Adira Energy Ltd. - Exhibit 99.5 - Filed by newsfilecorp.com
Adira Energy Ltd.
MANAGEMENT DISCUSSION AND
ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the three and nine month periods ended September 30,
2013
The following is a discussion and analysis of the
activities, consolidated results of operations and financial condition of Adira
Energy Ltd. (“Adira”, “we”,
“our”, “us”, or the
“Company”) for the three and nine month periods ended
September 30, 2013, which has been prepared on the basis of information
available up until November 27, 2013. Management’s Discussion and Analysis
should be read in conjunction with the Company’s annual consolidated financial
statements and related notes for the year ended December 31, 2012 and in
conjunction with the Company’s condensed consolidated interim financial
statements for the three and nine month periods ended September 30, 2013,
together with the notes thereto. These documents are available under the
Company’s profile on the System for Electronic Document Analysis and Retrieval
(SEDAR) website at www.sedar.com.
All monetary amounts are reported in United States
dollars and in accordance with IFRS unless otherwise noted.
Forward-Looking Statements
This Management’s Discussion and Analysis of Financial
Conditions and Results of Operations contains certain forward-looking
statements. All statements other than statements of historical fact that address
activities, events or developments that the Company believes, expects or
anticipates will or may occur in the future are forward-looking statements.
Forward-looking statements are often, but not always, identified by the use of
words such as “seek”, “anticipate”, “contemplate”, “target”, “believe”, “plan”,
“estimate”, “expect” and “intend” and statements that an event or result “may”,
“will”, “can”, “should”, “could” or “might” occur or be achieved and other
similar expressions. These statements are based upon certain assumptions and
analyses made by management in light of its experience and perception of
historical trends, current conditions and expected future developments, as well
as other factors management believes are appropriate in the circumstances.
However, whether actual results and developments will conform with management’s
expectations is subject to a number of risks and uncertainties, including the
considerations discussed herein and in other documents filed from time to time
by the Company with Canadian security regulatory authorities, general economic,
market or business conditions, the opportunities (or lack thereof) that may be
presented to and pursued by management, competitive actions by other companies,
changes in laws or regulations and other factors, many of which are beyond the
Company’s control. These factors may cause the actual results of the Company to
differ materially from those discussed in the forward-looking statements and
there can be no assurance that the actual results or developments anticipated by
management will be realized or, even if substantially realized, that they will
have the expected results on Adira Energy Ltd. All of the forward-looking
statements made herein are qualified by the foregoing cautionary statements. The
Company expressly disclaims any obligation to update or revise any such
forward-looking statements.
Date
This report is dated November 27, 2013.
Overall Performance
Information on the Company
Adira is an oil and gas early-stage exploration company.
Through its subsidiary, Adira Energy Israel Ltd. (“Adira
Israel”), the Company holds two petroleum licenses in the State of Israel,
being license No. 378 (the “Gabriella License”) and license No. 380 (the
“Yitzhak License” and together with the Gabriella License, the
“Licenses”). On October 16, 2013, the Company relinquished license No.
388 (the “Samuel License”) back to the State of Israel.
1
The Company’s current trading symbol on the TSX Venture
Exchange (the “Exchange”) is “ADL”. The Company also trades on the OTC
Bulletin Board with the trading symbol “ADEND” and on the Frankfurt Stock
Exchange with the trading symbol “OAM1”.
Significant Developments
On February 11, 2013, the Company announced that Adira Israel
suspended operations on the Gabriella License due to lack of funding and lack of
reasonable expectation of funding to meet certain work program obligations on
that license. On July 1, 2013, the Company announced that Adira Israel has
entered into a settlement and release agreement (the “Settlement
Agreement”) with the other Gabriella License participants to resolve the
disputes over their respective funding obligations and the related suspension of
operations on the Gabriella License. To date, Adira Israel has not made its
first payment under the Settlement Agreement and may, at the request of MELP (as
defined below), be required to relinquish its interest in the Gabriella
License.
In July 2013, the Company agreed to a non-brokered private
placement (the “Private Placement”) with Pelagic Investments Limited
(“PI”) for gross proceeds of US$5,000,000. On September 11, 2013, the
Company announced that due to PI’s breach of the subscription agreement between
PI and the Company, the financing did not close. On October 25, 2013, the
Company filed a Statement of Claim in the Superior Court of Justice (Ontario)
naming as defendants, PI and its principle, Prentis B. Tomlinson Jr. The Company
is seeking damages for breach of contract, intentional interference with
economic relations and intentional misrepresentation. As of the date of this
report, the final outcome of the litigation cannot be predicted with certainty,
and therefore, management cannot assess whether or not the results of this
litigation will have a material effect on the Company.
On August 9, 2013, the Company completed a consolidation of its
common shares (the “Common Shares”) on the basis of one
post-consolidation Common Share for every three pre-consolidation Common Shares
(the “Consolidation”). The Consolidation was effective for trading
purposes on August 13, 2013.
Business Overview
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 October 16,
2013, the Company has received an extension of the expiration of the Gabriella
License from the Ministry of Energy and Water of the State of Israel (the
“Ministry”) until September 1, 2014, with a corresponding extension of
certain milestones.
The following table sets out the current work program that must
be completed in order to maintain the Gabriella License:
|
Gabriella Work Program
|
Milestone
Dates |
| 1. Submit to the Ministry a request for approval of a new
operator |
February 28, 2014 |
| 2. Execute a contract with a drilling contractor |
April 30, 2104 |
| 3. Complete an Antisotricpic PSDM and coherent sub surface
model |
July 31, 2014 |
| 4. Spud the first well |
August 31, 2014
|
2
In January 2010, the Company, through 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 its
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. As of the date hereof, Adira Israel holds a
15% participating interest in the Gabriella License, MELP holds a 70% interest
and Brownstone holds a 15% interest.
The operations on the Gabriella License and the relationship of
the participating interest holders are governed by a joint operating agreement
(the “Gabriella JOA”). Pursuant to the Gabriella JOA, Adira Israel is the
operator of the Gabriella License. In connection with the extension of the
Gabriella License, Adira Israel has agreed to resign as the operator of the
Gabriella License. The Gabriella License participants have until February 28,
2014, to name an alternative operator for Ministry approval. As of January 27,
2012, the Gabriella License participants pay an operator fee of $25,000 per
month, plus an additional sliding-scale percentage of exploration expenses
incurred, ranging from 4.8% of annual exploration expenses (if less than $2
million) to 1.2% of annual exploration expenses (if over $6 million) (the
“Operator Fees”). Pursuant to the Settlement Agreement, since Adira did
not pay the Settlement Costs (as defined below), as of January 1, 2013, Adira
ceased to receive the Operator Fees.
Between July 2012 and January 2013, Adira Israel, MELP and
Brownstone entered into various agreement for the purpose of drilling the first
exploration well. The drilling, however, was not accomplished and Adira Israel
and MELP similarly alleged that the other was in default of various obligations
under the Gabriella JOA and other agreements entered into on behalf of the
Gabriella License participants. Accordingly, on February 11, 2013, Adira Israel,
in its capacity as operator under the Gabriella JOA, suspended operations on the
Gabriella License due to lack of funding and lack of reasonable expectation of
funding to meet certain work program obligations.
Effective July 8, 2013 (the “Settlement Agreement Effective
Date”), Adira Israel entered into the settlement Agreement with MELP and
Brownstone to resolve the abovementioned disputes and the related suspension of
operations. Pursuant to the Settlement Agreement, the Gabriella License
participants have agreed to waive and release each other from any claims and
demands that they may have against each other with respect to the Gabriella
License. The Agreement further provides that the Gabriella License participants
will fund their proportionate share of costs incurred in connection with the
attempted drilling of the first exploration well. As of September 30, 2013,
Adira Israel’s net share of the costs totals approximately US$3.3 million (the
“Settlement Costs”) and was payable in stages over a 60-90 day period
from the Settlement Agreement Effective Date. Additionally, Adira Israel agreed
to relinquish several entitlements, including, but not limited to, its
management fee. In the event that Adira Israel does not pay the Settlement
Costs, at MELP’s request, Adira Israel may withdraw from the Gabriella JOA,
assign its participating interest in the Gabriella License to the remaining
Gabriella License participants and relinquish its overriding royalty interest
(“ORRI”). To date, Adira Israel has not paid its share of the Settlement
Costs. Although MELP has yet to make the forgoing request, Adira Israel has
forfeited its ORRI.
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 Israel (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. The Company has
received an extension of the expiration of the Yitzhak License from the Ministry
until October 15, 2014, with a corresponding extension of certain
milestones.
3
The following table sets out the current work program that must
be completed to maintain the Yitzhak License:
| Yitzhak Work Program |
Milestone Dates |
| 1. Submit an Environmental Impact Assessment to the Central
District Planning Committee of the State of Israel |
January 1, 2014 |
| 2. Execute a contract with a drilling contractor. |
September 30, 2014
|
On January 9, 2012, Adira Israel received approval from the
Petroleum Commissioner of Israel (the “Commissioner”) to farm-out 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”). In accordance
with the Ellomay Farm-Out Agreement (as defined below), Ellomay has since
transferred half of its working interest (being 10%) back to Adira Israel for no
cost. Following this transfer, Adira Israel has a 70% interest in the Yitzhak
License, Brownstone has a 15% interest, AGR has a 5% interest and Ellomay a 10%
interest. The new holdings have not yet been approved by the Commissioner
The farm-out agreement between Adira Israel 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 Adira
Israel 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 Adira Israel 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 Adira Israel as part of the core professional team led
by AGR.
The farm-out agreement between Adira Israel and Ellomay, dated
November 29, 2011 (the “Ellomay Farm-Out Agreement”), provides, among
other things, that: (a) Ellomay will reimburse Adira Israel for its
proportionate share of the costs incurred by Adira Israel on the Yitzhak
License, plus interest at LIBOR plus 1%; and (b) Ellomay will issue to Adira
Israel 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.
Adira Israel, Brownstone, AGR and Ellomay signed a joint
operating agreement (the “Yitzhak JOA”) on September 11, 2012, to
regulate their commercial relationship in respect of the Yitzhak License. The
Yitzhak JOA incorporated the terms of the AGR Farm-Out Agreement and the Ellomay
Farm-Out Agreement.
On June 13, 2012, Adira Israel granted to MELP an option
(“MELP Yitzhak Option”) to purchase from Adira Israel a 15% participating
interest in the Yitzhak License (the “MELP Yitzhak Option Interest”). The
MELP Yitzhak Option may be exercised 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 Israel 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 Israel 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.
Samuel License
On October 16, 2103, the Company announced that, as a result of
challenging markets and difficulty in raising significant funds to drill multi
well programs, Adira Geo Global Ltd. (“Adira Geo Global”) and the other
Samuel License consortium members relinquished the Samuel License back to the
State of Israel. Adira Geo Global is owned 60% by the Company and 40% by Geo
Global Resources (India) Inc. (“GGRI”).
4
Yam Hadera Option
Adira Israel has an option (the “Yam Hadera Option”) to
acquire from MELP 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 Israel’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.
Myra and Sara Option
Adira Israel has an option (the “Myra and Sara Option”)
to acquire up to a 5% participating interest in each of two deep water licenses
offshore Israel, namely the Myra License and the Sara License (collectively, the
“Myra and Sara Licenses”). The Myra and Sara Licenses are located
offshore Israel approximately 40 km west of the City of Hadera. These license
areas total 800 sq. km. Adira Israel currently ascribes no value to the Myra and
Sara Licenses and as such the Company does not consider the Myra and Sara
Options to be material to its operations.
Capital Expenditures and Divestitures
During the nine month period ended September 30, 2013, the
Company incurred net capital expenditures of approximately $3,117 thousand which
relates primarily to costs incurred in the planning and development of the
wells. During the same period, the Company disposed of property and equipment in
the net amount of approximately $3,084 thousand which relates primarily to the
drilling equipment from the Samuel license.
The Company's planned capital expenditures for the next twelve
months include the Company’s drilling program in connection with the Licenses.
Additional disclosure for venture issuers without
significant revenues:
| |
|
Nine months ended |
|
|
Three months ended |
|
|
Year ended |
|
| |
|
September 30, |
|
|
September 30, |
|
|
December 31, |
|
| |
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
2012 |
|
|
2012 |
|
| |
|
|
|
|
Unaudited |
|
|
|
|
|
|
|
|
Audited |
|
| |
|
U.S. dollars in thousands |
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Capitalized and expensed exploration costs |
|
4,960 |
|
|
787 |
|
|
2,908 |
|
|
249 |
|
|
6,875 |
|
General and administrative
expenses (including share
based compensation) |
|
2,560 |
|
|
3,439 |
|
|
682 |
|
|
1,178 |
|
|
5,304 |
|
5
Discussion of Operations
The following is a discussion of the results of operations
which have been derived from the interim consolidated financial statements of
the Company for the three and nine month periods ended September 30, 2013:
| |
|
|
|
|
|
|
| |
|
Nine months ended |
|
|
Three months ended |
|
| |
|
September 30, |
|
|
September 30, |
|
| |
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
2012 |
|
| |
|
Unaudited |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Revenues and other income |
$ |
17 |
|
$ |
1,571 |
|
$ |
- |
|
$ |
422 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
| Exploration expenses |
|
1,843 |
|
|
787 |
|
|
114 |
|
|
249 |
|
| General and administrative
expenses |
|
2,560 |
|
|
3,439 |
|
|
682 |
|
|
1,178 |
|
| Impairment charge |
|
4,216 |
|
|
65 |
|
|
1,730 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Total expenses |
|
8,619 |
|
|
4,291 |
|
|
2,526 |
|
|
1,427 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Operating loss |
|
(8,602 |
) |
|
(2,720 |
) |
|
(2,526 |
) |
|
(1,005 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Finance income |
|
3,028 |
|
|
10 |
|
|
48 |
|
|
2 |
|
| Finance expense |
|
- |
|
|
(535 |
) |
|
|
|
|
(457 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Loss before income tax expense |
|
(5,574 |
) |
|
(3,245 |
) |
|
(2,478 |
) |
|
(1,460 |
) |
| Income tax expense |
|
- |
|
|
(48 |
) |
|
- |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net comprehensive loss |
|
(5,574 |
) |
|
(3,293 |
) |
|
(2,478 |
) |
|
(1,460 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Net comprehensive loss attributed to: |
|
|
|
|
|
|
|
|
|
|
|
|
| Equity holders of the parent |
$ |
(5,574 |
) |
$ |
(3,482 |
) |
|
(2,478 |
) |
$ |
(1,533 |
) |
| Non-controlling interests |
|
|
|
|
189 |
|
|
|
|
|
73 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
$ |
(5,574 |
) |
$ |
(3,293 |
) |
|
(2,478 |
) |
$ |
(1,460 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share *) attributable to
equity holders of the parent |
$ |
(0.09 |
) |
$ |
(0.1 |
) |
$ |
(0.04 |
) |
$ |
(0.03 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of Ordinary shares *) used
in
computing basic and diluted net loss per share |
|
60,260,318 |
|
|
33,051,489 |
|
|
60,260,318 |
|
|
48,809,257 |
|
*) Post Consolidation
6
Three month period ended September 30, 2013 compared
to the three month period ended September 30, 2012
Revenues and Other Income
For the three month period ended September 30, 2013, the
Company recorded revenues of Nil as compared to Nil for the three month period
ended September 30, 2012. The decrease during the period is primarily due to the
cessation of operations on the Gabriella License in February 2013 and the
significant decrease in activities on the Yitzhak License and Samuel License, as
compared to 2012.
Expenses
Exploration Expenses
For the three month period ended September 30, 2013,
exploration expenses amounted to $114 thousand as compared to $249 thousand for
three month period ended September 30, 2012. The decrease during the period is
primarily due to the cessation of operations on the Gabriella License in
February 2013 and the significant decrease in activities on the Yitzhak License
and Samuel License, as compared to 2012.
General and Administrative Expenses
For the three month period ended September 30, 2013, general
and administrative expenses amounted to $682 thousand as compared to $1,178
thousand for three month period ended September 30, 2012. The decrease in
general and administrative expenses resulted primarily from decreased activities
in the Company since the suspension of operations on the Gabriella License and
includes a reduction in the number of people employed by the Company and reduced
rental and other related expenses.
Impairment Charge
For the three month period ended September 30, 2013, the
impairment charge amounted to $1,730 as compared to Nil for the three month
period ended September 30, 2012. The impairment in 2013 relates primarily to
costs that had been capitalized to exploration and evaluation assets, prior to
the decision to suspend operations on the Gabriella License, and which have
subsequently been written–off and the decision by the Company to write off
expenses on the Yitzhak license, due to the low probability of realization of
the asset from either the successful development or sale of the Yitzhak license
in the near future.
Financing Income/Expense
For the three month period ended September 30, 2013, financing
income amounted to $48 thousand as compared to $2 thousand for the three month
period ended September 30, 2012. Financing expenses amounted of Nil for the
three month period ended September 30, 2013, as compared to $457 thousand for
the three month period ended September 30, 2012.
The warrants issued in the August 2012 financing 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 re-measured to fair value at the end of each
period. The changes in fair value are included in financing income.
In addition, the Company is exposed to financial risk related
to the fluctuation of foreign exchange rates. The Company operates in Israel
while 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. The Company also has
expenditures in NIS and Canadian dollars. The Company has not hedged its
exposure to currency fluctuations.
Net Profit/Loss
The Company reported a net profit and comprehensive profit for
the three month period ended September 30, 2013, of $2.5 million as compared to
a net loss and comprehensive loss of $1.5 million for three month period ended
September 30, 2012. The primary reason for the increase in the loss during the
third quarter of 2013 is a result of an increase in impairment charges and
exploration expenses, which has been offset by the decrease in exploration
expenses and general and administrative expenses.
7
Nine month period ended September 30, 2013 compared to
the nine month period ended September 30, 2012
Revenues and Other Income
For the nine month period ended September 30, 2013, the Company
recorded revenues of $17, as compared to $1,571 thousand for the nine month
period ended September 30, 2012. The decrease during the period is primarily due
to the suspension of operations on the Gabriella License in February 2013 and
the significant decrease in activities on the Yitzhak License and Samuel
License, as compared to 2012.
Expenses
Exploration Expenses
For the nine months ended September 30, 2013, exploration
expenses amounted to $1,843 thousand as compared to $787 thousand for nine month
period ended September 30, 2012. The increase in exploration expenses in 2013 is
due to costs that were incurred during the period which are no longer being
capitalized to exploration and evaluation assets following the decision to
suspend operations on the Gabriella License.
General and Administrative Expenses
For the nine month period ended September 30, 2013, general and
administrative expenses amounted to $2,560 thousand as compared to $3,439
thousand for nine month period ended September 30, 2012. The decrease in general
and administrative expenses resulted primarily from the decreased activities in
the Company since the suspension of operations on the Gabriella License and
includes a reduction in the number of people employed by the Company and reduced
rental and other related expenses.
Impairment Charge
For the nine month period ended September 30, 2013, the
impairment charge amounted to $4,216 thousand as compared to $65 thousand for
the nine month period ended September 30, 2012. The impairment in 2013 relates
primarily to costs that had been capitalized to exploration and evaluation
assets, prior to the decision to suspend operations on the Gabriella License,
and which have subsequently been written–off and the decision by the Company to
write off expenses on the Yitzhak license, due to the low probability of
realization of the asset from either the successful development or sale of the
Yitzhak license in the near future.
Financing Income/Expense
For the nine month period ended September 30, 2013, financing
income amounted to 3,028 thousand as compared to $10 thousand for the nine month
period ended September 30, 2012. Financing expenses amounted to Nil for the nine
month period ended September 30, 2013, as compared to $535 thousand for the nine
month period ended September 30, 2012.
The warrants issued in the August 2012 financing 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 re-measured to fair value at the end of each
period. The changes in fair value are included in financing income expenses.
In addition, the Company is exposed to financial risk related
to the fluctuation of foreign exchange rates. The Company operates in Israel
while 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. 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
nine month period ended September 30, 2013, of $5.6 million as compared to a net
loss and comprehensive loss of $3.3 million for nine month period ended
September 30, 2012. The primary reason for the increase in the loss during 2013
is a result of an increase in impairment charges and exploration expenses, which
has been offset by the decrease in general and administrative expenses and an
increase in financial income.
8
Inflation
During the three and nine month periods ended September 30,
2013, and 2012, inflation has not had a material impact on our operations.
Government Regulation
The Licenses have been granted to us, through various
subsidiaries, by the State of Israel under the Israeli Petroleum Law, and our
evaluation and exploration activities in the areas covered by the Licenses must
be undertaken in compliance with work plans approved by the Commissioner.
Summary of Quarterly results
| |
|
Quarter ended |
|
| |
|
September 30, 2013 |
|
|
June 30, 2013 |
|
|
March 31, 2013 |
|
|
December 31, 2012 |
|
| |
|
U.S dollars in thousands, except per share data |
|
| Revenues |
$ |
- |
|
|
4 |
|
|
13 |
|
|
318 |
|
| Net Profit (loss) |
$ |
(2,478 |
) |
|
32 |
|
|
(3,128 |
) |
|
(7,264 |
) |
| Net Profit (loss) per
share* |
$ |
(0.04 |
) |
|
0.01 |
|
|
(0.05 |
) |
|
(0.12 |
) |
*Attributable to equity holders of the Company, post
Consolidation
| |
|
Quarter ended |
|
| |
|
September 30, 2012 |
|
|
June 30, 2012 |
|
|
March 31, 2012 |
|
|
December 31, 2011 |
|
| |
|
U.S dollars in thousands, except per share data |
|
| Revenues |
$ |
422 |
|
|
489 |
|
|
660 |
|
|
236 |
|
| Net loss |
$ |
(1,460 |
) |
|
(865 |
) |
|
(968 |
) |
|
(2,170 |
) |
| Net loss per share* |
$ |
(0.03 |
) |
|
(0.03 |
) |
|
(0.03 |
) |
|
(0.06 |
) |
*Attributable to equity holders of the Company, post
Consolidation
Net profit (loss) per quarter is a function of the exploration
and operational activity during that quarter. There is no seasonal trend. Net
losses during the first three quarters of 2012 were lower than in the preceding
quarters as the Company commenced the capitalization of most of its exploration
expenses to the Company's Statement of Financial Position as they relate
directly to the execution of the drilling plan on the Licenses. Net losses in
the fourth quarter of 2012 were significantly higher due to an impairment charge
in respect of the Samuel license. The net loss for the first quarter of 2013
resulted primarily from an impairment charge in respect of the Gabriella license
and the net profit for the second quarter of 2013 is due to reduced general and
administrative expenses and finance income recorded in respect of the
re-measurement of the warrants issued in August 2012. The net loss for the third
quarter of 2013 resulted primarily from an impairment charge in respect of the
Yitzhak license
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.
The Company has an accumulated deficit of $34.5 million as of
September 30, 2013 ($28.9 million as of December 31, 2012), and the Company had
negative cash flows from operations of $1.7 million during the nine month period
ended September 30, 2013 (negative cash flows of $4.5 million during the nine
month period ended September 30, 2012). The ability of the Company to continue 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.
9
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.
Three month period ended September 30, 2013 compared
to the three month period ended September 30, 2012
During the three month period ended September 30, 2013, the
Company's overall position of cash and cash equivalents increased by $1,279
thousand. This decrease in cash can be attributed to the following
activities:
The Company's net cash used in operating activities during the
three month period ended September 30, 2013, was $2,065 thousand as compared to
net cash used in an amount of $2,579 thousand for the three month period ended
September 30, 2012. The decrease is as a result of a decrease in operating and
general and administrative expenses during the period, as compared to the same
period in 2012.
Cash provided by investing activities during the three month
period ended September 30, 2013, was $796 thousand as compared to cash used in
investing activities of $4,598 during the three month period ended September 30,
2012. During 2013, the generation of cash is primarily as a result of the
proceeds from sale of property and equipment. During 2012, the utilization of
cash relates to the capitalization of drilling costs in respect of the
Licenses.
Cash provided by financing activities for the three month
period ended September 30, 2013, was Nil as compared to $10,523 thousand during
the three month period ended September 30, 2012.
Nine month period ended September 30, 2013 compared to
the nine month period ended September 30, 2012
During the nine month period ended September 30, 2013, the
Company's overall position of cash and cash equivalents decreased by $1,563
thousand. This decrease in cash can be attributed to the following
activities:
The Company's net cash used in operating activities during the
nine month period ended September 30, 2013, was $1,751 thousand as compared to
$4,484 thousand for the nine month period ended September 30, 2012. The decrease
is due primarily to a significant reduction in accounts receivables, other
receivables and prepaid expenses, during 2013, as compared to the same period in
2012.
Cash provided from investing activities during the nine month
period ended September 30, 2013, was $208 thousand as compared to cash used in
investing activities of $8,028 thousand during the nine month period ended
September 30, 2012. Capitalization of drilling costs in respect of the Licenses
was significantly decreased in 2013, as compared to the same period in 2013,
resulting in a decrease in cash used during 2013 as compared to 2012, which was
further reduced in 2013 by the release of restricted deposits and proceeds from
the sale of property and equipment.
Cash provided by financing activities for the nine month period
ended September 30, 2013, was Nil as compared to $10,685 thousand during the
nine month period ended September 30, 2012. The amount in 2012 relates to the
Companies financing which was completed in August 2012.
There are no legal restrictions on transferring funds between
Canada and Israel.
Capital resources
As at September 30, 2013, the Company's cash and cash
equivalents were $831 thousand as compared to $6.3 million as at September 30,
2012. The majority of these funds are held in US Dollars. As at September 30,
2013, the Company had a negative working capital of $615 thousand, as compared
to positive working capital of $5.7 million as at September 30, 2012.
10
Commitments
Certain Adira subsidiaries that hold the Company’s offshore
licenses have Ministry mandated commitments to complete the work programs on all
of the Licenses. Please see “Business Overview” above for information on the
Company’s commitments on the Licenses.
Approved Expenditures Relating to the Gabriella and
Yitzhak
As of September 30, 2013, all budgeted and planned expenses for
the advancement of the drilling programs on the Licenses have been suspended
until the Company receives the extensions for its Licenses.
In order to maintain the Licenses the Company, through various
subsidiaries, is required to expend additional amounts in respect of exploration
expenditure. The Company intends to meet all of its drilling and related
expenditures as they become due to maintain its 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 subsidiaries’ participating interests in the
Licenses.
Disclosure of Outstanding Share Data
As of the date hereof, the Company has 60,260,318 common shares
outstanding, 32,474,338 warrants outstanding and 3,369,333 options granted to
directors, officers and employees.
Management of Capital
| |
|
September 30, |
|
|
December 31, |
|
| |
|
2013 |
|
|
2012 |
|
|
2012 |
|
| |
|
U.S. dollars in thousands |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
Unaudited |
|
|
Audited |
|
| |
|
|
|
|
|
|
|
|
|
| EQUITY: |
|
|
|
|
|
|
|
|
|
| Share capital |
|
- |
|
|
- |
|
|
- |
|
| Additional paid-in capital |
|
33,985 |
|
|
33,862 |
|
|
33,966 |
|
| Accumulated deficit |
|
(34,530 |
) |
|
(22,651 |
) |
|
(28,956 |
) |
| |
|
|
|
|
|
|
|
|
|
| Equity (deficit) attributable to equity
holders of the parent |
|
545 |
|
|
11,211 |
|
|
5,010 |
|
| Non-controlling interests |
|
- |
|
|
571 |
|
|
- |
|
| |
|
|
|
|
|
|
|
|
|
| Total equity (deficit) |
|
(545 |
) |
|
11,782 |
|
|
5,010 |
|
The Company is an early-stage exploration company and currently
does not generate significant cash flows from 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.
The Company defines its capital as share capital plus warrants.
To effectively manage the Company’s capital requirements, the Company has a
planning and budgeting process in place to ensure that adequate funds are
available to meet its strategic goals. The Company monitors actual expenses to
budget to manage its costs and commitments.
The Company’s capital management objective is to maximize
investment returns to its equity-linked stakeholders within the context of
relevant opportunities and risks associated with the Company’s operations.
Achieving this objective requires management to consider the underlying nature
of exploration activities, the availability of capital, the cost of various
capital alternatives and other factors. Establishing and adjusting capital
requirements is a continuous management process.
Although the Company has been successful at raising funds in
the past through the issuance of share capital, there can be no assurance that
future financings will be successful.
11
Off-Balance Sheet arrangements
See “Commitments” above.
Transactions with Related Parties
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
transactions, which in either such case has materially affected or will
materially affect the Company or the Company's predecessors since the beginning
of the Company's last completed fiscal year except as follows:
During the nine month period ended September 30, 2013, the
Company incurred $309 thousand in consulting fees and operating expenses to
private companies which are controlled by directors or officers of the Company,
as compared to $559 thousand during the nine month period ended September 30,
2012 ($96 thousand for the three months ended September 30, 2013, and $355
thousand for the three months ended September 30, 2012).
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.
Proposed Transactions
There are currently no proposed transactions that are expected
to affect the financial condition, results of operations and cash flows of the
Company.
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.
The key assumptions made in the financial statements concerning
uncertainties at the end of the reporting period and the critical estimates
computed by the Group that may result in a material adjustment to the carrying
amounts of assets and liabilities within the next financial year.
Exploration and evaluation assets
Pre-license costs
Pre-license costs are expensed in the period in which they are
incurred.
12
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.
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, through certain subsidiaries, conducts petroleum
and natural gas exploration activities jointly with other participants who each
have direct interests 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.
13
Farm-out arrangements in the exploration and evaluation
phase
A “farm-out” is the transfer of an 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 original interest holder (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 designates 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.
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 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 Licenses on a “time and
materials” basis. Consulting fees are recognized as revenues as the services are
rendered to the respective UJV’s.
14
Disclosure Controls and Procedures and Internal Controls
over Financial Reporting
There were no changes to the Company’s internal controls over
financial reporting in the nine month period ended September 30, 2013, which
have materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
As of September 30, 2013, the Company evaluated its disclosure
controls and procedures and internal control over financial reporting, as
defined by the Canadian Securities Administrators. These evaluations were
carried out under the supervision of and with the participation of management,
including the Company’s chief financial officer. Based on these evaluations, the
chief financial officer concluded that the design of these disclosure controls
and procedures and internal control over financial reporting were effective.
Financial Instruments and Other Instruments
The Company’s financial instruments have been designated as
follows:
| Cash and cash equivalents |
- Held-for-trading; |
| Restricted Cash |
- Held-for-trading; |
| Accounts receivable |
- Receivables; |
| Accounts payable and accrued liabilities |
- Other financial liabilities;
|
The carrying values of cash and cash equivalents, restricted
cash and accounts receivable and accounts payable approximate their fair values
due to the short-term maturity of these financial instruments.
Risks and Uncertainties Credit risk
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 cash and cash equivalents with high credit quality Israeli
and Canadian financial institutions. Concentration of credit risk exists with
respect to the Company’s cash and cash equivalents and accounts receivable. As
of September 30, 2013, the Company’s exposure is for cash held in bank accounts,
including restricted deposit, in the amount of $893 thousand and on accounts and
other receivable of $3.8 million. Except for amounts owed by MEGP, none of the
Company’s accounts receivable is overdue as at September 30, 2013. As of
September 30, 2013, the restricted deposits amount to $62 thousand and relates
primarily to a bank guarantee in respect of the Company’s Israeli office lease
and credit cards.
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 provide reasonable assurance that it will have sufficient
funds to meet its liabilities when due. As of September 30, 2013, the Company
had cash and cash equivalents of $831 thousand, restricted deposits of $62
thousand and accounts and other receivables of $3.8 million against current
trade and other payables in the amount of $5.3 million.
15
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.
| (i) |
Interest rate risk |
| |
|
|
The Company is not exposed to significant interest rate
risk due to the short-term maturity of its cash equivalents. |
| |
|
| (ii) |
Foreign currency risk |
| |
|
|
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. The Company has not
hedged its exposure to currency fluctuations. An increase or decrease of
5% of the NIS or the Canadian Dollar relative to the U.S dollar would not
have a significant effect on the Company. |
Environmental Risk
Environmental regulations affect the cost of exploration and
development, as well as future development operations; however, management does
not believe that any provision against environmental regulations is currently
required.
For a complete discussion on risk factors, please refer to the
Company’s Form 20-F dated April 30, 2013, filed on www.sedar.com.
Other Information
Additional information about the Company, the Company’s
quarterly and annual consolidated financial statements, annual information form,
technical reports and other disclosure documents, is accessible at the Company’s
website www.adiraenergy.com or through the Company’s public filings at www.sedar.com.
# # # #
16
