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TAT TransAtlantic Petroleum

Filed: 19 Nov 20, 5:01pm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

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

For the quarterly period ended: September 30, 2020

OR

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

For the transition period from                     to                     

Commission file number: 001-34574

 

TRANSATLANTIC PETROLEUM LTD.

(Exact name of registrant as specified in its charter)

 

 

Bermuda

None

(State or Other Jurisdiction of

Incorporation or Organization)

(I.R.S. Employer

Identification No.)

 

 

16803 Dallas Parkway

Addison, Texas

75001

(Address of Principal Executive Offices)

(Zip Code)

Registrant’s Telephone Number, Including Area Code: (214) 220-4323

 

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

Title of each class 

 

 

 

 

 

 

 

Ticker Symbol

 

 

 

 

 

 

 

Name of each exchange on which registered 

Common shares, par value $0.10

 

 

 

 

 

 

 

TAT

 

 

 

 

 

 

 

NYSE American

 

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 is required to submit such files).    Yes      No  

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

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

 

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

Emerging growth company

 

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

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

As of November 12, 2020, the registrant had 76,335,557‬ common shares outstanding.

 

 

 

 


TABLE OF CONTENTS

 

PART I. FINANCIAL INFORMATION

 

 

Item 1. Financial Statements

 

 

 

Consolidated Balance Sheets as of September 30, 2020 (Unaudited) and December 31, 2019

4

 

 

Unaudited Consolidated Statements of Operations and Comprehensive (Loss) Income for the Three and Nine Months Ended September 30, 2020 and 2019

5

 

 

Unaudited Consolidated Statement of Shareholders’ Equity for the Three and Nine Months Ended September 30, 2020 and 2019

6

 

 

Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019

7

 

 

Notes to Unaudited Consolidated Financial Statements

8

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

25

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

35

 

 

Item 4. Controls and Procedures

35

 

 

PART II. OTHER INFORMATION

 

 

Item 1. Legal Proceedings

36

 

 

Item 1A. Risk Factors

36

 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

36

 

 

Item 3. Defaults Upon Senior Securities

36

 

 

Item 4. Mine Safety Disclosures

36

 

 

Item 5. Other Information

36

 

 

Item 6. Exhibits

37

 

 


2


Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute “forward-looking statements” within the meaning of applicable U.S. and Canadian securities legislation. Additionally, forward-looking statements may be made orally or in press releases, conferences, reports, on our website or otherwise, in the future, by us or on our behalf. Such statements are generally identifiable by the terminology used such as “plans,” “expects,” “estimates,” “budgets,” “intends,” “anticipates,” “believes,” “projects,” “indicates,” “targets,” “objective,” “could,” “should,” “may,” or other similar words.

By their very nature, forward-looking statements require us to make assumptions that may not materialize or that may not be accurate. Forward-looking statements are subject to known and unknown risks and uncertainties and other factors that may cause actual results, levels of activity, and achievements to differ materially from those expressed or implied by such statements, including the factors discussed under Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2019 and our subsequent Quarterly Reports on Form 10-Q. Such factors include, but are not limited to, the following: the occurrence of any event, change, or other circumstances that could give rise to the termination of the Merger Agreement (as defined in Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations); the inability to obtain the requisite shareholder approval for the proposed merger or the failure to satisfy other conditions to completion of the proposed merger; risks that the proposed transaction disrupts current plans and operations; the ability to recognize the benefits of the merger; the amount of the costs, fees, and expenses and charges related to the merger; our ability to continue as a going concern; well development results; access to sufficient capital; market prices for natural gas, natural gas liquids, and oil products, including price changes resulting from COVID-19 fears as well as oil oversupply concerns; estimates of reserves and economic assumptions; the ability to produce and transport natural gas, natural gas liquids, and oil products, including price changes resulting from coronavirus fears as well as oil oversupply concerns; the results of exploration and development drilling and related activities; the effects of the coronavirus on our operations, demand for oil and natural gas as well as governmental actions in response to the coronavirus; economic conditions in the countries and provinces in which we carry on business, especially economic slowdowns; actions by governmental authorities; the unwinding of our hedges against a decline in the price of oil; receipt of required approvals; increases in taxes; legislative and regulatory initiatives relating to fracture stimulation activities; changes in environmental and other regulations; renegotiations of contracts; political uncertainty, including sanctions, armed conflicts, and actions by insurgent groups; outcomes of litigation; the negotiation and closing of material contracts; and the other factors discussed in other documents that we file with or furnish to the SEC and Canadian securities regulatory authorities. The impact of any one factor on a particular forward-looking statement is not determinable with certainty as such factors are interdependent upon other factors and our course of action would depend upon our assessment of the future, considering all information then available. In that regard, any statements as to: liquidity; ability to continue as a going concern; COVID-19; access to sufficient capital; future oil or natural gas production levels; capital expenditures; asset sales; the allocation of capital expenditures to exploration and development activities; sources of funding for our capital expenditure programs or operations; drilling of new wells; demand for oil and natural gas products; expenditures and allowances relating to environmental matters; dates by which certain areas will be developed or will come on-stream; expected finding and development costs; future production rates; ultimate recoverability of reserves, including the ability to convert probable and possible reserves to proved reserves; dates by which transactions are expected to close; future cash flows, uses of cash flows, collectability of receivables and availability of trade credit; expected operating costs; changes in any of the foregoing; and other statements using forward-looking terminology are forward-looking statements, and there can be no assurance that the expectations conveyed by such forward-looking statements will, in fact, be realized.

Although we believe that the expectations conveyed by the forward-looking statements are reasonable based on information available to us on the date such forward-looking statements were made, no assurances can be given as to future results, levels of activity, achievements or financial condition.

Readers should not place undue reliance on any forward-looking statement and should recognize that the statements are predictions of future results, which may not occur as anticipated. Actual results could differ materially from those anticipated in the forward-looking statements and from historical results, due to the risks and uncertainties described above, as well as others not now anticipated. The foregoing statements are not exclusive and further information concerning us, including factors that potentially could materially affect our financial results, may emerge from time to time. We do not intend to update forward-looking statements to reflect actual results or changes in factors or assumptions affecting such forward-looking statements, except as required by law.

 

3


PART I. FINANCIAL INFORMATION

Item 1.

Financial Statements

TRANSATLANTIC PETROLEUM LTD.

Consolidated Balance Sheets

(in thousands of U.S. Dollars, except share data)

 

 

September 30, 2020

 

 

December 31, 2019

 

 

(unaudited)

 

 

 

 

 

ASSETS

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

Cash and cash equivalents

$

5,877

 

 

$

9,664

 

Accounts receivable, net

 

 

 

 

 

 

 

Oil and natural gas sales

 

6,192

 

 

 

13,299

 

Joint interest and other

 

1,137

 

 

 

1,218

 

Related party

 

565

 

 

 

561

 

Prepaid and other current assets

 

13,215

 

 

 

12,375

 

Note receivable - related party

 

3,416

 

 

 

 

Derivative asset

 

35

 

 

 

 

Inventory

 

2,999

 

 

 

7,091

 

Total current assets

 

33,436

 

 

 

44,208

 

Property and equipment:

 

 

 

 

 

 

 

Oil and natural gas properties (successful efforts method)

 

 

 

 

 

 

 

Proved

 

106,277

 

 

 

167,948

 

Unproved

 

9,979

 

 

 

12,978

 

Equipment and other property

 

11,765

 

 

 

10,202

 

 

 

128,021

 

 

 

191,128

 

Less accumulated depreciation, depletion and amortization

 

(80,144

)

 

 

(106,610

)

Property and equipment, net

 

47,877

 

 

 

84,518

 

Other long-term assets:

 

 

 

 

 

 

 

Other assets

 

3,549

 

 

 

3,827

 

Note receivable - related party

 

 

 

 

3,951

 

Total other assets

 

3,549

 

 

 

7,778

 

Total assets

$

84,862

 

 

$

136,504

 

LIABILITIES, SERIES A PREFERRED SHARES AND SHAREHOLDERS' EQUITY

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

Accounts payable

$

1,971

 

 

$

4,555

 

Accounts payable - related party

 

2,956

 

 

 

4,262

 

Accrued liabilities

 

13,240

 

 

 

15,244

 

Derivative liability

 

2,201

 

 

 

966

 

Loans payable

 

9,197

 

 

 

17,143

 

Total current liabilities

 

29,565

 

 

 

42,170

 

Long-term liabilities:

 

 

 

 

 

 

 

Asset retirement obligations

 

3,185

 

 

 

4,749

 

Accrued liabilities

 

8,761

 

 

 

10,370

 

Deferred income taxes

 

16,718

 

 

 

22,728

 

Loans payable

 

 

 

 

2,857

 

Total long-term liabilities

 

28,664

 

 

 

40,704

 

Total liabilities

 

58,229

 

 

 

82,874

 

Commitments and contingencies

 

 

 

 

 

 

 

Series A preferred shares, $0.01 par value, 100,000 shares authorized; 100,000 shares issued and outstanding with a liquidation preference of $50 per share as of September 30, 2020 and December 31, 2019

 

5,000

 

 

 

5,000

 

Series A preferred shares-related party, $0.01 par value, 821,000 shares authorized; 821,000 shares issued and outstanding with a liquidation preference of $50 per share as of September 30, 2020 and December 31, 2019

 

41,050

 

 

 

41,050

 

Shareholders' equity:

 

 

 

 

 

 

 

Common shares, $0.10 par value, 200,000,000 shares authorized; 76,335,557 shares and 62,230,058 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively

 

7,634

 

 

 

6,223

 

Treasury stock

 

(970

)

 

 

(970

)

Additional paid-in-capital

 

584,849

 

 

 

582,359

 

Accumulated other comprehensive loss

 

(143,587

)

 

 

(147,347

)

Accumulated deficit

 

(467,343

)

 

 

(432,685

)

Total shareholders' equity (deficit)

 

(19,417

)

 

 

7,580

 

Total liabilities, Series A preferred shares and shareholders' equity

$

84,862

 

 

$

136,504

 

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

 

 

4


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Operations and Comprehensive (Loss) Income

(Unaudited)

(U.S. Dollars and shares in thousands, except per share amounts)

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

September 30,

 

 

September 30,

 

 

2020

 

 

2019

 

 

2020

 

 

2019

 

Revenues:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

8,459

 

 

$

14,543

 

 

$

23,285

 

 

$

50,537

 

Other

 

170

 

 

 

110

 

 

 

204

 

 

 

372

 

Total revenues

 

8,629

 

 

 

14,653

 

 

 

23,489

 

 

 

50,909

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Production

 

2,308

 

 

 

3,162

 

 

 

8,207

 

 

 

8,376

 

Transportation and processing

 

914

 

 

 

1,262

 

 

 

3,035

 

 

 

3,802

 

Exploration, abandonment and impairment

 

69

 

 

 

488

 

 

 

20,407

 

 

 

6,267

 

Seismic and other exploration

 

-

 

 

 

48

 

 

 

45

 

 

 

233

 

General and administrative

 

1,965

 

 

 

2,503

 

 

 

6,711

 

 

 

8,247

 

Depreciation, depletion and amortization

 

1,542

 

 

 

3,021

 

 

 

7,048

 

 

 

10,179

 

Accretion of asset retirement obligations

 

44

 

 

 

56

 

 

 

141

 

 

 

157

 

Total costs and expenses

 

6,842

 

 

 

10,540

 

 

 

45,594

 

 

 

37,261

 

Operating (loss) income

 

1,787

 

 

 

4,113

 

 

 

(22,105

)

 

 

13,648

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss on sale

 

-

 

 

 

-

 

 

 

(10,128

)

 

 

-

 

Interest and other expense

 

(2,557

)

 

 

(2,780

)

 

 

(7,165

)

 

 

(8,011

)

Interest and other income

 

230

 

 

 

381

 

 

 

643

 

 

 

776

 

Gain (loss) on derivative contracts

 

(359

)

 

 

403

 

 

 

3,937

 

 

 

(30

)

Foreign exchange loss

 

(532

)

 

 

(797

)

 

 

(1,016

)

 

 

(2,185

)

Total other expense

 

(3,218

)

 

 

(2,793

)

 

 

(13,729

)

 

 

(9,450

)

(Loss) income from operations before income taxes

 

(1,431

)

 

 

1,320

 

 

 

(35,834

)

 

 

4,198

 

Income tax (expense) benefit

 

(1,528

)

 

 

(250

)

 

 

1,176

 

 

 

(7,039

)

Net (loss) income

 

(2,959

)

 

 

1,070

 

 

 

(34,658

)

 

 

(2,841

)

Other comprehensive (loss) income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

(2,916

)

 

 

808

 

 

 

3,760

 

 

 

(3,834

)

Comprehensive income (loss)

$

(5,875

)

 

$

1,878

 

 

$

(30,898

)

 

$

(6,675

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) per common share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income (loss) per common share

$

(0.04

)

 

$

0.02

 

 

$

(0.04

)

 

$

(0.05

)

Weighted average common shares outstanding

 

66,183

 

 

 

57,680

 

 

 

73,738

 

 

 

54,249

 

Diluted net income (loss) per common share

$

(0.04

)

 

$

0.02

 

 

$

(0.04

)

 

$

(0.05

)

Weighted average common and common equivalent shares outstanding

 

66,183

 

 

 

57,680

 

 

 

73,738

 

 

 

54,249

 

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

 

 


5


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Equity for the Three and Nine Months Ended September 30, 2020 and 2019

(Unaudited)

(U.S. Dollars and shares in thousands)  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

Other

 

 

 

 

 

 

Shareholders'

 

 

Common

 

 

Treasury

 

 

Common

 

 

Treasury

 

 

Paid-in

 

 

Comprehensive

 

 

Accumulated

 

 

Equity

 

Three months ended September 30, 2020

Shares

 

 

Shares

 

 

Shares

 

 

Stock

 

 

Capital

 

 

Loss

 

 

Deficit

 

 

(Deficit)

 

Balance at June 30, 2020

 

62,759

 

 

 

333

 

 

$

6,276

 

 

$

(970

)

 

$

582,484

 

 

$

(140,671

)

 

$

(464,384

)

 

$

(17,265

)

Issuance of common shares

 

13,576

 

 

 

-

 

 

 

1,358

 

 

 

-

 

 

 

2,326

 

 

 

-

 

 

 

-

 

 

 

3,684

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

39

 

 

 

-

 

 

 

-

 

 

 

39

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,916

)

 

 

-

 

 

 

(2,916

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,959

)

 

 

(2,959

)

Balance at September 30, 2020

 

76,335

 

 

 

333

 

 

$

7,634

 

 

$

(970

)

 

$

584,849

 

 

$

(143,587

)

 

$

(467,343

)

 

$

(19,417

)

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2019

 

62,230

 

 

 

333

 

 

$

6,223

 

 

$

(970

)

 

$

582,359

 

 

$

(147,347

)

 

$

(432,685

)

 

$

7,580

 

Issuance of common shares

 

14,105

 

 

 

-

 

 

 

1,411

 

 

 

-

 

 

 

2,273

 

 

 

-

 

 

 

-

 

 

 

3,684

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

263

 

 

 

-

 

 

 

-

 

 

 

263

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(46

)

 

 

-

 

 

 

-

 

 

 

(46

)

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,760

 

 

 

-

 

 

 

3,760

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(34,658

)

 

 

(34,658

)

Balance at September 30, 2020

 

76,335

 

 

 

333

 

 

$

7,634

 

 

$

(970

)

 

$

584,849

 

 

$

(143,587

)

 

$

(467,343

)

 

$

(19,417

)

Three Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at June 30, 2019

 

52,723

 

 

 

333

 

 

$

5,273

 

 

$

(970

)

 

$

577,538

 

 

$

(146,663

)

 

$

(431,230

)

 

$

3,948

 

Issuance of common shares

 

4,986

 

 

 

-

 

 

 

498

 

 

 

-

 

 

 

3,186

 

 

 

-

 

 

 

-

 

 

 

3,684

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

119

 

 

 

-

 

 

 

-

 

 

 

119

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

808

 

 

 

-

 

 

 

808

 

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1,070

 

 

 

1,070

 

Balance at September 30, 2019

 

57,709

 

 

 

333

 

 

$

5,771

 

 

$

(970

)

 

$

580,843

 

 

$

(145,855

)

 

$

(430,160

)

 

$

9,629

 

Nine Months Ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance at December 31, 2018

 

52,413

 

 

 

333

 

 

$

5,241

 

 

$

(970

)

 

$

577,488

 

 

$

(142,021

)

 

$

(427,319

)

 

$

12,419

 

Issuance of common shares

 

4,986

 

 

 

-

 

 

 

498

 

 

 

-

 

 

 

3,186

 

 

 

-

 

 

 

-

 

 

 

3,684

 

Issuance of restricted stock units

 

310

 

 

 

-

 

 

 

32

 

 

 

-

 

 

 

(32

)

 

 

-

 

 

 

-

 

 

 

-

 

Share-based compensation

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

298

 

 

 

-

 

 

 

-

 

 

 

298

 

Tax effect of restricted stock

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(97

)

 

 

-

 

 

 

-

 

 

 

(97

)

Foreign currency translation adjustment

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,834

)

 

 

-

 

 

 

(3,834

)

Net loss

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,841

)

 

 

(2,841

)

Balance at September 30, 2019

 

57,709

 

 

 

333

 

 

$

5,771

 

 

$

(970

)

 

$

580,843

 

 

$

(145,855

)

 

$

(430,160

)

 

$

9,629

 

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

 

 

 

 

 


6


TRANSATLANTIC PETROLEUM LTD.

Consolidated Statements of Cash Flows

(Unaudited)

(in thousands of U.S. Dollars)

 

 

For the Nine Months Ended

 

 

September 30,

 

 

2020

 

 

2019

 

Operating activities:

 

 

 

 

 

 

 

Net loss

$

(34,658

)

 

$

(2,841

)

Adjustments to reconcile net loss to net cash provided by operating activities:

 

 

 

 

 

 

 

Share-based compensation

 

263

 

 

 

298

 

Foreign currency loss

 

1,214

 

 

 

1,776

 

Interest on Series A Preferred Shares paid in common shares

 

3,684

 

 

 

3,684

 

(Gain) loss on derivative contracts

 

(3,937

)

 

 

30

 

Cash settlement on derivative contracts

 

5,135

 

 

 

 

Loss on sale

 

10,128

 

 

 

 

Amortization on loan financing costs

 

23

 

 

 

31

 

Deferred income tax (benefit) expense

 

(444

)

 

 

4,396

 

Exploration, abandonment and impairment

 

20,407

 

 

 

6,267

 

Depreciation, depletion and amortization

 

7,048

 

 

 

10,179

 

Accretion of asset retirement obligations

 

141

 

 

 

157

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

Accounts receivable

 

4,742

 

 

 

172

 

Prepaid expenses and other assets

 

(4,339

)

 

 

(6,567

)

Accounts payable and accrued liabilities

 

1,570

 

 

 

8,122

 

Net cash provided by operating activities

 

10,977

 

 

 

25,704

 

Investing activities:

 

 

 

 

 

 

 

Additions to oil and natural gas properties

 

(3,745

)

 

 

(24,847

)

Additions to equipment and other properties

 

(158

)

 

 

(341

)

Proceeds from sale

 

1,451

 

 

 

 

Net cash used in investing activities

 

(2,452

)

 

 

(25,188

)

Financing activities:

 

 

 

 

 

 

 

Tax withholding on restricted share units

 

(46

)

 

 

(97

)

Note receivable - related party

 

 

 

 

1,000

 

Loan proceeds

 

626

 

 

 

20,605

 

Loan repayment

 

(11,429

)

 

 

(16,550

)

Net cash (used in) provided by financing activities

 

(10,849

)

 

 

4,958

 

Effect of exchange rate on cash flows, cash equivalents, and restricted cash

 

(1,463

)

 

 

(914

)

Net (decrease) increase in cash, cash equivalents and restricted cash

 

(3,787

)

 

 

4,560

 

Cash, cash equivalents and restricted cash, beginning of period (1)

 

9,804

 

 

 

10,032

 

Cash, cash equivalents and restricted cash, end of period (2)

$

6,017

 

 

$

14,592

 

Supplemental disclosures:

 

 

 

 

 

 

 

Cash paid for interest

$

2,555

 

 

$

3,387

 

Cash paid for taxes

$

592

 

 

$

2,988

 

 

 

 

 

 

 

 

 

 

(1)

The beginning of period balance at December 31, 2019 includes cash and cash equivalents of $9.7 million and restricted cash of $0.1 million in other assets.  The beginning of period balance at December 31, 2018 includes cash and cash equivalents of $9.9 million and restricted cash of $0.1 million in other assets

 

 

(2)

The end of period balance at September 30, 2020 includes cash and cash equivalents of $5.9 million and restricted cash of $0.1 million in other assets. The end of period balance at September 30, 2019 includes cash and cash equivalents of $14.5 million and restricted cash of $0.1 million in other assets.

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

 

 


7


Transatlantic Petroleum Ltd.

Notes to Consolidated Financial Statements

(Unaudited)

1. General

Nature of operations

TransAtlantic Petroleum Ltd. (together with its subsidiaries, “we,” “us,” “our,” the “Company,” or “TransAtlantic”) is an international oil and natural gas company engaged in acquisition, exploration, development, and production. We have focused our operations in countries that have established, yet underexplored petroleum systems, are net importers of petroleum, have an existing petroleum transportation infrastructure, and provide favorable commodity pricing, royalty rates, and tax rates to exploration and production companies. We hold interests in developed and undeveloped oil and natural gas properties in Turkey and Bulgaria. As of November 12, 2020, approximately 51.7% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors. Persons and entities associated with Mr. Mitchell also owned 739,000 of our 12.0% Series A Convertible Redeemable Preferred Shares (“Series A Preferred Shares”). Mr. Mitchell’s affiliates are currently prohibited from converting any of their Series A Preferred Shares to common shares if such conversion would cause Mr. Mitchell or his affiliates to obtain beneficial ownership in excess of 49.9% of the outstanding common shares; however, Mr. Mitchell, upon 61 days’ prior notice, may increase or decrease such percentage cap.

We are a holding company with two operating segments – Turkey and Bulgaria. Our assets consist of our ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria.

Basis of presentation

Our consolidated financial statements are expressed in U.S. Dollars (“USD”) and have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”). All amounts in the notes to the consolidated financial statements are in USD unless otherwise indicated. The unaudited consolidated financial statements include accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated in consolidation. In preparing financial statements, management makes informed judgments and estimates that affect the reported amounts of assets and liabilities as of the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, management reviews estimates, including those related to fair value measurements associated with financial derivatives, the recoverability and impairment of long-lived assets, contingencies and income taxes. Changes in facts and circumstances may result in revised estimates and actual results may differ from these estimates.

Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with U.S. GAAP have been condensed or omitted in this Form 10-Q pursuant to the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2019.

2. Going Concern

These consolidated financial statements have been prepared on the basis of accounting principles applicable to a going concern.  These principles assume that we will be able to realize our assets and discharge our obligations in the normal course of operations for the foreseeable future.  

We incurred a net loss of $34.7 million for the nine months ended September 30, 2020.  At September 30, 2020, we had cash and cash equivalents of $5.9 million, $9.2 million in short-term debt, and a working capital surplus of $3.9 million, compared to cash and cash equivalents of $9.7 million, $2.9 million in long-term debt, $17.1 million in short-term debt and a working capital surplus of $2.0 million at December 31, 2019.

In March 2020, crude oil prices declined to approximately $25 per barrel for Brent crude as a result of market concerns about the economic impact from the COVID-19 pandemic as well as the ability of OPEC and Russia to agree on a perceived need to implement further production cuts in response to weaker worldwide demand.  Since then, Brent crude prices have rebounded to approximately $40.00 per barrel as of November 5, 2020 and remain unpredictable.

As a result of the decline in Brent crude prices, the current near term price outlook and resulting lower current and projected cash flows from operations, we have reduced our planned capital expenditures to those necessary for production lease maintenance and those projecting a return on invested capital at current prices. In order to mitigate the impact of reduced prices on our 2020 cash flows and liquidity, we implemented cost reduction measures to reduce our operating costs and general and administrative expenses. In connection therewith, we intend to prioritize funding operating expenditures over general and administrative expenditures, whenever possible.

8


On March 9, 2020, we unwound our commodity derivative contracts with respect to our future crude oil production. In connection with these transactions, we received $6.5 million of proceeds from the derivative counterparty. In order to reduce future interest expense, we used these proceeds to pay down the 2019 Term Loan (as defined in Note 8. “Loans Payable”). On April 3, 2020, we entered into a new swap contract with DenizBank, A.S. (“DenizBank”), which hedged approximately 2,000 barrels of oil per day (“Bbl/d”). The swap contract extends through February 2021, has an ICE Brent Index strike price of $36.00 per barrel, and is settled monthly. Therefore, DenizBank is required to make a payment to us if the average monthly ICE Brent Index price is less than $36.00 per barrel, and we are required to make a payment to DenizBank if the average monthly ICE Brent Index price is greater than $36.00 per barrel.

Türkiye Petrol Rafinerileri A.Ş. (“TUPRAS”), a privately-owned oil refinery in Turkey, purchases substantially all of our crude oil production. The price of substantially all of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is tied to Arab Medium oil prices adjusted upward based on an API adjustment, Suez Canal tariff costs, and freight charges. Between March 2020 and May 2020, there was a significant widening of the differential between the average monthly ICE Brent Index price and our realized oil prices. In 2018 and 2019, the average monthly ICE Brent Index Price exceeded our realized oil prices by $2.44 and $0.17 per barrel, respectively. The differential between the average monthly ICE Brent Index Price and our realized oil prices widened from $3.40 per barrel in March 2020 to $8.34 per barrel in May 2020. The widening of the differential between the average monthly ICE Brent Index Price and our realized oil prices rendered our hedges less effective, resulting in significantly lowered revenues from March 2020 through May 2020.  In June 2020, the differential between the average monthly ICE Brent Index Price and our realized oil prices contracted to $0.74 per barrel, and in July 2020, our realized oil prices exceeded the average monthly ICE Brent Index Price by $3.71 per barrel. The differential between the average monthly ICE Brent Index Price and our realized oil prices remains unpredictable and may expand or contract in the future.

The price of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is determined under the Petroleum Market Law No. 5015 under the laws of the Republic of Turkey. In November 2019, TUPRAS filed a lawsuit seeking restitution from us for alleged overpayments resulting from a February 2019 amendment to the Turkish domestic crude oil pricing formula under Petroleum Market Law No. 5015 (the “Pricing Amendment”). TUPRAS also claimed that the Pricing Amendment violates the Constitution of the Republic of Turkey and seeks to have the Pricing Amendment cancelled. Additionally, in April 2020, TUPRAS notified us that it intends to extend payment terms for oil purchases by 60 days. The outcome of the TUPRAS lawsuit and negotiations regarding the extension of payment terms is uncertain; however, a conclusion of the lawsuit in TUPRAS’s favor or an extension of payment terms would reduce or delay our cash flow and decrease our cash balances.

In the second quarter of 2020, we borrowed approximately $626,000 pursuant to the U.S. Paycheck Protection Program (the “PPP”) to cover certain payroll, benefit, and rent expenses. We have forecast that amounts borrowed or received pursuant to the PPP will be forgiven for cash flow purposes. New guidance on the criteria for forgiveness continues to be released, and we currently expect that we will meet the conditions for forgiveness for a majority of the loan. Additionally, in the second quarter of 2020, the Turkish government passed legislation permitting employers to reduce the working hours of employees, reducing payroll and benefit expenses, through the end of August 2020. The actual reduction in payroll and benefit expenses due to this legislation is approximately $533,000.  

As of September 30, 2020, we had $8.6 million of outstanding principal under the 2019 Term Loan. The 2019 Term Loan is payable in five monthly installments of $1.4 million plus accrued interest from October 2020 through the maturity date in February 2021. In addition, dividends on our Series A Preferred Shares are payable quarterly at our election in cash, common shares, or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. In order to conserve cash, we elected to pay the 2020 third quarter dividend in common shares, and, as such, on September 30, 2020, we issued 7,749,267 common shares to holders of Series A Preferred Shares.

On August 7, 2020, to supplement our liquidity, we entered into an up to $8.0 million loan with an affiliate of Mr. Mitchell.  The loan is due August 7, 2021.  Even with this additional liquidity, as of the date hereof, based on cash on hand and projected future cash flow from operations, our current liquidity position is severely constrained.  As a result, substantial doubt exists regarding our ability to continue as a going concern. Our management is actively pursuing improving our working capital position in order to remain a going concern for the foreseeable future.  As of September 30, 2020, we have no amounts outstanding under this loan.  

Management believes the going concern assumption to be appropriate for these consolidated financial statements.  If the going concern assumption was not appropriate, adjustments would be necessary to the carrying values of assets and liabilities, reported revenues and expenses and in the balance sheet classifications used in these consolidated financial statements.

9


3. Recent accounting pronouncements

In June 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-13, Financial Instruments - Credit Losses (“ASU 2016-13”). ASU 2016-13 changes the impairment model for most financial assets and certain other instruments, including trade and other receivables, held-to-maturity debt securities and loans, and requires entities to use a new forward-looking expected loss model that will result in the earlier recognition of allowance for losses. This update is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Entities will apply the standard’s provisions as a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is adopted. We are currently assessing the potential impact of ASU 2016-13 on our consolidated financial statements and results of operations.

In November 2018, the FASB issued ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses. This update clarifies that receivables arising from operating leases are not in scope of this topic, but rather Topic 842, Leases. This update will be effective for financial statements issued for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. This update will be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We adopted this standard effective January 1, 2020. The adoption of this update had no impact on our consolidated financial statements and results of operations.

In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740) - Simplifying the Accounting for Income Taxes. This update removes certain exceptions to the general principles in Topic 740 and provides clarifications related to certain franchise taxes, transactions with a government that result in a step-up in the tax basis of goodwill, allocation of current and deferred income tax expense and the annual effective tax rate.  This update is effective January 1, 2021.  We are currently assessing the potential impact of this update on our consolidated financial statements and results of operations.

We have reviewed other recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on our consolidated results of operations, financial position and cash flows. Based on that review, we believe that none of these pronouncements will have a significant effect on current or future earnings or operations.

4. Series A Preferred Shares

Series A Preferred Shares

As of September 30, 2020 and 2019, we had 921,000 outstanding Series A Preferred Shares. The Series A Preferred Shares contain a substantive conversion option, are mandatorily redeemable and convert into a fixed number of common shares. As a result, under U.S. GAAP, we have classified the Series A Preferred Shares within mezzanine equity in our consolidated balance sheets. As of September 30, 2020, there were $5.0 million of Series A Preferred Shares and $41.1 million of Series A Preferred Shares – related party outstanding (See Note 15. “Related party transactions”).

Pursuant to the Certificate of Designations for the Series A Preferred Shares (as amended to date, the “Certificate of Designations”), each Series A Preferred Share may be converted at any time, at the option of the holder, into 45.754 common shares (which is equal to an initial conversion price of approximately $1.0928 per common share and is subject to customary adjustments for stock splits, stock dividends, recapitalizations or other fundamental changes).

If not converted sooner, on November 4, 2024, we are required to redeem the outstanding Series A Preferred Shares in cash at a price per share equal to the liquidation preference plus accrued and unpaid dividends. At any time on or after November 4, 2020, we may redeem all or a portion of the Series A Preferred Shares at the redemption prices listed below (expressed as a percentage of the liquidation preference amount per share) plus accrued and unpaid dividends to the date of redemption, if the closing sale price of the common shares equals or exceeds 150% of the conversion price then in effect for at least 10 trading days (whether or not consecutive) in a period of 20 consecutive trading days, including the last trading day of such 20 trading day period, ending on, and including, the trading day immediately preceding the business day on which we issue a notice of optional redemption. The redemption prices for the 12-month period starting on the dates below are:

 

Period Commencing

Redemption Price

November 4, 2020

105.000%

November 4, 2021

103.000%

November 4, 2022

101.000%

November 4, 2023 and thereafter

100.000%

Additionally, upon the occurrence of a change of control (as defined in the Certificate of Designations), we are required to offer to redeem the Series A Preferred Shares within 120 days after the first date on which such change of control occurred, for cash at a redemption price equal to the liquidation preference per share, plus any accrued and unpaid dividends.  A change of control excludes a transaction with Mr. Mitchell, his family members, and their affiliates.  

10


Dividends on the Series A Preferred Shares are payable quarterly at our election in cash, common shares or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid all in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. Dividends are payable quarterly on March 31, June 30, September 30, and December 31 of each year. The holders of the Series A Preferred Shares also are entitled to participate pro-rata in any dividends paid on the common shares on an as-converted-to-common shares basis. For the three and nine months ended September 30, 2020, we recorded $1.8 million and $5.0 million, respectively, in dividends on the Series A Preferred Shares, which is recorded in our consolidated statements of comprehensive (loss) income under the caption “Interest and other expense”.  For the three and nine months ended September 30, 2019, we recorded $1.8 million and $5.1 million, respectively, in dividends on the Series A Preferred Shares, which is recorded in our consolidated statements of comprehensive (loss) income under the caption “Interest and other expense”.     

Except as required by Bermuda law, the holders of Series A Preferred Shares have no voting rights, except that for so long as at least 400,000 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect two directors to our Board of Directors. For so long as between 80,000 and 399,999 Series A Preferred Shares are outstanding, the holders of the Series A Preferred Shares voting as a separate class have the right to elect one director to our Board of Directors. Upon less than 80,000 Series A Preferred Shares remaining outstanding, any directors elected by the holders of Series A Preferred Shares shall immediately resign from our Board of Directors.

The Certificate of Designation also provides that without the approval of the holders of a majority of the outstanding Series A Preferred Shares, we will not issue indebtedness for money borrowed or other securities which are senior to the Series A Preferred Shares in excess of the greater of (i) $100 million or (ii) 35% of our PV-10 of proved reserves as disclosed in our most recent independent reserve report filed or furnished by us on EDGAR.

5. Property and equipment

Oil and natural gas properties

The following table sets forth the capitalized costs under the successful efforts method for our oil and natural gas properties as of:

 

 

September 30, 2020

 

 

December 31, 2019

 

 

(in thousands)

 

Oil and natural gas properties, proved:

 

 

 

 

 

 

 

Turkey

$

105,753

 

 

$

167,446

 

Bulgaria

 

524

 

 

 

502

 

Total oil and natural gas properties, proved

 

106,277

 

 

 

167,948

 

Oil and natural gas properties, unproved:

 

 

 

 

 

 

 

Turkey

 

9,979

 

 

 

12,978

 

Total oil and natural gas properties, unproved

 

9,979

 

 

 

12,978

 

Gross oil and natural gas properties

 

116,256

 

 

 

180,926

 

Accumulated depletion

 

(75,546

)

 

 

(101,232

)

Net oil and natural gas properties

$

40,710

 

 

$

79,694

 

At September 30, 2020 and December 31, 2019, we excluded $0.3 million and $0.2 million, respectively, from the depletion calculation for proved development wells currently in progress and for costs associated with fields currently not in production.

At September 30, 2020, the capitalized costs of our oil and natural gas properties, net of accumulated depletion, included $3.4 million relating to acquisition costs of proved properties, which are being depleted by the unit-of-production method using total proved reserves, and $56.8 million relating to well costs and additional development costs, which are being depleted by the unit-of-production method using proved developed reserves.

At December 31, 2019, the capitalized costs of our oil and natural gas properties included $5.0 million relating to acquisition costs of proved properties, which are being amortized by the unit-of-production method using total proved reserves, and $63.8 million relating to well costs and additional development costs, which are being amortized by the unit-of-production method using proved developed reserves.

Impairments of proved properties and impairment of exploratory well costs

Proved oil and natural gas properties are reviewed for impairment when events and circumstances indicate the carrying value of such properties may not be recoverable. We primarily use Level 3 inputs to determine fair value, including but not limited to, estimates of

11


proved reserves, future commodity prices, the timing and amount of future production and capital expenditures and discount rates commensurate with the risk reflective of the lives remaining for the respective oil and natural gas properties.

During the nine months ended September 30, 2020, we recorded $2.2 million of exploratory dry-hole costs and $18.2 million of impairment of proved properties, which are primarily measured using Level 3 inputs.  During the three and nine months ended September 30, 2019, we recorded $0.5 million and $6.3 million of exploratory dry-hole costs, respectively, which are primarily measured using Level 3 inputs.

Capitalized cost greater than one year

As of September 30, 2020 and December 31, 2019, there were no exploratory well costs greater than one year.

Equipment and other property

The historical cost of equipment and other property, presented on a gross basis with accumulated depreciation, is summarized as follows:

 

 

September 30, 2020

 

 

December 31, 2019

 

 

(in thousands)

 

Other equipment

$

903

 

 

$

1,121

 

Land

 

101

 

 

 

132

 

Inventory

 

6,241

 

 

 

3,209

 

Gas gathering system and facilities

 

65

 

 

 

172

 

Vehicles

 

219

 

 

 

304

 

Leasehold improvements, office equipment and software

 

4,236

 

 

 

5,264

 

Gross equipment and other property

 

11,765

 

 

 

10,202

 

Accumulated depreciation

 

(4,598

)

 

 

(5,378

)

Net equipment and other property

$

7,167

 

 

$

4,824

 

 

At September 30, 2020, in addition to the above, we have classified $3.0 million of inventory as a current asset, which represents our expected inventory consumption during the next twelve months. We classify our remaining materials and supply inventory as a long-term asset because such materials will ultimately be classified as a long-term asset when the material is used in the drilling of a well.

At September 30, 2020 and December 31, 2019, we excluded $9.2 million and $10.3 million of inventory, respectively, from depreciation as the inventory had not been placed into service.

6. Asset retirement obligations

The following table summarizes the changes in our asset retirement obligations (“ARO”) for the nine months ended September 30, 2020 and for the year ended December 31, 2019:

 

 

September 30, 2020

 

 

December 31, 2019

 

 

(in thousands)

 

Asset retirement obligations at beginning of period

$

4,749

 

 

$

4,667

 

Liabilities settled

 

(791

)

 

 

 

Foreign exchange change effect

 

(914

)

 

 

(519

)

Additions

 

 

 

 

388

 

Accretion expense

 

141

 

 

 

213

 

Asset retirement obligations at end of period

$

3,185

 

 

$

4,749

 

 

Our ARO is measured using primarily Level 3 inputs. The significant unobservable inputs to this fair value measurement include estimates of plugging costs, remediation costs, inflation rate and well life. The inputs are calculated based on historical data as well as current estimated costs.

7. Derivative instruments

We use derivative instruments to manage certain risks related to commodity prices and foreign currency exchange rates. The use of derivative instruments for risk management is covered by operating policies and is closely monitored by our senior management. We do not hold any derivatives for speculative purposes and do not use derivatives with leveraged or complex features. We have not

12


designated the derivative contracts as hedges for accounting purposes, and accordingly, we record the derivative contracts at fair value and recognize changes in fair value in earnings as they occur.

To the extent that a legal right of offset exists, we net the value of our derivative contracts with the same counterparty in our consolidated balance sheets. All of our oil derivative contracts are settled based upon Brent crude oil pricing. We recognize gains and losses related to these contracts on a fair value basis in our consolidated statements of operations and comprehensive (loss) income under the caption “(Loss) gain on derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on derivative contracts.”

On March 9, 2020, we unwound our three-way collar contract with DenizBank, which hedged approximately 1,000 Bbl/d of our oil production in Turkey. The three-way collar contract had a Brent floor of $55.00, a Brent ceiling of $72.90, and a Brent long call of $80.00, and was in place through April 30, 2020. We also unwound our swap contract with DenizBank, which hedged approximately 1,000 Bbl/d of our oil production in Turkey. The swap contract had a Brent strike price of $60.30 and was in place through December 31, 2020. In connection with these transactions, we received approximately $6.5 million of proceeds from DenizBank. We used these proceeds to pay down the 2019 Term Loan to reduce our future interest expense.  

On April 3, 2020, we entered into a new swap contract DenizBank, which hedged 1,987 Bbl/d. The swap contract extends through February 2021, has an ICE Brent Index strike price of $36.00 per barrel, and is settled monthly.

At September 30, 2020, we had outstanding commodity derivative contracts with respect to our future crude oil production as set forth in the table below:

 

Fair Value of Commodity Derivative Instruments as of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Additional

 

 

 

 

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Call Ceiling

 

 

Estimated Fair

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Swap

 

October 1, 2020 - February 28, 2021

 

 

1,987

 

 

$

36.00

 

 

$

-

 

 

$

-

 

 

$

2,201

 

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,201

 

 

At December 31, 2019, we had outstanding commodity derivative contracts with respect to our future crude oil production as set forth in the table below:

Fair Value of Derivative Instruments as of December 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted

 

 

Weighted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Average

 

 

Average

 

 

Additional

 

 

Estimated Fair

 

 

 

 

 

Quantity

 

 

Minimum

 

 

Maximum Price

 

 

Call Ceiling

 

 

Value of Asset

 

Type

 

Period

 

(Bbl/day)

 

 

Price (per Bbl)

 

 

(per Bbl)

 

 

(per Bbl)

 

 

(Liability)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Three-way collar

 

January 1, 2020 - April 30, 2020

 

 

1,000

 

 

$

55.00

 

 

$

72.90

 

 

$

80.00

 

 

 

21

 

Swap

 

January 1, 2020 - December 31, 2020

 

 

986

 

 

$

60.30

 

 

 

-

 

 

 

-

 

 

 

(987

)

Total Estimated Fair Value of Liability

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

(966

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency derivatives

To the extent that a legal right of offset exists, we net the value of our derivative contracts with the same counterparty in our consolidated balance sheets. All of our foreign exchange derivative contracts are settled based upon the contract rate. We recognize gains and losses related to these contracts on a fair value basis in our consolidated statements of operations and comprehensive (loss) income under the caption “(Loss) gain on derivative contracts.” Settlements of derivative contracts are included in operating activities on our consolidated statements of cash flows under the caption “Cash settlement on derivative contracts.”

13


On September 16, 2020, we entered into foreign exchange forward contracts to hedge against currency fluctuations between the New Turkish Lira (“TRY”) and USD. The forward contract settlement dates are from October through December, 2020 for $1.0 million at a strike price of 7.5775 TRY to $1.00 USD.

At September 30, 2020, we had outstanding foreign exchange derivative contracts as set forth in the table below:

 

Fair Value of Foreign Exchange Derivative Instruments as of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Buy

 

 

 

 

Sell

 

 

Estimated Fair

 

Type

 

Buy/Sell

 

Rate

 

 

Settlement Dates

 

Buy Currency

 

Currency Amount

 

 

Sell Currency

 

Currency Amount

 

 

Value of Asset (Liability)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

FXOPT

 

Buy

 

 

7.5775

 

 

10/6/2020-12/1/2020

 

TRY

 

 

1,000,000

 

 

USD

 

 

1,000,000

 

 

 

35

 

Total Estimated Fair Value of Asset

 

 

 

 

 

 

 

 

 

 

 

 

 

$

35

 

 

We did not have any outstanding foreign currency derivatives outstanding as of December 31, 2019.

 

During the three months ended September 30, 2020 and 2019, we recorded a net loss on derivative contracts of $0.4 million and a net gain of $0.4 million, respectively.

During the nine months ended September 30, 2020 and 2019, we recorded a net gain on derivative contracts of $3.9 million and a net loss of $0.03 million, respectively.

Balance sheet presentation

The following tables summarizes both: (i) the gross fair value of our derivative instruments by the appropriate balance sheet classification even when the derivative instruments are subject to netting arrangements and qualify for net presentation in our consolidated balance sheets at September 30, 2020 and December 31, 2019, and (ii) the net recorded fair value as reflected on our consolidated balance sheet at September 30, 2020 and December 31, 2019.  

 

 

 

 

 

As of September 30, 2020

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

Assets (Liabilities)

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

Type of Derivative

 

Location on Consolidated

 

Recognized

 

 

Balance

 

 

Consolidated

 

Contract

 

Balance Sheets

 

Assets (Liabilities)

 

 

Sheets

 

 

Balance Sheets

 

 

 

 

 

(in thousands)

 

Commodity - crude oil

 

Current liabilities

 

$

(2,201

)

 

$

-

 

 

$

(2,201

)

Foreign exchange

 

Current asset

 

$

35

 

 

$

-

 

 

$

35

 

 

 

 

 

 

As of December 31, 2019

 

 

 

 

 

 

 

 

 

Gross

 

 

 

 

 

 

 

 

 

 

 

 

 

Amount

 

 

Net Amount of

 

 

 

 

 

Gross

 

 

Offset in the

 

 

(Liabilities)

 

 

 

 

 

Amount of

 

 

Consolidated

 

 

Presented in the

 

Type of Derivative

 

Location on Consolidated

 

Recognized

 

 

Balance

 

 

Consolidated

 

Contract

 

Balance Sheets

 

(Liabilities)

 

 

Sheets

 

 

Balance Sheets

 

 

 

 

 

(in thousands)

 

Crude Oil

 

Current liabilities

 

$

(987

)

 

$

21

 

 

$

(966

)

 

 

14


8. Loans payable

As of the dates indicated, our third-party debt consisted of the following:

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

Fixed and floating rate loans

(in thousands)

 

Term Loans (1)

$

8,571

 

 

$

20,000

 

PPP Loan

 

626

 

 

 

-

 

Less: current portion

 

9,197

 

 

 

17,143

 

Long-term portion

$

 

 

$

2,857

 

 

 

On August 23, 2016, the Turkish branch of TransAtlantic Exploration Mediterranean International Pty Ltd (“TEMI”) entered into a Credit Agreement (the “Credit Agreement”) with DenizBank. The Credit Agreement is a master agreement pursuant to which DenizBank may make loans to TEMI from time to time pursuant to additional loan agreements.

On August 31, 2016, we and DenizBank entered into additional agreements with respect to up to $20.0 million of non-cash facilities, including guarantee letters and treasury instruments for future hedging transactions.

2017 Term Loan

On November 17, 2017, DenizBank entered into a $20.4 million term loan (the “2017 Term Loan”) with TEMI under the Credit Agreement.

The 2017 Term Loan bore interest at a fixed rate of 6.0% (plus 0.3% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2017 Term Loan had a grace period which bore no interest or payments due until July 2018. Thereafter, the 2017 Term Loan was payable in one monthly installment of $1.38 million, nine monthly installments of $1.2 million each through April 2019 and thereafter in eight monthly installments of $1.0 million each through December 2019, with the exception of one monthly installment of $1.2 million occurring in October 2019.

On December 30, 2019, we repaid the 2017 Term Loan in full in accordance with its terms.

2018 Term Loan

On May 28, 2018, DenizBank entered into a $10.0 million term loan (the “2018 Term Loan”) with TEMI under the Credit Agreement.

The 2018 Term Loan bore interest at a fixed rate of 7.25% (plus 0.3% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2018 Term Loan had a grace period through July 2018 during which no payments were due. Thereafter, accrued interest on the 2018 Term Loan was payable monthly and the principal on the 2018 Term Loan was payable in five monthly installments of $0.2 million each through December 2018, four monthly installments of $0.5 million each through April 2019, four monthly installments of $1.0 million each through August 2019, and four monthly installments of $0.75 million each through December 2019.

On December 30, 2019, we repaid the 2018 Term Loan in full in accordance with its terms.

2019 Term Loan

On February 22, 2019, DenizBank entered into a $20.0 million term loan (the “2019 Term Loan”) with TEMI under the Credit Agreement.

The 2019 Term Loan bears interest at a fixed rate of 7.5% (plus 0.375% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2019 Term Loan had a grace period through December 2019 during which no payments were due. Thereafter, accrued interest on the 2019 Term Loan was payable monthly, and the principal on the 2019 Term Loan was payable in 14 monthly installments of $1.4 million each.

On March 9, 2020, we unwound our three-way collar contract with DenizBank and received approximately $6.5 million of proceeds of proceeds, which we used to pay down the 2019 Term Loan.  As part of the pay down, DenizBank extended a grace period for principal repayments until July 2020, at which time we resumed principal payments for one monthly installment in July 2020 of $0.6 million and seven monthly installments of $1.4 million beginning in August 2020.The 2019 Term Loan matures in February 2021. Amounts repaid under the 2019 Term Loan may not be reborrowed, and early repayments under the 2019 Term Loan are subject to early repayment fees. The 2019 Term Loan is guaranteed by Amity Oil International Pty Ltd (“Amity”), Talon Exploration, Ltd. (“Talon Exploration”), DMLP, Ltd. (“DMLP”), and TransAtlantic Turkey, Ltd. (“TransAtlantic Turkey”).

15


The 2019 Term Loan contains standard prohibitions on the activities of TEMI as the borrower, including prohibitions on encumbering or creating restrictions or limitations on all or a part of its assets, revenues, or properties, giving guaranties or sureties, selling assets or transferring revenues, dissolving, liquidating, merging, or consolidating, incurring additional debt, paying dividends, making certain investments, undergoing a change of control, and other similar matters. In addition, the 2019 Term Loan prohibits Amity, Talon Exploration, DMLP, and TransAtlantic Turkey from incurring additional debt. An event of default under the 2019 Term Loan includes, among other events, failure to pay principal or interest when due, breach of certain covenants, representations, warranties, and obligations, bankruptcy or insolvency, and the occurrence of a material adverse effect.

The 2019 Term Loan is secured by a pledge of (i) the stock of TEMI, DMLP, TransAtlantic Turkey, and Talon Exploration, (ii) substantially all of the assets of TEMI, (iii) certain Gundem real estate and Muratli real estate owned by Gundem (as defined in Note 15. “Related party transactions”), (iv) certain Diyarbakir real estate owned 80% by Mr. Mitchell and 20% by Mr. Uras, and (v) certain Ankara real estate owned 100% by Mr. Uras. In addition, TEMI assigned its Turkish collection accounts and its receivables from the sale of oil to DenizBank as additional security for the 2019 Term Loan.   

At September 30, 2020, we had $8.6 million outstanding under the 2019 Term Loan and no availability, and we were in compliance with the covenants in the 2019 Term Loan.

Paycheck Protection Program

On April 10, 2020, we received loan proceeds in the amount of $626,000 under the PPP.  The PPP, established as part of the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans are forgivable after 24 weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the 24-week period.  The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months.  We used the proceeds for purposes consistent with the PPP and believe that our use of the loan proceeds will meet the conditions for forgiveness for a majority of the loan.

Loan and Security Agreement

On August 7, 2020, we entered into a Loan and Security Agreement (the “Loan Agreement”) with Dalea Investment Group, LLC (the “Lender”), an entity controlled by the Preferred Shareholder Group.  Pursuant to the Loan Agreement, the Lender has committed to lend us an aggregate principal amount of up to $8.0 million. Advances shall be made available by Lender and applied by us in accordance with a budget agreed to by us and the Lender and subject to milestones set forth in the Loan Agreement. We intend to use the proceeds of the Loan to finance our and our subsidiaries working capital needs in accordance with the budget.

The outstanding borrowings under the Loan Agreement bear interest at a rate equal to 10% per annum. Principal on the Loan does not amortize and is required to be repaid in full on the maturity date of August 7, 2021. The Loan may be optionally prepaid in whole or in part from time to time without fee, premium, or penalty.

Our obligations under the Loan Agreement are secured by all of our present and future accounts, chattel paper, commercial tort claims, commodity accounts, commodity contracts, contracts receivable, deposit accounts, documents, financial assets, general intangibles, instruments, investment property (including all of our right, title, and interest in and to all of the capital stock of TransAtlantic Petroleum (USA) Corp. and TransAtlantic Worldwide Ltd., each our wholly-owned direct subsidiary), letters of credit, letter of credit rights, payment intangibles, securities, notes receivable, choses of action, security accounts, and security entitlements, now or hereafter owned, held, or acquired.  The Loan Agreement contains representations, warranties, covenants, and events of default.

9. Leases

Operating and financing leases

We lease office space in Dallas, Texas, Bulgaria and Turkey.  We also lease apartments, vehicles and operations yards in Turkey.    The terms of our lease agreements generally range from one to five years, with some containing options to renew or cancel. We determine if an arrangement meets the definition of a lease at inception, at which time we also perform an analysis to determine whether the lease qualifies as an operating or financing lease.

Our operating and financing leases are included in other assets and accrued liabilities (current and long-term) on our consolidated balance sheet.  Lease expense for our operating leases is recognized in our consolidated statements of comprehensive (loss) income under the caption “General and administrative”.  Lease expense for our operating leases for our operations yards in Turkey is recognized in our consolidated statements of comprehensive (loss) income under the caption “Production”.

16


Lease right-of-use assets and lease liabilities are measured using the present value of future minimum lease payments over the lease term at commencement date. The right-of-use asset also includes any lease payments made on or before the commencement date of the lease, less any lease incentives received. As the rate implicit in the lease is not readily determinable in our leases, we use our incremental borrowing rates based on the information available at the lease commencement date in determining the present value of lease payments.

For leases with an initial non-cancelable lease term of less than one year and no option to purchase, we have elected not to recognize the lease on our consolidated balance sheets and instead recognize lease payments on a straight-line basis over the lease term.

Operating lease costs were comprised of the following:

 

 

September 30, 2020

 

For the nine months ended September 30, 2020

(in thousands)

 

Operations yards

$

450

 

Office rent

 

180

 

Vehicles

 

27

 

Other

 

68

 

Total lease costs

$

725

 

 

Future non-cancelable minimum lease payments under our operating lease commitments as of September 30, 2020 were as follows for each of the next five years and thereafter:

 

 

September 30, 2020

 

 

(in thousands)

 

Remainder of 2020

$

219

 

2021

 

759

 

2022

 

869

 

2023

 

558

 

2024

 

202

 

2025

 

-

 

Thereafter

 

-

 

Total

$

2,607

 

Less: Imputed interest

 

90

 

Present value of lease liabilities

$

2,517

 

As of September 30, 2020, the weighted average remaining lease term in years was 3.3 years, and the weighted average discount rate used was 7.55%.  

Future non-cancelable minimum lease payments under our operating lease commitments as of December 31, 2019 were as follows for each of the next five years and thereafter:

 

 

December 31, 2019

 

 

(in thousands)

 

2020

$

960

 

2021

 

867

 

2022

 

867

 

2023

 

557

 

2024

 

200

 

Thereafter

 

-

 

Total

$

3,451

 

 

10. Contingencies relating to production leases and exploration permits

Selmo

We are involved in litigation with persons who claim ownership of a portion of the surface at the Selmo oil field in Turkey. These cases are being vigorously defended by TEMI and Turkish governmental authorities. We do not have enough information to estimate

17


the potential additional operating costs we would incur in the event the purported surface owners’ claims are ultimately successful. Any adjustment arising out of the claims will be recorded when it becomes probable and measurable.

Bulgaria

During 2012, we were notified that the Bulgarian government may seek to recover approximately $2.0 million in contractual obligations under our Aglen exploration permit work program. Due to the Bulgarian government’s January 2012 ban on fracture stimulation and related activities, a force majeure event under the terms of the exploration permit was recognized by the Bulgarian government. Although we invoked force majeure, we recorded $2.0 million in general and administrative expense relating to our Aglen exploration permit during 2012 for this contractual obligation.

In October 2015, the Bulgarian Minister of Energy filed a suit in the Sofia City Court against Direct Petroleum Bulgaria EOOD (“Direct Bulgaria”), claiming $200,000 in liquidated damages for Direct Bulgaria’s alleged failure to fulfill its obligations under the Aglen exploration permit work program. In May 2018, the Sofia City Court concluded that Direct Bulgaria did not fail to fulfill its obligations under the Aglen exploration permit work program as Direct Bulgaria received a force majeure event recognition as a result of a fracture stimulation ban in 2012, imposed by the Bulgarian Parliament, which force majeure event had not been terminated before the expiry of Direct Bulgaria’s obligations under the Aglen exploration permit work program. Additionally, the Sofia City Court concluded that, even if Direct Bulgaria had failed to fulfill its obligations under the Aglen exploration permit work program, the Bulgarian Minister of Energy failed to file suit within the three-year limitation period. Therefore, the Sofia City Court dismissed all claims of the Bulgarian Minister of Energy and ordered the Bulgarian Minister of Energy to pay Direct Bulgaria’s attorney’s fees and legal costs for court experts. In June 2018, the Bulgarian Minister of Energy filed an appeal in the Sofia Court of Appeal. In November 2018, the Sofia Court of Appeal concluded that the judgement of the Sofia City Court was correct and, therefore, dismissed the Bulgarian Minister of Energy’s appeal. In January 2019, the Bulgarian Minister of Energy filed an appeal in the Supreme Court of Cassation.  The Supreme Court of Cessation held a court hearing on October 21, 2019. A ruling was issued on March 10, 2020, by virtue of which the Supreme Court of Cessation decided that the appeal of the Bulgarian Minister of Energy in its substance is inadmissible. The Bulgarian Minister of Energy has no further rights to appeal.

 

TUPRAS

 

We sell all of our Southeastern Turkey oil to TUPRAS pursuant to a domestic crude oil purchase and sale agreement between TUPRAS and TEMI. The price of the oil delivered pursuant to the purchase and sale agreement is determined under the Petroleum Market Law No. 5015 under the laws of the Republic of Turkey. In February 2019, Turkey entered into the Pricing Amendment to change the statutory pricing formula for purchases of Turkish domestic crude oil.

In November 2019, TUPRAS filed a lawsuit against us, and filed similar lawsuits against other domestic oil producers, in the Batman 4th Civil Court of First Instance seeking restitution from TEMI for alleged overpayments resulting from the implementation of the Pricing Amendment plus interest thereon. In addition, TUPRAS claimed that the Pricing Amendment violates the Constitution of the Republic of Turkey and seeks to have the Pricing Amendment cancelled. TEMI is vigorously defending against these allegations. Any adjustment arising out of the claims will be recorded when it becomes probable and measurable.

11. Shareholders’ equity

Restricted stock units

We recorded share-based compensation expense of $0.1 million for awards of restricted stock units (“RSUs”) for the three months ended September 30, 2020 and 2019.  We recorded share-based compensation expense of $0.2 and $0.3 million for awards of RSUs for the nine months ended September 30, 2020 and 2019, respectively.  

As of September 30, 2020, we had approximately $0.1 million of unrecognized compensation expense related to unvested RSUs, which is expected to be recognized over a weighted average period of 0.7 years.

18


Earnings per share

We account for earnings per share in accordance with ASC Subtopic 260-10, Earnings Per Share (“ASC 260-10”). ASC 260-10 requires companies to present two calculations of earnings per share: basic and diluted. Basic earnings per common share for the three and nine months ended September 30, 2020 and 2019 equals net income (loss) divided by the weighted average shares outstanding during the periods. Weighted average shares outstanding are equal to the weighted average of all shares outstanding for the period, excluding unvested RSUs. Diluted earnings per common share for the three and nine months ended September 30, 2020 and 2019 are computed in the same manner as basic earnings per common share after assuming the issuance of common shares for all potentially dilutive common share equivalents, which includes RSUs and preferred shares, whether exercisable or not. For the three and nine months ended September 30, 2020 and 2019, there were no dilutive securities included in the calculation of diluted earnings per share.

The following table presents the basic and diluted earnings per common share computations:

 

Three Months Ended

 

 

Nine Months Ended

 

 

September 30,

 

 

September 30,

 

(in thousands, except per share amounts)

2020

 

 

2019

 

 

2020

 

 

2019

 

Net income (loss)

$

(2,959

)

 

$

1,070

 

 

$

(34,658

)

 

$

(2,841

)

Basic net income (loss) earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

66,183

 

 

 

57,680

 

 

 

73,738

 

 

 

54,249

 

Basic net income (loss) per common share:

$

(0.04

)

 

$

0.02

 

 

$

(0.04

)

 

$

(0.05

)

Diluted net income (loss) per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

66,183

 

 

 

57,680

 

 

 

73,738

 

 

 

54,249

 

Diluted net income (loss) per common share:

$

(0.04

)

 

$

0.02

 

 

$

(0.04

)

 

$

(0.05

)

 

12. Segment information

In accordance with ASC 280, Segment Reporting (“ASC 280”), we have two reportable geographic segments: Turkey and Bulgaria. Summarized financial information from operations concerning our geographic segments is shown in the following table:

 

Corporate

 

 

Turkey

 

 

Bulgaria

 

 

Total

 

 

(in thousands)

 

For the three months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

-

 

 

$

8,629

 

 

$

-

 

 

$

8,629

 

(Loss) income from operations before income taxes

 

(3,311

)

 

 

1,926

 

 

 

(46

)

 

 

(1,431

)

Capital expenditures

$

-

 

 

$

274

 

 

$

-

 

 

$

274

 

For the three months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

-

 

 

$

14,653

 

 

$

-

 

 

$

14,653

 

(Loss) income from operations before income taxes

 

(3,984

)

 

 

5,932

 

 

 

(628

)

 

 

1,320

 

Capital expenditures

$

-

 

 

$

9,696

 

 

$

487

 

 

$

10,183

 

For the nine months ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

-

 

 

$

23,489

 

 

$

-

 

 

$

23,489

 

(Loss) income from operations before income taxes

 

(10,283

)

 

 

(25,328

)

 

 

(223

)

 

 

(35,834

)

Capital expenditures

$

-

 

 

$

3,746

 

 

$

-

 

 

$

3,746

 

For the nine months ended September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total revenues

$

-

 

 

$

50,909

 

 

$

-

 

 

$

50,909

 

(Loss) income from operations before income taxes

 

(9,524

)

 

 

20,304

 

 

 

(6,582

)

 

 

4,198

 

Capital expenditures

$

-

 

 

$

20,424

 

 

$

5,537

 

 

$

25,961

 

Segment assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2020

$

7,250

 

 

$

76,994

 

 

$

618

 

 

$

84,862

 

December 31, 2019

$

7,810

 

 

$

127,986

 

 

$

708

 

 

$

136,504

 

 

13. Financial instruments

Interest rate risk

We are exposed to interest rate risk as a result of our variable rate short-term cash holdings.

19


Foreign currency risk

We have underlying foreign currency exchange rate exposure. Our currency exposures primarily relate to transactions denominated in the Bulgarian Lev, the European Union Euro, and the TRY. We are also subject to foreign currency exposures resulting from translating the functional currency of our subsidiary financial statements into the USD reporting currency. At September 30, 2020, we had 24.8 million TRY (approximately $3.2 million) in cash and cash equivalents, which exposes us to exchange rate risk based on fluctuations in the value of the TRY. At September 30, 2020, we were a party to foreign exchange derivative contracts (See Note 7. “Derivative instruments”).

Commodity price risk

We are exposed to fluctuations in commodity prices for oil and natural gas. Commodity prices are affected by many factors, including, but not limited to, supply and demand. At September 30, 2020 and December 31, 2019, we were a party to commodity derivative contracts (See Note 7. “Derivative instruments”).

Concentration of credit risk

The majority of our receivables are within the oil and natural gas industry, primarily from our industry partners and from government agencies. Included in receivables are amounts due from Turkiye Petrolleri Anonim Ortakligi (“TPAO”), the national oil company of Turkey, Zorlu Dogal Gaz Ithalat Ihracat ve Toptan Ticaret A.S. (“Zorlu”), a privately owned natural gas distributor in Turkey, and TUPRAS, which purchase the majority of our oil and natural gas production. The receivables are not collateralized. To date, we have experienced minimal bad debts and have no allowance for doubtful accounts for TUPRAS. The majority of our cash and cash equivalents are held by four financial institutions in the United States and Turkey.

Fair value measurements

Cash and cash equivalents, restricted cash, accounts receivable, accounts payable, accrued liabilities and our loans payable were each estimated to have a fair value approximating the carrying amount at September 30, 2020 and December 31, 2019, due to the short maturity of those instruments.

The following table summarizes the valuation of our financial liabilities as of September 30, 2020:

 

 

Fair Value Measurement Classification

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identical Assets or

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Liabilities

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

 

(in thousands)

 

Measured on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets and (liabilities):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

-

 

 

$

(2,201

)

 

$

-

 

 

$

(2,201

)

Foreign exchange derivative contracts

 

-

 

 

 

35

 

 

 

-

 

 

 

35

 

Total

$

-

 

 

$

(2,166

)

 

$

-

 

 

$

(2,166

)

Disclosed but not carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019 Term Loan

 

-

 

 

 

-

 

 

 

(7,244

)

 

 

(7,244

)

Total

$

-

 

 

$

-

 

 

$

(7,244

)

 

$

(7,244

)

20


The following table summarizes the valuation of our financial liabilities as of December 31, 2019:

 

 

Fair Value Measurement Classification

 

 

Quoted Prices in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Active Markets for

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Identical Assets or

 

 

Significant Other

 

 

Significant

 

 

 

 

 

 

Liabilities

 

 

Observable Inputs

 

 

Unobservable Inputs

 

 

 

 

 

 

(Level 1)

 

 

(Level 2)

 

 

(Level 3)

 

 

Total

 

 

(in thousands)

 

Measured on a recurring basis

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commodity derivative contracts

$

-

 

 

$

(966

)

 

$

-

 

 

$

(966

)

Disclosed but not carried at fair value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2019 Term Loan

 

-

 

 

 

-

 

 

 

(17,333

)

 

 

(17,333

)

Total

$

-

 

 

$

-

 

 

$

(17,333

)

 

$

(17,333

)

We remeasure our derivative contracts on a recurring basis, with changes flowing through earnings. At September 30, 2020 and December 31, 2019, the fair values of the 2019 Term Loan were estimated using a discounted cash flow analysis based on unobservable Level 3 inputs, including our own credit risk associated with the loans payable.

14. Asset divestiture

On February 24, 2020, we sold the shares in our wholly-owned subsidiary Petrogas Petrol Gaz ve Petrokemya Urunleri Insaat Sanayive Ticaret A.S. (“Petrogas”), which held the Edirne, Dogu Adatepe, Adatepe, and Gocerler production leases (the “Petrogas Leases”) and 14 employees, to Reform Ham Petrol Dogal Gaz Arama Uretim Sanayi ve Ticaret A.S. (“Reform”) in exchange for $1.5 million and a release of all plugging and abandonment obligations for 65 wells on the Petrogas leases and certain former leases.

 

For the three months ended March 31, 2020, we recorded a net loss of $10.1 million on the sale of Petrogas.  The loss primarily related to the reclassification of the accumulated foreign currency translation adjustment that was realized into earnings from accumulated other comprehensive loss within shareholders’ equity and presented below:

 

 

Loss on Sale

 

 

(in thousands)

 

Total cash proceeds for Petrogas

$

1,451

 

Less: Petrogas net liabilities

 

(652

)

Gain on sale before accumulated foreign currency translation adjustment

 

2,103

 

Less: Petrogas accumulated foreign currency translation adjustment

 

(12,231

)

Net loss on sale of Petrogas

$

(10,128

)

15. Related party transactions

The following table summarizes related party accounts receivable and accounts payable as of the dates indicated:

 

September 30,

 

 

December 31,

 

 

2020

 

 

2019

 

 

(in thousands)

 

Related party accounts receivable:

 

 

 

 

 

 

 

Service Agreement

$

463

 

 

$

433

 

PSI MSA

 

102

 

 

128

 

Total related party accounts receivable

$

565

 

 

$

561

 

Related party accounts payable:

 

 

 

 

 

 

 

Service Agreement

$

301

 

 

$

204

 

PSI MSA

 

2,655

 

 

 

3,959

 

Other - board of directors fees

 

-

 

 

 

99

 

Total related party accounts payable

$

2,956

 

 

$

4,262

 

21


Services transactions

We are a party to a Service Agreement (as amended, the “Service Agreement”) with Longfellow Energy, LP (“Longfellow”), Viking Drilling, LLC (“Viking Drilling”), Riata Management, LLC (“Riata”), LFN Holdco LLC (“LFN”), Red Rock Minerals, LP (“RRM”), Red Rock Minerals II, LP (“RRM II”), Red Rock Advisors, LLC (“RRA”), Production Solutions International Limited (“PSIL”), and NexLube Operating, LLC (“NexLube”) and their subsidiaries (collectively, the “Riata Entities”), under which we and the Riata Entities agreed to provide technical and administrative services to each other from time to time on an as-needed basis. Under the terms of the Service Agreement, the Riata Entities agree to provide us upon our request certain computer services, payroll and benefits services, insurance administration services, and entertainment services, and we and the Riata Entities agree to provide to each other certain management consulting services, oil and natural gas services, and general accounting services (collectively, the “Services”). Under the terms of the Service Agreement, we pay, or are paid, for the actual cost of the Services rendered plus the actual cost of reasonable expenses on a monthly basis. We or any Riata Entity may terminate the Service Agreement at any time by providing advance notice of termination to the other parties.

As of September 30, 2020, we had $0.5 million of outstanding receivables and $0.3 million of outstanding payables pursuant to the Service Agreement.

On March 3, 2016, Mr. Mitchell closed a transaction whereby he sold his interests in Viking Services B.V. (“Viking Services”), the beneficial owner of Viking International Limited (“Viking International”), Viking Petrol Sahasi Hizmetleri A.S. (“VOS”) and Viking Geophysical Services Ltd. (“Viking Geophysical”), to a third party. As part of the transaction, Mr. Mitchell acquired certain equipment used in the performance of stimulation, wireline, workover and similar services, which equipment is owned and operated by Production Solutions International Petrol Arama Hizmetleri Anonim Sirketi (“PSI”). PSI is beneficially owned by PSIL, which is beneficially owned by Dalea Investment Group, LLC, which is controlled by Mr. Mitchell. Consequently, on March 3, 2016, TEMI entered into a master services agreement (the “PSI MSA”) with PSI on substantially similar terms to our then current master services agreements with Viking International, VOS, and Viking Geophysical. Pursuant to the PSI MSA, PSI performs the services on behalf of TEMI and its affiliates. On February 28, 2019, TEMI and PSI entered into an amendment (the “PSI MSA Amendment”) to the PSI MSA, pursuant to which PSI and TEMI agreed to extend the primary term of the PSI MSA to February 26, 2021, with automatic successive renewal terms of one year each, unless terminated by PSI or TEMI by written notice at least 60 days prior to the end of the primary term or any successive renewal term. The master services agreement with each of Viking International, VOS, and Viking Geophysical currently remains in effect.

As of September 30, 2020, we had $0.1 million of outstanding receivables and $2.7 million of outstanding payables pursuant to the PSI MSA.

Office sublease

On August 7, 2018 and effective as of June 14, 2018, TransAtlantic USA entered into a sublease agreement (the “Sublease”) with Longfellow to lease corporate office space located at 16803 North Dallas Parkway, Addison, Texas. The Sublease was approved by the audit committee of the board of directors.

On June 30, 2020, TransAtlantic USA entered into a landlord consent (the “Consent”) with Longfellow, pursuant to which Longfellow consented to the continuing of that Sublease on a month-to-month basis with the rights of each of TransAtlantic USA and Longfellow to terminate the Sublease upon 30 days’ written notice.  

TransAtlantic USA subleases approximately 10,000 square feet of corporate office space in Addison, Texas. The initial lease term under the Sublease commenced on June 14, 2018 (the “Commencement Date”) and expired on June 30, 2020. From the Commencement Date until June 30, 2019, TransAtlantic USA was required to pay monthly rent of $18,333.33 to Longfellow, plus utilities, real property taxes, and liability insurance (to the extent that TransAtlantic USA does not obtain its own liability insurance). The monthly rent increases by $416.67 for the period commencing June 30, 2019 and ending June 30, 2021.

Pursuant to the Sublease, effective as of June 14, 2018, TransAtlantic USA and Longfellow agreed to terminate the Amended and Restated Office Lease, dated June 26, 2017, by and between TransAtlantic USA and Longfellow.

22


Dalea Note and Pledge Agreement

On June 13, 2012, we closed the sale of our oilfield services business, which was substantially comprised of our wholly owned subsidiaries, Viking International and Viking Geophysical, to a joint venture owned by Dalea Partners, LP (“Dalea”) and funds advised by Abraaj Investment Management Limited for an aggregate purchase price of $168.5 million, consisting of approximately $157.0 million in cash and a $11.5 million promissory note from Dalea (the “Original Note”). The promissory note bore interest at a rate of 3.0% per annum and was guaranteed by Mr. Mitchell. The promissory note was payable five years from the date of issuance or earlier upon the occurrence of certain specified events.

On April 19, 2016, we entered into a note amendment agreement (the “Note Amendment Agreement”) with Mr. Mitchell and Dalea, pursuant to which Dalea agreed to deliver an amended and restated promissory note (the “Amended Note”) in favor of us, in the principal sum of $7,964,053, which Amended Note amended and restated the Original Note. The Note Amendment Agreement reduced the principal amount of the Original Note to $7,964,053 in exchange for the cancellation of an account payable of approximately $3.5 million (the “Account Payable”) owed by TransAtlantic Albania Ltd. (“TransAtlantic Albania”), our former subsidiary, to Viking International. We have indemnified a third party for any liability relating to the payment of the Account Payable.

In the Amended Note, we and Dalea acknowledged that (i) while the sale of Dalea’s interest in Viking Services enabled us to take the position that the Original Note was accelerated in accordance with its terms, the principal purpose of including the acceleration events in the Original Note was to ensure that certain oilfield services provided by Viking Services to us would continue to be available to us, and (ii) such services will now be provided pursuant to the PSI MSA. PSI is beneficially owned by PSIL, which is beneficially owned by Dalea Investment Group, LLC, which is controlled by Mr. Mitchell. As a result, the Amended Note revised the events triggering acceleration of the repayment of the Original Note to the following: (i) a reduction of ownership by Dalea (and other controlled affiliates of Mr. Mitchell) of equity interest in PSI to less than 50%; (ii) the sale or transfer by Dalea or PSI of all or substantially all of its assets to any person (a “Transferee”) that does not own a controlling interest in Dalea or PSI and is not controlled by Mr. Mitchell (an “Unrelated Person”), or the subsequent transfer by any Transferee that is not an Unrelated Person of all or substantially all of its assets to an Unrelated Person; (iii) the acquisition by an Unrelated Person of more than 50% of the voting interests of Dalea or PSI; (iv) termination of the PSI MSA other than as a result of an uncured default thereunder by TEMI; (v) default by PSI under the PSI MSA, which default is not remedied within a period of 30 days after notice thereof to PSI; and (vi) insolvency or bankruptcy of PSI. The maturity date of the Amended Note was extended to June 13, 2019. The interest rate on the Amended Note remains at 3.0% per annum and continues to be guaranteed by Mr. Mitchell. The Amended Note contains customary events of default.

In addition, pursuant to the Note Amendment Agreement, on April 19, 2016, we entered into a pledge agreement (the “Pledge Agreement”) with Dalea, whereby Dalea pledged the $2.0 million principal amount of our 13.0% Senior Convertible Notes due 2017 (the “2017 Notes”) owned by Dalea (the “Dalea Convertible Notes”), including any future securities for which the Dalea Convertible Notes are converted or exchanged, as security for the performance of Dalea’s obligations under the Amended Note. The Pledge Agreement provides that interest payable to Dalea under the Dalea Convertible Notes (or any future securities for which the Dalea Convertible Notes are converted or exchanged) will be credited first against the outstanding principal balance of the Amended Note and, upon full repayment of the outstanding principal balance of the Amended Note, any accrued and unpaid interest on the Amended Note. The Pledge Agreement contains customary events of default. On November 4, 2016, Dalea exchanged $2.0 million of 2017 Notes for 40,000 Series A Preferred Shares.

On February 28, 2019, we and Dalea entered into an amendment (the “Note Amendment”) to the Amended Note (as amended by the Note Amendment, the “Note”), pursuant to which Dalea and we agreed to extend the maturity date of the Note to February 26, 2021 (unless otherwise accelerated in accordance with the terms of the Note).

During the nine months ended September 30, 2019, we reduced the principal amount of the Note by $1.0 million for amounts prepaid by Dalea on February 28, 2019 in conjunction with the Note Amendment and by $0.2 million for cash dividends paid on the Series A Preferred Shares.

During the nine months ended September 30, 2020, we reduced the principal amount of the Note by $0.3 million for cash dividends paid on the Series A Preferred Shares.

As of September 30, 2020, the amount receivable under the Note was $3.4 million.

23


Pledge fee agreements

In connection with the pledge of certain Gundem real estate and Muratli real estate to DenizBank as collateral for certain loans, on August 31, 2016, we entered into a pledge fee agreement (the “Gundem Fee Agreement”) with Gundem Turizm Yatirim ve Isletme A.S., predecessor-in-interest to Gundem Yatirim with respect to the Gundem real estate and Muratli real estate pledged as collateral for the term loans under the Credit Agreement (“Gundem”). Pursuant to the Gundem Fee Agreement, we pay Gundem a fee equal to 5% per annum of the collateral value of the Gundem real estate and Muratli real estate pledged as collateral for the term loans under the Credit Agreement. Pursuant to the Gundem Fee Agreement, the Gundem real estate has a deemed collateral value of $10.0 million and the Muratli real estate has a deemed collateral value of $5.0 million.

In connection with the pledge of the Diyarbakir real estate to DenizBank as collateral for certain loans, on August 31, 2016, we entered into a pledge fee agreement with Messrs. Mitchell and Uras (the “Diyarbakir Fee Agreement”) pursuant to which we pay Mr. Mitchell and Mr. Uras a fee of 5% per annum of the collateral value of the Diyarbakir real estate. Pursuant to the Diyarbakir Fee Agreement, the Diyarbakir real estate has a deemed collateral value of $5.0 million.

Amounts payable to Mr. Mitchell under the Gundem Fee Agreement and the Diyarbakir Fee Agreement are used to reduce the outstanding principal amount of the Note. During the nine months ended September 30, 2020, we reduced the principal amount of the Note by $0.4 million for amounts paid under the pledge fee agreements.

16. Subsequent Events

NYSE American Delinquency Letter

On November 9, 2020, we received a letter (the “Letter”) from the NYSE American LLC (the “NYSE American”) indicating that it has determined that we are not in compliance with the continued listing standards contained in Sections 1003(a)(i), (ii), and (iii) of the NYSE American Company Guide because we reported a shareholders’ equity deficit of $17.3 million as of June 30, 2020, and losses from continuing operations and/or net losses in the five most recent fiscal years ended December 31, 2019.  

In pertinent part, Section 1003 of the NYSE American Company Guide provides that the NYSE American will normally consider suspending dealings in, or removing from the list, securities of an issuer which:

 

has shareholders’ equity of less than $2,000,000 if such issuer has sustained losses from continuing operations and/or net losses in two of its three most recent fiscal years (Section 1003(a)(i));

 

has shareholders’ equity of less than $4,000,000 if such issuer has sustained losses from continuing operations and/or net losses in three of its four most recent fiscal years (Section 1003(a)(ii)); or

 

has shareholders’ equity of less than $6,000,000 if such issuer has sustained losses from continuing operations and/or net losses in its five most recent fiscal years (Section 1003(a)(iii)).

In order to maintain our listing on the NYSE American, we must submit a plan by December 9, 2020, advising of actions we have taken or will take to regain compliance with the continued listing standards by May 9, 2022 (the “Plan”).  

We intend to prepare the Plan and submit it to the NYSE American by December 9, 2020.  If the NYSE American does not accept the Plan, we will be subject to delisting proceedings. We may appeal a determination by the NYSE American to initiate delisting proceedings in accordance with Section 1010 and Part 12 of the NYSE American Company Guide.  There can be no assurance that the Plan will be accepted by the NYSE American.

As previously announced, on August 7, 2020, we entered into an Agreement and Plan of Merger (the “Merger Agreement”), with TAT Holdco LLC, a Texas limited liability company (“Parent”) controlled by a group of holders (the “Preferred Shareholder Group”) representing 100% of our outstanding Series A Preferred Shares, and TAT Merger Sub LLC, a Texas limited liability company and wholly-owned subsidiary of Parent (“Merger Sub”), pursuant to which we will merge with and into Merger Sub and each of our issued and outstanding common shares (other than the Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)) will be canceled and will be converted automatically into the right to receive $0.13 in cash (the “Merger Consideration”). If the merger is consummated, our common shares will be delisted from the NYSE American and Toronto Stock Exchange and deregistered under the Securities Exchange Act of 1934, as amended, as soon as practicable following the effective time of the merger. Our shareholders will be asked to vote on the adoption and approval of the Merger Agreement, a Bermuda statutory merger agreement, and the transactions contemplated thereby at a special meeting of the our common shareholders that will be held on December 17, 2020.

Derivative Contracts

24


On November 9, 2020, we entered into foreign exchange forward contracts to hedge against currency fluctuations between the TRY and USD. The forward contract settlement dates are from December 2020 through January 2021 for $1.0 million at a strike price of 8.2010 TRY and 8.3130 TRY to $1.00 USD.

 

25


Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

In this Quarterly Report on Form 10-Q, references to “we,” “our,” “us” or the “Company,” refer to TransAtlantic Petroleum Ltd. and its subsidiaries on a consolidated basis unless the context requires otherwise. Unless stated otherwise, all sums of money stated in this Quarterly Report on Form 10-Q are expressed in USD.

Executive Overview

We are an international oil and natural gas company engaged in acquisition, exploration, development, and production. We have focused our operations in countries that have established, yet underexplored petroleum systems, are net importers of petroleum, have an existing petroleum transportation infrastructure and provide favorable commodity pricing, royalty rates, and tax rates to exploration and production companies. As of September 30, 2020, we held interests in 365,171 and 162,800 net acres of developed and undeveloped oil and natural gas properties in Turkey and Bulgaria, respectively. As of November 12, 2020, approximately 51.7% of our outstanding common shares were beneficially owned by N. Malone Mitchell 3rd, our chief executive officer and chairman of our board of directors. Persons and entities associated with Mr. Mitchell also owned 739,000 Series A Preferred Shares. Mr. Mitchell’s affiliates are currently prohibited from converting any of their Series A Preferred Shares to common shares if such conversion would cause Mr. Mitchell or his affiliates to obtain beneficial ownership in excess of 49.9% of the outstanding common shares; however, Mr. Mitchell, upon 61 days’ prior notice, may increase or decrease such percentage cap.

We are a holding company with two operating segments – Turkey and Bulgaria. Our assets consist of our ownership interests in subsidiaries that primarily own assets in Turkey and Bulgaria.

Recent Developments

Merger Agreement.  On August 7, 2020, we entered into the Merger Agreement, pursuant to which we will merge with and into Merger Sub and each of our issued and outstanding common shares (other than the Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)) will be canceled and will be converted automatically into the right to receive the Merger Consideration.

The members of the Preferred Shareholder Group are Longfellow, Dalea, the Alexandria Nicole Mitchell Trust 2005, the Elizabeth Lee Mitchell Trust 2005, the Noah Malone Mitchell Trust 2005, Stevenson Briggs Mitchell, KMF Investments Partners, LP, West Investment Holdings, LLC, Randall I. Rochman, and Betsy Rochman. Longfellow and Dalea are affiliates of our chief executive officer and chairman of our board of directors, N. Malone Mitchell 3rd.

A special committee comprised entirely of independent and disinterested directors of our board of directors voted unanimously to recommend to our board of directors that it, and thereafter our board of directors (other than N. Malone Mitchell 3rd, Randall I. Rochman, and Jonathon T. Fite) voted unanimously to approve and declare, among other things, that (i) the merger, the Merger Agreement, a guaranty made in connection with the Merger Agreement (collectively, the “Merger Documents”) and the transactions contemplated by the Merger Documents are procedurally fair to, and advisable and in the best interests of, us and our shareholders, including our unaffiliated shareholders, and (ii) the Merger Consideration is fair to, both from a financial point of view and otherwise, advisable and in the best interests of our shareholders, including our unaffiliated shareholders.

If the merger is consummated, our common shares will be delisted from the NYSE American Exchange and Toronto Stock Exchange and deregistered under the Exchange Act as soon as practicable following the effective time of the merger.

Our shareholders will be asked to vote on the adoption and approval of the Merger Agreement, a Bermuda statutory merger agreement and the transactions contemplated thereby at a special meeting of our shareholders that will be held on December 17, 2020. Consummation of the merger is subject to customary conditions, including without limitation, the adoption and approval of the Merger Agreement and the Bermuda statutory merger agreement by holders of our common shares by at least 75% of the votes cast and holders of Series A Preferred Shares with at least 75% of the votes cast, in each case at a duly convened meeting of our shareholders at which a quorum is present. In connection with the execution of the Merger Agreement, the members of the Preferred Shareholder Group have entered into a voting agreement pursuant to which such shareholders have agreed to vote in favor of the merger and the adoption of the Merger Agreement, subject to the limitations set forth in the voting agreement.

There can be no assurance that the closing conditions will be satisfied, or that the merger will be completed within the required time period pursuant to the Merger Agreement. See Item 1A. “Risk Factors – Risks Related to the Merger.”

Internal Restructuring. Historically, our operations in Turkey have been conducted through various subsidiaries that we acquired over time. These subsidiaries were predominantly domiciled in Australia or the Bahamas. During the third quarter of 2020, we completed a portion of an internal restructuring that consolidated certain of our Turkish operations into one Turkish domiciled operating subsidiary. During the fourth quarter of 2020, we intend to complete the final steps of the internal restructuring that will

26


consolidate the remainder of our Turkish operations so that all of our Turkish operations will be consolidated into one Turkish domiciled operating subsidiary. We believe this internal restructuring will simplify our organizational structure, simplify and reduce the cost of our general and administrative functions, including legal and accounting requirements, allow us to more effectively utilize certain net operating loss carryforwards, and result in certain tax benefits.

NYSE American Deficiency Letter. On November 9, 2020, we received the Letter from the NYSE American indicating that it has determined that we are not in compliance with the continued listing standards contained in Sections 1003(a)(i), (ii), and (iii) of the NYSE American Company Guide because we reported a shareholders’ equity deficit of $17.3 million as of June 30, 2020, and losses from continuing operations and/or net losses in the five most recent fiscal years ended December 31, 2019.  

In pertinent part, Section 1003 of the NYSE American Company Guide provides that the NYSE American will normally consider suspending dealings in, or removing from the list, securities of an issuer which:

 

has shareholders’ equity of less than $2,000,000 if such issuer has sustained losses from continuing operations and/or net losses in two of its three most recent fiscal years (Section 1003(a)(i));

 

has shareholders’ equity of less than $4,000,000 if such issuer has sustained losses from continuing operations and/or net losses in three of its four most recent fiscal years (Section 1003(a)(ii)); or

 

has shareholders’ equity of less than $6,000,000 if such issuer has sustained losses from continuing operations and/or net losses in its five most recent fiscal years (Section 1003(a)(iii)).

In order to maintain our listing on the NYSE American, we must submit the Plan by December 9, 2020, advising of actions we have taken or will take to regain compliance with the continued listing standards by May 9, 2022.  

We intend to prepare the Plan and submit it to the NYSE American by December 9, 2020.  If the NYSE American does not accept the Plan, we will be subject to delisting proceedings. We may appeal a determination by the NYSE American to initiate delisting proceedings in accordance with Section 1010 and Part 12 of the NYSE American Company Guide.  There can be no assurance that the Plan will be accepted by the NYSE American.

As previously announced, on August 7, 2020, we entered into the Merger Agreement, pursuant to which we will merge with and into Merger Sub and each of our issued and outstanding common shares (other than the Excluded Shares and Dissenting Shares (each as defined in the Merger Agreement)) will be canceled and will be converted automatically into the right to receive the Merger Consideration. If the merger is consummated, our common shares will be delisted from the NYSE American and Toronto Stock Exchange and deregistered under the Securities Exchange Act of 1934, as amended, as soon as practicable following the effective time of the merger. Our shareholders will be asked to vote on the adoption and approval of the Merger Agreement, a Bermuda statutory merger agreement, and the transactions contemplated thereby at a special meeting of the our common shareholders that will be held on December 17, 2020.

Derivative Contracts. On November 9, 2020, we entered into foreign exchange forward contracts to hedge against currency fluctuations between the TRY and USD. The forward contract settlement dates are from December 2020 through January 2021 for $1.0 million at a strike price of 8.2010 TRY and 8.3130 TRY to $1.00 USD.

Financial and Operational Performance Summary

The following summarizes our financial and operational performance for the third quarter of 2020:

 

We reported a $3.0 million net loss for the three months ended September 30, 2020.

 

We derived substantially all of our oil and natural gas revenues from the production of oil during the three months ended September 30, 2020.

 

Total oil and natural gas sales revenues decreased 41.8% to $8.5 million for the quarter ended September 30, 2020 from $14.5 million for the same period in 2019. The decrease was the result of a $14.99 decrease in the average price received per barrel of oil equivalent (“Boe”) and a decrease in sales volumes of 55,000 barrels of oil equivalent (“Mboe”).

 

For the quarter ended September 30, 2020, we incurred $0.3 million in capital expenditures, including seismic and corporate expenditures, as compared to $10.2 million for the quarter ended September 30, 2019.

 

As of September 30, 2020, we had $9.2 million in short-term debt and $46.1 million in Series A Preferred Shares as compared to $2.9 million in long-term debt, $17.1 million in short-term debt, and $46.1 million in Series A Preferred Shares as of December 31, 2019.

27


Third Quarter 2020 Operational Update

Southeastern Turkey

Molla

During the remainder of 2020, we plan to continue our recompletion, workover, and production optimization plans in our producing fields, including Bahar, Yeniev, Goksu, Pinar, Southeast Bahar, Catak, and Karagoz. Drilling additional wells will be dependent on oil prices.

Yeniev Field. In the third quarter of 2020, we executed a recompletion operation in the Yeniev-6 well to test the Mardin formation. The well was put on production after acid stimulation with an initial production rate of 27 Bbl/d.

Selmo

During the remainder of 2020, we plan to continue our recompletion, workover, and production optimization operations in the Selmo field.

Bulgaria

We are currently evaluating future activity in Bulgaria.

Planned Operations

We expect net field capital expenditures during the remainder of 2020 will consist of up to $0.5 million for recompletions. Our projected 2020 capital expenditure budget is subject to change.

Significant Accounting Policies and Estimates

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosures. Our significant accounting policies are described in “Note 3. Significant accounting policies” to our audited consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2019 and are of particular importance to the portrayal of our financial position and results of operations and require the application of significant judgment by management. These estimates are based on historical experience, information received from third parties, and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

28


Results of Operations—Three Months Ended September 30, 2020 Compared to Three Months Ended September 30, 2019

Our results of operations for the three months ended September 30, 2020 and 2019 were as follows:

 

 

Three Months Ended September 30,

 

 

Change

 

 

2020

 

 

2019

 

 

2020-2019

 

 

(in thousands of U.S. Dollars, except per

unit amounts and production volumes)

 

Sales volumes:

 

 

 

 

 

 

 

 

 

 

 

Oil (Mbbl)

 

190

 

 

 

237

 

 

 

(47

)

Natural gas (Mmcf)

 

1

 

 

 

47

 

 

 

(46

)

Total production (Mboe)

 

190

 

 

 

245

 

 

 

(55

)

Average daily sales volumes (Boepd)

 

2,072

 

 

 

2,662

 

 

 

(590

)

Average prices:

 

 

 

 

 

 

 

 

 

 

 

Oil (per Bbl)

$

44.40

 

 

$

60.12

 

 

$

(15.72

)

Natural gas (per Mcf)

$

4.61

 

 

$

6.18

 

 

$

(1.57

)

Oil equivalent (per Boe)

$

44.38

 

 

$

59.37

 

 

$

(14.99

)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

8,459

 

 

$

14,543

 

 

$

(6,084

)

Other

 

170

 

 

 

110

 

 

 

60

 

Total revenues

 

8,629

 

 

 

14,653

 

 

 

(6,024

)

Costs and expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Production

 

2,308

 

 

 

3,162

 

 

 

(854

)

Transportation and processing

 

914

 

 

 

1,262

 

 

 

(348

)

Exploration, abandonment and impairment

 

69

 

 

 

488

 

 

 

(419

)

Seismic and other geological and geophysical

 

-

 

 

 

48

 

 

 

(48

)

General and administrative

 

1,965

 

 

 

2,503

 

 

 

(538

)

Depletion

 

1,430

 

 

 

2,885

 

 

 

(1,455

)

Depreciation and amortization

 

112

 

 

 

136

 

 

 

(24

)

Interest and other expense

 

2,557

 

 

 

2,780

 

 

 

(223

)

Interest and other income

 

(230

)

 

 

(381

)

 

 

151

 

Foreign exchange loss

 

532

 

 

 

797

 

 

 

(265

)

Gain (loss) on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

Cash settlements on derivative contracts

 

(1,333

)

 

 

-

 

 

 

(1,333

)

Change in fair value on derivative contracts

 

974

 

 

 

403

 

 

 

571

 

Total loss on derivative contracts

 

(359

)

 

 

403

 

 

 

(762

)

Oil and natural gas costs per Boe:

 

 

 

 

 

 

 

 

 

 

 

Production

$

10.60

 

 

$

11.30

 

 

$

(0.70

)

Depletion

$

6.56

 

 

$

10.31

 

 

$

(3.75

)

Oil and Natural Gas Sales. Total oil and natural gas sales revenues decreased to $8.5 million for the three months ended September 30, 2020 from $14.5 million for the same period in 2019. The decrease was primarily due to a decrease in the average realized price per Boe. Our average price received decreased $14.99 per Boe to $44.38 per Boe for the three months ended September 30, 2020 from $59.37 per Boe for the same period in 2019. The decrease was also due to a decrease in our average daily sales volumes of 590 Boe per day (“Boepd”) for the three months ended September 30, 2020 as compared to the same period in 2019.

Production. Production expenses decreased to $2.3 million, or $10.60 per Boe, for the three months ended September 30, 2020 from $3.2 million, or $11.30 per Boe, for the same period in 2019. The decrease was primarily due to a decrease in contract labor costs and personnel expenses.

Transportation and Processing. Transportation and processing expense decreased to $0.9 million for the three months ended September 30, 2020 from $1.3 million for the same period in 2019. The decrease in transportation expenses was primarily due to the decrease in our average daily sales volumes of 590 Boepd.

Exploration, Abandonment and Impairment. Exploration, abandonment and impairment cost decreased to $0.1 million for the three months ended September 30, 2020 from $0.5 million for the same period in 2019. The decrease was due to the exploratory dry hole write-off of the Deventci R-1 well in 2019.

29


General and Administrative. General and administrative expense decreased to $2.0 million for the three months ended September 30, 2020 from $2.5 million for the same period in 2019. The decrease was primarily due to a decrease in personnel, travel and office expenses compared to the same period in 2019.

Depletion. Depletion expense decreased to $1.4 million, or $6.56 per Boe, for the three months ended September 30, 2020 from $2.9 million, or $10.31 per Boe, for the same period of 2019. The decrease was primarily due to a reduction in the depletable basis of our oil and gas properties and a decrease in production volumes.

Interest and Other Expense. Interest and other expense decreased to $2.6 million for the three months ended September 30, 2020 from $2.8 million for the same period in 2019. The decrease was due to our lower average debt balances outstanding during the three months ended September 30, 2020 versus the same period in 2019.

Foreign Exchange Loss. We recorded a foreign exchange loss of $0.5 million for the three months ended September 30, 2020 as compared to a loss of $0.8 million for the same period in 2019. Foreign exchange gains and losses are primarily unrealized (non-cash) in nature and result from the re-measuring of specific transactions and monetary accounts in a currency other than the functional currency. For example, a USD transaction which occurs in Turkey is re-measured at the period-end to the TRY amount if it has not been settled previously. Generally, a strengthening of the USD relative to the TRY increases our foreign exchange loss. The foreign exchange loss for the three months ended September 30, 2020 was due to a decrease in the value of the TRY compared to the USD.

Gain (Loss) on Derivative Contracts. We recorded a net loss on derivative contracts of $0.4 million for the three months ended September 30, 2020 as compared to a net gain of $0.4 million for the same period in 2019. During the three months ended September 30, 2020, we recorded a $1.0 million gain to mark our currency derivative contracts to their fair value and a $1.3 million loss on settled contracts. During the same period in 2019, we recorded a $0.4 million gain to mark our derivative contracts to their fair value.

 

30


Results of Operations—Nine Months Ended September 30, 2020 Compared to Nine Months Ended September 30, 2019

Our results of operations for the nine months ended September 30, 2020 and 2019 were as follows:

 

Nine Months Ended September 30,

 

 

Change

 

 

2020

 

 

2019

 

 

2020-2019

 

 

(in thousands of U.S. Dollars, except per

unit amounts and production volumes)

 

Sales volumes:

 

 

 

 

 

 

 

 

 

 

 

Oil (Mbbl)

 

607

 

 

 

760

 

 

 

(153

)

Natural gas (Mmcf)

 

59

 

 

 

145

 

 

 

(86

)

Total production (Mboe)

 

517

 

 

 

784

 

 

 

(267

)

Average daily sales volumes (Boepd)

 

2,259

 

 

 

2,871

 

 

 

(612

)

Average prices:

 

 

 

 

 

 

 

 

 

 

 

Oil (per Bbl)

$

37.94

 

 

$

65.42

 

 

$

(27.48

)

Natural gas (per Mcf)

$

4.33

 

 

$

5.84

 

 

$

(1.51

)

Oil equivalent (per Boe)

$

37.75

 

 

$

64.48

 

 

$

(26.73

)

Revenues:

 

 

 

 

 

 

 

 

 

 

 

Oil and natural gas sales

$

23,285

 

 

$

50,537

 

 

$

(27,252

)

Other

 

204

 

 

 

372

 

 

 

(168

)

Total revenues

 

23,489

 

 

 

50,909

 

 

 

(27,420

)

Costs and expenses (income):

 

 

 

 

 

 

 

 

 

 

 

Production

 

8,207

 

 

 

8,376

 

 

 

(169

)

Transportation and processing

 

3,035

 

 

 

3,802

 

 

 

(767

)

Exploration, abandonment and impairment

 

20,407

 

 

 

6,267

 

 

 

14,140

 

Seismic and other geological and geophysical

 

45

 

 

 

233

 

 

 

(188

)

General and administrative

 

6,711

 

 

 

8,247

 

 

 

(1,536

)

Depletion

 

6,710

 

 

 

9,779

 

 

 

(3,069

)

Depreciation and amortization

 

338

 

 

 

400

 

 

 

(62

)

Interest and other expense

 

7,165

 

 

 

8,011

 

 

 

(846

)

Interest and other income

 

(643

)

 

 

(776

)

 

 

133

 

Foreign exchange loss

 

1,016

 

 

 

2,185

 

 

 

(1,169

)

Gain (loss) on derivative contracts:

 

 

 

 

 

 

 

 

 

 

 

Cash settlements on derivative contracts

 

5,135

 

 

 

-

 

 

 

5,135

 

Change in fair value on derivative contracts

 

(1,198

)

 

 

(30

)

 

 

(1,168

)

Total (loss) gain on derivative contracts

 

3,937

 

 

 

(30

)

 

 

3,967

 

Oil and natural gas costs per Boe:

 

 

 

 

 

 

 

 

 

 

 

Production

$

11.64

 

 

$

9.35

 

 

$

2.29

 

Depletion

$

9.52

 

 

$

10.92

 

 

$

(1.40

)

Oil and Natural Gas Sales. Total oil and natural gas sales revenues decreased to $23.3 million for the nine months ended September 30, 2020 from $50.5 million for the same period in 2019. The decrease was primarily due to a decrease in the average realized price per Boe. Our average price received decreased $26.73 per Boe to $37.75 per Boe for the nine months ended September 30, 2020 from $64.48 per Boe for the same period in 2019. The decrease was also due to a decrease in our average daily sales volumes of 612 Boepd for the nine months ended September 30, 2020 as compared to the same period in 2019.

Production. Production expenses decreased to $8.2 million, or $11.64 per Boe, for the nine months ended September 30, 2020 from $8.4 million, or $9.35 per Boe, for the same period in 2019. The decrease was primarily due to an increase in contract labor costs and personnel expenses.

Transportation and Processing. Transportation and processing expense decreased to $3.0 million for the nine months ended September 30, 2020 from $3.8 million for the same period in 2019. The decrease in transportation expenses was primarily due to the decrease in our average daily sales volumes of 612 Boepd.

Exploration, Abandonment and Impairment. Exploration, abandonment and impairment cost increased to $20.4 million for the nine months ended September 30, 2020 from $6.3 million for the same period in 2019. The increase was due to proved property impairments of our Selmo and Bahar fields due to the oil price decline and the exploratory dry hole write-off of the Bati-Yasince well.

31


General and Administrative. General and administrative expense decreased to $6.7 million for the nine months ended September 30, 2020 from $8.2 million for the same period in 2019. The decrease was primarily due to a decrease in personnel, travel and office expenses compared to the same period in 2019.

Depletion. Depletion expense decreased to $6.7 million, or $9.52 per Boe, for the nine months ended September 30, 2020 from $9.8 million, or $10.92 per Boe, for the same period of 2019. The decrease was primarily due to a reduction in the depletable basis of our oil and gas properties and a decrease in production volumes.

Interest and Other Expense. Interest and other expense decreased to $7.2 million for the nine months ended September 30, 2020 from $8.0 million for the same period in 2019. The decrease was due to our lower average debt balances outstanding during the nine months ended September 30, 2020 versus the same period in 2019.

Foreign Exchange Loss. We recorded a foreign exchange loss of $1.0 million for the nine months ended September 30, 2020 as compared to $2.2 million for the same period in 2019. Foreign exchange gains and losses are primarily unrealized (non-cash) in nature and result from the re-measuring of specific transactions and monetary accounts in a currency other than the functional currency. For example, a USD transaction which occurs in Turkey is re-measured at the period-end to the TRY amount if it has not been settled previously. Generally, a strengthening of the USD relative to the TRY increases our foreign exchange loss. The foreign exchange loss for the nine months ended September 30, 2020 was due to a decrease in the value of the TRY compared to the USD.

Gain (Loss) on Derivative Contracts. We recorded a net gain on derivative contracts of $3.9 million for the nine months ended September 30, 2020 as compared to a net loss of $0.03 million for the same period in 2019. During the nine months ended September 30, 2020, we recorded a $1.2 million loss to mark our currency derivative contracts to their fair value and a $5.1 million gain on settled contracts. During the same period in 2019, we recorded a $0.03 million loss to mark our derivative contracts to their fair value.

Capital Expenditures

For the three months ended September 30, 2020, we incurred $0.3 million in capital expenditures, including seismic and corporate expenditures, as compared to $10.2 million for the same period in 2019.

We expect net field capital expenditures during the remainder of 2020 will include up to $0.5 million for recompletions. Our projected 2020 capital expenditure budget is subject to change.

Cash Flows

Net cash provided by operating activities during the nine months ended September 30, 2020 was $11.0 million, a decrease from net cash provided by operating activities of $25.7 million for the same period in 2019. The decrease was primarily due to a decrease in our revenues.

Net cash used in investing activities during the nine months ended September 30, 2020 was $2.5 million, a decrease from net cash used in investing activities of $25.2 million for the same period in 2019. The decrease was primarily due to a decrease in our capital expenditures compared to the same period in 2019.

Net cash used in financing activities during the nine months ended September 30, 2020 was $10.8 million, a decrease from net cash provided by financing activities of $5.0 million for the same period in 2019. The decrease was primarily due to a decrease in our loan payments.

Liquidity and Capital Resources

Our primary sources of liquidity for 2020 were our cash and cash equivalents, cash flow from operations, the sale of assets and borrowings under the U.S. Paycheck Protection Program (“PPP”) loan. At September 30, 2020, we had cash and cash equivalents of $5.9 million, $9.2 million in short-term debt, and a working capital surplus of $3.9 million, compared to cash and cash equivalents of $9.7 million, $2.9 million in long-term debt, $17.1 million in short-term debt and a working capital surplus of $2.0 million at December 31, 2019.

In March 2020, crude oil prices declined to approximately $25 per barrel for Brent crude as a result of market concerns about the economic impact from the COVID-19 pandemic as well as the ability of OPEC and Russia to agree on a perceived need to implement further production cuts in response to weaker worldwide demand.  Since then, Brent crude prices have rebounded to approximately $40.00 per barrel as of November 5, 2020 and remain unpredictable.

As a result of the decline in Brent crude prices, the current near term price outlook and resulting lower current and projected cash flows from operations, we have reduced our planned capital expenditures to those necessary for production lease maintenance and those projecting a return on invested capital at current realized prices. In order to mitigate the impact of reduced prices on our 2020

32


cash flows and liquidity, we implemented cost reduction measures to reduce our operating costs and general and administrative expenses. In connection therewith, we intend to prioritize funding operating expenditures over general and administrative expenditures, whenever possible.

On March 9, 2020, we unwound our commodity derivative contracts with respect to our future crude oil production. In connection with these transactions, we received $6.5 million of proceeds from the derivative counterparty. In order to reduce future interest expense, we used these proceeds to pay down the 2019 Term Loan. On April 3, 2020, we entered into a new swap contract with DenizBank, which hedged approximately 2,000 Bbl/d. The swap contract extends through February 2021, has an ICE Brent Index strike price of $36.00 per barrel, and is settled monthly. Therefore, DenizBank is required to make a payment to us if the average monthly ICE Brent Index price is less than $36.00 per barrel, and we are required to make a payment to DenizBank if the average monthly ICE Brent Index price is greater than $36.00 per barrel.

TUPRAS purchases substantially all of our crude oil production. The price of substantially all of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is tied to Arab Medium oil prices adjusted upward based on an API adjustment, Suez Canal tariff costs, and freight charges. Between March 2020 and May 2020, there was a significant widening of the differential between the average monthly ICE Brent Index price and our realized oil prices. In 2018 and 2019, the average monthly ICE Brent Index Price exceeded our realized oil prices by $2.44 and $0.17 per barrel, respectively. The differential between the average monthly ICE Brent Index Price and our realized oil prices widened from $3.40 per barrel in March 2020 to $8.34 per barrel in May 2020. The widening of the differential between the average monthly ICE Brent Index Price and our realized oil prices rendered our hedges less effective, resulting in significantly lowered revenues from March 2020 through May 2020.  In June 2020, the differential between the average monthly ICE Brent Index Price and our realized oil prices contracted to $0.74 per barrel, and in July 2020, our realized oil prices exceeded the average monthly ICE Brent Index Price by $3.71 per barrel. The differential between the average monthly ICE Brent Index Price and our realized oil prices remains unpredictable and may expand or contract in the future.

The price of the oil delivered pursuant to the purchase and sale agreement with TUPRAS is determined under the Petroleum Market Law No. 5015 under the laws of the Republic of Turkey. In November 2019, TUPRAS filed a lawsuit seeking restitution from us for alleged overpayments resulting from the Pricing Amendment. TUPRAS also claimed that the Pricing Amendment violates the Constitution of the Republic of Turkey and seeks to have the Pricing Amendment cancelled. Additionally, in April 2020, TUPRAS notified us that it intends to extend payment terms for oil purchases by 60 days. The outcome of the TUPRAS lawsuit and negotiations regarding the extension of payment terms is uncertain; however, a conclusion of the lawsuit in TUPRAS’s favor or an extension of payment terms would reduce or delay our cash flow and decrease our cash balances.

In the second quarter of 2020, we borrowed approximately $626,000 pursuant to the PPP to cover certain payroll, benefit, and rent expenses. We have forecast that amounts borrowed or received pursuant to the PPP will be forgiven for cash flow purposes. New guidance on the criteria for forgiveness continues to be released, and we currently expect that we will meet the conditions for forgiveness for a majority of the loan. Additionally, in the second quarter of 2020, the Turkish government passed legislation permitting employers to reduce the working hours of employees, reducing payroll and benefit expenses, through the end of August 2020. The actual reduction in payroll and benefit expenses due to this legislation is approximately $533,000.  

As of September 30, 2020, we had $8.6 million of outstanding principal under the 2019 Term Loan. The 2019 Term Loan is payable in five monthly installments of $1.4 million plus accrued interest from October 2020 through the maturity date in February 2021. In addition, dividends on our Series A Preferred Shares are payable quarterly at our election in cash, common shares, or a combination of cash and common shares at an annual dividend rate of 12.0% of the liquidation preference if paid in cash or 16.0% of the liquidation preference if paid in common shares. If paid partially in cash and partially in common shares, the dividend rate on the cash portion is 12.0%, and the dividend rate on the common share portion is 16.0%. In order to conserve cash, we elected to pay the 2020 third quarter dividend in common shares, and, as such, on September 30, 2020, we issued 7,749,267 common shares to holders of Series A Preferred Shares.

On August 7, 2020, to supplement our liquidity, we entered into an up to $8.0 million loan with an affiliate of Mr. Mitchell.  The loan is due August 7, 2021.  Even with this additional liquidity, as of the date hereof, based on cash on hand and projected future cash flow from operations, our current liquidity position is severely constrained.  As a result, substantial doubt exists regarding our ability to continue as a going concern. Our management is actively pursuing improving our working capital position in order to remain a going concern for the foreseeable future.

33


Outstanding Debt and Series A Preferred Shares

2017 Term Loan. On November 17, 2017, DenizBank entered into the 2017 Term Loan under the Credit Agreement. The 2017 Term Loan bore interest at a fixed rate of 6.0% (plus 0.3% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2017 Term Loan had a grace period which bore no interest or payments due until July 2018. Thereafter, the 2017 Term Loan was payable in one monthly installment of $1.38 million, nine monthly installments of $1.2 million each through April 2019 and thereafter in eight monthly installments of $1.0 million each through December 2019, with the exception of one monthly installment of $1.2 million occurring in October 2019. On December 30, 2019 we repaid the 2017 Term Loan in full in accordance with its terms.

2018 Term Loan. On May 28, 2018, DenizBank entered into the 2018 Term Loan under the Credit Agreement. The 2018 Term Loan bore interest at a fixed rate of 7.25% (plus 0.3% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2018 Term Loan had a grace period through July 2018 during which no payments were due. Thereafter, accrued interest on the 2018 Term Loan was payable monthly and the principal on the 2018 Term Loan was payable in five monthly installments of $0.2 million each through December 2018, four monthly installments of $0.5 million each through April 2019, four monthly installments of $1.0 million each through August 2019, and four monthly installments of $0.75 million each through December 2019. On December 30, 2019 we repaid the 2018 Term Loan in full in accordance with its terms.

2019 Term Loan. On February 22, 2019, DenizBank entered into the 2019 Term Loan under the Credit Agreement.

The 2019 Term Loan bears interest at a fixed rate of 7.5% (plus 0.375% for Banking and Insurance Transactions Tax per the Turkish government) per annum. The 2019 Term Loan had a grace period through December 2019 during which no payments were due. Thereafter, accrued interest on the 2019 Term Loan was payable monthly and the principal on the 2019 Term Loan was payable in 14 monthly installments of $1.4 million each.  

On March 9, 2020, we unwound our three-way collar contract with DenizBank and received approximately $6.5 million of proceeds which we used to pay down the 2019 Term Loan.  As part of the pay down, DenizBank extended a grace period for principal repayments until June 29, 2020 at which time we will resume principal payments for one monthly installment in June 2020 of $0.6 million and seven monthly installments of $1.4 million beginning in July 2020. The 2019 Term Loan matures in February 2021. Amounts repaid under the 2019 Term Loan may not be reborrowed, and early repayments under the 2019 Term Loan are subject to early repayment fees. The 2019 Term Loan is guaranteed by Amity, Talon Exploration, DMLP, and TransAtlantic Turkey.

The 2019 Term Loan contains standard prohibitions on the activities of TEMI as the borrower, including prohibitions on encumbering or creating restrictions or limitations on all or a part of its assets, revenues, or properties, giving guaranties or sureties, selling assets or transferring revenues, dissolving, liquidating, merging, or consolidating, incurring additional debt, paying dividends, making certain investments, undergoing a change of control, and other similar matters. In addition, the 2019 Term Loan prohibits Amity, Talon Exploration, DMLP, and Transatlantic Turkey from incurring additional debt. An event of default under the 2019 Term Loan includes, among other events, failure to pay principal or interest when due, breach of certain covenants, representations, warranties, and obligations, bankruptcy or insolvency, and the occurrence of a material adverse effect.

The 2019 Term Loan is secured by a pledge of (i) the stock of TEMI, DMLP, TransAtlantic Turkey, and Talon Exploration, (ii) substantially all of the assets of TEMI, (iii) certain Gundem real estate and Muratli real estate owned by Gundem, (iv) certain Diyarbakir real estate owned 80% by Mr. Mitchell and 20% by Mr. Uras, and (v) certain Ankara real estate owned 100% by Mr. Uras. In addition, TEMI will assigned its Turkish collection accounts and its receivables from the sale of oil to DenizBank as additional security for the 2019 Term Loan.

At September 30, 2020, we had $8.6 million outstanding under the 2019 Term Loan and no availability, and we were in compliance with the covenants in the 2019 Term Loan.

Paycheck Protection Program. On April 10, 2020, we received loan proceeds in the amount of $626,000 under the PPP.  The PPP, established as part of the CARES Act, provides for loans to qualifying businesses for amounts up to 2.5 times the average monthly payroll expenses of the qualifying business. The loans are forgivable after 24 weeks as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the 24-week period.  The unforgiven portion of the PPP loan is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months.  We used the proceeds for purposes consistent with the PPP and believe that our use of the loan proceeds will meet the conditions for forgiveness of a majority the loan.

Loan and Security Agreement. In addition, on August 7, 2020, we entered into the Loan Agreement with the Lender.  Pursuant to the Loan Agreement, the Lender has committed to lend us an aggregate principal amount of up to $8.0 million. Advances shall be made available by Lender and applied by us in accordance with a budget agreed to by us and the Lender and subject to milestones set

34


forth in the Loan Agreement. We intend to use the proceeds of the Loan to finance our and our subsidiaries working capital needs in accordance with the budget.

The outstanding borrowings under the Loan Agreement bear interest at a rate equal to 10% per annum. Principal on the Loan does not amortize and is required to be repaid in full on the maturity date of August 7, 2021. The Loan may be optionally prepaid in whole or in part from time to time without fee, premium, or penalty.

Our obligations under the Loan Agreement are secured by all of our present and future accounts, chattel paper, commercial tort claims, commodity accounts, commodity contracts, contracts receivable, deposit accounts, documents, financial assets, general intangibles, instruments, investment property (including all of our right, title, and interest in and to all of the capital stock of TransAtlantic Petroleum (USA) Corp. and TransAtlantic Worldwide Ltd., each our wholly-owned direct subsidiary), letters of credit, letter of credit rights, payment intangibles, securities, notes receivable, choses of action, security accounts, and security entitlements, now or hereafter owned, held, or acquired.  The Loan Agreement contains representations, warranties, covenants, and events of default.

Series A Preferred Shares. As of June 30, 2020, we had 921,000 Series A Preferred Shares outstanding. The Series A Preferred Shares contain a substantive conversion option, are mandatorily redeemable, and convert into a fixed number of common shares. As a result, under U.S. GAAP, we have classified the Series A Preferred Shares within mezzanine equity in our consolidated balance sheets. As of September 30, 2020, we had $5.0 million of Series A Preferred Shares and $41.1 million of Series A Preferred Shares – related party outstanding (See Note 3. “Series A Preferred Shares”).

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.

Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is accumulated and communicated to management, including our chief executive officer and principal accounting and financial officer, as appropriate to allow timely decisions regarding required disclosure.

As of September 30, 2020, management carried out an evaluation, under the supervision and with the participation of our chief executive officer and principal accounting and financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act). Based upon the evaluation, our chief executive officer and principal accounting and financial officer concluded that, as of September 30, 2020, our disclosure controls and procedures were effective at the reasonable assurance level.

There are inherent limitations to the effectiveness of any system of disclosure controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurances of achieving their control objectives.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

35


PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

During the third quarter of 2020, there were no material developments to the Legal Proceedings disclosed in “Part I, Item 3. Legal Proceedings” in our Annual Report on Form 10-K for the year ended December 31, 2019 as supplemented by “Part II, Item 1. Legal Proceedings” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2020.

Item 1A.

Risk Factors

During the third quarter of 2020, there were no material changes to the risk factors disclosed in our Annual Report on Form 10-K for the year ended December 31, 2019 and subsequent Quarterly Reports on Form 10-Q.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

None

Item 3.

Defaults Upon Senior Securities

None.

Item 4.

Mine Safety Disclosures

Not applicable.

Item 5.

Other Information

None.


 

36


Item 6.

Exhibits

 

  2.1

 

Agreement and Plan of Merger, dated August 7, 2020, by and among TAT Holdco LLC, TAT Merger Sub LLC, and TransAtlantic Petroleum Ltd. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8‑K dated August 4, 2020, filed with the SEC on August 7, 2020).

 

 

 

  3.1

 

Certificate of Continuance of TransAtlantic Petroleum Ltd., dated October 1, 2009 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 1, 2009, filed with the SEC on October 7, 2009).

 

 

 

  3.2

 

Altered Memorandum of Continuance of TransAtlantic Petroleum Ltd., dated March 4, 2014 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated March 6, 2014, filed with the SEC on March 6, 2014).

 

 

 

  3.3

 

Amended Bye-Laws of TransAtlantic Petroleum Ltd., dated March 4, 2014 (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K dated March 6, 2014, filed with the SEC on March 6, 2014).

 

 

 

  3.4

 

Certificate of Designations of 12.0% Series A Convertible Redeemable Preferred Shares of TransAtlantic Petroleum Ltd. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated October 31, 2016, filed with the SEC on November 4, 2016).

 

 

 

  3.5

 

Memorandum of Increase of Share Capital of TransAtlantic Petroleum Ltd., dated July 2017 (incorporated by reference to Exhibit 3.5 to the Company’s Annual Report on Form 10-K filed with the SEC on March 26, 2019).

 

 

 

  3.6

 

Amendment No. 1 to the Certificate of Designations of 12.0% Series A Convertible Redeemable Preferred Shares of TransAtlantic Petroleum Ltd. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated May 22, 2020, filed with the SEC on May 27, 2020).

 

 

 

  4.1

 

Amended and Restated Registration Rights Agreement, dated December 30, 2008, by and between TransAtlantic Petroleum Corp. and Riata Management, LLC (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 30, 2008, filed with the SEC on January 6, 2009).

 

 

 

  4.2

 

Specimen Common Share certificate (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K dated March 4, 2014, filed with the SEC on March 6, 2014).

 

 

 

  31.1*

  

Certification of the Chief Executive Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  31.2*

  

Certification of the Principal Accounting and Financial Officer of the Company, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

 

 

 

  32.1**

  

Certification of the Chief Executive Officer and Principal Accounting and Financial Officer of the Company, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

 

101.INS*

  

XBRL Instance Document.

 

 

 

101.SCH*

  

XBRL Taxonomy Extension Schema Document.

 

 

 

101.CAL*

  

XBRL Taxonomy Extension Calculation Linkbase Document.

 

 

 

101.DEF*

  

XBRL Taxonomy Extension Definition Linkbase Document.

 

 

 

101.LAB*

  

XBRL Taxonomy Extension Label Linkbase Document.

 

 

 

101.PRE*

  

XBRL Taxonomy Extension Presentation Linkbase Document.

 

 

*

Filed herewith.

**

Furnished herewith.


37


Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

By:

 

/s/ N. MALONE MITCHELL 3rd

 

 

N. Malone Mitchell 3rd

Chief Executive Officer

 

 

 

By:

 

/s/ MICHAEL P. HILL

 

 

Michael P. Hill

Chief Accounting Officer

 

 

 

Date: November 19, 2020

 

 

38