsidiary of Blue<br>Dolphin.	LTRI. Lazarus Texas<br>Refinery I, an affiliate of LEH.<br><br><br><br><br><br>NAAQS.<br>National Ambient Air Quality Standards.<br><br><br><br><br><br>Naphtha. A refined or<br>partly refined light distillate fraction of crude oil. Blended<br>further or mixed with other materials it can make high-grade motor<br>gasoline or jet fuel. It is also a generic term applied to the<br>lightest and most volatile petroleum fractions.<br><br><br><br><br><br>Natural gas.<br>A naturally occurring hydrocarbon gas mixture<br>consisting primarily of methane, but commonly including varying<br>amounts of other higher alkanes, and sometimes a small percentage<br>of carbon dioxide, nitrogen, hydrogen sulfide, or<br>helium.<br><br><br><br><br><br>Nixon<br>facility. Encompasses the 15,000-bpd crude<br>distillation tower, petroleum storage tanks, loading and unloading<br>facilities, and 56 acres of land in Nixon,<br>Texas.<br><br><br><br><br><br>Nixon<br>refinery. The 15,000-bpd crude distillation tower and<br>associated processing units in Nixon, Texas.<br><br><br><br><br><br>NPS. Nixon Product<br>Storage, LLC, a wholly owned subsidiary of Blue<br>Dolphin.<br><br><br><br><br><br>NOL. Net operating<br>losses.<br><br><br><br><br><br>NSR/PSD. New Source<br>Review/Prevention of Significant Deterioration.<br><br><br><br><br><br>OPA<br>90. Oil Pollution Act of 1990.<br><br><br><br><br><br>Operating days.<br>Represents the number of days in a period in which the crude<br>distillation tower operated. Operating days is calculated by<br>subtracting downtime in a period from calendar days in the same<br>period.<br><br><br><br><br><br>OPEC. Organization of<br>Petroleum Exporting Countries.<br><br><br><br><br><br>OSHA. Occupational<br>Safety and Health Administration.<br><br><br><br><br><br>OSRO. Oil Spill Response<br>Organization.<br><br><br><br><br><br>Other<br>conversion costs. Represents the combination of<br>direct labor costs and manufacturing overhead costs. These are the<br>costs that are necessary to convert our raw materials into refined<br>products.<br><br><br><br><br><br>Other<br>operating expenses. Represents costs associated with<br>our natural gas processing, treating, and redelivery facility, as<br>well as our pipeline assets and leasehold interests in oil and gas<br>properties.<br><br><br><br><br><br>PCAOB. Public Company<br>Accounting Oversight Board.<br><br><br><br><br><br>Petroleum. A naturally<br>occurring flammable liquid consisting of a complex mixture of<br>hydrocarbons of various molecular weights and other liquid organic<br>compounds. The name petroleum covers both the naturally occurring<br>unprocessed crude oils and petroleum products that are made up of<br>refined crude oil.<br><br><br><br><br><br>PHMSA. Pipeline and<br>Hazardous Materials Safety Administration of the U.S. Department of<br>Transportation.<br><br><br><br><br><br>Pilot. Pilot Travel<br>Centers LLC, a Delaware limited liability<br>company.<br><br><br><br><br><br>Preferred Stock. Blue<br>Dolphin preferred stock, par value $0.10 per share. Blue Dolphin<br>has 2,500,000 shares of Preferred Stock authorized and no shares of<br>Preferred Stock issued and outstanding.<br><br><br><br><br><br>Product slate.<br>Represents type and quality of products<br>produced.<br><br><br><br><br><br>Propane. A by-product of<br>natural gas processing and petroleum refining. Propane is one of a<br>group of liquified petroleum gases. Others include butane,<br>propylene, butadiene, butylene, isobutylene, and mixtures<br>thereof.<br><br><br><br><br><br>Refined products.<br>Hydrocarbon compounds, such as jet fuel and residual fuel, that are<br>produced by a refinery.<br><br><br><br><br><br>Refinery. Within the oil<br>and gas industry, a refinery is an industrial processing plant<br>where crude oil, condensate, and intermediate feeds are separated<br>and transformed into petroleum products.
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Blue<br>Dolphin Energy Company	September 30, 2020 │Page 4
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Glossary of Terms
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Refining gross profit (deficit) per<br>bbl. Calculated<br>as refinery operations revenue less total cost of goods sold<br>divided by the volume, in bbls, of refined products sold during the<br>period; reflected as a dollar ($) amount per<br>bbl.<br><br><br><br><br><br><br><br><br>RCRA. Federal Resource<br>Conservation and Recovery Act.<br><br><br><br><br><br><br><br><br>RFS2. Second Renewable<br>Fuels Standard.<br><br><br><br><br><br><br><br><br>ROU.<br>Right-of-use.<br><br><br><br><br><br><br><br><br>SBA. Small Business<br>Administration.<br><br><br><br><br><br><br><br><br>SEC. Securities and<br>Exchange Commission.<br><br><br><br><br><br><br><br><br>Securities Act. The<br>Securities Act of 1933, as amended.<br><br><br><br><br><br>Segment margin<br>(deficit). For our refinery operations and tolling<br>and terminaling business segments, represents net revenues<br>(excluding intercompany fees and sales) attributable to the<br>respective business segment less associated intercompany fees and<br>sales less associated operation costs and<br>expenses.<br><br><br><br><br><br><br><br><br>SEMS. Safety and<br>Environmental Management System.<br><br><br><br><br><br><br><br><br>Sour<br>crude. Crude oil containing sulfur content of more<br>than 0.5%.<br><br><br><br><br><br>Stabilizer unit. A<br>distillation column intended to remove the lighter boiling<br>compounds, such as butane or propane, from a<br>product.<br><br><br><br><br><br>Sweet<br>crude. Crude oil containing sulfur content of less<br>than 0.5%.<br><br><br><br><br><br>Sulfur. Present at<br>various levels of concentration in many hydrocarbon deposits, such<br>as petroleum, coal, or natural gas. Also, produced as a by-product<br>of removing sulfur-containing contaminants from natural gas and<br>petroleum. Some of the most commonly used hydrocarbon deposits are<br>categorized per their sulfur content, with lower sulfur fuels<br>usually selling at a higher, or premium, price and higher sulfur<br>fuels selling at a lower, or discounted, price.<br><br><br><br><br><br>Throughput. The volume<br>processed through a unit or a refinery or transported through a<br>pipeline.	TMT. Texas<br>margins tax; a form of business tax imposed on an entity’s<br>gross profit rather than on its net income.<br><br><br><br><br><br>Topping unit. A type of<br>petroleum refinery that engages in only the first step of the<br>refining process -- crude distillation. A topping unit uses<br>atmospheric distillation to separate crude oil and condensate into<br>constituent petroleum products. A topping unit has a refinery<br>complexity range of 1.0 to 2.0.<br><br><br><br><br><br>Total<br>refinery production. Refers to the volume processed<br>as output through the crude distillation tower. Refinery production<br>includes finished petroleum products, such as jet fuel, and<br>intermediate petroleum products, such as naphtha, HOBM and<br>AGO.<br><br><br><br><br><br>Turnaround. Scheduled<br>large-scale maintenance activity wherein an entire process unit is<br>taken offline for a week or more for comprehensive revamp and<br>renewal.<br><br><br><br><br><br>USACOE. U.S. Army Corps<br>of Engineers.<br><br><br><br><br><br>USDA. U.S. Department of<br>Agriculture.<br><br><br><br><br><br>U.S.<br>GAAP. Accounting principles generally accepted in the<br>United States of America.<br><br><br><br><br><br>Veritex. Veritex<br>Community Bank, successor in interest to Sovereign Bank by<br>merger.<br><br><br><br><br><br>WHO. World Health<br>Organization.<br><br><br><br><br><br>WSJ<br>prime rate. A measure of the U.S. prime rate as<br>defined by the Wall Street Journal.<br><br><br><br><br><br>XBRL. eXtensible<br>Business Reporting Language.<br><br><br><br><br><br>Yield. The percentage of<br>refined products that is produced from crude oil and other<br>feedstocks.
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Important Information Regarding Forward Looking<br>Statements
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Important Information Regarding Forward-Looking Statements

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

Business and Industry ● Our going concern status. ● The effects of public health threats, pandemics and epidemics, such as the ongoing outbreak of COVID-19, and the adverse impacts thereof on our business, financial condition, results of operations, and liquidity, including, but not limited to, our growth, operating costs, supply chain, labor availability, logistical capabilities, customer demand for our products, industry demand generally, crude oil supply, margins, production and throughput capacity, utilization, inventory value, cash position, taxes, the price of our securities and trading markets with respect thereto, our ability to access capital markets, and the global economy and financial markets generally. ● Inadequate liquidity to sustain operations due to defaults under our secured loan agreements, margin deterioration, and historic net losses and working capital deficits. ● Substantial debt in current liabilities, which is currently in default. ● Ability to regain compliance with the terms of our outstanding indebtedness. ● Increased costs of capital or a reduction in the availability of credit. ● Affiliate common stock ownership and transactions that could cause conflicts of interest. ● Operational hazards inherent in refining and natural gas processing operations and in transporting and storing crude oil and condensate and refined products. ● Geographic concentration of our assets and customers in West Texas, creating significant exposure to regional economy risks and other conditions. ● Competition from companies having greater financial and other resources. ● Environmental laws and regulations that could require us to make substantial capital expenditures to remain in compliance or remediate current or future contamination that could give rise to material liabilities. ● Changes in insurance markets impacting costs and the level and types of coverage available. ● NOL carryforwards to offset future taxable income for U.S. federal income tax purposes that are subject to limitation. ● Direct or indirect effects on our business resulting from actual or threatened terrorist or activist incidents, cyber-security breaches, or acts of war.

Refinery and Tolling and Terminaling Operations ● Timing and extent of changes in commodity prices and demand for refined products. ● Availability and costs of crude oil and other feedstocks. ● Price volatility of fuel and utility services to operate the Nixon facility. ● Disruptions due to equipment interruption or failure at the Nixon facility. ● Changes in our cash flow from operations and working capital requirements, shortfalls for which Affiliates may not fund. ● Ability to regain compliance with the terms of our outstanding indebtedness. ● Key personnel loss, labor relations, and workplace safety. ● Loss of market share by and a material change in profitability of our key customers. ● Contract cancellation, non-renewal, or failure to perform by those in our supply and distribution chains, and the ability to replace such contracts and/or customers. ● Changes in the cost or availability of third-party vessels, pipelines, trucks, and other means of delivering and transporting crude oil and condensate, feedstocks, and refined products. ● Sourcing of a substantial amount, if not all, of our crude oil and condensate from the Eagle Ford Shale. ● Geographic concentration of our refining operations and customers within the Eagle Ford Shale. ● Weather conditions, hurricanes or other natural disasters affecting operations by us or our key customers or the areas in which our customers operate. ● The effect, impact, potential duration, or other implications of the ongoing outbreak of COVID-19 and global crude oil production levels, and any expectations we may have with respect thereto. Pipeline and Facilities and Oil and Gas Assets ● Assessment of civil penalties by BOEM for our failure to satisfy orders to provide additional financial assurance (supplemental pipeline bonds) within the time period prescribed. ● Assessment of civil penalties by BSEE for our failure to decommission pipeline and platform assets, as well as complete structural platform surveys, within the time periods prescribed. Common Stock ● Decline in stock price due to share sales by Affiliates. Issuance of additional shares of Common Stock and Preferred Stock, which significantly dilute the equity ownership of current holders.

See also the risk factors described in greater detail under “Item 1A.” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020 as filed with the SEC. All forward-looking statements included in this report are based on information available to us on the date of this report. We undertake no obligation to revise or update any forward-looking statements as a result of new information, future events, or otherwise.

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

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 6
Financial Statements
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PART I

ITEM 1.

FINANCIAL STATEMENTS

Consolidated Balance Sheets (Unaudited)

	December<br>31,
	2019

ASSETS
CURRENT<br>ASSETS
Cash<br>and cash equivalents	$72
Restricted<br>cash	49
Accounts<br>receivable, net	446
Accounts<br>receivable, related party	1,364
Prepaid<br>expenses and other current assets	2,276
Deposits	158
Inventory	1,645
Refundable<br>federal income tax	65
Total<br>current assets	6,075
LONG-TERM<br>ASSETS
Total<br>property and equipment, net	63,893
Operating<br>lease right-of-use assets, net	649
Restricted<br>cash, noncurrent	547
Surety<br>bonds	230
Deferred<br>tax assets, net	50
Total<br>long-term assets	65,369
TOTAL<br>ASSETS	$71,444
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT<br>LIABILITIES
Long-term<br>debt less unamortized debt issue costs, current portion (in<br>default)	$33,836
Line<br>of credit payable less unamortized debt issue costs (in<br>default)	11,464
Long-term<br>debt, related party, current portion (in default)	6,001
Interest<br>payable (in default)	3,814
Interest<br>payable, related party (in default)	2,174
Accounts<br>payable	1,877
Accounts<br>payable, related party	149
Current<br>portion of lease liabilities	251
Asset<br>retirement obligations, current portion	2,565
Accrued<br>expenses and other current liabilities	3,333
Total<br>current liabilities	65,464
LONG-TERM<br>LIABILITIES
Long-term<br>lease liabilities, net of current	564
Deferred<br>revenues	1,930
Long-term<br>debt, net of current portion	-
Total<br>long-term liabilities	2,494
TOTAL<br>LIABILITIES	67,958
Commitments<br>and contingencies (Note 16)
STOCKHOLDERS'<br>EQUITY (DEFICIT)
Common<br>stock (0.01 par value, 20,000,000 shares authorized; 12,693,514<br>and 12,327,365
shares<br>issued at September 30, 2020 and December 31, 2019,<br>respectively)	123
Additional<br>paid-in capital	38,275
Accumulated<br>deficit	(34,912)
TOTAL<br>STOCKHOLDERS' EQUITY (DEFICIT)	3,486
TOTAL<br>LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)	$71,444

All values are in US Dollars.

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

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 7
Financial Statements
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Consolidated Statements of Operations (Unaudited)

	Three Months<br>Ended September 30,		Nine Months<br>Ended September 30,
	2020	2019	2020	2019
	(in thousands,<br>except share and per-share amounts)
REVENUE<br>FROM OPERATIONS
Refinery<br>operations	$41,929	$77,537	$120,185	$222,652
Tolling<br>and terminaling	1,001	1,096	3,214	3,253
Total<br>revenue from operations	42,930	78,633	123,399	225,905
COST<br>OF GOODS SOLD
Crude<br>oil, fuel use, and chemicals	41,789	74,163	118,292	213,714
Other<br>conversion costs	2,611	2,066	7,872	6,587
Total<br>cost of goods sold	44,400	76,229	126,164	220,301
Gross profit (deficit)	(1,470)	2,404	(2,765)	5,604
COST<br>OF OPERATIONS
LEH<br>operating fee	169	144	506	477
Other<br>operating expenses	58	52	164	165
General<br>and administrative expenses	684	655	1,859	1,904
Depletion,<br>depreciation and amortization	690	632	1,992	1,855
Total<br>cost of operations	1,601	1,483	4,521	4,401
Income<br>(loss) from operations	(3,071)	921	(7,286)	1,203
OTHER<br>INCOME (EXPENSE)
Easement,<br>interest and other income	70	1	170	2
Interest<br>and other expense	(1,652)	(1,883)	(5,104)	(4,718)
Gain<br>on extinguishment of debt	-	9,128	-	9,128
Total<br>other income (expense)	(1,582)	7,246	(4,934)	4,412
Income<br>(loss) before income taxes	(4,653)	8,167	(12,220)	5,615
Income<br>tax expense	-	-	(15)	-
Net<br>income (loss)	$(4,653)	$8,167	$(12,235)	$5,615
Income<br>(loss) per common share:
Basic	$(0.37)	$0.74	$(0.98)	$0.51
Diluted	$(0.37)	$0.74	$(0.98)	$0.51
Weighted<br>average number of common shares outstanding:
Basic	12,693,514	10,975,514	12,534,493	10,975,514
Diluted	12,693,514	10,975,514	12,534,493	10,975,514

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

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 8
Financial Statements
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Consolidated Statements of Cash Flows (Unaudited)

	Nine Months<br>ended September 30,
	2020	2019
OPERATING<br>ACTIVITIES
Net<br>income (loss)	$(12,235)	$5,615
Adjustments<br>to reconcile net income (loss) to net cash
used<br>in operating activities:
Depletion,<br>depreciation and amortization	1,992	1,855
Deferred<br>income tax	15	-
Amortization<br>of debt issue costs	316	409
Guaranty<br>fees paid in kind	457	471
Related-party<br>interest expense paid in kind	361	189
Deferred<br>revenues and expenses	(295)	-
Gain<br>on extinguishment of debt	-	(9,128)
Gain<br>on issuance of shares	(80)	-
Changes<br>in operating assets and liabilities
Accounts<br>receivable	243	43
Accounts<br>receivable, related party	1,364	(321)
Prepaid<br>expenses and other current assets	659	522
Deposits<br>and other assets	34	32
Inventory	783	(224)
Accrued<br>arbitration award	-	(12,000)
Accounts<br>payable, accrued expenses and other liabilities	4,184	1,689
Accounts<br>payable, related party	6	513
Net<br>cash used in operating activities	(2,196)	(10,335)
INVESTING<br>ACTIVITIES
Capital<br>expenditures	(1,085)	(1,458)
Net<br>cash used in investing activities	(1,085)	(1,458)
FINANCING<br>ACTIVITIES
Proceeds<br>from debt	300	12,402
Payments<br>on debt	(2,351)	(1,312)
Net<br>activity on related-party debt	5,502	218
Net<br>cash provided by financing activities	3,451	11,308
Net<br>change in cash, cash equivalents, and restricted cash	170	(485)
CASH,<br>CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF<br>PERIOD	668	1,665
CASH,<br>CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$838	$1,180
Supplemental<br>Information:
Non-cash<br>investing and financing activities:
Financing<br>of capital expenditures via accounts payable and finance<br>leases	$-	$86
Issuance<br>of shares to extinguish debt	$120	$-
Conversion<br>of related-party notes to common stock	$148	$-
Line<br>of credit closing costs included in principal balance	$-	$398
Interest<br>paid	$1,980	$2,261
Income<br>taxes paid	$-	$-

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

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 9
Notes to Consolidated Financial Statements
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Notes to Consolidated Financial Statements
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(1)

Organization

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”. Blue Dolphin has 20.0 million shares of Common Stock and 2.5 million shares of Preferred Stock authorized. There are approximately 12.7 million shares of Common Stock and no shares of Preferred Stock issued and outstanding.

Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline and facilities assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information about our business segments.

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

Affiliates

Affiliates control approximately 82% of the voting power of our Common Stock. An Affiliate operates and manages all Blue Dolphin properties and has historically funded working capital requirements during periods of working capital deficits, and an Affiliate is a significant customer of our refined products. Blue Dolphin and certain of its subsidiaries are currently parties to a variety of agreements with Affiliates. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and arrangements and working capital deficits.

Going Concern

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include the following:

Defaults Under Secured Loan Agreements with Third Parties. Our secured loan agreements with third parties that are in default include loan agreements with Veritex in the original aggregate principal amount of $35.0 million, which are guaranteed 100% by the USDA, and a line of credit agreement with Pilot in the original principal amount of $13.0 million. Certain of our related-party debt is also in default. See “Note (3)” of our consolidated financial statements for additional disclosures related to related-party debt.

Veritex Loan Agreements. In April 2019, LE, Jonathan Carroll, Blue Dolphin, LRM, and LE received notification from Veritex that the bank agreed to waive certain covenant defaults and forbear from enforcing its remedies under our secured loan agreements subject to: (i) the agreement and concurrence of the USDA and (ii) the replenishment of the payment reserve account on or before August 31, 2019. Following the GEL Settlement, the associated mutual releases became effective and GEL filed the stipulation of dismissal of claims against LE. As of the date of this report, LE had not replenished the payment reserve account and the obligors were still in default under our secured loan agreements with Veritex.

In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex, but other defaults are ongoing as noted below.

At September 30, 2020, LE and LRM were in violation of the debt service coverage ratio, current ratio, and debt to net worth ratio financial covenants under our secured loan agreements with Veritex. As a result, the debt associated with these loans was classified within current portion of long-term debt on our consolidated balance sheets at September 30, 2020 and December 31, 2019.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 10
Notes to Consolidated Financial Statements
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We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Veritex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements with Veritex permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Further, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Amended Pilot Line of Credit. On May 4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Obligations”) under the Amended Pilot Line of Credit. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Obligations began to accrue interest at a rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor to pay the past due Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.

Pursuant to a June 1, 2020 letter, Pilot notified the borrower and guarantors of its intent to apply Pilot’s payment obligations to us under each of (a) the Terminal Services Agreement (covering Tank Nos. 67, 71, 72, 73, 77, and 78), dated as of May, 2019, between borrower and Pilot, and (b) the Terminal Services Agreement (covering Tank No. 56), dated as of June 1, 2019, between the borrower and Pilot, against our payment obligations to Pilot under the Amended Pilot Line of Credit. Such setoff amounts only partially satisfy the Obligations, and Pilot expressly retained and reserved all its rights and remedies available to it at any time, including, without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. For the three and nine-month periods ended September 30, 2020, the setoff amounts totaled $0.6 million and $0.8 million, respectively.

The borrower and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue to work with the borrower to settle the Obligations. The borrower and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. Our ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. In the event we are unsuccessful in such endeavors, we may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Notre Dame Debt. Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. No payments have been made under the subordinated Notre Dame Debt.

See “Note (10)” and “Note (11)” to our consolidated financial statements for additional information related to defaults under our secured loan agreements with Veritex, Pilot, and the Notre Dame Debt and their potential effects on our business, financial condition, and results of operations.

Margin Deterioration and Volatility.

Throughout 2020, energy supply and demand patterns have been adversely affected by reduced economic activity related to the COVID-19 pandemic. In some countries, including the U.S., recent increases in COVID-19 cases have renewed fears of a second wave of COVID-19. As a result, some countries have reinstated government-imposed restrictions, although to a much lesser extent than in March and April 2020, in order to stem the spread of the virus. Heightened levels of uncertainty have renewed downward pressure on crude oil and other commodity prices, and supply and demand are expected to remain volatile into 2021. Accordingly, we can provide no assurances that these events will not have a material adverse effect on our financial position or results of operations.

Net Losses and Working Capital Deficits.

Net Losses. Net loss for the three months ended September 30, 2020 was $4.7 million, or a loss of $0.37 per share, compared to net income of $8.2 million, or income of $0.74 per share, for the three months ended September 30, 2019. The increase in net loss was the result of less favorable margins per bbl and lower sales volume during the three months ended September 30, 2020 compared to the same period in 2019. Net income in 2019 included a $9.1 million gain on the extinguishment of debt related to the GEL Settlement.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 11
Notes to Consolidated Financial Statements
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Net loss for the nine months ended September 30, 2020 was $12.2 million, or a loss of $0.98 per share, compared to net income of $5.6 million, or income of $0.51 per share, for the nine months ended September 30, 2019. The significant increase in net loss was the result of less favorable margins per bbl and lower sales volume during the nine-month period ended September 30, 2020 compared to the same period a year earlier. Net income in 2019 included a $9.1 million gain on the extinguishment of debt related to the GEL Settlement.

Working Capital Deficits. We had a working capital deficit of $70.6 million and $59.4 million at September 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.8 million and $19.6 million at September 30, 2020 and December 31, 2019, respectively. We had cash and cash equivalents and restricted cash (current portion) of $0.3 million and $0.05 million, respectively, at September 30, 2020. Comparatively, we had cash and cash equivalents and restricted cash (current portion) of $0.07 million and $0.05 million, respectively, at December 31, 2019.

Operating Risks

Successful execution of our business strategy depends on several key factors, including having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under “Note (1) – Going Concern” above and throughout this report, we are currently unable to estimate the impact the ongoing COVID-19 pandemic will have on our future financial position and results of operations. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential and, as such, has remained open. As U.S. federal, state, and local officials contemplate renewed restrictive mandates due to resurging coronavirus cases, we expect to continue operating. However, such mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.

Management believes that it has taken all prudent steps to mitigate risk, avoid business disruptions, manage cash flow, and remain competitive in a low oil price environment. Steps include managing cash flow by optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. However, there can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. Further, if Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

(2)

Principles of Consolidation and Significant Accounting Policies

Basis of Presentation

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

The consolidated balance sheet as of December 31, 2019 was derived from the audited financial statements at that date. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 as filed with the SEC. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2020, or for any other period. As discussed further below within this “Note (2) – Significant Accounting Policies – Use of Estimates,” the ongoing COVID-19 pandemic has resulted in significant economic disruption globally. This disruption became more acute in the latter half of March 2020; therefore, our operating results for the three and nine months ended September 30, 2020 do not fully reflect the impact this disruption has had, and will likely continue to have, on us.

Significant Accounting Policies

The summary of significant accounting policies of Blue Dolphin is presented to assist in understanding our consolidated financial statements. Our consolidated financial statements and accompanying notes are representations of management, who is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of our consolidated financial statements.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 12
Notes to Consolidated Financial Statements
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Use of Estimates. The ongoing COVID-19 pandemic and certain developments in the global oil markets have impacted and continue to impact our business. Oil and gas businesses were designated as ‘essential’ businesses under state and federal mandates and, as such, we have remained open throughout the pandemic. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through the remainder of the year and beyond. Given diminished expectations for the global economy, and speculation regarding a second wave of the virus, we are unable to predict the ultimate economic impact of COVID-19 on our business.

The nature of our business requires that we make estimates and assumptions in accordance with U.S. GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenue and expenses during the reporting period. The ongoing COVID-19 pandemic has impacted these estimates and assumptions and will continue to do so.

We assessed certain accounting matters that generally require consideration of forecasted financial information in context with the information reasonably available to us and the unknown future impacts of COVID-19 as of September 30, 2020 and through the filing date of this report. The accounting matters assessed included, but were not limited to, our allowance for doubtful accounts, inventory and related reserves, and the carrying value of long-lived assets.

Cash and Cash Equivalents. Cash and cash equivalents represent liquid investments with an original maturity of three months or less. Cash balances are maintained in depository and overnight investment accounts with financial institutions that, at times, may exceed insured deposit limits. We monitor the financial condition of the financial institutions and have experienced no losses associated with these accounts.

Restricted Cash. Restricted cash, current portion primarily represents a payment reserve account held by Veritex as security for payments under a loan agreement. Restricted cash, noncurrent represents funds held in the Veritex disbursement account for payment of construction related expenses to complete building new petroleum storage tanks.

Accounts Receivable and Allowance for Doubtful Accounts. Accounts receivable are presented net of any necessary allowance(s) for doubtful accounts. Receivables are recorded at the invoiced amount and generally do not bear interest. An allowance for doubtful accounts is established, when necessary, based on prior experience and other factors which, in management's judgment, deserve consideration in estimating bad debts. Management assesses collectability of the customer’s account based on current aging status, collection history, and financial condition. Based on a review of these factors, management establishes or adjusts the allowance for specific customers and the entire accounts receivable portfolio. We had an allowance for doubtful accounts of $0.1 million at both September 30, 2020 and December 31, 2019.

Inventory. Inventory primarily consists of refined products, crude oil and condensate, and chemicals. Inventory is valued at lower of cost or net realizable value with cost determined by the average cost method, and net realizable value determined based on estimated selling prices less associated delivery costs. If the net realizable value of our refined products inventory declines to an amount less than our average cost, we record a write-down of inventory and an associated adjustment to cost of goods sold. See “Note (7)” to our consolidated financial statements for additional disclosures related to inventory.

Property and Equipment.

Refinery and Facilities. We typically make ongoing improvements to the crude distillation tower based on operational needs and technological advances. However, capital expenditures are currently on hold due to COVID-19. Additions to refinery and facilities assets are capitalized, and expenditures for repairs and maintenance are expensed as incurred. We record refinery and facilities at cost less any adjustments for depreciation or impairment. Adjustment of the asset and the related accumulated depreciation accounts are made for the refinery and facilities asset’s retirement and disposal, with the resulting gain or loss included in the consolidated statements of operations. For financial reporting purposes, depreciation of refinery and facilities assets is computed using the straight-line method using an estimated useful life of 25 years beginning when the refinery and facilities assets are placed in service. We did not record any impairment of our refinery and facilities assets for the periods presented.

Pipelines and Facilities. Our pipelines and facilities are recorded at cost less any adjustments for depreciation or impairment. Depreciation is computed using the straight-line method over estimated useful lives ranging from 10 to 22 years. In accordance with FASB ASC guidance we performed periodic impairment testing of our pipeline and facilities assets in 2016. Upon completion of testing, our pipeline assets were fully impaired at December 31, 2016. All pipeline transportation services to third parties have ceased, existing third-party wells along our pipeline corridor have been permanently abandoned, and no new third-party wells are being drilled near our pipelines. Although we planned to decommission the offshore pipelines and platform assets in the third quarter of 2020, decommissioning of these assets has been delayed due to the ongoing impact of COVID-19, the hyperactive hurricane season, and cash flow constraints. We cannot currently estimate when decommissioning may occur.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 13
Notes to Consolidated Financial Statements
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Oil and Gas Properties. Our oil and gas properties are accounted for using the full-cost method of accounting, whereby all costs associated with acquisition, exploration and development of oil and gas properties, including directly related internal costs, are capitalized on a cost center basis. Amortization of such costs and estimated future development costs are determined using the unit-of-production method. All leases associated with our oil and gas properties have expired, and our oil and gas properties were fully impaired in 2011.

CIP. CIP expenditures, including capitalized interest, relate to construction and refurbishment activities and equipment for the Nixon facility. These expenditures are capitalized as incurred. Depreciation begins once the asset is placed in service. See “Note (8)” to our consolidated financial statements for additional disclosures related to our refinery and facilities assets, oil and gas properties, pipelines and facilities assets, and CIP.

Leases. We evaluate if a contract is or contains a lease at inception of the contract. If we determine that a contract is or contains a lease, we recognize ROU asset and lease liability at the commencement date of the lease based on the present value of lease payments over the lease term. The present value of the lease payments is determined by using the implicit rate when readily determinable. If not determinable, we use the incremental borrowing rate to discount lease payments to present value. Lease terms include options to extend or terminate the lease when it is reasonably certain that we will exercise those options.

We recognize ROU assets and lease liabilities for leasing arrangements with terms greater than one year. We account for lease and non-lease components in a contract as a single lease component for all classes of underlying assets. We allocate the consideration in these contracts based on pricing information contained in the lease.

Expense for an operating lease is recognized as a single lease cost on a straight-line basis over the lease term and is reflected in the appropriate income statement line item based on the leased asset’s function. Amortization expense of a finance lease ROU asset is recognized on a straight-line basis over the lesser of the useful life of the leased asset or the lease term. However, if the lease transfers ownership of the finance lease ROU asset to us at the end of the lease term, the finance lease ROU asset is amortized over the useful life of the leased asset. Amortization expense is reflected in ‘depreciation and amortization expense.’ Interest expense is incurred based on the carrying value of the lease liability and is reflected in ‘interest and other expense.’

Revenue Recognition.

Refinery Operations Revenue. Revenue from the sale of refined products is recognized when the product is sold to the customer in fulfillment of performance obligations. Each load of refined product is separately identifiable and represents a distinct performance obligation to which the transaction price is allocated. Performance obligations are met when control is transferred to the customer. Control is transferred to the customer when the product has been lifted or, in cases where the product is not lifted immediately (bill and hold arrangements), when the product is added to the customer’s bulk inventory as stored at the Nixon facility.

We consider a variety of facts and circumstances in assessing the point of control transfer, including but not limited to: whether the purchaser can direct the use of the refined product, the transfer of significant risks and rewards, our rights to payment, and transfer of legal title. In each case, the term between the sale and when payment is due is not significant. Transportation, shipping, and handling costs incurred are included in cost of goods sold. Excise and other taxes that are collected from customers and remitted to governmental authorities are not included in revenue.

Tolling and Terminaling Revenue. Tolling and terminaling revenue represents fees pursuant to: (i) tank storage agreements, whereby a customer agrees to pay a certain fee per tank based on tank size over a period of time for the storage of products and (ii) tolling agreements, whereby a customer agrees to pay a certain fee per gallon or barrel for throughput volumes moving through the naphtha stabilizer unit and a fixed monthly reservation fee for use of the naphtha stabilizer unit.

We typically satisfy performance obligations for tolling and terminaling operations with the passage of time. We determine the transaction price at agreement inception based on the guaranteed minimum amount of revenue over the term of the agreement. We allocate the transaction price to the single performance obligation that exists under the agreement, and we recognize revenue in the amount for which we have a right to invoice. Generally, payment terms do not exceed 30 days.

Revenue from tank storage customers may, from time to time, include fees for ancillary services, such as in-tank and tank-to-tank blending. These services are considered optional to the customer, and the price we charge for such services is not included in the fixed cost under the customer’s tank storage agreement. Ancillary services are considered a separate performance obligation by us under the tank storage agreement. The performance obligation is satisfied when the requested service has been performed in the applicable period.

Deferred Revenue. We record deferred revenue when cash payments are received or due in advance of our performance. An increase in the deferred revenue balance reflects cash payments received or due in advance of satisfying our performance obligations, offset by recognized revenue that was included in the deferred revenue balance at the beginning of the period. Deferred revenue represents a liability as of the balance sheet date related to a revenue producing activity for which revenue has not yet been recognized. We record deferred revenue when we receive consideration under a contract before achieving certain criteria that must be met for revenue to be recognized in conformity with GAAP.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 14
Notes to Consolidated Financial Statements
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Income Taxes. Deferred income taxes are determined based on the differences between the financial reporting and tax basis of assets and liabilities, as well as operating losses and tax credit carryforwards using currently enacted tax rates and laws in effect for the year in which the differences are expected to reverse. We record a valuation allowance against deferred income tax assets if it is more likely than not that those assets will not be realized. The provision for income taxes comprises our current tax liability and change in deferred income tax assets and liabilities.

Significant judgment is required in evaluating uncertain tax positions and determining its provision for income taxes. As of each reporting date, we consider new evidence, both positive and negative, to determine the realizability of deferred tax assets. We consider whether it is more likely than not that a portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. When we determine that it is more likely than not that a tax benefit will not be realized, a valuation allowance is recorded to reduce deferred tax assets. A significant piece of objective negative evidence evaluated was cumulative losses incurred over the three-year period ended September 30, 2020. Such objective evidence limits the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of September 30, 2020 and December 31, 2019. We expect to recover deferred tax assets related to AMT credit carryforwards. In addition, we have NOL carryforwards that remain available for future use.

The benefit of an uncertain tax position is recognized in the financial statements if it meets a minimum recognition threshold. A determination is first made as to whether it is more likely than not that the income tax position will be sustained, based upon technical merits, upon examination by the taxing authorities. If the income tax position is expected to meet the more-likely-than-not criteria, the benefit recorded in the financial statements equals the largest amount that is greater than 50% likely to be realized upon its ultimate settlement. At September 30, 2020 and December 31, 2019, there were no uncertain tax positions for which a reserve or liability was necessary. See “Note (14)” to our consolidated financial statements for more information related to income taxes.

Impairment or Disposal of Long-Lived Assets. We periodically evaluate our long-lived assets for impairment. Additionally, we evaluate our long-lived assets when events or circumstances indicate that the carrying value of these assets may not be recoverable. The carrying value is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset or group of assets. If the carrying value exceeds the sum of the undiscounted cash flows, an impairment loss equal to the amount by which the carrying value exceeds the fair value of the asset or group of assets is recognized. Significant management judgment is required in the forecasting of future operating results that are used in the preparation of projected cash flows and, should different conditions prevail or judgments be made, material impairment charges could be necessary. The GEL Final Arbitration Award represented a significant adverse change that could have affected the value of certain of our long-lived assets, and management performed potential impairment testing of our refinery and facilities assets in 2019 and 2018. Upon completion of each testing, no impairment was deemed necessary. In addition, the market volatility of crude oil prices as a result of the ongoing COVID-19 pandemic could have affected the value of certain of our long-lived assets, and management performed impairment testing of our refinery and facilities assets at September 30, 2020. No impairment was deemed necessary based upon this testing, and we did not record any impairment of our refinery and facilities assets for the periods presented.

Asset Retirement Obligations. We record a liability for the discounted fair value of an ARO in the period incurred, and we also capitalize the corresponding cost by increasing the carrying amount of the related long-lived asset. The liability is accreted towards its future value each period, and the capitalized cost is depreciated over the useful life of the related asset. If the liability is settled for an amount other than the recorded amount, a gain or loss is recognized.

We have concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Further, we believe that these assets have indeterminate lives because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

We recorded an ARO liability related to future asset retirement costs associated with dismantling, relocating, or disposing of our offshore platform, pipeline systems, and related onshore facilities, as well as for plugging and abandoning wells and restoring land and sea-beds. Cost estimates for each of our assets were developed based upon regulatory requirements, structural makeup, water depth, reservoir characteristics, reservoir depth, equipment demand, current retirement procedures, and construction and engineering consultations. Estimating future costs are difficult and require management to make judgments that are subject to future revisions based upon numerous factors, including changing technology, political, and regulatory environments. We review our assumptions and estimates of future abandonment costs on an annual basis. See “Note (12)” to our consolidated financial statements for additional information related to AROs.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 15
Notes to Consolidated Financial Statements
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Computation of Earnings Per Share. We present basic and diluted EPS. Basic EPS excludes dilution and is computed by dividing net income available to common stockholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS is computed by dividing net income available to common stockholders by the diluted weighted average number of common shares outstanding, which includes the potential dilution that could occur if securities or other contracts to issue shares of common stock were converted to common stock that then shared in the earnings of the entity. The number of shares related to restricted stock included in diluted EPS is based on the “Treasury Stock Method.” We do not have issued options, warrants, or similar instruments. See “Note (15)” to our consolidated financial statements for additional information related to EPS.

New Pronouncements Adopted. The FASB issues ASUs to communicate changes to the FASB ASC, including changes to non-authoritative SEC content. Recently adopted ASUs include:

Income Taxes. In March 2018, FASB issued ASU 2018-05, Income Taxes (Topic 740). This guidance amended SEC paragraphs in ASC 740, Income Taxes, to reflect Staff Accounting Bulletin No. 118, which provided guidance for companies that were not able to complete their accounting for the income tax effects of the Tax Cuts and Jobs Act in the period of enactment. This guidance also included amendments to the XBRL taxonomy. Although the amendments in ASU 2018-05 were effective for public business entities for fiscal years ending after December 15, 2020, early adoption was permitted. Adoption of this guidance did not have a significant impact on our consolidated financial statements.

Consolidation. In October 2018, FASB issued ASU 2018-17, Consolidation (Topic 810). This ASU provided targeted improvements to related-party guidance for variable interest entities. Indirect interests held through related parties in common control arrangements are considered on a proportional basis for determining whether fees paid to decision makers and service providers are variable interests. For entities other than private companies, the amendments in ASU 2018-17 were effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Adoption of this guidance did not have a significant impact on our consolidated financial statements.

Codification Updates to SEC Sections. In July 2019, FASB issued ASU 2019-07, Codification Updates to SEC Sections, which amended certain SEC sections or paragraphs within the FASB ASC. The amendments were made pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates (SEC Update). The SEC Final Rule Releases, which required improvements to the XBRL taxonomy, were made to improve, update, and simplify SEC regulations on financial reporting and disclosure. For public companies, the amendments in ASU 2019-07 were effective upon issuance. Adoption of this guidance did not have a significant impact on our consolidated financial statements.

New Pronouncements Issued, Not Yet Effective.

Codification Improvements. In October 2020, FASB issued ASU 2020-10, Codification Improvements. The amendments in this guidance affect a wide variety of topics in the ASC by either clarifying the codification or correcting unintended application of guidance. The changes are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. For all reporting entities, the amendments in ASU 2020-10 are effective for fiscal years ending after December 15, 2020. Early adoption is permitted. We do not expect adoption of this guidance to have a significant impact on our consolidated financial statements.

Other new pronouncements issued but not yet effective are not expected to have a material impact on our financial position, results of operations, or liquidity.

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Blue<br>Dolphin Energy Company	September 30, 2020 │Page 16
Notes to Consolidated Financial Statements
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(3)

Related-Party Transactions

Affiliate Operational Agreements Summary

Blue Dolphin and certain of its subsidiaries are party to several operational agreements with Affiliates. Management believes that these related-party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions. Related-party agreements related to Blue Dolphin’s operations consist of the following:

Agreement/Transaction	Parties	Effective Date	Key Terms
Refinery<br>Equipment Purchase	LTRI -<br>LE	07/01/2019	LE<br>purchase of two (2) refurbished heat exchangers for $0.08 million<br>each
Dock<br>Tolling Agreement	LMT -<br>LE	05/24/2016	5-year<br>term cancellable by either party any time; LE paid flat reservation<br>fee for tolling volumes up to 84,000 gallons per day; excess<br>tolling volumes subject to increased per gallon rate; terminated<br>07/01/2019
Jet<br>Fuel Sales Agreement	LEH -<br>LE	04/01/2020	1-year<br>term expiring earliest to occur of 03/31/2021 plus 30-day carryover<br>or delivery of maximum jet fuel quantity; LEH bids on jet fuel<br>contracts under preferential pricing terms due to a HUBZone<br>certification
Office<br>Sub-Lease Agreement	LEH -<br>BDSC	01/01/2018	68-month<br>term expiring 08/31/2023; office lease Houston, Texas; includes<br>6-month rent abatement period; rent approximately $0.02 million per<br>month
Amended<br>and Restated Operating Agreement	LEH<br>– Blue Dolphin, LE, LRM, NPS, BDPL, BDPC and<br>BDSC	04/01/2020	3-year<br>term; expires 04/01/2023 or notice by either party at any time of<br>material breach or 90 days Board notice; LEH receives management<br>fee of 5% of all consolidated operating costs, excluding crude<br>costs, depreciation, amortization and interest, of Blue Dolphin,<br>LE, LRM, NPS, BDPL, BDPC and BDSC

Working Capital

We have historically depended on Affiliates for financing when revenue from operations and borrowings under bank facilities are insufficient to meet our liquidity and working capital needs. Such borrowings are reflected in our consolidated balance sheets in accounts payable, related party, and/or long-term debt, related party.

Related-Party Long-Term Debt

Loan Description	Parties	Maturity Date	Interest Rate	Loan Purpose
March<br>Carroll Note (in<br>default)	Jonathan<br>Carroll – Blue Dolphin	Jan<br>2019	8.00%	Blue<br>Dolphin working capital; reflects amounts owed to Jonathan Carroll<br>under the guaranty fee agreements
March<br>Ingleside Note (in<br>default)	Ingleside<br>– Blue Dolphin	Jan<br>2019	8.00%	Blue<br>Dolphin working capital
June<br>LEH Note (in<br>default)	LEH<br>– Blue Dolphin	Jan<br>2019	8.00%	Blue<br>Dolphin working capital; reflects amounts owed to LEH under the<br>Amended and Restated Operating Agreement
BDPL-LEH<br>Loan Agreement (in<br>default)(1)	LEH -<br>BDPL	Aug<br>2018	16.00%	Blue<br>Dolphin working capital
Amended<br>and Restated Guaranty<br><br><br>Fee<br>Agreement(2)	Jonathan<br>Carroll - LE	--	2.00%	Tied to<br>payoff of LE $25 million Veritex loan
Amended<br>and Restated Guaranty<br><br><br>Fee<br>Agreement(2)	Jonathan<br>Carroll - LRM	--	2.00%	Tied to<br>payoff of LRM $10 million Veritex loan

(1)

The original principal amount of the BDPL-LEH Loan Agreement was $4.0 million.

(2)

As a condition for our secured loan agreements with Veritex, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest. Under the guaranty fee agreements, Mr. Carroll is entitled to receive guaranty fees. The fees are payable 50% in cash and 50% in Common Stock. The Common Stock portion is paid quarterly. For the foreseeable future, management does not intend to pay Mr. Carroll the cash portion due to Blue Dolphin’s working capital deficits. The cash portion will continue to accrue and be added to the outstanding principal balance owed to Mr. Carroll under the March Carroll Note.

Guarantees and Security

Loan Description	Guarantees	Security
BDPL-LEH<br>Loan Agreement	---	● Secured by certain<br>BDPL property

Covenants

The BDPL-LEH Loan Agreement contains representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for a credit facility of this type. There are no covenants associated with the March Carroll Note, March Ingleside Note, or June LEH Note.

Defaults

Loan Description	Event(s) of Default	Covenant Violations
March<br>Carroll Note (in<br>default)	Failure<br>of borrower to pay past due obligations; loan matured January<br>2019	--
March<br>Ingleside Note (in<br>default)	Failure<br>of borrower to pay past due obligations; loan matured January<br>2019	---
June<br>LEH Note (in<br>default)	Failure<br>of borrower to pay past due obligations; loan matured January<br>2019	---
BDPL-LEH<br>Loan Agreement (in<br>default)	Failure<br>of borrower to pay past due obligations; loan matured August<br>2018	---
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 17
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Notes to Consolidated Financial Statements
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Related-Party Financial Impact

Consolidated Balance Sheets.

Accounts receivable, related party. Accounts receivable, related party totaled $0 and $1.4 million at September 30, 2020 and December 31, 2019, respectively. At December 31, 2019, accounts receivable, related party represented amounts owed from LEH for the sale of jet fuel under the Jet Fuel Sales Agreement. Amounts are settled under normal business terms. Amounts outstanding relating to the Jet Fuel Sales Agreement can significantly vary period to period based on the timing of the related sales and payments received. See below for the total amount owed to LEH under the June LEH Note and the BDPL-LEH Loan Agreement.

Accounts payable, related party. Accounts payable, related party to LTRI related to the purchase of refinery equipment totaled $0.2 million at both September 30, 2020 and December 31, 2019.

Long-term debt, related party, current portion (in default) and accrued interest payable, related party.

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
LEH
June<br>LEH Note (in default)	$5,733	$-
BDPL-LEH<br>Loan Agreement	6,654	6,174
LEH<br>Total	12,387	6,174
Ingleside
March<br>Ingleside Note (in default)	1,067	1,004
Jonathan<br>Carroll
March<br>Carroll Note (in default)	1,373	997
	14,827	8,175
Less:<br>Long-term debt, related party, current portion, in<br>default	(12,173)	(6,001)
Less:<br>Accrued interest payable, related party (in default)	(2,654)	(2,174)
	$-	$-

Consolidated Statements of Operations.

Total revenue from operations.

	Three Months Ended September 30,				Nine Months Ended September 30,
	2020		2019		2020		2019
	(in thousands,<br>except percent amounts)
Refinery<br>operations
LEH	$11,942	27.8%	$25,034	31.8%	$34,244	27.8%	$70,016	31.0%
Third-Parties	29,987	69.9%	52,503	66.8%	85,941	69.6%	152,636	67.6%
Tolling and<br>terminaling
Third-Parties	1,001	2.3%	1,096	1.4%	3,214	2.6%	3,253	1.4%
	$42,930	100.0%	$78,633	100.0%	$123,399	100.0%	$225,905	100.0%

Interest expense.

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
	(in<br>thousands)
Jonathan<br>Carroll
Guaranty<br>Fee Agreements
First<br>Term Loan Due 2034	$108	$110	$324	$333
Second<br>Term Loan Due 2034	45	46	134	138
March<br>Carroll Note (in default)	23	33	66	86
LEH
BDPL-LEH<br>Loan Agreement (in default)	160	160	480	480
June<br>LEH Note (in default)	102	17	245	40
Ingleside
March<br>Ingleside Note (in default)	15	12	50	63
	$453	$378	$1,299	$1,140
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 18
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Notes to Consolidated Financial Statements
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Other. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.05 million for the three months ended September 30, 2020 and 2019, respectively. Fees associated with the Dock Tolling Agreement with LMT totaled $0 and $0.4 million for the nine months ended September 30, 2020 and 2019, respectively.

Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.01 million for both three-month periods ended September 30, 2020 and 2019. Lease payments received under the office sub-lease agreement with LEH totaled approximately $0.03 million for both nine-month periods ended September 30, 2020 and 2019.

The LEH operating fee was flat, totaling approximately $0.2 million for both three-month periods ended September 30, 2020 and 2019. The LEH operating fee was also relatively flat, totaling approximately $0.05 million for both nine-month periods ended September 30, 2020 and 2019.

(4)

Revenue and Segment Information

We have two reportable business segments: (i) refinery operations and (ii) tolling and terminaling. Refinery operations relate to the refining and marketing of petroleum products at our 15,000-bpd crude distillation tower. Tolling and terminaling operations relate to tolling and storage terminaling services under third-party lease agreements. Both operations are conducted at the Nixon facility. Corporate and other includes BDSC, BDPL and BDPC.

Revenue from Contracts with Customers

Disaggregation of Revenue. Revenue is presented in the table below under “Segment Information” disaggregated by business segment because this is the level of disaggregation that management has determined to be beneficial to users of our financial statements.

Receivables from Contracts with Customers. Our receivables from contracts with customers are presented as receivables, net on our consolidated balance sheets.

Contract Liabilities. Our contract liabilities from contracts with customers consist of unearned revenue and are included in accrued expenses and presented in “Note (9)” to our consolidated financial statements.

Remaining Performance Obligations. Most of our contracts with customers are spot contracts and therefore have no remaining performance obligations.

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Blue<br>Dolphin Energy Company	September 30, 2020 │Page 19
Notes to Consolidated Financial Statements
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Segment Information. Business segment information for the periods indicated (and as of the dates indicated) was as follows:

	Three Months Ended September 30,		Nine Months Ended September 30,
	2020	2019	2020	2019
	(in<br>thousands)
Net<br>revenue (excluding intercompany fees and sales)
Refinery<br>operations	$41,929	$77,537	$120,185	$222,652
Tolling<br>and terminaling	1,001	1,096	3,214	3,253
Total<br>net revenue	42,930	78,633	123,399	225,905
Intercompany<br>fees and sales
Refinery<br>operations	(595)	(668)	(1,618)	(1,927)
Tolling<br>and terminaling	595	668	1,618	1,927
Total<br>intercompany fees	-	-	-	-
Operation costs and expenses(1)
Refinery<br>operations	(43,691)	(76,088)	(124,942)	(219,766)
Tolling<br>and terminaling	(709)	(285)	(1,222)	(1,012)
Corporate<br>and other	(58)	(52)	(164)	(165)
Total<br>operation costs and expenses	(44,458)	(76,425)	(126,328)	(220,943)
Segment<br>contribution margin (deficit)
Refinery<br>operations	(2,357)	781	(6,375)	959
Tolling<br>and terminaling	887	1,479	3,610	4,168
Corporate<br>and other	(58)	(52)	(164)	(165)
Total<br>segment contribution margin (deficit)	(1,528)	2,208	(2,929)	4,962
General and administrative<br>expenses(2)
Refinery<br>operations	(414)	(292)	(1,045)	(898)
Tolling<br>and terminaling	(132)	(68)	(268)	(173)
Corporate<br>and other	(307)	(295)	(1,052)	(833)
Total<br>general and administrative expenses	(853)	(655)	(2,365)	(1,904)
Depreciation<br>and amortization
Refinery<br>operations	(301)	(481)	(883)	(1,429)
Tolling<br>and terminaling	(338)	(99)	(956)	(297)
Corporate<br>and other	(51)	(52)	(153)	(129)
Total<br>depreciation and amortization	(690)	(632)	(1,992)	(1,855)
Interest<br>and other non-operating expenses, net
Refinery<br>operations	(679)	8,329	(2,171)	6,723
Tolling<br>and terminaling	(599)	(824)	(1,985)	(1,599)
Corporate<br>and other	(304)	(259)	(778)	(712)
Total<br>interest and other non-operating expenses, net	(1,582)	7,246	(4,934)	4,412
Income<br>(loss) before income taxes
Refinery<br>operations	(3,751)	8,337	(10,474)	5,355
Tolling<br>and terminaling	(182)	488	401	2,099
Corporate<br>and other	(720)	(658)	(2,147)	(1,839)
Total<br>income (loss) before income taxes	(4,653)	8,167	(12,220)	5,615
Income<br>tax expense	-	-	(15)	-
Net income (loss)	$(4,653)	$8,167	$(12,235)	$5,615

(1)

Operation costs include cost of goods sold. Also, operation costs within: (a) tolling and terminaling includes terminal operating expenses and an allocation of other costs (e.g. insurance and maintenance) and (b) corporate and other includes expenses related to BDSC, BDPC and BDPL.

(2)

General and administrative expenses within refinery operations include the LEH operating fee.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 20
Notes to Consolidated Financial Statements
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	Nine Months Ended
---	---	---
	September 30,
	2020	2019
	(in<br>thousands)
Capital<br>expenditures
Refinery<br>operations	$295	$1,375
Tolling<br>and terminaling	790	83
Corporate<br>and other	-	-
Total<br>capital expenditures	$1,085	$1,458
	September<br>30,	December<br>31,
---	---	---
	2020	2019
	(in<br>thousands)
Identifiable<br>assets
Refinery<br>operations	$47,169	$51,317
Tolling<br>and terminaling	18,815	18,401
Corporate<br>and other	1,667	1,726
Total<br>identifiable assets	$67,651	$71,444

(5)

Concentration of Risk

Bank Accounts

Financial instruments that potentially subject us to concentrations of risk consist primarily of cash, trade receivables and payables. We maintain cash balances at financial institutions in Houston, Texas. The FDIC insures certain financial products up to a maximum of $250,000 per depositor. At both September 30, 2020 and December 31, 2019, we had cash balances (including restricted cash) that exceeded the FDIC insurance limit per depositor of approximately $0.3 million.

Key Supplier

Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. Under the initial term of the crude supply agreement, Pilot will sell us approximately 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement will continue on a one-year evergreen basis. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Either party may terminate the crude supply agreement by providing the other party 60 days prior written notice. Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.

Beginning on June 1, 2020, Pilot began applying payment obligations owed to us under the two terminal services agreements against our payment obligations owed to Pilot under the Amended Pilot Line of Credit. For the three and nine-month periods ended September 30, 2020, the setoff amounts totaled $0.6 million and $0.8 million, respectively. See “Note (1) Organization – Going Concern” to our consolidated financial statements for additional disclosures related to defaults in our debt obligations.

Our financial health could be materially and adversely affected by defaults in our secured loan agreements, margin deterioration and volatility, historic net losses and working capital deficits, as well as termination of the crude supply agreement or terminal services agreement with Pilot, which could impact our ability to acquire crude oil and condensate. In addition, sustained periods of low crude oil prices due to market volatility associated with the COVID-19 pandemic has resulted in significant financial constraints on producers, which in turn has resulted in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. During the three- and nine-month periods ended September 30, 2020, our refinery experienced downtime as a result of lack of crude due to cash constraints.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 21
Notes to Consolidated Financial Statements
---

Significant Customers

We routinely assess the financial strength of our customers and have not experienced significant write-downs in accounts receivable balances. We believe that our accounts receivable credit risk exposure is limited.

	Number<br>Significant<br><br><br>Customers	% Total Revenue<br>from Operations	Portion of<br>Accounts Receivable at Date<br>Indicated
Three<br>Months Ended
September 30,<br>2020	4	80%	$0
September 30,<br>2019	4	97%	$0.6<br>million
Nine<br>Months Ended
September 30,<br>2020	4	82%	$0
September 30,<br>2019	4	97%	$0.6<br>million

One of our significant customers is an Affiliate. The Affiliate, LEH, purchases our jet fuel under a Jet Fuel Sales Agreement and bids on jet fuel contracts under preferential pricing terms due to a HUBZone certification. LEH accounted for nearly 28% and 32% of our total revenue from operations for the three months ended September 30, 2020 and 2019, respectively. LEH accounted for nearly 28% and 31% of our total revenue from operations for the nine months ended September 30, 2020 and 2019, respectively. LEH represented $0 in accounts receivable at September 30, 2020. LEH represented $0.3 million in accounts receivable at September 30, 2019.

Amounts outstanding relating to the Jet Fuel Sales Agreement can significantly vary period to period based on the timing of the related sales and payments received. The amounts are settled under normal business terms. The total amount owed to LEH under the June LEH Note and the BDPL-LEH Loan Agreement totaled $12.4 million and $6.2 million at September 30, 2020 and December 31, 2019, respectively. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to transactions with Affiliates.

Concentration of Customers. Our customers are concentrated on refined petroleum product wholesalers. This customer concentration may impact our overall exposure to credit risk, either positively or negatively, as our customers are likely similarly affected by economic changes. This includes the uncertainties related to the COVID-19 pandemic and the associated volatility in the global oil markets. Historically, we have had no significant problems collecting our accounts receivable.

Refined Product Sales. We sell our products primarily in the U.S. within PADD 3. Occasionally we sell refined products to customers that export to Mexico. Total refined product sales by distillation (from light to heavy) for the periods indicated consisted of the following:

	Three Months Ended September 30,				Nine Months Ended Ended September 30,
	2020		2019		2020		2019
	(in<br>thousands, except percent amounts)
LPG<br>mix	$-	0.0%	$8	0%	$-	0.0%	$17	0%
Naphtha	7,847	18.7%	14,147	18.2%	22,523	18.7%	43,358	19.5%
Jet<br>fuel	11,942	28.5%	25,035	32.3%	34,244	28.5%	70,017	31.4%
HOBM	12,196	29.1%	17,044	22.0%	31,077	25.9%	49,951	22.5%
AGO	9,944	23.7%	21,303	27.5%	32,341	26.9%	59,309	26.6%
	$41,929	100.0%	$77,537	100.0%	$120,185	100.0%	$222,652	100.0%

An Affiliate, LEH, purchases all of our jet fuel. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate transactions.

(6)

Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Prepaid<br>insurance	$1,099	$417
Prepaid<br>crude oil and condensate	374	1,651
Prepaid<br>easement renewal fees	104	121
Other<br>prepaids	40	87
	$1,617	$2,276
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 22
---	---
Notes to Consolidated Financial Statements
---

(7)

Inventory

Inventory as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Crude<br>oil and condensate	$493	$959
Chemicals	143	120
AGO	118	440
Naphtha	88	95
Propane	13	26
LPG<br>mix	7	5
	$862	$1,645

Due to fluctuating commodity prices, we recorded a net realizable value adjustment to inventory of approximately $0.3 million and $0.3 million at September 30, 2020 and December 31, 2019, respectively.

(8)

Property, Plant and Equipment, Net

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

	September<br>30,	December<br>31,
	2020	2019
	(in<br>thousands)
Refinery<br>and facilities	$71,855	$66,317
Land	566	566
Other<br>property and equipment	903	833
	73,324	67,716
Less:<br>Accumulated depletion, depreciation, and amortiation	(14,577)	(12,739)
	58,747	54,977
CIP	4,392	8,916
	$63,139	$63,893

We capitalize interest cost incurred on funds used to construct property, plant, and equipment. Capitalized interest is recorded as part of the asset it relates to and is depreciated over the asset’s useful life. Capitalized interest cost, which is included in CIP, was $0 and $0.7 million at September 30, 2020 and December 31, 2019. Capital expenditures for expansion at the Nixon facility were funded by long-term debt from Veritex, revenue from operations, and working capital from Affiliates. At September 30, 2020, unused amounts for capital expenditures derived from Veritex loans were reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (10)” to our consolidated financial statements for additional disclosures related to working capital deficits and borrowings for capital spending.

(9)

Accrued Expenses and Other Current Liabilities

Accrued expenses and other current liabilities as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Unearned<br>revenue from contracts with customers	$2,441	$1,990
Insurance	525	159
Unearned<br>contract renewal income	500	500
Property,<br>fuel and other taxes	389	183
Other<br>payable	186	228
Board<br>of director fees payable	68	263
Customer<br>deposits	10	10
	$4,119	$3,333
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 23
---	---
Notes to Consolidated Financial Statements
---

(10)

Third-Party Long-Term Debt

Loan Agreements Summary

Loan Description	Parties	Original Principal Amount<br><br><br>(in millions)	Maturity Date	Monthly Principal and Interest Payment	Interest Rate	Loan Purpose
Veritex<br>Loans(1)
LE Term<br>Loan Due 2034 (in<br>default)	LE-Veritex	$25.0	Jun<br>2034	$0.2<br>million	WSJ<br>Prime + 2.75%	Refinance<br>loan; capital improvements
LRM<br>Term Loan Due 2034<br><br><br>(in default)	LRM-Veritex	$10.0	Dec<br>2034	$0.1<br>million	WSJ<br>Prime + 2.75%	Refinance<br>bridge loan; capital improvements
Notre<br>Dame Debt (in<br>default)(2)(3)	LE-Kissick	$11.7	Jan<br>2018	No<br>payments to date; payment rights subordinated	16.00%	Working<br>capital; reduced balance of GEL Final Arbitration<br>Award
SBA<br>EIDLs
LE Term<br>Loan Due 2050(4)	LE-SBA	$0.15	Aug<br>2050	$0.0007<br>million	3.75%	Working<br>capital
NPS<br>Term Loan Due 2050(4)	NPS-SBA	$0.15	Aug<br>2050	$0.0007<br>million	3.75%	Working<br>capital

(1)

Proceeds were placed in a disbursement account whereby Veritex makes payments for construction related expenses. Amounts held in the disbursement account are reflected on our consolidated balance sheets as restricted cash (current portion) and restricted cash, noncurrent. At September 30, 2020, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.5 million. At December 31, 2019, restricted cash (current portion) was $0.05 million and restricted cash, noncurrent was $0.6 million.

(2)

LE originally entered into a loan agreement with Notre Dame Investors, Inc. in the principal amount of $8.0 million. The debt is currently held by John Kissick. Pursuant to a 2017 sixth amendment, the Notre Dame Debt was amended to increase the principal amount by $3.7 million; the additional principal was used to reduce the GEL Final Arbitration Award by $3.6 million.

(3)

Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034.

(4)

Payments are deferred for the first twelve (12) months of the loan; interest accrues during the deferral period. SBA EIDLs are not forgivable.

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Third-party long-term debt (outstanding principal and accrued interest), as of the dates indicated was as follows:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Veritex<br>Loans
LE Term Loan Due 2034 (in<br>default)	$22,424	$21,776
LRM Term Loan Due 2034 (in<br>default)	9,299	9,031
SBA<br>EIDLs
LE<br>Term Loan Due 2050	150	-
NPS<br>Term Loan Due 2050	150	-
Notre Dame Debt (in<br>default)	9,214	8,617
	41,237	39,424
Less:<br>Current portion of long-term debt, net	(33,644)	(33,836)
Less:<br>Unamortized debt issue costs	(1,781)	(1,877)
Less: Accrued interest payable (in<br>default)	(5,512)	(3,711)
	$300	$-

Unamortized debt issue costs associated with the Veritex loans as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Veritex<br>Loans
LE Term Loan Due 2034 (in<br>default)	$1,674	$1,674
LRM Term Loan Due 2034 (in<br>default)	768	768
Less:<br>Accumulated amortization	(661)	(565)
	$1,781	$1,877

Amortization expense was $0.03 million for both three-month periods ended September 30, 2020 and 2019. Amortization expense was $0.09 million for both nine-month periods ended September 30, 2020 and 2019.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 24
Notes to Consolidated Financial Statements
---

Accrued interest related to third-party long-term debt, reflected as accrued interest payable in our consolidated balance sheets, as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Notre Dame Debt (in<br>default)	$4,236	$3,639
Veritex<br>Loans
LE Term Loan Due 2034 (in<br>default)	879	25
LRM Term Loan Due 2034 (in<br>default)	397	47
	5,512	3,711
Less:<br>Accrued interest payable (in default)	(5,512)	(3,711)
Long-term<br>Interest Payable, Net of Current Portion	$-	$-

Payment Deferments

Veritex Loans. In April 2020, LE and LRM were each granted a two-month deferment period on their respective Veritex loans commencing from April 22, 2020 to June 22, 2020. During the deferment period, LE and LRM were not obligated to make payments and interest continued to accrue at the stated rates of the loans. Upon expiration of the deferment period: (i) Veritex re-amortized the loan such that future payments on principal and interest were adjusted based on the remaining principal balances and loan terms, and (ii) all other terms of the loans reverted to the original terms, and previous defaults were reinstated. The deferment did not address LE’s requirement to replenish the $1.0 million payment reserve account. Principal and interest payments resumed on July 22, 2020. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex, but other defaults are ongoing as noted below under “Defaults”.

SBA EIDLs. Payments under the SBA loans are deferred for the first twelve (12) months. Interest accrues during the deferral period. Principal and interest payments begin in August 2021.

Guarantees and Security

Loan Description	Guarantees	Security
Veritex<br>Loans(1)
LE Term<br>Loan Due 2034 (in<br>default)	●<br><br><br>100%<br>USDA-guarantee<br><br><br>●<br><br><br>Jonathan Carroll<br>personal guarantee<br><br><br>●<br><br><br>LEH, LRM and Blue<br>Dolphin cross-guarantee	●<br><br><br>First priority lien<br>on Nixon facility’s business assets (excluding accounts<br>receivable and inventory)<br><br><br>●<br><br><br>Assignment of all<br>Nixon facility contracts, permits, and licenses<br><br><br>●<br><br><br>Absolute assignment<br>of Nixon facility rents and leases, including tank rental<br>income<br><br><br>●<br><br><br>$1.0 million<br>payment reserve account held by Veritex<br><br><br>●<br><br><br>$5.0 million life<br>insurance policy on Jonathan Carroll
LRM<br>Term Loan Due 2034 (in<br>default)	●<br><br><br>100%<br>USDA-guarantee<br><br><br>●<br><br><br>Jonathan Carroll<br>personal guarantee<br><br><br>●<br><br><br>LEH, LE and Blue<br>Dolphin cross-guarantee	●<br><br><br>Second priority<br>lien on rights of LE in crude distillation tower and other<br>collateral of LE<br><br><br>●<br><br><br>First priority lien<br>on real property interests of LRM<br><br><br>●<br><br><br>First priority lien<br>on all LRM fixtures, furniture, machinery, and<br>equipment<br><br><br><br>●<br><br><br>First priority lien<br>on all LRM contractual rights, general intangibles, and<br>instruments, except with respect to LRM rights in its leases of<br>certain specified tanks for which Veritex has second priority<br>lien<br><br><br><br>●<br><br><br>All other<br>collateral as described in the security documents
Notre<br>Dame Debt (in<br>default)(2)	---	●<br><br><br>Subordinated deed<br>of trust that encumbers the crude distillation tower and general<br>assets of LE
SBA<br>EIDLs
LE Term<br>Loan Due 2050	---	●<br><br><br>Business assets<br>(e.g. machinery and equipment, furniture, fixtures, etc.) as more<br>fully described in the security agreement
NPS<br>Term Loan Due 2050	---	●<br><br><br>Business assets<br>(e.g. machinery and equipment, furniture, fixtures, etc.) as more<br>fully described in the security agreement

(1)

As a condition of the LE Term Loan Due 2034 and LRM Term Loan Due 2034, Jonathan Carroll was required to personally guarantee repayment of borrowed funds and accrued interest.

(2)

The USDA, acting through its agencies, administers a federal rural credit program that makes direct loans and guarantees portions of loans made and serviced by USDA-qualified lenders for various purposes. Each USDA guarantee is a full faith and credit obligation of the U.S. with the USDA guaranteeing up to 100% of the principal amount. The lender for a USDA-guaranteed loan, in our case Veritex, is required by regulations to retain both the guaranteed and unguaranteed portions of the loan, to service the entire underlying loan, and to remain mortgage and/or secured party of record. Both the guaranteed and unguaranteed portions of the loan are to be secured by the same collateral with equal lien priority. The USDA-guaranteed portion of a loan cannot be paid later than, or in any way be subordinated to, the related unguaranteed portion. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliate agreements and transactions, including long-term debt guarantees.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 25
Notes to Consolidated Financial Statements
---

Covenants

The Veritex loans and SBA EIDLs contain representations and warranties, affirmative and negative covenants, and events of default that we consider usual and customary for credit facilities of this type. There are no covenants associated with the Notre Dame Debt.

Defaults

Loan Description	Event(s) of Default	Covenant Violations
Veritex<br>Loans
LE Term<br>Loan Due 2034 (in<br>default)	GEL<br>Final Arbitration Award and associated material adverse effect<br>conditions; failure to replenish $1.0 million payment reserve<br>account; events of default under other secured loan agreements with<br>Veritex	Financial<br>covenants:<br><br><br>●<br><br><br>debt service<br>coverage ratio, current ratio, and debt to net worth<br>ratio
LRM<br>Term Loan Due 2034 (in<br>default)	GEL<br>Final Arbitration Award and associated material adverse effect<br>conditions; events of default under other secured loan agreements<br>with Veritex	Financial<br>covenants:<br><br><br>●<br><br><br>debt service<br>coverage ratio, current ratio, and debt to net worth<br>ratio
Notre<br>Dame Debt (in<br>default)	Failure<br>of borrower to pay past due obligations; loan matured January<br>2019	---

As reflected in the table above and elsewhere in this report, we are in default under the LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt. Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. The debt associated with the LE Term Loan Due 2034, LRM Term Loan Due 2034, and the Notre Dame Debt was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2020 and December 31, 2019.

Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Vertitex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. Defaults under our secured loan agreements and any exercise by Veritex of its rights and remedies related to such defaults may have a material adverse effect on the trading prices of our common stock and on the value of an investment in our common stock, and holders of our common stock could lose their investment in our common stock in its entirety. See “Note (1)” and “Note (11)” to our consolidated financial statements for additional information regarding defaults under our secured loan agreements and their potential effects on our business, financial condition, and results of operations.

(11)

Line of Credit Payable

Line of Credit Agreement Summary

Line of Credit Description	Original<br><br><br>Principal Amount<br><br><br>(in millions)	Maturity Date	Monthly Principal and Interest Payment	Interest Rate	Loan Purpose
Amended<br>Pilot Line of Credit<br><br><br>(in<br>default)	$13.0	May<br>2020	----	14.00%	GEL<br>Settlement Payment, NPS purchase of crude oil from Pilot, and<br>working capital

Outstanding Principal, Debt Issue Costs, and Accrued Interest

Line of credit payable, which represents outstanding principal and accrued interest, as of the dates indicated was as follows:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
Amended Pilot Line of Credit (in<br>default)	$9,724	$11,786
Less:<br>Unamortized debt issue costs	-	(219)
Less:<br>Interest payable, short-term	(103)	(103)
	$9,621	$11,464
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 26
---	---
Notes to Consolidated Financial Statements
---

Guarantees and Security

Loan Description	Guarantees	Security
Amended<br>Pilot Line of Credit (in<br>default)	●<br><br><br>Blue Dolphin<br>pledged its equity interests in NPS to Pilot to secure NPS’<br>obligations;<br><br><br>●<br><br><br>Blue Dolphin, LE,<br>LRM, and LEH have each guaranteed NPS’<br>obligations.	● NPS<br>receivables;<br><br><br>● NPS assets,<br>including a tank lease (the “Tank Lease”);<br><br><br>● LRM<br>receivables.

In an Agreement Regarding Attornment of Tank Leases dated April 30, 2019 between Veritex, LE, NPS, and Pilot, Veritex in its capacity as a secured lender of LE and LRM, agreed to permit the continued performance of obligations under a certain tank lease agreement if it were to foreclose on LE property that NPS was leasing from LE so long as certain conditions were met. The effectiveness of the Agreement Regarding Attornment of Tank Leases was subject to certain conditions, including the agreement and concurrence of the USDA that the Agreement Regarding Attornment of Tank Leases does not impair or void the LE Term Loan Due 2034 and LRM Term Loan Due 2034 or any associated guarantees. Veritex used commercially reasonable efforts to obtain such USDA concurrence, however, as of the filing date of this report such USDA concurrence had not been provided.

Covenants

The Amended Pilot Line of Credit contains customary affirmative and negative covenants and events of default.

Defaults

Loan Description	Event(s) of Default	Covenant Violations
Amended<br>Pilot Line of Credit (in<br>default)	Failure<br>of borrower or any guarantor to pay past due obligations; loan<br>matured May 2020	---

As reflected in the table above and elsewhere in this report, we are in default under the Amended Pilot Line of Credit. On May 4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Obligations”) under the Amended Pilot Line of Credit. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Obligations began to accrue interest at a rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor to pay the past due Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 27
Notes to Consolidated Financial Statements
---

(12)

AROs

Refinery and Facilities

Management has concluded that there is no legal or contractual obligation to dismantle or remove the refinery and facilities assets. Management believes that the refinery and facilities assets have indeterminate lives under FASB ASC guidance for estimating AROs because dates or ranges of dates upon which we would retire these assets cannot reasonably be estimated at this time. When a legal or contractual obligation to dismantle or remove the refinery and facilities assets arises and a date or range of dates can reasonably be estimated for the retirement of these assets, we will estimate the cost of performing the retirement activities and record a liability for the fair value of that cost using present value techniques.

Pipelines and Facilities and Oil and Gas Properties

We have AROs associated with the decommissioning of our pipelines and facilities assets, as well as the plugging and abandonment of our oil and gas properties. We recorded a discounted liability for the fair value of an ARO with a corresponding increase to the carrying value of the related long-lived asset at the time the asset was installed or placed in service, and we depreciated the amount added to property and equipment and recognized accretion expense relating to the discounted liability over the remaining life of the asset. At September 30, 2020 and December 31, 2019, the liability was fully accreted. See “Note (16)” to our consolidated financial statements for disclosures related to decommissioning of our offshore pipelines and platform assets and related risks.

ARO liability as of the dates indicated was as follows:

	September 30,	December 31,
	2020	2019
	(in<br>thousands)
AROs,<br>at the beginning of the period	$2,565	$2,565
Liabilities<br>settled	(179)	-
	2,386	2,565
Less:<br>AROs, current portion	(2,386)	(2,565)
Long-term<br>AROs, at the end of the period	$-	$-

Liabilities settled reflects preparatory costs in the period associated with decommissioning our offshore pipelines and platform assets.

(13)

Lease Obligations

Operating Lease

Office Lease. BDSC has an office lease related to our headquarters office in Houston, Texas. The 68-month operating lease expires in 2023. BDSC has the option to extend the lease term for one additional five (5) year period if notice of intent to extend is provided to the lessor at least twelve (12) months before the end of the current term. An Affiliate, LEH, subleases a portion of this office space. Sublease income received from LEH totaled approximately $0.01 million for both the three months ended September 30, 2020 and 2019. Sublease income received from LEH totaled approximately $0.03 million for both the nine months ended September 30, 2020 and 2019. See “Note (3)” to our consolidated financial statements for additional disclosures related to the Affiliate sub-lease.

Finance Leases

Crane. In January 2018, LE entered a 24-month lease for the purchase of a 20-ton crane for use at the Nixon facility. The lease required a negligible monthly payment and matured in January 2020.

Backhoe Lease Agreement. In October 2020, LE entered into a new 5-year finance lease agreement to purchase a backhoe. LE previously rented the backhoe under a rent-to-own agreement that matured. The new lease, which includes a rental credit applied as a down payment, requires a negligible monthly payment and matures in October 2025. The backhoe continues to be used at the Nixon Facility.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 28
Notes to Consolidated Financial Statements
---

The following table presents the lease-related assets and liabilities recorded on the consolidated balance sheet:

		September<br>30,	December<br>31,
	Balance Sheet Location	2020	2019
		(in<br>thousands)
Assets
Operating<br>lease ROU assets	Operating<br>lease ROU assets	$787	$787
Less:<br>Accumulated amortization on operating lease assets	Operating lease ROU assets	(249)	(138)
		538	649
Finance<br>lease assets	Property<br>and equipment, net	86	180
Less:<br>Accumulated amortization on finance lease assets	Property<br>and equipment, net	(16)	(34)
		70	146
Total<br>lease assets		608	795
Liabilities
Current
Operating<br>lease	Current<br>portion of lease liabilities	190	175
Finance<br>leases	Current<br>portion of lease liabilities	61	76
		251	251
Noncurrent
Operating<br>lease	Long-term<br>lease liabilities, net of current	421	564
Total<br>lease liabilities		$672	$815
Weighted<br>average remaining lease term in years
---	---
Operating<br>lease	2.92
Weighted<br>average discount rate
Operating<br>lease	8.25%
Finance<br>leases	8.25%

The following table presents information related to lease costs for operating and finance leases:

	Three<br>Months Ended		Nine<br>Months Ended
	September<br>30,		September<br>30,
	2020	2019	2020	2019
	(in thousands)
Operating<br>lease costs	$51	$51	$154	$154
Finance<br>lease costs:
Depreciation<br>of leased assets	3	4	13	12
Interest<br>on lease liabilities	-	2	3	4
Total<br>lease cost	$54	$57	$170	$170

The table below presents supplemental cash flow information related to leases as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
	(in thousands)
Cash<br>paid for amounts included in the measurement
of<br>lease liabilities:
Operating<br>cash flows for operating lease	$44	$40	$130	$81
Operating<br>cash flows for finance leases	$-	$2	$4	$4
Financing<br>cash flows for finance leases	$5	$13	$17	$35
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 29
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Notes to Consolidated Financial Statements
---

As of September 30, 2020, maturities of lease liabilities for the periods indicated were as follows:

September<br>30,	Operating Lease	Financing Leases	Total
	(in<br>thousands)
2021	$190	$61	$251
2022	209	-	209
2023	212	-	212
	$611	$61	$672

Future minimum annual lease commitments that are non-cancelable:

	Operating
September 30,	Lease
	(in thousands)
2021	$232
2022	236
2023	220
	$688

(14)

Income Taxes

Tax Provision

The provision for income tax benefit (expense) for the periods indicated was as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
Current
Federal	$-	$-	$(15)	$-
State	-	-	-	-
Deferred
Federal	975	(1,833)	2,566	(1,190)
State	-		-
Change<br>in valuation allowance	(975)	1,833	(2,566)	1,190
Total<br>provision for income taxes	$-	$-	$(15)	$-

The TMT is treated as an income tax for financial reporting purposes.

Remainder of Page Intentionally Left Blank

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 30
Notes to Consolidated Financial Statements
---

Deferred income taxes as of the dates indicated consisted of the following:

	September 30,	December 31,
	2020	2019
	(in thousands)
Deferred<br>tax assets:
NOL<br>and capital loss carryforwards	$14,854	$12,463
Business<br>interest expense	2,995	1,923
Start-up<br>costs (crude oil and condensate processing facility)	530	594
ARO<br>liability/deferred revenue	501	539
AMT<br>credit	-	50
Other	1	11
Total<br>deferred tax assets	18,881	15,580
Deferred<br>tax liabilities:
Basis<br>differences in property and equipment	(6,968)	(6,183)
Total<br>deferred tax liabilities	(6,968)	(6,183)
	11,913	9,397
Valuation<br>allowance	(11,913)	(9,347)
Deferred<br>tax assets, net	$-	$50

Deferred Income Taxes

Deferred income tax balances reflect the effects of temporary differences between the carrying amounts of assets and liabilities and their tax basis, as well as from NOL carryforwards. We state those balances at the enacted tax rates we expect will be in effect when taxes are paid. NOL carryforwards and deferred tax assets represent amounts available to reduce future taxable income.

NOL Carryforwards. Under IRC Section 382, a corporation that undergoes an “ownership change” is subject to limitations on its use of pre-change NOL carryforwards to offset future taxable income. Within the meaning of IRC Section 382, an “ownership change” occurs when the aggregate stock ownership of certain stockholders (generally 5% shareholders, applying certain look-through rules) increases by more than fifty (50) percentage points over such stockholders' lowest percentage ownership during the testing period (generally three years). For income tax purposes, we experienced ownership changes in 2005, relating to a series of private placements, and in 2012, because of a reverse acquisition, that limit the use of pre-change NOL carryforwards to offset future taxable income. In general, the annual use limitation equals the aggregate value of common stock at the time of the ownership change multiplied by a specified tax-exempt interest rate. The 2012 ownership change will subject approximately $16.3 million in NOL carryforwards that were generated prior to the ownership change to an annual use limitation of approximately $0.6 million per year. Unused portions of the annual use limitation amount may be used in subsequent years. Because of the annual use limitation, approximately $6.7 million in NOL carryforwards that were generated prior to the 2012 ownership change will expire unused. NOL carryforwards that were generated after the 2012 ownership change and prior to 2018 are not subject to an annual use limitation under IRC Section 382 and may be used for a period of 20 years in addition to available amounts of NOL carryforwards generated prior to the ownership change.

NOL Carryforwards. NOL carryforwards that remained available for future use for the periods indicated were as follow (amounts shown are net of NOLs that will expire unused because of the IRC Section 382 limitation):

	Net Operating Loss Carryforward
	Pre-Ownership Change	Post-Ownership Change	Total
	(in<br>thousands)
Balance<br>at December 31, 2018	$9,614	$37,335	$46,949
Net<br>operating losses	-	5,723	5,723
Balance<br>at December 31, 2019	9,614	43,058	52,672
Net<br>operating losses	-	11,384	11,384
Balance at September 30, 2020	$9,614	$54,442	$64,056
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 31
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Notes to Consolidated Financial Statements
---

Valuation Allowance. As of each reporting date, management considers new evidence, both positive and negative, to determine the realizability of deferred tax assets. Management considers whether it is more likely than not that some portion or all the deferred tax assets will be realized, which is dependent upon the generation of future taxable income prior to the expiration of any NOL carryforwards. At September 30, 2020 and December 31, 2019, management determined that cumulative losses incurred over the prior three-year period provided significant objective evidence that limited the ability to consider other subjective evidence, such as projections for future growth. Based on this evaluation, we recorded a valuation allowance against the deferred tax assets for which realization was not deemed more likely than not as of September 30, 2020 and December 31, 2019.

(15)

Earnings Per Share

A reconciliation between basic and diluted income per share for the periods indicated was as follows:

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
Net<br>income (loss)	$(4,653)	$8,167	$(12,235)	$5,615
Basic<br>and diluted income (loss) per share	$(0.37)	$0.74	$(0.98)	$0.51
Basic<br>and Diluted
Weighted<br>average number of shares of
common<br>stock outstanding and potential
dilutive<br>shares of common stock	12,693,514	10,975,514	12,534,493	10,975,215

Diluted EPS is computed by dividing net income available to common stockholders by the weighted average number of shares of common stock outstanding. Diluted EPS for the three and nine months ended September 30, 2020 and 2019 was the same as basic EPS as there were no stock options or other dilutive instruments outstanding.

(16)

Commitments and Contingencies

Amended and Restated Operating Agreement

See “Note (3)” to our consolidated financial statements for additional disclosures related to operation and management of all Blue Dolphin properties by an Affiliate under the Amended and Restated Operating Agreement.

BSEE Offshore Pipelines and Platform Decommissioning

BDPL has pipelines and platform assets that are subject to BSEE’s idle iron regulations. Idle iron regulations mandate lessees and rights-of-way holders to permanently abandon and/or remove platforms and other structures when they are no longer useful for operations. Until such structures are abandoned or removed, lessees and rights-of-way holders are required to inspect and maintain the assets in accordance with regulatory requirements.

In December 2018, BSEE issued an INC to BDPL for failure to flush and fill Pipeline Segment No. 13101. Management met with BSEE on August 15, 2019 to address BDPL’s plans with respect to decommissioning its offshore pipelines and platform assets. BSEE proposed that BDPL re-submit permit applications for pipeline and platform decommissioning, along with a safe boarding plan for the platform, within six (6) months (no later than February 15, 2020), and develop and implement a safe boarding plan for submission with such permit applications. Further, BSEE proposed that BDPL complete approved, permitted work within twelve (12) months (no later than August 15, 2020). BDPL timely submitted permit applications for decommissioning of the subject offshore pipelines and platform assets to BSEE on February 11, 2020 and the USACOE on March 25, 2020. Decommissioning of the offshore pipelines and platform assets is on hold due to financial constraints associated with COVID-19. We are also awaiting approval of regulatory permits on certain segments and/or fairways, which approvals are required prior to work commencement. We cannot currently estimate when decommissioning may occur.

In April 2020, BSEE issued another INC to BDPL for failure to perform the required structural surveys for the GA-288C Platform. BDPL requested an extension to the INC related to the structural platform surveys, and BSEE approved BDPL’s extension request. The required platform surveys were completed, and the INC was resolved in June 2020.

Lack of permit approvals does not relieve BDPL of its obligations to remedy the BSEE INCs or of BSEE’s authority to impose financial penalties. If BDPL fails to complete decommissioning of the offshore pipelines and platform assets and/or remedy the INCs within a timeframe determined to be prudent by BSEE, BDPL could be subject to regulatory oversight and enforcement, including but not limited to failure to correct an INC, civil penalties, and revocation of BDPL’s operator designation, which could have a material adverse effect on our earnings, cash flows and liquidity.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 32
Notes to Consolidated Financial Statements
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We are currently unable to predict the outcome of the BSEE INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of September 30, 2020. At September 30, 2020 and December 31, 2019, BDPL maintained $2.4 million and $2.6 million, respectively, in AROs related to abandonment of these assets.

Defaults Under Secured Loan Agreements with Third Parties

See “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to defaults under our secured and unsecured debt agreements.

Financing Agreements and Guarantees

Indebtedness. See “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for disclosures related to Affiliate and third-party indebtedness and defaults thereto.

Guarantees. Affiliates provided guarantees on certain debt of Blue Dolphin and its subsidiaries. The maximum amount of any guarantee is equal to the principal amount and accrued interest, which amounts are reduced as payments are made. See “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party guarantees associated with indebtedness and defaults thereto.

Health, Safety and Environmental Matters

Our operations are subject to extensive federal, state, and local environmental, health, and safety regulations governing, among other things, the generation, storage, handling, use and transportation of petroleum products and hazardous substances; the emission and discharge of materials into the environment; waste management; characteristics and composition of jet fuel and other products; and the monitoring, reporting and control of air emissions. Our operations also require numerous permits and authorizations under various environmental, health, and safety laws and regulations. Failure to obtain and comply with these permits or environmental, health, or safety laws generally could result in fines, penalties or other sanctions, or a revocation of our permits.

Legal Matters

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds). To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

BDPL has historically maintained $0.9 million in financial assurance to BOEM for the decommissioning of its trunk pipeline offshore in federal waters. Following an agency restructuring of the financial assurance program, in March 2018 BOEM ordered BDPL to provide additional financial assurance totaling approximately $4.8 million for five (5) existing pipeline rights-of-way within sixty (60) calendar days. In June 2018, BOEM issued BDPL INCs for each right-of-way that failed to comply. BDPL appealed the INCs to the IBLA, and the IBLA granted multiple extension requests that extended BDPL’s deadline for filing a statement of reasons for the appeal with the IBLA. On August 9, 2019, BDPL timely filed its statement of reasons for the appeal with the IBLA. Considering BDPL’s August 2019 meeting with BOEM and BSEE, BDPL requested a stay in the IBLA matter until August 2020. The Office of the Solicitor of the U.S. Department of the Interior was agreeable to a 10-day extension while it conferred with BOEM on BDPL’s stay request. In late October 2019, BDPL filed a motion to request the 10-day extension, which motion was subsequently granted by the IBLA. The solicitor’s office consented to an additional 14-day extension for BDPL to file its reply, and BDPL filed a motion to request the 14-day extension in November 2019. The solicitor’s office indicated that BOEM would not consent to further extensions. However, the solicitor’s office signaled that BDPL’s adherence to the milestones identified in an August 15, 2019 meeting between management and BSEE may help in future discussions with BOEM related to the INCs. Decommissioning of these assets will significantly reduce or eliminate the amount of financial assurance required by BOEM, which may serve to partially or fully resolve the INCs. See “Note (16) – BSEE Offshore Pipelines and Platform Decommissioning”.

BDPL’s pending appeal of the BOEM INCs does not relieve BDPL of its obligations to provide additional financial assurance or of BOEM’s authority to impose financial penalties. There can be no assurance that we will be able to meet additional financial assurance (supplemental pipeline bond) requirements. If BDPL is required by BOEM to provide significant additional financial assurance (supplemental pipeline bonds) or is assessed significant penalties under the INCs, we will experience a significant and material adverse effect on our operations, liquidity, and financial condition.

We are currently unable to predict the outcome of the BOEM INCs. Accordingly, we have not recorded a liability on our consolidated balance sheet as of September 30, 2020. At both September 30, 2020 and December 31, 2019, BDPL maintained approximately $0.9 million in credit and cash-backed pipeline rights-of-way bonds issued to BOEM.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 33
Notes to Consolidated Financial Statements
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Resolved - GEL Settlement. As previously disclosed, GEL was awarded the GEL Final Arbitration Award in the aggregate amount of $31.3 million. In July 2018, the Lazarus Parties and GEL entered into the GEL Settlement Agreement. The GEL Settlement Agreement was subsequently amended five (5) times to extend the GEL Settlement Payment Date and/or modify certain terms related to the GEL Interim Payments or the GEL Settlement Payment. During the period September 2017 to August 2019, GEL received the following amounts from the Lazarus Parties to reduce the outstanding balance of the GEL Final Arbitration Award:

	(in<br>millions)
Initial payment<br>(September 2017)	$3.7
GEL Interim<br>Payments (July 2018 to April 2019)	8.0
Settlement Payment<br>(Multiple Payments May 7 to 10, 2019)	10.0
Deferred Interim<br>Installment Payments (June 2019 to August 2019)	0.5
	$22.2

The GEL Settlement Effective Date occurred on August 23, 2019. As a result of the GEL Settlement: (i) the mutual releases became effective, (ii) GEL filed the stipulation of dismissal of claims against LE, and (iii) Blue Dolphin recognized a $9.1 million gain on the extinguishment of debt on its consolidated statements of operations in the third quarter of 2019. Until the GEL Settlement occurred, the debt was reflected on Blue Dolphin’s consolidated balance sheets as accrued arbitration award payable. At both September 30, 2020 and December 31, 2019, the accrued arbitration award payable was $0.

Other Legal Matters. We are involved in lawsuits, claims, and proceedings incidental to the conduct of our business, including mechanic’s liens, contract-related disputes, and administrative proceedings. Management is in discussion with all concerned parties and does not believe that such matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that such discussions will result in a manageable outcome. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

Share Issuances (Sales of Unregistered Securities)

We are obligated to issue shares of our Common Stock to: (i) non-employee directors for services rendered to the Board and (ii) to Jonathan Carroll pursuant to the Guaranty Fee Agreements. Set forth below is information regarding the sale or issuance of Common Stock related to these obligations during the three and nine months ended September 30, 2020:

●

On April 30, 2020, we issued an aggregate of 231,065 restricted shares of Common Stock to Jonathan Carroll, which represents payment of the common stock component of guaranty fees for the period November 2019 through March 2020. The average cost basis was $0.69, the low was $0.52, and the high was $1.07. For the foreseeable future, management does not intend on paying Mr. Carroll the cash portion of guaranty fees due to Blue Dolphin’s working capital deficits. The cash portion will continue to be accrued and added to the principal balance of the March Carroll Note. See “Note (3)” to our consolidated financial statements for additional disclosures related to Affiliates and working capital deficits, as well as for information related to the guaranty fee agreements.

●

On April 30, 2020, we also issued an aggregate of 135,084 restricted shares of Common Stock to certain of our non-employee, independent directors, which represents payment for services rendered to the Board for the three month periods ended September 30, 2018, March 31, 2019, September 30, 2019, and March 31, 2020. The average cost basis was $0.97, the low was $0.57, and the high was $1.18.

The sale and issuance of these securities were exempt from registration under the Securities Act in reliance on Section 4(a)(2) of the Securities Act. We recognized a gain on the issuance of shares of $0 and $0.1 million for the three and nine months ended September 30, 2020, respectively.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 34
Management’s Discussion and Analysis
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ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Management’s Discussion and Analysis is our analysis of our financial performance, financial condition, and significant trends that may affect future performance. All statements in this section, other than statements of historical fact, are forward-looking statements that are inherently uncertain. See “Important Information Regarding Forward-Looking Statements” for a discussion of the factors that could cause actual results to differ materially from those projected in these statements. You should read the following discussion together with the financial statements and the related notes included elsewhere in this Quarterly Report, as well as with the business strategy, risk factors, and financial statements and related notes included thereto in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019 and our Quarterly Reports on Form 10-Q for the quarterly periods ended March 31, 2020 and June 30, 2020.

Overview

Blue Dolphin is an independent downstream energy company operating in the Gulf Coast region of the United States. Our subsidiaries operate a light sweet-crude, 15,000-bpd crude distillation tower with more than 1.2 million bbls of petroleum storage tank capacity in Nixon, Texas. Our assets are primarily organized in two segments: refinery operations (owned by LE) and tolling and terminaling services (owned by LRM and NPS). Active subsidiaries that are reflected in corporate and other include BDPL (inactive pipeline assets), BDPC (inactive leasehold interests in oil and gas wells), and BDSC (administrative services). See “Note (4)” to our consolidated financial statements for more information related to our business segments and properties. Blue Dolphin was formed in 1986 as a Delaware corporation and is traded on the OTCQX under the ticker symbol “BDCO”.

Affiliates

Business Operations Update

We continue to proactively address the known impacts of COVID-19. Facility-dependent personnel, including those needed to maintain the Nixon facility, are reporting to the facility under strict protocols that are designed to ensure personnel health and safety. We are also supporting non-facility-dependent personnel through remote work and virtual meeting technology, and we are encouraging all personnel to follow local guidance. All non-essential business travel and attendance at conferences, trainings, and other gatherings have been suspended.

Uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment remains as COVID-19 cases in the U.S. and around the world begin to resurge. Some countries have renewed mandates, including stay-at-home orders and business closures, to prevent the further spread of COVID-19. Such mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.

The oil and gas industry has been adversely impacted by crude oil price volatility and demand for refined petroleum products. Although commodity prices recovered slightly during the second quarter, overall market prices were volatile during the third quarter of 2020 and are expected to remain volatile into 2021. The prices at which we acquire crude oil and sell our refined products significantly impact our revenue, cost of goods sold, operating income, and liquidity. Also, when market prices of crude oil and refined products fall below our inventory carrying value, we must write down our inventory value and adjust cost of goods sold. Given diminished expectations for the global economy amid the ongoing pandemic and resultant recession, we cannot predict the ultimate economic impact of COVID-19 on our business.

Remainder of Page Intentionally Left Blank

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 35
Management’s Discussion and Analysis
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Going Concern

Management has determined that certain factors raise substantial doubt about our ability to continue as a going concern. These factors include the following:

Defaults Under Secured Loan Agreements with Third Parties. We are currently in default under certain of our secured loan agreements with third parties. Certain of our related-party debt is also in default. As a result, the debt associated with these loans was classified within the current portion of long-term debt on our consolidated balance sheets at September 30, 2020 and December 31, 2019. See “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to third-party and related-party debt, defaults on such debt, and the potential effects of such defaults on our business, financial condition, and results of operations.

Third-Party Defaults

●

Veritex Loans – Defaults under the LE Term Loan Due 2034 and LRM Term Loan Due 2034 permit Veritex to declare the amounts owed under these loan agreements immediately due and payable, exercise its rights with respect to collateral securing obligors’ obligations under these loan agreements, and/or exercise any other rights and remedies available. Any exercise by Veritex of its rights and remedies under our secured loan agreements would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations. Veritex exercising its rights would also adversely impact the trading price of our common stock and the value of an investment in our common stock, which could lead to holders of our common stock losing their investment in its entirety. We can provide no assurance that: (i) our assets or cash flow will be sufficient to fully repay borrowings under our secured loan agreements with Vertitex, either upon maturity or if accelerated, (ii) LE and LRM will be able to refinance or restructure the payments of the debt, and/or (iii) Veritex, as first lien holder, will provide future default waivers. The borrowers continue in active dialogue with Veritex. As of the filing date of this report, payments under the Veritex loans were current, but other defaults remain outstanding as noted in the table above.

●

Amended Pilot Line of Credit – On May 4, 2020, Pilot sent NPS, as borrower, and LRM, LEH, LE and Blue Dolphin, each a guarantor and collectively guarantors, a notice demanding the immediate payment of the unpaid principal amount and all interest accrued and unpaid, and all other amounts owing or payable (the “Obligations”) under the Amended Pilot Line of Credit. Pursuant to the Amended Pilot Line of Credit, commencing on May 4, 2020, the Obligations began to accrue interest at a default rate of fourteen percent (14%) per annum. Failure of the borrower or any guarantor of paying the past due Obligations constituted an event of default. Pilot expressly retained and reserved all its rights and remedies available to it at any time, including without limitation, the right to exercise all rights and remedies available to Pilot under the Amended Pilot Line of Credit or applicable law or equity. Any exercise by Pilot of its rights and remedies under the Amended Pilot Line of Credit would have a material adverse effect on our business operations, including crude oil and condensate procurement and our customer relationships; financial condition; and results of operations.

The borrower and guarantors continue in active dialogue with Pilot to reach a negotiated settlement, and we believe that Pilot hopes to continue working with the borrower to settle the Obligations. The borrower and guarantors are also working on the possible refinance of amounts owing and payable under the Amended Pilot Line of Credit. However, progress with potential lenders has been slow due to the ongoing COVID-19 pandemic. Our ability to repay, refinance, replace or otherwise extend this credit facility is dependent on, among other things, business conditions, our financial performance, and the general condition of the financial markets. Given the current financial markets, we could be forced to undertake alternate financings, including a sale of additional common stock, negotiate for an extension of the maturity, or sell assets and delay capital expenditures in order to generate proceeds that could be used to repay such indebtedness. We can provide no assurance that we will be able to consummate any such transaction on terms that are commercially reasonable, on terms acceptable to us or at all. In the event we are unsuccessful in such endeavors, we may be unable to pay the amounts outstanding under the Amended Pilot Line of Credit, which may require us to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

●

Notre Dame Debt – Pursuant to a 2015 subordination agreement, the holder of the Notre Dame Debt agreed to subordinate their right to payments, as well as any security interest and liens on the Nixon facility’s business assets, in favor of Veritex as holder of the LE Term Loan Due 2034. No payments have been made under the subordinated Notre Dame Debt.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 36
Management’s Discussion and Analysis
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Related-Party Defaults

Affiliates control approximately 82% of the voting power of our Common Stock, an Affiliate operates and manages all Blue Dolphin properties, an Affiliate is a significant customer of our refined products, and we borrow from Affiliates during periods of working capital deficits. Replated party debt, which is currently in default, represents such working capital borrowings.

Margin Deterioration and Volatility. Steps taken globally in March 2020 to address COVID-19 and the associated Russia-OPEC price war caused oil and refined product prices, demand, and production levels to decline sharply. Governmental mandates to slow the spread of the virus included travel restrictions, stay-at-home orders, and public gathering bans. Beginning late in the second quarter of 2020, governmental authorities worldwide began lifting restrictions in an effort to jump start economies. Although oil prices saw a slight uptick due to partial business re-openings, a resurgence of the virus led to price volatility during the third quarter of 2020. Oil prices and demand are expected to remain volatile for the foreseeable future as governments reissue restrictive mandates and cold weather becomes a factor in the virus’ spread. We are currently unable to estimate the impact these events will have on our future financial position and results of operations. We believe margins will remain weak for the remainder of 2020 and into 2021. Accordingly, we can provide no assurances that these events will not have a material adverse effect on our financial position or results of operations.

Net Losses and Working Capital Deficits.

Net Losses

Net loss for the three months ended September 30, 2020 was $4.7 million, or a loss of $0.37 per share, compared to net income of $8.2 million, or income of $0.74 per share, for the three months ended September 30, 2019. The increase in net loss was the result of less favorable margins per bbl and lower sales volume in the three-month period ended September 30, 2020 compared to the three-month period ended September 30, 2019. Net loss for the nine months ended September 30, 2020 was $12.2 million, or a loss of $0.98 per share, compared to net income of $5.6 million, or income of $0.51 per share, for the nine months ended September 30, 2019. The significant increase in net loss was the result of less favorable margins per bbl and lower sales volume in the nine-month period ended September 30, 2020 compared to the same period a year earlier. Both the three- and nine-month periods ended September 30, 2019 included a gain on the extinguishment of debt of $9.1 million.

Working Capital Deficits

We had a working capital deficit of $70.6 million and $59.4 million at September 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.8 million and $19.6 million at September 30, 2020 and December 31, 2019, respectively. We had cash and cash equivalents and restricted cash (current portion) of $0.3 million and $0.05 million, respectively, at September 30, 2020. Comparatively, we had cash and cash equivalents and restricted cash (current portion) of $0.07 million and $0.05 million, respectively, at December 31, 2019.

Operating Risks

Successful execution of our business strategy depends on several key factors, including, having adequate working capital to meet operational needs and regulatory requirements, maintaining safe and reliable operations at the Nixon facility, meeting contractual obligations, and having favorable margins on refined products. As discussed under “Going Concern” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations and throughout this report, we are currently unable to estimate the impact the COVID-19 pandemic will have on our future financial position and results of operations. Under earlier state and federal mandates that regulated business closures, our business was deemed as an essential business and, as such, has remained open. As U.S. federal, state, and local officials contemplate renewed restrictive mandates due to resurging coronavirus cases, we expect to continue operating. However, such mandates, while necessary to address the virus, will result in further business and operational disruptions, including demand destruction, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and workforce availability.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 37
Management’s Discussion and Analysis
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Business Strategy

Considering the uncertainty surrounding the COVID-19 pandemic, which has weakened the commodity price environment, we remain focused on safe and reliable operations and cash conservation.

●

Operational Improvements – In the second quarter of 2020, we safely completed a 13-day planned maintenance turnaround and concluded the 5-year capital improvement expansion project of the Nixon facility. The turnaround focused on resolving crude heater issues while the expansion project involved the construction of nearly 1.0 million bbls of new petroleum storage tanks, smaller efficiency improvements to the refinery, and acquisition of refurbished refinery equipment for future deployment. The increase in petroleum storage capacity has helped with de-bottlenecking the Nixon refinery. In the future, additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase the Nixon refinery’s complexity.

●

Cash Conservation – Although in place pre-pandemic, we have further tightened our cash conservation program to manage cash flow and remain competitive in a low oil price environment. This includes optimizing receivables and payables by prioritizing payments, managing inventory to avoid buildup, monitoring discretionary spending, and delaying capital expenditures. Despite this focus, management is keeping in mind the overall safety of our operations and personnel, as well as the impact to our business over the long-term.

As discussed above under “Going Concern” and ”Operating Risks” within this Management’s Discussion and Analysis of Financial Condition and Results of Operations many uncertainties remain with respect to COVID-19 and the global oil markets, and it is currently difficult to accurately forecast and plan future business activities. There can be no assurance that our business strategy will be successful, that Affiliates will continue to fund our working capital needs when we experience working capital deficits, that we will meet regulatory requirements to provide additional financial assurance (supplemental pipeline bonds) and decommission offshore pipelines and platform assets, that we will be able to obtain additional financing on commercially reasonable terms or at all, or that margins on our refined products will be favorable. If Veritex and/or Pilot exercise their rights and remedies under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

We regularly engage in discussions with third parties regarding the possible purchase of assets and operations that are strategic and complementary to our existing operations or to explore new business opportunities. As noted above, management has determined that conditions exist that raise substantial doubt about our ability to continue as a going concern due to defaults under our secured loan agreements with third parties, margin deterioration and volatility, and historic net losses and working capital deficits. A ‘going concern’ opinion could impair our ability to finance our operations through the sale of equity, incurring debt, or other financing alternatives. Our ability to continue as a going concern will depend on sustained positive operating margins and working capital to sustain operations, including the purchase of crude oil and condensate and payments on our secured debt agreements with third parties. If we are unable to achieve these goals, our business would be jeopardized, and we may have to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Refinery Operations

Our refinery operations segment consists of the following assets and operations:

Property	Key Products<br><br><br>Handled	Operating Subsidiary	Location
Nixon<br>facility<br><br><br>● Crude distillation<br>tower (15,000 bpd)<br><br><br>● Petroleum storage<br>tanks<br><br><br>● Loading and<br>unloading facilities<br><br><br>● Land (56<br>acres)	Crude<br>Oil<br><br><br>Refined<br>Products	LE	Nixon,<br>Texas

Capital Improvement Expansion Project. In the second quarter of 2020, we safely completed a 5-year capital improvement expansion project of the Nixon facility. The expansion project involved the construction of nearly 1.0 million bbls of new petroleum storage tanks, smaller efficiency improvements to the refinery, and acquisition of refurbished refinery equipment for future deployment. The increase in petroleum storage capacity has helped with de-bottlenecking the Nixon refinery. In the future, additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase the Nixon refinery’s complexity. The total cost of the project, which was funded through the Veritex loans, was approximately $32.5 million.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 38
Management’s Discussion and Analysis
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Crude Oil and Condensate Supply. Operation of the Nixon refinery depends on our ability to purchase adequate amounts of crude oil and condensate. We have a long-term crude supply agreement in place with Pilot. Under the initial term of the crude supply agreement, Pilot will sell us approximately 24.8 million net bbls of crude oil. Thereafter, the crude supply agreement will continue on a one-year evergreen basis. Effective March 1, 2020, Pilot assigned its rights, title, interest, and obligations in the crude supply agreement to Tartan Oil LLC, a Pilot affiliate. Either party may terminate the crude supply agreement by providing the other party 60 days prior written notice. Pilot also stores crude oil at the Nixon facility under two terminal services agreements. Under the terminal services agreements, Pilot stores crude oil at the Nixon facility at a specified rate per bbl of the storage tank’s shell capacity. Although the initial term of the terminal services agreement expired April 30, 2020, the agreement renewed on a one-year evergreen basis. Either party may terminate the terminal services agreement by providing the other party 60 days prior written notice. However, the terminal services agreement will automatically terminate upon expiration or termination of the crude supply agreement.

Beginning on June 1, 2020, Pilot began applying payment obligations owed to us under the two terminal services agreements against our payment obligations owed to Pilot under the Amended Pilot Line of Credit. For the three and nine-month periods ended September 30, 2020, the setoff amounts totaled $0.6 million and $0.8 million, respectively. See ‘going concern’ within “Note (1)” to our consolidated financial statements for additional disclosures related to defaults in our debt obligations.

Products and Markets. Our market is the Gulf Coast region of the U.S., which is represented by the EIA as Petroleum Administration for PADD 3. We sell our products primarily in the U.S. within PADD 3. Occasionally, we sell refined products to customers that export to Mexico.

The Nixon refinery’s product slate is moderately adjusted based on market demand. We currently produce a single finished product – jet fuel – and several intermediate products, including naphtha, HOBM, and AGO. Our jet fuel is sold to an Affiliate, which is HUBZone certified. Our intermediate products are primarily sold in nearby markets to wholesalers and refiners as a feedstock for further blending and processing. See “Note (3)” and “Note (16)” to our consolidated financial statements for additional disclosures related to Affiliates arrangements and transactions.

Customers. Customers for our refined products include distributors, wholesalers and refineries primarily in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). We have bulk term contracts in place with most of our customers, including month-to-month, six months, and up to one-year terms. Certain of our contracts require our customers to prepay and us to sell fixed quantities and/or minimum quantities of finished and intermediate petroleum products. Many of these arrangements are subject to periodic renegotiation on a forward-looking basis, which could result in higher or lower relative prices on future sales of our refined products. See “Note (5)” to our consolidated financial statements for disclosures related to concentration of risk associated with significant customers.

Competition. Many of our competitors are substantially larger than us and are engaged on a national or international level in many segments of the oil and gas industry, including exploration and production, gathering and transportation, and marketing. These competitors may have greater flexibility in responding to or absorbing market changes occurring in one or more of these business segments. We compete primarily based on cost. Due to the low complexity of our simple “topping unit” refinery, we can be relatively nimble in adjusting our refined products slate because of changing commodity prices, market demand, and refinery operating costs.

Safety and Downtime. Our refinery operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA, the EPA, and comparable state and local requirements. Together, these regulations are designed for personnel safety, process safety management, and risk management, as well as to prevent or minimize the probability and consequences of an accidental release of toxic, reactive, flammable, or explosive chemicals. Storage tanks used for refinery operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our refinery operations have response and control plans, spill prevention and other programs to respond to emergencies.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 39
Management’s Discussion and Analysis
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The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Unplanned shutdowns can occur for a variety of reasons, including voluntary regulatory compliance measures, cessation or suspension by regulatory authorities, or disabled equipment. However, in Texas the most typical reason is excessive heat or power outages from high winds and thunderstorms. Planned turnarounds are used to repair, restore, refurbish, or replace refinery equipment. Refineries typically undergo a major turnaround every three to five years. Since the Nixon refinery was placed back in service in 2012 (commonly referred to as “recommissioning”), turnarounds are needed more frequently for unanticipated maintenance or repairs.

We are particularly vulnerable to disruptions in our operations because all our refining operations are conducted at a single facility. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.

Tolling and Terminaling Operations

Our tolling and terminaling segment consists of the following assets and operations:

Property	Key Products<br><br><br>Handled	Operating Subsidiary	Location
Nixon<br>facility<br><br><br>● Petroleum storage<br>tanks<br><br><br>● Loading and<br>unloading facilities	Crude<br>Oil<br><br><br>Refined<br>Products	LRM,<br>NPS	Nixon,<br>Texas

Capital Improvement Expansion Project. As previously noted, we completed a 5-year capital improvement expansion project of the Nixon facility in the second quarter of 2020. Tolling and terminaling capital improvements primarily related to construction of new petroleum storage tanks to significantly increase petroleum storage capacity. Increased petroleum storage capacity will provide an opportunity to generate additional tolling and terminaling revenue.

Products and Customers. The Nixon facility’s petroleum storage tanks and infrastructure are primarily suited for crude oil and condensate and refined products, such as naphtha, jet fuel, diesel, and fuel oil. Storage customers are typically refiners in the lower portion of the Texas Triangle (the Houston - San Antonio - Dallas/Fort Worth area). Shipments are received and redelivered from within the Nixon facility via pipeline or from third parties via truck. Contract terms range from month-to-month to three years.

Operations Safety. Our tolling and terminal operations are operated in a manner materially consistent with industry safe practices and standards. These operations are subject to regulations under OSHA and comparable state and local regulations. Storage tanks used for terminal operations are designed for crude oil and condensate and refined products, and most are equipped with appropriate controls that minimize emissions and promote safety. Our terminal operations have response and control plans, spill prevention and other programs to respond to emergencies.

Inactive Operations

We own certain other pipeline and facilities assets and have leasehold interests in oil and gas properties. These assets, which are shown below and included in corporate and other, are not operational and are fully impaired.

Property	Operating Subsidiary	Location
Freeport<br>facility<br><br><br>● Crude oil and<br>natural gas separation and dehydration<br><br><br>● Natural gas<br>processing, treating, and redelivery<br><br><br>● Vapor recovery<br>unit<br><br><br>● Two onshore<br>pipelines<br><br><br>● Land (162<br>acres)	BDPL	Freeport,<br>Texas
Offshore<br>Pipelines (Trunk Line and Lateral Lines)	BDPL	Gulf of<br>Mexico
Oil and<br>Gas Leasehold Interests	BDPC	Gulf of<br>Mexico

We fully impaired our pipeline assets at December 31, 2016 and our oil and gas properties at December 31, 2011. Our pipeline and oil and gas properties had no revenue during the three and nine months ended September 30, 2020 and 2019. See “Note (16)” to our consolidated financial statements related to pipelines and platform decommissioning requirements and related risks.

Pipeline and Facilities Safety.

Although our pipeline and facility assets are inactive, they require upkeep and maintenance and are subject to safety regulations under OSHA, PHMSA, BOEM, BSEE, and comparable state and local regulations. We have response and control plans, spill prevention and other programs to respond to emergencies related to these assets.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 40
Management’s Discussion and Analysis
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Results of Operations

A discussion and analysis of the factors contributing to our consolidated financial results of operations is presented below. The financial statements, together with the following information, are intended to provide investors with a reasonable basis for assessing our historical operations, but they should not serve as the only criteria for predicting future performance.

Major Influences on Results of Operations. Our results of operations and liquidity are highly dependent upon the margins that we receive for our refined products. The dollar per bbl 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. Steps taken to address the COVID-19 pandemic globally and nationally and the actions of members of the OPEC and other producer countries with respect to oil production and pricing significantly impacted supply and demand in global oil and gas markets, causing oil prices to decline sharply, as well as other changes to the economic outlook in the near term. Such developments included, but are not limited to, government-imposed temporary business closures and voluntary shelter-at-home directives as well as developments in production discussions between global oil producers, and the effect thereof. Oil prices as well as demand are expected to continue to be volatile as a result of the near-term over-supply and the ongoing COVID-19 pandemic as changes in oil inventories, industry demand and global and national economic performance are reported, and we cannot predict when prices and demand will improve and stabilize. We are currently unable to estimate the impact these events will have on our future financial position and results of operations. Accordingly, we can provide no assurances that these events will not continue to have a material adverse effect on our financial position or results of operations.

How We Evaluate Our Operations. Management uses certain financial and operating measures to analyze segment performance. These measures are significant factors in assessing our operating results and profitability and include: segment contribution margin (deficit), and refining gross profit (deficit) per bbl, tank rental revenue, operation costs and expenses, refinery throughput and production data, and refinery downtime. Segment contribution margin (deficit) and refining gross profit (deficit) per bbl are non-GAAP measures.

Segment Contribution Margin (Deficit) and Refining Gross Profit (Deficit) per Bbl

Segment contribution margin (deficit) is used to evaluate both refinery operations and tolling and terminaling while refining gross profit (deficit) per bbl is a refinery operations benchmark. Both measures supplement our financial information presented in accordance with U.S. GAAP. Management uses these non-GAAP measures to analyze our results of operations, assess internal performance against budgeted and forecasted amounts, and evaluate future impacts to our financial performance as a result of capital investments. Non-GAAP measures have important limitations as analytical tools. These non-GAAP measures, which are defined in our glossary of terms, should not be considered a substitute for GAAP financial measures. We believe these measures may help investors, analysts, lenders, and ratings agencies analyze our results of operations and liquidity in conjunction with our U.S. GAAP results. See “Non-GAAP Reconciliations” within this “Item 2.” and the financial statements within “Item 1.” for a reconciliation of Non-GAAP measures to U.S. GAAP.

Tank Rental Revenue

Tolling and terminaling revenue primarily represents tank rental storage fees associated with customer tank rental agreements. As a result, tank rental revenue is one of the measures management uses to evaluate the performance of our tolling and terminaling business segment.

Operation Costs and Expenses

We manage operating expenses in tandem with meeting environmental and safety requirements and objectives and maintaining the integrity of our assets. Operating expenses are comprised primarily of labor expenses, repairs and other maintenance costs, and utility costs. Expenses for refinery operations generally remain stable across broad ranges of throughput volumes, but they can fluctuate from period to period depending on the mix of activities performed during that period and the timing of those expenses. Operation costs for tolling and terminaling operations are relatively fixed.

Refinery Throughput and Production Data

The amount of revenue we generate from our refinery operations business segment primarily depends on the volumes of crude oil and refined products that we handle through our processing assets and the volume sold to customers. These volumes are affected by the supply and demand of, and demand for, crude oil and refined products in the markets served directly or indirectly by our assets, as well as refinery downtime.

Refinery Downtime

The Nixon refinery periodically experiences planned and unplanned temporary shutdowns. Any scheduled or unscheduled downtime will result in lost margin opportunity, potential increased maintenance expense, and a reduction of refined products inventory, which could reduce our ability to meet our payment obligations.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 41
Management’s Discussion and Analysis
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Consolidated Results. Our consolidated results of operations include certain other unallocated corporate activities and the elimination of intercompany transactions and therefore do not equal the sum of the operating results of our refinery operations and tolling and terminaling business segments.

Three Months Ended September 30, 2020 Versus September 30, 2019 (Q3<br>2020 Versus Q3 2019)<br><br><br>Overview. Net loss for Q3 2020 was $4.7 million, or a loss<br>of $0.37 per share, compared to net income of $8.2 million, or<br>income of $0.74 per share, in Q3 2019. The increase in net loss was<br>the result of unfavorable margins per bbl and significantly lower<br>sales volume. The Q3 2019 included a gain on the extinguishment of<br>debt of $9.1 million.<br><br><br><br><br><br>Total Revenue from Operations. Total revenue from operations for Q3<br>2020 decreased $35.7 million, or 45%, to $42.9 million compared to<br>$78.6 million for Q3 2019. The significant decrease related to a<br>decline in refinery operations revenue as a result of lower<br>commodity pricing per bbl on refined products sold due to market<br>fluctuations associated with the COVID-19 pandemic and<br>significantly lower sales volumes in 2020. Tolling and terminaling<br>revenue decreased $0.1 million between the periods to $1.0<br>million.<br><br><br><br><br><br>Total Cost of Goods Sold. Total cost of goods sold was $44.4<br>million for Q3 2020 compared to $76.2 million for Q3 2019. The<br>$31.8 million decrease related to lower commodity prices per bbl<br>for crude oil and chemicals due to market fluctuations associated<br>with the COVID-19 pandemic and significant refinery downtime in<br>2020, which resulted in lower sales volumes.<br><br><br><br><br><br>Gross Profit (Deficit). Gross deficit was $1.5 million for Q3<br>2020 compared to a gross profit of $2.4 million for Q3 2019. The<br>significant decrease in gross profit between the periods primarily<br>related to lower margins per bbl due to market fluctuations<br>associated with the COVID-19 pandemic in 2020.<br><br><br><br><br><br>General and Administrative Expenses. General and administrative expenses<br>were relatively flat at $0.7 million for both Q3 2020 and Q3<br>2019.<br><br><br><br><br><br>Depletion, Depreciation and Amortization. Depletion, depreciation, and<br>amortization expenses for Q3 2020 totaled approximately $0.7<br>million compared to approximately $0.6 million in Q3 2019. The<br>nearly 9% increase primarily related to placing a petroleum storage<br>tank in service.<br><br><br><br><br><br>Total Other Income (Expense). Total<br>other expense in Q3 2020 was $1.6 million compared to total other<br>income of $7.2 million in Q3 2019, representing a decrease of $8.8<br>million. Total other expense in Q3 2020 primarily related to<br>interest expense associated with our secured loan agreements with<br>Veritex, related-party debt, and the line of credit with Pilot.<br>Total other income in Q3 2019 included a $9.1 million gain on the<br>extinguishment of debt related to the GEL Settlement, which was<br>offset by interest and other expense of $1.9<br>million.	Nine Months Ended September 30, 2020 Versus September 30, 2019 (9<br>Months 2020 Versus 9 Months 2019)<br><br><br>Overview. Net loss for 9 Months 2020 was $12.2 million, or a<br>loss of $0.98 per share, compared to net income of $5.6 million, or<br>income of $0.51 per share, in 9 Months 2019. The significant<br>increase in net loss was the result of unfavorable margins per bbl<br>and significantly lower sales volume. The 9 Months 2019 included a<br>gain on the extinguishment of debt of $9.1 million.<br><br><br><br><br><br>Total Revenue from Operations. Total revenue from operations for 9<br>Months 2020 decreased $102.5 million, or 45%, to $123.4 million<br>compared to $225.9 million for 9 Months 2019. The significant<br>decrease in refinery operations revenue was the result of lower<br>commodity pricing per bbl on refined products sold due to market<br>fluctuations associated with the COVID-19 pandemic and<br>significantly lower sales volumes in 2020. Tolling and terminaling<br>revenue remained relatively flat between the periods at<br>approximately $3.2 million.<br><br><br><br><br><br>Total Cost of Goods Sold. Total cost of goods sold was $126.2<br>million for 9 Months 2020 compared to $220.3 million for 9 Months<br>2019. The $94.1 million, or nearly 43%, decrease related to lower<br>commodity prices per bbl for crude oil and chemicals due to market<br>fluctuations associated with the COVID-19 pandemic and significant<br>refinery downtime in 2020, which resulted in lower sales<br>volumes.<br><br><br><br><br><br>Gross Profit (Deficit). Gross deficit was $2.8 million for 9<br>Months 2020 compared to gross profit of $5.6 million for 9 Months<br>2019. The significant decrease in gross profit between the periods<br>primarily related to lower margins per bbl due to market<br>fluctuations associated with the COVID-19 pandemic in<br>2020.<br><br><br><br><br><br>General and Administrative Expenses. General and administrative expenses<br>were relatively flat at approximately $1.9 million for 9 Months<br>2020 compared to 9 Months 2019.<br><br><br><br><br><br>Depletion, Depreciation and Amortization. Depletion, depreciation, and<br>amortization expenses for 9 Months 2020 totaled $2.0 million<br>compared to $1.9 million for 9 Months 2019. The 7% increase<br>primarily related to placing a petroleum storage tank in<br>service.<br><br><br><br><br><br>Total Other Expense. Total<br>other expense in 9 Months 2020 was $4.9 million compared to total<br>other income of $4.4 million in 9 Months 2019, representing a<br>decrease of $9.3 million. Total other expense in 9 Months 2020<br>primarily related to interest expense associated with our secured<br>loan agreements with Veritex, related-party debt, and the line of<br>credit with Pilot. Total other income in 9 Months 2019 included a<br>$9.1 million gain on the extinguishment of debt related to the GEL<br>Settlement, which was offset by interest and other expense of $4.7<br>million.
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 42
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Management’s Discussion and Analysis
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Refinery Operations. Our refinery operations business segment is owned by LE. Assets within this segment consist of a light sweet-crude, 15,000-bpd crude distillation tower, petroleum storage tanks, loading and unloading facilities, and approximately 56 acres of land. Refinery operations revenue is derived from refined product sales.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
	(in<br>thousands)
Refined<br>product sales	$41,929	$77,537	$120,185	$222,652
Less:<br>Total cost of goods sold	(44,400)	(76,229)	(126,164)	(220,301)
Gross<br>profit (deficit)	(2,471)	1,308	(5,979)	2,351
Sales<br>(Bbls)	1,021	1,181	2,818	3,314
Gross Profit (Deficit) per Bbl	$(2.42)	$1.11	$(2.12)	$0.71
	Three Months Ended		Nine Months Ended
---	---	---	---	---
	September 30,		September 30,
	2020	2019	2020	2019
	(in<br>thousands)
Net revenue (1)	$41,929	$77,537	$120,185	$222,652
Intercompany<br>fees and sales	(595)	(668)	(1,618)	(1,927)
Operation<br>costs and expenses	(43,691)	(76,088)	(124,942)	(219,766)
Segment Contribution Margin (Deficit)	$(2,357)	$781	$(6,375)	$959

(1)

Net revenue excludes intercompany crude sales.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
Calendar	92	92	274	273
Operating	(81)	(90)	(237)	(253)
Refinery Downtime (Days)	11	2	37	20
Refinery Throughput
bpd	11,407	13,312	12,178	13,357
bbls	923,930	1,198,102	2,886,073	3,379,266
Capacity<br>utilization rate	76.0%	88.7%	81.2%	89.0%
Refinery Production
bpd	11,144	12,997	11,885	13,023
bbls	902,641	1,169,745	2,816,746	3,294,914
Capacity<br>utilization rate	74.3%	86.6%	79.2%	86.8%

Q3 2020 Versus Q3 2019

●

Refining gross deficit per bbl was $2.42 for Q3 2020 compared to a gross profit per bbl of $1.11 in Q3 2019, representing a decrease of $3.53 per bbl. The significant decrease related to lower margins due to market fluctuations associated with the COVID-19 pandemic and significant refinery downtime in 2020.

●

Segment contribution margin decreased approximately $3.1 million to a deficit of $2.3 million in Q3 2020 compared to profit of $0.8 million in Q3 2019. The decrease related to lower margins per bbl due to market fluctuations associated with the COVID-19 pandemic and lower sales volume in 2020.

●

Refinery downtime increased significantly to 11 days in Q3 2020 compared to 2 days in Q3 2019. Refinery downtime in 2020 related to a maintenance turnaround, lack of crude due to cash constraints, and an equipment repair while refinery downtime in Q3 2019 primarily related to equipment repairs. Significant refinery downtime in Q3 2020 negatively impacted refinery throughput, refinery production, and capacity utilization rate.

9 Months 2020 Versus 9 Months 2019

●

Refining gross deficit per bbl was $2.12 for 9 Months 2020 compared to gross profit per bbl of $0.71 in 9 Months 2019, representing a decrease of $2.83 per bbl. The significant decrease related to lower margins due to market fluctuations associated with the COVID-19 pandemic and significant refinery downtime in 2020.

●

Segment contribution margin decreased approximately $7.3 million to a loss of $6.3 million in 9 Months 2020 compared to profit of $1.0 million in 9 Months 2019. The significant decrease related to lower margins per bbl due to market fluctuations associated with the COVID-19 pandemic and lower sales volume in 2020.

Refinery downtime increased significantly to 37 days in 9 Months 2020 compared to 20 days in 9 Months 2019. Refinery downtime in 2020 related to a maintenance turnaround, lack of crude due to cash constraints, and an equipment repair, while 2019 downtime related to a maintenance turnaround and equipment repairs. Significant refinery downtime in 9 Months 2020 negatively impacted refinery throughput, refinery production, and capacity utilization rate.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 43
Management’s Discussion and Analysis
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Tolling and Terminaling. Our tolling and terminaling business segment is owned by LRM and NPS. Assets within this segment include petroleum storage tanks and loading and unloading facilities. Tolling and terminaling revenue is derived from tank storage rental fees, tolling and reservation fees for use of the naphtha stabilizer, and fees collected for ancillary services, such as in-tank blending.

	Three Months Ended		Nine Months Ended
	September 30,		September 30,
	2020	2019	2020	2019
	(in<br>thousands)
Net revenue (1)	$1,001	$1,096	$3,214	$3,253
Intercompany<br>fees and sales	595	668	1,618	1,927
Operation<br>costs and expenses	(709)	(285)	(1,222)	(1,012)
Segment Contribution Margin (Deficit)	$887	$1,479	$3,610	$4,168

(1)

Net revenue excludes intercompany crude sales.

Q3 2020 Versus Q3 2019

●

Tolling and terminaling net revenue decreased nearly 9% in Q3 2020 compared to Q3 2019 primarily as a result of decreased fees collected for ancillary services, such as in-tank and tank-to-tank blending.

●

Intercompany fees and sales, which reflect fees associated with an intercompany tolling agreement tied to naphtha volumes, decreased in Q3 2020 compared to Q3 2019. Naphtha sales volumes decreased between the periods.

●

Segment contribution margin in Q3 2020 decreased nearly 40% to approximately $0.9 million compared to approximately $1.5 million Q3 2019. The decrease related to lower intercompany fees and sales tied to naphtha.

9 Months 2020 Versus 9 Months 2019

●

Tolling and terminaling net revenue decreased 1% in 9 Months 2020 compared to 9 Months 2019 primarily as a result of decreased fees collected for ancillary services.

●

Intercompany fees and sales decreased in 9 Months 2020 compared to 9 Months 2019 as a result of lower naphtha sales volumes.

●

Segment contribution margin decreased $0.6 million, or 13%, between the periods. The decrease related to lower intercompany fees and sales tied to naphtha as well as decreased fees associated with ancillary services.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 44
Management’s Discussion and Analysis
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Non-GAAP Reconciliations.

Reconciliation of Segment Contribution Margin<br>(Deficit)
	Three<br>Months Ended September 30,
---	---	---	---	---	---	---	---	---
	2020	2019	2020	2019	2020	2019	2020	2019
	Refinery Operations		Tolling and Terminaling		Corporate and Other		Total
	(in<br>thousands)
Segment<br>contribution margin	$(2,357)	$781	$887	$1,479	$(58)	$(52)	$(1,528)	$2,208
General and administrative<br>expenses(1)	(414)	(292)	(132)	(68)	(307)	(295)	$(853)	$(655)
Depreciation<br>and amortization	(301)	(481)	(338)	(99)	(51)	(52)	$(690)	$(632)
Interest<br>and other non-operating income (expenses), net	(679)	8,329	(599)	(824)	(304)	(259)	$(1,582)	$7,246
Income<br>(loss) before income taxes	(3,751)	8,337	(182)	488	(720)	(658)	(4,653)	8,167
Income<br>tax benefit	-	-	-	-	-	-	-	-
Income (loss) before income taxes	$(3,751)	$8,337	$(182)	$488	$(720)	$(658)	$(4,653)	$8,167
	Nine<br>Months September June 30,
---	---	---	---	---	---	---	---	---
	2020	2019	2020	2019	2020	2019	2020	2019
	Refinery Operations		Tolling and Terminaling		Corporate and Other		Total
	(in<br>thousands)
Segment<br>contribution margin	$(6,375)	$959	$3,610	$4,168	$(164)	$(165)	$(2,929)	$4,962
General and administrative<br>expenses(1)	(1,045)	(898)	(268)	(173)	(1,052)	(833)	$(2,365)	$(1,904)
Depreciation<br>and amortization	(883)	(1,429)	(956)	(297)	(153)	(129)	$(1,992)	$(1,855)
Interest<br>and other non-operating income (expenses), net	(2,171)	6,723	(1,985)	(1,599)	(778)	(712)	$(4,934)	$4,412
Income<br>(loss) before income taxes	(10,474)	5,355	401	2,099	(2,147)	(1,839)	(12,220)	5,615
Income<br>tax benefit	-	-	-	-	(15)	-	(15)	-
Income (loss) before income taxes	$(10,474)	$5,355	$401	$2,099	$(2,162)	$(1,839)	$(12,235)	$5,615

(1)

General and administrative expenses within refinery operations include the LEH operating fee.

Remainder of Page Intentionally Left Blank

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 45
Management’s Discussion and Analysis
---

Capital Resources and Liquidity

Considering this period of extreme economic disruption, combined with the weaker commodity price environment, we remain focused on the safe and reliable operation of the Nixon facility and cash conservation. Our primary cash requirements relate to: (i) purchasing crude oil and condensate for the operation of the Nixon refinery, (ii) reimbursing LEH for direct operating expenses and paying the LEH operating fee under the Amended and Restated Operating Agreement and (iii) servicing debt. In instances where we experience a working capital deficit, we have historically relied on Affiliates to meet our liquidity needs. While we believe that we can fund our operations through revenue from operations and Affiliate financing, we may not be able to, among other things, (i) maintain our current general and administrative spending levels; (ii) fund certain obligations as they become due; and (iii) respond to competitive pressures or unanticipated capital requirements. We cannot provide any assurance that financing will be available to us in the future on acceptable terms.

We had a working capital deficit of $70.6 million and $59.4 million at September 30, 2020 and December 31, 2019, respectively. Excluding the current portion of long-term debt, we had a working capital deficit of $24.8 million and $19.6 million at September 30, 2020 and December 31, 2019, respectively. During the three and nine-month periods ended September 30, 2020, we received two small loans totaling $0.3 million in the aggregate under federal or other governmental programs to support our operations as a result of the COVID-19 pandemic.

The future impact that COVID-19 will have on our business, cash flows, sources of liquidity, financial condition and results of operations will depend on future developments, including, among other things, volatility in the global capital markets, the ultimate geographic spread and severity of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. A sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations. As a result, we may have to seek protection under bankruptcy laws. In such a case, the trading price of our common stock and the value of an investment in our common stock could significantly decrease, which could lead to holders of our common stock losing their investment in our common stock in its entirety.

Debt Overview.

Total Debt
	September 30,	December 31,
---	---	---
	2020	2019
	(in<br>thousands)
Veritex<br>Loans
LE Term Loan Due 2034 (in<br>default)	$22,424	$21,776
LRM Term Loan Due 2034 (in<br>default)	9,299	9,031
Amended Pilot Line of Credit (in<br>default)	9,724	11,786
Notre Dame Debt (in<br>default)	9,214	8,617
Related-Party<br>Debt
BDPL Loan Agreement (in<br>default)	6,654	6,174
March Ingleside Note (in<br>default)	1,067	1,004
March Carroll Note (in<br>default)	1,373	997
June LEH Note (in<br>default)	5,733	-
LE<br>Term Loan Due 2050	150	-
NPS<br>Term Loan Due 2050	150	-
Total<br>Debt	65,788	59,385
Less:<br>Current portion of long-term debt, net	(55,438)	(51,301)
Less:<br>Unamortized debt issue costs	(1,781)	(2,096)
Less: Accrued interest payable (in<br>default)	(8,269)	(5,988)
	$300	$-

Net cash provided by financing activities was $3.5 million in 9 Months 2020 compared to $11.3 million in 9 Months 2019. Net proceeds from the issuance of debt was $0.3 million in 9 Months 2020 compared to $12.4 million in 9 Months 2019.

Principal payments on long-term debt totaled $0.9 million in Q3 2020 compared to $0.8 million in Q3 2019. Principal payments on long-term debt totaled $2.4 million in 9 Months 2020 compared to $1.3 million in 9 Months 2019. As of the filing date of this report, we are current on required monthly payments under our secured loan agreements with Veritex, but other defaults remain outstanding as noted below. No payments have been made under the subordinated Notre Dame Debt.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 46
Management’s Discussion and Analysis
---

Debt Defaults. The majority of our debt is in default. Defaults under our secured loan agreements with third parties include Veritex financial covenant violations, a Pilot event of default and debt acceleration, and a Notre Dame Debt event of default. We also have defaults under secured and unsecured related-party debt. See Going Concern within this Management’s Discussion and Analysis section, as well as “Note (1),” “Note (3),” “Note (10),” and “Note (11)” to our consolidated financial statements for additional disclosures related to Affiliate and third-party debt agreements, including debt guarantees, and defaults in our debt obligations.

Concentration of Customers. Our operations have a concentration of customers who are refined petroleum product wholesalers. This concentration of customers may impact our overall exposure to credit risk, either positively or negatively, in that these customers may be similarly affected by changes in economic or other conditions including the uncertainties concerning COVID-19 and volatility in the global oil markets. Historically, we have not had any significant problems collecting our accounts receivable.

Contractual Obligations.

Related-Party

Agreement/Transaction	Parties	Type	Effective Date	Interest Rate	Key Terms
Amended<br>and Restated Guaranty Fee<br><br><br>Agreement	Jonathan<br>Carroll - LE	Debt	04/01/2017	2.00%	Tied to<br>payoff of LE $25 million Veritex loan; payments 50% cash, 50%<br>Common Stock
Amended<br>and Restated Guaranty Fee<br><br><br>Agreement	Jonathan<br>Carroll - LRM	Debt	04/01/2017	2.00%	Tied to<br>payoff of LRM $10 million Veritex loan; payments 50% cash, 50%<br>Common Stock
March<br>Carroll Note (in<br>default)	Jonathan<br>Carroll – Blue Dolphin	Debt	03/31/2017	8.00%	Blue<br>Dolphin working capital; matured 01/01/2019; interest still<br>accruing
March<br>Ingleside Note (in<br>default)	Ingleside<br>– Blue Dolphin	Debt	03/31/2017	8.00%	Blue<br>Dolphin working capital; reflects amounts owed to Ingleside under<br>previous Amended and Restated Tank Lease Agreement; matured<br>01/01/2019; interest still accruing
June<br>LEH Note (in<br>default)	LEH<br>– Blue Dolphin	Debt	03/31/2017	8.00%	Blue<br>Dolphin working capital; reflects amounts owed to LEH under the<br>Amended and Restated Operating Agreement; reflects amounts owed to<br>Jonathan Carroll under guaranty fee agreements; matured 01/01/2019;<br>interest still accruing
BDPL-LEH<br>Loan Agreement (in<br>default)	LEH -<br>BDPL	Debt	08/15/2016	16.00%	2-year<br>term; $4.0 million principal amount; $0.5 million annual payment;<br>proceeds used for working capital; no financial maintenance<br>covenants; secured by certain BDPL property

Third-Party Debt

Loan Description	Parties	Original Principal Amount<br><br><br>(in millions)	Maturity Date	Monthly Principal and Interest Payment	Interest Rate	Loan Purpose
Veritex<br>Loans(1)
LE Term<br>Loan Due 2034 (in<br>default)	LE-Veritex	$25.0	Jun<br>2034	$0.2<br>million	WSJ<br>Prime + 2.75%	Refinance<br>loan; capital improvements
LRM<br>Term Loan Due 2034<br><br><br>(in default)	LRM-Veritex	$10.0	Dec<br>2034	$0.1<br>million	WSJ<br>Prime + 2.75%	Refinance<br>bridge loan; capital improvements
Notre<br>Dame Debt (in<br>default)(2)(3)	LE-Kissick	$11.7	Jan<br>2018	No<br>payments to date; payment rights subordinated	16.00%	Working<br>capital; reduced balance of GEL Final Arbitration<br>Award
Amended<br>Pilot Line of Credit<br><br><br>(in default)	NPS-Pilot	$13.0	May<br>2020	---	14.00%	GEL<br>Settlement Payment, NPS purchase of crude oil from Pilot, and<br>working capital
SBA<br>EIDLs
LE Term<br>Loan Due 2050(4)	LE-SBA	$0.15	Aug<br>2050	$0.0007<br>million	3.75%	Working<br>capital
NPS<br>Term Loan Due 2050(4)	NPS-SBA	$0.15	Aug<br>2050	$0.0007<br>million	3.75%	Working<br>capital

(1)

(2)

(3)

(4)

Payments are deferred for the first twelve (12) months of the loan; interest accrues during the deferral period. SBA EIDLs are not forgivable.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 47
Management’s Discussion and Analysis
---

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)

To cover the various obligations of lessees and rights-of-way holders operating in federal waters of the Gulf of Mexico, BOEM evaluates an operator’s financial ability to carry out present and future obligations to determine whether the operator must provide additional security beyond the statutory bonding requirements. Such obligations include the cost of plugging and abandoning wells and decommissioning pipelines and platforms at the end of production or service activities. Once plugging and abandonment work has been completed, the collateral backing the financial assurance is released by BOEM.

BSEE Offshore Pipelines and Platform Decommissioning

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 48
Management’s Discussion and Analysis
---

Sources and Use of Cash.

Components of Cash Flows
	Three<br>Months Ended September 30,		Nine<br>Months Ended September 30,
---	---	---	---	---
	2020	2019	2020	2019
	(in<br>thousands)
Cash Flows Provided By (Used In):
Operating<br>activities	$1,878	$832	$(2,196)	$(10,335)
Investing<br>activities	(177)	(964)	(1,085)	(1,458)
Financing<br>activities	(1,463)	(655)	3,451	11,308
Increase<br>(Decrease) in Cash and Cash Equivalents	$238	$(787)	$170	$(485)

Cash Flow 2020 Compared to 2019

We had cash flow from operations of approximately $1.8 million for Q3 2020 compared to cash flow of approximately $0.8 million for Q3 2019. The approximate $1.0 million increase in cash flow from operations between the periods related to a decline in inventory levels and increases in accounts payable. The cash flow deficit for 9 Months 2020 primarily related to loss from operations. The cash flow deficit from operations for 9 Months 2019 was primarily the result of payments toward the accrued arbitration award with GEL.

2020 Capital Expenditures

During Q3 2020, capital expenditures totaled $0.2 million compared to $1.0 million during Q3 2019. During 9 Months 2020, capital expenditures totaled $1.1 million compared to $1.5 million during 9 Months 2019. Expenditures during 9 Months 2020 primarily related to:

●

Completion of Nixon Facility Expansion Project – We completed a 5-year expansion project involving the construction of nearly 1.0 million bbls of new petroleum storage tanks, smaller efficiency improvements to the refinery, and acquisition of refurbished refinery equipment for future deployment. The increase in petroleum storage capacity has helped with de-bottlenecking the Nixon refinery. In the future, additional petroleum storage capacity will allow for increased refinery throughput of up to approximately 30,000 bpd while deployment of various refurbished refinery equipment will help improve processing capacity and increase the Nixon refinery’s complexity. The total cost of the project, which was funded through the Veritex loans, was approximately $32.5 million.

●

Maintenance Turnaround and Repairs – We completed a 13-day, planned maintenance turnaround that primarily involved replacing a key component of the crude heater. We also made equipment repairs. These costs were expensed as maintenance and repair.

We account for our capital expenditures in accordance with GAAP. We also classify capital expenditures as ‘maintenance’ if it maintains capacity or throughput or as ‘expansion’ if it increases capacity or throughput capabilities. Although classification is generally a straightforward process, in certain circumstances the determination is a matter of management judgment and discretion.

We budget for maintenance capital expenditures throughout the year on a project-by-project basis. Projects are determined based on maintaining safe and efficient operations, meeting customer needs, complying with operating policies and applicable law, and producing economic benefits, such as increasing efficiency and/or lowering future expenses.

Future Expected Capital Expenditures

We remain focused on the safe and reliable operation of the Nixon facility. In view of the uncertainty surrounding the COVID-19 pandemic, combined with the weaker commodity price environment, we anticipate new capital expenditures to be minimal over the next twelve (12) months. However, capital spending using remaining funds under a loan from Veritex will continue until the funds are depleted. Unused amounts under the Veritex loans are reflected in restricted cash (current and non-current portions) on our consolidated balance sheets. See “Note (10)” to our consolidated financial statements for additional disclosures related to borrowings for capital spending.

Off-Balance Sheet Arrangements. None.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 49
Management’s Discussion and Analysis and Internal<br>Controls
---

Accounting Standards.

Critical Accounting Policies and Estimates

Our significant accounting policies and recent accounting developments are described in “Note (2)” to our consolidated financial statements. The ongoing COVID-19 pandemic and certain developments in the global oil markets have impacted and continue to impact our business. Our business was designated as an essential business and, as such, has remained open. We have instituted various initiatives throughout the company as part of our business continuity programs, and we are working to mitigate risk when disruptions occur. The uncertainty around the availability and prices of crude oil, the prices and demand for our refined products, and the general business environment is expected to continue through the remainder of the year and beyond. Given diminished expectations for the global economy, and speculation regarding a prolonged slowdown and recession, we are unable to predict the ultimate economic impact of COVID-19 on our business.

New Accounting Standards and Disclosures

New accounting standards and disclosures are discussed in “Note (2)” to our consolidated financial statements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision of, and with the participation of our management, including our Chief Executive Officer (principal executive officer and principal financial officer), we conducted an evaluation of the effectiveness of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). As previously reported in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019, based on our evaluation, our Chief Executive Officer (principal executive officer, principal financial officer, and principal accounting officer) concluded that our disclosure controls and procedures were ineffective due to certain material weaknesses and/or significant deficiencies as described below:

●	Significant deficiency – There is currently not a process in<br>place for formal review of manual journal entries.
●	Material weakness – The company currently lacks resources to<br>handle complex accounting transactions. This can result in errors<br>related to the recording, disclosure and presentation of<br>consolidated financial information in quarterly, annual, and other<br>filings.

These disclosure controls and procedures remained ineffective as of the end of the period covered by this Quarterly Report. Management continues to evaluate internal processes to take corrective actions. Corrective actions may include implementing formal policies, improving processes, documenting procedures, and better defining segregation of duties to improve financial reporting. These actions will be subject to ongoing senior management review, as well as Audit Committee oversight. Although we plan to complete remediation efforts as quickly as possible, we cannot at this time estimate how long it will take, and our initiatives may not prove to be successful in fully remediating the identified weakness and deficiency.

Changes in Internal Control over Financial Reporting

There have been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the three and nine months ended September 30, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. See the above section “Evaluation of Disclosure Controls and Procedures” for a discussion related to current ineffective disclosure controls and procedures.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 50
Legal Proceedings
---

PART II

ITEM 1. LEGAL PROCEEDINGS

BOEM Additional Financial Assurance (Supplemental Pipeline Bonds)

Resolved - GEL Settlement

As previously disclosed, GEL was awarded the GEL Final Arbitration Award in the aggregate amount of $31.3 million. In July 2018, the Lazarus Parties and GEL entered into the GEL Settlement Agreement. The GEL Settlement Agreement was subsequently amended five (5) times to extend the GEL Settlement Payment Date and/or modify certain terms related to the GEL Interim Payments or the GEL Settlement Payment. During the period September 2017 to August 2019, GEL received the following amounts from the Lazarus Parties to reduce the outstanding balance of the GEL Final Arbitration Award:

	(in<br>millions)
Initial payment<br>(September 2017)	$3.7
GEL Interim<br>Payments (July 2018 to April 2019)	8.0
Settlement Payment<br>(Multiple Payments May 7 to 10, 2019)	10.0
Deferred Interim<br>Installment Payments (June 2019 to August 2019)	0.5
	$22.2

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 51
Legal Proceedings (Continued) and Risk Factors
---

Other Legal Matters

From time to time, we are involved in legal matters incidental to the routine operation of our business. Such legal matters include mechanic’s liens, contract-related disputes, and administrative proceedings. As of the filing date of this report, we were involved in a contract-related dispute with a counter-party. Management is working to resolve the dispute amicably, however, the potential outcome is unknown. Management does not believe that the contract-related dispute or other matters will have a material adverse effect on our financial position, earnings, or cash flows. However, there can be no assurance that management's efforts will result in a manageable outcome. If Veritex and/or Pilot exercise their rights and remedies due to defaults under our secured loan agreements, our business, financial condition, and results of operations will be materially adversely affected.

ITEM 1A. RISK FACTORS

In addition to the other information set forth in this Quarterly Report, careful consideration should be given to the risk factors discussed under “Part I, Item 1A. Risk Factors” and elsewhere in our Annual Report for the fiscal year ended December 31, 2019 and our Quarterly Reports for the three month periods ended March 31, 2020 and June 30, 2020 as filed with the SEC. These risks and uncertainties could materially and adversely affect our business, financial condition and results of operations. Our operations could also be affected by additional factors that are not presently known to us or by factors that we currently consider immaterial to our business. Except as noted below, there have been no material changes in our assessment of our risk factors from those set forth in our Annual Report for the fiscal year ended December 31, 2019, as well as our Quarterly Reports for the three month periods ended March 31, 2020 and June 30, 2020.

The ongoing COVID-19 pandemic, and actions taken in response thereto, as well as certain developments in the global oil markets have had, and will likely continue to have, material adverse consequences for general economic, financial and business conditions, and could materially and adversely affect our business, financial condition, results of operations and cash flows and those of our customers and suppliers.

The ongoing COVID-19 pandemic, and actions taken in response thereto, have resulted in significant economic disruption globally, including in the United States. Governmental authorities around the world have taken actions, such as stay-at-home orders and other social distancing measures, to prevent the spread of COVID-19. These measures have resulted in significant business and operational disruptions, including demand destruction, business closures, liquidity strains, supply chain challenges, travel restrictions, controls on in-person gathering, and limitations on workforce availability. In some countries, including the U.S., recent increases in COVID-19 cases have renewed fears of a second wave of COVID-19. As a result, some countries have reinstated government-imposed restrictions, although to a much lesser extent than in March and April 2020, in order to stem the spread of the virus. Heightened levels of uncertainty have renewed downward pressure on crude oil and other commodity prices, and supply and demand are expected to remain volatile into 2021.

Concerns over the negative effects of COVID-19 on economic and business prospects across the world have contributed to increased market and oil price volatility and have diminished expectations for the global economy. These factors, coupled with the emergence of decreasing business and consumer confidence and increasing unemployment resulting from the COVID-19 outbreak and the recent abrupt oil price decline, may precipitate a prolonged economic slowdown and recession. Our refinery utilization and operating margins and other aspects of our business have been adversely impacted by these developments. Any such prolonged period of economic slowdown or recession, or a protracted period of depressed prices for crude oil and our refined products or reduced margins for the refined products we produce and sell could have significant adverse consequences for our financial condition and the financial condition of our customers and suppliers, and could diminish our liquidity and negatively affect our ability to obtain adequate crude oil volumes and to market certain of our products at favorable prices, or at all.

Due to declines in the market prices of products held in our inventories, in future periods we may record an inventory write-down to cost of goods sold to value certain of our inventories at the lower of cost or market, which charge may be material. This expected inventory valuation write-down will have a negative effect on our earnings. Depending on future movements of refined product prices, future inventory valuation adjustments could have a negative or positive effect on our financial performance. In addition, a sustained period of low crude oil prices may also result in significant financial constraints on our crude oil supplier, which could result in long term crude oil supply constraints and higher transportation costs for our business. Such conditions could also result in an increased risk that our customers may be unable to fully fulfill their obligations in a timely manner, or at all. Any of the foregoing events or conditions, or other unforeseen consequences of COVID-19, could significantly adversely affect our business and financial condition and the business and financial condition of our customers.

The future impact that COVID-19 will have on our business, results of operations, financial condition, cash flows, and stock price will depend on future developments, including, among others, volatility in the global capital markets, the ultimate geographic spread and severity of the virus, the consequences of governmental and other measures designed to prevent the spread of the virus, the development of effective treatments, the duration of the outbreak, actions taken by governmental authorities, customers, suppliers and other third parties, workforce availability, and the timing and extent to which normal economic and operating conditions resume. A sustained period of low crude oil prices due to market volatility associated with the COVID-19 pandemic may also result in significant financial constraints on producers, which could result in long term crude oil supply constraints and increased transportation costs. A failure to acquire crude oil and condensate when needed will have a material effect on our business results and operations.

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 52
Unregistered Sales of Equity Securities and Exhibits
---

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

See “Part I, Item. 1. Financial Statements – Note (10)” and “Note (11)” for disclosures related to defaults on our debt.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.

OTHER INFORMATION

SBA EIDLs

On August 29, 2020, LE and NPS executed the standard loan documents required to secure an EIDL through the SBA for COVID-19 pandemic relief. The principal amount of the loans is $0.3 million in the aggregate. Proceeds were used for working capital purposes. Interest on each loan accrues at the rate of 3.75% per annum and will accrue from the date of loans. Installment payments, including principal and interest, total $.001 million per month in the aggregate and are due beginning twelve (12) months from the date of the loans. The balance of principal and interest is payable over a 30-year term. SBA EIDLs are not forgivable.

ITEM 6. EXHIBITS

Exhibits Index

No.	Description
10.1	Loan<br>Authorization and Agreement between Nixon Product Storage, LLC and<br>the Small Business Administration dated August 29,<br>2020.
10.2	Loan<br>Authorization and Agreement between Lazarus Energy, LLC and the<br>Small Business Administration dated August 29, 2020.
31.1*	Jonathan<br>P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as<br>adopted pursuant to section 302 of the Sarbanes-Oxley Act of<br>2002.
32.1*	Jonathan<br>P. Carroll Certification Pursuant to 18 U.S.C. Section 1350, as<br>adopted pursuant to section 906 of the Sarbanes-Oxley Act of<br>2002.
101.INS*	XBRL<br>Instance Document.
101.SCH*	XBRL<br>Taxonomy Schema Document.
101.CAL*	XBRL<br>Calculation Linkbase Document.
101.LAB*	XBRL<br>Label Linkbase Document.
101.PRE*	XBRL<br>Presentation Linkbase Document.
101.DEF*	XBRL<br>Definition Linkbase Document.

Filed herewith

Blue<br>Dolphin Energy Company	September 30, 2020 │Page 53
Signature Page
---

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Quarterly Report to be signed on its behalf by the undersigned, thereunto duly authorized.

	BLUE DOLPHIN ENERGY COMPANY
	(Registrant)
November<br>16, 2020	By:	/s/<br>JONATHAN P. CARROLL
		Jonathan<br>P. Carroll<br><br><br>Chief<br>Executive Officer, President,<br><br><br>Assistant<br>Treasurer and Secretary<br><br><br>(Principal<br>Executive Officer, Principal Financial Officer, and Principal<br>Accounting Officer)
Blue<br>Dolphin Energy Company	September 30, 2020 │Page 54
---	---

bdco_ex101

SBA Loan #7467248205

Application #3313846826

LOAN AUTHORIZATION AND AGREEMENT (LA&A)

A PROPERLY SIGNED DOCUMENT IS

REQUIRED PRIOR TO ANY

DISBURSEMENT

CAREFULLY READ THE LA&A: This document describes the terms and conditions of your loan. It is your responsibility to comply with ALL the terms and conditions of your loan.

SIGNING THE LA&A: All borrowers must sign the LA&A. ● Sign your name exactly as it appears on the LA&A. If typed incorrectly, you should sign with the correct spelling. ● If your middle initial appears on the signature line, sign with your middle initial. ● If a suffix appears on the signature line, such as Sr. or Jr., sign with your suffix. ● Corporate Signatories: Authorized representatives should sign the signature page. Your signature represents your agreement to comply with the terms and conditions of the loan.

---

Ref 50 30

SBA Loan #7467248205

Application #3313846826

U.S. Small Business Administration

Economic Injury Disaster Loan

LOAN AUTHORIZATION AND AGREEMENT

Date: 08.29.2020 (Effective Date)

On the above date, this Administration (SBA) authorized (under Section 7(b) of the Small Business Act, as amended) a Loan (SBA Loan #7467248205) to NIXON PRODUCT STORAGE LLC (Borrower) of 801 TRAVIS ST STE 2100 HOUSTON Texas 77002 in the amount of one hundred and fifty thousand and 00/100 Dollars ($150,000.00), upon the following conditions:

PAYMENT

●

Installment payments, including principal and interest, of $731.00 Monthly, will begin Twelve (12) months from the date of the promissory Note. The balance of principal and interest will be payable Thirty (30) years from the date of the promissory Note.

INTEREST

●

Interest will accrue at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date(s) of each advance.

PAYMENT TERMS

●

Each payment will be applied first to interest accrued to the date of receipt of each payment, and the balance, if any, will be applied to principal.

●

Each payment will be made when due even if at that time the full amount of the Loan has not yet been advanced or the authorized amount of the Loan has been reduced.

COLLATERAL

●

For loan amounts of greater than $25,000, Borrower hereby grants to SBA, the secured party hereunder, a continuing security interest in and to any and all “Collateral” as described herein to secure payment and performance of all debts, liabilities and obligations of Borrower to SBA hereunder without limitation, including but not limited to all interest, other fees and expenses (all hereinafter called “Obligations”). The Collateral includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

●

For loan amounts of $25,000 or less, SBA is not taking a security interest in any collateral. Page 2 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

REQUIREMENTS RELATIVE TO COLLATERAL

●

Borrower will not sell or transfer any collateral (except normal inventory turnover in the ordinary course of business) described in the "Collateral" paragraph hereof without the prior written consent of SBA.

USE OF LOAN PROCEEDS

●

Borrower will use all the proceeds of this Loan solely as working capital to alleviate economic injury caused by disaster occurring in the month of January 31, 2020 and continuing thereafter and to pay Uniform Commercial Code (UCC) lien filing fees and a third-party UCC handling charge of $100 which will be deducted from the Loan amount stated above.

REQUIREMENTS FOR USE OF LOAN PROCEEDS AND RECEIPTS

●

Borrower will obtain and itemize receipts (paid receipts, paid invoices or cancelled checks) and contracts for all Loan funds spent and retain these receipts for 3 years from the date of the final disbursement. Prior to each subsequent disbursement (if any) and whenever requested by SBA, Borrower will submit to SBA such

itemization together with copies of the receipts.

●

Borrower will not use, directly or indirectly, any portion of the proceeds of this Loan to relocate without the prior written permission of SBA. The law prohibits the use of any portion of the proceeds of this Loan for voluntary relocation from the business area in which the disaster occurred. To request SBA's prior written permission to relocate, Borrower will present to SBA the reasons therefore and a description or address of the relocation site. Determinations of (1) whether a relocation is voluntary or otherwise, and (2) whether any site other than the disaster-affected location is within the business area in which the disaster occurred, will be made solely by SBA.

●

Borrower will, to the extent feasible, purchase only American-made equipment and products with the proceeds of this Loan.

●

Borrower will make any request for a loan increase for additional disaster-related damages as soon as possible after the need for a loan increase is discovered. The SBA will not consider a request for a loan increase received more than two (2) years from the date of loan approval unless, in the sole discretion of the SBA, there are extraordinary and unforeseeable circumstances beyond the control of the borrower.

DEADLINE FOR RETURN OF LOAN CLOSING DOCUMENTS

●

Borrower will sign and return the loan closing documents to SBA within 2 months of the date of this Loan Authorization and Agreement. By notifying the Borrower in writing, SBA may cancel this Loan if the Borrower fails to meet this requirement. The Borrower may submit and the SBA may, in its sole discretion, accept documents after 2 months of the date of this Loan Authorization and Agreement.

COMPENSATION FROM OTHER SOURCES

●

Eligibility for this disaster Loan is limited to disaster losses that are not compensated by other sources. Other sources include but are not limited to: (1) proceeds of policies of insurance or other indemnifications, (2) grants or other reimbursement (including loans) from government agencies or private organizations, (3)

Page 3 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

claims for civil liability against other individuals, organizations or governmental entities, and (4) salvage (including any sale or re-use) of items of damaged property.

●

Borrower will promptly notify SBA of the existence and status of any claim or application for such other compensation, and of the receipt of any such compensation, and Borrower will promptly submit the proceeds of same (not exceeding the outstanding balance of this Loan) to SBA.

●

Borrower hereby assigns to SBA the proceeds of any such compensation from other sources and authorizes the payor of same to deliver said proceeds to SBA at such time and place as SBA shall designate.

●

SBA will in its sole discretion determine whether any such compensation from other sources is a duplication of benefits. SBA will use the proceeds of any such duplication to reduce the outstanding balance of this Loan, and Borrower agrees that such proceeds will not be applied in lieu of scheduled payments.

DUTY TO MAINTAIN HAZARD INSURANCE

●

Within 12 months from the date of this Loan Authorization and Agreement the Borrower will provide proof of an active and in effect hazard insurance policy including fire, lightning, and extended coverage on all items used to secure this loan to at least 80% of the insurable value. Borrower will not cancel such coverage and will maintain such coverage throughout the entire term of this Loan. BORROWER MAY NOT BE ELIGIBLE FOR EITHER ANY FUTURE DISASTER ASSISTANCE OR SBA FINANCIAL ASSISTANCE IF THIS INSURANCE IS NOT MAINTAINED AS STIPULATED HEREIN THROUGHOUT THE ENTIRE TERM OF THIS LOAN. Please submit proof of insurance to: U.S. Small Business Administration, Office of Disaster Assistance, 14925 Kingsport Rd, Fort Worth, TX. 76155.

BOOKS AND RECORDS

●

Borrower will maintain current and proper books of account in a manner satisfactory to SBA for the most recent

5 years until 3 years after the date of maturity, including extensions, or the date this Loan is paid in full, whichever occurs first. Such books will include Borrower's financial and operating statements, insurance policies, tax returns and related filings, records of earnings distributed and dividends paid and records of compensation to officers, directors, holders of 10% or more of Borrower's capital stock, members, partners and proprietors.

●

Borrower authorizes SBA to make or cause to be made, at Borrower's expense and in such a manner and at such times as SBA may require: (1) inspections and audits of any books, records and paper in the custody or control of Borrower or others relating to Borrower's financial or business conditions, including the making of copies thereof and extracts therefrom, and (2) inspections and appraisals of any of Borrower's assets.

●

Borrower will furnish to SBA, not later than 3 months following the expiration of Borrower's fiscal year and in such form as SBA may require, Borrower's financial statements.

●

Upon written request of SBA, Borrower will accompany such statements with an 'Accountant's Review Report' prepared by an independent public accountant at Borrower's expense.

●

Borrower authorizes all Federal, State and municipal authorities to furnish reports of examination, records and other information relating to the conditions and affairs of Borrower and any desired information from such reports, returns, files, and records of such authorities upon request of SBA.

Page 4 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

LIMITS ON DISTRIBUTION OF ASSETS

●

Borrower will not, without the prior written consent of SBA, make any distribution of Borrower’s assets, or give any preferential treatment, make any advance, directly or indirectly, by way of loan, gift, bonus, or otherwise, to any owner or partner or any of its employees, or to any company directly or indirectly controlling or affiliated with or controlled by Borrower, or any other company.

EQUAL OPPORTUNITY REQUIREMENT

●

If Borrower has or intends to have employees, Borrower will post SBA Form 722, Equal Opportunity Poster (copy attached), in Borrower's place of business where it will be clearly visible to employees, applicants for employment, and the general public.

DISCLOSURE OF LOBBYING ACTIVITIES

●

Borrower agrees to the attached Certification Regarding Lobbying Activities

BORROWER’S CERTIFICATIONS

Borrower certifies that:

●

There has been no substantial adverse change in Borrower's financial condition (and organization, in case of a business borrower) since the date of the application for this Loan. (Adverse changes include, but are not limited to: judgment liens, tax liens, mechanic's liens, bankruptcy, financial reverses, arrest or conviction of felony, etc.)

●

No fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on SBA Form 5 Business Disaster Loan Application'; SBA Form 3501 COVID-19 Economic Injury Disaster Loan Application; or SBA Form 159, 'Compensation Agreement'. All fees not approved by SBA are prohibited.

●

All representations in the Borrower's Loan application (including all supplementary submissions) are true, correct and complete and are offered to induce SBA to make this Loan.

●

No claim or application for any other compensation for disaster losses has been submitted to or requested of any source, and no such other compensation has been received, other than that which Borrower has fully disclosed to SBA.

●

Neither the Borrower nor, if the Borrower is a business, any principal who owns at least 50% of the Borrower, is delinquent more than 60 days under the terms of any: (a) administrative order; (b) court order; or (c) repayment agreement that requires payment of child support.

●

Borrower certifies that no fees have been paid, directly or indirectly, to any representative (attorney, accountant, etc.) for services provided or to be provided in connection with applying for or closing this Loan, other than those reported on the Loan Application. All fees not approved by SBA are prohibited. If an Applicant chooses to employ an Agent, the compensation an Agent charges to and that is paid by the Applicant must bear a necessary and reasonable relationship to the services actually performed and must be comparable to those charged by other Agents in the geographical area. Compensation cannot be contingent on loan approval. In addition, compensation must not include any expenses which are deemed by SBA to be unreasonable for services actually performed or expenses actually incurred. Compensation must not include

Page 5 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

charges prohibited in 13 CFR 103 or SOP 50-30, Appendix 1. If the compensation exceeds $500 for a disaster home loan or $2,500 for a disaster business loan, Borrower must fill out the Compensation Agreement Form 159D which will be provided for Borrower upon request or can be found on the SBA website.

●

Borrower certifies, to the best of its, his or her knowledge and belief, that the certifications and representations in the attached Certification Regarding Lobbying are true, correct and complete and are offered to induce SBA to make this Loan.

CIVIL AND CRIMINAL PENALTIES

●

Whoever wrongfully misapplies the proceeds of an SBA disaster loan shall be civilly liable to the Administrator in an amount equal to one-and-one half times the original principal amount of the loan under 15 U.S.C. 636(b). In addition, any false statement or misrepresentation to SBA may result in criminal, civil or administrative sanctions including, but not limited to: 1) fines, imprisonment or both, under 15 U.S.C. 645, 18 U.S.C. 1001, 18 U.S.C. 1014, 18 U.S.C. 1040, 18 U.S.C. 3571, and any other applicable laws; 2) treble damages and civil penalties under the False Claims Act, 31 U.S.C. 3729; 3) double damages and civil penalties under the Program Fraud Civil Remedies Act, 31 U.S.C. 3802; and 4) suspension and/or debarment from all Federal procurement and non-procurement transactions. Statutory fines may increase if amended by the Federal Civil Penalties Inflation Adjustment Act Improvements Act of 2015.

RESULT OF VIOLATION OF THIS LOAN AUTHORIZATION AND AGREEMENT

●

If Borrower violates any of the terms or conditions of this Loan Authorization and Agreement, the Loan will be in default and SBA may declare all or any part of the indebtedness immediately due and payable. SBA's failure to exercise its rights under this paragraph will not constitute a waiver.

●

A default (or any violation of any of the terms and conditions) of any SBA Loan(s) to Borrower and/or its affiliates will be considered a default of all such Loan(s).

DISBURSEMENT OF THE LOAN

●

Disbursements will be made by and at the discretion of SBA Counsel, in accordance with this Loan Authorization and Agreement and the general requirements of SBA.

●

Disbursements may be made in increments as needed.

●

Other conditions may be imposed by SBA pursuant to general requirements of SBA.

●

Disbursement may be withheld if, in SBA's sole discretion, there has been an adverse change in Borrower's financial condition or in any other material fact represented in the Loan application, or if Borrower fails to meet any of the terms or conditions of this Loan Authorization and Agreement.

●

NO DISBURSEMENT WILL BE MADE LATER THAN 6 MONTHS FROM THE DATE OF THIS LOAN AUTHORIZATION AND AGREEMENT UNLESS SBA, IN ITS SOLE DISCRETION, EXTENDS THIS DISBURSEMENT PERIOD.

Page 6 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

PARTIES AFFECTED

●

This Loan Authorization and Agreement will be binding upon Borrower and Borrower's successors and assigns and will inure to the benefit of SBA and its successors and assigns.

RESOLUTION OF BOARD OF DIRECTORS

●

Borrower shall, within 180 days of receiving any disbursement of this Loan, submit the appropriate SBA Certificate and/or Resolution to the U.S. Small Business Administration, Office of Disaster Assistance, 14925 Kingsport Rd, Fort Worth, TX. 76155.

ENFORCEABILITY

●

This Loan Authorization and Agreement is legally binding, enforceable and approved upon Borrower’s signature, the SBA’s approval and the Loan Proceeds being issued to Borrower by a government issued check or by electronic debit of the Loan Proceeds to Borrower’ banking account provided by Borrower in application for this Loan.

<br><br><br>James<br>E. Rivera<br><br><br><br><br><br>Associate Administrator<br><br><br>U.S.<br>Small Business Administration

The undersigned agree(s) to be bound by the terms and conditions herein during the term of this Loan, and further agree(s) that no provision stated herein will be waived without prior written consent of SBA. Under penalty of perjury of the United States of America, I hereby certify that I am authorized to apply for and obtain a disaster loan on behalf of Borrower, in connection with the effects of the COVID-19 emergency.

NIXON PRODUCT STORAGE LLC<br><br><br><br><br><br><br><br><br>Jonathan<br>Carroll, Owner/Officer	Date:<br>08.29.2020

Note: Corporate Borrowers must execute Loan Authorization and Agreement in corporate name, by a duly authorized officer. Partnership Borrowers must execute in firm name, together with signature of a general partner. Limited Liability entities must execute in the entity name by the signature of the authorized managing person.

Page 7 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7467248205

Application #3313846826

CERTIFICATION REGARDING LOBBYING

For loans over $150,000, Congress requires recipients to agree to the following:

Appropriated funds may NOT be used for lobbying.

Payment of non-federal funds for lobbying must be reported on Form SF-LLL.

Language of this certification must be incorporated into all contracts and subcontracts exceeding $100,000.

All contractors and subcontractors with contracts exceeding $100,000 are required to certify and disclose accordingly.

Page 8 of 11

SBA Form 1391 (5-00)

SBA Loan #7467248205

Application #3313846826

CERTIFICATION REGARDING

LOBBYING

Certification for Contracts, Grants, Loans, and Cooperative

Agreements

Borrower and all Guarantors (if any) certify, to the best of its, his or her knowledge and belief, that:

(1) No Federal appropriated funds have been paid or will be paid, by or on behalf of the undersigned, to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with awarding of any Federal contract, the making of any Federal grant, the making of any Federal loan, the entering into of any cooperative agreement, and the extension, continuation, renewal, or modification of any Federal contract, grant, loan, or cooperative agreement.

(2) If any funds other than Federal appropriated funds have been paid or will be paid to any person for influencing or attempting to influence an officer or employee of any agency, a Member of Congress, an officer or employee of Congress, or an employee of a Member of Congress in connection with this Federal loan, the undersigned shall complete and submit Standard Form LLL, "Disclosure Form to Report Lobbying," in accordance with its instructions.

(3) The undersigned shall require that the language of this certification be included in the award documents for all sub-awards at all tiers (including subcontracts, sub-grants, and contracts under grants, loans, and co-operative agreements) and that all sub-recipients shall certify and disclose accordingly.

This certification is a material representation of fact upon which reliance was placed when this transaction was made or entered into. Submission of this certification is a prerequisite for making or entering into this transaction imposed by Section 1352, Title 31, U.S. Code. Any person who fails to file the required certification shall be subject to a civil penalty of not less than $10,000.00 and not more than $100,000.00 for each such failure.

Page 9 of 11

SBA Form 1391 (5-00)

This<br>Statement of Policy is Posted<br><br><br>In<br>Accordance with Regulations of the<br><br><br><br><br><br><br><br><br>Small Business Administration

This Organization Practices

Equal Employment Opportunity

We do not discriminate on the ground of race, color, religion, sex, age, disability

or national origin in the hiring, retention, or promotion of employees; nor in determining their rank, or the compensation or fringe benefits paid them.

This Organization Practices

Equal Treatment of Clients

We do not discriminate on the basis of race, color, religion, sex, marital status,

disability, age or national origin in services or accommodations offered or

provided to our employees, clients or guests.

These policies and this notice comply with regulations of the

United States Government.

Please report violations of this policy to:

Administrator<br><br><br><br><br><br>Small Business Administration<br><br><br>Washington, D.C. 20416

In order for the public and your employees to know their rights under 13 C.F.R Parts 112, 113, and 117, Small Business Administration Regulations, and to conform with the directions of the Administrator of SBA, this poster must be displayed where it is clearly visible to employees, applicants for employment, and the public.

Failure to display the poster as required in accordance with SBA Regulations may be considered evidence of noncompliance and subject you to the penalties contained in those Regulations.

Page 10 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346 This form was electronically produced by Elite Federal Inc.

Esta Declaración De Principios Se Publica<br><br><br>De Acuerdo Con Los Reglamentos De La<br><br><br><br><br><br>Agencia<br>Federal Para el Desarrollo de la Pequeña Empresa

Esta Organización Practica

Igual Oportunidad De Empleo

No discriminamos por razón de raza, color, religión, sexo, edad, discapacidad o

nacionalidad en el empleo, retención o ascenso de personal ni en la determinación

de sus posiciones, salarios o beneficios marginales.

Esta Organización Practica

Igualdad En El Trato A Su Clientela

No discriminamos por razón de raza, color, religión, sexo, estado civil,

edad, discapacidad o nacionalidad en los servicios o facilidades provistos para

nuestros empleados, clientes o visitantes.

Estos principios y este aviso cumplen con los reglamentos del Gobierno de los Estados Unidos de America.

Favor de informar violaciones a lo aquí indicado a:

Administrador

Agencia Federal Para el Desarrollo de la

Pequeña Empresa

Washington, D.C. 20416

A fin de que el público y sus empleados conozcan sus derechos según lo expresado en las Secciones 112, 113 y 117 del Código de Regulaciaones Federales No. 13, de los Reglamentos de la Agencja Federal Para el Desarrollo de la Pequeña Empresa y de acuerdo con las instrucciones del Administrador de dicha agencia,

esta notificación debe fijarse en un lugar claramente visible para los empleados, solicitantes de empleo y público en general. No fijar esta notificación según lo requerido por los reglamentos de la Agencia Federal Para el Desarrollo de la Pequeña Empresa, puede ser interpretado como evidencia de falta de cumplimiento de los mismos y conllevará la ejecución de los castigos impuestos en estos reglamentos.

Page 11 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346 This form was electronically produced by Elite Federal Inc.

DocuSign Envelope ID: C115D191-BEFD-484F-8BFB-FC9BF1C729DA Doc

L-01-4474386-01

SBA Loan #7467248205

Application #3313846826

NOTE

A PROPERLY SIGNED NOTE IS

REQUIRED PRIOR TO ANY

DISBURSEMENT

CAREFULLY READ THE NOTE: It is your promise to repay the loan. ● The Note is pre-dated. DO NOT CHANGE THE DATE OF THE NOTE. ● LOAN PAYMENTS will be due as stated in the Note. ● ANY CORRECTIONS OR UNAUTHORIZED MARKS MAY VOID THIS DOCUMENT.

SIGNING THE NOTE: All borrowers must sign the Note. ● Sign your name exactly as it appears on the Note. If typed incorrectly, you should sign with the correct spelling. ● If your middle initial appears on the signature line, sign with your middle initial. ● If a suffix appears on the signature line, such as Sr. or Jr., sign with your suffix. ● Corporate Signatories: Authorized representatives should sign the signature page.

---

SBA Loan #7467248205

Application #3313846826

U.S. Small Business Administration<br><br><br>NOTE<br><br><br>(SECURED DISASTER<br>LOANS)	Date: 08.29.2020<br><br><br>Loan Amount: $150,000.00<br><br><br>Annual Interest Rate: 3.75%

SBA Loan # 7467248205

Application #3313846826

PROMISE TO PAY: In return for a loan, Borrower promises to pay to the order of SBA the amount of one hundred and fifty thousand and 00/100 Dollars ($150,000.00), interest on the unpaid principal balance, and all other amounts required by this Note.

DEFINITIONS: A) “Collateral” means any property taken as security for payment of this Note or any guarantee of this Note. B) “Guarantor” means each person or entity that signs a guarantee of payment of this Note. C) “Loan Documents” means the documents related to this loan signed by Borrower, any Guarantor, or anyone who pledges collateral.

PAYMENT TERMS: Borrower must make all payments at the place SBA designates. Borrower may prepay this Note in part or in full at any time, without notice or penalty. Borrower must pay principal and interest payments of $731.00 every month beginning Twelve (12) months from the date of the Note. SBA will apply each installment payment first to pay interest accrued to the day SBA receives the payment and will then apply any remaining balance to reduce principal. All remaining principal and accrued interest is due and payable Thirty (30) years from the date of the Note.

DEFAULT: Borrower is in default under this Note if Borrower does not make a payment when due under this Note, or if Borrower: A) Fails to comply with any provision of this Note, the Loan Authorization and Agreement, or other Loan Documents; B) Defaults on any other SBA loan; C) Sells or otherwise transfers, or does not preserve or account to SBA’s satisfaction for, any of the Collateral or its proceeds; D) Does not disclose, or anyone acting on their behalf does not disclose, any material fact to SBA; E) Makes, or anyone acting on their behalf makes, a materially false or misleading representation to SBA; F) Defaults on any loan or agreement with another creditor, if SBA believes the default may materially affect Borrower’s ability to pay this Note; G) Fails to pay any taxes when due; H) Becomes the subject of a proceeding under any bankruptcy or insolvency law; I) Has a receiver or liquidator appointed for any part of their business or property; J) Makes an assignment for the benefit of creditors; K) Has any adverse change in financial condition or business operation that SBA believes may materially affect Borrower’s ability to pay this Note; L) Dies; M) Reorganizes, merges, consolidates, or otherwise changes ownership or business structure without SBA’s prior written consent; or, N) Becomes the subject of a civil or criminal action that SBA believes may materially affect Borrower’s ability to pay this Note.

SBA’S RIGHTS IF THERE IS A DEFAULT: Without notice or demand and without giving up any of its rights, SBA may: A) Require immediate payment of all amounts owing under this Note; B) Have recourse to collect all amounts owing from any Borrower or Guarantor (if any); C) File suit and obtain judgment; D) Take possession of any Collateral; or E) Sell, lease, or otherwise dispose of, any Collateral at public or private sale, with or without advertisement.

SBA’S GENERAL POWERS: Without notice and without Borrower’s consent, SBA may: A) Bid on or buy the Collateral at its sale or the sale of another lienholder, at any price it chooses; B) Collect amounts due under this Note, enforce the terms of this Note or any other Loan Document, and preserve or dispose of the Collateral. Among other things, the expenses may include payments for property taxes, prior liens, insurance, appraisals, environmental remediation costs, and reasonable attorney’s fees and costs. If SBA incurs such expenses, it may demand immediate reimbursement from Borrower or add the expenses to the principal balance; C) Release anyone obligated to pay this Note; D) Compromise, release, renew, extend or substitute any of the Collateral; and E) Take any action necessary to protect the Collateral or collect amounts owing on this Note.

Page 2 of 3

SBA FORM 147 B (5-00)

SBA Loan #7467248205

Application #3313846826

FEDERAL LAW APPLIES: When SBA is the holder, this Note will be interpreted and enforced under federal law, including SBA regulations. SBA may use state or local procedures for filing papers, recording documents, giving notice, foreclosing liens, and other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax, or liability. As to this Note, Borrower may not claim or assert against SBA any local or state law to deny any obligation, defeat any claim of SBA, or preempt federal law.

GENERAL PROVISIONS: A) All individuals and entities signing this Note are jointly and severally liable. B) Borrower waives all suretyship defenses. C) Borrower must sign all documents required at any time to comply with the Loan Documents and to enable SBA to acquire, perfect, or maintain SBA’s liens on Collateral. D) SBA may exercise any of its rights separately or together, as many times and in any order it chooses. SBA may delay or forgo enforcing any of its rights without giving up any of them. E) Borrower may not use an oral statement of SBA to contradict or alter the written terms of this Note. F) If any part of this Note is unenforceable, all other parts remain in effect. G) To the extent allowed by law, Borrower waives all demands and notices in connection with this Note, including presentment, demand, protest, and notice of dishonor. Borrower also waives any defenses based upon any claim that SBA did not obtain any guarantee; did not obtain, perfect, or maintain a lien upon Collateral; impaired Collateral; or did not obtain the fair market value of Collateral at a sale. H) SBA may sell or otherwise transfer this Note.

MISUSE OF LOAN FUNDS: Anyone who wrongfully misapplies any proceeds of the loan will be civilly liable to SBA for one and one- half times the proceeds disbursed, in addition to other remedies allowed by law.

10.

BORROWER’S NAME(S) AND SIGNATURE(S): By signing below, each individual or entity acknowledges and accepts personal obligation and full liability under the Note as Borrower.

NIXON PRODUCT STORAGE LLC<br><br><br><br><br><br><br><br><br><br><br>Jonathan<br>Carroll, Owner/Officer

Page 3 of 3

SBA FORM 147 B (5-00)

SBA Loan #7467248205

Application #3313846826

SECURITY AGREEMENT

Read this document carefully. It grants the SBA a security interest (lien) in all the property described in paragraph 4.

This document is predated. DO NOT CHANGE THE DATE ON THIS DOCUMENT.

SBA Loan #7467248205

Application #3313846826

U.S. Small Business Administration<br><br><br>SECURITY<br>AGREEMENT
SBA<br>Loan #:	7467248205
---	---
Borrower:	NIXON<br>PRODUCT STORAGE LLC
Secured<br>Party:	The Small Business Administration, an Agency of the U.S.<br>Government
Date:	08.29.2020
Note<br>Amount:	$150,000.00

DEFINITIONS.

Unless otherwise specified, all terms used in this Agreement will have the meanings ascribed to them under the

Official Text of the Uniform Commercial Code, as it may be amended from time to time, (“UCC”). “SBA” means the Small Business Administration, an Agency of the U.S. Government.

GRANT OF SECURITY INTEREST.

For value received, the Borrower grants to the Secured Party a security interest in the property described below in paragraph 4 (the “Collateral”).

OBLIGATIONS SECURED.

This Agreement secures the payment and performance of: (a) all obligations under a Note dated 08.29.2020, made by NIXON PRODUCT STORAGE LLC , made payable to Secured Lender, in the amount of $150,000.00 (“Note”), including all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the disbursement, administration and collection of the loan evidenced by the Note; (b) all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the protection, maintenance and enforcement of the security interest hereby granted; (c) all obligations of the Borrower in any other agreement relating to the Note; and (d) any modifications, renewals, refinancings, or extensions of the foregoing obligations.

COLLATERAL DESCRIPTION.

The Collateral in which this security interest is granted includes the following property that Borrower now owns or shall acquire or create immediately upon the acquisition or creation thereof: all tangible

Page 2 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7467248205

Application #3313846826

and intangible personal property, including, but not limited to: (a) inventory, (b) equipment, (c) instruments, including promissory notes (d) chattel paper, including tangible chattel paper and electronic chattel paper, (e) documents, (f) letter of credit rights, (g) accounts, including health-care insurance receivables and credit card receivables, (h) deposit accounts, (i) commercial tort claims, (j) general intangibles, including payment intangibles and software and (k) as-extracted collateral as such terms may from time to time be defined in the Uniform Commercial Code. The security interest Borrower grants includes all accessions, attachments, accessories, parts, supplies and replacements for the Collateral, all products, proceeds and collections thereof and all records and data relating thereto.

RESTRICTIONS ON COLLATERAL TRANSFER.

Borrower will not sell, lease, license or otherwise transfer (including by granting security interests, liens, or other encumbrances in) all or any part of the Collateral or Borrower’s interest in the Collateral without Secured Party’s written or electronically communicated approval, except that Borrower may sell inventory in the ordinary course of business on customary terms. Borrower may collect and use amounts due on accounts and other rights to payment arising or created in the ordinary course of business, until notified otherwise by Secured Party in writing or by electronic communication.

MAINTENANCE AND LOCATION OF COLLATERAL; INSPECTION; INSURANCE.

Borrower must promptly notify Secured Party by written or electronic communication of any change in location of the Collateral, specifying the new location. Borrower hereby grants to Secured Party the right to inspect the Collateral at all reasonable times and upon reasonable notice. Borrower must: (a) maintain the Collateral in good condition; (b) pay promptly all taxes, judgments, or charges of any kind levied or assessed thereon; (c) keep current all rent or mortgage payments due, if any, on premises where the Collateral is located; and (d) maintain hazard insurance on the Collateral, with an insurance company and in an amount approved by Secured Party (but in no event less than the replacement cost of that Collateral), and including such terms as Secured Party may require including a Lender’s Loss Payable Clause in favor of Secured Party. Borrower hereby assigns to Secured Party any proceeds of such policies and all unearned premiums thereon and authorizes and empowers Secured Party to collect such sums and to execute and endorse in Borrower’s name all proofs of loss, drafts, checks and any other documents necessary for Secured Party to obtain such payments.

CHANGES TO BORROWER’S LEGAL STRUCTURE, PLACE OF BUSINESS, JURISDICTION OF ORGANIZATION, OR NAME.

Borrower must notify Secured Party by written or electronic communication not less than 30 days before taking any of the following actions: (a) changing or reorganizing the type of organization or form under which it does business; (b) moving, changing its place of business or adding a place of business; (c) changing its jurisdiction of organization; or (d) changing its name. Borrower will pay for the preparation and filing of all documents Secured Party deems necessary to maintain, perfect and continue the perfection of Secured Party’s security interest in the event of any such change.

PERFECTION OF SECURITY INTEREST.

Borrower consents, without further notice, to Secured Party’s filing or recording of any documents necessary to perfect, continue, amend or terminate its security interest. Upon request of Secured Party, Borrower must sign or otherwise authenticate all documents that Secured Party deems necessary at any time to allow Secured Party to acquire, perfect, continue or amend its security interest in the Collateral. Borrower will pay the filing and recording costs of any documents relating to Secured Party’s security interest. Borrower ratifies all previous filings and recordings, including financing statements and

Page 3 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7467248205

Application #3313846826

notations on certificates of title. Borrower will cooperate with Secured Party in obtaining a Control Agreement satisfactory to Secured Party with respect to any Deposit Accounts or Investment Property, or in otherwise obtaining control or possession of that or any other Collateral.

DEFAULT.

Borrower is in default under this Agreement if: (a) Borrower fails to pay, perform or otherwise comply with any provision of this Agreement; (b) Borrower makes any materially false representation, warranty or certification in, or in connection with, this Agreement, the Note, or any other agreement related to the Note or this Agreement; (c) another secured party or judgment creditor exercises its rights against the Collateral; or (d) an event defined as a “default” under the Obligations occurs. In the event of default and if Secured Party requests, Borrower must assemble and make available all Collateral at a place and time designated by Secured Party. Upon default and at any time thereafter, Secured Party may declare all Obligations secured hereby immediately due and payable, and, in its sole discretion, may proceed to enforce payment of same and exercise any of the rights and remedies available to a secured party by law including those available to it under Article 9 of the UCC that is in effect in the jurisdiction where Borrower or the Collateral is located. Unless otherwise required under applicable law, Secured Party has no obligation to clean or otherwise prepare the Collateral for sale or other disposition and Borrower waives any right it may have to require Secured Party to enforce the security interest or payment or performance of the Obligations against any other person.

FEDERAL RIGHTS.

When SBA is the holder of the Note, this Agreement will be construed and enforced under federal law,

including SBA regulations. Secured Party or SBA may use state or local procedures for filing papers, recording documents, giving notice, enforcing security interests or liens, and for any other purposes. By using such procedures, SBA does not waive any federal immunity from state or local control, penalty, tax or liability. As to this Agreement, Borrower may not claim or assert any local or state law against SBA to deny any obligation, defeat any claim of SBA, or preempt federal law.

GOVERNING LAW.

Unless SBA is the holder of the Note, in which case federal law will govern, Borrower and Secured Party agree that this Agreement will be governed by the laws of the jurisdiction where the Borrower is located, including the UCC as in effect in such jurisdiction and without reference to its conflicts of laws principles.

SECURED PARTY RIGHTS.

All rights conferred in this Agreement on Secured Party are in addition to those granted to it by law, and all rights are cumulative and may be exercised simultaneously. Failure of Secured Party to enforce any rights or remedies will not constitute an estoppel or waiver of Secured Party’s ability to exercise such rights or remedies. Unless otherwise required under applicable law, Secured Party is not liable for any loss or damage to Collateral in its possession or under its control, nor will such loss or damage reduce or discharge the Obligations that are due, even if Secured Party’s actions or inactions caused or in any way contributed to such loss or damage.

SEVERABILITY.

If any provision of this Agreement is unenforceable, all other provisions remain in effect.

Page 4 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7467248205

Application #3313846826

14.

BORROWER CERTIFICATIONS.

Borrower certifies that: (a) its Name (or Names) as stated above is correct; (b) all Collateral is owned or titled in the Borrower’s name and not in the name of any other organization or individual; (c) Borrower has the legal authority to grant the security interest in the Collateral; (d) Borrower’s ownership in or title to the Collateral is free of all adverse claims, liens, or security interests (unless expressly permitted by Secured Party); (e) none of the Obligations are or will be primarily for personal, family or household purposes; (f) none of the Collateral is or will be used, or has been or will be bought primarily for personal, family or household purposes; (g) Borrower has read and understands the meaning and effect of all terms of this Agreement.

BORROWER NAME(S) AND SIGNATURE(S).

By signing or otherwise authenticating below, each individual and each organization becomes jointly and severally obligated as a Borrower under this Agreement.

NIXON PRODUCT STORAGE LLC

	Date:	08.29.2020
Jonathan<br>Carroll, Owner/Officer

Page 5 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

bdco_ex102000

Exhiubit 10.2

SBA Loan #7471228202

Application #3313844581

LOAN AUTHORIZATION AND AGREEMENT (LA&A)

A PROPERLY SIGNED DOCUMENT IS

REQUIRED PRIOR TO ANY

DISBURSEMENT

CAREFULLY READ THE LA&A:

This document describes the terms and conditions of your loan. It is your responsibility to comply with

ALL the terms and conditions of your loan.

Ref 50 30

SBA Loan #7471228202

Application #3313844581

U.S. Small Business Administration

Economic Injury Disaster Loan

LOAN AUTHORIZATION AND AGREEMENT

Date: 08.29.2020 (Effective Date)

On the above date, this Administration (SBA) authorized (under Section 7(b) of the Small Business Act, as amended) a Loan (SBA Loan #7471228202) to Lazarus Energy LLC (Borrower) of 801 TRAVIS ST STE 2100 HOUSTON Texas 77002 in the amount of one hundred and fifty thousand and 00/100 Dollars ($150,000.00), upon the following conditions:

PAYMENT

●

INTEREST

●

Interest will accrue at the rate of 3.75% per annum and will accrue only on funds actually advanced from the date(s) of each advance.

PAYMENT TERMS

●

Each payment will be applied first to interest accrued to the date of receipt of each payment, and the balance, if any, will be applied to principal.

●

Each payment will be made when due even if at that time the full amount of the Loan has not yet been advanced or the authorized amount of the Loan has been reduced.

COLLATERAL

●

For loan amounts of $25,000 or less, SBA is not taking a security interest in any collateral. Page 2 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

REQUIREMENTS RELATIVE TO COLLATERAL

●

USE OF LOAN PROCEEDS

●

REQUIREMENTS FOR USE OF LOAN PROCEEDS AND RECEIPTS

●

itemization together with copies of the receipts.

●

Borrower will, to the extent feasible, purchase only American-made equipment and products with the proceeds of this Loan.

●

DEADLINE FOR RETURN OF LOAN CLOSING DOCUMENTS

●

COMPENSATION FROM OTHER SOURCES

●

Page 3 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

claims for civil liability against other individuals, organizations or governmental entities, and (4) salvage (including any sale or re-use) of items of damaged property.

●

Borrower hereby assigns to SBA the proceeds of any such compensation from other sources and authorizes the payor of same to deliver said proceeds to SBA at such time and place as SBA shall designate.

●

DUTY TO MAINTAIN HAZARD INSURANCE

●

BOOKS AND RECORDS

●

Borrower will maintain current and proper books of account in a manner satisfactory to SBA for the most recent

●

Borrower will furnish to SBA, not later than 3 months following the expiration of Borrower's fiscal year and in such form as SBA may require, Borrower's financial statements.

●

Upon written request of SBA, Borrower will accompany such statements with an 'Accountant's Review Report' prepared by an independent public accountant at Borrower's expense.

●

Page 4 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

LIMITS ON DISTRIBUTION OF ASSETS

●

EQUAL OPPORTUNITY REQUIREMENT

●

DISCLOSURE OF LOBBYING ACTIVITIES

●

Borrower agrees to the attached Certification Regarding Lobbying Activities

BORROWER’S CERTIFICATIONS

Borrower certifies that:

●

All representations in the Borrower's Loan application (including all supplementary submissions) are true, correct and complete and are offered to induce SBA to make this Loan.

●

Page 5 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

●

CIVIL AND CRIMINAL PENALTIES

●

RESULT OF VIOLATION OF THIS LOAN AUTHORIZATION AND AGREEMENT

●

A default (or any violation of any of the terms and conditions) of any SBA Loan(s) to Borrower and/or its affiliates will be considered a default of all such Loan(s).

DISBURSEMENT OF THE LOAN

●

Disbursements will be made by and at the discretion of SBA Counsel, in accordance with this Loan Authorization and Agreement and the general requirements of SBA.

●

Disbursements may be made in increments as needed.

●

Other conditions may be imposed by SBA pursuant to general requirements of SBA.

●

NO DISBURSEMENT WILL BE MADE LATER THAN 6 MONTHS FROM THE DATE OF THIS LOAN AUTHORIZATION AND AGREEMENT UNLESS SBA, IN ITS SOLE DISCRETION, EXTENDS THIS DISBURSEMENT PERIOD.

Page 6 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

PARTIES AFFECTED

●

This Loan Authorization and Agreement will be binding upon Borrower and Borrower's successors and assigns and will inure to the benefit of SBA and its successors and assigns.

RESOLUTION OF BOARD OF DIRECTORS

●

ENFORCEABILITY

●

James E. Rivera

Associate Administrator

U.S. Small Business Administration

Lazarus Energy LLC

Date: 08.29.2020

Jonathan Carroll, Owner/Officer

Page 7 of 11

SBA Form 1391 (5-00)

Ref 50 30

SBA Loan #7471228202

Application #3313844581

CERTIFICATION REGARDING LOBBYING

For loans over $150,000, Congress requires recipients to agree to the following:

Appropriated funds may NOT be used for lobbying.

Payment of non-federal funds for lobbying must be reported on Form SF-LLL.

Language of this certification must be incorporated into all contracts and subcontracts exceeding $100,000.

All contractors and subcontractors with contracts exceeding $100,000 are required to certify and disclose accordingly.

Page 8 of 11

SBA Form 1391 (5-00)

SBA Loan #7471228202

Application #3313844581

CERTIFICATION REGARDING

LOBBYING

Certification for Contracts, Grants, Loans, and Cooperative

Agreements

Borrower and all Guarantors (if any) certify, to the best of its, his or her knowledge and belief, that:

Page 9 of 11

SBA Form 1391 (5-00)

This<br>Statement of Policy is Posted<br><br><br>In<br>Accordance with Regulations of the<br><br><br>Small Business Administration

This Organization Practices

Equal Employment Opportunity

We do not discriminate on the ground of race, color, religion, sex, age, disability

or national origin in the hiring, retention, or promotion of employees; nor in determining their rank, or the compensation or fringe benefits paid them.

This Organization Practices

Equal Treatment of Clients

We do not discriminate on the basis of race, color, religion, sex, marital status,

disability, age or national origin in services or accommodations offered or

provided to our employees, clients or guests.

These policies and this notice comply with regulations of the

United States Government.

Please report violations of this policy to:

Administrator

Small Business Administration

Washington, D.C. 20416

Failure to display the poster as required in accordance with SBA Regulations may be considered evidence of noncompliance and subject you to the penalties contained in those Regulations.

Page 10 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346 This form was electronically produced by Elite Federal Inc.

Esta Declaración De Principios Se Publica<br><br><br>De Acuerdo Con Los Reglamentos De La<br><br><br>Agencia<br>Federal Para el Desarrollo de la Pequeña Empresa

Esta Organización Practica

Igual Oportunidad De Empleo

No discriminamos por razón de raza, color, religión, sexo, edad, discapacidad o

nacionalidad en el empleo, retención o ascenso de personal ni en la determinación

de sus posiciones, salarios o beneficios marginales.

Esta Organización Practica

Igualdad En El Trato A Su Clientela

No discriminamos por razón de raza, color, religión, sexo, estado civil,

edad, discapacidad o nacionalidad en los servicios o facilidades provistos para

nuestros empleados, clientes o visitantes.

Estos principios y este aviso cumplen con los reglamentos del Gobierno de los Estados Unidos de America.

Favor de informar violaciones a lo aquí indicado a:

Administrador

Agencia Federal Para el Desarrollo de la

Pequeña Empresa

Washington, D.C. 20416

Page 11 of 11

SBA FORM 722 (10-02) REF: SOP 9030 PREVIOUS EDITIONS ARE OBSOLETE

U.S. GOVERNMENT PRINTING OFFICE: 1994 0- 153-346 This form was electronically produced by Elite Federal Inc.

SBA Loan #7471228202

Application #3313844581

NOTE

A PROPERLY SIGNED NOTE IS

REQUIRED PRIOR TO ANY

DISBURSEMENT

CAREFULLY READ THE NOTE: It is your promise to repay the<br>loan.<br><br><br><br><br><br>● The<br>Note is pre-dated. DO NOT CHANGE THE DATE OF THE<br>NOTE.<br><br><br>● LOAN<br>PAYMENTS will be due as stated<br>in the Note.<br><br><br><br><br><br>● ANY<br>CORRECTIONS OR UNAUTHORIZED MARKS MAY VOID THIS<br>DOCUMENT.

SIGNING THE NOTE: All borrowers must sign the Note.

●

Sign your name exactly as it appears on the Note. If typed incorrectly, you should sign with the correct spelling.

●

If your middle initial appears on the signature line, sign with your middle initial.

●

If a suffix appears on the signature line, such as Sr. or Jr., sign with your suffix.

●

Corporate Signatories: Authorized representatives should sign the signature page.

SBA Loan #7471228202

Application #3313844581

U.S. Small Business Administration<br><br><br>NOTE<br><br><br>(SECURED DISASTER<br>LOANS)	Date: 08.29.2020<br><br><br>Loan Amount: $150,000.00<br><br><br>Annual Interest Rate: 3.75%

SBA Loan # 7471228202

Application #3313844581

Page 2 of 3

SBA FORM 147 B (5-00)

SBA Loan #7471228202

Application #3313844581

10.

BORROWER’S NAME(S) AND SIGNATURE(S): By signing below, each individual or entity acknowledges and accepts personal obligation and full liability under the Note as Borrower.

Lazarus Energy LLC

Jonathan Carroll, Owner/Officer

Page 3 of 3

SBA FORM 147 B (5-00)

SBA Loan #7471228202

Application #3313844581

SECURITY AGREEMENT

Read this document carefully. It grants the SBA a security interest (lien) in all the property described in paragraph 4.

This document is predated. DO NOT CHANGE THE DATE ON THIS DOCUMENT.

SBA Loan #7471228202

Application #3313844581

U.S. Small Business Administration<br><br><br>SECURITY<br>AGREEMENT
SBA<br>Loan #:	7471228202
---	---
Borrower:	Lazarus<br>Energy LLC
Secured<br>Party:	The Small Business Administration, an Agency of the U.S.<br>Government
Date:	08.29.2020
Note<br>Amount:	$150,000.00

DEFINITIONS.

Unless otherwise specified, all terms used in this Agreement will have the meanings ascribed to them under the

Official Text of the Uniform Commercial Code, as it may be amended from time to time, (“UCC”). “SBA” means the Small Business Administration, an Agency of the U.S. Government.

GRANT OF SECURITY INTEREST.

For value received, the Borrower grants to the Secured Party a security interest in the property described below in paragraph 4 (the “Collateral”).

OBLIGATIONS SECURED.

This Agreement secures the payment and performance of: (a) all obligations under a Note dated 08.29.2020, made by Lazarus Energy LLC , made payable to Secured Lender, in the amount of $150,000.00 (“Note”), including all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the disbursement, administration and collection of the loan evidenced by the Note; (b) all costs and expenses (including reasonable attorney’s fees), incurred by Secured Party in the protection, maintenance and enforcement of the security interest hereby granted; (c) all obligations of the Borrower in any other agreement relating to the Note; and (d) any modifications, renewals, refinancings, or extensions of the foregoing obligations.

COLLATERAL DESCRIPTION.

Page 2 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7471228202

Application #3313844581

RESTRICTIONS ON COLLATERAL TRANSFER.

MAINTENANCE AND LOCATION OF COLLATERAL; INSPECTION; INSURANCE.

CHANGES TO BORROWER’S LEGAL STRUCTURE, PLACE OF BUSINESS, JURISDICTION OF ORGANIZATION, OR NAME.

PERFECTION OF SECURITY INTEREST.

Page 3 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7471228202

Application #3313844581

DEFAULT.

FEDERAL RIGHTS.

When SBA is the holder of the Note, this Agreement will be construed and enforced under federal law,

GOVERNING LAW.

SECURED PARTY RIGHTS.

SEVERABILITY.

If any provision of this Agreement is unenforceable, all other provisions remain in effect.

Page 4 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

SBA Loan #7471228202

Application #3313844581

14.

BORROWER CERTIFICATIONS.

BORROWER NAME(S) AND SIGNATURE(S).

By signing or otherwise authenticating below, each individual and each organization becomes jointly and severally obligated as a Borrower under this Agreement.

Lazarus Energy LLC

	Date:	08.29.2020
Jonathan<br>Carroll, Owner/Officer

Page 5 of 5

SBA Form 1059 (09-19) Previous Editions are obsolete.

bdco_ex311

Exhibit 31.1

I, Jonathan P. Carroll, certify that:

1.	I have<br>reviewed this quarterly report on Form 10-Q of Blue Dolphin Energy<br>Company (the “Registrant”).
2.	Based<br>on my knowledge, this quarterly report does not contain any untrue<br>statement of a material fact or omit to state a material fact<br>necessary to make the statements made, in light of the<br>circumstances under which such statements were made, not misleading<br>with respect to the periods covered by this quarterly<br>report;
---	---
3.	Based<br>on my knowledge, the financial statements and other financial<br>information included in this quarterly report, fairly present in<br>all material respects the financial condition, results of<br>operations and cash flows of the Registrant as of, and for, the<br>periods presented in this quarterly report;
---	---
4.	I am<br>responsible for establishing and maintaining disclosure controls<br>and procedures (as defined in Exchange Act Rules 13a-15(e) and<br>15d-15(e)) and internal control over financial reporting (as<br>defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the<br>Registrant and I have:
---	---

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under my supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to me by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under my supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this quarterly report my conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d) Disclosed in this quarterly report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s first fiscal quarter in the case of this quarterly report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and

5.	I have<br>disclosed, based on my most recent evaluation of internal control<br>over financial reporting, to the Registrant’s auditors and<br>the Audit Committee of the Registrant’s Board of<br>Directors:

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.

Date: November 16, 2020

/s/<br>JONATHAN P. CARROLL
Jonathan<br>P. Carroll

Chief Executive Officer, President, Assistant Treasurer and Secretary

(Principal Executive Officer and Principal Financial Officer)

bdco_ex321

Exhibit 32.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE OFFICER AND

PRINCIPAL FINANCIAL OFFICER

PURSUANT TO 18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO SECTION 906

OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Blue Dolphin Energy Company (the “Blue Dolphin”) on Form 10-Q for the period ended September 30, 2020 (the “Report”), as filed with the Securities and Exchange Commission on the date hereof, I, Jonathan P. Carroll, Chief Executive Officer, President, Assistant Treasurer and Secretary (Principal Executive Officer and Principal Financial Officer) of Blue Dolphin, certify, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that to my knowledge:

The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and
The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of Blue Dolphin.

/s/<br>JONATHAN P. CARROLL
Jonathan<br>P. Carroll

Chief Executive Officer, President, Assistant Treasurer and Secretary

(Principal Executive Officer and Principal Financial Officer)

November 16, 2020