UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
[ ] REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) or 12(g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year endedDecember 31, 2012
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
[ ] SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number000-30087
ADIRA ENERGY LTD.
(Exact name of Registrant specified in its charter)
CANADA
(Jurisdiction of incorporation or organization)
120 Adelaide Street West, Suite 1204
Toronto, Ontario
Canada M5H 1T1
(Address of principal executive offices)
Contact Person: Gadi Levin
Address: 120 Adelaide Street West, Suite 1204
Toronto, Ontario M5H 1T1
Email: glevin@adiraenergy.com
Telephone: (416) 250-1955, Facsimile: (416) 250-6330
(Name, Telephone, Email and/or Facsimile number and Address of Company Contact Person)
Securities registered or to be registered pursuant to Section 12(b) of the Act:
| Title of Each Class | Name of each exchange on which registered |
| None | Not applicable |
Securities registered or to be registered pursuant to Section 12(g) of the Act:
COMMON SHARES
(Title of Class)
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:None
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Number of outstanding shares of the Company’s only class of capital or common stock as at December 31, 2012 was
180,781,093 common shares.
Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
If this is an annual report or a transition report, indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes [ ] No [X]
Indicate by check mark whether 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 Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes [ ] No [ ]
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check one):
Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X]
Indicate by check mark which basis of accounting the Registrant has used to prepare the financial statements included in this filing:
| | International Financial Reporting Standards as issued | |
| U.S. | by the International Accounting Standards Board | |
| GAAP [ ] | [X] | Other [ ] |
If “other” has been checked in response to the previous question, indicate by check mark which financial statement item the Registrant has elected to follow:
Item 17 [ ] Item 18 [ ]
If this is an annual report, indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
(APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS)
Indicate by checkmark whether the Registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
YES [ ] NO [ ]
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TABLE OF CONTENTS
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GENERAL
This Form 20-F is being filed as an annual report under the Exchange Act.
In this Form 20-F, references to:
“Adira” means Adira Energy Ltd., a Canadian federal corporation (formerly AMG Oil Ltd.);
“Adira Group” means Adira Energy Ltd. (formerly AMG Oil Ltd.) together with: (a) its wholly-owned subsidiary, Adira Energy Holding Corp.; (b) its wholly-owned indirect (through Adira Energy) subsidiaries, Adira Energy Israel Ltd., Adira Energy Israel Services Ltd., Adira Oil Technologies Ltd., Adira Energy CBM Ltd., and Adira Energy Holdings (Barbados) Ltd., which wholly owns Adira Energy Investments (Barbados) Ltd.; and (c) Adira’s 60% indirect (through Adira Energy) subsidiary, Adira Geo Global Ltd.;
“Adira Energy” means Adira Energy Holding Corp., an Ontario corporation (formerly Adira Energy Corp.);
“Adira Israel” means Adira Energy Israel Ltd., an Israeli corporation;
“Adira Services” means Adira Energy Israel Services Ltd., an Israeli corporation;
“We”, “us”, “our”, and the “Company” mean Adira Group; and
“AMG” refers to AMG Oil Ltd. which was the name of the Company prior to its change of name to Adira Energy Ltd. on December 17, 2009.
Adira and Adira Energy have historically used U.S. dollar as their reporting currency. All references in this document to “dollars” or “$” are to United States dollars and all references to “CDN$” are to Canadian dollars, unless otherwise indicated.
Except as noted, the information set forth in this Form 20-F is as of December 31, 2012 and all information included in this document should only be considered correct as of such date.
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NOTE REGARDING FORWARD LOOKING STATEMENTS
Much of the information included in this Form 20-F includes or is based upon estimates, projections or other “forward looking statements”. Such forward looking statements include any projections or estimates made by us and our management in connection with our business operations. These statements relate to future events or our future financial performance. Generally, any statements contained herein that are not statements of historical facts may be forward–looking statements. In some cases you can identify forward-looking statements by terminology such as “may”, “should”, “expects”, “plans”, “anticipates”, “believes”, “estimates”, “predicts”, “potential” or “continue or the negative of those terms or other comparable terminology. While these forward-looking statements, and any assumptions upon which they are based, are made in good faith and reflect our current judgment regarding the direction of our business, actual results will almost always vary, sometimes materially, from any estimates, predictions, projections, assumptions or other future performance suggested herein. Such estimates, projections or other forward looking statements involve various risks and uncertainties and other factors, including the risks in the section titled “Risk Factors” below, that may cause our actual results, levels of activities, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements. We caution the reader that important factors in some cases have affected and, in the future, could materially affect actual results and cause actual results to differ materially from the results expressed in any such estimates, projections or other forward looking statements. Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Except as required by applicable law, including the securities laws of the United States, we do not intend to update any of the forward-looking statements to conform those statements to actual results.
In particular, without limiting the generality of the foregoing disclosure, the statements contained in Item 4.B. – “Business Overview”, Item 5 – “Operating and Financial Review and Prospects” and Item 11 – “Quantitative and Qualitative Disclosures About Market Risk” are inherently subject to a variety of risks and uncertainties that could cause actual results, performance or achievements to differ significantly.
PART I
ITEM 1 - IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2 - OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3 - KEY INFORMATION
A. Selected Financial Data
Adira Energy
On August 31, 2009, Adira acquired Adira Energy by issuing 39,040,001 common shares of Adira to Adira Energy’s shareholders on a one-for-one basis. As the shareholders of Adira Energy obtained control of Adira, the share exchange is considered to be a reverse takeover transaction. Accordingly, for accounting purposes, Adira Energy is the acquirer.
Adira Energy’s predecessor is Adira Israel, which was incorporated in Israel on October 26, 2008. In order to facilitate tax planning, all of the issued and outstanding shares of Adira Israel were registered in the name of Adira Africa Corp. (“Adira Africa”), a privately-owned Canadian corporation, as a trustee for and on behalf of a corporation to be incorporated in Ontario – namely, Adira Energy, which was subsequently incorporated on April 8, 2009 – pursuant to a Declaration of Trust dated November 16, 2008 (the “Declaration of Trust”). In December 2008, upon application to Ministry of Energy and Water Resources (formerly the Ministry of National Infrastructures) of the State of Israel (the “Ministry” or “MNI”), Adira Israel obtained Eitan License No. 356, covering 31,060 acres (125.7 square kilometers) in the Hula Valley in Northern Israel (the “Eitan License”), for no consideration other than the payment of a nominal stamp duty in the amount of $3,544. Upon the incorporation of Adira Energy on April 8, 2009, Adira Africa transferred the shares of Adira Israel to Adira Energy for no consideration, as contemplated by the Declaration of Trust.
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The only activity undertaken in Adira Israel from December 2008 to April 8, 2009 was the application for, and the receipt of, the Eitan License, and, pursuant to the Declaration of Trust, Adira Energy is in substance treated as the owner of the Adira Israel shares since the inception of Adira Israel. Further, the carrying amount of the single asset owned by Adira Israel, the Eitan License (there were no material liabilities), was recorded in the accounts of Adira Israel as of April 8, 2009 in its nominal amount of the stamp duty. Therefore, under International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (the “IASB”), the carrying amount of the Adira Israel shares transferred to Adira Energy on that date was of the same nominal amount. Subsequent to April 7, 2009, all activities of the Company are reflected in the consolidated financial statements of Adira.
As disclosed elsewhere in this annual report, we have now plugged and abandoned the first well that we drilled on the Eitan License (the “Eitan #1 Well”), and we have surrendered the Eitan License in accordance with the Israeli Petroleum Law (as defined below). However, we continue to hold interests in certain other oil and gas licenses located offshore Israel.
The selected historical information presented in the table below for the years ended December 31, 2012 and 2011 are derived from the audited consolidated financial statements of Adira for such period, and have been prepared in accordance with IFRS as issued by the IASB. The selected historical financial information presented in the table below for the 267-day period ended December 31, 2009 comprises the operating data of Adira Energy and its subsidiary companies from April 8, 2009 (date of incorporation of Adira Energy) and that of Adira (formerly AMG Oil Ltd) from September 1, 2009, and have also been prepared in accordance with IFRS as issued by the IASB. The selected financial information presented below should be read in conjunction with the audited consolidated financial statements and the notes thereto of Adira Group, and with the information appearing under each of Item 4 – “Information on the Company” and Item 5 – “Operating and Financial Review and Prospects” of this Form 20-F. All financial data presented in this Form 20-F are qualified in their entirety by reference to the consolidated financial statements and their notes.
U.S. dollars in thousands, except share and per share data
| | Year Ended December 31, |
| | 2012 | 2011 | 2010 | 2009 |
| | ($ thousands) |
| Balance Sheet Data | | | | |
| Cash and cash equivalents | 2,394 | 8,094 | 8,686 | 2,044 |
| Total Assets | 15,340 | 10,247 | 18,610 | 2,437 |
| Total Liabilities | 10,330 | 1,421 | 7,373 | 227 |
| Total Shareholders’ Equity | 5,010 | 8,826 | 11,237 | 2,437 |
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| | | Year ended December 31 | | | 267-day period | |
| | | | | | | | | | | | ended | |
| | | | | | | | | | | | December 31 | |
| | | 2012 | | | 2011 | | | 2010 | | | 2009 | |
| | | $ | | | $ | | | $ | | | $ | |
| Operating Data | | | | | | | | | | | | |
| Revenues and other income | | 1,889 | | | 1,323 | | | 1,707 | | | - | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Exploration expenses | | 1,026 | | | 5,018 | | | 1,624 | | | 195 | |
| General and administrative expenses | | 5,304 | | | 5,031 | | | 3,067 | | | 1,639 | |
| Impairment charge | | 7,810 | | | 1,226 | | | - | | | - | |
| | | | | | | | | | | | | |
| Total expenses | | 14,140 | | | 11,275 | | | 4,691 | | | 1,834 | |
| | | | | | | | | | | | | |
| Operating loss | | (12,251 | ) | | (9,952 | ) | | (2,984 | ) | | (1,834 | ) |
| | | | | | | | | | | | | |
| Financing income | | 2,480 | | | 43 | | | - | | | 15 | |
| Financing expense | | (745 | ) | | (109 | ) | | (5 | ) | | - | |
| Issuance expenses | | - | | | - | | | - | | | (4,902 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | (10,516 | ) | | (10,018 | ) | | (2,989 | ) | | (6,721 | ) |
| | | | | | | | | | | | | |
| Income taxes | | (41 | ) | | (33 | ) | | (15 | ) | | (1 | ) |
| | | | | | | | | | | | | |
| Net loss and comprehensive loss | | (10,557 | ) | | (10,051 | ) | | (3,004 | ) | | (6,722 | ) |
| | | | | | | | | | | | | |
| Basic and diluted net loss per share attributable to equity holders of the parent | | (0.06 | ) | | (0.10 | ) | | (0.05 | ) | | (0.14 | ) |
| Weighted average number of Ordinary shares used in computing basic and diluted net loss per share | | 132,940,856 | | | 99,813,334 | | | 65,653,700 | | | 49,184,720 | |
We previously prepared our financial statements in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”). The consolidated financial statements included in our transition report on Form 20-F for the period from October 1, 2010 to December 31, 2010, as filed with the SEC on February 27, 2012, were our Company’s first annual financial statements reported in accordance with IFRS. “IFRS 1, First-time Adoption of International Financial Reporting Standards,” was applied to such consolidated financial statements; the impact of the transition to reporting in accordance with IFRS on our Company's financial statements was detailed in Note 19 to those financial statements.
The selected balance sheet data presented in the table below for Adira Israel as of April 7, 2009, and the related changes in equity for the 164-day period from its incorporation (October 26, 2008) to April 7, 2009, are derived from the audited financial statements of Adira Israel for such period, which are included in Amendment No. 1 to our annual report on Form 20-F for the year ended September 30, 2010, as filed with the SEC on November 21, 2011. Adira Israel’s financial statements do not include a statement of operations and statement of cash flows for the 164-day period ended April 7, 2009, as there were no revenues, expenses or cash transactions during this period. The selected financial information presented below should be read in conjunction with the audited financial statements and the notes thereto of Adira Israel.
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Under Israeli GAAP (U.S. dollars in thousands)
| | | As at April 7 | |
| | | 2009 | |
| | | $ | |
| Balance Sheet Data | | | |
| Exploration and evaluation asset | | 3,544 | |
| Total Assets | | 3,544 | |
| Total Liabilities | | 3,541 | |
| Total Shareholders’ Equity | | 3 | |
| Changes in Equity | | Share Capital | | | Total | |
| | | Number | | | Amount | | | Equity | |
| | | | | | | | | | |
| Balance at October 26, 2008 (date of incorporation) | | - | | $ | - | | $ | - | |
| | | | | | | | | | |
| Shares issued | | 1,000 | | | 3 | | | 3 | |
| | | | | | | | | | |
| Balance at April 7, 2009 | | 1,000 | | $ | 3 | | $ | 3 | |
As noted in Note 4 to the audited financial statements of Adira Israel, which are included in Amendment No. 1 to our annual report on Form 20-F for the year ended September 30, 2010, as filed with the SEC on November 21, 2011, there are no differences between Israeli GAAP and US GAAP in respect of the financial position and results of operations of Adira Israel for the period presented.
We have never declared or paid any cash or other dividends.
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B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
An investment in our securities is highly speculative and involves a high degree of risk. Our Company may face a variety of risks that may affect our operations or financial results and many of those risks are driven by factors that we cannot control or predict. Before investing in our company’s securities, investors should carefully consider the following risks. The risks and uncertainties described below are not the only risks and uncertainties that we face or that an investment in our securities entails. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. Any of the following risks could materially and adversely affect our business, financial condition, prospects and results of operations. In that case, investors may lose all or a part of their investment. The risks discussed below also include forward-looking statements and the out actual results may differ substantially from those discussed in these forward-looking statements. See ‘‘Note Regarding Forward Looking Statements” and “Operating and Financial Review and Prospects”.
Risks Associated with the Company
Our independent auditors have referred to circumstances which might result in doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Adira incurred a net loss of $10.6 million for the year ended December 31, 2012. At December 31, 2012, Adira had an accumulated deficit of $29 million. These circumstances raise doubt about our ability to continue as a going concern, as described in the Note 1 to our consolidated financial statements for the period ended December 31, 2012, which are included herein. Although our consolidated financial statements refer to circumstances which might raise doubt about our ability to continue as a going concern, they do not reflect any adjustments that might result if we are unable to continue our business.
We are an early-stage oil and gas exploration company without significant revenues. Our ability to continue in business depends upon our continued ability to obtain significant financing from external sources and the success of our exploration efforts and any production efforts resulting therefrom, none of which can be assured.
We are an early-stage oil and gas exploration company without any significant revenues, and there can be no assurance of our ability to develop and operate our projects profitably. We have historically depended entirely upon capital infusion from the issuance of equity securities to provide the cash needed to fund our operations, but we cannot assure you that we will be able to continue to do so. Our ability to continue in business depends upon our continued ability to obtain significant financing from external sources and the success of our exploration efforts and any production efforts resulting therefrom. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and could have a significant negative effect on our business plans and operations, including our ability to continue our current exploration activities and maintain ownership of our current licenses.
While we may in the future generate additional working capital through the development, operation, sale or possible syndication of our current property or any future properties, there is no assurance that our Company will be successful in generating positive cash flow, or if successful, that any such funds will be available for distribution to shareholders or to fund further exploration and development programs.
We have had negative cash flows from operations, and there is no assurance that our current liquidity or capital resources will be sufficient to fund our operations on an ongoing basis. Our business operations may fail if our actual cash requirements exceed our estimates and we are not able to obtain further financing.
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We will require significant capital to complete our drill test wells, and to build the necessary infrastructure to commence operations if our exploration activities result in the discovery of sufficient oil and gas reserves to justify their exploitation and development.
Since inception, we have not earned any significant revenues from operations, and due to the length of time between the discovery of oil and gas reserves and their exploitation and development, we do not anticipate earning significant revenues from operation in the near future. We have incurred and will continue to incur significant expenses. As noted above, at December 31, 2012, we had cash and equivalents on hand of $2.4 million. We will have to seek additional financing to fund the advanced exploration on our assets, if warranted. Further, we cannot assure you that our actual cash requirements will not exceed our estimates, and in any case we will require additional financing to bring our interests into commercial operation, finance working capital, meet our contractual minimum expenditures and pay for operating expenses and capital requirements until we achieve a positive cash flow. Additional capital also may be required in the event we incur any significant unanticipated expenses.
In light of our operating history, and under the current capital and credit market conditions, we may not be able to obtain additional equity or debt financing on acceptable terms if and when needed. Even if financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy our requirements.
If we require, but are unable to obtain, additional financing in the future, we may be unable to implement our business plan and our growth strategies, respond to changing business or economic conditions, withstand adverse operating results, and compete effectively. More importantly, if we are unable to raise further financing when required, our planned exploration activities may have to be scaled down or even ceased, and our ability to generate revenues in the future would be negatively affected.
As a holding company, our ability to make payments will eventually depend on the cash flows of our subsidiaries.
We are a holding company and conduct substantially all of our operations through our subsidiaries incorporated outside North America. We have no direct operations and no significant assets other than the shares of our subsidiaries and cash proceeds received from any financings, which cash is subsequently provided to our subsidiaries. Assuming our holding company structure remains, we will be dependent on the cash flows from our subsidiaries to meet our obligations, including payment of principal and interest on any debt we incur. The ability of certain of our subsidiaries to provide us with payments may be constrained by the following factors:
the cash flows generated by operations, investment activities and financing activities; and
the level of taxation, particularly corporate profits and withholding taxes.
In addition, we cannot guarantee that the current fiscal regime that allows for repatriation of funds in each of the countries where we do business will remain in effect, nor can we guarantee that arbitrary changes in exchange controls in each of the countries where we do business will not take place, which may adversely impact on the ability of investors to recover their investment.
If we are unable to receive sufficient cash from our subsidiaries, we may be required to refinance any indebtedness we incur, raise funds in a public or private equity or debt offering or sell some or all of our assets. We can provide no assurances that an offering of our debt or equity or a refinancing of our debt can or will be completed on satisfactory terms or that it would be sufficient to enable us to make payment with respect to our debt. The foregoing events could have an adverse impact on our future cash flows, earnings, results of operations and financial condition.
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The majority of our assets are outside the United States, with the result that it may be difficult for investors to enforce within the United States any judgments obtained against us or some of our directors or officers.
The majority of our assets are located outside the United States. In addition, some of our directors and officers are nationals and/or residents of countries other than the United States, and all or a substantial portion of such persons’ assets are located outside the United States.
As a result, it may be difficult for investors to enforce within the United States any judgments obtained against us or our officers or directors, including judgments predicated upon the civil liability provisions of the securities laws of the United States or any state thereof. Consequently, investors may be effectively prevented from pursuing remedies under United States federal securities laws against them.
We may be adversely affected by current global financial conditions.
Current global financial conditions have been characterized by increased volatility and several financial institutions have either gone into bankruptcy or have had to be rescued by governmental authorities. Access to public financing and bank credit has been negatively impacted by both the rapid decline in value of sub-prime mortgages and the liquidity crisis affecting the asset-backed commercial paper market. These and other factors may affect our ability to obtain equity or debt financing in the future on favorable terms. Additionally, these factors, as well as other related factors, may cause decreases in our asset values that may be other than temporary, which may result in impairment losses. If such increased levels of volatility and market turmoil continue, or if more extensive disruptions of the global financial markets occur, our operations could be adversely impacted and the market value of our common shares may be adversely affected.
Currency fluctuations could have an adverse effect on our business.
Our earnings and cash flow may also be affected by fluctuations in the exchange rate between the U.S. dollar and other currencies, such as the New Israeli Shekel (“NIS”) and the Canadian dollar. Our consolidated financial statements are expressed in U.S. dollars. Our sales of oil and gas, if any, will be denominated in U.S. dollars, while exploration costs and operating costs are, in part, denominated in Israel Shekels, U.S. dollars and Canadian dollars
Fluctuations in exchange rates between the U.S. dollar and other currencies may give rise to foreign exchange currency exposures, both favorable and unfavorable, which have impacted and in the future may materially impact our future financial results. We do not utilize a hedging program to limit the adverse effects of foreign exchange rate fluctuations.
Conditions in Israel may affect our operations.
Our subsidiaries conduct their principal operations in Israel, and therefore are directly affected by the political, economic, and military conditions affecting Israel and the Middle East. Armed conflicts between Israel and its neighboring countries and territories occur periodically and a protracted state of hostility, varying in degree and intensity over time, has in the past led to security and economic difficulties for Israel. These hostilities, any escalation thereof or any future armed conflict or violence in the region, could adversely affect our subsidiaries’ operations. In addition, we could be adversely affected by other events or factors affecting Israel such as the interruption or curtailment of trade between Israel and its present trading partners, a significant downturn in the economic or financial condition of Israel, a significant downgrading of Israel’s international credit rating, labor disputes and strike actions and political instability.
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Our financial reporting may be subject to weaknesses in internal controls.
Internal controls over financial reporting are procedures designed to provide reasonable assurance that transactions are properly authorized, assets are safeguarded against unauthorized or improper use, and transactions are properly recorded and reported. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance with respect to the reliability of financial reporting and financial statement preparation.
We cannot be certain that current expected expenditures and completion/testing programs will be realized.
We believe that the costs used to prepare internal budgets are reasonable, however, there are assumptions, uncertainties, and risk that may cause our allocated funds on a per well basis to change as a result of having to alter certain activities from those originally proposed or programmed to reduce and mitigate uncertainties and risks. These assumptions, uncertainties, and risks are inherent in the completion and testing of wells and can include but are not limited to: pipe failure, casing collapse, unusual or unexpected formation pressure, environmental hazards, and other operating or production risk intrinsic in oil and/or gas activities. Any of the above may cause a delay in the Company’s completion program and its ability to determine reserve potential.
Our lack of diversification increases the risk of an investment, and our financial condition and results of operations may deteriorate if we fail to diversify.
Our business focus is on oil and gas exploration on three properties in Israel within close proximity. As a result, we lack diversification, in terms of both the nature and geographic scope of our business. We will likely be impacted more acutely by factors affecting our industry or the regions in which we operate than we would if our business were more diversified. If we cannot diversify our operations, our financial condition and results of operations could deteriorate.
We may not effectively manage the growth necessary to execute our business plan.
Our business plan anticipates a significant increase in the number of our contractors, strategic partners and equipment suppliers. Such growth, if any, will place significant strain on our current personnel, systems and resources. We expect that we will be required to hire qualified consultants and employees to help manage our growth effectively. We believe that we will also be required to improve our management, technical, information and accounting systems, controls and procedures. We may not be able to maintain the quality of our operations, control our costs, continue complying with all applicable regulations and expand our internal management, technical information and accounting systems to support our desired growth. If we fail to manage our anticipated growth effectively, our business could be adversely affected.
We have agreed to indemnify our directors against liabilities incurred by them as directors.
We have agreed to indemnify our directors from and against all costs, charges and expenses reasonably incurred by them in respect of any civil, criminal or administrative action or proceeding to which they are made a party or with which they are threatened by reason of being or having been a director of Adira, provided that (a) they have acted honestly and in good faith with a view to the best interests of Adira; and (b) in the case of a criminal or administrative action or proceeding that is enforced by a monetary penalty, they had reasonable grounds for believing that their conduct was lawful. This indemnity may reduce the likelihood of derivative litigation against our directors and may discourage or deter our shareholders from suing the directors.
Risks Associated with Our Business
We have not discovered any oil and gas reserves, and we cannot assure you that we or our venture ever will.
We are in the business of exploring for oil and natural gas, and the development and exploitation of any significant reserves that are found. Oil and gas exploration involves a high degree of risk that the exploration will not yield positive results. These risks are more acute in the early stages of exploration. We have not discovered any reserves, and we cannot guarantee you that we ever will. Even if we succeed in discovering oil or gas reserves, these reserves may not be in commercially viable quantities or locations. Until we discover such reserves, we will not be able to generate any revenues from their exploitation and development. If we are unable to generate revenues from the development and exploitation of oil and gas reserves, we will be forced to change our business or cease operations.
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Our business will suffer if we cannot obtain or maintain necessary licenses.
Our operations require licenses, permits and in some cases renewals of licenses and permits from various governmental authorities. Specifically, the licenses awarded to us by the Government of Israel have terms of three years and must be renewed in order to extend the license beyond this initial term. Although certain licenses have received one extension, there can be no assurance that we will be able to secure any additional extensions, if necessary. The Offshore Licenses require us to meet certain minimum commitments with respect to our activities on those licenses. We may apply to extend the timing for the commitments associated with the Offshore Licenses, but there can be no assurance that we will be able to secure any amendments to the commitment dates associated with the licenses, if necessary.
As of the date hereof, we have missed two Ministry milestones on the Samuel License; namely we have not signed a drilling contract by March 31, 2013, and we have not spud a well by April 30, 2013. We have requested an extension of both milestones and await a formal response from the Ministry. There is no assurance that the Ministry will grant our requests.
Among other factors, our ability to obtain, sustain or renew such licenses and permits on acceptable terms is subject to change in regulations and policies and to the discretion of the applicable governments. Our inability to obtain, maintain or acquire extensions for these licenses or permits could hamper our ability to produce revenues from operations. Other oil and gas companies may seek to acquire property leases and licenses that we will need to operate our business. This competition has become increasingly intense as the price of oil on the commodities markets has risen in recent years. This competition may prevent us from obtaining licenses we deem necessary for our business, or it may substantially increase the cost of obtaining these licenses.
We may not meet the timing commitments with respect to the Offshore Licenses.
We have formally applied to revise only certain of the minimum commitments with respect to the Offshore Licenses. We understand that rig availability in the eastern-Mediterranean region is in low supply and, accordingly, we may not be able to secure drilling rig contracts for drilling on our licenses. As such, even if we have funds available to proceed with the work programs on our licenses, we may not be able to source and secure a rig to begin drilling. Moreover, in the event that our joint venture, farm-out and/or other co-participants related to each of the Offshore Licenses are unable to meet their obligations under their respective agreements related to the Offshore Licenses or in the event that certain unforeseen circumstances occur, the timing commitments under the Offshore Licenses may not be met. If in the future we are required to apply for a formal extension from the Ministry from certain of the timing commitments with respect to the Offshore Licenses, we can make no guarantee that the Ministry will provide such extensions relating to the Offshore Licenses. If the Ministry does not provide such extensions, the Ministry could then begin a process to retract the applicable license or licenses from us.
Disagreements among Gabriella License co-participants may prevent the continued operations on the Gabriella License or result in the loss of our working interest in the Gabriella License.
We are a party to various contracts with Modi’in Energy Limited Partnership (“MELP) and Brownstone Energy Inc. (“Brownstone”) related to the Gabriella License and the joint operations to explore for hydrocarbons on that license. These contracts include the Farmout Agreement, dated January 26, 2010; the International Operating Agreement, dated March 10, 2011 (as amended on August 24, 2012); the Memorandum of Understanding, dated June 12, 2011; and the Letter Agreement, dated December 20, 2012. In addition, MELP entered into a rig/drilling contract with Noble International Limited dated July 19, 2012 (as amended three times). In connection with the License and the contracts just mentioned, (i) MELP alleges in letters and oral communications that we breached obligations under the contracts listed above, including failure to transfer funds required to meet various financial obligations; and (ii) we allege similar claims against MELP. In addition, both MELP and Adira have accused the other of various defaults under the joint operating agreement (the “Gabriella JOA”) relating to the Gabriella License, to which each of MELP, Adira and Brownstone are parties. The Gabriella JOA provides that certain “Defaults,” if not cured, will result in a party’s removal from the Gabriella JOA, and forfeiture of any working interest in the Gabriella License. Aspects of the Memorandum of Understanding and the Letter Agreement listed above contain a similar mechanism that would, if triggered, strip us of any interest in the Gabriella License, cause the loss of our right to receive management fees, royalty rights, and other payments and rights due to it from MELP and from MELP’s general partner.
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Thus far, accusations to and from MELP have been in the form of letters and oral communications, not legal action. If either party initiates legal action, then the other will likely respond with counter-claims, and we cannot provide any assurance that we would prevail on any of the matters in dispute. If legal action is pursued by either side, and if we are ultimately found to be in breach of our obligations, this could result in the loss of our entire interest in the Gabriella License, and the loss of all associated royalty rights, options to purchase an interest in the Yam Hadera License, management fees, and operator fees.
In addition, even if we were to prevail in any legal action against MELP, that could mean that a 70% share of the total funding obligations with respect to the Gabriella License would have to be met pro rata (50/50) by Adira and Brownstone, or new Gabriella License participants would have to agree to take on a large portion of the funding. This would further exacerbate the challenges with regards to liquidity, capital resources and funding that are mentioned in other Risk Factors in this filing, unless new investors were located, or third parties were interested in taking a working interest in the Gabriella License directly. Finally, rather than initiating or responding to court action filed by MELP or Adira, the parties may reach an amicable settlement of their current disagreements. Such settlement may result in additional changes to Adira’s rights, obligations, or working interest on the Gabriella License that are not yet known to the Company.
We may be liable to pay operating expenditures respecting our licenses exceeding our pro rata share of such expenditures.
We are a party to certain joint operation and farm-out agreements respecting our licenses pursuant to which we have agreed to pay our pro rata share of operating expenditures in connection with the licenses. In accordance with the terms and conditions of such agreements, if a party fails to pay its pro rata share of the expenditures, we may be liable to cover such defaulting party’s pro rata share of the expenditures based on our interest in the license to ensure compliance with the terms and expenditure requirements under the work plan. If we do not have sufficient funds to cover the defaulting party’s pro rata share of expenditures, we may not be able to maintain our licenses in good standing, causing them to be revoked, suspended or cancelled, which would have a material adverse effect on us.
Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Joint Operating Agreement, or “JOA,” for that license, made up as follows: Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal. The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.
We might incur debt in order to fund our exploration and development activities, which would continue to reduce our financial flexibility and could have a material adverse effect on our business, financial condition or results of operation.
It is possible that we might incur debt in order to fund our exploration and development activities, which would continue to reduce our financial flexibility and could have a material adverse effect on our business, operations and results of operations and financial condition. General economic conditions, oil and gas prices and financial, business and other factors affect our operations and future performance. Many of these factors are beyond our control. No assurances can be made that we will be able to generate sufficient cash flow to pay the interest on its debt or that future working capital, borrowings or equity financing will be available to pay or refinance such debt. Factors that will affect its ability to raise cash through an offering of Common Shares or other types of equity securities, or a refinancing of debt include financial market conditions, the value of its assets and performance at the time we need capital. No assurances can be made that we will have sufficient funds to make such payments. If we do not have sufficient funds and are otherwise unable to negotiate renewals of our borrowings or arrange new financing, we might be required to sell significant assets. Any such sale could have a material adverse effect on our business, financial condition and results of operations.
Our assets and operations are subject to government regulation in Israel.
Our interests and operations in Israel may be affected in varying degrees by government regulations relating to the oil and gas industry. Any changes in regulations or shifts in political conditions are beyond the control of the Company and may adversely affect our business. Our operations may be affected in varying degrees by new government regulations and changes to existing regulations, including those with respect to restrictions on exploration and production, price controls, export controls, income taxes, employment, land use, water use, environmental legislation and safety regulations. On April 10, 2011, the Petroleum Profits Taxation Law, 5771-2011 (the “Petroleum Taxation Law”) was published based largely on the conclusions and recommendations of the Sheshinski Committee, a government appointed committee in Israel which was tasked with examining the fiscal system prevailing in Israel in respect of petroleum and gas resources and proposing an updated fiscal policy. The Petroleum Taxation Law imposes a progressive levy (the “Levy”) on profits derived from petroleum reserve, in addition to the 12.5% royalty payable under the old tax regime which remains unchanged. The Levy is designed to capitalize on the economic benefits from each individual reservoir and is imposed only after the investment in exploration, development and construction are fully returned, plus a yield that reflects, among other things, the developer’s risk and required financial expenses. As a result of the Levy, the aggregate government take from oil and gas revenue is expected to increase from approximately 33% to about 52% to 62%. The implementation of the Petroleum Taxation Law may have an adverse effect on our business, financial conditions and results as our business matures.
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Our future success depends upon our ability to find, develop and acquire additional oil and natural gas reserves that are economically recoverable.
In the event that we are able to find and develop oil and natural gas reserves which are economically recoverable, the rate of production from those reservoirs will decline as reserves are depleted. As a result, we must locate and develop or acquire new oil and natural gas reserves to replace those being depleted by production. We must do this even during periods of low oil and natural gas prices when it is difficult to raise the capital necessary to finance activities. Without successful exploration or acquisition activities, our reserves and revenues will decline. We may not be able to find and develop or acquire additional reserves at an acceptable cost or have necessary financing for these activities.
Oil and natural gas drilling is a high-risk activity.
Our future success will depend on the success of our exploration and drilling programs. In addition to the numerous operating risks described in more detail below, these activities involve the risk that no commercially productive oil or natural gas reservoirs will be discovered. In addition, we are uncertain as to the future cost or timing of drilling, completing and producing wells. Furthermore, our drilling operations may be curtailed, delayed or cancelled as a result of a variety of factors, including, but not limited to, the following: unexpected drilling conditions; pressure or irregularities in formations; equipment failures or accidents; adverse weather conditions; inability to comply with governmental requirements; and shortages or delays in the availability of drilling rigs and the delivery of equipment. If we experience any of these problems, our ability to conduct operations could be adversely affected.
Our success depends on our ability to attract and retain qualified personnel.
Recruiting and retaining qualified personnel is critical to our success. The number of persons skilled in the acquisition, exploration and development of oil and gas properties is limited and competition for such persons is intense. As our business activity grows, it will require additional key financial, administrative and qualified technical personnel as well as additional operations staff. Although we believe that we will be successful in attracting, training and retaining qualified personnel, there can be no assurance of such success. If we are not successful in attracting and training qualified personnel, the efficiency of our operations could be affected, which could have an adverse impact on our future cash flows, earnings, results of operations and financial condition. Our development now and in the future will also depend on the efforts of key management figures. The loss of any of these key people could have a material adverse effect on our business. We do not currently maintain key-man life insurance on any of our key employees.
We face strong competition from other energy companies that may negatively affect our ability to carry on operations.
We operate in the highly competitive area of oil and natural gas exploration, development and production. Factors which affect our ability to successfully compete in the marketplace include, but are not limited to, the following: the availability of funds and information relating to a property; the standards established by us for the minimum projected return on investment; the availability of alternate fuel sources; and the transportation of gas.
Our competitors include major integrated oil companies, substantial independent energy companies, affiliates of major pipeline companies, and national and local natural gas gatherers. Many of these competitors possess greater financial and other resources than we do.
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We might not be able to determine reserve potential, identify liabilities associated with the properties or obtain protection from sellers against them, which could cause us to incur losses.
Although we believe we have reviewed and evaluated our properties in Israel in a manner consistent with industry practices, such review and evaluation might not necessarily reveal all existing or potential problems. This is also true for any future acquisitions made by us. Inspections may not always be performed on every well, and environmental problems, such as groundwater contamination, are not necessarily observable even when an inspection is undertaken. Even when problems are identified, a seller may be unwilling or unable to provide effective contractual protection against all or part of those problems, and we often assume environmental and other risks and liabilities in connection with the acquired properties.
You should not place undue reliance on reserve information because reserve information represents estimates.
There are numerous uncertainties inherent in estimating quantities of proved reserves and cash flows from such reserves, including factors beyond our control and the control of engineers. Reserve engineering is a subjective process of estimating underground accumulations of oil and natural gas that cannot be measured in an exact manner. The accuracy of an estimate of quantities of reserves, or of cash flows attributable to these reserves, is a function of many factors, including, but not limited to, the following: available data; assumptions regarding future oil and natural gas prices; estimates of future production rates; expenditures for future development and exploitation activities; and engineering and geological interpretation and judgment.
Reserves and future cash flows may also be subject to material downward or upward revisions based upon production history, development and exploitation activities and oil and natural gas prices. Actual future production, revenue, taxes, development expenditures, operating expenses, quantities of recoverable reserves and value of cash flows from those reserves may vary significantly from the estimates. In addition, reserve engineers may make different estimates of reserves and cash flows based on the same available data.
The nature of oil and gas exploration makes the estimates of costs uncertain, and our operations may be adversely affected if we underestimate such costs.
It is difficult to project the costs of implementing an exploratory drilling program. Complicating factors include the inherent uncertainties of drilling in unknown formations, the costs associated with encountering various drilling conditions, such as over-pressured zones and tools lost in the hole, and changes in drilling plans and locations as a result of prior exploratory wells or additional seismic data and interpretations thereof. If we underestimate the costs of such programs, we may be required to seek additional funding, shift resources from other operations or abandon such programs.
Losses and liabilities arising from uninsured or under-insured hazards could have a material adverse effect on our business.
If we develop and exploit oil and gas reserves, those operations will be subject to the customary hazards of recovering, transporting and processing hydrocarbons, such as fires, explosions, gaseous leaks, migration of harmful substances, blowouts and oil spills. An accident or error arising from these hazards might result in the loss of equipment or life, as well as injury, property damage or other liability. We cannot assure you that we will obtain insurance on reasonable terms or that any insurance we may obtain will be sufficient to cover any such accident or error. Our operations could be interrupted by natural disasters or other events beyond our control. Losses and liabilities arising from uninsured or under-insured events could have a material adverse effect on our business, financial condition and results of operations.
Compliance with environmental and other government regulations could be costly and could negatively impact production.
All phases of the oil and gas business present environmental risks and hazards and are subject to environmental regulation pursuant to a variety of laws and regulations. Our operations are subject to laws and regulations governing the discharge of materials into the environment or otherwise relating to environmental protection. The recent trend toward stricter standards in environmental legislation and regulation is likely to continue. The enactment of stricter legislation or the adoption of stricter regulation could have a significant impact on our operating costs, as well as on the oil and natural gas industry in general.
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Our existing property, and any future properties that we may acquire, may be subject to pre-existing environmental liabilities.
Pre-existing environmental liabilities may exist on the property in which we currently hold an interest or on properties that may be subsequently acquired by us which are unknown to the Company and which have been caused by previous or existing owners or operators of the properties. In such event, we may be required to remediate these properties and the costs of remediation could be substantial. Further, in such circumstances, we may not be able to claim indemnification or contribution from other parties. In the event we were required to undertake and fund significant remediation work, such event could have a material adverse effect upon the Company and the value of our common shares.
Penalties we may incur could impair our business.
Failure to comply with government regulations could subject us to civil and criminal penalties, could require us or our venture to forfeit property rights or licenses, and may affect the value of our assets. We may also be required to take corrective actions, such as installing additional equipment, which could require substantial capital expenditures. We could also be required to indemnify our employees in connection with any expenses or liabilities that they may incur individually in connection with regulatory action against them. As a result, our future business prospects could deteriorate due to regulatory constraints, and our profitability could be impaired by our obligation to provide such indemnification to our employees.
Strategic relationships upon which we may rely are subject to change, which may diminish our ability to conduct our operations.
Our ability to successfully acquire additional licenses, to discover reserves, to participate in drilling opportunities and to identify and enter into commercial arrangements depends on developing and maintaining close working relationships with industry participants and government officials and on our ability to select and evaluate suitable properties and to consummate transactions in a highly competitive environment. We may not be able to establish these strategic relationships, or if established, we may not be able to maintain them. In addition, the dynamics of our relationships with strategic partners may require us to incur expenses or undertake activities we would not otherwise be inclined to undertake in order to fulfill our obligations to these partners or maintain our relationships. If our strategic relationships are not established or maintained, our business prospects may be limited, which could diminish our ability to conduct our operations.
Political instability or fundamental changes in the leadership or in the structure of the governments in the jurisdictions in which the Company operates could have a material negative impact on the Company.
Our interests may be affected by political and economic upheavals. Although we currently operate in jurisdictions that welcome foreign investment and are generally stable, there is no assurance that the current economic and political situation in these jurisdictions will not change drastically in coming years. Local, regional and world events could cause the jurisdictions in which we operate to change the applicable resource laws, tax laws, foreign investment laws, or to revise their policies in a manner that renders our current and future projects non-economic.
Even if we discover and then develop oil and gas reserves, we may have difficulty distributing our production.
If our exploration activities result in the discovery of oil and gas reserves, and if we are able to successfully develop and exploit such reserves, we will have to make arrangements for storage and distribution of oil and gas. We would have to rely on local infrastructure and the availability of transportation for storage and shipment of oil and gas products, but any readily available infrastructure and storage and transportation facilities may be insufficient or not available at commercially acceptable terms. The marketability of our production, if any, will depend in part upon the availability, proximity, and capacity of oil and natural gas pipelines, crude oil trucking, natural gas gathering systems and processing facilities. This could be particularly problematic to the extent that operations are conducted in remote areas that are difficult to access, such as areas that are distant from shipping or pipeline facilities. Furthermore, weather conditions or natural disasters, actions by companies doing business in one or more of the areas in which we or our venture will operate, or labor disputes may impair the distribution of oil and gas. In addition, Israel has little or no storage capacity and the currently available distribution infrastructure is limited. These factors may affect the ability to explore and develop properties and to store and transport oil and gas and may increase our expenses to a degree that has a material adverse effect on operations.
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Our inability to obtain necessary facilities could hamper our operations.
Oil and gas exploration activities depend on the availability of equipment, transportation, power and technical support in the particular areas where these activities will be conducted, and our access to these facilities may be limited. Demand for such limited equipment and other facilities or access restrictions may affect the availability of such equipment to us and may delay exploration and development activities. The quality and reliability of necessary facilities may also be unpredictable and we may be required to make efforts to standardize our facilities, which may entail unanticipated costs and delays. Shortages or the unavailability of necessary equipment or other facilities will impair our activities, either by delaying our activities, increasing our costs or otherwise.
Factors beyond our control affect our ability to market oil and gas.
Our ability to market oil and natural gas from ourwells, in the event we discover and exploit oil and natural gas, depends upon numerous factors beyond our control. These factors include, but are not limited to, the following: the level of domestic production and imports of oil and gas; the volatility of both oil and natural gas pricing; the proximity of natural gas production to natural gas facilities, pipelines and other means of transportation; the availability of pipeline capacity or other means of transportation; the demand for oil and natural gas by utilities and other end users; the availability of alternate fuel sources; the effect of inclement weather; and government regulation of oil and natural gas marketing.
If these factors were to change dramatically, our ability to market oil and natural gas or obtain favourable prices for our oil and natural gas could be adversely affected.
Prices and markets for oil are unpredictable and tend to fluctuate significantly, which could reduce profitability, growth and the value of our business if we or our ventures ever begin exploitation of reserves.
Our future financial condition, results of operations and the carrying value of our oil and natural gas properties depend primarily upon the prices we receive for our oil and natural gas production, if any. Oil and natural gas prices historically have been volatile and likely will continue to be volatile in the future, especially given current world economic conditions. Significant changes in long-term price outlooks for crude oil could by the time that we start exploiting oil and gas reserves, if we ever discover and exploits such reserves, have a material adverse effect on revenues as well as the value of licenses or other assets.
Future cash flow from operations, if any, will be highly dependent on the prices that we receive for oil and natural gas. This price volatility also affects the amount of our cash flow available for capital expenditures and our ability to borrow money or raise additional capital. The prices for oil and natural gas are subject to a variety of additional factors that are beyond our control. These factors include: the level of consumer demand for oil and natural gas; the domestic and foreign supply of oil and natural gas; the ability of the members of the Organization of Petroleum Exporting Countries to agree to and maintain oil price and production controls; the price of foreign oil and natural gas; the price and availability of alternative fuel sources; governmental regulations; weather conditions; market uncertainty; political conditions in oil and natural gas producing regions, including Israel and the Middle East; war, or the threat of war, in oil producing regions; and worldwide economic conditions.
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These factors and the volatility of the energy markets generally make it extremely difficult to predict future oil and natural gas price movements with any certainty. Also, oil and natural gas prices do not necessarily move in tandem. Declines in oil and natural gas prices would not only reduce revenue, but could reduce the amount of oil and natural gas that we can produce economically and, as a result, could have a material adverse effect upon our financial condition, cash flows, results of operations, oil and natural gas reserves, the carrying values of our oil and natural gas properties and the amounts we can borrow under any bank credit facilities we may obtain in the future.
Operating hazards may adversely affect our ability to conduct business.
Our future operations, if any, will be subject to risks inherent in the oil and natural gas industry, including, but not limited to, the following: blowouts; cratering; explosions; uncontrollable flows of oil, natural gas or well fluids; fires; pollution; and other environmental risks.
These risks could result in substantial losses to us from injury and loss of life, damage to and destruction of property and equipment, pollution and other environmental damage and suspension of operations. Governmental regulations may impose liability for pollution damage or result in the interruption or termination of operations.
We may enter into hedging agreements but may not be able to hedge against all such risks.
If we are able to discover commercially exploitable quantities of oil or gas and is able to enter into commercial production, from time to time we may enter into agreements to receive fixed or a range of prices on its oil and natural gas production to offset the risk of revenue losses if commodity prices decline; however, if commodity prices increase beyond the levels set in such agreements, we will not benefit from such increases. Similarly, from time to time we may enter into agreements to fix the exchange rate of certain currencies to US dollars in order to offset the risk of revenue losses if the other currencies increase in value compared to the US dollar; however, if other currencies decline in value compared to the US dollar, we will not benefit from the fluctuating exchange rate. In addition to the potential of experiencing an opportunity cost, other potential costs or losses associated with hedging include the risk that the other party to a hedge transaction does not perform its obligations under a hedge agreement, the hedge is imperfect or our hedging policies and procedures are not followed.
Our Company is organized under the laws of Canada.
Our Company is a Canadian corporation governed by theCanada Business Corporations Actand as such, its corporate structure, the rights and obligations of shareholders and its corporate bodies may be different from those of the home countries of international investors. Furthermore, non-Canadian residents may find it more difficult and costly to exercise shareholder rights. International investors may also find it costly and difficult to effect service of process and enforce their civil liabilities against the Company or some of its directors, controlling persons and officers.
To the extent that we establish natural gas and oil reserves, we will be required to replace, maintain or expand these natural gas and oil reserves in order to prevent reserves and production from declining, which could adversely affect cash flows and income.
In general, production from natural gas and oil properties declines over time as reserves are depleted, with the rate of decline depending on reservoir characteristics. If we establish reserves, of which there is no assurance, and are not successful in its subsequent exploration and development activities or in subsequently acquiring properties containing proved reserves, our proved reserves will decline as reserves are produced. Our future natural gas and oil production is highly dependent upon its ability to economically find, develop or acquire reserves in commercial quantities.
To the extent cash flow from operations, if any, is reduced, either by a decrease in prevailing production volume prices for natural gas and oil or an increase in finding and development costs, and external sources of capital become limited or unavailable, our ability to make the necessary capital investment to maintain or expand its asset base of natural gas and oil reserves would be impaired. Even with sufficient available capital, our future exploration and development activities may not result in additional proved reserves, and we might not be able to drill productive wells at acceptable costs.
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We may be treated as a U.S. corporation and taxed by the U.S. on our worldwide income.
We continued from Nevada to Canada in 2008. Such continuance is for corporate purposes a migration of us from Nevada to Canada. Transactions whereby a U.S. corporation migrates to a foreign jurisdiction are considered by the U.S. Congress to be a potential abuse of the U.S. tax rules because thereafter the foreign entity is not subject to U.S. tax on its worldwide income. As a result, Section 7874(b) of the Internal Revenue Code of 1986, as amended, was enacted to address this potential abuse. Section 7874(b) provides generally that a corporation that migrates from the U.S. will nonetheless remain subject to U.S. tax on its worldwide income unless the migrating entity has substantial business activities in the foreign country in which it is migrating when compared to its total business activities.
If Section 7874(b) were to apply to our migration from Nevada to Canada, it would cause us to be subject to U.S. federal income taxation on our worldwide income. Section 7874(b) of the Code will apply to our migration unless we had substantial business activities in Canada when compared to our total business activities at the time of our migration.
Based on the fact that substantially all of our activities were taking place in Canada and all of our assets were located in Canada at the time of our migration, we have taken the position that we had substantial business activity in Canada in relation to our worldwide activities at the time of the migration and that Section 7874(b) did not apply to cause us, after the migration, to be subject to U.S. federal income tax on our worldwide income. There is limited guidance as to what “substantial business activity” is “when compared to our worldwide activities.” Accordingly, the position adopted by us may be challenged by the U.S. tax authorities with the result that we may be subject to U.S. federal income taxes on our worldwide activities. In addition to U.S. federal income taxes, were Section 7874(b) to apply to us, we could be subject to penalties for failure to file U.S. federal income tax returns, late fees and interest on past due taxes. Furthermore, if Section 7874(b) were to apply to us, our non-U.S. shareholders may be subject to adverse U.S. federal income tax consequences such as the assessment of U.S. federal income withholding taxes on dividends paid by us. Each shareholder should consult its own tax advisor regarding the foregoing rules.
Risks Associated with our Common Shares
The market price of the common shares of our corporation may be volatile
The market price of our common shares may experience significant volatility. For the 12 months preceding the date of this annual report, the trading price of our common shares on the TSXV (as defined below) has ranged from a low of CDN$0.02 per share to a high of CDN$0.30 per share. Numerous factors, including many over which we have no control, may have a significant impact on the market price of our common shares including, among other things: regulatory developments in target markets affecting us, our customers or our competitors; actual or anticipated fluctuations in our quarterly operating results; changes in financial estimates or other material comments by securities analysts relating to us, our competitors or the industry in general; announcements by other companies in the industry relating to their operations, strategic initiatives, financial condition or financial performance or to the industry in general; announcements of acquisitions or consolidations involving industry competitors or industry suppliers; addition or departure of our executive officers; and sales or perceived sales of additional common shares of Adira.In addition, the stock market in recent years has experienced extreme price and trading volume fluctuations that often have been unrelated or disproportionate to the operating performance of individual companies. These broad market fluctuations may adversely affect the price of the common shares of Adira regardless of our operating performance. There can be no assurance that an active market for the Common Shares will be established or persist and the share price may decline.
The value of securities issued by us might be affected by matters not related to our operating performance.
The value of securities issued by us may be affected by matters not related to our operating performance or underlying value for reasons that include the following: general economic conditions in Canada, the US, Israel and globally; industry conditions, including fluctuations in the price of oil and natural gas; governmental regulation of the oil and gas industry, including environmental regulation; fluctuation in foreign exchange or interest rates; liabilities inherent in oil and natural gas operations; geological, technical, drilling and processing problems; assuming we achieve production, unanticipated operating events which can reduce production or cause production to be shut-in or delayed; failure to obtain industry partner and other third party consents and approvals, when required; stock market volatility and market valuations; competition for, among other things, capital, acquisition of reserves, undeveloped land and skilled personnel; the need to obtain required approvals from regulatory authorities; worldwide supplies and prices of and demand for natural gas and oil; political conditions and developments in Israel, Canada, the US, and globally; political conditions in natural gas and oil producing regions; revenue and operating results failing to meet expectations in any particular period; investor perception of the oil and gas industry; limited trading volume of our common shares; change in environmental and other governmental regulations; announcements relating to our business or the business of our competitors; our liquidity; and our ability to raise additional funds.
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In the past, companies that have experienced volatility in their value have been the subject of securities class action litigation. We might become involved in securities class action litigation in the future. Such litigation often result in substantial costs and diversion of management’s attention and resources and could have a material adverse effect on our business, financial condition and results of operation.
An investment in our Company will likely be diluted.
We may issue a substantial number of our common shares without investor approval to raise additional financing and we may consolidate the current outstanding common shares. Any such issuance or consolidation of our securities in the future could reduce an investor’s ownership percentage and voting rights in the Company and further dilute the value of your investment.
If we are a “passive foreign investment company” at any time that a U.S. shareholder holds our common shares, such U.S. shareholder may be subject to adverse U.S. federal income tax consequences
Acquiring, holding or disposing of our common shares may have tax consequences under the laws of Canada and the United States that are not disclosed in this Form 20-F. In particular, potential investors that are U.S. taxpayers should be aware that we may be considered a “passive foreign investment company” under Section 1297(a) of the U.S. Internal Revenue Code (a “PFIC”) with respect to U.S. shareholders. If the Company is or becomes a PFIC during any time that a U.S. shareholder holds our common shares, any gain recognized on the sale of our common shares and any excess distributions paid on our common shares must be ratably allocated to each day in a U.S. taxpayer’s holding period for our common shares and any excess distributions paid on our common shares must be ratably allocated to each day in a U.S. taxpayer’s holding period for our common shares. The amounts allocated to the taxable year of disposition and to years before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to tax at the highest rate applicable to ordinary income in effect for that taxable year for individuals or corporations, as appropriate, and an interest charge would be imposed on the tax attributable to the allocated amount, calculated as if such tax liability had been due in each such prior year. This risk factor is qualified in its entirety by the discussion set forth under the heading “Certain United States Federal Income Tax Considerations.” Shareholders should consult their own tax advisors as to the PFIC rules and the other tax consequences of the acquisition, ownership, and disposition of our common shares.
We do not expect to pay dividends for the foreseeable future.
We do not intend to declare dividends for the foreseeable future, as we anticipate that we will reinvest any future earnings in the development and growth of our business. Therefore, investors will not receive any funds unless they sell their Common Shares, and shareholders may be unable to sell their shares on favorable terms or at all. We cannot assure you of a positive return on investment or that you will not lose the entire amount of your investment in our Common Shares. Prospective investors seeking or needing dividend income or liquidity should not purchase our
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ITEM 4 INFORMATION ON THE COMPANY
We are a Canadian corporation existing under theCanada Business Corporations Act (the “CBCA”) which conducts business as an oil and gas exploration company with operations in the State of Israel. We have been granted certain petroleum licenses from the State of Israel, as more particularly described below in Item 4B – “Business Overview”.
The Company presently does not have any oil and gas reserves, does not produce any oil or gas and does not earn any significant revenues.
A. History and Development of the Company
Name
Our legal and commercial name is Adira Energy Ltd.
Principal Office
Our principal office is located at 120 Adelaide Street West, Suite 1204, Toronto, Ontario, Canada, M5H 1T1. Our telephone number is (416) 250-6500.
Incorporation and Continuation
We are a Canadian corporation existing under the CBCA.
We were incorporated on February 20, 1997 under the name “Trans New Zealand Oil Company” by filing our Articles of Incorporation with the Secretary of State of Nevada. We changed our name to “AMG Oil Ltd.” on July 27, 1998. On December 17, 2009, we changed our name to “Adira Energy Ltd.” Our fiscal year end is December 31.
On November 25, 2008, our shareholders approved the change of our jurisdiction of incorporation from the State of Nevada to the Canadian federal jurisdiction under the CBCA by way of continuation. The Company completed the filing of its Articles of Conversion with the Nevada Secretary of State on November 25, 2008, and the Company’s Articles of Continuance were accepted for filing by Industry Canada effective November 27, 2008. The effect of these filings was to transfer the jurisdiction of incorporation of the Company from the State of Nevada to the Canadian federal jurisdiction under the CBCA. Copies of the Articles of Conversion, Articles of Continuance, Certificate of Continuance and By-Laws, are incorporated by reference into this Form 20-F as exhibits.
The Company’s common shares remain registered under Section 12(g) of the Exchange Act after completion of the continuation as a result of the operation of Rule 12g-3 of the Exchange Act. The Company’s current trading symbol on the OTC Bulletin Board (the “OTCBB”) is “ADENF”. The Company’s current trading symbol on the TSX Venture Exchange (the “TSXV”) is “ADL”.
Acquisition of Adira Energy
We completed the acquisition of Adira Energy, a company incorporated in the Province of Ontario, on August 31, 2009. As a result of the completion of this acquisition, we are now the owner of all the issued and outstanding shares of Adira Energy and we ceased to be a “shell company”, as defined in Rule 12b-2 of the Exchange Act. The acquisition was completed pursuant to a securities exchange agreement dated August 4, 2009 among Adira, Adira Energy and Dennis Bennie, Ilan Diamond and Alan Friedman, as principal shareholders, and concurrent securities exchange agreements among Adira and each of the minority shareholders of Adira Energy. We issued an aggregate of 39,040,001 common shares to the shareholders of Adira Energy as consideration for the acquisition of Adira Energy.
On December 2, 2010, our common shares commenced trading on the TSXV following approval of its listing in November 2010.
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Prior Operations of Adira
We were previously engaged in the acquisition and, formerly, exploration of resource properties.
We were inactive for approximately four years prior to our acquisition of Adira Energy in 2009 and were considered a “shell” company within the meaning assigned to that term in Rule 12b-2 of the Exchange Act because we had no operations and our assets consisted solely of cash. Prior to this four-year period, we had conducted oil and gas exploration activities in New Zealand but withdrew from the permit and assigned our interest to other participants in the permit during the 2003 fiscal year.
We do not receive any revenue from our discontinued oil and gas operations in New Zealand, and had no significant assets, tangible or intangible except for cash on hand. We have no history of earnings and there is no assurance that our business will be profitable. We expect to continue incurring operating losses and accumulating deficits in future periods.
Reporting Issuer Status under Canadian Securities Laws
On February 1, 2006, the British Columbia Securities Commission granted our application to be designated as a reporting issuer under theSecurities Act (British Columbia). Accordingly, we and our insiders became subject to the continuous disclosure requirements under the securities laws of the Province of British Columbia, Canada. The Company received final approval for listing on the TSXV on December 1, 2010, and on December 2, 2010, our common shares commenced trading on the TSXV. The Company is also a reporting issuer under the securities legislation of the provinces of Alberta and Ontario.
Capital Expenditures and Divestitures
During the year ended December 31, 2012, the Company incurred capital expenditures of approximately $10.6 million which relates to costs incurred in the planning and development of the three offshore wells. We have now plugged and abandoned the Eitan #1 Well, and we have surrendered the Eitan License in accordance with the Israeli Petroleum Law.
Takeover Offers
We are not aware of any indication of any public takeover offers by third parties in respect of our common shares during our last and current financial years.
B. Business Overview
The Company only operates in the State of Israel. We currently hold a working interest in three offshore petroleum licenses: the Gabriella License No. 378, Yitzhak License No. 380 and Samuel License No. 388. We refer to these three licenses, together, as the “Offshore Licenses”. We are the operator of the Gabriella License and the Samuel License, and the “Co-Operator” of the Yitzhak License. In addition, we have options to acquire up to a 5% participating interest two licenses called the Myra and Sara Licenses, as well as an option to acquire up to a 15% participating interest in the a license called the Yam Hadera License. We currently ascribe no value to the Myra and Sara Licenses and as such we do not consider our options to be material to our operations.
As discussed below, we suspended operations on the Gabriella License for various reasons, including lack of funding by working interest parties sufficient to pursue the current work program. Please see prior discussion under “Risk Factors - Disagreements among Gabriella License partners co-participants may prevent the continued operations on the Gabriella License or result in the loss of our working interest in the Gabriella License.” We continue to work with the all of the participants on the Gabriella License to resolve these issues and resume the work program.
As discussed below, Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Joint Operating Agreement, or “JOA,” for that license, made up as follows: Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal. The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.
Additionally, as of the date hereof, we have missed two Ministry milestones on the Samuel License; namely we have not signed a drilling contract by March 31, 2013, and we have not spud a well by April 30, 2013. We have requested an extension of both milestones and await a formal response from the Ministry. There is no assurance that the Ministry will grant our requests.
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As disclosed in more detail in our annual report on Form 20-F for the year ended December 31, 2011, in 2011, we relinquished our interest in the Eitan License, onshore, and we waived our right to farm into the Notera License, onshore. We notified the Commissioner of our surrender of the Eitan License on December 15, 2011, pursuant to the Israeli Petroleum Law. By August 2012, we had plugged and abandoned the Eitan #1 Well, and on December 5, 2012, we received final confirmation from the Ministry approving the surrender of the Eitan License.
Offshore Licences
Below is a map showing the locations of the Offshore Licences, the Myra and Sara Licenses, and the Yam Hadera License, as well as other licenses that are not the property of the Company.
Gabriella License
The Gabriella License covers 97,000 acres (392 square kilometers) and is approximately 10 kilometers offshore Israel between Netanya and Ashdod. The Gabriella License was issued to the Company on July 15, 2009 for an initial three year exploration period, subject to renewal for an additional period of four years and a second additional period of two years in the case of a discovery. Thereafter, a 30-50 year lease maybe granted if a “discovery” (as defined in the Israeli Petroleum Law 5712 & 1952 and the regulations promulgated thereunder (“Israeli Petroleum Law”)) is made. On February 23, 2012, the Petroleum Commissioner of Israel (the “Commissioner”) approved an extension of the expiration of the Gabriella License to February 28, 2013, and on June 11, 2012, the Commissioner approved the extension of the expiration to September 1, 2013, with a corresponding extension of certain milestones.
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This table sets out the work program that must be completed in order to maintain the Gabriella License:
Gabriella Work Program
| Milestone Dates
|
| 1. Spud the first well | June 30, 2013 |
| 2. Prepare a summary report of the first well and transfer of all of the findings, including tests, samples, logs (if taken), electrical logs and results of tests (if performed). | Within three months from completion of the drilling in 2013 |
| 3. Submit a work plan for continuation of the work in the license. | Within four months from completion of the drilling in 2013 |
In January 2010, our subsidiary, Adira Energy Israel Ltd. (“Adira Israel”), entered into an agreement with Modi’in Energy Limited Partnership (“MELP”) and Modi’in Energy Management (1992) Ltd. (“MEGP”) to transfer 70% of the participating interests in the Gabriella License to MELP (the “Gabriella 2010 Agreement”). In January 2010, a subsidiary of Brownstone Energy Inc. (“Brownstone”) exercised its option to purchase 15% of the participating interests in the Gabriella License. To date, Brownstone’s interest in the Gabriella License has not been registered with the Ministry; however Adira Israel holds Brownstone’s 15% interest in trust on behalf of Brownstone pursuant to an agreement dated July 7, 2011. Adira asserts that the parties to the Gabriella License are: Adira 15%, Brownstone 15% and MELP 70%.
Adira Israel has the option to reacquire from MELP a 15% participating interest in the Gabriella Licenseat any time until the earlier of (a) six months after a discovery and (b) the end of the license period, including all renewals. This option is not registered with the Ministry, but exists by private contract with MELP.
All exploration and extraction activity on the Gabriella License, and the relationship of the participating interest holders, is governed by a joint operating agreement or “JOA” (the “Gabriella JOA”). Purusant to the Gabriella JOA, Adira Israel is the operator of the Gabriella JOA. The Gabriella JOA parties paid the Company an operating fee equal to 7.5% of the cumulative, direct costs incurred to operate the Gabriella License, through January 26, 2012. Commencing January 27, 2012, the Gabriella License participants began paying a new operator fee of (i) a $25,000 per month, plus (ii) an additional sliding-scale percentage of exploration expenses incurred, ranging from 4.8% of annual exploration expenses (if less than $2 million) down to 1.2% of annual exploration expenses (if over $6 million).
According to the Gabriella JOA, Adira may be removed as the operator of the license. Adira has a right of first refusal to match proposals generated from third party operators; however Adira does not currently meet the definition of an operator under recent amendments to the Israeli law, and therefore, it is unlikely that Adira would be positioned to bid for this work. These amendments do not impact our current position as operator until a third party bids for this role. The other Gabriella JOA parties may remove Adira as operator if Adira is declared bankrupt, becomes insolvent, dissolves or liquidates, or upon the vote of two or more non-operators holding a combined interest of at least 75% of the working interests.
We previously received a monthly fee of $12,500 from MELP, pursuant to the Gabriella 2010 Agreement; however those payments ended on February 1, 2012. We are entitled to receive: (a) 4.25% of the 7.5% management fees payable by MELP to MEGP; and (b) a royalty in the aggregate amount of 4.5% (2.25% from each of MELP and MEGP) from any resources extracted from the Gabriella License until MELP recovers the pro rata exploration expenditures incurred by it, after which time the royalty increases to an aggregate of 10.5% (5.25% from each of MELP and MEGP).
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On July 19, 2012, the Company announced that MELP executed a drilling contract with Noble International Ltd (“Noble Drilling”) to secure access to the Noble Homer Farrington drilling unit rig for a minimum of 75 days to drill one well, and possibly one sidetrack, on behalf of the Gabriella License (the “Drilling Contract”). The Drilling Contract, which, as previously reported, has since been terminated, required that MELP provide a letter of credit or cash collateral within specified timeframes outlined in the Drilling Contract. Pursuant to the Drilling Contract, the parties determined that a letter of credit will be issued to secure the Drilling Contract.
On June 12, 2012, Adira signed a Memorandum of Understanding (“MOU”) with MELP, pursuant to which the Company agreed to provide its working interest share of the collateral due to Noble Drilling. The MOU provided that if Adira failed to pay its share of the collateral, then it would: (a) withdraw from the Gabriella JOA; (b) assign its participating interest in the Gabriella License to the other participants in proportion to their holdings; and (c) relinquish all back-in rights, overriding royalty interests (“ORRI”) and management fees, rights of first refusal and co-sale rights to MELP. Pursuant to the MOU, Adira Israel has also granted MELP the MELP Yitzhak Option (as described below).
On December 21, 2012, the Company entered into an agreement with MELP and Brownstone (the “Gabriella 2012 Agreement”), wherein certain terms regarding the parties’ use of the Noble Drilling unit were revised to require MELP to provide a letter of credit to Noble Drilling in two phases ($20 million by January 3, 2013 (the “First LC Amount”) and $13.2 million by January 31, 2013 (the “Second LC Amount”)). The Gabriella 2012 Agreement also confirmed a reduction in the daily drilling rate due to Noble Drilling by MELP under the Drilling Contract from $500,000 per day to $415,000 per day and, to the extent used, the reduction in stand-by rates to an amount that between $100,000 and $300,000 per day. The parties also agreed to take possession of the Homer Ferrington drilling unit in direct continuation from its then current drilling program, which meant the parties would need to accelerate, by up to three months, the program previously contemplated for the Gabriella License. According to the Gabriella 2012 Agreement, Adira's share of the aggregated letter of credit amounted to $5 million, which was required to be placed by January 31, 2013.On January 3, 2013, MELP announced that the Drilling Contract had been further amended such that the First LC Amount was reduced to $12 million, but the Second LC Amount was increased to $21.2 million.
The Gabriella 2012 Agreement, also provided that if MELP secures a farm-in participant for a portion of its participating interest, than Adira may agree to farm-down a portion of its participating interest, subject to a maximum of 30% of such participating interest. Adira’s proportional reduction obligation only apply to participants that farm into MELP’s participating interest, up to a date that is was the earlier of the (a) commencement of the first test of the first well on the Gabriella License; and (b) plugging and abandoning or suspending of the first well on the Gabriella License. Any consideration received by MELP from any farm-in participant will be shared equally between Adira and MELP, provided that at a minimum, Adira will receive 50% of past costs incurred by MELP, estimated to be $1.3 million per each 10% farmed out, as well as an ORRI of 1.5%. Additionally, Adira has a 10% tag along right to farm-out, on the same terms as MELP, in the event that MELP farms down its participating interest and such participant complies with certain criterion.
Finally in Gabriella 2012 Agreement, MELP granted to Adira an option to acquire a 15% participating interest in the Yam Hadera License (as defined below), offshore Israel. See "Yam Hadera License".
On January 31, 2013, the Company announced that Adira Israel did not place its share of First LC Amount, for reasons explained in that announcement.
On February 11, 2013, the Company announced that it suspended operations on the Gabriella License for reasons explained in that announcement.
Due to allegations made by MELP against Adira, and by allegations made by Adira against MELP, both parties assert that the other is in default of various obligations under the Gabriella JOA and other contracts described above. As such, while the Company maintains that its rights under the Gabriella JOA and such other contracts remain valid, there is no assurance that any of the rights could effectively be pursued and realized. Additionally, while the working interest percentage ownership of the participants remains 70% MELP, 15% Brownstone and 15% Adira; both MELP and Adira assert that the other has a 0% interest and is obligated to withdraw from the Gabriella JOA and the Gabriella License. Please see prior discussion under “Risk Factors - Disagreements among Gabriella License partners co-participants may prevent the continued operations on the Gabriella License or result in the loss of our working interest in the Gabriella License.”
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Yitzhak License
The Yitzhak License covers 31,555 acres (127.7 sq. km) and is located approximately 9 km offshore and is contiguous to the Gabriella License. The Yitzhak License was issued in October 2009 to Adira Energy (85% working interest) and Brownstone (15% working interest) for an initial three year exploration period and may be renewed upon fulfillment of certain conditions for an additional four year period plus an additional 2 year renewal option in the case of a reserve discovery. Thereafter, a 30-50 year lease may be pursued if a “discovery” (as defined in the Israeli Petroleum Law) is made. During 2012, the Commissioner approved an extension of the expiration of the Yitzhak License to December 1, 2013, including the extension of certain milestones.
This table sets out the work program that must be completed to maintain the Yitzhak License:
| Yitzhak Work Program | Milestone Dates |
| 1. Execute a contract with a drilling contractor. | June 30, 2013 |
| 2. Spud the first well. | October 30, 2013 |
| 3. Prepare a summary report of the first well and transfer of all of the findings, including tests, samples, logs (if taken), electrical logs and results of tests (if performed). | Within three months from completion of the drilling |
| 4. Submit a work plan for continuation of the work in the license. | Within four months from completion of the drilling |
On January 9, 2012, the Company received approval from the Commissioner to farm-out a 25% working interest in the Yitzhak License to two new co-participants, thereby reducing its working interest from 85% to 60%. The Company transferred a 5% carried working interest to AGR Group ASA (“AGR”) and a 20% working interest (subject to dilution explained below) to Ellomay Oil and Gas 2011 LP, a limited partnership (“Ellomay”) whose general partner is a wholly-owned subsidiary of Ellomay Capital Ltd. (“Ellomay Capital”). Following those transfers, the Company held a 60% working interest in the Yitzhak License, Brownstone a 15% working interest, AGR a 5% working interest and Ellomay a 20% working interest. The Company and AGR Petroleum Services Holdings AS are the co-operators of the Yitzhak License, and AGR is the statutory operator of record.
The farm-out agreement between the Company and AGR dated November 29, 2011 (the “AGR Farm-Out Agreement”) provides, among other things, that: (a) AGR’s 5% working interest is carried by the remaining holders of the Yitzhak License through the exploration period; (b) AGR issued to the Company a 3% ORRI on AGR’s share of production, until repayment of AGR's expenditures in the work program and a 4.5% ORRI from that point forward; (c) AGR will be designated lead operator in accordance with Israeli regulations defining “Operator”, with the continued involvement of the Company as “co-operator” which is a construction of private contract; and (d) AGR will be appointed as engineering services contractor on the Yitzhak License with continued involvement of the Company as part of the core professional team led by AGR. The farm-out agreement between the Company and Ellomay dated November 29, 2011 (the “Ellomay Farm-Out Agreement”) provides, among other things, that: (a) Ellomay will reimburse the Company for its proportionate share of the costs incurred by the Company on the Yitzhak License, plus interest at LIBOR plus 1%; and (b) Ellomay will issue to the Company a 3% ORRI on Ellomay’s share of production, until repayment of Ellomay's expenditures in the work program and a 4.5% ORRI from that date forward.
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The Company, Brownstone, AGR and Ellomay signed a joint operating agreement on September 11, 2012, to regulate their commercial relationship in respect of the Yitzhak License (the “Yitzhak JOA”). The Yitzhak JOA incorporated the terms of the AGR Farm-Out Agreement and the Ellomay Farm-Out Agreement.
According to the Ellomay Farm-Out Agreement and the Yitzhak JOA, Ellomay could elect not to fund and be subject to dilution for no consideration (i.e. the diluted interest would be transferred to Adira without cost), or it could transfer one-half of its 20% interest to a third party on negotiated terms. On October 29, 2012, Ellomay advised the Company of its intention to decrease Ellomay's interest in the Yitzhak License from 20% to 10% by paying decreased operating costs pursuant to the terms of the Yitzhak JOA. As of December 31, 2012, the Company expended $640 thousand on behalf of Ellomay in respect of the Yitzhak License for which the Company was entitled to be reimbursed by a third party if the 10% interest was transferred. This amount was recorded as a long-term receivable as of December 31, 2012. Subsequent to balance sheet date, Ellomay failed to transfer its interest to a third party, and therefore one-half of its 20% interest was transferred back to the Company without cost. In the Company’s 2013 financial statements, the receivable will be classified as an additional investment in the exploration and evaluation assets in respect of the Yitzhak License. As a result of the foregoing, as of the date hereof, the Company has a 70% interest in the Yitzhak License, Brownstone has a 15% interest, AGR has a 5% interest and Ellomay a 10% interest in the license. The new holdings have not yet been approved by the Commissioner.
On June 13, 2012, pursuant to MOU, Adira granted MELP an option to purchase (“MELP Yitzhak Option”) from Adira a 15% participating interest in the Yitzhak License (the “MELP Yitzhak Option Interest”). Pursuant to the MOU, MELP was able to exercise the MELP Yitzhak Option until the earlier of (a) December 31, 2012, and (b) the 30th day from the date Adira notifies MELP of the execution of an agreement with a drilling contractor in relation to the Yitzhak License. The Gabriella 2012 Agreement amends the exercise date until 14 days before signing of the rig contract for the Yitzhak License. If MELP exercises the MELP Yitzhak Option, then it must reimburse Adira for expenditures in respect of the MELP Yitzhak Option Interest incurred up to the date of transfer of the MELP Yitzhak Option Interest. MELP must also issue to Adira an ORRI of 3% with respect to all oil and gas (including any distillate and condensate) produced, saved and marketed from the area covered by Yitzhak License that is attributable to the MELP Yitzhak Option Interest, before payout, and 4.5% after payout. The transfer of the MELP Yitzhak Option Interest is subject to the approval of the Commissioner, as are all license transfers in Israel. As described above, due to allegations made by MELP against Adira, and by allegations made by Adira against MELP, both parties assert that the other is in default of various obligations under the Gabriella JOA and other contracts on the Gabriella License, including the MOU. As such, MELP’s ability to exercise the MELP Yitzhak Option is not assured.
Samuel License
The Samuel License covers 88,708 acres (361 sq. km) and is located approximately 17 km offshore Israel. The Samuel License was issued on August 1, 2010 to Adira Geo Global Ltd. (“Adira GeoGlobal”) (30% interest), Geo Global Resources (India) Inc. (“GGRI”) (30% interest), Adira Oil Technologies Ltd. (“Adira Oil”) (23.25% interest), Pinetree Capital Ltd. (“Pinetree”) (10% interest) and Brownstone (6.75% interest) for an initial three year exploration period. The Samuel License may be renewed for an additional four years and a second additional period of two years in the case of a discovery. Thereafter, a 30-50 year lease may be granted if a “discovery” (as defined in the Israeli Petroleum Law) is made. On July 2, 2012, the Commissioner approved an extension of certain milestones associated with the Samuel License.
This table sets out the work program that must be completed to maintain the Samuel License:
| Samuel Work Program | Milestone Dates |
| 1. Execute a contract with a drilling contractor. | March 31, 2013(1) |
| 2. Spud the first well. | April 30 , 2013(2) |
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| Samuel Work Program | Milestone Dates |
| 3. Prepare a summary report of the first well and transfer of all of the findings, including tests, samples, logs (if taken), electrical logs and results of tests (if performed). | Within three months from completion of the drilling |
| 4. Submit a work plan for continuation of the work in the license. | Within four months from completion of the drilling |
Notes:
| | (1) | On March 27, 2013, Adira submitted a request to the Ministry to extend the milestone date to March 31, 2014. As of the date hereof, we are waiting for a formal response. |
| | (2) | On March 27, 2013, Adira submitted a request to the Ministry to extend the milestone date to September 30, 2014. As of the date hereof, we are waiting for a formal response. |
The exploration and extraction activity in the Samuel License is to be performed within the framework of a joint operating agreement (the “Samuel JOA”) between GGRI, Adira Geo Global, Adira Oil, Brownstone and Pinetree, whereby Adira GeoGlobal is the designated operator of the Samuel License. Adira Geo Global is owned 60% by the Company and 40% by GGRI. In accordance with the Samuel JOA, Adira Geo Global is entitled to receive 7.5% of the cumulative direct costs to operate the Samuel License and one-half of a 3% ORRI. According to a cooperation agreement signed a between Adira and GGRI on August 20, 2010, GGRI is entitled to 50% of the operator fee received by Adira Geo Global. Adira Geo Global may be removed as the operator if it is declared bankrupt, insolvent, dissolved or liquidated or if two or more of the total number of non-operators holding a combined interest of at least 51% agree to the removal.
On October 26, 2012, Emanuelle Energy Limited (“Emanuelle”) exercised an option to acquire a 7.13% interest in the Samuel License from GGRI and became a signatory to the Samuel JOA thereby reducing GGRI’s direct interest in the Samuel License to 22.88%.
Adira is owed an aggregate of $3 million of operating costs on the Samuel License from GGRI and Emmanuelle under the Samuel JOA, made up as follows: Emanuelle and GGRI owe an aggregate of $2.8 million as a result of their direct interest in the license, as Samuel JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal. The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the Samuel JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.
Options to Acquire Interests in Petroleum Licenses
Myra and Sara Option
The Company has an option to acquire up to a 5% participating interest in two licenses called the Myra License and Sara License. We currently ascribe no value to the Myra and Sara Licenses and as such we do not consider our options to be material to our operations.
Yam Hadera Option
Purusant to the Gabriella 2012 Agreement, the Company has an option (the “Yam Hadera Option”) to acquire up to a 15% participating interest in the Yam Hadera License, located 30 kilometers offshore Israel, between Hadera and Haifa and North West of Adira’s Yitzhak license. The Yam Hadera Option is exercisable until 14 days prior to the signing of a rig contract for the Yam Hadera License.
As we discussed above, due to allegations made by MELP against Adira, and by allegations made by Adira against MELP, both parties assert that the other in default of various obligations under the Gabriella JOA and other contracts, including the Gabriella 2012 Agreement. Accordingly, there is no assurance that the Company will be able to exercise the Yam Hadera Option.
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Reserve Reporting History
In May 2011, the Company engaged Gustavson Associates LLC (“Gustavson”) as an independent contractor, to provide geophysical, petrophysical, geological and engineering services for resource interpretation and evaluation on the first phase of processing (often termed “Fast Track”) for the Gabriella License and the Yitzhak License. In September 2011, the Company received two independent reports disclosing resource estimates on the Gabriella License and the Yitzhak License. The reports were prepared by Gustavson in accordance with National Instrument 51-101, Standards of Disclosure for Oil and Gas Activities (“NI 51-101”), as adopted by the Canadian Securities Administrators, and described a probabilistic distribution of contingent resources in respect of oil on the Gabriella License, prospective resources in respect of gas for both the Gabriella License and the Yitzhak License, and prospective resources in respect of oil on the Yitzhak License.
In March 2012, the Company received two further independent reports from Netherland, Sewell & Associates, Inc. (“Netherland, Sewell”) disclosing resource estimates on each of the Gabriella License and the Yitzhak License. The reports were prepared by Netherland, Sewell in accordance with NI 51-101 and also described a probabilistic distribution of contingent resources in respect of oil on the Gabriella License, prospective resources in respect of gas for both the Gabriella License and the Yitzhak License, and prospective resources in respect of oil on the Yitzhak License. The reports are available on www.sedar.com.
In October 2012, the Company received an independent report from Netherland, Sewell disclosing resource estimates on the Samuel License. The report was prepared by Netherland, Sewell in accordance with NI 51-101 and also describes a probabilistic distribution of “Prospective Resources” in respect of oil and gas on the Samuel License. The report is available on www.sedar.com.
Readers should note that “Contingent Resources” and “Prospective Resources” are as defined by the Canadian Oil and Gas Evaluation Handbook, and do not represent an estimate of reserves. Readers are cautioned that in contrast to disclosure permitted by NI 51-101, under applicable SEC rules, the disclosure of estimates of oil or gas resources other than reserves, and any estimated values of such resources, is not permitted to be disclosed in any document publicly filed with the SEC.
Drilling Activity
As of the date of this Form 20-F, no drilling activity is being carried out. During the past three fiscal years, we have had no productive wells and have had only one dry exploratory well – the Eitan #1 Well – which was drilled on lands in the Hula Valley in Northern Israel covered by the Eitan License.
We plugged and abandoned the Eitan #1 Well during the financial year ended December 31, 2012.
Effects of Government Regulations
See Item 3D - “Risk Factors”.
C. Organizational Structure
As December 31, 2012, we operate in Canada through our wholly owned subsidiary Adira Energy, an Ontario corporation incorporated on April 8, 2009; and in Israel, through Adira Energy’s subsidiaries. The following sets out the current organizational structure of the Company and its subsidiaries:
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Notes:
| (1) | The other 40% of the shares of Adira Geo Global are held by GGRI, a corporation that is not related to the Company, the Company’s partner in the development of the Samuel License. |
| (2) | Adira Energy Ltd. (Canada) is a holding corporation and is the registered and beneficial owner of 100% of Adira Energy Holding Corp. (Ontario). |
| (3) | Adira Energy Holding Corp. (Ontario) is a holding corporation and is the registered and beneficial owner of foreign subsidiaries: (i) 60% of Adira GeoGlobal Ltd., a holding corporation created to hold certain licenses that Adira may acquire. It currently holds a 30% interest in the Samuel License; (ii) 100% of Adira Energy CBM Ltd. (Israel), an inactive corporation; (iii) 100% of Adira Oil Technologies Ltd. (Israel), a holding corporation created to hold licenses. It currently holds a 23.25% interest in the Samuel License; (iv) 100% of Adira Energy Israel Ltd. (Israel), a holding corporation created to hold certain licenses that Adira may acquire. It currently holds the Gabriella License, the Yitzhak License and the Yam Hadera Option; (v) 100% of Adira Energy Israel Services Ltd. (Israel), a corporation created to provide services to the Company’s other Israeli subsidiaries; (vi) 100% of Adira Energy Holdings (Barbados) Ltd. (Barbados), a holding corporation created to hold certain licenses that the Company may acquire, which wholly owns Adira Energy Investments (Barbados) Ltd. (Barbados) (“AEIB”); and (vii) AEIB, a holding corporation created to hold certain licenses that the Company may acquire. It currently holds the Myra and Sara Option. |
D. Property, Plant and Equipment
(a) Corporate Offices
Our executive offices are comprised of approximately 784 square feet at 120 Adelaide Street West, Suite 120, Toronto, Ontario, Canada, M4V 3A1 for which the lease cost is CDN$3,663 per month and 424 square meters at Aba Hillel Silver 12, Ramat Gan, Israel, for which the lease cost is NIS 40,000 ($11,433 per month).
(b) Special Skill and Knowledge
Our ability to complete drilling and exploration is dependent on the availability of well-trained, experienced crews to operate our field equipment and qualified management. We believe that our strategic arrangement with certain oil and gas exploration companies provides us with access to the special skills and knowledge required to assist us in the evaluation of our exploration properties.
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(c) Foreign Operations
During the fiscal years ended December 31, 2012 and 2011, all of our oil and gas exploration activities were in the State of Israel.
(d) Competitive Conditions
The oil and gas industry in the State of Israel is, and will continue to be, competitive. Most contracts are awarded on the basis of competitive bids. We believe that our early entry into oil and gas exploration in Israel will provide us with a competitive advantage in the exploration and evaluation of our licenses. Our joint venture with Brownstone is anticipated to allow us to access to new projects while limiting our financial exposure. We also expect to benefit from Brownstone’s operational knowledge and experience, given its established oil and gas exploration and development operations.
(e) Dependence on Customers and Suppliers
We are not dependent upon a concentration of customers or suppliers for revenues, or our operations.
(f) Environmental Protection and Policies
We are subject to various state and district environmental laws and regulations enacted in Israel, which primarily govern the manufacture, processing, importation, transportation, handlings and disposal of certain materials used in operations, as well as limits on emissions into the air and discharges into surface and sub-surface waters. We adhere to all such laws and regulations. We may be required to increase operating expenses or capital expenditures in order to comply with any new restrictions or regulations.
We do not expect that environmental protection requirements will have a significant financial or operational effect on our capital expenditures, earnings or competitive position. Environmental requirements have not had a significant effect on such matters in fiscal year 2012 nor are they currently anticipated in the future.
To date, all of our operations have been in compliance in all material respects with applicable corporate standards and environmental regulations and there were no material notices of violations, fines or convictions relating to environmental matters at any of our operations.
We believe that we are in substantial compliance with all material current government controls and regulations for each of our licenses.
See also Item 3D - “Risk Factors”.
ITEM 5 OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following is a discussion and analysis of the activities, consolidated results of operations and financial condition of the Company as of and for the year ended December 31, 2012. Our management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2012 should be read in conjunction with our audited consolidated financial statements and related notes for the year ended December 31, 2012. Our financial statements have been prepared in accordance with IFRS as issued by the IASB.
A. Operating Results
Summary
We are an oil and gas exploration company. Through our wholly-owned subsidiary, Adira Energy, and its wholly owned subsidiary, Adira Israel, we have been granted three offshore petroleum licenses (collectively, the “Offshore Licenses”) - namely: (a) the Gabriella License held by Adira Israel; (b) the Yitzhak License held by Adira Israel; and (c) the Samuel License, which we own through our other wholly-owned subsidiary, Adira Oil Technologies Limited, and our partially-owned 60% subsidiary, Adira Geo Global. Our business plan is to undertake evaluation work on each of the offshore licenses to establish whether exploration is justified. We also previously held one onshore petroleum license in Israel, the Eitan License, which we relinquished in December 2011 after we determined that exploration work was not warranted.
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In addition, the Company has an option to acquire up to a 5% participating interest in two licenses called the Myra License and Sara License. We currently ascribe no value to the Myra and Sara Licenses and as such we do not consider our options to be material to our operations.
We presently do not produce any oil or gas and do not earn any significant revenues.
Our activities on each of the Offshore Licenses are conducted jointly with others. Our financial statements reflect our proportionate interest in these activities.
Results of Operations
Consolidated results of operations for the year ended December 31, 2012 compared to the year ended December 31, 2011.
Revenues and Other Income
| | Year ended
December 31,
| |
| | | 2012 | | | 2011 | |
| | | U.S. dollars in thousands | |
| | | | | | | |
| Consulting | $ | 455 | | $ | 771 | |
| Operator fees | | 544 | | | 312 | |
| Income from farm-out | | 890 | | | 240 | |
| | | | | | | |
| | $ | 1,889 | | $ | 1,323 | |
Consulting fees relates to consulting services in respect of the Offshore Licenses on a “time and materials” basis. For the year ended December 31, 2012, the Company earned consulting fees of $455,000, as compared to $771,000 for the year ended December 31, 2011. In 2012, following the appointment of AGR as the joint operator on the Yitzhak license, the Company ceased to charge consulting fees, and, therefore, the consulting fees earned in 2012 relate to Gabriella and Samuel only. In addition, the Company revised the operator fee structure on the Gabriella License, which fixed the consulting fee at $25,000 per month, which is lower than the average monthly fee earned in 2011.
Operator fees relate to fees we received as the operator on our three Offshore Licenses, at a fixed rate of the total exploration costs incurred by the respective Unincorporated Joint Ventures (“UJVs”). For the year ended December 31, 2012 the Company earned operator fees of $544,000, as compared to $312,000 for the year ended December 31, 2011. The increase is due to the increase exploration activity that took place in 2012.
Income from farm-out relates mainly to fees received from MELP and MEGP, in respect of our agreement with them relating to the farm out of 70% of the Company’s interest in the Gabriella License as well as the reimbursement of prior costs incurred on the Yitzhak License relating to the Company’s farm out of 20% of the Yitzhak License in January 2012.
Expenses
Exploration Expenses
For the year ended December 31, 2012, exploration expenses amounted to $1,026,000 as compared to $5,018,000 for year ended December 31, 2011. The decrease in exploration expenses in 2012 is due to the advancement of the Company's drilling plan on its three Offshore Licenses, and as such, exploration costs are being capitalized to Exploration and Evaluation Assets, thus reducing the amount of costs being expensed. In 2011, the Company incurred expenses in connection with the execution of the 3D seismic program on the Gabriella License, Yitzhak License and Samuel License.
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General and Administrative Expenses
For the year ended December 31, 2012, general and administrative expenses amounted to $5,304,000 as compared to $5,031,000 for year ended December 31, 2011. The increase in operating expenses resulted primarily from increased legal and accounting expenses relating to planned capital raises that were not completed in 2012, increased activity in Israel, including the hiring of additional staff in the second half of 2011 and during 2012. The increase in the general and administrative expenses is offset by the decrease in share based compensation ($1,023,000 in 2011 as compared to $887,000 in 2012). The decrease is mainly due to the fact that most of the Company’s options that were granted in prior years are now either fully vested or expired.
Impairment Charge
For the year ended December 31, 2012, the impairment charge amounted to $7,810,000 as compared to $1,226,000 for the year ended December 31, 2011. The impairment in 2012 relates primarily to the Company’s decision to record an impairment charge of $7,596,000 in respect of the Samuel license. The Company believes that there is a low probability of realization of the asset from either the successful development or sale of the Samuel license in the near future. The impairment in 2011 is in respect of the Company’s Eitan #1 well and consumables and equipment related to the Eitan License relinquished in 2011.
Financing Income/Expense
For the year ended December 31, 2012, financing income amounted to $2,480,000 as compared to $43,000 for the year ended December 31, 2011, and financing expenses of $745,000 of the year ended December 31, 2012 as compared to $109,000 in the year ended December 31, 2011. The primary reason for the increase in financing expenses is the inclusion of offering expenses in the amount of $726,000in financing expenses. This amount represents offering costs incurred in the August Offering relating to the portion of the offering that was classified as financial liability.
The warrants issued in the August offering are denominated in Canadian dollars, while the functional currency of the Company is US dollars; therefore the fair value of the warrants are classified as a financial liability which is remeasured to fair value at the end of each period. The changes in fair value are included in financing income/expenses. For the year ended December 31, 2012, the amount is income of $2,299,000.
In addition, the Company is exposed to financial risk related to the fluctuation of foreign exchange rates. The Company operates in Israel. Most of the Company's monetary assets are held in U.S. dollars and most of the Company's expenditures are made in U.S. dollars. However, the Company also has expenditures in NIS and Canadian dollars. The Company has not hedged its exposure to currency fluctuations.
Net Loss
The Company reported a net loss and comprehensive loss for the year ended December 31, 2012 of $10.6 million as compared to a net loss and comprehensive loss of $10 million for year ended December 31, 2011. The primary reason for the loss in 2012 is as a result of an impairment charge in respect of the Samuel License.
Inflation
During the years ended December 31, 2012 and 2011, inflation has not had a material impact on our operations.
Government Regulation
The Offshore Licenses held by us have been granted to us by the State of Israel under the Israeli Petroleum Law, and our evaluation and exploration activities in the areas covered by the Offshore Licenses must be undertaken in compliance with work plans approved by the Commissioner.
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Consolidated results of operations for the year ended December 31, 2011 compared to the year ended December 31, 2010.
Revenues and Other Income
For the year ended December 31, 2011 we earned revenues and other income of $1.3 million as compared to $1.7 for the year ended December 31, 2010. The breakdown of revenues for the year ended December 31, 2011 is as follows:
| | | Year ended | |
| | | December 31, | |
| | | 2011 | | | 2010 | |
| | | U.S. dollars in thousands | |
| | | | | | | |
| Consulting | $ | 771 | | $ | 810 | |
| Operator fees | | 312 | | | 455 | |
| Income from farm-out | | 240 | | | 330 | |
| Other income | | - | | | 112 | |
| | | | | | | |
| | $ | 1,323 | | $ | 1,707 | |
Consulting fees relates to consulting services in respect of the Offshore Licenses on a “time and materials” basis.
Operator fees relate to fees we received as the operator on our three Offshore Licenses, at a fixed rate of the total exploration costs incurred by the respective Unincorporated Joint Ventures (“UJVs”).
Income from farm-out relates mainly to fees received from MELP and MEGP, in respect of our agreement with them relating to the farm out of 70% of the Company’s interest in the Gabriella License.
For the year ended December 31, 2011 the Company earned revenues of $1,323,000, as compared to $1,707,000 for the year ended December 31, 2010. Revenues in 2011 relate to operator, and consulting fees, which are a function of the level of exploration activity in 2011 and income from our farm out agreement with MELP and MEGP. The higher revenues in 2010 relate to higher management and operator fees received, mainly due to higher exploration expenses in 2010 following the execution of the 3D seismic program in the Gabriela License, which took place in 2010. As the Company’s portion of these expenses was carried by MELP, no exploration expenses were recorded.
Expenses
Exploration Expenses
For the year ended December 31, 2011, exploration expenses amounted to $5,018,000 as compared to $1,624,000 for year ended December 31, 2010. The increase in exploration expenses in 2011 is a result of the Company’s continued exploration work on the Offshore Licenses, specifically, the execution of the 3D seismic program on each of the Yitzhak License and the Samuel License, compared with less exploration activities in 2010.
Impairment Charge
For the year ended December 31, 2011, the write off amounted to $1,226,000 in respect of the Company’s Eitan #1 well as well as consumables and equipment related to the Eitan License relinquished in 2011, as compared to $0 for the year ended December 31, 2010.
General and Administrative Expenses
For the year ended December 31, 2011, general and administrative expenses amounted to $5,031,000 as compared to $3,067,000 for year ended December 31, 2010. The increase in operating expenses results primarily from increased activity in Israel since late 2010, including the hiring of additional staff and the opening of the Company's new office in Israel as well as increased legal, accounting, travel and marketing expenses.
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Part of the expenses relates to share based compensation of $1,023,000 as compared to $1,277,000 in 2010. The decrease of $254,000 is mainly due to employee stock options that were forfeited during 2011.
Financing Income/Expense
For the year ended December 31, 2011, financial income amounted to $43,000 as compared to a financial income of $0 for the year ended December 31, 2010. Financing income represents interest earned on short-term deposits, primarily held in Canadian dollars and US dollars.
For the year ended December 31, 2011, financial expenses amounted to $109,000 as compared to a financial expense of $5,000 for the year ended December 31, 2010. The amounts in 2011 and in 2010 are a result of fluctuations in NIS and Canadian dollar rates against the US dollar.
Net Loss
The Company reported a net loss and comprehensive loss for the year ended December 31, 2011 of $10.0 million as compared to a net loss and comprehensive loss of $3 million for year ended December 31, 2010. The reason for the increase in the loss is as a result of an increase in exploration and operating activities, offset by revenues generated from management, operator and consulting fees.
Inflation
During the years ended December 31, 2011 and 2010, inflation has not had a material impact on our operations.
Government Regulation
The Offshore Licenses held by us have been granted to us by the State of Israel under the Israeli Petroleum Law, and our evaluation and exploration activities in the areas covered by the Offshore Licenses must be undertaken in compliance with work plans approved by the Commissioner.
B. Liquidity and Capital Resources
Liquidity
Liquidity is a measure of a company’s ability to meet potential cash requirements. The Company has historically met its capital requirements through the issuance of common shares.
During the year ended December 31, 2012, the Company completed a Canadian public offering of 79,012,640 units, as a price of CDN$0.14 per unit, for gross proceeds of approximately CDN$11,061,770 (the “August Offering”). Each unit consisted of one common share in the capital of our Company and one warrant; each warrant entitles the holder to purchase one additional common share at a price of CDN$0.20 per share until August 9, 2015. The offering was qualified by a Canadian short form prospectus dated July 25, 2012, filed in the provinces of British Columbia, Alberta and Ontario, and was completed in accordance with Rule 903 of Regulation S under the Securities Act of 1933, as amended (the “Securities Act”). The Company concurrently offered the units to certain accredited investors in the United States through the U.S. registered broker-dealer affiliates of the Canadian agents, pursuant to Rule 506 of Regulation D under the Securities Act. Commissions of 6% in broker fees and broker warrants were paid on the offering. Each broker warrant is exercisable for one common share at an exercise price of CDN$0.14 per common share until August 9, 2014. The August Offering closed on August 9, 2012.
The Company has an accumulated deficit of $29 million as of December 31, 2012, and the Company had negative cash flows from operations of $4 million for the year ended December 31, 2012 ($6.4 million for the year ended December 31, 2011). The ability of the Company to continue as a going concern depends upon the discovery of economically recoverable reserves, the ability of the Company to obtain financing to complete development, and upon future profitable operations from the properties or proceeds from their disposition. The Company is an exploration stage company and has not earned any revenues from its oil and gas properties to date.
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There can be no assurance that the Company will be able to continue to raise funds in which case the Company may be unable to meet its obligations. The Company is considering various alternatives with respect to raising additional capital to remedy any future shortfall in capital, but to date has made no specific plans or arrangements. Because of the early stage of the Company's operations and the Company's absence of any material oil and natural gas reserves, there can be no assurance this capital will be available and if it is not, the Company may be forced to substantially curtail or cease exploration, appraisal and development expenditures.
Year ended December 31, 2012 compared to year ended December 31, 2011
During the year ended December 31, 2012, the Company's overall position of cash and cash equivalents decreased by $5,700,000. This decrease in cash can be attributed to the following activities:
The Company's net cash used in operating activities during the year ended December 31, 2012 was $3,980,000 as compared to $6,414,000 for the year ended December 31, 2011. This decrease is due to the fact that most of the Company’s exploration activities are capitalized to Exploration and Evaluation Assets and are therefore included in investment activities.
Cash used in investing activities during the year ended December 31, 2012 was $12,003,000 as compared to cash used in investing activities of $657,000 during the year ended December 31, 2011. The investment in 2012 relates primarily to the capitalization of drilling costs in respect of the Offshore Licences.
Cash provided by financing activities for the year ended December 31, 2012 was $10,351,000 as compared to $6,617,000 during the year ended December 31, 2011. The cash provided in 2012 is primarily as a result of the completion of a public offering of shares and warrants for the net proceeds of $9,801,000. Cash provided in 2011 is as a result of a private placement for net proceeds of $6,152,000, and the exercise of warrants and employee stock options during the period.
There are no legal restrictions on transferring funds between Canada and Israel.
Year ended December 31, 2011 compared to the year ended December 31, 2010
During the year ended December 31, 2011, the Company's overall position of cash and cash equivalents decreased by $592,000. This decrease in cash can be attributed to the following activities:
The Company's net cash used in operating activities during the year ended December 31, 2011 was $6,414,000 as compared to $3,010,000 for the year ended December 31, 2010. This increase is attributable to and consistent with the increase in the Company's exploration and operating activities for the current year, compared to the prior year.
Cash used in investing activities during the year ended December 31, 2011 was $657,000 as compared to cash used in investing activities of $1,087,000 during the year ended December 31, 2010. The investment in 2011 relates primarily to the capitalization of drilling costs in respect of the Eitan #1 well as well as purchase of furniture, computers and office equipment for the Israeli office, offset by the release of restricted cash. The amount invested in 2010 relates primarily to investment in restricted cash and to the purchase of the drilling rig and related equipment for the Eitan License.
Cash provided by financing activities for the year ended December 31, 2011 was $6,617,000 as compared to $10,754,000 during the year ended December 31, 2010. The cash provided in 2011 a result of the completion of a private placement for net proceeds of $6,152,000, and the exercise of warrants and employee stock options during the period. The cash provided in 2010 is a primarily as a result of the completion of a private placement for net proceeds of $10,077,000 in November 2010.
Capital Resources
At December 31, 2012, the Company's cash and cash equivalents were $2.4 million (December 31, 2011 - $8.1 million). The majority of this balance is being held in US Dollars. The Company's working capital at December 31, 2012 was $1.2 million as compared to $8 million at December 31, 2011. The decrease in 2012 is a result of significant exploration activities that took place during the year.
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Commitments
The Company has commitments to the Ministry to complete the work programs on all of the Company’s licenses as set out above under Item 4B – “Offshore Licences”.
In order to maintain the current licenses, the Company will be required to expend amounts in respect of exploration expenditures. The Company intends to meet all of its drilling and related expenditures as they become due to maintain the Company’s interests in its oil and gas properties. These oil and gas expenditure obligations are not fixed and cannot be pre-determined with certainty. Failure to meet the obligations may result in the loss of the Company’s ownership interests.
The Company's share of the remaining contractual commitments as of December 31, 2012, for the Offshore Licenses is approximately $197,000. Due to our allegation that MELP materially breached the Gabriella 2012 Agreement, we believe that the $5 million commitment on the First LC Amount and the Second LC Amount, is not valid.
Critical Accounting Policies and Estimates
Our results of operation and financial condition are based on our consolidated financial statements, which are presented in accordance with IFRS. Certain accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which we rely are reasonable based upon information available to us at that time. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, as well as the reported amounts of revenues and expenses during the periods presented. To the extent there are material differences between these estimates, judgments or assumptions and actual results, our financial statements will be affected. The significant accounting policies and estimates that we believe are the most critical to aid in fully understanding and evaluating our reported financial results include the following:
- Exploration and evaluation assets;
- Share-based payment transactions;
- Joint oil and gas ventures;
- Farm out arrangements in the exploration and evaluation phase;
- Impairment of financial assets; and
- Revenue recognition.
Exploration and evaluation assets
Prelicense costs
Pre-license costs are expensed in the period in which they are incurred.
Exploration and evaluation costs
Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting.
During the geological and geophysical exploration phase, costs are charged against income as incurred. Costs directly associated with an exploration well in its drilling phase, for which it has not yet been determined whether there are proved reserves or it is not commercially viable, are capitalized as exploration and evaluation intangible assets until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs and payments made to contractors. If no reserves are found, the exploration asset is tested for impairment. If extractable hydrocarbons are found and, subject to further appraisal activity (e.g., by drilling further wells), are likely to be developed commercially, the costs continue to be carried as an intangible assets while sufficient and continued progress is made in assessing the commerciality of the hydrocarbons. All such costs are subject to technical, commercial and management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil are determined and development sanctioned, the relevant expenditure is transferred to oil and gas properties after impairment is assessed and any resulting impairment loss is recognized.
As of December 31, 2012, Adira has paid and aggregate of $3 million of operating costs on the Samuel License on behalf of GGRI and Emanuelle, made up as follows: Emanuelle and GGRI owe an aggregate of $2.8 million through their direct interest in the license, as Samuel JOA signatories and GGRI owes an additional $0.2 million, indirectly, through its 40% interest in Adira GeoGlobal. . Subsequent to balance sheet date, Adira issued a default letter to GGRI and Emanuelle in accordance with the Samuel JOA. The three parties are currently discussing a plan to ensure the reimbursement to Adira for such costs. If GGRI and Emanuelle do not repay Adira for the costs owed through their direct interest in the Samuel License, then in accordance with the Samuel JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. In addition, if GGRI does not repay Adira for the costs owed through GGRI’s 40% ownership interest in Adira GeoGlobal, Adira may have to seek reimbursement through continued negotiation or litigation.
In addition, the Company did not sign a drilling contract for the Samuel license by March 31, 2013, nor has it spud a well by April 30, 2013, as required by the Ministry. Adira is currently in the process of requesting extensions for both milestones from the Ministry, but it is uncertain that such extensions will be received. The Company believes that, as of December 31, 2012, the events described above, including the lack of available funding from other license participants sufficient to meet the current milestones on the Samuel License, are indicators of impairment of the Samuel license and there is a low probability of realization of the asset from either the successful development or sale of the license in the near future. Accordingly, the Company recorded an impairment charge of $7.6 million on the exploration and evaluation assets (including uncollected receivables from GGRI and Emanuelle) in respect of the Samuel license for the year ended December 31, 2012.
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Share-based payment transactions
The Company's employees and other service providers are entitled to remuneration in the form of equity-settled share-based payment transactions.
The cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. The fair value is determined using an appropriate pricing model. As for other service providers, the cost of the transactions is measured at the fair value of the goods or services received as consideration for equity instruments. In cases where the fair value of the goods or services received as consideration of equity instruments cannot be measured, they are measured by reference to the fair value of the equity instruments granted.
The cost of equity-settled transactions is recognized in profit or loss, together with a corresponding increase in equity, during the period which the performance and service conditions are to be satisfied, ending on the date on which the relevant employees become fully entitled to the award (the “vesting period”). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The expense or income recognized in profit or loss represents the movement in the cumulative expense recognized at the end of the reporting period.
If the Company modifies the conditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service provider at the modification date. If a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the cancellation date, and any expense not yet recognized for the grant is recognized immediately. However, if a new grant replaces the cancelled grant and is identified as a replacement grant on the grant date, the cancelled and new grants are accounted for as a modification of the original grant, as described above.
Joint oil and gas ventures
The Company conducts petroleum and natural gas exploration activities jointly with other partners who each have direct ownership in the assets and each are directly obligated for the liabilities of the ventures. Consequently, these financial statements reflect only the Company's proportionate interest in such activities.
The Company accounts for its share of the joint venture's assets, liabilities it has incurred, income from the sale or use of its share of the joint venture's output, together with its share of the expenses incurred by the joint venture and any expenses it incurs in relation to its interest in the joint venture.
Farm-out arrangements in the exploration and evaluation phase
A farm out is the transfer of part of oil and gas interest in consideration for an agreement by the transferee (the “farmee”) to meet, absolutely, certain expenditures which would otherwise have to be undertaken by the owner (the “farmor”). Farm-out transactions generally occur in the exploration or development phase and are characterized by the transferor (i.e. farmor) giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations.
Accordingly, the farmee recognizes its expenditure under the arrangement in respect of its interest and that retained by the farmor, as and when the costs are incurred.
The Company, as the farmor, accounts for the farm-out arrangement as follows:
- the Company does not record any expenditure made by the farmee on its behalf;
- the Company does not recognize a gain or loss on the farm out arrangement, but rather redesignates any costs capitalized in relation to the whole interest as relating to the partial interest retained; and
- any cash consideration received is credited against costs previously capitalized in relation to the whole interest with any excess accounted for by the farmor as a gain on disposal.
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Impairment of financial assets
At the end of each reporting period, the Company assesses whether there is objective evidence of impairment of a financial asset or group of financial assets carried at amortized cost.
As of the date hereof, there is objective evidence of impairment of debt instruments and receivables as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. The amount of the loss recorded in profit or loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred) discounted at the financial asset's original effective interest rate (the effective interest rate computed at initial recognition). If the financial asset has a variable interest rate, the discount rate is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (see allowance for doubtful accounts above). In a subsequent period, the amount of the impairment loss is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss.
Revenue recognition
Revenues are recognized in the statement of comprehensive loss when the revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably.
The Company’s revenues are mainly derived from:
1.Operator fees - The Company acts as the operator or joint operator on the Offshore Licenses and is entitled to operator fees and revenues are recognized in accordance with the terms of the JOAs, as exploration expenses are incurred in the UJV’s.
2.Consulting fees – The Company provides consulting services in respect of the Offshore Licenses on a “time and materials” basis. Consulting fees are recognized as revenues as the services are rendered to the respective UJV’s.
C. Research and Development, Patents and Licences
Not applicable.
D. Trend Information
We are not aware of any trends that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
E. Off-Balance Sheet Arrangements
Except for the Myra and Sara Option and the Yam Hadera Option, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.
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F. Tabular Disclosure of Contractual Obligations
The following sets forth our contractual obligations as of December 31, 2012:
| | Payments due by period (U.S. dollars in thousands) |
| Contractual Obligations | Total | Less than 1
year | 1-3 years | 3-5 years | More than 5
years |
| Operating Lease Obligations | 231 | 187 | 44 | 0 | 0 |
| Approved funding commitment regarding our licenses | 197 | 197 | 0 | 0 | 0 |
| Total | 428 | 384 | 44 | 0 | 0 |
G. Safe Harbor
Not applicable.
ITEM 6 DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
The size of Adira’s Board of Directors is currently set at 6. All of our directors are elected annually by the shareholders and hold office until our next annual general meeting or until their successors are duly elected and qualified, unless their office is earlier vacated in accordance with the CBCA and our articles of incorporation.
The following table sets forth information relating to the directors and senior management of Adira as at the date of this Form 20-F:
| Name(1) | Position |
| Dennis Bennie(2)(3) | Director (Co-Chairman) |
| Amos Lasker | Director (Co-Chairman) from August 22, 2012 |
| Colin Kinley | Director |
| Alan Friedman(2) | Director and Executive Vice-President, Corporate Development |
| Jeffrey E. Walter | Chief Executive Officer from February 27, 2012 and Director from July 6, 2012 |
| Richard Crist(2)(3) | Director from July 6, 2012 |
Gadi Levin
| Chief Financial Officer
Secretary
Acting Principal Executive Officer from February 24 to February 27, 2012 |
| Alon Polishuk | Vice-President, Contracts Administration and Regulations from August 15, 2012 |
| Mosh Politi | Chief Geologist |
| (1) | Neither age nor date of birth of directors or senior managers is required to be reported in the Company’s home country (Canada) nor otherwise publicly disclosed. |
| (2) | Member of Audit Committee. |
| (3) | “Independent” for purposes of National Instrument 52-110 (“NI 52-110”). |
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During the 2012 financial year, Eli Barkat and Yale Renik Cramer resigned from the Board of Directors of Adira. Subsequent to the year end, Sheldon Inwentash resigned as a director on February 12, 2013, and Orit Leitman, who was appointed to the Board of Directors on November 26, 2012, resigned on March 10, 2013.
Directors and Senior Management of the Subsidiaries
The following table sets out the directors and senior management of Adira’s subsidiaries as of the date of this Form 20-F, provides the person’s name, location of residence, position(s) held with the entity, principal occupation during the last five years and if a director, the date on which the person became a director. None of the directors and senior management listed below beneficially own, control or direct, directly or indirectly, any common shares of any subsidiary listed below.
Adira Energy Holding Corp. (Ontario)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer | January 11, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
| | | | |
Alan Friedman
Toronto, Canada | President, Secretary and Director | April 4, 2008 | Founder, President and Chief Executive Officer of Rivonia Capital Inc., South African lawyer |
| | | | |
Dennis Bennie
Toronto, Canada | Director | April 4, 2008 | Founder, XDL Venture Capital Fund and XDL Capital Invest |
Adira Energy CBM Ltd. (Israel)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer and Director | February 17, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
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Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
|
|
|
|
| Adira Oil Technologies Ltd. (Israel) | | | |
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer | March 1, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
Adira Energy Israel Ltd. (Israel)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer and Director | January 11, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
Adira Energy Israel Services Ltd. (Israel)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean |
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Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer and Director | April 4, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
Adira Geo Global Ltd. (Israel)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Jeffrey E. Walter
Annapolis MD, USA | Chief Executive Officer | February 27, 2012 | Chief Executive Officer of White Birch Energy. Principal at Energy Consultant International. Vice President Europe and Mediterranean for Noble Energy Inc. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Chief Financial Officer and Director | April 4, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
| | | |
Paul Miller
Calgary, AB, Canada | Director | December 17, 2010 | President and Chief Executive Officer of GeoGlobal Resources Inc. Prior to that, worked with Talisman Energy and Matrikon Inc. in various management capacities |
Adira Energy Holdings (Barbados) Ltd. (Barbados)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Dr. J. Gordon Murphy
Lascelles, St. James,
Barbados Barbados | President and Director | June 30, 2011 | Self Employed Business and Technology Consultant since 1994. President and Director of Brownstone Ventures (Barbados) Inc. since December 2007 and of Pinetree (Barbados) Inc. since July 2000. |
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Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
Gadi Levin
Lev Hasharon, Israel | Director | June 30, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
| | | |
Joseph William Ward
Falmouth House, Belair,
St. Philip, Barbados | Director | August 11, 2011 | Chartered Accountant and partner, BDO Barbados (formerly Ward, Patel & Co.). Director of Barbados Insurance Managers Limited |
Adira Energy Investments (Barbados) Ltd. (Barbados)
Name and Residence |
Position | Date First
Elected | Principal Occupation During Last
5 Years |
| | | | |
Dr. J. Gordon Murphy
Lascelles, St. James,
Barbados Barbados | President and Director | June 30, 2011 | Self Employed Business and Technology Consultant since 1994. President and Director of Brownstone Ventures (Barbados) Inc. since December 2007 and of Pinetree (Barbados) Inc. since July 2000. |
| | | | |
Gadi Levin
Lev Hasharon, Israel | Director | June 30, 2011 | VP and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate. Prior to that, financial consultant to the Prime Minister’s Office of the State of Israel |
| | | | |
Joseph William Ward
Falmouth House, Belair,
St. Philip, Barbados | Director | August 11, 2011 | Chartered Accountant and partner, BDO Barbados (formerly Ward, Patel & Co.). Director of Barbados Insurance Managers Limited |
The following is biographical information on directors and offers of the Company who are acting in the capacity of director or officer as of the date hereof:
Mr. Dennis Bennie. Mr. Bennie became Chairman and a director of Adira on August 31, 2009. Prior to that, Mr. Bennie was a founding member of Adira Holding Co., now a wholly-owned subsidiary of the Company and its Chairman since inception in April 2009. Over the past 25 years, Mr. Bennie has founded and managed several successful companies. In 1996, he founded the XDL Venture Capital Fund. One of its most noteworthy investments was a 1997 start-up, Delano Technology Corporation (NASD:DTEC). XDL Intervest, a $150 million fund was started in 1999 and is now fully invested. From 1988 to 1996, Mr. Bennie was Chairman and Chief Executive Officer of Delrina Corporation, which was listed on both the Toronto Stock Exchange and NASDAQ. Mr. Bennie serves on several boards and also regularly serves on various charitable boards.
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Mr. Colin Kinley. Mr. Kinley became a director of Adira on August 31, 2009 and was a Senior Advisor of the Company from August 23, 2010 to December 15, 2011. He also served as President and Chief Operating Officer of the Company from July 22, 2010 to June 27, 2011. Mr. Kinley is Chief Executive Officer of Kinley Exploration LLC, a specialized exploration company providing integrated program exploration and development management for both new and established oil and gas plays. Mr. Kinley has over 30 years of international experience in the exploration of frontier resource plays, 26 years as a senior executive for Layne Christensen and its predecessor companies. During his tenure at Layne he had executive oversight of multiple service companies and exploration and production operations, both domestically and internationally. During the past 6 years, Mr. Kinley and his team have developed an E&P advisory firm consulting on the development of frontier oil and gas plays from concept development through to exploration. He is experienced and practiced in both public and private company disciplines.
Mr. Alan Friedman. Mr. Friedman became Executive Vice-President and a director of Adira on August 31, 2009. Prior to joining the Company, Mr. Friedman was a founding member of Adira Holding Co. and had been its President since its inception in April 2009. Mr. Friedman is a South African qualified attorney and has played an integral role in the acquisition of various mining and oil and gas assets, financings and go-public transactions for many resource companies over the past 13 years. Mr. Friedman is also the co-founder and Director of Eco (Atlantic) Oil & Gas Ltd., a TSXV listed oil and gas exploration company, developing various oil assets offshore and onshore Namibia. He was also a director and co-founder of Auryx Gold Corp., a TSX listed Namibian gold exploration company having been sold to B2 Gold for more than $150 million. Mr. Friedman is the President and Chief Executive Officer of Rivonia Capital Inc. and a director of the Canada-South Africa Chamber of Business.
Mr. Gadi Levin. Mr. Levin became Chief Financial Officer of Adira’s Israeli subsidiaries in July 2010, Secretary of Adira in August 2010 and was appointed as Adira’s Chief Financial Officer in January 2011. He served as the Acting Principal Executive Officer of Adira during the interim period from the effective date of the termination of Mr. Kugler as the Chief Executive Officer of Adira (February 24, 2012) to the effective date of Mr. Walter’s employment as the Chief Executive Officer of Adira (February 27, 2012). Mr. Levin previously served as the Vice President of Finance and Chief Financial Officer for two Israeli investment houses in the fields of private equity, hedge funds and real estate (July 2008 to December 2009 and January 2010 to June 2010, respectively). For the five years prior to that he worked as a financial consultant to the Prime Minister’s Office of the State of Israel. Mr. Levin began his career at the accounting firm, Arthur Andersen, where he worked in the Cape Town, London and Tel Aviv offices for nine years. He has a Bachelor of Commerce degree in Accounting and Information Systems from the University of the Cape Town, South Africa, and a post graduate diploma in Accounting from the University of South Africa. He received his Chartered Accountant designation in South Africa and has an MBA from Bar Ilan University in Israel.
Mr. Paul Miller. Mr. Miller became director of Adira GeoGlobal Ltd. (Israel) on December 17, 2010. As of March 1, 2010, he joined GGRI as an Executive Officer and effective August 17, 2010, he became its President and Chief Executive Officer. Mr. Miller is a professional engineer licensed in Ontario and Alberta. He has a depth of experience working in the oil and gas industry all over the world. Originally from the east coast of Canada, Mr. Miller has lived and worked throughout Canada having started his career in Alberta in 1997 working for Talisman Energy from 1997 to 2000 before moving on to Matrikon Inc., a global engineering consulting company, where he was employed in various management capacities from 2000 to 2010. During his ten year tenure with Matrikon, he headed up business units in Australia, Eastern North America, and the Middle East prior to returning to Alberta. Mr. Miller holds a Bachelor of Science degree in Chemical Engineering from the University of Alberta and in 2009 graduated from the Kellogg-Schulich Executive MBA program.
Mr. J. Gordon Murphy. Dr. Murphy became President and Director of Adira Energy Holdings (Barbados) Ltd. and Adira Energy Investments (Barbados) Ltd. on June 30, 2011. Educated in Canada, Dr. Murphy has a B.Sc. in Physics, an M.Sc. in Engineering Physics and a Ph.D. in Mining and Metallurgical Engineering. He was employed as a scientist and laboratory manager from 1977-1984 before accepting an appointment as a Professor at the Technical University of Nova Scotia. In 1989 he re-entered the private sector as cofounder of a Massachusetts based aerospace manufacturing firm specializing in advanced materials. In 1994 he sold that firm and moved from Canada to Barbados where he has since operated as a business and technology consultant. He has served as President and Director of Adira’s business partners Brownstone Ventures (Barbados) Inc. and Pinetree (Barbados) Inc. since 2007 and 2000 respectively.
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Mr. Jeffrey Walter.Mr. Walter became Chief Executive Officer of Adira and was appointed to the applicable positions with Adira’s subsidiaries on February 27, 2012 and became a director of Adira on July 6, 2012. Immediately prior to joining the Company, Mr. Walter was the Chief Executive Officer of White Birch Energy, a start-up oil and gas company focussed on energy exploration in the Eastern Mediterranean (April 2010 to February 2012). Prior to his role at White Birch Energy, from April 2009 to February 2012, Mr. Walter was a principal at Energy Consultant International where he acted as a consultant for various oil and gas clients. From 2006 to 2009, Mr. Walter was Vice President Europe and Mediterranean for Noble Energy Inc. where he lead the Noble Energy Inc. team responsible for the Tamar field offshore Israel discovery and increased Noble Energy Inc.’s Eastern Mediterranean portfolio, including the discovery of the Leviathan Basin and Block 12 in Cyprus. Mr. Walter has a BS in Geology from The University of New Mexico.
Mr. Alon Polishuk. Mr. Polishuk became the Vice President, Contracts and Administration and Regulations of Adira on August 15, 2011. He has over five years of experience in Government Services of Israel, managing and co-coordinating mission critical programs and projects. He has experience in project management, business development and expertise in legal analysis and critical examination. Mr. Polishuk specializes in Law and was admitted to the Israel Bar in 2001. He holds a BA, Business (Finance) from the Arison School of Business, as well as LLE, Radzyner School of Law, Interdisciplinary Center, Herzliya.
Mr. Moshe Politi. Mr. Politi became the Chief Geologist of the Company on March 9, 2010. He has 39 years of experience, specializing in the integration of multi-disciplinary aspects and methodologies of geology and geophysics into viable prospects in various environments: onshore, offshore, shallow and deep prospects, structurally complex (overthrust) and stratigraphic plays. Mr. Politi received his Bachelor and Master Degrees in Geology from the Hebrew University in Jerusalem and is currently engaged in his PhD studies in Jerusalem. Mr. Politi has taught Petroleum geology and geophysical methods courses for graduate and post graduate students at the Hebrew University in Jerusalem.
Mr. Joseph W. Ward.Mr. Ward became a director of Adira Energy Holdings (Barbados) Ltd. and of Adira Energy Investments (Barbados) Ltd. on August 11, 2011. He has practised as a CPA in the United Kingdom and Barbados since 1978. He is a Member of the Institute of Chartered Accountants of England and Wales and of the Institute of Chartered Accountants of Barbados. In 1994 he founded a sole practitioner accounting practice in Barbados which provided audit, accounting, taxation and corporate secretarial services to Barbadian and international clients. That firm became Ward, Patel & Co. in January 2002 and BDO Barbados on April 1, 2012. Mr. Ward is joint managing partner of BDO Barbados which provides accounting and management services to Adira’s Barbados subsidiaries.
Mr. Richard Crist. Mr. Crist became a director of Adira on July 6, 2012. He has over 42 years of oil and gas experience, with a broad range of managerial and technical expertise that includes 45 years in corporate and senior management roles. Prior to being appointed an officer of Gasco Energy, he held various senior managerial positions including Executive Vice President – Business Development for Delek US, Executive Vice President, Business Development for Elk Resources, a privately held, Denver-based oil and gas company. Degree as an engineer of geophysics with a minor in geology from the Colorado School of Mines in Golden, Colo. Member in good standing of the Society of Exploration Geophysicists and the American Association of Petroleum Geologists and is a Certified Petroleum Geologist.
Alan Friedman's wife is the niece of Dennis Bennie. Other than that relationship, no director or any member of senior management has any family relationships with any other director or manager.
Cease trade orders, bankruptcies, penalties or sanctions
For the purposes of this section, “order” means a cease trade order; an order similar to a cease trade order; or an order that denied the relevant company access to any exemption under securities legislation that was in effect for a period of more than 30 consecutive days.
No director or executive officer of the Company is, as at the date hereof, or has been, within the 10 years before the date hereof, a director, chief executive officer or chief financial officer of any corporation (including the Company) that:
- 44 -
| | (a) | was subject to an order that was issued while the director or executive officer was acting in the capacity as director, chief executive officer or chief financial officer; or |
| | | |
| | (b) | was subject to an order that was issued after the director or executive officer ceased to be a director, chief executive officer or chief financial officer and which resulted from an event that occurred while that person was acting in the capacity as director, chief executive officer or chief financial officer. |
No director or executive officer of the Company or a shareholder holding a sufficient number of securities of the Company to affect materially the control of the Company:
| | (a) | is, as at the date hereof, or has been within the 10 years before the date hereof, a director or executive officer of any corporation (including the Company) that, while that person was acting in that capacity, or within a year of that person ceasing to act in that capacity, became bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency or was subject to or instituted any proceedings, arrangement or compromise with creditors or had a receiver, receiver manager or trustee appointed to hold its assets; or |
| | | |
| | (b) | as, within the 10 years before the date hereof, become bankrupt, made a proposal under any legislation relating to bankruptcy or insolvency, or become subject to or instituted any proceedings, arrangement or compromise with creditors, or had a receiver, receiver manager or trustee appointed to hold the assets of the director, executive officer or shareholder. |
No director or executive officer of the Company, or a shareholder holding a sufficient number of the Company’s securities to affect materially the control of the Company, has been subject to:
| | (a) | any penalties or sanctions imposed by a court relating to securities legislation or by a securities regulatory authority or has entered into a settlement agreement with a securities regulatory authority; or |
| | | |
| | (b) | any other penalties or sanctions imposed by a court or regulatory body that would likely be considered important to a reasonable investor in making an investment decision. |
Conflicts of Interest
Certain officers and directors of the Company are directors or officers of other oil and gas exploration companies. Consequently, potential conflicts of interest may arise in the event that these companies compete in respect of the sale or option of oil and gas properties in which the Company is or may be interested.
The directors and officers of the Company are aware of the existence of laws governing accountability of directors and officers for corporate opportunity and requiring disclosures by directors of conflicts of interest and the Company will rely upon such laws in respect of any directors and officers conflicts of interest or in respect of any breaches of duty by any of its directors or officers. All such conflicts will be disclosed by such directors or officers in accordance with the CBCA and they will govern themselves in respect thereof to the best of their ability in accordance with the obligations imposed upon them by law.
Promoters
Alan Friedman, Ilan Diamond, former Chief Executive Officer and Director of the Company, and Dennis Bennie took the initiative in organizing the Company and may be considered to have been promoters of the Company. See Item 6E -Share Ownership for details of the shareholdings of such individuals.
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B. Compensation
During the year ended December 31, 2012, we paid aggregate remuneration to our directors and officers as a group who served in the capacity of director or executive officer during such year of approximately $1,982,000, of which $1,071,000 relates to salaries to executive officers and $911,000 relates to share based compensation to executive officer and directors.
Executive Compensation
Compensation Discussion and Analysis
In assessing the compensation of our Company’s executive officers, we do not have in place any formal objectives, criteria or analysis; instead, we rely mainly on Board discussion. Currently, any material commitments, inclusive of remuneration, are required to be pre-approved by the Board.
Our executive compensation program has three principal components: base salary, incentive bonus plan and stock options. Base salaries for all our employees are established for each position through comparative salary surveys of similar type and size companies. Both individual and corporate performances are also taken into account. Incentive bonuses, in the form of cash payments, are designed to add a variable component of compensation based on corporate and individual performances for executive officers and employees. No bonuses were paid to executive officers or employees during the most recently completed financial year.
We have no other forms of compensation, although payments may be made from time to time to individuals or companies they control for the provision of consulting services. Such consulting services are paid for by the Company at competitive industry rates for work of a similar nature by reputable arm’s length services providers.
We have no compensatory plan, contract or arrangement where an executive officer is entitled to receive more than $100,000 to compensate such executive officers in the event of resignation, retirement or other termination, a change of control of the Company or a change in responsibilities following a change in control, other than as described in this Form 20-F.
Summary Compensation Table
The following table provides a summary of compensation paid to the senior management employed by our Company as of December 31, 2012 during the fiscal year then ended (inthousands of US Dollars):
Names and
Principal
Position | Salary
($) | Share-
Based
Awards
($) | Option-
Based
Awards
($) | Non-Equity Incentive
Plan Compensation
($) |
Pension
Value
($) |
All Other
Compensation
($) |
Total
Compensation
($) |
Annual
incentive
plans
| Long-
term
incentive
plans |
Hezi Kugler,
Chief Executive Officer(1) | 58 | 104 | - | - | - | - | - | 162 |
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Names and
Principal
Position |
Salary
($) |
Share-
Based
Awards
($) |
Option-
Based
Awards
($) | Non-Equity Incentive
Plan Compensation
($)
|
Pension
Value
($) |
All Other
Compensation
($) |
Total
Compensation
($) |
Annual
incentive
plans
| Long-
term
incentive
plans |
| Jeffrey E. Walter, Chief Executive Officer(2) | 280 | 169 | - | - | - | - | - | 449 |
Gadi Levin,
Chief Financial Officer | 191 | 90 | - | - | - | - | - | 281 |
| Alan Friedman, Executive Vice President, Corporate Development | 144 | 78 | - | - | - | - | - | 222 |
Alon Polishuk,
Vice President, Contracts Administration and Regulations | 167 | 55 | - | - | - | - | - | 222 |
Moshe Politi
Chief Geologist | 183
| 72
| -
| -
| -
| -
| -
| 255
|
Notes:
| (1) | Mr. Kugler served as the Chief Executive Officer and Director of the Company from June 2, 2011 to February 24, 2012 and continued to assist the Company as a Strategic Consultant effective February 27, 2012 through to September 22, 2012. |
| (2) | Mr. Walter was appointed the Chief Executive Officer of the Company effective February 27, 2012. |
Option Based Awards
Stock options are granted to provide an incentive to the directors, officers, employees and consultants of the Company to achieve the longer-term objectives of the Company; to give suitable recognition to the ability and industry of such persons who contribute materially to the success of the Company; and to attract and retain persons of experience and ability, by providing them with the opportunity to acquire an increased proprietary interest in the Company. The Company awards stock options to its executive officers based upon the recommendation of the Board, which recommendation is based upon the Compensation Committee’s review of a proposal from the President and CEO. Previous grants of incentive stock options are taken into account when considering new grants.
- 47 -
The Company has a stock option plan for the granting of incentive stock options to the officers, employees, consultants and directors. See Item 6E - “Share Ownership – Equity Compensation Plans” for more information.
Director Compensation
The Company has no arrangements, standard or otherwise, pursuant to which Directors are compensated by the Company for their services in their capacity as Directors, or for committee participation, involvement in special assignments or for services as consultant or expert during the most recently completed financial year or subsequently, up to and including the date of this Form 20-F, except for the consulting fees described in Item 7.B – “Related Party Transactions” of this Form 20-F.
Long-Term Incentive Plan Awards
The Company did not make any long-term incentive plan awards during the years ended December 31, 2012 and 2011.
Pension, Retirement or Similar Benefits
We have amounts set aside to provide for pension, retirement or similar benefits.
Employment Agreements
We have entered into employment agreements with certain of our officers. The agreements contain, among other things, confidentiality, non-solicitation and non-competition covenants that will apply during the term of each officer’s employment and for a specific period of time after termination of their employment.
Each employment agreement provides for certain compensation arrangements upon termination on the occurrence of specified circumstances as described below. Generally, on a termination without cause or resignation for good reason, the officer will be entitled to a severance payment based on past salary and bonus levels, and outstanding and unvested incentives and other equity entitlements will accelerate to immediately vest and become exercisable. “Good reason” generally means (i) a material and adverse change in the officer’s status or position or a material reduction in his duties and responsibilities; (ii) a reduction in the officer’s base compensation; (iii) a relocation of the officer’s place of employment; (iv) the failure to pay material compensation when due; or (v) a change of control of the Company as defined below.
The employment agreements also provide for certain benefits in the event of a change of control of the Company. Generally, a “change of control” is defined in the employment agreements as (i) a tender or take-over offer (or series of related offers) completed for 50% or more of the Company’s outstanding voting securities; (ii) the amalgamation, merger or consolidation of the Company or the entry into an arrangement, as a result of which less than 50% of the outstanding voting securities of the surviving or resulting entity are owned by the former securityholders of the Company or its subsidiaries and affiliates; (iii) the sale or disposition by the Company of all or substantially all of its assets to another entity that is not wholly owned by the Company; or (iv) the acquisition by a person of 50% or more of the outstanding voting securities of the Company (whether directly, indirectly, beneficially or of record).
As of the date of this Annual Report, we have employment agreements with the following officers of the Company:
Mr. Dennis Bennie – Co-Chairman
Effective August 31, 2009, we entered into an agreement with Mr. Bennie pursuant to which Mr. Bennie agreed to provide his services to us in the capacity of Co-Chairman of the Board for a term to continue until terminated (the “Bennie Agreement”). Under the Bennie Agreement, Mr. Bennie is paid an annual salary of CDN$60,000.
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Pursuant to the Bennie Agreement, each party thereto is entitled to terminate the Bennie Agreement at any time by providing sixty days’ written notice. In addition, the Company is entitled to terminate the Bennie Agreement immediately without notice and/or payment in lieu for cause (as defined in the Bennie Agreement).
Furthermore, if the Bennie Agreement is terminated by the Company without cause (as defined in the Bennie Agreement), by Mr. Bennie for good reason (as defined in the Bennie Agreement ) or due to a change of control in the Company (as defined in the Bennie Agreement), Mr. Bennie is entitled to a payment equal to twenty four months’ salary and 100% of the stock options granted to Mr. Bennie will vest immediately.
Mr. Amos Lasker – Co-Chairman
Effective August 22, 2012, we entered into an agreement with Mr. Lasker pursuant to which Mr. Lasker agreed to provide his services to us in the capacity of Co-Chairman of the Board for a term to continue until terminated (the “Canadian Lasker Agreement”). Under the Canadian Lasker Agreement, Mr. Lasker was granted 300,000 stock options, exercisable at a price of CDN$0.20 (the “CanadianLasker Compensation Options”). The Canadian Lasker Compensation Options have a vesting schedule of 1/3 vesting on the day the Canadian Lasker Compensation Option were publicly disclosed (the “Grant Date”), a further 1/3 on the first anniversary of the Grant Date and the remaining amount on the second anniversary of the Grant Date, expiring five years after the Grant Date.
Pursuant to the Canadian Lasker Agreement, each party thereto is entitled to terminate the Canadian Lasker Agreement at any time by providing sixty days’ written notice. In addition, the Company is entitled to terminate the Canadian Lasker Agreement immediately without notice for cause (as defined in the Canadian Lasker Agreement).
Furthermore, if the Canadian Lasker Agreement is terminated by the Company without cause (as defined in the Canadian Lasker Agreement), by Mr. Lasker for good reason (as defined in the Canadian Lasker Agreement) or due to a change of control in the Company (as defined in the Canadian Lasker Agreement), (i) 25% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Canaidan Lasker Agreement is terminated within 12 months of its effective date, (ii) 50% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Canadian Lasker Agreement is terminated between 13 and 36 months of its effective date, or (iii) 100% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Canadian Lasker Agreement is terminated at least 37 months of its effective date.
Effective August 22, 2012, Adira Israel entered into an employment agreement with Mr. Lasker pursuant to which Mr. Lasker agreed to provide his services to Adira Israel in the capacity of Vice President Business Development for a term to continue until terminated (the “Israeli Lasker Agreement”).
Under the Israeli Lasker Agreement, Mr. Lasker is paid a monthly salary of NIS 32,400 ($9,000, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT. Mr. Lasker was also granted 700,000 stock options, exercisable at a price of CDN$0.20 (the “Israeli Lasker Compensation Options”). The Israeli Lasker Compensation Options have a vesting schedule of 1/3 vesting on the Grant Date, a further 1/3 on the first anniversary of the Grant Date and the remaining amount on the second anniversary of the Grant Date, expiring five years after the Grant Date.
The Israeli Lasker Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Lasker Employment Agreement and for a period of six months thereafter.
Pursuant to the Israeli Lasker Agreement, each party thereto is entitled to terminate the Israeli Lasker Agreement at any time by providing thirty day’s written notice. In addition, the Company is entitled to terminate the Israeli Lasker Agreement immediately without notice and/or payment in lieu thereof if Mr. Lasker materially breaches the Israeli Lasker Agreement or Mr. Lasker engages in any act of dishonesty or fraud towards the Company.
Furthermore, if the Israeli Lasker Agreement is terminated by the Company without cause (as defined in the Israeli Lasker Agreement), by Mr. Lasker for good reason (as defined in the Israeli Lasker Agreement) or due to a change of control in the Company (as defined in the Israeli Lasker Agreement), Mr. Lasker is entitled to a payment equal (i) six months’ salary and 25% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Israeli Lasker Agreement is terminated within 12 months of its effective date, (ii) twelve months salary and 50% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Israeli Lasker Agreement is terminated between 13 and 36 months of its effective date, or (iii) twenty four months’ salary and 100% of the unvested stock options granted to Mr. Lasker will be accelerated and be vested if the Israeli Lasker Agreement is terminated at least 37 months of its effective date.
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Mr. Alan Friedman – Executive Vice President, Corporate Development
Effective May 1, 2011, we entered into an employment agreement, as amended and restated on December 19, 2012 and as amended further on March 22, 2013, with Rivonia Capital Inc. (the “FriedmanService Company”), a company wholly owned by Mr. Friedman, pursuant to which Mr. Friedman agreed to provide his services to us in the capacity of Executive Vice President of Corporate Development for a term to continue until terminated (the “FriedmanService Agreement”). Mr. Friedman reports to the Company’s CEO.
Under the Friedman Service Agreement, Mr. Friedman is paid a monthly salary of CDN$12,000 (excluding HST).
The Friedman Service Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Friedman Service Agreement and for a period of six months thereafter.
Pursuant to the Friedman Service Agreement, each party thereto is entitled to terminate the Friedman Service Agreement at any time by providing sixty days’ written notice. In addition, the Company is entitled to terminate the Friedman Service Agreement immediately without notice and/or payment in lieu thereof if the Friedman Service Company or Mr. Friedman materially breach the Friedman Service Agreement and such breach is not cured within 30 days from the date on which the Company informs the party of such breach.
Furthermore, if the Friedman Service Agreement is terminated by the Company without cause (as defined in the Friedman Service Agreement), by the Friedman Service Company or Mr. Friedman for good reason (as defined in the Friedman Service Agreement ) or due to a change of control in the Company (as defined in the Friedman Service Agreement), the Friedman Service Company is entitled to a payment equal to twenty four months’ salary and 100% of the stock options granted to Mr. Friedman will vest immediately.
Notwithstanding the forgoing, for a 6 month period ending August 31, 2013, 50% of Mr. Friedman’s salary shall accrue and become payable on the earlier of September 1, 2013, or the happening of certain prescribed events. Additionally, if the Friedman Service Agreement is terminated during the 6 month period ending August 31, 2013 by the Company without cause (as defined in the Friedman Service Agreement), by the Friedman Service Company or Mr. Friedman for good reason (as defined in the Friedman Service Agreement) or due to a change of control in the Company (as defined in the Friedman Service Agreement), 50% of Mr. Friedman’s entitles (as described above) will be delayed until the earlier of September 1, 2013, or the happening of certain prescribed events.
Mr. Jeffery Walter – Chief Executive Officer from February 27, 2012
Effective February 27, 2012, we entered into an employment agreement with Mr. Walter, as amended and restated on October 19, 2012 and amended further on February 28, 2013, pursuant to which Mr. Walter agreed to provide his services to us in the capacity of Chief Executive Officer for a term to continue until terminated (the “Walter Employment Agreement”). Mr. Walter will report to the Company’s board of directors.
Under the Walter Employment Agreement, Mr. Walter is paid a monthly salary of CDN$28,000, excluding VAT and is entitled to, among other things, remuneration for his transportation and accommodation expenses while physically present in the State of Israel.
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The Walter Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Walter Employment Agreement and for a period of six months thereafter.
Pursuant to the Walter Employment Agreement, each party thereto will be entitled to terminate the Walter Employment Agreement at any time by one month’s written notice, and during each year thereafter, by three months’ written notice. In addition, the Company is entitled to terminate the Walter Employment Agreement immediately without notice and/or payment in lieu thereof if Mr. Walter has materially breached the Walter Employment Agreement.
If the Walter Employment Agreement is terminated due to a change of control in the Company (as defined in the Walter Employment Agreement), by the Company without Cause (as defined in the Walter Employment Agreement) or by Mr. Walter for good reason (as defined in the Walter Employment Agreements), Mr. Walter is entitled to a payment equal (i) six months’ salary and 25% of the unvested stock options granted to Mr. Walter will be accelerated and be vested if the Walter Employment Agreement is terminated within 12 months of its effective date, (ii) twelve months salary and 50% of the unvested stock options granted to Mr. Walter will be accelerated and be vested if the Walter Employment Agreement is terminated between 13 and 36 months of its effective date, or (iii) twenty four months’ salary and 100% of the unvested stock options granted to Mr. Walter will be accelerated and be vested if the Walter Employment Agreement is terminated at least 37 months of its effective date.
Notwithstanding the foregoing, for a 6 month period ending August 31, 2013, 50% of Mr. Walters’s salary shall accrue and become payable on the earlier of September 1, 2013, or upon a change in control. Additionally, if the Walter Employment Agreement is terminated during the 6 month period ending August 31, 2013 by the Company without cause or by the Mr. Walter for good reason, Mr. Walter is entitled to a payment equal to three months’ salary and 25% of the unvested stock options granted to Mr. Walter will be accelerated and be vested.
Mr. Gadi Levin – Chief Financial Officer
Effective July 21, 2010, we entered into an employment agreement with Mr. Levin, as amended on September 13, 2012, and March 13, 2013, pursuant to which Mr. Levin agreed to provide his services to us in the capacity of Chief Financial Officer for a term to continue until terminated (the “Levin Employment Agreement”). Mr. Levin reports to the Company’s CEO.
Under the Levin Employment Agreement, Mr. Levin is paid a monthly salary of NIS 51,000 ($14,167, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund) and is entitled to, among other things, a vehicle allowance.
The Levin Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Levin Employment Agreement and for a period of six months thereafter.
Pursuant to the Levin Employment Agreement, each party thereto is entitled to terminate the Levin Employment Agreement at any time by two months’ written notice. In addition, the Company is entitled to terminate the Levin Employment Agreement immediately without notice and/or payment in lieu thereof if Mr. Levin has materially breached the Levin Employment Agreement and such breach is not cured within 30 days from the date on which the Company informs Mr. Levin of such breach.
If the Levin Employment Agreement is terminated due to a change of control in the Company (as defined in the Levin Employment Agreement), by the Company without cause (as defined in the Levin Employment Agreement) or by Mr. Levin for good reason (as defined in the Levin Employment Agreements), Mr. Levin is entitled to a payment equal (i) six months salary and 25% of the unvested stock options granted to Mr. Levin will be accelerated and be vested if the Levin Employment Agreement is terminated within 12 months of its effective date, (ii) twelve months salary and 50% of the unvested stock options granted to Mr. Levin will be accelerated and be vested if the Levin Employment Agreement is terminated between 13 and 36 months of its effective date, or (iii) twenty four months salary and 100% of the unvested stock options granted to Mr. Levin will be accelerated and be vested if the Levin Employment Agreement is terminated at least 37 months of its effective date.
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Notwithstanding the foregoing, for a six month period ending August 31, 2013, Mr. Levin’s salary will be reduced by 10%. The aggregate amount of the reduced salary during this period will paid to Mr. Levin at the earlier of September 1, 2013, a change in control of the Company (as defined in the Levin Employment Agreement), the resignation of Mr. Levin for good reason (as defined in the Levin Employment Agreement), the termination of the Levin Employment Agreement by the Company without cause (as defined in the Levin Employment Agreement).
Mr. Alon Polishuk – Vice President Contracts and Regulation
Effective August 1, 2011, we entered into an employment agreement with Mr. Polishuk, as amended on September 13, 2012 and April 23, 2013, pursuant to which Mr. Polishuk agreed to provide his services to us in the capacity of Vice President Contracts and Regulation for a term to continue until terminated (the “Polishuk Employment Agreement”). Mr. Polishuk reports to the Company’s CEO.
Under the Polishuk Employment Agreement, Mr. Polishuk is paid a monthly salary of NIS 44,700 ($12,417, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT, and is entitled to, among other things, a vehicle allowance.
The Polishuk Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality, non-competition and non-solicitation covenants that will apply during the term of the Polishuk Employment Agreement and for a period of six months thereafter.
Notwithstanding the forgoing, for a two month period ending June 30, 2013, the scope of Mr. Polishuk’s employment will be part-time and his total compensation will be NIS 27,300 per month ($7,583, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund).
Pursuant to the Polishuk Employment Agreement, each party thereto is entitled to terminate the Polishuk Employment Agreement at any time by providing the other party (a) one month’s written notice, if Mr. Polishuk elects to work during this notice period in a full-time role at his original salary, and (b) two month’s written notice, if Mr. Polishuk elects to work during such notice period in a part-time role at his revised salary.
In addition, the Company is entitled to terminate the Polishuk Employment Agreement immediately without notice and/or payment in lieu thereof if Mr. Polishuk materially breaches the Polishuk Employment Agreement and such breach is not cured within 30 days from the date on which the Company informs Mr. Polishuk of such breach. If the Polishuk Employment Agreement is terminated due to a change of control in the Company (as defined in the Polishuk Employment Agreement), Mr. Polishuk is entitled to a payment equal to six months’ salary and a pro rata portion of Mr. Polishuk’s annual bonus entitlement, if any.
Furthermore, in accordance with the terms and conditions of the Polishuk Employment Agreement, on Mr. Polishuk’s termination without cause or resignation for good reason, Mr. Polishuk is entitled to a severance payment equal to six months’ salary. The Polishuk Employment Agreement cannot be terminated without cause prior to June 30, 2013.
Mr. Moshe Politi – Chief Geologist
Effective August 1, 2011, we entered into a revised employment agreement with Mr. Politi, as amended on April 23, 2013, pursuant to which Mr. Politi agreed to provide his services to us in the capacity of Chief Geologist for a term to continue until terminated (the “Politi Employment Agreement”). Mr. Politi reports to the Company’s CEO.
Under the Politi Employment Agreement, Mr. Politi is paid a monthly salary of NIS 33,000 ($9,167, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT, and is entitled to, among other things, a vehicle allowance.
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The Politi Employment Agreement contains certain representations, warranties and covenants, including, among other things, standard confidentiality and non-competition and non-solicitation clauses effective during the term of the Politi Employment Agreement and for a period of six months thereafter.
Notwithstanding the forgoing, for a two month period ending June 30, 2013, the scope of Mr. Politi’s employment will be part-time and his total compensation will be NIS 28,222 per month ($7,839, based on an exchange rate of one U.S. dollar into New Israeli Shekel of $1.00 per NIS 3.60, on 29 April, 2013, as published by International Monetary Fund), excluding VAT.
Pursuant to the Politi Employment Agreement, each party thereto is entitled to terminate the Politi Employment Agreement at any time by providing the other party (a) one month’s written notice, if Mr. Politi elects to work during this notice period in a full-time role at his original salary, and (b) two month’s written notice, if Mr. Politi elects to work during such notice period in a part-time role at his revised salary.
In addition, the Company is entitled to terminate the Politi Employment Agreement immediately without notice and/or payment in lieu thereof if Mr. Politi materially breaches the Politi Employment Agreement and such breach is not cured within 30 days from the date on which the Company informs Mr. Politi of such breach. If the Politi Employment Agreement is terminated due to a change of control in the Company (as defined in the Politi Employment Agreement), Mr. Politi is entitled to a payment equal to six months’ salary and a pro rata portion of Mr. Politi’s annual bonus entitlement, if any.
Furthermore, in accordance with the terms and conditions of the Politi Employment Agreement, on Mr. Politi’s termination without cause or resignation for good reason, Mr. Politi is entitled to a severance payment equal to six months’ salary. The Politi Employment Agreement cannot be terminated without cause prior to June 30, 2013.
C. Board Practices
Our Directors have served in their respective capacities since their election or appointment and will serve until our next annual general meeting or until a successor is duly elected and qualified, unless their office is earlier vacated in accordance with the CBCA and our articles of incorporation. Our officers serve at the discretion of the board.
The Board is responsible for, among other things, identifying suitable candidates to be recommended for election to the Board by shareholders or appointment by the Directors, subject to the limits in the Company’s articles and the CBCA. One of the objectives of the Board with respect to the nomination is to maintain the composition of the Directors in a way that provides the best mix of skills and experience to guide our long-term strategy and ongoing business operations.
The Board conducts an annual review and assessment of the performance of the Chairman and Chief Executive Officer and the other senior executive officers of the Company.
The Board also reviews and monitors our executive development programs and the long-range plans and personnel policies for recruiting, developing and motivating our executives. The Board has reviewed and approved the qualifications of each of the Board nominees standing for election.
The Board’s review of the performance of the Company and the Chief Executive Officer as measured against objectives established in the prior year by the Board and the CEO. The evaluation is to be used by the Board in its deliberations concerning the CEO’s annual compensation. The evaluation of performance against objectives forms part of the determination of the entire compensation of senior employees. The Board is also responsible for reviewing the compensation of the Directors on an annual basis, taking into account such matters as time commitment, responsibility and compensation provided by comparable organizations. The compensation committee will make an annual review of such matters and make a recommendation to the Board.
The Board is responsible for making an annual assessment of the overall performance of the Directors as a group and to reporting its findings to the full Board. The assessment examines the effectiveness of the Directors as a whole and specifically reviews areas that the Directors and/or management believe could be improved to ensure the continued effectiveness of the Directors in the execution of their responsibilities
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Term of Office
All directors have a term of office expiring at our next annual general meeting, unless a director’s office is earlier vacated in accordance with our Articles or the provisions of the CBCA. All officers serve at the discretion of the Board.
Audit, Compensation and Disclosure Committees
Audit Committee
We have a standing Audit Committee that assists the directors of Adira in overseeing all material aspects of the Company’s reporting, control and audit functions, except those specifically related to the responsibilities of another standing committee of the Board. The role of the Audit Committee includes a particular focus on the qualitative aspects of financial reporting to shareholders and on the Company’s processes for the management of business/financial risk and for compliance with significant applicable legal, ethical, and regulatory requirements. The Audit Committee is responsible for, among other things, the making recommendations to our Board of Directors with respect to the appointment and remuneration of the Company’s independent accountant. A copy of our Audit Committee Charter was filed as an exhibit to our Form 10-KSB filed for the Company’s 2003 fiscal year.
As of the date hereof, our Audit Committee is comprised of Dennis Bennie, Richard Crist and Alan Friedman.
The Company has procedures for the review and pre-approval of any services performed by its auditors. The procedures require that all proposed engagements of its auditors for audit and non-audit services be submitted to the Audit Committee for approval prior to the beginning of any such services. The Audit Committee considers such requests, and, if acceptable to a majority of the Audit Committee members, pre-approves such audit and non-audit services by a resolution authorizing management to engage the Company's auditors for such audit and non-audit services. During such deliberations, the Audit Committee assesses, among other factors, whether the services requested would be considered "prohibited services" as contemplated by the regulations of the SEC, and whether the services requested and the fees related to such services could impair the independence of the auditors.
Pursuant to section 6.1 of National Instrument 52-110 – Audit Committees ("NI 52-110"), as adopted by the Canadian Securities Administrators (the "CSA"), the Company is exempt from the requirements of Parts 3 and 5 of NI 52-110 for the year ended December 31, 2012, by virtue of the Company being a "venture issuer" (as defined in NI 52-110).
Part 3 of NI 52-110 prescribes certain requirements for the composition of audit committees of non-exempt companies that are reporting issuers under Canadian provincial securities legislation. Part 3 of NI 52-110 requires, among other things that an audit committee be comprised of at three directors, each of whom, is, subject to certain exceptions, independent and financially literate in accordance with the standards set forth in NI 52-110.
Part 5 of NI 52-110 requires an annual information form that is filed by a non-exempt reporting issuer under National Instrument 51-102 –Continuous Disclosure Obligations, as adopted the CSA, to include certain disclosure about the issuer's audit committee, including, among other things: the text of the audit committee's charter; the name of each audit committee member and whether or not the member is independent and financially literate; whether a recommendation of the audit committee to nominate or compensate an external auditor was not adopted by the issuer's board of directors, and the reasons for the board's decision; a description of any policies and procedures adopted by the audit committee for the engagement of non-audit services; and disclosure of the fees billed by the issuer's external auditor in each of the last two fiscal years for audit, tax and other services.
Compensation Committee
We have a Compensation Committee comprised of Dennis Bennie, Richard Crist and Colin Kinley. Currently, any material commitments, inclusive of remuneration, are required to be pre-approved by the Board, following recommendation of the Compensation Committee
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Disclosure Committee
We have a Disclosure Committee comprised of Dennis Bennie, Alan Friedman and Jeffery Walter and a Disclosure Committee Charter. Our Disclosure Committee is comprised of all of our officers and directors. The purpose of the Committee is to provide assistance to the Chief Executive Officer and the Chief Financial Officer in fulfilling their responsibilities regarding the identification and disclosure of material information about us, and the accuracy, completeness and timeliness of our financial reports.
D. Employees
As of December 31, 2012, we and our subsidiaries together employed a total of 16 full-time employees, out of which 12 are employed in Israel and 4 in North America, 7 employees who performed management and professional functions. 2 employees provide administrative services, 2 provide legal/regulatory service, and 5 provide geological/technical services to the Company.
None of the Company’s employees are part of a collective bargaining unit. Management believes that its relations with its employees and consultants are good.
Israeli Employment Law and Practices
The Company's employees are located in Israel. Certain provisions of Israeli employment laws and of extension orders based upon provisions of the collective bargaining agreements between the Histadrut (i.e., the General Federation of Labor in Israel) and the Coordination Bureau of Economic Organizations (including the Industrialists’ Associations) are applicable to employees in Israel by order of the Israeli Ministry of Labor. These provisions concern principally the length of the work day, minimum daily wages for professional workers, insurance for work-related accidents, procedures for dismissing employees, determination of severance pay and other conditions of employment.
Israeli law generally requires severance pay, which may be funded by Managers’ Insurance described below in this section upon the retirement or death of an employee or termination of employment without cause (as defined in the law). The payments thereto amount to approximately 8.33% of wages. Furthermore, Israeli employees and employers are required to pay predetermined sums to the National Insurance Institute, which is similar to the United States Social Security Administration. Such amounts also include payments for national health insurance. The payments to the National Insurance Institute are equal to approximately 16.3% of the wages, of which the employee contributes approximately 66% and the employer contributes approximately 34%. In addition, Israeli law requires employers to make mandatory pension payments on behalf of their employees.
A general practice followed, although not legally required, is the contribution of additional funds on behalf of employees to a fund known as Managers’ Insurance. This fund provides a combination of savings plan, insurance and severance pay benefits to the employee, giving the employee a lump sum payment upon retirement and securing the severance pay, if legally entitled, upon termination of employment. The employer decides which employees are entitled to participate in the plan, and each employee who agrees to participate, contributes an amount equal to 5% of his or her salary, and the employer contributes between 13.3% and 15.8% of the employee's salary which also includes the mandatory pension payments required by applicable law.
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E. Share Ownership
Shares
The shareholdings of our officers and directors are set forth below as of the date hereof.
| Holder name | No. of Shares
held | Percentage of holding | Percentage of holding infull dilution(1) |
% in
capital | % in voting | % in
capital | % in voting |
| Dennis Bennie(2) | 13,403,928 | 7.41% | 7.41% | 4.53% | 4.53% |
| Alan Friedman(3) | 6,988,267 | 3.87% | 3.87% | 2.36% | 2.36% |
| Colin Kinley(4) | 50,000 | 0.03% | 0.03% | 0.02% | 0.02% |
| Jeffrey Walter | 173,946 | 0.10% | 0.10% | 0.06% | 0.06% |
| (1) | In full dilution means with the exercise of non-negotiable warrants and options which were allotted to the Company’s employees and officers and to private investors. |
| (2) | Mr. Dennis Bennie is an interested party in the Company by virtue of his share holdings and by virtue of him serving as the chairman of the Board. Mr. Bennie indirectly holds all of the shares through companies controlled by himself and through his spouse. |
| (3) | Mr. Allan Friedman is an interested party in the Company by virtue of his share holdings and by virtue of him serving as a director and as the Company’s chief business development officer. Mr. Friedman holds directly 4,953,600 shares and 150,000 options, and indirectly, through his spouse, 1,034,667 shares and 75,000 warrants. |
| (4) | Mr. Colin Kinley is an interested party in the Company by virtue of his share holdings and by virtue of him serving as a director in the Company. |
Options
The stock options, exercisable into common shares of the Company, held by our officers and directors are set forth below as of the date hereof.
| Name | Position | Allotment
date | Expiration
date | Exercise
price (US
Dollar)(1) | Vesting
date(2) | Total |
| Dennis Bennie | Co-Chairman | Aug. 31, 2009 | Aug. 20, 2014 | $0.25 | A | 396,000 |
| Jan. 28, 2010 | Jan. 27, 2015 | $0.61 | E | 250,000 |
| Jan. 11, 2011 | Jan. 10, 2015 | $0.80 | I | 100,000 |
| Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 1,520,000 |
| Alan Friedman | Executive Vice
President,
Corporate
Development and | Aug. 31, 2009 | Aug. 20, 2014 | $0.25 | A | 396,000 |
| Aug. 31, 2009 | Aug. 20, 2014 | $0.25 | C | 250,000 |
| Jan. 28, 2010 | Jan. 27, 2015 | $0.60 | E | 250,000 |
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| Name | Position | Allotment
date | Expiration
date | Exercise
price (US
Dollar)(1) | Vesting
date(2) | Total |
| | Director | Jan. 11, 2011 | Jan. 10, 2017 | $0.80 | G | 150,000 |
| Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 1,060,000 |
| Colin Kinley | Director | Aug. 31, 2009 | Aug. 20, 2014 | $0.25 | B | 400,000 |
| Sep. 23, 2009 | Sep. 23, 2014 | $0.25 | D | 250,000 |
| Jan. 28, 2010 | Jan. 28, 2015 | $0.60 | E | 250,000 |
| Jan. 18, 2011 | Jan. 17, 2017 | $0.80 | I | 800,000 |
| Mar. 18, 2011 | Mar. 17, 2017 | $0.80 | J | 100,000 |
| Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 150,000 |
| Gadi Levin | Chief Financial Officer | Jul. 22, 2010 | Jul. 21, 2015 | $0.61 | H | 250,000 |
| May. 3, 2011 | May. 2, 2016 | $0.60 | L | 250,000 |
| Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 910,000 |
| Jeffrey Walter | Chief Executive Officer | Mar. 14, 2012 | Mar. 13, 2017 | $0.25 | Q | 2,000,000 |
| Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 760,000 |
| Richard Crist | Director | Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 600,000 |
| Amos Lasker | Co-Chairman | Aug. 22, 2012 | Aug. 21, 2017 | $0.20 | R | 1,000,000 |
| (1) | The exercise prices of employee stock options in 2010 were set in US Dollars and in 2011 in Canadian Dollars. The tables show all amounts in US Dollars. |
| (2) | The details of the vesting terms are as follows: |
| | | |
| (i) | Type A stock options vest over 2 years, with 12.5% vesting each quarter with the initial amount vesting on the date three months after the grant date. |
| | | |
| (ii) | Type B stock options vest 8.5% at the end of each quarter for the first two years and 8% at the end of each quarter thereafter. The initial amount will vest three months after the grant date. |
| | | |
| (iii) | Type C stock options vest over 4 years, with 6.25% vesting at the end of each quarter with the initial amount vesting on the date three months after the grant date. |
| | | |
| (iv) | Type D stock options vest at 12.5% each quarter and the initial amount vests on the business day immediately on which each of the optionees is elected or appointed as a director of the Company. In the event they are not elected as a director, all options granted expire immediately. |
| | | |
| (v) | Type E stock options vest over 2 years, with 12.5% vesting at the end of each quarter with the initial amount vesting on the date three months after the grant date. |
| | | |
| (vi) | Type H stock options vest 12.5% each quarter over two years with the initial amount vesting on the grant date. |
| | | |
| (vii) | Type I stock options vest 12.5% every six months over four years with the initial amount vesting on the date three months after the grant date; |
| | | |
| (viii) | Type J stock options vest 12.5% every six months over four years with the initial amount vested on September 18, 2011; |
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| | (ix) | Type L stock options vest 12.5% every six months over four years with the initial amount vested on September 3, 2011; |
| | | |
| | (x) | Type Q stock options vest 12.5% every six months over four years with the initial vesting on March 14, 2013; |
| | | |
| | (xi) | Type R stock options vest 33.33% every twelve months over two years with the initial vesting on August 22, 2012; and |
Each option may be exercised to purchase one of our common shares at the exercise price.
Warrants
The share purchase warrants held by our officers and directors are set forth below as of the date hereof.
| Name | Position | Allotment date | Expiration date | Exercise
price | Total |
| Dennis Bennie | Co-Chairman of the
Board | Dec. 3, 2010 | Dec. 3, 2013 | $0.55 | 157,000 |
| August 9, 2012 | August 9, 2015 | $0.20 | 7,142,860 |
| Alan Friedman | Executive Vice
President, Corporate
Development and
Director | Dec. 3, 2010 | Dec. 3, 2013 | $0.55 | 75,000 |
| August 9, 2012 | August 9, 2015 | $0.20 | 1,000,000 |
| Colin Kinley | Director | Dec. 3, 2010 | Dec. 3, 2013 | $0.55 | 25,000 |
| Jeffrey Walter | Director, Chief
Executive Officer | August 9, 2012 | August 9, 2015 | $0.20 | 173,946 |
Each warrant may be exercised to purchase one of our common shares at the exercise price.
Equity Compensation Plans
The following table summarizes our compensation plans under which equity securities are authorized for issuance as at December 31, 2012.
Plan Category |
Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights |
Weighted-average
exercise price of
outstanding options,
warrants and rights | Number of securities
remaining available for
future issuance under
equity compensation
plans(1)(excluding
securities reflected in
the second column) |
| Equity compensation plans approved by securityholders | 115,084,124 | 0.26 | 417,000 |
| Equity compensation plans not approved by securityholders | N/A | N/A | N/A |
| Total: | 115,084,124 | 0.26 | 417,000 |
| (1) | The number of securities remaining available for future issuance under our 10% rolling stock option plan as at the end of our most recently completed financial year is calculated on the basis of 10% of the Company’s issued and outstanding shares as at such date (being 10% of 180,781,093 - 17,661,109 = 417,000). |
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On August 31, 2009, our board of directors adopted a new 10% rolling stock option plan (the “New Stock Option Plan”) to replace the existing plan. The New Stock Option plan was ratified by the shareholders of the Company on December 17, 2009.
The purpose of the New Stock Option Plan continues to be to allow the Company to grant options to directors, officers, employees and consultants, as additional compensation, and as an opportunity to participate in the success of the Company. The granting of such options is intended to align the interests of such persons with that of the shareholders. Options will be exercisable over periods of up to ten years as determined by the Board and are required to have an exercise price no less than the fair market value of the Company’s common shares, as determined in accordance with the New Stock Option Plan. Pursuant to the New Stock Option Plan, the Board may from time to time authorize the issue of options to directors, officers, employees and consultants of the Company and its subsidiaries or employees of companies providing management or consulting services to the Company or its subsidiaries.
The maximum number of common shares which may be issued pursuant to options previously granted and those granted under the New Stock Option Plan will be a maximum of 10% of the issued and outstanding common shares at the time of the grant. In addition, the number of shares which may be reserved for issuance to any one individual may not exceed 5% of the issued shares on a yearly basis or 2% if the optionee is engaged in investor relations activities or is a consultant. The New Stock Option Plan contains no vesting requirements, but permits the Board to specify a vesting schedule in its discretion.
As of the date of this Form 20-F, 22,565,218 options had been granted under the New Stock Option Plan as follows (527,811 options have been exercised and 4,356,298 options have been cancelled):
| | 1. | On August 31, 2009, 3,334,000 options were granted to the former holders of Adira Energy stock options, in exchange for previously outstanding Adira Energy options. The exercise price per common share of these options is $0.25. These options will expire on August 19, 2014 and are subject to various vesting terms. |
| | | |
| | 2. | On September 23, 2009, 650,000 options were granted to certain directors and officers of the Company. The exercise price per common share of these options is $0.25. These options will expire on September 23, 2014 and are subject to various vesting terms. |
| | | |
| | 3. | On January 27, 2010, 1,820,000 options were granted to certain directors and officers of the Company. The exercise price per common share of these options is $0.60. These options will expire on January 26, 2015 and are subject to various vesting terms |
| | | |
| | 4. | In March 2010, 270,000 options with an exercise price of $0.25 were cancelled and in June 2010, 250,000 Options with an exercise price of $0.25 and 550,000 options with an exercise price of $0.60 were cancelled. |
| | | |
| | 5. | On July 22, 2010, 925,000 options were granted to certain directors and officers of the Company. The exercise price per common share of these options is $0.60. These options will expire on July 22, 2015 and are subject to various vesting terms. |
| | | |
| | 6. | On January 11, 2011, 1,650,000 options were granted to certain directors and officers of the Company. The exercise price per common share of these options is CDN$0.80. These options will expire on January 11, 2016 and are subject to various vesting terms. |
| | | |
| | 7. | On March 17, 2011, 300,000 options were granted to two officers of the Company. Terms of the options include an exercise price of CDN$0.72 per common share. 100,000 of the options vest as follows: 12.5% of the options granted every six months with the initial amount vested on September 17, 2011, resulting in the options being fully vested on September 17, 2015. These options expire on March 17, 2016. 200,000 of the options were fully vested on September 17, 2011 and expire on March 17, 2016. |
| | | |
| | 8. | On May 3, 2011, 505,000 options were granted to a certain officer and a number of employees of the Company. The exercise price per common share of these options is CDN$0.60. Terms of these options include an exercise price of CDN$0.60 per common share, a vesting schedule allowing for 12.5% of the options to vest by November 2, 2011with an additional 12.5% vesting each subsequent 6 month period until the options are fully vested on December 2, 2015. The options expire on May 2, 2016. |
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| | 9. | On June 1, 2011, 2,276,218 options were granted to Mr. Hezi Kugler concurrent with his appointment as Chief Executive Officer of the Company. Terms of these options include an exercise price of CDN$0.50 per common share, a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vested on December 1, 2011. Pursuant to the Kugler Consulting Agreement, all options other than the Committed Vested Options that were granted to Mr. Kugler (through the Kugler Service Company), being 1,422,636 options, were cancelled as of February 27, 2012. The Committed Vested Options, being 853,582 options, are beneficially held by Mr. Kugler (through the Kugler Service Company). In accordance with the terms and conditions of the Kugler Consulting Agreement, in the event of termination of the Kugler Consulting Agreement prior to November 30, 2012, the Kugler Service Company will be entitled to exercise the Committed Vested Options by December 30, 2012, unless the Kugler Consulting Agreement is terminated for cause (as defined in the Kugler Consulting Agreement), in which case the Committed Vested Options will be exercisable within 30 (thirty) days of the date of such termination. |
| | | |
| | 10. | On June 27, 2011, 100,000 options were granted to a certain director of the Company. Terms of these options include an exercise price of CDN$0.50 per common share, a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vested on December 24, 2011, resulting in the options being fully vested on December 24, 2015. The options expire on June 24, 2016. |
| | | |
| | 11. | On September 8, 2011, 250,000 options were granted to a certain employee of the Company. Terms of these options include an exercise price of CDN$0.49 per common share, and a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vesting on February 1, 2012, resulting in the options being fully vested on August 1, 2015. The options expire on August 31, 2016. |
| | | |
| | 12. | On December 1, 2011, 625,000 options were granted to certain employees of the Company. Terms of the options include an exercise price of CDN$0.50 per common share, a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vesting on June 1, 2012, resulting in the options being fully vested on December 1, 2015. The options expire on December 1, 2016. |
| | | |
| | 13. | On March 14, 2012, 2,000,000 options were granted to the Chief Executive Officer of the Company. Terms of the options include an exercise price of CDN$0.25 per common share, a vesting schedule allowing for the vesting of 12.5% of the options granted every six months with the initial amount vesting on September 14, 2012, resulting in the options being fully vested on March 14, 2016. The options expire on March 14, 2017. |
| | | |
| | 14. | On August 22, 2012, 8,130,000 options were granted to certain directors, officers and employees of the Company. Terms of the options include an exercise price of CDN$0.20 per common share, a vesting schedule allowing for the vesting of 33.33% of the options granted every year with the initial amount vesting on August 22, 2012, resulting in the options being fully vested on August 22, 2014. The options expire on August 22, 2017. |
On January 11, 2011, the Board of Directors adopted an annex to the New Stock Option Plan applicable to optionees who are residents of the State of Israel at the date of grant or those who are deemed to be residents of the state of Israel for the payment of tax at the date of grant. The provisions specified therein form an integral part of the New Stock Option Plan and is to be read as a continuation of the New Stock Option Plan and only modifies options granted to Israeli optionees so that they comply with the requirements set by the Israeli law in general, and in particular with the provisions of Section 102 of the Israeli Income Tax Ordinance, as may be amended or replaced from time to time. In connection with options granted to Israeli optionees under the New Stock Option Plan, the Board of Directors selected the capital gains tax track pursuant to the Israeli tax legislation which came into effect on January 1, 2003.
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ITEM 7 MAJOR SHAREHOLDER AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
Major Shareholders
We are a publicly-held corporation, with our shares held by residents of the United States, Canada and other countries. To the best of our knowledge, as at December 31, 2012, no person, corporation or other entity beneficially owns, directly or indirectly, or controls more than 5% of our common shares, except as follows:
Name
| Number of Common Shares
Owned(1) | Percentage(2)
|
| Dennis Bennie | 13,403,928(3) | 7.41% |
| Sheldon Inwantash | 14,242,290(4) | 7.88% |
| BRM Group Ltd.(5) | 10,000,000 | 5.53% |
| Goodman Investment Counsel Inc.(6) | 16,077,715 | 8.89% |
| (1) | Under Rule 13d–3, a beneficial owner of a security includes any person who, directly or indirectly, through any contract, arrangement, understanding, relationship, or otherwise has or shares: (i) voting power, which includes the power to vote, or to direct the voting of shares; and (ii) investment power, which includes the power to dispose or direct the disposition of shares. Certain shares may be deemed to be beneficially owned by more than one person (if, for example, persons share the power to vote or the power to dispose of the shares). In addition, shares are deemed to be beneficially owned by a person if the person has the right to acquire the shares (for example, upon exercise of an option) within 60 days of the date as of which the information is provided. In computing the percentage ownership of any person, the amount of shares outstanding is deemed to include the amount of shares beneficially owned by such person (and only such person) by reason of these acquisition rights. As a result, the percentage of outstanding shares of any person as shown in this table does not necessarily reflect the person’s actual ownership or voting power with respect to the number of common shares actually outstanding on the date hereof. |
| (2) | Based on 101,768,453 of our common shares issued and outstanding as of the date of this filing. |
| (3) | Includes 100,000 shares held by spouse. (4) Includes 884,667 held by spouse. |
| (5) | BRM is a private investment company beneficially owned by Mr. Eli Barkat, Mr. Nir Barkat and Mr. Yuval Rakav. |
| (6) | Includes shares held by Goodman Investment Counsel Inc. and associated companies that are controlled by Mr. Nathan Goodman. |
Each of our common shares entitles the holder thereof to one vote.
Geographic Breakdown of Shareholders
As of December 31, 2012, our shareholder register indicates that our common shares are held as follows:
Location
| Number of Shares
| Percentage of Total
Shares | Number of Registered
Shareholders of Record |
| United States | 2,374,043 | 1.31 | 57 |
| Canada | 160,895,273 | 89 | 44 |
| Other | 17,511,777 | 9.69 | 21 |
| Total | 180,781,093 | 100 | 122 |
Shares registered in intermediaries were assumed to be held by residents of the same country in which the clearing house was located.
Transfer Agent
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Our securities are recorded in registered form on the books of our transfer agent, Computershare Trust Company of Canada, located at 3rd Floor, 510 Burrard Street, Vancouver, BC V6C 3B9. However, the majority of such shares are registered in the name of intermediaries such as brokerage houses and clearing houses (on behalf of their respective brokerage clients). We do not have knowledge or access to the identities of the beneficial owners of such shares registered through intermediaries.
Control
To the best of our knowledge, we are not directly or indirectly owned or controlled by any other corporation, by any foreign government or by any other natural or legal person, severally or jointly.
Insider Reports under the British Columbia Securities Act
Under the Canadian Securities laws, “insiders” (generally officers, directors and holders of 10% or more of our shares) are required to file insider reports of changes in their ownership in the first 5 days following a trade in our securities. Copies of such reports are available publically at www.sedi.ca.
B. Related Party Transactions
No director or senior officer of the Company, and no associate or affiliate of the foregoing persons, and no insider has or has had any material interest, direct or indirect, in any transactions, or in any proposed transaction, which in either such case has materially affected or will materially affect us or our predecessors during the years ended December 31, 2012 except as follows:
| | (a) | During the year ended December 31, 2012, the Company incurred $357,000 in consulting fees and operating expenses to private companies which are controlled by directors or officers of the Company (year ended December 31, 2011 - $906,000). |
| | | |
| | | These transactions are in the normal course of operations and are measured at the exchange amount, which is the amount of consideration established and agreed to by the related parties. |
| | | |
| | (b) | Compensation of key management personnel: |
| | | |
| | | For the purpose of related party disclosure in accordance with IASB 24, directors, the CEO, CFO, COO and executive vice president are considered key management personnel. |
| | | | | | | Year ended | | | | |
| | | | | | | December 31, | | | | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Short-term employee benefits | $ | 1,071 | | $ | 911 | | $ | 481 | |
| | Share based compensation | | 613 | | | 850 | | | 595 | |
| | | | | | | | | | | |
| | | $ | 1,684 | | $ | 1,761 | | $ | 1,076 | |
Benefits in respect of key management persons (including directors) who are not employed by the Company:
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| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Share based compensation | $ | 298 | | $ | 206 | | $ | 243 | |
C. Interests of Experts and Counsel
Not applicable.
ITEM 8 FINANCIAL INFORMATION
A. Consolidated Statements and Other Financial Information
Financial Statements
The financial statements required as part of this Annual Report on Form 20-F are filed under Item 18 of this Annual Report.
Legal Proceedings
We are not a party to any legal or arbitration proceedings nor, to our knowledge, are any such proceedings contemplated.
Dividends
We have not paid any dividends on our common shares since incorporation. Our management anticipates that we will retain all future earnings and other cash resources for the future operation and development of our business. We do not intend to declare or pay any cash dividends in the foreseeable future. Payment of any future dividends will be at our board of directors’ discretion, subject to applicable law, after taking into account many factors including our operating results, financial condition and current and anticipated cash needs.
B. Significant Changes
We have not experienced any significant changes since the date of the financial statements included with this Form 20-F except as disclosed in this Form 20-F.
ITEM 9 THE OFFER AND LISTING
Common Shares
Our authorized capital consists of an unlimited number of common shares without par value, of which 101,768,453 common shares are issued and outstanding as of December 31, 2011 and 90,140,001 as of December 31, 2010. All shares are initially issued in registered form. Except for the escrowed shares (see below) there are no restrictions on the transferability of our common shares imposed by our constituting documents.
The common shares entitle their holders to: (i) vote at all meetings of our shareholders except meetings at which only holders of specified classes of shares are entitled to vote, having one vote per common share, (ii) receive dividends at the discretion of our board of directors; and (iii) receive our remaining property on liquidation, dissolution or winding up.
A. Offer and Listing Details – Price History
Trading Markets
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The Company’s current trading symbol on the TSXV is “ADL”. The Company also trades on the OTCBB with the trading symbol “ADENF” and on the Frankfurt Stock Exchange with the trading symbol “AORLB8”.
The following table shows the progression in the high and low closing trading prices of our common shares on the OCTBB for the periods listed.
| | High ($) | Low ($) |
| Annual (fiscal year) | | |
| 2012 | 0.34 | 0.09 |
| 2011 | 0.90 | 0.21 |
| 2010 | 0.90 | 0.25 |
| 2009 | 0.54 | 0.05 |
| 2008 | 0.50 | 0.03 |
| | | |
| Quarterly | | |
| Fiscal 2012 | | |
| Fourth Quarter | 0.15 | 0.09 |
| Third Quarter | 0.16 | 0.11 |
| Second Quarter | 0.31 | 0.17 |
| First Quarter | 0.34 | 0.15 |
| | | |
| | | |
| Fiscal 2011 | | |
| Fourth Quarter | 0.46 | 0.21 |
| Third Quarter | 0.62 | 0.29 |
| Second Quarter | 0.79 | 0.46 |
| First Quarter | 0.90 | 0.55 |
| | | |
| | | |
| Monthly | | |
| April 1, 2013 to April 29, 2013 | 0.03 | 0.02 |
| March 2013 | 0.03 | 0.01 |
| February 2013 | 0.08 | 0.02 |
| January 2013 | 0.12 | 0.08 |
| December 2012 | 0.12 | 0.09 |
| November 2012 | 0.13 | 0.10 |
The following table shows the progression in the high and low closing trading prices of our common shares on the TSXV for the periods listed.
| | High ($) | Low ($) |
| Annual (fiscal year) | | |
| 2012 | 0.34 | 0.09 |
| 2011 | 0.90 | 0.20 |
| 2010(1) | 0.90 | 0.55 |
| 2009(1) | N/A | N/A |
| 2008(1) | N/A | N/A |
Notes:
(1) We commenced trading on the TSXV on December 2, 2010. Therefore, information may not be available for all periods listed.
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| | High ($) | Low ($) |
| Quarterly | | |
| Fiscal 2012 | | |
| Fourth Quarter | 0.14 | 0.09 |
| Third Quarter | 0.18 | 0.11 |
| Second Quarter | 0.30 | 0.18 |
| First Quarter | 0.34 | 0.16 |
| | | |
| | | |
| Fiscal 2011 | | |
| Fourth Quarter | 0.435 | 0.20 |
| Third Quarter | 0.58 | 0.30 |
| Second Quarter | 0.71 | 0.43 |
| First Quarter | 0.90 | 0.60 |
| | | |
| | | |
| Monthly | | |
| April 1, 2013 to April 29, 2013 | 0.03 | 0.02 |
| March 2013 | 0.03 | 0.02 |
| February 2013 | 0.08 | 0.02 |
| January 2013 | 0.12 | 0.08 |
| December 2012 | 0.11 | 0.09 |
| November 2012 | 0.12 | 0.10 |
Escrowed Securities
As of December 31, 2012, the following securities were subject to escrow:
Designation of Class | Number of Securities held in
escrow or that are subject to a
contractual restriction on
transfer |
% of Class(1) |
| Common Shares | 13,300,773 | 7.36% |
| Options | 1,013,100 | 5.73% |
| Warrants | 0 | 0.0% |
(1) Based on 180,791,093 Common Shares, 17,681,109 Options and 97,423,015 Warrants issued and outstanding as at December 31, 2012.
B. Plan of Distribution
Not applicable.
C. Markets
Our common shares are traded on the TSXV under the symbol “ADL”, in the United States on the OTC Bulletin Board under the symbol “ADENF” and on the Frankfurt Stock Exchange under the symbol “AORLB8”.
D. Selling Shareholders
Not applicable.
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E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10 ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles of Incorporation
We were incorporated on February 20, 1997 as “Trans New Zealand Oil Company” under the laws of the State of Nevada, U.S.A. We changed our name to “AMG Oil Ltd.” on July 27, 1998.
On November 27, 2008, we changed our jurisdiction of incorporation from Nevada to the Canadian federal jurisdiction under theCanada Business Corporation Act (the “CBCA”) through a process known as a conversion under Nevada corporate law, and known as a continuation under Canadian corporate law. A continuance or continuation is a process by which a corporation which is not incorporated under the laws of Canada may change its jurisdiction of incorporation to Canada. Under the CBCA, if the laws of its home jurisdiction allow for it, a company may be “continued” as a Canadian corporation by filing Articles of Continuance with the Director under the CBCA. In order to give effect to the continuation, our board of directors adopted a plan of conversion under Chapter 92A of the Nevada Revised Statutes which was subsequently approved and adopted by our shareholders. After the completion of the continuation, we became a Canadian corporation governed by the CBCA.
With effect from our continuation under the CBCA, our corporate constituting documents are comprised of our Articles of Continuance (“Articles”) and our By-Laws (“By-Laws”). Information regarding our Articles and By-Laws is incorporated by reference from Amendment No. 3 to our registration statement on Form S-4, which was filed with the SEC on October 10, 2010. The forms of our Articles and By-Laws were included as Appendices C and D, respectively, to the proxy statement/prospectus included in the registration statement, and the proxy statement/prospectus contained a summary, under the heading “Comparative Rights of Stockholders,” of the more significant differences between the Nevada Revised Statutes and the CBCA which resulted in various changes in the rights of our shareholders as a result of our continuance.
We changed our name to “Adira Energy Ltd.” pursuant to Articles of Amendment dated December 17, 2009, and filed with the Director under the CBCA. Such amendment to our Articles was certified by a Certificate of Amendment dated December 17, 2009. The Certificate and Articles of Amendment were filed as Exhibit 1.4 to our annual report on Form 20-F for the year ended September 30, 2009, filed with the SEC on January 1, 2010.
C. Material Contracts
The Company is party to certain joint operating agreements and farmout agreements with respect to the Offshore Licenses, which have been granted and are held either directly or indirectly by the Company, and are disclosed under Item 4.B. – “Business Overview”. The Company is of the view that the Offshore Licenses, joint operating agreements and farmout agreements have been obtained or entered into in the ordinary course of its business.
The Company is party to executive employment agreements with certain of its officers, which are disclosed under Item 6.B – “Directors, Senior Management and Employees- Compensation”.
D. Exchange Controls
There is no limitation imposed by Canadian law or by the charter or other constituent documents of the Company on the right of a non-resident to hold or vote common shares of the Company. However, the Investment Canada Act (Canada) (the “Investment Act”) has rules regarding certain acquisitions of shares by non-residents, along with other requirements under that legislation.
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The following discussion summarizes the principal features of the Investment Act for a non-resident who proposes to acquire common shares of the Company. The discussion is general only; it is not a substitute for independent legal advice from an investor’s own advisor; and it does not anticipate statutory or regulatory amendments.
The Investment Act is a federal statute of broad application regulating the establishment and acquisition of Canadian businesses by non-Canadians, including individuals, governments or agencies thereof, corporations, partnerships, trusts or joint ventures (each an “entity”). Investments by non-Canadians to acquire control over existing Canadian businesses or to establish new ones are either reviewable or notifiable under the Investment Act. If an investment by a non-Canadian to acquire control over an existing Canadian business is reviewable under the Investment Act, the Investment Act generally prohibits implementation of the investment unless, after review, the Minister of Industry, is satisfied that the investment is likely to be of net benefit to Canada.
A non-Canadian would acquire control of the Company for the purposes of the Investment Act through the acquisition of common shares if the non-Canadian acquired a majority of the common shares of the Company.
Further, the acquisition of less than a majority but one-third or more of the common shares of the Company would be presumed to be an acquisition of control of the Company unless it could be established that, on the acquisition, the Company was not controlled in fact by the acquirer through the ownership of common shares.
For a direct acquisition that would result in an acquisition of control of the Company, subject to the exception for “WTO-investors” that are controlled by persons who are resident in World Trade Organization (“WTO”) member nations , a proposed investment would be reviewable where the value of the acquired assets is CAD $5 million or more, or if an order for review was made by the federal cabinet on the grounds that the investment related to Canada’s cultural heritage or national identity, where the value of the acquired assets is less than CAD $5 million.
For a proposed indirect acquisition that is not a so-called WTO transaction and that would result in an acquisition of control of the Company through the acquisition of a non-Canadian parent entity, the investment would be reviewable where (a) the value of the Canadian assets acquired in the transaction is CAD $50 million or more, or (b) the value of the Canadian assets is greater than 50% of the value of all of the assets acquired in the transaction and the value of the Canadian assets is CAD $5 million or more.
In the case of a direct acquisition by or from a “WTO investor”, the threshold is significantly higher, and is adjusted for inflation each year. The 2013 threshold is CAD$444 million. Other than the exception noted below, an indirect acquisition involving a WTO investor is not reviewable under the Investment Act.
The higher WTO threshold for direct investments and the exemption for indirect investments do not apply where the relevant Canadian business is carrying on a “cultural business”. The acquisition of a Canadian business that is a “cultural business” is subject to lower review thresholds under the Investment Act because of the perceived sensitivity of the cultural sector.
In 2009, amendments were enacted to the Investment Act concerning investments that may be considered injurious to national security. If the Industry Minister has reasonable grounds to believe that an investment by a non-Canadian “could be injurious to national security,” the Industry Minister may send the non-Canadian a notice indicating that an order for review of the investment may be made. The review of an investment on the grounds of national security may occur whether or not an investment is otherwise subject to review on the basis of net benefit to Canada or otherwise subject to notification under the Investment Canada Act. To date, there is neither legislation nor guidelines published, or anticipated to be published, on the meaning of “injurious to national security.” Discussions with government officials suggest that very few investment proposals will cause a review under these new sections.
Certain transactions, except those to which the national security provisions of the Investment Act may apply, relating to common shares of the Company are exempt from the Investment Act, including
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| | (a) | acquisition of common shares of the Company by a person in the ordinary course of that person’s business as a trader or dealer in securities, |
| | | |
| | (b) | acquisition of control of the Company in connection with the realization of security granted for a loan or other financial assistance and not for a purpose related to the provisions on the Investment Act, and |
| | | |
| | (c) | acquisition of control of the Company by reason of an amalgamation, merger, consolidation or corporate reorganization following which the ultimate direct or indirect control in fact of the Company, through the ownership of common shares, remained unchanged. |
E. Taxation
Material Canadian Federal Income Tax Consequences for United States Residents
The following summarizes the material Canadian federal income tax consequences generally applicable to the holding and disposition of our shares by a holder (in this summary, a “U.S. Holder”) who, (a) for the purposes of theIncome Tax Act(Canada) (the “Tax Act”) and at all relevant times, is not resident in Canada, deals at arm’s length with us, holds our shares as capital property and does not use or hold our shares in the course of carrying on, or otherwise in connection with, a business in Canada, and (b) for the purposes of the Canada-United States Income Tax Convention, 1980 (the “Treaty”) and at all relevant times, is a resident solely of the United States, has never been a resident of Canada, is a “qualifying person” and has not held or used (and does not hold or use) our shares in connection with a permanent establishment or fixed base in Canada. This summary does not apply to traders or dealers in securities, limited liability companies, tax-exempt entities, insurers, financial institutions (including those to which the mark-to-market provisions of the Tax Act apply), or any other holder in special circumstances.
This summary is based on the current provisions of the Tax Act, all regulations thereunder, the Treaty, all proposed amendments to the Tax Act, the regulations and the Treaty publicly announced by the Government of Canada prior to the date hereof, and our understanding of the current administrative practices of the Canada Revenue Agency. It has been assumed that all currently proposed amendments will be enacted as proposed and that there will be no other relevant change in any governing law or administrative practice, although no assurances can be given in this respect.
The summary does not take into account Canadian provincial, U.S. federal (which follows further below), state or other foreign income tax law or practice.The tax consequences to any particular U.S. Holder will vary according to the status of that holder as an individual, trust, corporation, partnership or other entity, the jurisdictions in which that holder is subject to taxation, and generally according to that holder’s particular circumstances. Accordingly, this summary is not, and is not to be construed as, Canadian tax advice to any particular U.S. Holder. All U.S. Holders are advised to consult with their own tax advisors regarding their particular circumstances. The discussion below is qualified accordingly.
Dividends
Dividends paid or credited or deemed to be paid or credited to a U.S. Holder by us will be subject to Canadian withholding tax. The Tax Act requires a 25% withholding unless reduced under a tax treaty. Under the Treaty, provided that a holder can demonstrate that it is a qualifying U.S. Holder, the rate of withholding tax on dividends paid to a U.S. Holder is generally limited to 15% of the gross amount of the dividend (or 5% if the U.S. Holder is a corporation and beneficially owns at least 10% of our voting shares). We will be required to withhold the applicable withholding tax from any dividend and remit it to the Canadian government for the U.S. Holder’s account.
Disposition
For purposes of the following discussion, we have assumed that our shares will remain listed on the TSXV. A U.S. Holder is not subject to tax under the Tax Act in respect of a capital gain realized on the disposition of our shares in the open market unless the shares are “taxable Canadian property” to the holder thereof and the U.S. Holder is not entitled to relief under the Treaty. Our shares will be taxable Canadian property to a U.S. Holder (a) if, at any time during the 60-month period preceding the disposition: (i) the U.S. Holder, alone or together with persons with whom the U.S. Holder did not deal at arm’s length, owned 25% or more of our issued shares of any class or series, and (ii) more than 50% of the fair market value of the shares was derived, directly or indirectly, from one or any combination of real property situated in Canada, timber resource properties, Canadian resource properties, or an option in respect of, or an interest in, or for civil law a right in, any of the foregoing, or (b) in other specific circumstances, including where shares were acquired for other securities in a tax-deferred transaction for Canadian tax purposes. If our shares constitute taxable Canadian property to the holder, the holder will (unless relieved under the Treaty) be subject to Canadian income tax on any gain. The taxpayer’s capital gain or loss from a disposition of the share is the amount, if any, by which the proceeds of disposition exceed (or are exceeded by) the aggregate of the adjusted cost base of the share and reasonable expenses of disposition. One-half of a capital gain (“taxable capital gain”) from the disposition of taxable Canadian property (other than treaty protected properties) is included in computing the income of a U.S. Holder and one-half of a capital loss (“allowable capital loss”) is deductible from taxable capital gains from dispositions of taxable Canadian property realized in the same year. Unused allowable capital losses from previous taxation years generally may be carried back three taxation years or forward indefinitely and applied to reduce net taxable capital gains realized in those years by a U.S. Holder from the disposition of a taxable Canadian property.
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A U.S. Holder whose shares constitute taxable Canadian property should consult with the holder’s own tax advisors regarding any possible relief (if any) from Canadian tax under the Treaty based on applicable circumstances at the relevant time.
Israeli Tax Consequences
The following is a summary of the material provisions of the current tax law applicable to companies in Israel and does not discuss all the aspects of Israeli tax law. To the extent that the discussion is based on tax legislation that has not been subject to judicial or administrative interpretation, we cannot assure you that the views expressed in the discussion will be accepted by the tax authorities in question. The discussion is not intended, and should not be construed, as legal or professional tax advice and is not exhaustive of all possible tax considerations.
General Corporate Tax Structure
In December 2011, the Knesset passed the Law for Adjustment of the Tax Burden (Amended Legislation) – 2011, which amends the Law for Economic Efficiency (Amended Legislation for Implementing the Economic Plan for 2009 and 2010) – 2009 which prescribed, among other provisions, a gradual reduction in the rates of the Israeli corporate tax and real capital gains tax starting in 2011. Following the amendment, corporate tax rates and capital gains rates are: 2011 – 24%, 2012 – and thereafter – 25%. The cancellation of the gradual reduction in the corporate tax rate, will decrease the Levy per the Petroleum Taxation Law from 2016 and thereafter to a maximum rate of 45.52% from the Company's oil and gas revenues.
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Israeli Transfer Pricing Regulations
On November 29, 2006, Income Tax Regulations (Determination of Market Terms), 2006, promulgated under Section 85A of the Tax Ordinance, came into force (the “TP Regs”). Section 85A of the Tax Ordinance and the TP Regs generally require that all cross-border transactions carried out between related parties will be conducted on an arm’s length principle basis and will be reported and taxed accordingly.
United States Tax Consequences
United States Federal Income Tax Consequences
The following is a general summary of certain material U.S. federal income tax considerations applicable to a U.S. Holder (as defined below) arising from and relating to the acquisition, ownership, and disposition of our common shares.
This summary is for general information purposes only and does not purport to be a complete analysis or listing of all potential U.S. federal income tax considerations that may apply to a U.S. Holder arising from and relating to the acquisition, ownership, and disposition of our common shares. In addition, this summary does not take into account the individual facts and circumstances of any particular U.S. Holder that may affect the U.S. federal income tax consequences to such U.S. Holder, including without limitation specific tax consequences to a U.S. Holder under an applicable tax treaty. Accordingly, this summary is not intended to be, and should not be construed as, legal or U.S. federal income tax advice with respect to any U.S. Holder. This summary does not address the U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences to U.S. Holders of the acquisition, ownership, and disposition of our common shares. Except as specifically set forth below, this summary does not discuss applicable tax reporting requirements. Each U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership, and disposition of our common shares.
No legal opinion from U.S. legal counsel or ruling from the Internal Revenue Service (the “IRS”) has been requested, or will be obtained, regarding the U.S. federal income tax consequences of the acquisition, ownership, and disposition of our common shares. This summary is not binding on the IRS, and the IRS is not precluded from taking a position that is different from, and contrary to, the positions taken in this summary. In addition, because the authorities on which this summary is based are subject to various interpretations, the IRS and the U.S. courts could disagree with one or more of the conclusions described in this summary.
Scope of this Summary
Authorities
This summary is based on the Internal Revenue Code of 1986, as amended (the “Code”), Treasury Regulations (whether final, temporary, or proposed), published rulings of the IRS, published administrative positions of the IRS, the Convention Between Canada and the United States of America with Respect to Taxes on Income and on Capital, signed September 26, 1980, as amended (the “Canada-U.S. Tax Convention”), and U.S. court decisions that are applicable and, in each case, as in effect and available, as of the date of this document. Any of the authorities on which this summary is based could be changed in a material and adverse manner at any time, and any such change could be applied on a retroactive or prospective basis which could affect the U.S. federal income tax considerations described in this summary. This summary does not discuss the potential effects, whether adverse or beneficial, of any proposed legislation that, if enacted, could be applied on a retroactive or prospective basis.
U.S. Holders
For purposes of this summary, the term "U.S. Holder" means a beneficial owner of our common shares that is for U.S. federal income tax purposes:
- an individual who is a citizen or resident of the U.S.;
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a corporation (or other entity taxable as a corporation for U.S. federal income tax purposes) organized under the laws of the U.S., any state thereof or the District of Columbia;
an estate whose income is subject to U.S. federal income taxation regardless of its source; or
a trust that (1) is subject to the primary supervision of a court within the U.S. and the control of one or more U.S. persons for all substantial decisions or (2) has a valid election in effect under applicable Treasury Regulations to be treated as a U.S. person.
Non-U.S. Holders
For purposes of this summary, a “non-U.S. Holder” is a beneficial owner of our common shares that is not a U.S. Holder. This summary does not address the U.S. federal income tax consequences to non-U.S. Holders arising from and relating to the acquisition, ownership, and disposition of our common shares. Accordingly, a non-U.S. Holder should consult its own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences (including the potential application of and operation of any income tax treaties) relating to the acquisition, ownership, and disposition of our common shares.
U.S. Holders Subject to Special U.S. Federal Income Tax Rules Not Addressed
This summary does not address the U.S. federal income tax considerations applicable to U.S. Holders that are subject to special provisions under the Code, including, but not limited to, the following: (a) U.S. Holders that are tax-exempt organizations, qualified retirement plans, individual retirement accounts, or other tax-deferred accounts; (b) U.S. Holders that are financial institutions, underwriters, insurance companies, real estate investment trusts, or regulated investment companies; (c) U.S. Holders that are broker-dealers, dealers, or traders in securities or currencies that elect to apply a mark-to-market accounting method; (d) U.S. Holders that have a “functional currency” other than the U.S. dollar; (e) U.S. Holders that own our common shares as part of a straddle, hedging transaction, conversion transaction, constructive sale, or other arrangement involving more than one position; (f) U.S. Holders that acquired our common shares in connection with the exercise of employee stock options or otherwise as compensation for services; (g) U.S. Holders that hold our common shares other than as a capital asset within the meaning of Section 1221 of the Code (generally, property held for investment purposes); or (h) U.S. Holders that own or have owned (directly, indirectly, or by attribution) 10% or more of the total combined voting power of the outstanding shares of we. This summary also does not address the U.S. federal income tax considerations applicable to U.S. Holders who are: (a) U.S. expatriates or former long-term residents of the U.S.; (b) persons that have been, are, or will be a resident or deemed to be a resident in Canada for purposes of the Tax Act; (c) persons that use or hold, will use or hold, or that are or will be deemed to use or hold our common shares in connection with carrying on a business in Canada; (d) persons whose our common shares constitute “taxable Canadian property” under the Tax Act; or (e) persons that have a permanent establishment in Canada for the purposes of the Canada-U.S. Tax Convention. U.S. Holders that are subject to special provisions under the Code, including, but not limited to, U.S. Holders described immediately above, should consult their own tax advisor regarding the U.S. federal, U.S. federal alternative minimum, U.S. federal estate and gift, U.S. state and local, and foreign tax consequences relating to the acquisition, ownership and disposition of our common shares.
If an entity or arrangement that is classified as a partnership (or other “pass-through” entity) for U.S. federal income tax purposes holds our common shares, the U.S. federal income tax consequences to such entity and the partners (or other owners) of such entity generally will depend on the activities of the entity and the status of such partners (or owners). This summary does not address the tax consequences to any such owner. Partners (or other owners) of entities or arrangements that are classified as partnerships or as “pass-through” entities for U.S. federal income tax purposes should consult their own tax advisors regarding the U.S. federal income tax consequences arising from and relating to the acquisition, ownership, and disposition of our common shares.
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Ownership and Disposition of our common shares
The following discussion is subject to the rules described below under the heading “Passive Foreign Investment Company Rules.”
Taxation of Distributions
A U.S. Holder that receives a distribution, including a constructive distribution, with respect to our common share will be required to include the amount of such distribution in gross income as a dividend (without reduction for any foreign income tax withheld from such distribution) to the extent of the current or accumulated “earnings and profits” of we, as computed for U.S. federal income tax purposes. To the extent that a distribution exceeds the current and accumulated “earnings and profits” of we, such distribution will be treated first as a tax-free return of capital to the extent of a U.S. Holder's tax basis in the our common shares and thereafter as gain from the sale or exchange of such our common shares (see “Sale or Other Taxable Disposition of Common Shares” below). However, we may not maintain the calculations of earnings and profits in accordance with U.S. federal income tax principles, and each U.S. Holder should therefore assume that any distribution by us with respect to the our common shares will constitute ordinary dividend income. Dividends received on our common shares generally will not constitute qualified dividend income eligible for the “dividends received deduction”. Subject to applicable limitations and provided that we are eligible for the benefits of the Canada-U.S. Tax Convention, dividends paid by us to non-corporate U.S. Holders, including individuals, generally will be eligible for the preferential tax rates applicable to long-term capital gains for dividends, provided certain holding period and other conditions are satisfied, including that we are not classified as a PFIC (as defined below) in the tax year of distribution or in the preceding tax year. The dividend rules are complex, and each U.S. Holder should consult its own tax advisor regarding the application of such rules.
Sale or Other Taxable Disposition of Common Shares
A U.S. Holder will recognize gain or loss on the sale or other taxable disposition of our common shares in an amount equal to the difference, if any, between (a) the amount of cash plus the fair market value of any property received and (b) such U.S. Holder’s tax basis in such our common shares sold or otherwise disposed of. Any such gain or loss generally will be capital gain or loss, which will be long-term capital gain or loss if, at the time of the sale or other disposition, such our common shares are held for more than one year.
Preferential tax rates apply to long-term capital gains of a U.S. Holder that is an individual, estate, or trust. There are currently no preferential tax rates for long-term capital gains of a U.S. Holder that is a corporation. Deductions for capital losses are subject to significant limitations under the Code.
Passive Foreign Investment Company Rules
If we were to constitute a PFIC for any year during a U.S. Holder’s holding period, then certain potentially adverse rules would affect the U.S. federal income tax consequences to a U.S. Holder resulting from the acquisition, ownership and disposition of our common shares. We do not believe that we were a PFIC during our tax years ended September 30, 2010 and December 31, 2010, 2011 and 2012. However, we believe we were a PFIC in prior tax years. PFIC classification is fundamentally factual in nature, generally cannot be determined until the close of the tax year in question, and is determined annually. Additionally, the analysis depends, in part, on the application of complex U.S. federal income tax rules, which are subject to differing interpretations. Consequently, there can be no assurances regarding our PFIC status for any tax year during which U.S. Holders hold our common shares.
In addition, in any year in which we are classified as a PFIC, such holder may be required to file an annual report with the IRS containing such information as Treasury Regulations and/or other IRS guidance may require. U.S. Holders should consult their own tax advisors regarding the requirements of filing such information returns under these rules, including the requirement to file a revised IRS Form 8621.
We generally will be a PFIC under Section 1297 of the Code if, for a tax year, (a) 75% or more of our gross income for such tax year is passive income (the “income test”) or (b) 50% or more of the value of our assets either produce passive income or are held for the production of passive income (the “asset test”), based on the quarterly average of the fair market value of such assets. “Gross income” generally includes all sales revenues less the cost of goods sold, plus income from investments and from incidental or outside operations or sources, and “passive income” generally includes, for example, dividends, interest, certain rents and royalties, certain gains from the sale of stock and securities, and certain gains from commodities transactions. Active business gains arising from the sale of commodities generally are excluded from passive income if substantially all (85% or more) of a foreign corporation’s commodities are stock in trade or inventory, depreciable property used in a trade or business or supplies regularly used or consumed in a trade or business and certain other requirements are satisfied.
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In addition, for purposes of the PFIC income test and asset test described above, if we own, directly or indirectly, 25% or more of the total value of the outstanding shares of another corporation, we will be treated as if we (a) held a proportionate share of the assets of such other corporation and (b) received directly a proportionate share of the income of such other corporation. In addition, for purposes of the PFIC income test and asset test described above, “passive income” does not include any interest, dividends, rents, or royalties that are received or accrued by us from a “related person” (as defined in Section 954(d)(3) of the Code), to the extent such items are properly allocable to the income of such related person that is not passive income.
Under certain attribution rules, if we are a PFIC, U.S. Holders will be deemed to own their proportionate share of any subsidiary of ours which is also a PFIC (a ‘‘Subsidiary PFIC’’), and will be subject to U.S. federal income tax on (i) a distribution on the shares of a Subsidiary PFIC or (ii) a disposition of shares of a Subsidiary PFIC, both as if the holder directly held the shares of such Subsidiary PFIC.
If we are a PFIC in any tax year in which a U.S. Holder held our common shares, such holder generally would be subject to special rules with respect to “excess distributions” made by us on the our common shares and with respect to gain from the disposition of our common shares. An “excess distribution” generally is defined as the excess of distributions with respect to the our common shares received by a U.S Holder in any tax year over 125% of the average annual distributions such U.S. Holder has received from us during the shorter of the three preceding tax years, or such U.S. Holder’s holding period for the our common shares. Generally, a U.S. Holder would be required to allocate any excess distribution or gain from the disposition of our common shares ratably over its holding period for the our common shares. Such amounts allocated to the year of the disposition or excess distribution would be taxed as ordinary income, and amounts allocated to prior tax years would be taxed as ordinary income at the highest tax rate in effect for each such year and an interest charge at a rate applicable to underpayments of tax would apply.
While there are U.S. federal income tax elections that sometimes can be made to mitigate these adverse tax consequences (including, without limitation, the “QEF Election” under Section 1295 of the Code and the “Mark-to-Market Election” under Section 1296 of the Code), such elections are available in limited circumstances and must be made in a timely manner.
U.S. Holders should be aware that, for each tax year, if any, that we are a PFIC, we can provide no assurances that we will satisfy the record keeping requirements of a PFIC, or that we will make available to U.S. Holders the information such U.S. Holders require to make a QEF Election with respect to us or any Subsidiary PFIC. U.S. Holders are urged to consult their own tax advisors regarding the potential application of the PFIC rules to the ownership and disposition of our common shares, and the availability of certain U.S. tax elections under the PFIC rules.
Additional Considerations
Additional Tax on Passive Income
Individuals, estates and certain trusts whose income exceeds certain thresholds will be required to pay a 3.8% Medicare surtax on “net investment income” including, among other things, dividends and net gain from disposition of property (other than property held in a trade or business). U.S. Holders should consult with their own tax advisors regarding the effect, if any, of this tax on their ownership and disposition of our common shares.
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Receipt of Foreign Currency
The amount of any distribution paid to a U.S. Holder in foreign currency, or on the sale, exchange or other taxable disposition of our common shares, generally will be equal to the U.S. dollar value of such foreign currency based on the exchange rate applicable on the date of receipt (regardless of whether such foreign currency is converted into U.S. dollars at that time). A U.S. Holder will have a basis in the foreign currency equal to its U.S. dollar value on the date of receipt. Any U.S. Holder who converts or otherwise disposes of the foreign currency after the date of receipt may have a foreign currency exchange gain or loss that would be treated as ordinary income or loss, and generally will be U.S. source income or loss for foreign tax credit purposes. Each U.S. Holder should consult its own U.S. tax advisor regarding the U.S. federal income tax consequences of receiving, owning, and disposing of foreign currency.
Foreign Tax Credit
Subject to the PFIC rules discussed above, a U.S. Holder that pays (whether directly or through withholding) Canadian income tax with respect to dividends paid on our common shares generally will be entitled, at the election of such U.S. Holder, to receive either a deduction or a credit for such Canadian income tax. Generally, a credit will reduce a U.S. Holder’s U.S. federal income tax liability on a dollar-for-dollar basis, whereas a deduction will reduce a U.S. Holder’s income subject to U.S. federal income tax. This election is made on a year-by-year basis and applies to all foreign taxes paid (whether directly or through withholding) by a U.S. Holder during a year.
Complex limitations apply to the foreign tax credit, including the general limitation that the credit cannot exceed the proportionate share of a U.S. Holder’s U.S. federal income tax liability that such U.S. Holder’s “foreign source” taxable income bears to such U.S. Holder’s worldwide taxable income. In applying this limitation, a U.S. Holder’s various items of income and deduction must be classified, under complex rules, as either “foreign source” or “U.S. source.” Generally, dividends paid by a foreign corporation should be treated as foreign source for this purpose, and gains recognized on the sale of stock of a foreign corporation by a U.S. Holder should be treated as U.S. source for this purpose, except as otherwise provided in an applicable income tax treaty, and if an election is properly made under the Code. However, the amount of a distribution with respect to the our common shares that is treated as a “dividend” may be lower for U.S. federal income tax purposes than it is for Canadian federal income tax purposes, resulting in a reduced foreign tax credit allowance to a U.S. Holder. In addition, this limitation is calculated separately with respect to specific categories of income. The foreign tax credit rules are complex, and each U.S. Holder should consult its own U.S. tax advisor regarding the foreign tax credit rules.
Backup Withholding and Information Reporting
Under U.S. federal income tax law and Treasury Regulations, certain categories of U.S. Holders must file information returns with respect to their investment in, or involvement in, a foreign corporation. For example, U.S. return disclosure obligations (and related penalties) are imposed on individuals who are U.S. Holders that hold certain specified foreign financial assets in excess certain threshold amounts. The definition of specified foreign financial assets includes not only financial accounts maintained in foreign financial institutions, but also, unless held in accounts maintained by a financial institution, any stock or security issued by a non-U.S. person, any financial instrument or contract held for investment that has an issuer or counterparty other than a U.S. person and any interest in a foreign entity. U. S. Holders may be subject to these reporting requirements unless our common shares are held in an account at certain financial institutions. Penalties for failure to file certain of these information returns are substantial. U.S. Holders should consult with their own tax advisors regarding the requirements of filing information returns, including the requirement to file an IRS Form 8938.
Payments made within the U.S. or by a U.S. payor or U.S. middleman, of dividends on, and proceeds arising from the sale or other taxable disposition of, our common shares will generally be subject to information reporting and backup withholding tax, at the rate of 28%, if a U.S. Holder (a) fails to furnish such U.S. Holder’s correct U.S. taxpayer identification number (generally on Form W-9), (b) furnishes an incorrect U.S. taxpayer identification number, (c) is notified by the IRS that such U.S. Holder has previously failed to properly report items subject to backup withholding tax, or (d) fails to certify, under penalty of perjury, that such U.S. Holder has furnished its correct U.S. taxpayer identification number and that the IRS has not notified such U.S. Holder that it is subject to backup withholding tax. However, certain exempt persons generally are excluded from these information reporting and backup withholding rules. Backup withholding is not an additional tax. Any amounts withheld under the U.S. backup withholding tax rules will be allowed as a credit against a U.S. Holder’s U.S. federal income tax liability, if any, or will be refunded, if such U.S. Holder furnishes required information to the IRS in a timely manner. Each U.S. Holder should consult its own tax advisor regarding the information reporting and backup withholding rules.
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F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
Exhibits attached to this Form 20-F are also available for viewing at our offices, 120 Adelaide Street West, Suite 1204, Toronto, Ontario, Canada, M5H 1T1; or you may request them by calling our office at (416) 250-6500. Copies of our financial statements and other continuous disclosure documents required under securities rules are available for viewing on the internet at www.sedar.com.
I. Subsidiary Information
See Item 4.C – “Organizational Structure” of this Annual Report on Form 20-F.
ITEM 11 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are not subject to any material market risks.
A. Transaction Risk and Currency Risk Management
Our operations do not employ complex financial instruments or derivatives, and given that we keep our excess funds in high-grade short-term instruments, we do not have significant or unusual financial market risks. In the event we experience substantial growth in the future, our business and results of operations may be materially affected by changes in interest rates on new debt financings, the granting of credit options to our customers, and certain other credit risks associated with our operations.
B. Interest Rate Risk and Equity Price Risk
We are equity financed and do not have any debt which could be subject to significant interest rate change risks. We have raised equity funding through the sale of securities denominated in Canadian dollars, and will likely raise additional equity funding denominated in Canadian dollars in the future.
C. Exchange Rate Sensitivity
The Company is exposed to financial risk related to the fluctuation of foreign exchange rates. The Company operates in Israel. Most of the Company’s monetary assets are held in US dollars and most of the Company’s expenditures are made in US dollars. However, the Company also has expenditures in NIS and Canadian dollars. A significant change in the currency rates between the NIS and the Canadian dollars relative to the US dollar could have an effect on the Company’s future results of operations, financial position or cash flows depending on the Company’s currency management techniques. The Company has not hedged its exposure to currency fluctuations. An increase or decrease of 5% of the NIS relative to the U.S dollar would not have a significant effect on the Company. An increase or decrease of 5% on the Canadian dollar relative to the US dollar could have an effect on the Company as follows:
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| | | December 31 | |
| | | 2012 | | | 2011 | |
| | | U.S. dollars in thousands | |
| Profit (loss) from change: | | | | | | |
| | | | | | | |
| 5% increase in exchange rate US/CAN | | (153 | ) | | 67 | |
| | | | | | | |
| 5% decrease in exchange rate US/CAN | | 153 | | | (67 | ) |
D. Commodity Price Risk
While the value of our exploration properties can always be said to relate to the price of the commodity and the outlook for same, we do not have any operating mines nor economic ore and therefore do not have any hedging arrangements.
ITEM 12 DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
Not applicable.
PART II
ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
None.
ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
None.
ITEM 15 CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Disclosure controls and procedures are defined in Rule 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) to mean controls and other procedures of an issuer that are designed to ensure that information required to be disclosed by the issuer in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms and includes, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
As required under the Exchange Act, we have carried out an evaluation of the effectiveness of the design and operation of our company’s disclosure controls and procedures as of the end of the period covered by this annual report on Form 20-F, being December 31, 2012. This evaluation was carried out by our Chief Executive Officer (being our principal executive officer) and Chief Financial Officer (being our principal financial officer). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as at December 31, 2012.
Management’s Annual Report on Internal Control Over Financial Reporting
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Our management is responsible for establishing and maintaining adequate internal control over financial reporting. The Exchange Act in Rule 13a-15(f ) and 15d-15(f ) defines this as a process designed by, or under the supervision of, the company’s principal executive and principal financial officers and effected by the Board of Directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that:
| | - | pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; |
| | - | provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and |
| | - | provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company’s assets that may have a material effect on the financial statements. |
Under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, our management assessed the effectiveness of the Company’s internal control over financial reporting as at December 31, 2012. In making this assessment, the Company’s management used the criteria, established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based upon this assessment, our management concluded that the Company’s internal control over financial reporting was effective as of December 31, 2012.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness of internal control over financial reporting to future periods are subject to risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
This Annual Report does not include an attestation report of the Company’s registered public accounting firm regarding internal control over financial reporting, as the Company is a smaller reporting company.
Changes in Internal Control over Financial Reporting
During the period ended December 31, 2012, there were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) of the Exchange Act) that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
ITEM 16A AUDIT COMMITTEE FINANCIAL EXPERTS
As disclosed above, as of the date hereof, our Audit Committee is comprised of Dennis Bennie, Richard Crist and Alan Friedman.
The Board has determined that Messrs. Bennie and Crist meet the SEC’s definition of an “audit committee financial expert”, as defined in Item 16 of Form 20-F. Although we are not currently subject to any law, rule or regulation in the United States requiring that we establish or maintain an audit committee, the Board has determined that Messrs. Bennie and Crist meet the definition of an “independent director”, as defined in Section 803 of the NYSE MKT Company Guide.
ITEM 16B CODE OF ETHICS
We have adopted a Code of Business Conduct that applies to all of our employees and officers, including our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. The Code of Business Conduct meets the requirements for a “code of ethics” within the meaning of that term in Item 16B of Form 20-F. The text of our Code of Business Conduct is also posted on our website atwww.adiraenergy.com, under the “Company” tab. In addition, a copy of our Code of Business Conduct will be provided to any person without charge, upon request. All requests for a copy of our code of ethics should be directed in writing to the attention of Gadi Levin, c/o Adira Energy Ltd., 120 Adelaide Street West, Suite 1204, Toronto, Ontario, Canada M5H 1T1, or by email at: glevin@adiraenergy.com.
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ITEM 16C PRINCIPAL ACCOUNTANT FEES AND SERVICES
The following table sets forth information regarding the amount billed to us by our principal independent auditors, Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, for our fiscal years ended December 31, 2011 and 2010:
| | Period Ended December 31 |
| | 2012 | 2011 |
| Audit Fees: | $155,000 | $110,000 |
| Audit Related Fees: | $88,000 | $18,000 |
| Tax Fees: | $120,000 | $64,000 |
| Total: | $363,000 | $174,000 |
Audit Fees
This category includes the aggregate fees billed by our independent auditor for the audit of our consolidated annual financial statements, reviews of interim financial statements and attestation services that are provided in connection with statutory and regulatory filings or engagements.
Audit Related Fees
This category includes the aggregate fees billed in each of the last two fiscal years for assurance and related services by the independent auditors that are reasonably related to the performance of the audits or reviews of the financial statements and are not reported above under "Audit Fees," and generally consist of fees for other engagements under professional auditing standards, accounting and reporting consultations.
Tax Fees
This category includes the aggregate fees billed in each of the last two fiscal years for professional services rendered by the independent auditors for tax compliance, tax planning and tax advice.
Policy on Pre-Approval by Audit Committee of Services Performed by Independent Auditors
The policy of our Audit Committee is to pre-approve all audit and permissible non-audit services to be performed by our independent auditors during the fiscal year.
ITEM 16D EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Not applicable.
ITEM 16E PURCHASE OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
None.
ITEM 16F CHANGES TO REGISTRANT’S CERTIFYING ACCOUNTANT
From August 23, 2010 until March 16, 2011, MSCM LLP acted as our independent auditors. On March 16, 2011 we appointed Kost Forer Gabbay and Kasierer, a member firm of Ernst & Young Global, as our new auditors. MSCM LLP’s reports on our financial statements for our past two fiscal years did not contain an adverse opinion or disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope or accounting principles, except to indicate doubt as to the Company’s ability to continue as a going concern. During our past two fiscal years there were no disagreements between our Company and our independent auditors on any matter of accounting principles or practices, financial statement disclosure or auditing scope or procedure.
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ITEM 16G CORPORATE GOVERNANCE
Not applicable.
ITEM 16H MINE SAFETY DISCLOSURE
Not applicable.
PART III
ITEM 17 FINANCIAL STATEMENTS
Not applicable.
ITEM 18 FINANCIAL STATEMENTS
Financial Statements Filed as Part of this Annual Report:
Report of Independent Registered Public Accounting Firm dated April 30, 2013;
Consolidated statement of financial position for the fiscal years ended December 31, 2012 and 2011;
Consolidated statements of comprehensive income for the fiscal years ended December 31, 2012 and 2011;
Consolidated statements of changes in shareholder’s equity for the fiscal years ended December 31, 2012 and 2011;
Consolidated statements of cash flows for the fiscal years ended December 31, 2012 and 2011; and
Notes to consolidated financial statements
- 79 -
ADIRA ENERGY LTD.
(Canadian Company)
CONSOLIDATED FINANCIAL STATEMENTS
AS OF DECEMBER 31, 2012
U.S. DOLLARS IN THOUSANDS
INDEX
- - - - - - - - - - - - - - - - - -
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
ADIRA ENERGY LTD.
We have audited the accompanying consolidated balance sheets of Adira Energy Ltd. ("the Company") and its subsidiaries as of December 31, 2012 and 2011, and the related consolidated statements of comprehensive loss, changes in equity and cash flows for each of the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Company's internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company and its subsidiaries as of December 31, 2012 and 2011 and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 2012, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board.
As described in Note 1b to the financial statements, as of December 31, 2012 the Company has an accumulated deficit of $29 million and a negative cash flow from operations of $4 million for the year ended December 31, 2012. The Company is an early exploration stage company and its existing funds and operating revenues are currently insufficient to finance its future operating expenses and exploration funding commitments. These matters and other matters discussed in Note 1b, raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
| | KOST FORER GABBAY & |
| Tel-Aviv, Israel | KASIERER |
| April 30, 2013 | A Member of Ernst & Young Global |
- 81 -
| ADIRA ENERGY LTD. |
| |
| CONSOLIDATED STATEMENTS OF FINANCIAL POSITION |
| U.S. dollars in thousands |
| | | | | December 31, | |
| | Note | | | 2012 | | | 2011 | |
| ASSETS | | | | | | | | |
| | | | | | | | | |
| CURRENT ASSETS: | | | | | | | | |
| Cash and cash equivalents | 4 | | $ | 2,394 | | $ | 8,094 | |
| Restricted deposits | 5 | | | 1,082 | | | 100 | |
| Accounts receivable | 6 | | | 360 | | | 96 | |
| Other receivables and prepaid expenses | 7 | | | 4,701 | | | 1,117 | |
| | | | | | | | | |
| Total current assets | | | | 8,537 | | | 9,407 | |
| | | | | | | | | |
| NON-CURRENT ASSETS: | | | | | | | | |
| Restricted deposits | 5 | | | - | | | 343 | |
| Property and equipment, net | 8 | | | 276 | | | 459 | |
| Long - term receivables | 9b (2) | | | 640 | | | - | |
| Exploration and evaluation assets | 9 | | | 5,887 | | | 38 | |
| | | | | | | | | |
| Total non-current assets | | | | 6,803 | | | 840 | |
| | | | | | | | | |
| Total assets | | | $ | 15,340 | | $ | 10,247 | |
| | | | | | | | | |
| LIABILITIES AND EQUITY | | | | | | | | |
| | | | | | | | | |
| CURRENT LIABILITIES: | | | | | | | | |
| Trade payables | 10 | | $ | 5,841 | | $ | 482 | |
| Other accounts payable and accrued liabilities | 11 | | | 1,476 | | | 939 | |
| | | | | | | | | |
| Total current liabilities | | | | 7,317 | | | 1,421 | |
| | | | | | | | | |
| LONG-TERM LIABILITIES | | | | | | | | |
| Share warrants | 14b | | | 3,013 | | | - | |
| | | | | | | | | |
| Total long-term liabilities | | | | 3,013 | | | - | |
| | | | | | | | | |
| EQUITY: | | | | | | | | |
| Share capital | 14 | | | - | | | - | |
| Additional paid-in capital | | | | 33,966 | | | 27,775 | |
| Accumulated deficit | | | | (28,956 | ) | | (19,169 | ) |
| | | | | | | | | |
| Equity attributable to equity holders of the parent | | | | 5,010 | | | 8,606 | |
| Non-controlling interests | | | | - | | | 220 | |
| | | | | | | | | |
| Total equity | | | | 5,010 | | | 8,826 | |
| | | | | | | | | |
| Total liabilities and equity | | | $ | 15,340 | | $ | 10,247 | |
The accompanying notes are an integral part of the consolidated financial statements.
Approved on Behalf of the Board:
| April 30, 2013 | | | | |
| Date of approval of the financial | | Dennis Bennie | | Alan Friedman |
| statements | | Chairman of the board of directors | | Director |
- 82 -
| ADIRA ENERGY LTD. |
| |
| CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS |
| U.S. dollars in thousands, except share and per share data |
| | | | | | Year ended | |
| | | | | | December 31, | |
| | | Note | | | 2012 | | | 2011 | | | 2010 | |
| | | | | | | | | | | | | |
| Revenues and other income | | 17 | | $ | 1,889 | | $ | 1,323 | | $ | 1,707 | |
| | | | | | | | | | | | | |
| Expenses: | | | | | | | | | | | | |
| Exploration expenses | | 9 | | | 1,026 | | | 5,018 | | | 1,624 | |
| General and administrative expenses | | 18 | | | 5,304 | | | 5,031 | | | 3,067 | |
| Impairment charge | | 9 | | | 7,810 | | | 1,226 | | | - | |
| | | | | | | | | | | | | |
| Total expenses | | | | | 14,140 | | | 11,275 | | | 4,691 | |
| | | | | | | | | | | | | |
| Operating loss | | | | | (12,251 | ) | | (9,952 | ) | | (2,984 | ) |
| | | | | | | | | | | | | |
| Financing income | | 19 | | | 2,480 | | | 43 | | | - | |
| Financing expense | | 19 | | | (745 | ) | | (109 | ) | | (5 | ) |
| | | | | | | | | | | | | |
| Loss before income taxes | | | | | (10,516 | ) | | (10,018 | ) | | (2,989 | ) |
| Income taxes | | 13 | | | (41 | ) | | (33 | ) | | (15 | ) |
| | | | | | | | | | | | | |
| Net loss and comprehensive loss | | | | $ | (10,557 | ) | $ | (10,051 | ) | $ | (3,004 | ) |
| | | | | | | | | | | | |
| Net loss and comprehensive loss attributed to: | | | | | | | | | | | | |
| Equity holders of the parent | | | | | (8,554 | ) | | (9,489 | ) | | (2,958 | ) |
| Non-controlling interests | | | | $ | (2,003 | ) | $ | (562 | ) | $ | (46 | ) |
| | | | | | | | | | | | | |
| | | | | $ | (10,557 | ) | $ | (10,051 | ) | $ | (3,004 | ) |
| | | | | | | | | | | | | |
| Basic and diluted net loss per share attributable to equity holders of the parent | | | | | (0.06 | ) | | (0.10 | ) | | (0.05 | ) |
| | | | | | | | | | | | | |
| Weighted average number of Ordinary shares used in computing basic and diluted net loss per share | | | | | 132,940,856 | | | 99,813,334 | | | 65,653,700 | |
The accompanying notes are an integral part of the consolidated financial statements.
- 83 -
| ADIRA ENERGY LTD. |
| CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY |
| U.S. dollars in thousands, except share data |
| | | | | | | | | Attributable to equity holders | | | | | | | |
| | | | | | | | | of the parent | | | | | | | |
| | | | | | | | | Additional | | | | | | | | | Non- | | | | |
| | | Number of | | | Share | | | paid in | | | Accumulated | | | | | | controlling | | | Total | |
| | | shares | | | capital | | | capital | | | deficit | | | Total | | | interests | | | equity | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance as of January 1, 2010 | | 62,640,001 | | | - | | $ | 8,932 | | $ | (6,722 | ) | $ | 2,210 | | $ | - | | $ | 2,210 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Shares and warrants issued in private placement, net (Note 14b(i)) | | 27,500,000 | | | - | | | *)10,077 | | | - | | | 10,077 | | | - | | | 10,077 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Investment in equity of subsidiary by non-controlling interests | | - | | | - | | | - | | | - | | | - | | | 677 | | | 677 | |
| Share-based compensation | | - | | | - | | | 1,277 | | | - | | | 1,277 | | | - | | | 1,277 | |
| Net loss | | - | | | - | | | - | | | (2,958 | ) | | (2,958 | ) | | (46 | ) | | (3,004 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2010 | | 90,140,001 | | | - | | | 20,286 | | | (9,680 | ) | | 10,606 | | | 631 | | | 11,237 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Shares issued in private placement, net (Note 14b(ii)) | | 10,483,871 | | | - | | | *)6,152 | | | - | | | 6,152 | | | - | | | 6,152 | |
| Exercise of warrants and options | | 1,144,581 | | | - | | | 314 | | | - | | | 314 | | | - | | | 314 | |
| Investment in equity of subsidiary by non-controlling interests | | - | | | - | | | - | | | - | | | - | | | 151 | | | 151 | |
| Share-based compensation | | - | | | - | | | 1,023 | | | - | | | 1,023 | | | - | | | 1,023 | |
| Net loss | | - | | | - | | | - | | | (9,489 | ) | | (9,489 | ) | | (562 | ) | | (10,051 | ) |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2011 | | 101,768,453 | | | - | | | 27,775 | | | (19,169 | ) | | 8,606 | | | 220 | | | 8,826 | |
| | | | | | | | | | | | | | | | | | | | | | |
| Shares issued in private placement, net (Note 14b(iii)) | | 79,012,640 | | | - | | | *)5,215 | | | - | | | 5,215 | | | - | | | 5,215 | |
| Investment in equity of subsidiary by non-controlling interests | | - | | | - | | | - | | | - | | | - | | | 550 | | | 550 | |
| Share-based compensation | | - | | | - | | | 976 | | | - | | | 976 | | | - | | | 976 | |
| Net loss | | - | | | - | | | - | | | (8,554 | ) | | (8,554 | ) | | (2,003 | ) | | (10,557 | ) |
| Adjustment of non-controlling interests **) | | - | | | - | | | - | | | (1,233 | ) | | (1,233 | ) | | 1,233 | | | - | |
| | | | | | | | | | | | | | | | | | | | | | |
| Balance as of December 31, 2012 | | 180,781,093 | | | - | | $ | 33,966 | | $ | (28,956 | ) | $ | 5,010 | | $ | - | | $ | 5,010 | |
| *) | Net of issuance expenses of $923, $472 and $791 in the years 2010, 2011 and 2012, respectively. |
| **) | Due to assumption of liabilities of a subsidiary. |
The accompanying notes are an integral part of the consolidated financial statements.
- 84 -
| ADIRA ENERGY LTD. |
| |
| CONSOLIDATED STATEMENTS OF CASH FLOWS |
| U.S. dollars in thousands |
| | | Year ended | |
| | | December 31, | |
| | | 2012 | | | 2011 | | | 2010 | |
| Cash flows from operating activities: | | | | | | | | | |
| Net loss | $ | (10,557 | ) | $ | (10,051 | ) | $ | (3,004 | ) |
| | | | | | | | | | |
| Adjustments to reconcile net loss to net cash used in operating activities: | | | | | | | | | |
| Adjustments to the profit or loss items: | | | | | | | | | |
| Exchange rate differences for cash and cash equivalents | | 68 | | | 138 | | | 15 | |
| Depreciation | | 96 | | | 80 | | | 12 | |
| Impairment charge | | 7,810 | | | 1,226 | | | - | |
| Issuance expenses | | 726 | | | - | | | - | |
| Reevaluation of warrants | | (2,299 | ) | | - | | | - | |
| Share-based compensation | | 976 | | | 1,023 | | | 1,277 | |
| | | | | | | | | | |
| | | 7,377 | | | 2,467 | | | 1,304 | |
| | | | | | | | | | |
| Changes in operating asset and liability items: | | | | | | | | | |
| Decrease (increase) in accounts receivable, other receivables and prepaid expenses | | (6,696 | ) | | 7,122 | | | (8,456 | ) |
| Increase (decrease) in trade payables | | 5,359 | | | (6,611 | ) | | 7,014 | |
| Increase in other accounts payable and accrued liabilities | | 537 | | | 659 | | | 132 | |
| | | | | | | | | | |
| | | (800 | ) | | 1,170 | | | (1,310 | ) |
| | | | | | | | | | |
| Net cash used in operating activities | | (3,980 | ) | | (6,414 | ) | | (3,010 | ) |
| | | | | | | | | | |
| Cash flows from investing activities: | | | | | | | | | |
| Expenditures on exploration and evaluation assets | | (10,654 | ) | | (923 | ) | | (7 | ) |
| Purchase of property and equipment | | (70 | ) | | (297 | ) | | (74 | ) |
| Increase in long term receivables | | (640 | ) | | - | | | - | |
| Decrease (increase) in restricted cash | | (639 | ) | | 563 | | | (1,006 | ) |
| | | | | | | | | | |
| Net cash used in investing activities | | (12,003 | ) | | (657 | ) | | (1,087 | ) |
| | | | | | | | | | |
| Cash flows from financing activities: | | | | | | | | | |
| Proceeds from issuance of warrants, net of issuance expenses | | 4,586 | | | - | | | - | |
| Proceeds from issue of shares, net of issuance expenses | | 5,215 | | | 6,152 | | | 10,077 | |
| Investment in equity of subsidiary by non-controlling interests | | 550 | | | 151 | | | 677 | |
| Proceeds from exercise of warrants and options to employees | | - | | | 314 | | | - | |
| | | | | | | | | | |
| Net cash provided by financing activities | | 10,351 | | | 6,617 | | | 10,754 | |
| | | | | | | | | | |
| Exchange rate differences for cash and cash equivalents | | (68 | ) | | (138 | ) | | (15 | ) |
| | | | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | (5,700 | ) | | (592 | ) | | 6,642 | |
| Cash and cash equivalents at the beginning of the year | | 8,094 | | | 8,686 | | | 2,044 | |
| | | | | | | | | | |
| Cash and cash equivalents at the end of the year | $ | 2,394 | | $ | 8,094 | | $ | 8,686 | |
The accompanying notes are an integral part of the consolidated financial statements.
- 85 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| | a. | Nature of operations: |
| | | |
| | | Adira Energy Ltd. and its subsidiaries ("Adira" or "the Company"), is an oil and gas early-stage exploration company. Adira is a limited company, incorporated on April 8, 2009, and domiciled in Toronto, Ontario, Canada. The Company's shares are currently traded on the OTC market in the U.S. and the TSX Venture Exchange in Canada. The consolidated financial statements of the Company for the year ended December 31, 2012 were authorized for issue in accordance with a resolution of the directors on April 29, 2013. |
| | | |
| | | The Company has been granted three offshore petroleum licenses in Israel. The Company's wholly-owned Canadian subsidiary, Adira Energy Holdings Corp. owns three wholly owned active Israeli subsidiaries as follows as of December 31, 2012: (i) Adira Energy Israel Limited, which holds two offshore petroleum licenses being the "Gabriella License No. 378" ("Gabriella") of which it owns a 15% interest and the "Yitzhak License No. 380" ("Yitzhak") of which it owns 60% interest (see also Notes 9 and 19); (ii) Adira Oil Technologies Limited ("AOT") has been granted a 23.25% interest in one offshore petroleum license, the "Samuel License No. 388" ("Samuel"), (Gabriella, Yitzhak and Samuel - collectively the "Offshore Licenses") and (iii) Adira Energy Israel Services Ltd. provides services in respect of the entities described above. Adira Energy Holdings Corp. also owns 60% of the subsidiary, Adira Geo Global Limited ("AGG"), which owns a 30% interest in Samuel. |
| | | |
| | | Adira Energy Israel Limited is the operator of Gabriella, a co-operator of Yitzhak and AGG is the operator of Samuel. As the operator, the Company has established Unincorporated Joint Ventures ("UJV's") to manage the exploration activities of each of the offshore licenses. The Company receives consulting and operator fees in accordance with the terms of Joint Operating Agreements signed between the Company and each of its consortium partners in the UJV's. |
- 86 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| | b. | Financial position: |
| | | |
| | | As reflected in the consolidated financial statements, as of December 31, 2012, the Company has an accumulated deficit of $28,956 and, in 2012, the Company had negative cash flows from operations of $3,980. The Company is an early-exploration stage company and its existing funds and operating revenues are currently insufficient to finance its future operating expenses and exploration funding commitments. |
| | | |
| | | The ability of the Company to continue as a going concern depends upon the discovery of economically recoverable reserves, the ability of the Company to obtain financing to complete development, and upon future profitable operations from the properties or proceeds from their disposition. |
| | | |
| | | There can be no assurance that the Company will be able to continue to raise funds from the aforementioned sources in which case the Company may be unable to meet its obligations. These matters raise substantial doubt about the Company's ability to continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. |
| NOTE 2:- | BASIS OF PREPARATION |
| | a. | Basis of preparation of the financial statements: |
| | | | |
| | | These financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as issued by the International Accounting Standards Board. These Standards comprise: |
| | | | |
| | | 1. | International Financial Reporting Standards (IFRS). |
| | | | |
| | | 2. | International Accounting Standards (IAS). |
| | | | |
| | | 3. | Interpretations issued by the IFRIC and by the SIC. |
| | | | |
| | b. | The consolidated financial statements have been prepared on a historical cost basis, and are presented in U.S. dollars and all values are rounded to the nearest thousand ($ 000), except when otherwise indicated. |
- 87 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES |
| | |
| The following are the significant accounting policies applied by the Company in preparing its consolidated financial statements for all periods presented unless otherwise stated. |
| | a. | Significant judgments, estimates and assumptions used in the preparation of the financial statements: |
| | | |
| | | The preparation of the financial statements requires management to make judgments, estimates and assumptions that have an effect on the application of the accounting policies and on the reported amounts of assets, liabilities, revenues and expenses. These estimates and underlying assumptions are reviewed regularly. Changes in accounting estimates are reported in the period of the change in estimate. |
| | | |
| | | In the process of applying the significant accounting policies, the Company has made the following judgments which have a significant effect on the amounts recognized in the financial statements: |
| | - | Determining the fair value of share-based payment transactions: |
| | | |
| | | The fair value of share-based payment transactions is determined using an acceptable option-pricing model. The assumptions made by management and used in the model include expected volatility, expected life and expected dividend. Changes in assumptions could affect the estimates of fair values. |
The key assumptions made in the financial statements concerning uncertainties at the end of the reporting period and the critical estimates computed by the Company that may result in a material adjustment to the carrying amounts of assets and liabilities within the next financial year are discussed below.
| | - | Impairment of Exploration and Evaluation Assets: |
| | | |
| | | The Company reviews its Exploration and Evaluation Assets for impairment at least once a year and when facts and circumstances suggest that the carrying amount of an exploration and evaluation asset may exceed its recoverable amount. This requires management to make judgments, estimates and assumptions with respect to the probability that the carrying amount of the exploration and evaluation asset will be recovered in full from successful development or by sale. See Note 9 for further details. |
| | b. | Consolidated financial statements: |
| | | |
| | | The consolidated financial statements comprise the financial statements of companies that are controlled by the Company (subsidiaries). Control exists when the Company has the power, directly or indirectly, to govern the financial and operating policies of an entity. The effect of potential voting rights that are exercisable at the end of the reporting period is considered when assessing whether an entity has control. The consolidation of the financial statements commences on the date on which control is obtained and ends when such control ceases. |
- 88 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
All intercompany balances and transactions and gains or losses resulting from intercompany transactions are eliminated in full in the consolidated financial statements.
The financial statements of the Company and of the subsidiaries are prepared as of the same dates and periods. The consolidated financial statements are prepared using uniform accounting policies by all companies in the Company.
Non-controlling interests of subsidiaries represent the non-controlling shareholders' share of the total comprehensive income (loss) of the subsidiaries and fair value of the net assets upon the acquisition of the subsidiaries. The non-controlling interests are presented in equity separately from the equity attributable to the equity holders of the Company.
The acquisition of non-controlling interests by the Company is recorded as a decrease/ an increase in equity (capital reserve from transactions with non-controlling interests) and calculated as the difference between the consideration paid by the Company and the proportionate amount of non-controlling interests acquired and derecognized at the date of acquisition (when non-controlling interests also include a share of other comprehensive income, the Company reattributes the cumulative amounts recognized in other comprehensive income between the equity holders of the Company and the non-controlling interests).
Upon the disposal of a subsidiary that does not result in a loss of control, an increase / a decrease in equity (capital reserve from transactions with non-controlling interests) is recognized for the amount of the difference between the consideration received by the Company and the carrying amount of the non-controlling interests in the subsidiary which has been added to the Company's equity, taking into account also the disposal of a portion of any goodwill in the subsidiary and any translation differences from foreign operations which have been recognized in other comprehensive income, based on the relative decrease in the interests in the subsidiary.
Transaction costs in respect of transactions with non-controlling interests are also recorded in equity. Cash flows from transactions with non-controlling interests (without change in status) are classified in the statement of cash flows as cash flows from financing activities.
Upon the disposal of a subsidiary resulting in loss of control, the Company:
| | - | derecognizes the subsidiary's assets (including goodwill) and liabilities. |
| | - | derecognizes the carrying amount of non-controlling interests. |
| | - | recognizes the fair value of the consideration received. |
| | - | recognizes any remaining equity interest at fair value. |
- 89 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | - | recognizes any resulting difference (surplus or deficit) as gain or loss. |
| | - | reclassifies the components recognized in other comprehensive income on the same basis as would be required if the subsidiary had directly disposed of the related assets or liabilities. Accordingly, cumulative exchange differences are reclassified to profit or loss upon loss of control. |
| | c. | Unincorporated joint oil and gas ventures: |
| | | |
| | | The Company conducts petroleum and natural gas exploration activities jointly with other partners who each have direct ownership in the assets and each are directly obligated for the liabilities of the ventures. Consequently, these financial statements reflect only the Company's proportionate interest in such activities. |
| | | |
| | | The Company accounts for its share of the joint venture's assets, liabilities it has incurred, income from the sale or use of its share of the joint venture's output, together with its share of the expenses incurred by the joint venture and any expenses it incurs in relation to its interest in the joint venture. |
| | | |
| | d. | Farm-out arrangements in the exploration and evaluation phase: |
| | | |
| | | A farm-out is the transfer of part of an oil and gas interest in consideration for an agreement by the transferee ("farmee") to meet, absolutely, certain expenditures which would otherwise have to be undertaken by the owner ("farmor"). Farm-out transactions generally occur in the exploration or development phase and are characterized by the transferor (i.e. farmor) giving up future economic benefits, in the form of reserves, in exchange for a reduction in future funding obligations. |
| | | |
| | | Accordingly, the farmee recognizes its expenditure under the arrangement in respect of its interest and that retained by the farmor, as and when the costs are incurred. |
| | | |
| | | The Company (farmor) accounts for the farm-out arrangement as follows: |
| | - | The farmor does not record any expenditure made by the farmee on its behalf; |
| | | |
| | - | The farmor does not recognize a gain or loss on the farm-out arrangement, but rather redesignates any costs previously capitalized in relation to the whole interest as relating to the partial interest retained; and |
| | | |
| | - | any cash consideration received is credited against costs previously capitalized in relation to the whole interest with any excess accounted for by the farmor as a gain on disposal. |
- 90 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | e. | Functional currency and foreign currency: |
| | | | |
| | | 1. | Functional currency and presentation currency: |
| | | | |
| | | | The functional currency, which is the currency that best reflects the economic environment in which the Company operates and conducts its transactions, is separately determined for the Company and each of its subsidiaries, and is used to measure the financial position and operating results. The functional currency of the Company and its subsidiaries is the U.S. dollar. |
| | | | |
| | | | The presentation currency of the financial statements is the U.S. dollar. |
| | | | |
| | | 2. | Transactions, assets and liabilities in foreign currency: |
| | | | |
| | | | Transactions denominated in foreign currency (other than the functional currency) are recorded on initial recognition at the exchange rate at the date of the transaction. After initial recognition, monetary assets and liabilities denominated in foreign currency are translated at the end of each reporting period into the functional currency at the exchange rate at that date. Exchange differences, are recognized in profit or loss. Non-monetary assets and liabilities measured at cost are translated at the exchange rate at the date of the transaction. |
| | | | |
| | f. | Cash equivalents: |
| | | | |
| | | Cash equivalents are considered as highly liquid investments, including unrestricted short-term bank deposits with an original maturity of three months or less from the date of acquisition or with a maturity of more than three months, but which are redeemable on demand without penalty and which form part of the Company's cash management. |
| | | | |
| | g. | Allowance for doubtful accounts: |
| | | | |
| | | The allowance for doubtful accounts is determined in respect of specific debts whose collection, in the opinion of the Company's management, is doubtful. No allowance for doubtful account exists as of December 31, 2012 and 2011. |
| | | | |
| | h. | Financial instruments: |
| | | | |
| | | 1. | Financial assets: |
| | | | |
| | | | Financial assets within the scope of IAS 39 are initially recognized at fair value plus directly attributable transaction costs. |
| | | | |
| | | | The Company has receivables that are financial assets (non-derivative) with fixed or determinable payments that are not quoted in an active market. Short-term receivables (such as trade and other receivables) are measured based on their terms, normally at face value. Gains and losses are recognized in profit or loss when the loans and receivables are derecognized or impaired, as well as through the systematic amortization process. As for recognition of interest income, see q. below. |
- 91 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | 2. | Financial liabilities measured at amortized cost: |
| | | | |
| | | Interest-bearing loans and borrowings are initially recognized at fair value less directly attributable transaction costs (such as loan raising costs). After initial recognition, loans, including debentures, are measured based on their terms at amortized cost using the effective interest method taking into account directly attributable transaction costs. Short-term credit (such as trade and other payables) are measured based on their terms, normally at face value. Gains and losses are recognized in profit or loss when the financial liability is derecognized as well as through the systematic amortization process. |
| | | | |
| | 3. | Derecognition of financial instruments: |
| | | | |
| | | a) | Financial assets: |
| | | | |
| | | | A financial asset is derecognized when the contractual rights to the cash flows from the financial asset expire or the Company has transferred its contractual rights to receive cash flows from the financial asset or assumes an obligation to pay the cash flows in full without material delay to a third party and has transferred substantially all the risks and rewards of the asset, or has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset. |
- 92 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | If the Company transfers its rights to receive cash flows from an asset and neither transfers nor retains substantially all the risks and rewards of the asset nor transfers control of the asset, a new asset is recognized to the extent of the Company's continuing involvement in the asset. When continuing involvement takes the form of guaranteeing the transferred asset, the extent of the continuing involvement is the lower of the original carrying amount of the asset and the maximum amount of consideration received that the Company could be required to repay. |
| | | |
| | b) | Financial liabilities: |
| | | |
| | | A financial liability is derecognized when it is extinguished, that is when the obligation is discharged or cancelled or expires. A financial liability is extinguished when the debtor: |
| • | discharges the liability by paying in cash, other financial assets, goods or services; or |
| | • | is legally released from the liability. |
| | 4. | Impairment of financial assets: |
| | | |
| | | The Company assesses at the end of each reporting period whether there is any objective evidence of impairment of a financial asset or group of financial assets carried at amortized cost as follows. |
| | | |
| | | There is objective evidence of impairment of debt instruments and receivables as a result of one or more events that has occurred after the initial recognition of the asset and that loss event has an impact on the estimated future cash flows. Evidence of impairment may include indications that the debtor is experiencing financial difficulties, including liquidity difficulty and default in interest or principal payments. The amount of the loss recorded in profit or loss is measured as the difference between the asset's carrying amount and the present value of estimated future cash flows (excluding future credit losses that have not yet been incurred) discounted at the financial asset's original effective interest rate (the effective interest rate computed at initial recognition). If the financial asset has a variable interest rate, the discount rate is the current effective interest rate. The carrying amount of the asset is reduced through the use of an allowance account (see allowance for doubtful accounts above). In a subsequent period, the amount of the impairment loss is reversed if the recovery of the asset can be related objectively to an event occurring after the impairment was recognized. The amount of the reversal, up to the amount of any previous impairment, is recorded in profit or loss. |
- 93 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | 5. | Classification of rights issues: |
| | | |
| | | Rights, options or warrants to acquire a fixed number of the Company's equity instruments for a fixed amount of any currency are classified as equity instruments if the Company offers the rights, options or warrants pro rata to all of its existing owners of the same class of its non-derivative equity instruments. |
| | | |
| | 6. | Issue of a unit of securities: |
| | | |
| | | The issue of a unit of securities involves the allocation of the proceeds received (before issue expenses) to the components of the securities issued in the unit based on the following order: financial derivatives and other financial instruments measured at fair value in each period. Then fair value is determined for financial liabilities and compound instruments (such as convertible debentures) that are presented at amortized cost. The proceeds allocated to equity instruments are the residual amount calculated as the difference between the total proceeds and the proceeds allocated as above. Issue costs are allocated to each component pro rata to the amounts determined for each component in the unit. |
| | i. | Property and equipment: |
| | | |
| | | Property and equipment are measured at cost, including directly attributable costs, less accumulated depreciation. Cost includes spare parts and auxiliary equipment that can be used only in connection with the machinery and equipment. |
| | | |
| | | Depreciation is calculated on a straight-line basis over the useful life of the assets at annual rates as follows: |
| | % |
| | |
| Drilling rig and related equipment | 10 |
| Office furniture and equipment | 10 |
| Computers and peripheral equipment | 33 |
The useful life, depreciation method and residual value of an asset are reviewed at least each year-end and any changes are accounted for prospectively as a change in accounting estimate.
Depreciation of an asset ceases at the earlier of the date that the asset is classified as held for sale and the date that the asset is derecognized. An asset is derecognized on disposal or when no further economic benefits are expected from its use. The gain or loss arising from the derecognition of the asset (determined as the difference between the net disposal proceeds and the carrying amount in the financial statements) is included in profit or loss when the asset is derecognized.
- 94 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | j. | Impairment of non-financial assets: |
| | | |
| | | The Company evaluates the need to record an impairment of the carrying amount of non- financial assets whenever events or changes in circumstances indicate that the carrying amount is not recoverable. If the carrying amount of non-financial assets exceeds their recoverable amount, the assets are reduced to their recoverable amount. The recoverable amount is the higher of fair value less costs of sale and value in use. In measuring value in use, the expected future cash flows are discounted using a pre-tax discount rate that reflects the risks specific to the asset. The recoverable amount of an asset that does not generate independent cash flows is determined for the cash-generating unit to which the asset belongs. Impairment losses are recognized in profit or loss. |
| | | |
| | k. | Exploration and evaluation assets: |
| | | |
| | | Pre-license costs: |
| | | |
| | | Pre-license costs are expensed in the period in which they are incurred. |
| | | |
| | | Exploration and evaluation costs: |
| | | |
| | | Oil and natural gas exploration and development expenditure is accounted for using the successful efforts method of accounting. |
| | | |
| | | During the geological and geophysical exploration phase, costs are charged against income as incurred. Costs directly associated with an exploration well in its drilling phase, for which it has not yet been determined whether there are proved reserves or it is not commercially viable, are capitalized as exploration and evaluation intangible assets until the drilling of the well is complete and the results have been evaluated. These costs include employee remuneration, materials and fuel used, rig costs and payments made to contractors. If no reserves are found, the exploration asset is tested for impairment. If extractable hydrocarbons are found and, subject to further appraisal activity (e.g., by drilling further wells), are likely to be developed commercially, the costs continue to be carried as an intangible assets while sufficient and continued progress is made in assessing the commerciality of the hydrocarbons. All such costs are subject to technical, commercial and management review as well as review for impairment at least once a year to confirm the continued intent to develop or otherwise extract value from the discovery. When this is no longer the case, the costs are written off. When proved reserves of oil are determined and development sanctioned, the relevant expenditure is transferred to oil and gas properties after impairment is assessed and any resulting impairment loss is recognized. |
| | | |
| | l. | Taxes on income: |
| | | |
| | | Taxes on income in the consolidated statement of comprehensive loss comprise current and deferred taxes. Current or deferred taxes are recognized in profit or loss, except to the extent that the tax arises from items which are recognized directly in other comprehensive income or in equity. In such cases, the tax effect is also recognized in the relevant item. |
- 95 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | 1. | Current taxes: |
| | | |
| | | The current tax liability is measured using the tax rates and tax laws that have been enacted or substantively enacted by the end of reporting period as well as adjustments required in connection with the tax liability in respect of previous years. |
| | | |
| | 2. | Deferred taxes: |
| | | |
| | | Deferred taxes are computed in respect of temporary differences between the carrying amounts in the financial statements and the amounts attributed for tax purposes. Deferred taxes are recognized directly in other comprehensive income or in equity if the tax relates to those items. |
| | | |
| | | Deferred taxes are measured at the tax rates that are expected to apply to the period when the taxes are reversed in profit or loss, comprehensive income or equity, based on tax laws that have been enacted or substantively enacted by the end of the reporting period. |
| | | |
| | | Deferred tax assets are reviewed at the end of each reporting period and reduced to the extent that it is not probable that they will be utilized. Also, temporary differences (such as carry-forward losses) for which deferred tax assets have not been recognized are reassessed and deferred tax assets are recognized to the extent that their recoverability has become probable. Any resulting reduction or reversal is recognized in the line item, "taxes on income". |
| | m. | Share-based payment transactions: |
| | | |
| | | The Company's employees and other service providers are entitled to remuneration in the form of equity-settled share-based payment transactions. |
| | | |
| | | The cost of equity-settled transactions with employees is measured at the fair value of the equity instruments granted at grant date. Fair value measurement of all options and warrants granted is determined using an appropriate pricing model. As for other service providers, the cost of the transactions is measured at the fair value of the goods or services received as consideration for equity instruments. In cases where the fair value of the goods or services received as consideration of equity instruments cannot be measured, they are measured by reference to the fair value of the equity instruments granted. |
| | | |
| | | The cost of equity-settled transactions is recognized in profit or loss, together with a corresponding increase in equity, during the period which the performance and service conditions are to be satisfied, ending on the date on which the relevant employees become fully entitled to the award ("the vesting period"). The cumulative expense recognized for equity-settled transactions at the end of each reporting period until the vesting date reflects the extent to which the vesting period has expired and the Company's best estimate of the number of equity instruments that will ultimately vest. The expense or income recognized in profit or loss represents the movement in the cumulative expense recognized at the end of the reporting period. No expense is recognized for awards that do not ultimately vest. |
- 96 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | If the Company modifies the conditions on which equity-instruments were granted, an additional expense is recognized for any modification that increases the total fair value of the share-based payment arrangement or is otherwise beneficial to the employee/other service provider at the modification date. |
| | | |
| | | If a grant of an equity instrument is cancelled, it is accounted for as if it had vested on the cancellation date, and any expense not yet recognized for the grant is recognized immediately. However, if a new grant replaces the cancelled grant and is identified as a replacement grant on the grant date, the cancelled and new grants are accounted for as a modification of the original grant, as described above. |
| | | |
| | n. | Employee benefit liabilities: |
| | | |
| | | The Company has several employee benefit plans: |
| | 1. | Short-term employee benefits: |
| | | |
| | | Short-term employee benefits include salaries, paid annual leave, paid sick leave, recreation and social security contributions and are recognized as expenses as the services are rendered. A liability in respect of a cash bonus is recognized when the Company has a legal or constructive obligation to make such payment as a result of past service rendered by an employee and a reliable estimate of the amount can be made. |
| | | |
| | 2. | Post-employment benefits: |
| | | |
| | | The Company's plan in Israel is financed by contributions to insurance companies and is classified as a defined contribution plan, pursuant to Section 14 of the Severance Pay Law. |
| | | |
| | | The Company pays fixed contributions and has no legal or constructive obligation to pay further contributions if the insurance company does not hold sufficient amounts to pay all employee benefits relating to employee service in the current and prior periods; therefore, upon release of the policy to the employee, no additional liability exists between the parties regarding the matter of severance pay and no additional payments shall be made by the Company to the employee. Accordingly, severance liability and deposits on behalf of such liability are not presented on the balance sheet, as the Company has no further obligation to these employees once the deposits have been paid. |
- 97 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | o. | Revenue recognition: |
| | | |
| | | Revenues are recognized in the statement of comprehensive loss when the revenues can be measured reliably, it is probable that the economic benefits associated with the transaction will flow to the Company and the costs incurred or to be incurred in respect of the transaction can be measured reliably. |
| | | |
| | | The Company's revenues are derived from: |
| | | |
| | | Operator fees- the Company acts as the operator on the Offshore Licenses and is entitled to operator fees at a fixed rate of 7.5% of the total exploration costs incurred by the respective UJV's or at a rate ranging from 1.2%-4.8% of the total exploration costs incurred by the respective UJV's depending on the annual expenditures in the UJV. Revenues from operator fees are recognized in accordance with the terms of the Joint Operating Agreements, as exploration costs are incurred in the UJV's. |
| | | |
| | | Consulting fees- The Company provides consulting services in respect of the Offshore Licenses on a "time and materials" basis. Consulting fees are recognized as revenues as the services are rendered to the respective UJV's. |
| | | |
| | p. | Finance income and expenses: |
| | | |
| | | Finance income comprises interest income on cash, cash equivalents and restricted cash and exchange rate gains and losses. |
| | | |
| | | Gains and losses on exchange rate differences are reported on a net basis. |
| | | |
| | q. | Loss per share: |
| | | |
| | | Loss per share is calculated by dividing the net loss attributable to equity holders of the Company by the weighted number of Ordinary shares outstanding during the period. Basic loss per share only includes shares that were actually outstanding during the period. Potential Ordinary shares (warrants and employee options) are only included in the computation of diluted loss per share when their conversion decreases earnings per share or increases loss per share from continuing operations. Further, potential Ordinary shares that are converted during the period are included in diluted earnings per share only until the conversion date and from that date in basic earnings per share. |
| | | |
| | | All share options and warrants outstanding for all periods presented have not been included in the calculation of diluted loss per share, as they are antidilutive. |
- 98 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | r. | Decommissioning liability: |
| | | |
| | | Decommissioning liability is recognized when the Company has a present legal or constructive obligation as a result of past events, and it is probable that an outflow of resources will be required to settle the obligation, and a reliable estimate of the amount of obligation can be made. A corresponding amount equivalent to the provision is also recognized as part of the cost of the related property and equipment. The amount recognized is the estimated cost of decommissioning, discounted to its present value. Changes in the estimated timing of decommissioning or decommissioning cost estimates are dealt with prospectively by recording an adjustment to the provision, and a corresponding adjustment to property and equipment. The unwinding of the discount on the decommissioning provision is included as a finance cost. |
| | | |
| | s. | Presentation of statement of comprehensive loss: |
| | | |
| | | The Company has elected to present a single statement of comprehensive loss which includes both the items of the statement of operation and the items of other comprehensive loss. |
| | | |
| | t. | Reclassification: |
| | | |
| | | Certain amounts have been reclassified in comparative data in order to conform to current year's presentation. |
| | | |
| | u. | Disclosure of new IFRSs in the period prior to their adoption: |
IAS 32 - Financial Instruments: Presentation and IFRS 7 - Financial Instruments: Disclosure:
The IASB issued certain amendments to IAS 32 ("the amendments to IAS 32") regarding the offsetting of financial assets and liabilities. The amendments to IAS 32 clarify, among others, the meaning of "currently has a legally enforceable right of set-off" ("the right of set-off"). Among others, the amendments to IAS 32 prescribe that the right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties. The amendments to IAS 32 also state that in order for the right of set-off to be currently available, it must not be contingent on a future event, there may not be periods during which the right is not available, or there may not be any events that will cause the right to expire.
The IASB also issued amendments to IFRS 7 ("the amendments to IFRS 7") regarding the offsetting of financial assets and liabilities. According to the amendments to IFRS 7, the Company is required, among others, to provide disclosure of rights of set-off and related arrangements (such as collateral agreements), the composition of amounts that are set off, and amounts subject to enforceable master netting arrangements that do not meet the offsetting criteria of IAS 32.
- 99 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | |
| The amendments to IAS 32 are to be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2014, or thereafter. Earlier application is permitted, but disclosure of early adoption is required as well as the disclosures required by the amendments to IFRS 7 as described above. The amendments to IFRS 7 are to be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2013, or thereafter. |
| | |
| The Company estimates that the amendments to IAS 32 are not expected to have a material impact on its financial statements. The required disclosures pursuant to the amendments to IFRS 7 will be included in the Company's financial statements. |
IFRS 9 - Financial Instruments:
| | 1. | In November 2009, the IASB issued IFRS 9, "Financial Instruments", the first part of Phase 1 of a project to replace IAS 39, "Financial Instruments: Recognition and Measurement". IFRS 9 focuses mainly on the classification and measurement of financial assets and it applies to all financial assets within the scope of IAS 39. |
| | | | |
| | | According to IFRS 9, all financial assets (including hybrid contracts with financial asset hosts) should be measured at fair value upon initial recognition. In subsequent periods, debt instruments should be measured at amortized cost if both of the following conditions are met: |
| | | | |
| | | - | the asset is held within a business model whose objective is to hold assets in order to collect the contractual cash flows. |
| | | | |
| | | - | the contractual terms of the financial asset give rise on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding. |
Notwithstanding the aforesaid, upon initial recognition, the Company may designate a debt instrument that meets both of the abovementioned conditions as measured at fair value through profit or loss if this designation eliminates or significantly reduces a measurement or recognition inconsistency ("accounting mismatch") that would have otherwise arisen.
Subsequent measurement of all other debt instruments and financial assets should be at fair value.
Financial assets that are equity instruments should be measured in subsequent periods at fair value and the changes recognized in profit or loss or in other comprehensive income, in accordance with the election by the Company on an instrument-by-instrument basis (amounts recognized in other comprehensive income cannot be subsequently transferred to profit or loss). Nevertheless, if equity instruments are held for trading, they should be measured at fair value through profit or loss. This election is final and irrevocable. When an entity changes its business model for managing financial assets it shall reclassify all affected financial assets. In all other circumstances, reclassification of financial instruments is not permitted.
- 100 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
| | | The Standard is effective commencing from January 1, 2013. Earlier application is permitted. Upon initial application, the Standard should be applied retrospectively, except as specified in the Standard. |
| | | |
| | 2. | In October 2010, the IASB issued certain amendments to IFRS 9 regarding de- recognition and financial liabilities. According to those amendments, the provisions of IAS 39 will continue to apply to de-recognition and to financial liabilities for which the fair value option has not been elected (designated as measured at fair value through profit or loss); that is, the classification and measurement provisions of IAS 39 will continue to apply to financial liabilities held for trading and financial liabilities measured at amortized cost. |
The changes arising from these amendments affect the measurement of a liability for which the fair value option has been chosen. Pursuant to the amendments, the amount of the adjustment to the liability's fair value that is attributable to changes in credit risk should be presented in other comprehensive income. All other fair value adjustments should be presented in profit or loss. If presenting the fair value adjustment of the liability arising from changes in credit risk in other comprehensive income creates an accounting mismatch in profit or loss, then that adjustment should also be presented in profit or loss rather than in other comprehensive income.
Furthermore, according to the amendments, derivative liabilities in respect of certain unquoted equity instruments can no longer be measured at cost but rather only at fair value.
The amendments are effective commencing from January 1, 2013. Earlier application is permitted provided that the Company also adopts the provisions of IFRS 9 regarding the classification and measurement of financial assets (the first part of Phase 1). Upon initial application, the amendments should be applied retrospectively, except as specified in the amendments.
The Company believes that the amendments are not expected to have a material effect on the financial statements.
IFRS 10, IFRS 11, IFRS 12, IFRS 13 - Consolidated Financial Statements, Joint Arrangements, Disclosure of Interests in Other Entities, Fair Value Measurement:
In May 2011, the IASB issued four new Standards: IFRS 10, "Consolidated Financial Statements", IFRS 11, "Joint Arrangements", IFRS 12, "Disclosure of Interests in Other Entities" ("the new Standards") and IFRS 13, "Fair Value Measurement", and amended two existing Standards, IAS 27R (Revised 2011), "Separate Financial Statements", and IAS 28R (Revised 2011), "Investments in Associates and Joint Ventures".
- 101 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The new Standards are to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013 or thereafter. Earlier application is permitted. However, if the Company chooses earlier application, it must adopt all the new Standards as a package (excluding the disclosure requirements of IFRS 12 which may be adopted separately). The Standards prescribe transition provisions with certain modifications upon initial adoption.
The main provisions of the Standards and their expected effects on the Company are as follows:
IFRS 10 - Consolidated Financial Statements:
IFRS 10 supersedes IAS 27 regarding the accounting treatment of consolidated financial statements and includes the accounting treatment for the consolidation of structured entities previously accounted for under SIC 12, "Consolidation - Special Purpose Entities".
IFRS 10 does not prescribe changes to the consolidation procedures but rather modifies the definition of control for the purpose of consolidation and introduces a single consolidation model.
IFRS 10 also prescribes that an investor may have control even if it holds less than a majority of the investee's voting rights (de facto control), as opposed to the provisions of the existing IAS 27 which permits a choice between two consolidation models - the de facto control model and the legal control model.
IFRS 10 is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013, or thereafter.
The Company believes that the adoption of IFRS 10 is not expected to have a material effect on the financial statements.
IAS 27R - Separate Financial Statements:
IAS 27R supersedes IAS 27 and only addresses separate financial statements. The existing guidanceforseparate financial statements has remained unchanged in IAS 27R.
IFRS 11 - Joint Arrangements:
IFRS 11 supersedes IAS 31 regarding the accounting treatment of interests in joint ventures and SIC 13 regarding the interpretation of the accounting treatment of non-monetary contributions by venturers.
- 102 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
IFRS 11 defines joint arrangements as contractual arrangements over which two or more parties have joint control.
IFRS 11 distinguishes between two types of joint arrangements:
| | - | Joint ventures in which the parties that have joint control of the arrangement have rights to the net assets of the arrangement. IFRS 11 requires joint ventures to be accounted for solely by using the equity method, as opposed to the provisions of IAS 31 which allowed the Company to make an accounting policy choice whether to apply proportionate consolidation or the equity method for entities under joint control. |
| | | |
| | - | Joint operations in which the parties that have joint control of the arrangement have rights to the assets, and obligations for the liabilities, relating to the arrangement. IFRS 11 requires the joint operator to recognize a joint operation's assets, liabilities, revenues and expenses in proportion to its relative share of the joint operation as determined in the joint arrangement, similar to the current accounting treatment for proportionate consolidation. |
IFRS 11 is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013, or thereafter.
The Company believes that the adoption of IFRS 11 is not expected to have a material effect on the financial statements.
IAS 28R - Investments in Associates and Joint Ventures:
IAS 28R supersedes IAS 28. The principal changes in IAS 28R compared to IAS 28 relate to the application of the equity method of accounting for investments in joint ventures, as a result of the issuance of IFRS 11, and the guidance for transition from proportionate consolidation to the equity method of accounting for these investments. IAS 28R also prescribes that in the event of disposal of an investment in an associate or joint venture, including a portion thereof, the portion that meets the criteria to be classified as held for sale is accounted for in accordance with IFRS 5. Any remaining portion is accounted for using the equity method until the time of actual disposal. In addition, an investment in an associate that becomes an investment in a joint venture, or vice versa, will continue to be accounted for at equity and the remaining investment will not be remeasured.
IAS 28R is to be applied retrospectively in financial statements for annual periods commencing on January 1, 2013, or thereafter. Earlier application is permitted; however, if the Company elects earlier application of IAS 28R, it must also apply IFRS 10, IFRS 11, IFRS 12 and IFRS 27R (Revised 2011) collectively.
- 103 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The Company estimates that IAS 28R is not expected to have a material impact on its financial statements.
IFRS 12 - Disclosure of Interests in Other Entities:
IFRS 12 prescribes disclosure requirements for the Company's investees, including subsidiaries, joint arrangements, associates and structured entities. IFRS 12 expands the disclosure requirements to include the judgments and assumptions used by management in determining the existence of control, joint control or significant influence over investees, and in determining the type of joint arrangement. IFRS 12 also provides disclosure requirements for material investees.
The required disclosures will be included in the Company's financial statements upon initial adoption of IFRS 12.
IFRS 13 - Fair Value Measurement:
IFRS 13 establishes guidance for the measurement of fair value, to the extent that such measurement is required according to IFRS. IFRS 13 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. IFRS 13 also specifies the characteristics of market participants and determines that fair value is based on the assumptions that would have been used by market participants. According to IFRS 13, fair value measurement is based on the assumption that the transaction will take place in the asset's or the liability's principal market, or in the absence of a principal market, in the most advantageous market.
IFRS 13 requires an entity to maximize the use of relevant observable inputs and minimize the use of unobservable inputs. IFRS 13 also includes a fair value hierarchy based on the inputs used to determine fair value as follows:
| | Level 1 - | quoted prices (unadjusted) in active markets for identical assets or liabilities. |
| | | |
| | Level 2 - | inputs other than quoted market prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. |
| | | |
| | Level 3 - | unobservable inputs (valuation techniques that do not make use of observable inputs). |
IFRS 13 also prescribes certain specific disclosure requirements.
The new disclosures, and the measurement of assets and liabilities pursuant to IFRS 13, are to be applied prospectively for periods commencing after the Standard's effective date, in financial statements for annual periods commencing on January 1, 2013 or thereafter. Earlier application is permitted. The new disclosures will not be required for comparative data.
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 3: | SIGNIFICANT ACCOUNTING POLICIES (Cont.) |
The appropriate disclosures will be included in the Company's financial statements upon initial adoption of IFRS 13.
As for the effect on the financial statements, the Company believes that IFRS 13 is not expected to have a material impact on its financial statements.
IAS 32 - Financial Instruments: Presentation and IFRS 7 - Financial Instruments: Disclosure:
In December 2011, the IASB issued amendments to IAS 32 ("the amendments to IAS 32") regarding the offsetting of financial assets and liabilities. The amendments to IAS 32 clarify, among others, the meaning of "currently has a legally enforceable right of set-off" ("the right of set-off"). Among others, the amendments to IAS 32 prescribe that the right of set-off must be legally enforceable not only during the ordinary course of business of the parties to the contract but also in the event of bankruptcy or insolvency of one of the parties. The amendments to IAS 32 also state that in order for the right of set-off to be currently available, it must not be contingent on a future event, there may not be periods during which the right is not available, or there may not be any events that will cause the right to expire.
Simultaneously in December 2011, the IASB issued amendments to IFRS 7 ("the amendments to IFRS 7") regarding the offsetting of financial assets and liabilities. According to the amendments to IFRS 7, the Company is required, among others, to provide disclosure of rights of set-off and related arrangements (such as collateral agreements), the composition of amounts that are set off, and amounts subject to enforceable master netting arrangements that do not meet the offsetting criteria of IAS 32.
The amendments to IAS 32 are to be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2014, or thereafter. Earlier application is permitted, but disclosure of early adoption is required as well as the disclosures required by the amendments to IFRS 7 as described above. The amendments to IFRS 7 are to be applied retrospectively commencing from the financial statements for periods beginning on January 1, 2013, or thereafter.
The Company estimates that the amendments to IAS 32 are not expected to have a material impact on its financial statements. The required disclosures pursuant to the amendments to IFRS 7 will be included in the Company's financial statements.
- 105 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 4:- | CASH AND CASH EQUIVALENTS |
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | In US Dollars | $ | 2,205 | | $ | 6,633 | |
| | In Canadian Dollars | | 73 | | | 1,324 | |
| | In NIS | | 116 | | | 137 | |
| | | | | | | | |
| | | $ | 2,394 | | $ | 8,094 | |
| NOTE 5:- | RESTRICTED CASH |
| | |
| Short-term restricted cash of $ 100 as of December 31, 2012 and 2011 relates to deposits held by a financial institution as security in connection with a guarantee against the Company's credit facility and was released subsequent to balance sheet date. |
| | |
| Long-term restricted cash of $ 65 as of December 31, 2011 and short-term restricted cash of $67 as of December 31, 2012 relates to cash held by a financial institution as a guarantee for the Company's Israeli office and the land lease on the Eitan license. |
| | |
| Long-term restricted cash of $ 278 as of December 31, 2011 and short-term restricted cash of $915 as of December 31, 2012 relates to deposits held by a financial institution as security in connection with the guarantee in favor of customs. |
| | |
| NOTE 6:- | ACCOUNTS RECEIVABLE |
| | |
| Accounts receivable are non-interest bearing and are generally on 30-90 days terms. The Company has no past due or impaired trade receivables as of December 31, 2012 and 2011. |
- 106 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 7:- | OTHER RECEIVABLES AND PREPAID EXPENSES |
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Receivable from UJVs | $ | 3,563 | | $ | 586 | |
| | Government authorities | | 889 | | | 220 | |
| | Prepaid expenses | | 175 | | | 195 | |
| | Other receivables | | 26 | | | 11 | |
| | Consumables | | 48 | | | 105 | |
| | | | | | | | |
| | | $ | 4,701 | | $ | 1,117 | |
| NOTE 8:- | PROPERTY AND EQUIPMENT, NET |
| | |
| | Composition and movement: |
| | |
| | 2012 |
| | | | | | | Office | | | Computer | | | | |
| | | | Drilling rig | | | furniture | | | and | | | | |
| | | | and related | | | and | | | peripheral | | | | |
| | | | equipment | | | equipment | | | equipment | | | Total | |
| | | | U.S. dollars in thousands | |
| | Cost: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Balance at January 1, 2012 | $ | 426 | | $ | 83 | | $ | 215 | | $ | 724 | |
| | Purchases during the year | | - | | | - | | | 70 | | | 70 | |
| | | | | | | | | | | | | | |
| | Balance at December 31, 2012 | | 426 | | | 83 | | | 285 | | | 794 | |
| | | | | | | | | | | | | | |
| | Accumulated depreciation: | | | | | | | | | | | | |
| | Balance at January 1, 2012 | | 191 | | | 14 | | | 60 | | | 265 | |
| | Additions during the year: | | | | | | | | | | | | |
| | Depreciation for the year **) | | - | | | 16 | | | 80 | | | 96 | |
| | | | | | | | | | | | | | |
| | Provision for impairment *) | | 157 | | | - | | | - | | | - | |
| | | | | | | | | | | | | | |
| | Balance at December 31, 2012 | | 348 | | | 30 | | | 140 | | | 518 | |
| | | | | | | | | | | | | | |
| | Depreciated cost at December 31, 2012 | $ | 78 | | $ | 53 | | $ | 145 | | $ | 276 | |
| | *) | Following the Eitan license relinquishment in 2011 (See Note 9a), an impairment loss of $157 was recognized in the Statement of Comprehensive Loss for 2012. |
| | **) | On January 2012, the Company activated a program for the sale of the drilling rig and related equipment and commenced marketing the equipment for sale. Accordingly, the equipment was accounted for as held for sale under IFRS 5 and therefore was not depreciated during 2012. |
- 107 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 8:- | PROPERTY AND EQUIPMENT, NET (Cont.) |
| | | | | | | Office | | | Computer | | | | |
| | | | Drilling rig | | | furniture | | | and | | | | |
| | | | and related | | | and | | | peripheral | | | | |
| | | | equipment | | | equipment | | | equipment | | | Total | |
| | | | U.S. dollars in thousands | |
| | Cost: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Balance at January 1, 2011 | $ | 389 | | $ | 6 | | $ | 32 | | $ | 427 | |
| | | | | | | | | | | | | | |
| | Purchases during the year | | 37 | | | 77 | | | 183 | | | 297 | |
| | | | | | | | | | | | | | |
| | Balance at December 31, 2011 | | 426 | | | 83 | | | 215 | | | 724 | |
| | | | | | | | | | | | | | |
| | Accumulated depreciation: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Balance at January 1, 2011 | | 9 | | | - | | | 3 | | | 12 | |
| | | | | | | | | | | | | | |
| | Additions during the year: | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | Depreciation for the year *) | | 40 | | | 14 | | | 57 | | | 111 | |
| | | | | | | | | | | | | | |
| | Provision for impairment **) | | 142 | | | - | | | - | | | 142 | |
| | | | | | | | | | | | | | |
| | Balance at December 31, 2011 | | 191 | | | 14 | | | 60 | | | 265 | |
| | | | | | | | | | | | | | |
| | Depreciated cost at December 31, 2011 | $ | 235 | | $ | 69 | | $ | 155 | | $ | 459 | |
| | *) | Including depreciation of drilling rig and drilling equipment of $31 that was capitalized to exploration and evaluation assets. |
| | **) | Following the Eitan license relinquishment in 2011 (See Note 9a), an impairment loss of $142 was recognized in the Statement of Comprehensive Loss for 2011. |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS |
| | |
| | The following is a description of activities in respect of the Company's licenses: |
| | a. | Eitan: |
| | | |
| | | The Eitan License comprises an area of approximately 31,060 acres in the Hula Valley in Northern Israel. The Eitan License was awarded in December 2008 for a term of three years which expired in December 2011. The Company had a 100% working interest in the license. |
- 108 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
The Company commenced drilling its first new well ("Eitan # 1") in January 2011. In accordance with the Company's accounting policy, the Company capitalized $935 to Exploration and Evaluation Assets during 2011.
Following a review and further analysis by the Company's geoscientists, in consultation with outside consultants, management concluded in November 2011 that commercial quantities of hydrocarbons were not present in the Eitan 1 well. In December 2011, the Company notified the Ministry of Energy and Water Resources of the State of Israel ("the Ministry") that it is relinquishing the license and in December 2012. The Company received a final confirmation from the Ministry approving the surrender of the Eitan License.
As a result of the above, the Company recorded in 2011 $1,226 non-cash impairment charge arising from the write-off of exploration and evaluation assets, as well as inventory and equipment related to onshore drilling in the statement of comprehensive loss. In 2012, the Company decided to sell the remaining inventory and equipment and recorded a $214 non-cash impairment charge arising from the write-off of exploration and evaluation assets as well as inventory and equipment related to onshore drilling in the statement of comprehensive loss. In 2012, the Company decided to sell the remaining inventory and equipment.
The exploration expenses relating to the Eitan license that were not capitalized are as follows:
| | | | Year ended December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Exploration expenses | $ | 116 | | $ | 784 | | $ | 568 | |
| | b. | Off-shore licenses: |
| | | | |
| | | (1) | Gabriella: |
| | | | |
| | | | The Gabriella License was awarded to the Company in July 2009 and covers 97,000 acres (392 sq. km.) and is located approximately 10 km offshore Israel between Netanya and Ashdod. The license was issued for an initial three year period and may be renewed upon fulfillment of certain conditions for a further four year period with a further renewal option of two years in case of a reserve discovery. As of December 31, 2012, the Company had received a renewal of the Gabriella license to September 2013, including extension of certain milestones. |
- 109 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
As of December 31, 2012, the Company has a 15% working interest in Gabriella. In addition, the Company is the operator of the Gabriella License and is entitled to an operating fee as described below.
In January 2010, Adira Energy Israel Ltd., signed an agreement with Modiin Energy Limited Partnership ("MELP") and Modiin Energy General Partners ("MEGP") (collectively "Modiin") to facilitate the full initial funding of the Gabriella License. Under the terms of the agreement, Modiin farmed in 70% of the rights of participation in the Gabriella License (the "Gabriella Project"). Brownstone Ventures Inc ("Brownstone") has a 15% participating interest in the Gabriella License. Brownstone's working interest is registered in the Company's name. Transfer of the beneficial ownership is subject to the approval of the Ministry. Until such time, these participating interests are held in trust by the Company. Modiin has agreed to fund its 70% share, as well as the Company's 15% share of the work program up to a total of $8,000 (i.e. $1,200). Modiin completed this funding commitment in 2011.
In addition, Modiin agreed to pay Adira: 1) a monthly management fee of $ 12.5 for a period of two years commencing February 1, 2010, 2) one half of the management fees MEGP receives from MELP (3.75% of 7.5% management fees) in respect to this license, for a period of 24 months, commencing February 1, 2010, after which the amount increases to 4.25% (the "Modiin Management Fees"); and 3) a royalty of 2.25% from both MELP and MEGP each from any resources extracted until Modiin recovers its costs incurred, after which the royalty increases to 5.25% (the "Modiin Royalty" and together with the Modiin Buy Back Option and Modiin Management Fees, the "Modiin Farmout Rights"). Due to the uncertainty of receipt of these fees and royalties in the event of the termination of the exploration program, these fees and royalties are recorded as income upon receipt.
The Company has an option to purchase 15% of the Gabriella License from Modiin (or 21.43% of MELP's 70% interest) any time until the earlier of six months after a discovery or seven years from July 2009 ("Modiin Buy Back Option"). The exercise price for this option is the actual costs incurred by Modiin on the 15% interest up until the exercise date.
All exploration and extraction activity on the Gabriella License, and the relationship of the participating interest holders, is governed by a joint operating agreement or "JOA" (the "Gabriella JOA"). The Gabriella JOA parties paid the Company an operating fee equal to 7.5% of the cumulative, direct costs incurred to operate the Gabriella License, through January 26, 2012. Commencing January 27, 2012, the Gabriella License participants began paying a new operator fee of (i) a $25 per month, plus (ii) an additional sliding-scale percentage of exploration expenses incurred, ranging from 4.8% of annual exploration expenses (if less than $2,000) down to 1.2% of annual exploration expenses (if over $6,000).
- 110 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
On July 19, 2012, the Company announced that MELP executed a drilling contract with Noble International Ltd ("Noble Drilling") to secure access to the Noble Homer Farrington drilling unit rig for a minimum of 75 days to drill one well, and possibly one sidetrack on behalf of the Gabriella License (the "Drilling Contract"). The Drilling Contract, which has since been terminated as previously reported, required that MELP provide a letter of credit or cash collateral within specified time frames outlined in the Drilling Contract. Pursuant to the Drilling Contract, the parties determined that a letter of credit will be issued to secure the Drilling Contract.
On June 12, 2012, of the Company signed a Memorandum of Understanding ("MOU") with MELP and Brownstone, pursuant to which the parties agreed to authorize MELP to sign the Drilling Contract and the Company agreed to provide its working interest share of the collateral due to Noble Drilling. The MOU provided that if Adira failed to pay its share of the collateral, then it would: (a) withdraw from the Gabriella JOA; (b) assign its participating interest in the Gabriella License to the other participants in proportion to their holdings; and (c) relinquish all back-in rights, overriding royalty interests ("ORRI") and management fees, rights of first refusal and co-sale rights to MELP. Pursuant to the MOU, Adira Israel also granted MELP the MELP Yitzhak Option (as described below).
On December 21, 2012, the Company entered into an agreement with MELP and Brownstone (the "Gabriella 2012 Agreement"), wherein certain terms regarding the parties’ use of the Noble Drilling unit were revised to require MELP to provide letter of credit to Noble Drilling in two phases ($20 million by January 3, 2013 (the "First LC Amount") and $13.2 million by January 31, 2013 (the "Second LC Amount")) and confirmed a reduction in the daily drilling rate due to Noble Drilling by MELP under the Drilling Contract from $500,000 per day to $415,000 per day, and to the extent used, reduction in stand-by rates to between $100,000 and $300,000 per day. The parties also agreed to take possession of the Homer Ferrington drilling unit in direct continuation from its then current drilling program, which meant the parties would need to accelerate, by up to three months, the program previously contemplated for the Gabriella License. According to the Gabriella 2012 Agreement, Adira's share of the aggregated letter of credit amounted to $5,000, which was required to be placed by January 31, 2013.
In addition, the parties agreed that: (i) in order to facilitate farm-in transactions to the License, in the event that MELP secures a farm-in partner of its participating interest, Adira will proportionally reduce its Modiin Farmout Rights for up to a maximum of 30% of such participating interest. Adira’s proportional reduction obligation will only be applied to partners that have farmed into MELP’s participating interest, up to a date that is the earlier of the (a) commencement of the first test of the first well on the Gabriella License; or (b) plugging and abandoning or suspending of the first well on the Gabriella License. Any consideration received by MELP from any farm in partner will be shared equally between Adira and MELP, provided that at a minimum, Adira will receive 50% of past costs incurred by MELP, estimated to be $1.3 million per each 10% farmed out, as well as an ORRI of 1.5%,. (ii) Adira will have a 10% tag along rights to farm-out, on the same terms to the farm in partner that farms into MELP’s participating interest in the Gabriella License, in the event that such partner complies with certain criterion, (iii) MELP has granted to Adira an irrevocable option to purchase (the "Yam Hadera Option") from MELP a 15% participating interest in the Yam Hadera petroleum license (the "Yam Hadera License") offshore Israel. See also Note 9b(4).
- 111 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
Subsequent to balance sheet date, the Drilling Contract was further amended as described in Note 20.
Exploration activities of Gabriella since inception and throughout the year ended December 31, 2012 amounted to $27,336. The Company's 15% interest in the first $8,000 thousand of exploration expense was carried by Modiin and is not included in the Company's accounts for the years ended December 31, 2011 and 2010.
The Company's proportionate share of the Gabriella license is as follows:
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Cash and cash equivalents | $ | 475 | | $ | 35 | |
| | Other receivables and prepaid expenses | | 335 | | | - | |
| | Exploration and evaluation assets (*) | | 2,646 | | | - | |
| | Trade payables | | (512 | ) | | (32 | ) |
| | | | | | | | |
| | | $ | 2,944 | | $ | 3 | |
(*) This amount primarily includes $1,597 relating to tangibles (piping tubes, etc.), $240 relating to a seabed survey and $580 relating to project management costs (including well design).
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Exploration expenses | $ | 48 | | $ | 13 | | $ | - | |
- 112 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
The Yitzhak license was awarded to the Company in October 2009 and covers 31,555 acres (127.7 sq.km) and is located approximately 9 km offshore Israel between Hadera and Netanya, directly to the North of and contiguous to Gabriella. The license was issued for an initial three year period and may be renewed upon fulfillment of certain conditions for a further four year period with a further renewal option of two years in case of a reserve discovery. As of December 31, 2012, the Company had received a renewal of te Yitzhak license to December 2013, including extension of certain milestones.
In 2011, the Company had 85% working interest in this license. Brownstone has a 15% participating interest in the Yitzhak license. In addition, until January 1, 2012, the Company was the operator of the Yitzhak License and was entitled to receive a 7.5% operating fee on all its expenditures.
In November 2011, an agreement was signed between Adira Israel and Ellomay Oil and Gas 2011 LP ("Ellomay"), whose general partner is a wholly owned subsidiary of Ellomay Capital Ltd. ("Ellomay Capital") for the transfer of rights in the Yitzhak license (the "Agreement") according to which Ellomay would receive 20% (out of 100%) participation rights in the Yitzhak License (the "Transferred Rights"), in consideration for reimbursement of the expenses paid by Adira until the date of execution of the Agreement in respect of the Transferred Rights plus interest of Libor + 1%. Therefore, following the closing in February 2012 (See below), Ellomay paid Adira approximately $361, which was recognized as income in 2012.
In addition, on November 29, 2011 the Company entered into an agreement with AGR Petroleum Services Holding AS ("AGR PSH"), a related party, AGR Group ASA ("AGR") whereby AGR PSH would act as chief operator in the Yitzhak License, and would receive 5% (out of 100%) participation rights in the Yitzhak License. Adira Israel will act as a joint operator, in accordance with the provisions of the JOA agreement and/or a services agreement to be signed and/or another agreement to be signed between the parties. All the partners (Ellomay, Brownstone and Adira) undertook to bear their proportionate share in AGR's expenses (5%) from the date of execution of the Agreement until the date of approval of a development plan by the Minstry ("Coverage of Expenses"). From the date of approval of the work plan as aforesaid, AGR shall bear its expenses according to its proportionate share in the participation rights (5%). AGR's income from the production of gas and petroleum in accordance with its proportionate share in its participation rights in the license shall be used to repay the Coverage of Expenses plus interest of Libor + 1%.
On January 9, 2012, the Ministry approved the farm-out of an aggregate of 25% of its interest in the Yitzhak License to the two new partners, 5% to AGR and 20% to
- 113 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
Ellomay, Accordingly, as of December 31, 2012, the Company has a 60% interest in the Yitzhak License, Brownstone has a 15% working interest in the license, AGR has a 5% working interest in the license and Ellomay has a 20% working interest in the license. The Company and AGR PSH are currently the co-operators of the Yitzhak License. The Company, Brownstone, AGR and Ellomay signed a joint operating agreement to regulate their commercial relationship in respect of the Yitzhak License on September 11, 2012 (the “Yitzhak JOA”). The Yitzhak JOA incorporated the terms of the AGR Farm-Out Agreement and the Ellomay Farm-Out Agreement. The Company does not expect to receive material operator fees from on account of the Yitzhak License.
Until reimbursement of all the expenses incurred by AGR and Ellomay in connection with the license, AGR and Ellomay shall pay Adira Israel overriding royalties at the rate of 3% of their full share in income deriving from petroleum and/or gas and/or other valuable materials actually produced and extracted from the license. After reimbursement of the expenses as aforesaid, AGR and Ellomay shall pay Adira Israel overriding royalties at the rate of 4.5% of their full share in rights in petroleum and/or gas and/or other valuable materials actually produced and extracted from the license.
According to the Ellomay Farm-Out Agreement and the Yitzhak JOA, Ellomay could elect not to fund the Yitzhak license and be subject to dilution for no consideration (i.e. the diluted interest would be transferred to Adira without cost), or it could transfer one-half of its 20% interest to a third party on negotiated terms. On October 29, 2012, Ellomay advised the Company of its intention to decrease Ellomay's interest in the Yitzhak License from 20% to 10% by paying decreased operating costs pursuant to the terms of the Yitzhak JOA. As of December 31, 2012, the Company expended $640 on behalf of Ellomay in respect of the Yitzhak License for which the Company was entitled to be reimbursed by a third party if the 10% interest was transferred. This amount was recorded as a long-term receivable as of December 31, 2012. Subsequent to balance sheet date, Ellomay failed to transfer timely its interest to a third party, and therefore one-half of its 20% interest was transferred back to the Company without cost. In 2013, the receivable will be classified as an additional investment in the exploration and evaluation assets in respect of the Yitzhak License. As of the date the financial statements were approved, the Company has a 70% interest in the Yitzhak License, Brownstone has a 15% interest, AGR has a 5% interest and Ellomay a 10% interest in the license. The new holdings have not yet been approved by the Minstry.
On June 13, 2012, pursuant to an MOU with MELP (see Note 9b(1)), Adira granted MELP, an option to purchase ("MELP Yitzhak Option") from Adira a 15% participating interest in the Yitzhak License (the "MELP Yitzhak Option Interest"). MELP may exercise the MELP Yitzhak Option until the later of (a) December 31, 2012, and (b) the 30th day from the date Adira notifies MELP of the execution of an agreement with a drilling contractor in relation to the Yitzhak License. The Gabriella 2012 Agreement amends the exercise date until 14 days before signing of the rig contract for the Yitzhak License. If MELP exercises the MELP Yitzhak Option, then it must reimburse Adira for expenditures in respect of the MELP Yitzhak Option Interest incurred up to the date of transfer of the MELP Yitzhak Option Interest. MELP must also issue to Adira an ORRI of 3% with respect to all oil and gas (including any distillate and condensate) produced, saved and marketed from the area covered by Yitzhak License that is attributable to the MELP Yitzhak Option Interest, before payout, and 4.5% after payout. The transfer of the MELP Yitzhak Option Interest is subject to the approval of the Minstry.
- 114 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
The Company's proportionate share of the Yitzhak license is as follows:
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Cash and cash equivalents | $ | 2 | | $ | 92 | |
| | Prepaid expenses and other receivables | | 103 | | | - | |
| | Exploration and evaluation assets (*) | | 2,328 | | | - | |
| | Trade payables | | (124 | ) | | (225 | ) |
| | | | | | | | |
| | | $ | 2,309 | | $ | (133 | ) |
(*) This amount primarily includes $1,017 relating to a seabed survey and $795 relating to project management costs (including well design).
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Exploration expenses | $ | 113 | | $ | 433 | | $ | 883 | |
| | (3) | Samuel: |
| | | |
| | | The Samuel license was issued in August 2010 and covers 88,708 acres (361 sq. km) approximately 17 km offshore Israel adjacent to the shoreline between Ashkelon and Palmachim. The license was issued to a consortium led by the Company (through the Company's subsidiaries, AOT and AGG). As of December 31, 2012, the Company has a working interest of 41.25% in this license. In accordance with the Joint Operating Agreement, AGG is the operator of the Samuel License and is entitled to receive a 7.5% operating fee on all its expenditures. AGG is also entitled to a 3% overriding royalty. The operator fee and ORRI are shared equally between Adira and Geo Global Resources Inc. ("GGRI"). |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
On October 26, 2012, Emanuelle Energy Limited ("Emanuelle") exercised an option to acquire a 7.13% interest in the Samuel License from GGRI and became a signatory to the Samuel JOA thereby reducing GGRI’s interest in the Samuel License to 22.88%.
As of December 31, 2012, Adira paid $3,000 of operating costs on behalf of GGRI and Emmanuelle, which are holding a total of 42% of the Samuel License. GGRI's obligation arises from GGRI’s direct interest in the license and indirectly through GGRI’s 40% in Adira GeoGlobal. Subsequent to balance sheet date, Adira issued a default letter to GGRI and Emmanuelle and in accordance with the Samuel JOA, Adira may seek reimbursement of these costs from the other Samuel License participants in proportion to their respective interests in the Samuel License, and all of the participants, including Adira, will each receive a proportionate increase in their interests in the Samuel License. Adira and GGRI are currently discussing a plan to ensure that GGRI reimburses Adira for costs advanced by Adira.
Adira did not sign a drilling contract for the drilling of the first well milestone by March 31, 2013, as required by the Ministry. Adira is currently in the process of requesting an extension for the timetable of the milestones from the Ministry and it is uncertain that such an extension will be received.
As of December 31, 2012, the Company believes that events described above including the lack of available funding from the license partners sufficient to meet the current milestones timetable, there are indicators of impairment of the Samuel license and there is a low probability of realization of the asset from either the successful development or sale of the license in the near future. Therefore, as of December 31, 2012, the Company recorded a $7,596 non-cash impairment charge arising from the write-off of exploration and evaluation (including uncollected recivables from GGRI and Emmanuelle) assets in the statement of comprehensive loss.
The Company's proportionate share of the Samuel license is as follows:
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Cash and cash equivalents | $ | 7 | | $ | 124 | |
| | Prepaid expenses and other receivables | | 765 | | | 16 | |
| | Exploration and evaluation assets (*) | | 875 | | | - | |
| | Trade payables | | (1,211 | ) | | (354 | ) |
| | | | | | | | |
| | | $ | 436 | | $ | (214 | ) |
- 116 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 9: | EXPLORATION AND EVALUATION ASSETS (Cont.) |
(*) This amount includes the estimated net realizable value of the tangible equipment for offshore drilling (piping tubes, etc.)
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Exploration expenses | $ | 217 | | $ | 3,163 | | $ | 17 | |
| | (4) | Yam Hadera: |
| | | |
| | | Pursuant to the Gabriella 2012 Agreement, the Company has an option (the "Yam Hadera Option") to acquire up to a 15% participating interest in the Yam Hadera petroleum license (the "Yam Hadera License"), located 30 kilometers offshore Israel, between Hadera and Haifa and North West of Adira’s Yitzhak license. The Yam Hadera Option is exercisable until 14 days prior to the signing of a rig contract for the Yam Hadera License. |
| | | |
| | | As described in Note 20, due to allegations made by MELP against Adira, and by allegations made by Adira against MELP, subsequent to balance sheet date, both parties assert that the other in default of various obligations under the Gabriella JOA and other contracts described above. Accordingly, there is no assurance that the Company will be able to exercise the Yam Hadera Option. |
| The Company has recognized exploration expenses for which it has not charged its license partners, in accordance with the terms and conditions set forth in the partnership agreements. These exploration expenses amounted to $532, $625 and $156 for the years ended December 31, 2012, 2011 and 2010, respectively. |
| | |
| NOTE 10:- | TRADE PAYABLES |
| | |
| | Trade payables are non-interest bearing and are normally settled on 60-day terms. |
| | |
| NOTE 11:- | OTHER ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Employees in respect of payroll | $ | 201 | | $ | 80 | |
| | Accrued expenses | | 1,239 | | | 824 | |
| | Other | | 36 | | | 35 | |
| | | | | | | | |
| | | $ | 1,476 | | $ | 939 | |
| | Accounts payable are non-interest bearing and have an average term of 30 days. |
| | |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 12:- | FINANCIAL INSTRUMENTS |
| | |
| The Company's activities expose it to various financial risks, such as market risks (foreign currency risk, consumer price index risk, interest risk and price risk), credit risk and liquidity risk. The Company's comprehensive risk management program focuses on actions to minimize potential adverse effects on the Company's financial performance. |
| | a. | Credit risk: |
| | | | |
| | | Concentration of credit risk exists with respect to the Company's cash and cash equivalent balances and receivables. The Company's exposure is for cash held in bank accounts, including restricted deposits, in the amount of $3,476 and $8,537 as of December 31, 2012 and December 31, 2011, respectively, and on accounts and other receivables in the sum of $5,061 and $1,213 on December 31, 2012 and December 31, 2011, respectively. |
| | | | |
| | | The Company manages credit risk, in respect of cash and cash equivalents, and restricted cash, by holding them at major Canadian and Israeli financial institutions in accordance with the Company's investment policy. The Company places its temporary cash and cash equivalents with high credit quality financial institutions. The Company regularly monitors credit extended to customers and their general financial condition. The Company historically has not had significant past-due receivables. |
| | | | |
| | b. | Liquidity risk: |
| | | | |
| | | Liquidity risk is the risk that the Company will encounter difficulty in obtaining funds to meet current obligations and future commitments. The Company's approach to managing liquidity risk is to forecast cash requirements to determine whether it will have sufficient funds to meet its current liabilities when due. The Company maintains sufficient working capital in order to meet short-term business requirements. As of December 31, 2012, the Company had cash and cash equivalents and restricted cash of $3,476, and accounts and other receivables of $5,061 against trade and other payables in the amount of $7,317. |
| | | | |
| | | As of December 31, 2011, the Company had cash and cash equivalents and restricted cash of $8,537 and accounts and other receivables of $1,213 against trade and other payables in the amount of $1,421. |
| | | | |
| | c. | Market risk: |
| | | | |
| | | Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. Market risk is comprised of two types of risk: interest rate risk and foreign currency risk. |
| | | | |
| | | 1. | Interest rate risk: |
| | | | |
| | | | The Company is not exposed to significant interest rate risk due to the short-term maturity of its cash equivalents. |
| | | | |
| | | 2. | Foreign currency risk: |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
NOTE 12:- FINANCIAL INSTRUMENTS (Cont.) |
The Company is exposed to financial risk related to the fluctuation of foreign exchange rates. The Company operates in Israel. Most of the Company's monetary assets are held in U.S. dollars and most of the Company's expenditures are made in
U.S. dollars. However, the Company also has expenditures in new Israeli shekels ("NIS") and Canadian dollars. The Company has not hedged its exposure to currency fluctuations. An increase or decrease of 5% of the NIS relative to the U.S or the Canadian dollar would not have a significant effect on the Company.
| NOTE 13:- TAXES ON INCOME |
| | a. | Tax rates applicable to the Company: |
| | | | | |
| | | 1. | The corporate tax rate in Canada in 2012 is 15%, (2011 – 16.5%), and the Ontario tax rate in 2012 is 11.5%, % (2011 - 11.75%). |
| | | | | |
| | | 2. | The Israeli corporate tax rate was 25% in 2010, 24% in 2011 and 25% in 2012. |
| | | | | |
| | | | On December 5, 2011, the Israeli Parliament (the Knesset) passed the Law for Tax Burden Reform (Legislative Amendments), 2011 ("the Tax Burden Law") which, among others, cancels effective from 2012, the scheduled progressive reduction in the corporate tax rate. The Tax Burden Law also increases the corporate tax rate to 25% in 2012. In view of this increase in the corporate tax rate to 25% in 2012, the real capital gains tax rate and the real betterment tax rate were also increased accordingly. |
| | | | | |
| | | 3. | On April 12, 2010, the Minister of Finance appointed the Committee for Examination of the Fiscal Policy on Petroleum and Gas Resources in Israel (the "Sheshinski Committee"). The Committee was charged with examining the fiscal system prevailing in Israel with regard to petroleum and gas resources, and proposing an updated fiscal policy. |
| | | | | |
| | | | On January 3, 2011, the Sheshinski Committee submitted its final recommendations to the Minister of Finance. On January 23, 2011 the Government adopted the Sheshinski Committee's report and recommendations, and on March 30, 2011 the Knesset adopted the Petroleum Profits Taxation Law, 5771-2011 (the "Law"). The Law was published in the Official Gazette on April 10, 2011. The main recommendations of the Committee and provisions of the Law are as follows: |
| | | | | |
| | | | a) | Leaving the rate of royalties to the State unchanged (12.5%). |
| | | | b) | Cancelling the depletion deduction. |
| | | | c) | Imposing a petroleum and gas profits levy: |
The levy will be calculated according to a proposed R-factor mechanism, according to the ratio between the net cumulative income from the project and the cumulative investments as defined in the Law. A minimum levy of 20% will be charged from the stage at which the R-factor ratio reaches 1.5, and when the ratio increases, the levy is progressively raised up to a maximum rate of 50%, when the ratio reaches 2.3. Further provisions were also set forth regarding the levy, including that the levy will be recognized as an expense for income tax calculation; the borders of the levy will not include export facilities; the levy will be calculated and imposed in respect of each reservoir separately (ring fencing); payment by a petroleum right holder which is calculated as a percentage of the petroleum extracted, the payment recipient will be liable for payment of a levy in accordance with the amount of the payment received thereby, which amount will be deducted from the levy amount for which the petroleum right holder is liable.
- 119 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 13:- TAXES ON INCOME (Cont.) |
| | d) | Accelerated depreciation will be granted for the investments at the rate of 10%, with a possibility of electing depreciation up to the amount of the taxable income in that year. |
| | | |
| | e) | Taxation of a petroleum partnership - the Law sets forth provisions regarding the manner of calculation and reporting of the profits of the partners in partnerships engaging in oil exploration, including the manner of calculation and payment of the tax arising from such profits. |
| | | |
| | f) | The following transition provisions were set forth: |
i) A petroleum venture in respect of which the date of commencement of commercial production occurs before the commencement date, the provisions of this Law shall apply with the following modifications:
| - | If such venture is subject to a levy payment duty in the tax year in which the date of commencement occurs, the levy rate in that tax year shall be one half the rate of the levy which would have been imposed on the petroleum profits but for the provisions of this paragraph, and no more than 10%. |
| - | If the levy coefficient in the tax year in which the commencement date occurs exceeds 1.5, rules are determined for the manner of calculation of the levy coefficient in each subsequent tax year. |
| - | The levy rate imposed on the petroleum profits of the venture in each of the tax years 2012 to 2015 will be equal to one half the levy rate which would have been imposed on the petroleum profits as aforesaid, but for the provisions of this paragraph. |
| | ii) | A venture in respect of which the date of commencement of commercial production occurs in the period from the date of commencement until January 1, 2014, shall be subject,inter aliato the following provisions: |
| - | The minimal levy coefficient shall be 2 instead of 1.5, and the maximum - 2.8 instead of 2.3. |
| | | |
| - | The depreciation rate for an asset acquired in the years 2011 to 2013 shall be 15% instead of 10%. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 13:- TAXES ON INCOME (Cont.) |
| | g) | An Amendment to the Income Tax Regulations (Deductions from the Income of Petroleum Rights Holders) (Amendment), 5771-2011, cancelled the recognition as a current expense of development expenses in respect of reservoirs, commercial production from which shall commence after January 1, 2014, and they shall be subject to the depreciation rules set forth in the Law. It is stated that the depletion deduction was canceled in the Amendment to the Income Tax Regulations (Deductions from the Income of Petroleum Rights Holders) (Amendment), 5771-2011, effective May 1, 2011. The provisions regarding the imposition of the petroleum and gas profits levy are effective from April 10, 2011, and the provision regarding the taxation of a petroleum partnership (Section above) is effective from the tax year 2011. The cancellation of the gradual reduction in the corporate tax rate, as described in a(2) above, will decrease the levy per the Petroleum Taxation law from 2016 and threafter to a maximum rate of 45.52% from the Company's oil and gas revenue. |
| | | At this time, the expected implications of the Law on the Company's business cannot be fully estimated. However, it may already be estimated that the implementation of the Law could significantly increase the tax burden and adversely affect the Company's business and activity, as compared with the situation before the Law took effect. |
| | | |
| | b. | Tax assessments: |
| | | |
| | | The Company's and its subsidiaries have not yet received final tax assessments since their incorporation. |
| | | |
| | c. | Carryforward losses for tax purposes and other temporary differences: |
| | | |
| | | As of December 31, 2012, carryforward losses in Canada are approximately $3,500 expiring through 2032. As of December 31, 2012, carryforward losses in Israel are approximately $18,000 and may be carried forward indefinitely. |
| | | |
| | | Net deferred tax assets relating to carryforward operating losses and other temporary differences of approximately $4,500 were not recognized because their utilization in the foreseeable future is not probable. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 13:- TAXES ON INCOME (Cont.) |
| | d. | Taxes on income included in the statements of comprehensive loss: |
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Current taxes | $ | 3 | | $ | 13 | | $ | 15 | |
| | Taxes in respect of prior years | | 38 | | | 20 | | | - | |
| | | | | | | | | | | |
| | | $ | 41 | | $ | 33 | | $ | 15 | |
| | e. | Theoretical tax: |
| | | |
| | | A reconciliation between the tax expense, assuming that all the income and expenses, gains and losses in the statement of comprehensive loss were taxed at the statutory tax rate and the taxes on income recorded in the statement of comprehensive loss is as follows: |
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Loss before income taxes | $ | (10,516 | ) | $ | (10,018 | ) | $ | (2,989 | ) |
| | | | | | | | | | | |
| | Statutory tax rate | | 26.5% | | | 28.25% | | | 31% | |
| | | | | | | | | | | |
| | Tax benefit computed at the statutory tax rate | $ | (2,787 | ) | $ | (2,830 | ) | $ | (927 | ) |
| | | | | | | | | | | |
| | Increase in taxes on income resulting from the following factors: | | | | | | | | | |
| | Taxes in respect of prior years | | 38 | | | 20 | | | - | |
| | Increase in tax due to tax rate differences in Israel | | 149 | | | 240 | | | 37 | |
| | Non-deductible expenses | | 179 | | | 224 | | | 328 | |
| | Non-recognition of tax benefit in respect of losses | | 2,462 | | | 2,379 | | | 577 | |
| | | | | | | | | | | |
| | Taxes on income | $ | 41 | | $ | 33 | | $ | 15 | |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| | a. | Authorized: |
| | | | |
| | | Unlimited number of Common shares without nominal or par value. |
| | | | |
| | b. | Issued and outstanding Common shares: |
| | | | |
| | | (i) | On November 22, 2010, the Company completed a private placement of 27,500,000 subscription receipts ("Receipts") for gross proceeds of $11,000 (issuance expenses of $923). On December 3, 2010, the Receipts were converted into 27,500,000 Common shares at $0.40 per share and 13,750,000 Common share purchase warrants ("Warrants") with an exercise price of $0.55 and a term of three years. In addition, 1,307,375 broker warrants were issued with an exercise price of $0.40. |
| | | | |
| | | | On December 2, 2010, the Common shares of the Company commenced trading on the TSX Venture Exchange (the "TSX-V") under the trading symbol "ADL". 28,233,745 Common shares, 2,848,000 options and 118,200 warrants are subject to TSX-V Escrow requirements. |
| | | | |
| | | (ii) | On February 16, 2011, the Company issued 10,483,871 common shares at CAD $0.62 per share for net proceeds of $6,152. |
| | | | |
| | | (iii) | On August 9, 2012, the Company completed a prospectus offering of 79,012,640 units for gross proceeds of $11,099 (before issuance expenses of $1,298 including the fair value of broker warrants $ 219). Each unit was priced at CAN$0.14 and consists of one Common Share and one warrant. Each warrant is exercisable to acquire one Common Share at a price of CAN$0.20 per Common Share until August 9, 2015. |
| | | | |
| | | | The warrants are denominated in Canadian dollars, while the functional currency of the Company is US dollars; therefore the fair value of the warrants was classified as a financial liability and the fair value of the warrants on the date of issuance was approximately $5,312. This financial liability is remeasured to fair value at the end of each period and changes in fair value is recorded in profit or loss. Therefore, the Company recorded a gain in financing income of $2,299 during the year ended December 31, 2012, as a result of remeasuring the fair value of the warrants to their fair value of $3,013 as of December 31, 2012. |
| | | | |
| | | | As part of the offering, a total of 3,353,000 broker warrants were issued. Each broker warrant is exercisable for one Common Share at an exercise price of CAN$0.14 per Common Share until August 9, 2014. The fair value of the warrants on the date of issuance was $219, which was included in offering expenses in statement of changes in equity. |
| | | | |
| | | | Following the completion of this offering a total of 180,781,093 Common Shares and 97,423,015 warrants are now issued and outstanding. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 14:- SHARE CAPITAL (Cont.) |
| | c. | Stock Option Plan: |
| | | |
| | | Under the Company's August 31, 2009 Stock Option Plan ("the Incentive Stock Option Plan"), options may be granted to employees, officers, consultants, service providers and directors of the Company or its subsidiaries. |
| | | |
| | | Stock options may be issued up to 10% of the Company's outstanding Common shares at a term and an exercise price to be determined by the Company's Board of Directors. The maximum term of the options is ten years from the date of grant. |
| | | |
| | | As of December 31, 2012, an aggregate of 417,000 of the Company's options were still available for future grant. |
| | | |
| | | The Company typically grants stock options with vesting periods of between two to four years, generally with the exercise price at the closing price of the stock on the date of the grant and an expiration date of five years from the date of grant. |
| | | |
| | | A summary of the stock option plan and changes during the years ended December 31, 2012 and 2011 were as follows: |
| | | | Number of | | | Weighted | |
| | | | options | | | average | |
| | | | outstanding | | | exercise price | |
| | | | | | | | |
| | Balance, January 1, 2011 | | 5,659,000 | | | 0.39 | |
| | Options granted | | 5,706,218 | | | 0.62 | |
| | Options exercised | | (527,811 | ) | | 0.25 | |
| | Options forfeited | | (1,453,189 | ) | | 0.49 | |
| | | | | | | | |
| | Balance, December 31, 2011 | | 9,384,218 | | | 0.52 | |
| | Options granted | | 10,130,000 | | | 0.21 | |
| | Options forfeited | | (1,853,109 | ) | | 0.56 | |
| | | | | | | | |
| | Balance, December 31, 2012 | | 17,661,109 | | | 0.34 | |
- 124 -
| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 14:- SHARE CAPITAL (Cont.) |
The following tables summarize information about stock options outstanding and exercisable as of December 31, 2012:
| | | | | | | | | | | | | | | | | | | Average | |
| | | | | | | | | | | | | Number of | | | Number of | | | remaining | |
| | | | | | | Grant date | | | Exercise | | | options | | | options | | | contractual | |
| | Grant date | | Expiry date | | | fair value | | | price *) | | | outstanding | | | exercisable | | | life | |
| | | | | | | | | | | | | | | | | | | | |
| | August 31, 2009 | | August 20, 2014 | | $ | 0.29 | | $ | 0.25 | | | 1,708,000 | | | 1,648,000 | | | 1.64 | |
| | September 23, 2009 | | September 23, 2014 | | $ | 0.22 | | $ | 0.25 | | | 400,000 | | | 400,000 | | | 1.73 | |
| | January 28, 2010 | | January 27, 2015 | | $ | 0.56 | | $ | 0.61 | | | 970,000 | | | 947,604 | | | 2.08 | |
| | July 22, 2010 | | July 21, 2015 | | $ | 0.25 | | $ | 0.61 | | | 850,000 | | | 850,000 | | | 2.56 | |
| | January 11, 2011 | | January 10, 2016 | | $ | 0.66 | | $ | 0.80 | | | 1,050,000 | | | 459,375 | | | 3.03 | |
| | March 18, 2011 | | March 17, 2016 | | $ | 0.59 | | $ | 0.80 | | | 100,000 | | | 43,750 | | | 3.21 | |
| | May 3, 2011 | | May 2, 2016 | | $ | 0.52 | | $ | 0.60 | | | 415,000 | | | 155,625 | | | 3.34 | |
| | June 1, 2011 | | May 31, 2016 | | $ | 0.43 | | $ | 0.50 | | | 1,138,109 | | | 426,791 | | | 3.42 | |
| | June 27, 2011 | | June 26, 2016 | | $ | 0.42 | | $ | 0.50 | | | 100,000 | | | 37,500 | | | 3.49 | |
| | September 8, 2011 | | September 7, 2016 | | $ | 0.41 | | $ | 0.50 | | | 250,000 | | | 62,500 | | | 3.58 | |
| | December 1, 2011 | | November 30, 2016 | | $ | 0.22 | | $ | 0.50 | | | 570,000 | | | 142,500 | | | 3.92 | |
| | March 14, 2012 | | March 13, 2017 | | $ | 0.15 | | $ | 0.25 | | | 2,000,000 | | | 250,000 | | | 4.20 | |
| | August 22, 2012 | | August 21, 2017 | | $ | 0.07 | | $ | 0.20 | | | 8,110,000 | | | 2,703,333 | | | 4.64 | |
| | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | 17,661,109 | | | 8,126,978 | | | | |
| | *) | The exercise price of all options granted in 2011 and 2012 is denominated in Canadian Dollars and was translated to USD in the table above using the exchange rate as of December 31, 2012. |
Stock options granted are expensed as share-based payments. For grants made until December 31, 2011, the Company uses the Black-Scholes option pricing model to value stock options granted. For grants made from January 1, 2012, the Company uses the Binominal option pricing model to value stock options granted.
The fair value of options granted is amortized over their vesting period and estimated at the date of grant with the following assumptions:
| | | 2012 | 2011 | 2010 |
| | | | | |
| | Dividend yield | 0% | 0% | 0% |
| | Expected volatility | 80%-104% | 112%-115% | 113%-175% |
| | Risk-free interest | 1%-1.8% | 1.3%-2.6% | 1.7%-2.4% |
| | Forfeiture rate | 0%-5% | 0%-5% | 0% |
| | Expected life | 5 | 5 | 5 |
Expected volatility is based on historical volatility of comparable companies, as the Company does not have sufficient history to determine the expected volatility of its shares. The expected term of options granted represents the period of time that options granted are expected to be outstanding. The risk free interest rate is based on the yield of Canadian Treasury bonds with equivalent terms. The dividend yield is based on the Company's historical and future expectation of dividends payouts. The Company has not paid cash dividends historically and has no plans to pay cash dividends in the foreseeable future.
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 14:- SHARE CAPITAL (Cont.) |
| | d. | Share purchase warrants: |
| | | |
| | | The Company has share purchase warrants outstanding entitling the holders to acquire Common shares as follows: |
| | | | | | | Weighted | |
| | | | Number of | | | average | |
| | | | warrants | | | exercise price | |
| | | | | | | | |
| | Balance as of January 1, 2011 | | 19,558,145 | | $ | 0.52 | |
| | Warrants Exercised | | (616,770 | ) | $ | 0.30 | |
| | Warrants Expired | | (3,884,000 | ) | $ | 0.50 | |
| | | | | | | | |
| | Balance as of December 31, 2011 | | 15,057,375 | | $ | (*0.54 | |
| | Warrants Granted | | 82,365,640 | | $ | (*0.20 | |
| | | | | | | | |
| | Balance as of December 31, 2012 | | 97,423,015 | | $ | 0.25 | |
The following tables summarize information applicable to warrants outstanding as of December 31, 2012:
| | | | | | | Grant date | | | Exercise | | | Number of | |
| | Issue date | | Expiry date | | | fair value | | | price | | | warrants | |
| | | | | | | | | | | | | | |
| | December 3, 2010 | | December 3, 2013 | | $ | 0.34 | | $ | 0.55 | | | 13,750,000 | |
| | December 3, 2010 | | December 3, 2013 | | $ | 0.35 | | $ | 0.40 | | | 1,307,375 | |
| | August 9, 2012 | | August 9, 2015 | | $ | 0.07 | | $ | (*0.20 | | | 79,012,640 | |
| | August 9, 2012 | | August 9, 2014 | | $ | 0.07 | | $ | (*0.14 | | | 3,353,000 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | 97,423,015 | |
| | *) | The exercise price of warrants granted in 2012 is denominated in Canadian Dollars and was translated to USD in the table above using the exchange rate as of December 31, 2012. |
| | e. | Capital management in the Company: |
| | | |
| | | The Company is in the early stage of gas and petroleum exploration. The Company has negative cash flows from current operations. The Company's primary source of funds comes from the issuance of share capital. The Company does not use other sources of financing that require fixed payments of interest and principal and is not subject to any externally imposed capital requirements. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 14:- SHARE CAPITAL (Cont.) |
The Company defines its capital as share capital. To effectively manage the Company's capital requirements, the Company has a planning and budgeting process in place. The Company supervises the actual expenditure against the budget to manage its costs and commitments.
The Company's capital management objective is to maximize investment returns for shareholders within the context of relevant opportunities and risks associated with the Company's operating segment. Achieving this objective requires management to consider the underlying nature of exploration activities, availability of capital, the cost of various capital alternatives and other factors. Establishing and adjusting capital requirements is a continuous administrative process.
Although the Company has been successful at raising funds in the past through the issuance of share capital, it is uncertain whether it will continue to raise this financing due to uncertain economic conditions.
| NOTE 15:- RELATED PARTY TRANSACTIONS |
| | a. | For the year ended December 31, 2012, the Company recognized $357 for advisory fees and operating expenses to private companies controlled by the directors or by officers of the Company (2011 - $906). |
| | | |
| | | These transactions are in the ordinary course of business and are measured at the amount of consideration set and agreed by the related parties. |
| | | |
| | b. | Compensation to directors and key management personnel: |
| | | |
| | | The CEO, CFO, COO, V.P. Business Development, Head Geologist, V.P. Contracts and Regulation, and the directors are considered key management personnel. |
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Short-term employee benefits | $ | 1,071 | | $ | 911 | | $ | 481 | |
| | Share based compensation | | 613 | | | 850 | | | 595 | |
| | | | | | | | | | | |
| | | $ | 1,684 | | $ | 1,761 | | $ | 1,076 | |
| | | | | | | | | | | |
| | Number of people | | 7 | | | 7 | | | 5 | |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 15:- RELATED PARTY TRANSACTIONS (Cont.) |
Benefits in respect of key management persons (including directors) who are not employed by the Company:
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Share based compensation | $ | 298 | | $ | 206 | | $ | 243 | |
| | | | | | | | | | | |
| | Number of people | | 4 | | | 5 | | | 3 | |
| NOTE 16:- COMMITMENTS AND CONTINGENCIES |
| | a. | Leases: |
| | | |
| | | The Company has agreements for the lease of the offices in Toronto, Canada and Ramat- Gan, Israel for periods through 2014. Future minimum lease payments under non- cancelable operating leases are as follows: |
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | |
| | Within one year | $ | 187 | | $ | 171 | |
| | After one year but not more than five years | | 44 | | | 168 | |
| | | | | | | | |
| | | $ | 231 | | $ | 339 | |
| | b. | Licenses: |
| | | |
| | | The Company has commitments to the Ministry to complete the work programs on all of the Company's licenses. Based on the current commitments, the Company is required to spud at least one well on the Samuel license by April 30, 2013 and on the Gabriella license by June 30, 2013 and on Yitzhak license by October 30, 2013. The validity of the petroleum licenses of the Company are conditional upon fulfillment of certain obligations on dates set in the conditions of the petroleum assets. In the event of non-fulfillment of the conditions, the petroleum rights are subject to cancellation. As of December 31, 2012 the Company believes that it complies with the conditions and obligations above. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.) |
| | c. | Joint venture commitments: |
| | | | |
| | | The JOA's of each of the joint ventures in which the Company has a participating interest require that the Company commit to fund its proportionate share of the approved budget or work programs. |
| | | | |
| | | The Company's share of the remaining contractual commitments as of December 31, 2012, for the Offshore Licenses is approximately $197. Due to our allegations that MELP materially breached the Gabriella 2012 Agreement, per company's managment the $5,000 commitment on the First LC Amount and the Second LC Amount, is not valid as of the date of the financial statements. See Note 20. |
| | | | |
| | d. | Legislative limitations: |
| | | | |
| | | 1. | The Petroleum Law, 5712-1952 and regulations enacted by virtue thereof: |
| | | | |
| | | | Petroleum and gas exploration and production in Israel are regulated mainly by the Petroleum Law and the regulations enacted by virtue thereof and by the Natural Gas Sector Law, 5762-2002. The Petroleum Law includes stringent conditions for the submission of applications for receipt of petroleum assets and transfer of rights in petroleum assets in accordance with the Petroleum Law. |
| | | | |
| | | 2. | The Natural Gas Sector Law, 5762-2002 |
| | | | |
| | | | The purpose of the Natural Gas Sector Law is to create conditions for the development of the natural gas sector and carrying out of competition therein and regulating the activity in the natural gas sector. The law, and the regulations enacted thereunder, prescribe provisions regarding storage, transmission, distribution and marketing of natural gas in Israel, including the construction and operation of a transmission system, a distribution network, a Liquid Natural Gas (LNG) facility, and a natural gas storage facility in Israel which require the receipt of a license from the Minister of Energy and Water Resources. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 16:- COMMITMENTS AND CONTINGENCIES (Cont.) |
| | 3. | At the beginning of 2011, the Ministry of Environmental Protection published directives for the protection of the environment regarding new and existing gas and petroleum drillings (for all stages, including trial, development, production) in order to prevent land, unsaturated zone and water source contamination. |
| NOTE 17:- REVENUES AND OTHER INCOME |
| | a. | The Company operates in one segment, the oil and gas business and conducts its operations in Israel with its head office in Canada. Details of the Company's revenues and other income (all of which are derived from Israel) are as follows: |
| | | | Year ended | |
| | | | December 31, | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Consulting | $ | 455 | | $ | 771 | | $ | 810 | |
| | Operator fees | | 544 | | | 312 | | | 455 | |
| | Income from farm-out | | 890 | | | 240 | | | 330 | |
| | Other income | | - | | | - | | | 112 | |
| | | | | | | | | | | |
| | | $ | 1,889 | | $ | 1,323 | | $ | 1,707 | |
| | b. | Revenues from major customers (UJVs), each one of which exceeds 10% of the consolidated revenues, as of the years ended December 31, 2012, 2011 and 2010 are as follows: |
| | | | Year ended | |
| | | | December 31 | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Customer A | $ | 461 | | $ | 591 | | $ | 1,121 | |
| | Customer B | | 529 | | | 449 | | | - | |
| | Customer C | | 529 | | | 150 | | | - | |
| | Customer D | | 370 | | | - | | | - | |
| | | | | | | | | | | |
| | | $ | 1,889 | | $ | 1,190 | | $ | 1,121 | |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 18:- | GENERAL AND ADMINISTRATIVE EXPENSES |
| | | | Year ended | |
| | | | December 31 | |
| | | | 2012 | | | 2011 | | | 2010 | |
| | | | U.S. dollars in thousands | |
| | | | | | | | | | | |
| | Payroll and related payments | $ | 759 | | $ | 543 | | $ | 364 | |
| | Share-based compensation | | 887 | | | 1,023 | | | 1,277 | |
| | Professional fees | | 2,397 | | | 2,068 | | | 1,034 | |
| | Rent and office expenses | | 287 | | | 370 | | | 140 | |
| | Depreciation | | 96 | | | 80 | | | 12 | |
| | Travel | | 350 | | | 529 | | | 184 | |
| | Insurance | | 31 | | | 97 | | | 3 | |
| | Others | | 497 | | | 321 | | | 53 | |
| | | | | | | | | | | |
| | | $ | 5,304 | | $ | 5,031 | | $ | 3,067 | |
| NOTE 19:- | FINANCING INCOME AND EXPENSES |
| | |
| Financing income in 2012 includes $2,299 in respect of the remeasurement of warrants to their fair value. See note 14b(iii). |
| | |
| Financing expense in 2012 includes $726 in respect to the offering expeses related to the warrants issued in the August 2012 offering that were classified as a financial liability. See note 14b(iii). |
| | |
| NOTE 20:- | SUBSEQUENT EVENTS |
| | |
| | Gabriella License (See also Note 9b(1)) |
| | |
| On January 3, 2013, MELP announced that the Drilling Contract had been further amended such that the First LC Amount was reduced to $12,000 but the Second LC Amount was increased to $21,000. |
| | |
| As of January 31, 2013, the Company did not place its share of the letter of credit in the amount of $5,000, due to the Company’s alleged breaches by MELP of the MOU, and the Gabriella 2012 Agreement. |
| | |
| On February 1, 2013, the Company sent a default letter to MELP for its failure to pay the last cash call issued under the Gabriella JOA. This was followed by a second default notice on March 3, 2013. |
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| ADIRA ENERGY LTD. |
| |
| NOTES TO CONSOLIDATED FINANCIAL STATEMENTS |
| U.S. dollars in thousands, except share and per share data |
| NOTE 20:- | SUBSEQUENT EVENTS (Cont.) |
| | |
| On February 11, 2013, the Company announced that it suspended operations on the Gabriella License due to lack of funding and lack of reasonable expectation of funding by certain parties sufficient to pursue the current work program; lack of agreement among the license holders regarding how to proceed under the circumstances; and due to the fact that MELP has not met its obligations under the Gabriella JOA or under other agreements in place among the JOA parties. |
| | |
| Due to allegations made by MELP against Adira, alleging the Company’s breach of the Gabriella JOA, the MOU and the Gabriella 2012 Agreement and by allegations made by Adira against MELP, both parties assert that the other is in default of various obligations under the Gabriella JOA and other contracts described above. As such, while the Company maintains that its rights under the Gabriella JOA and such other contracts remain valid, there is no assurance that any of the rights could effectively be pursued and realized. Additionally, while the working interest percentage ownership of the participants remains 70% MELP, 15% Brownstone and 15% Adira; both MELP and Adira assert that the other has a 0% interest and is obligated to withdraw from the Gabriella JOA and the Gabriella License. The Gabriella license holders have been holding discussions regarding the above matters. |
- - - - - - - -
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ITEM 19 EXHIBITS
The following exhibits are included in this Form 20-F:
Exhibit
Number Description
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| (1) | Incorporated by reference from our current report on Form 8-K filed with the SEC on December 2, 2008. |
| (2) | Incorporated by reference from our Form 20-F shell company report filed with the SEC on September 4, 2009. |
| (3) | Incorporated by reference from our Form 20-F report filed with the SEC on January 22, 2010. |
| (4) | Incorporated by reference from our Form 20-F report filed with the SEC on February 3, 2011. |
| (5) | Filed as an exhibit hereto. |
SIGNATURES
The Registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to sign this Form 20-F on its behalf.
ADIRA ENERGY LTD.
Per: /s/ Jeffrey Walter
Name: Jeffrey Walter
Title: Chief Executive Officer
Date: April 30, 2013
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