PART
I
ITEM
1. BUSINESS
Overview
Zion
Oil and Gas, Inc., a Delaware corporation, is an oil and gas exploration company with a history of 17 years of oil and gas exploration
in Israel. We were incorporated in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed
our initial public offering in January 2007. Our common stock, par value $0.01 per share (the “Common Stock”) currently
trades on the NASDAQ Global Market under the symbol “ZN” and our Common Stock warrant under the symbol “ZNWAA.”
Zion currently holds
one active petroleum exploration license onshore Israel, the Megiddo-Jezreel License (“MJL”), comprising approximately
99,000 acres. The Company has selected and constructed the specific drill pad location from which to drill its next exploration
well, which it plans to spud within the second quarter of 2017. The drilling of this well to the desired depth is subject to the
Company raising sufficient funds from the current unit offering (scheduled to terminate on March 31, 2017) and possible additional
capital raising efforts.
Depending
on the results of the planned exploratory well and having adequate cash resources, multiple wells could be drilled from this pad
site as several subsurface geologic targets can be reached using directional well trajectories.
At
present, we have no revenues or operating income. Our ability to generate future revenues and operating cash flow will depend
on the successful exploration and exploitation of our current and any future petroleum rights or the acquisition of oil and/or
gas producing properties, and the volume and timing of such production. In addition, even if we are successful in producing oil
and gas in commercial quantities, our results will depend upon commodity prices for oil and gas, as well as operating expenses
including taxes and royalties.
Our
executive offices are located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is
(214) 221-4610. Our branch office’s address in Israel is 9 Halamish Street, North Industrial Park, Caesarea 3088900, and
the telephone number is +972-4-623-8500. Our website address is: www.zionoil.com.
Company
Background
In
1983, during a visit to Israel, John M. Brown (our Founder and Chairman of the Board of Directors) became inspired and dedicated
to finding oil and gas in Israel. During the next 17 years he made several trips each year to Israel, hired oil and gas consultants
in Israel and Texas, met with Israeli government officials, made direct investments with local exploration companies, and assisted
Israeli exploration companies in raising money for oil and gas exploration in Israel. This activity led Mr. Brown to form Zion
Oil & Gas, Inc. in April 2000, in order to receive the award of a small onshore petroleum license from the Israeli government.
Zion’s
vision, as guided by John Brown, of finding oil and/or natural gas in Israel, is biblically inspired. The vision is based, in
part, on biblical references alluding to the presence of oil and/or natural gas in territories within the State of Israel that
were formerly within certain ancient biblical tribal areas. While John Brown provides the broad vision and goals for our company,
the actions taken by the Zion Board of Directors and management team as it actively explores for oil and gas in Israel, are based
on modern science and good business practice. Zion’s oil and gas exploration activities are supported by appropriate geological,
geophysical and other science-based studies and surveys typically carried out by companies engaged in oil and gas exploration
activities.
Upon
the award of our first petroleum right in May 2000, the Israeli government provided us access to most of its data with respect
to previous exploration in the area, including geologic reports, seismic records and profiles, drilling reports, well files, gravity
surveys, geochemical surveys and regional maps. We also gathered information concerning prior and ongoing geological, geophysical
and drilling activity relevant to our planned activities from a variety of publicly accessible sources. Subsequently, we have
acquired additional studies on our own such as seismic and other geophysical and geological surveys.
To
date, the Company has drilled four exploratory wells. While the presence of hydrocarbons was indicated while drilling certain
of these wells, none of the exploratory wells that we have drilled to date have been deemed capable of producing oil or gas in
commercial quantities.
ZION’S
CURRENT EXPLORATION LICENSE AREA
Zion
currently holds one active petroleum exploration license onshore Israel, the Megiddo-Jezreel License (covering an area of approximately
99,000 acres – See Map 1). Under Israeli law, Zion has an exclusive right to oil and gas exploration in our license area
in that no other company may drill there. In the event we drill an oil or gas discovery in our license area, current Israeli law
entitles us to convert the relevant portions of our license to a 30-year production lease, extendable to 50 years, subject to
compliance with a field development work program and production.
Map
1. Zion’s Megiddo-Jezreel Petroleum Exploration License as of December, 2016.
Summary
of Current and Former Company License Areas
Megiddo-Jezreel
Petroleum License
The
Megiddo-Jezreel License (“MJL”) was awarded on December 3, 2013 for a three-year primary term through December 2,
2016, with the possibility of additional one-year extensions up to a maximum of seven years. The MJL (~99,000 acres) is onshore,
south and west of the Sea of Galilee.
Under
the original license terms, Zion had until July 1, 2015 to identify and submit a drilling prospect. The license terms also called
for the Company to enter into a drilling contract by October 1, 2015 and begin drilling or “spud” a well by December
1, 2015. Zion has applied for, and been awarded several extensions/revisions of the original MJL terms, the most recent of which
are outlined below.
On
June 28, 2016, the Company submitted a third Application for Extension of Drilling Date, and on July 4, 2016, the Petroleum Commissioner
formally approved the application as follows:
No.
|
|
Activity Description
|
|
To be carried out by:
|
1
|
|
Sign a contract with drilling contractor and forward to Petroleum Commissioner
|
|
13 October 2016
|
2
|
|
Submit detailed Engineering Plan to carry out the drilling
|
|
13 October 2016
|
3
|
|
Spudding in the license area
|
|
1 December 2016
|
4
|
|
Submit a final report on the results of the drilling
|
|
1 May 2017
|
5
|
|
Submit a plan for continued work in the license area
|
|
29 June 2017
|
The
Company timely complied with two key special conditions of our existing license terms established by Israel’s Petroleum
Commissioner, by providing on October 13, 2016 the fully executed drilling contract with S.A. Daflog, S.R.L. (dated 6 October
2016) and a detailed Drilling Engineering Plan for the Megiddo-Jezreel #1 well.
Zion
entered into a drilling contract with S.A. DAFLOG S.R.L., an Israeli-registered related party entity to DAFORA S.A. DAFORA
is the largest drilling company in Romania and has drilled over 1,000 wells in Romania, Eastern Europe and East Africa. Zion
will use DAFORA’s F-400 drilling rig which has a 3,000 HP capacity drawworks capable of drilling to over 7,000 meters
(approximately 23,000 feet). This provides sufficient horsepower and safety factor to drill our planned well with a target
depth of up to 4,500 meters (approximately 15,000 feet). The DAFORA rig and most of its major components are currently stored
in Israel, at Givot Olam’s Meged-8 drill site.
As
previously reported, the Company needed authorization from the Israel land Authority (the “ILA”), the formal lessor
of the land to the kibbutz, to access and utilize the drill site. On August 16, 2016, the Company signed the agreement with the
ILA to access and utilize the drill site. This is in conjunction with our May 15, 2016, signed agreement with Kibbutz Sde Eliyahu
on whose property the drilling pad will be situated.
The
drill site plan was prepared by an outside engineering firm to accommodate DAFORA’s F-400 Rig. Zion awarded the drill site
construction contract to an Israeli company named
Y. Bazelet and Aggregatim LTD
. The final step in the process is for Zion
to submit our Application for Permit to Drill for final drilling permit approval. Drill site construction started in late December
2016, and was completed in February, 2017. Upon completion of the access road and drill site, we plan to commence rig mobilization
to the MJ#1 location to begin rig-up and acceptance testing, assuming no weather or regulatory delays. The drilling, completion
and testing of the well will be subject to raising the necessary capital of which no assurances can be provided. As of the date
of this report, the Company has cash resources to spud the well but does not yet have the cash resources to drill the MJ #1 well
to the planned total depth of 4,500 meters (approximately 15,000 feet).
While
Zion has successfully complied with the Special Conditions of the Company’s work program to date, the process of securing
an appropriate drilling rig and crew with which to drill our upcoming well was long and complicated. As such, Zion submitted a
drilling date extension request to the Petroleum Commissioner on November 7, 2016. Key details of the extension request are outlined
below:
NO.
|
|
ACTIVITY
DESCRIPTION
|
|
TO BE CARRIED
OUT BY:
|
1
|
|
Begin drilling / spud well
|
|
30 June 2017
|
2
|
|
Submit final report on the results of drilling
|
|
1 November 2017
|
3
|
|
Submit a plan for continued work in the license area
|
|
1 December 2017
|
On
November 29, 2016, the Company received notification from the State of Israel’s Petroleum Commissioner officially approving
the Company’s drilling date extension.
Zion’s
Former Jordan Valley, Asher-Menashe and Joseph Licenses
On March 29, 2015,
the Energy Ministry formally approved the Company’s application to merge the southernmost portion of the Jordan Valley License
into the Megiddo-Jezreel License. The Company has plugged all of its exploratory wells (in the former Joseph and Asher-Menashe
License areas) but acknowledges its obligation to complete the abandonment of these well sites in accordance with guidance from
the Environmental Ministry and local officials.
Exploration
Plans Going Forward
We continue our exploration
focus on our Megiddo-Jezreel License area as that area appears to possess the key geologic ingredients of an active petroleum
system. We have selected the specific drill pad location from which to drill our next exploration well, the Megiddo-Jezreel #1
well (“MJ#1”), which we plan to spud in the first half of 2017.
The drill site and access
road construction which started in late December 2016 was completed. We plan to commence rig mobilization to the MJ #1 location
to begin rig-up and acceptance testing, assuming no weather or regulatory delays.
In September 2015, Zion
engaged Forrest Garb & Associates (“FGA”), an international petroleum engineering and geoscience consulting firm
and an independent third party, to provide a resource assessment report, as required under the terms of Zion’s current petroleum
exploration license. FGA prepared its Resource Assessment Report of Gross Prospective Resources (“Garb Report)) which relates
to Zion’s Beit Shean Prospect for the proposed drilling of the MJ #1 well. This independent analysis affirms Zion’s
internal interpretation of four separate objectives (Mid-Cretaceous, Upper Jurassic, Mid-Jurassic and Triassic) and discloses
potential resource estimates.
FGA’s
estimates of prospective resource volumes used probabilistic analysis methods in accordance with the Petroleum Resources Management
System (PRMS) as endorsed by the Society of Petroleum Engineers, the American Association of Petroleum Geologists, the World Petroleum
Council, and the Society of Petroleum Evaluation Engineers. The classification system and definitions are in common use internationally
within the petroleum industry. They provide a measure of comparability and reduce the subjective nature of resource estimation.
This analysis provides a consistent approach to estimating petroleum quantities, evaluating development projects, and presenting
results within a comprehensive classification framework. The Garb Report is attached as an exhibit to this annual report on Form
10-K.
It
should be noted that “Contingent Resources” and “Prospective Resources” used in the Garb Report do not
represent an estimate of reserves. Readers are cautioned that 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.
Exploration
Expenditures
The
following table summarizes the amounts we expended on our exploration efforts during 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
US$
(000)
|
|
|
US$
(000)
|
|
|
|
|
|
|
|
|
Megiddo-Jezreel Valley License
|
|
|
|
|
|
|
|
|
Geological & Geophysical Operations
|
|
|
1,020
|
|
|
|
725
|
|
Equipment purchasing
|
|
|
325
|
|
|
|
443
|
|
Location construction
|
|
|
89
|
|
|
|
--
|
|
|
|
|
|
|
|
|
|
|
Asher-Menashe License (expired on June 9, 2014)
|
|
|
|
|
|
|
|
|
Geological & Geophysical Operations
|
|
|
--
|
|
|
|
15
|
|
Plug & Abandonment Operations
|
|
|
2
|
|
|
|
178
|
|
|
|
|
|
|
|
|
|
|
Joseph License (expired on October 10, 2013)
|
|
|
|
|
|
|
|
|
Plug & Abandonment Operations
|
|
|
2
|
|
|
|
77
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,438
|
|
|
|
1,438
|
|
Employees & Contractors
As of December 31,
2016, we had 23 employees and contractors of whom all but three are on a full-time basis. Included in this number are certain
contractors who provide services to the Company on an ongoing basis. Of the 23 total headcount, 14 work out of our Dallas
office and 9 work out of the Caesarea, Israel office. None of our current employees or contractors are subject to any
collective bargaining agreements, and there have been no strikes.
We
regularly utilize independent consultants and contractors to perform various professional services,
particularly
for services connected to drilling
operations, such as specialized drilling, health and safety, engineering, logging, cementing
and well-testing.
Competition
and Markets
The
oil and gas exploration industry in Israel currently consists of a number of exploration companies. These include relatively small
local or foreign companies (such as Zion Oil & Gas, Genie Oil & Gas/Afek, and Givot Olam), as well as larger consortia
of local Israeli and foreign participants (Noble Energy Inc./Delek Group Ltd.). Most groups are engaged primarily in offshore
activities, which is not an area in which we are currently active. So long as we hold our current license, Israeli law conveys
an exclusive exploration right to Zion such that no additional companies may compete in our license area.
Historically,
primarily for geopolitical reasons, Israel (particularly onshore) has not been an area of interest for international integrated
or large or mid-size independent oil and gas exploration companies. Since the announcement of the Tamar and Leviathan discoveries,
this situation has changed somewhat. Limited availability in Israel of oil field service companies, equipment and personnel continues
to present obstacles, especially during periods of decreased activity and risk aversion in the current market. We attempt to enhance
our position by developing and maintaining good professional relations with oil field service providers and by demonstrating a
high level of credibility in making and meeting commercial commitments.
The
oil and gas industry is cyclical, and from time to time there is a shortage of drilling rigs, equipment, supplies and qualified
personnel. During these periods, the costs and delivery times of rigs, equipment and supplies can vary greatly. If the unavailability
or high cost of drilling rigs, equipment, supplies or qualified personnel were particularly severe in the areas where we operate,
we could be materially and adversely affected. We will continue to monitor the market and build service provider relationships
in order to help mitigate concentration risk.
If
any of our exploratory wells are commercially productive, we would install the appropriate production equipment which includes,
among other items, oil and gas separation facilities and storage tanks. Under the terms of the Petroleum Law, we may be required
by the Minister of Energy and Water Resources to offer first refusal for any oil and gas discovered to Israeli domestic purchasers
at market prices.
Since
Israel imports almost all of its crude oil needs and the market for crude oil in Israel is limited to two local oil refineries,
no special marketing strategy needs to be adopted initially with regard to any oil that we may ultimately discover. We believe
that we would have a ready local market for our oil at market prices in addition to having the option of exporting to the international
market, if any of our future exploratory wells are commercially productive.
Israel’s
Petroleum Law
Our
business in Israel is subject to regulation by the State of Israel under the Petroleum Law. The administration and implementation
of the Petroleum Law are vested in the Minister of Infrastructures, Energy and Water Resources (“Energy Minister”),
the Petroleum Commissioner and an advisory council. The following discussion includes a brief summary review of certain provisions
of the Petroleum Law as currently in effect. This review is not complete, and it should not be relied on as a definitive restatement
of the law related to petroleum exploration and production activities in Israel.
Petroleum
resources are owned by the State of Israel, regardless of whether they are located on state lands or the offshore continental
shelf. No person is allowed to explore for or produce petroleum without being granted a specific right under the Petroleum Law.
License.
The “license”
is a petroleum exploration right, bestowing an exclusive right for further exploration work and requiring the drilling of one
or more test wells. The initial term of a license is up to three years, and it may be extended for up to an additional four years
(in one year increments). A license area may not exceed 400,000 dunams (approximately 98,842 acres). One dunam is equal to
1,000 square meters (approximately 0.24711 of an acre). No one entity may hold more than 12 licenses or hold more than a
total of four million dunam in aggregate license area.
Production
lease.
Upon discovery of petroleum in commercial quantities, a licensee has a statutory “right” to receive a production
“lease.” The initial lease term is 30 years, extendable for an additional 20 years (up to a maximum period of 50 years).
A lease confers upon the lessee the exclusive right to explore for and produce petroleum in the lease area and requires the lessee
to produce petroleum in commercial quantities (or pursue test or development drilling). The lessee is entitled to transport and
market the petroleum produced, subject, however, to the right of the government to require the lessee to supply local needs first,
at market price.
Petroleum
rights fees.
The holders of licenses and leases are required to pay fees to the government of Israel to maintain the rights.
The fees vary according to the nature of the right, the size and location (onshore or offshore) of the right, acreage subject
to the right and, in the case of a license, the period during which the license has been maintained. Every subsequent year, the
license fee increases incrementally.
Requirements
and entitlements of holders of petroleum rights.
The holder of a petroleum right (license or lease) is required to conduct
its operations in accordance with a work program set as part of the petroleum right, with due diligence and in accordance with
the accepted practice in the petroleum industry. The holder is required to submit progress and final reports; provided, however,
the information disclosed in such reports remains confidential for as long as the holder owns a petroleum right on the area concerned.
If
the holder of a petroleum right does not comply with the work program provided by the terms of the right, the Petroleum Commissioner
may issue a notice requiring that the holder cure the default within 60 days of the giving of the notice, together with a warning
that failure to comply within the 60-day cure period may entail cancellation of the right. If the petroleum right is cancelled
following such notice, the holder of the right may, within 30 days of the date of notice of the Commissioner’s decision,
appeal such cancellation to the Energy Minister. No petroleum right shall be cancelled until the Energy Minister has ruled on
the appeal.
We
are obligated, according to the Petroleum Law, to pay royalties to the Government of Israel on the gross production of oil and
gas from the oil and gas properties of Zion located in Israel (excluding those reserves serving to operate the wells and related
equipment and facilities). The royalty rate stated in the Petroleum Law is 12.5% of the produced reserves. At December 31,
2016 and 2015, the Company did not have any outstanding obligation with respect to royalty payments, since it is in the development
stage and, to this date, no proved reserves have been found.
In
March 2011, the Israeli parliament enacted the Petroleum Profits Taxation Law, 2011, which imposes a new levy on oil and gas production.
Under the new tax regime, the Israeli Government repealed the percentage depletion deduction and imposed a levy at an initial
rate of 20% on profits from oil and gas which will gradually rise to 45.52% for 2016 onwards, depending on the levy coefficient
(the R-Factor). The R-Factor refers to the percentage of the amount invested in the exploration, the development and the establishment
of the project, so that the 20% rate will be imposed only after a recovery of 150% of the amount invested (R-Factor of 1.5) and
will range linearly up to 45.52% after a recovery of 230% of the amount invested (R-Factor of 2.3). For purposes of the levy rate
calculation, the minimal gas sale price that will be accepted by the State is the bi-annual average local price. The present 12.5%
royalty imposed on oil revenues remains unchanged.
The
grant of a petroleum right does not automatically entitle its holder to enter upon the land to which the right applies or to carry
out exploration and production work thereon. Entry requires the consent of the private or public holders of the surface rights
and of other public regulatory bodies (e.g. planning and building authorities, Nature Reserves Authority, municipal and security
authorities, etc.). The holder of a petroleum right may request the government to acquire, on its behalf, land needed for petroleum
purposes. The petroleum right holder is required to obtain all other necessary approvals.
Petroleum
Taxation.
Our activities in Israel will be subject to taxation both in Israel and in the United States. Under the U.S. Internal
Revenue Code, we will be entitled to claim either a deduction or a foreign tax credit with respect to Israeli income taxes paid
or incurred on our Israeli source oil and gas income. As a general rule, we anticipate that it will be more advantageous for us
to claim a credit rather than a deduction for applicable Israeli income taxes on our U.S tax return. A tax treaty exists between
the U.S. and Israel that would provide opportunity to use the tax credit.
Exploration
and development expenses.
Under current US and Israeli tax laws, exploration and development expenses incurred by a holder
of a petroleum right can, at the option of such holder, either be expensed in the year incurred or capitalized and expensed (or
amortized) over a period of years. Most of our expenses to date have been expensed for both U.S. and Israeli income tax purposes.
Depletion
allowances.
Until 2011, the holder of an interest in a petroleum license or lease was allowed a deduction for income tax purposes
on account of the depletion of the petroleum reserve relating to such interest. This may have been by way of percentage depletion
or cost depletion, whichever is greater. In 2010, the Finance Minister of Israel established an advisory committee to study the
country’s fiscal policy as it relates to the upstream oil and natural gas sector, as well as various options, including
an increase in royalties or cancellation of tax incentives. In January 2011, the Finance Ministry advisory committee issued its
final recommendations which included cancellation of currently existing tax incentives, including the depletion allowance. In
2011, the depletion allowance was abolished.
Corporate
tax.
Under current Israeli tax laws, whether a company is registered in Israel or is a foreign company operating in Israel
through a branch, it is subject to Israeli Companies Tax on its taxable income (including capital gains) from Israeli sources
at a flat rate of 25%, effective January 1, 2016.
Import
duties.
Insofar as similar items are not available in Israel, the Petroleum Law provides that the owner of a petroleum right
may import into Israel, free of most customs, purchase taxes and other import duties, all machinery, equipment, installations,
fuel, structures, transport facilities, etc. (apart from consumer goods and private cars and similar vehicles) that are required
for the petroleum exploration and production purposes, subject to the requirement that security be provided to ensure that the
equipment is exported out of Israel within the agreed upon time frame.
Israeli
Energy Related Regulations
Our
operations are subject to legal and regulatory oversight by energy-related ministries or other agencies of Israel, each having
jurisdiction over certain relevant energy or hydrocarbons laws.
The
Onshore Petroleum Exploration Permitting Process in Israel
The permitting process
in Israel with respect to petroleum exploration continues to undergo significant modification, the result of which is to considerably
increase the complexity, time period, and expenditures needed to obtain the necessary permits to undertake exploratory drilling
once a drilling prospect has been identified. Applications for new exploration licenses need to comply with more demanding requirements
relating to a license applicant’s financial capability, experience and access to experienced personnel. Various guidelines
have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries since
2012 as it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil & Gas filings.
On
January 11, 2015, the Energy Ministry issued revised guidelines (initially issued in February 2012) for onshore wellbore abandonment
that are based on US regulations on well abandonment found in 43 CFR, Section 3162.3-4; applicable Texas Railroad Commission guidelines;
and Well Abandonment and Inactive Well Practices for U.S. Exploration and Production Operations found in API Bulletin E3. This
guideline is effective April 1, 2015.
On February 12, 2015, the
Energy Ministry issued guidance for preparation and submission of the drilling program (first presented on April 29, 2014), describing
types and purposes of production tests depending on the stage of development of a reservoir. This guideline is effective April
1, 2015.
On
April 27, 2015, the Energy Ministry issued guidelines for well testing, establishing procedures and minimum requirements for pressure
testing, production flow testing, fluid analyses testing, etc.
On August 13, 2015, the
Energy Ministry issued a new guideline for hydraulic fracturing design and operations that is based on Canadian regulations per
Directive 083. This guideline is effective November 21, 2015. The procedures seek to prevent impacts on water wells, non-saline
aquifers and prevent surface impacts.
On
September 9, 2015, the Energy Ministry issued information relating to application forms for exploration drilling, detailing certain
operator requirements prior to drilling, including required submission of an Application for Permit to Drill (APD) and Supplemental
APD Information Sheet - Casing Design, both due 30 days prior to commencement of work. An Application for Permit to Modify (APM)
form is now provided relating to changes to and modifications of already-approved drilling programs and other actions that were
omitted from the original application such as production testing, abandonment, etc. An End of Operation Report (EOR) form is also
provided to report the end of drilling or a temporary or a final end of operations.
On
December 31, 2015, the Energy Ministry issued a new guidance for wellsite design and spacing for onshore and offshore sites. The
guidelines relate to the necessary safety distance between installations and equipment at the drill site, flare pit and flare
design and design of the drill site.
On December 31, 2015, the
Energy Ministry issued revised guidance for “Transfer or Lien of Oil Rights” under section 76 of the Petroleum Law.
The guidelines apply to a transfer of petroleum and related rights, license and production lease as well as rights to profit and
royalties. The guidelines specify transfer of control in a corporation and the necessary procedure to apply for and receive approval
from the Petroleum Commissioner for transfer of petroleum rights.
On
May 16, 2016, the Energy Ministry issued new guidelines for the preparation and submission of a drilling program in accordance
with industry best practices or “Good Oilfield Practice.”
On
May 17, 2016, the Energy Ministry issued new guidelines for production testing in accordance with “Good Industry Practice”
detailing the applicable measures and reporting requirements.
We
believe that these new regulations will significantly increase the expenditures associated with obtaining new exploration rights
and drilling new wells, coupled with the heavy financial burden of “locking away” significant amounts of cash that
could otherwise be used for operational purposes. Finally, this will also considerably increase the time needed to obtain all
of the necessary authorizations and approvals prior to drilling.
Environmental & Safety / Planning
& Building
Oil and gas drilling operations
could potentially harm the environment if there are polluting spills caused by the loss of well control. The Petroleum Law
and regulations provide that the conduct of petroleum exploration and drilling operations be pursued in compliance with “good
oil field practices” and that measures of due care be taken to avoid seepage of oil, gas and well fluids into the ground
and from one geologic formation to another. The Petroleum Law and regulations also require that, upon the abandonment of a well,
it be adequately plugged and marked. Recently, as a condition for issuing the required permit for the construction of a drilling
site, the planning commissions have required the submission of a site remediation plan, subject to approval of the environmental
authorities. Our operations are also subject to claims for personal injury and property damage caused by the release of
chemicals or petroleum substances by us or others in connection with the conduct of petroleum operations on our behalf. Various
guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries
since 2012 as it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil & Gas filings.
Regulations entitled
“The Petroleum Regulations (Authorization to Deviate from the Provisions of the Planning and Building Law)
5772-2012” were adopted on April 24, 2012 and detail a new permitting process which, among other things, require the submission to the local regulatory and permitting authorities, of a detailed environmental report
relating to the proposed drilling site and surroundings. The report is to address, in detail, the environmental implications
of the drilling, including hydrological analysis, surface water management, risk assessment, environmental impact, and
abandonment and remediation of the drill site, among others.
The drilling application
must be published, and there are specified time frames (approximately 100 days) for any person (including environmental and other
interested bodies) to comment on the drilling application. As a result, we believe that the time periods to obtain the necessary
permits (prior to spudding a well) have been considerably increased.
On
January 2015, new guidelines were published regarding the abandonment of onshore (land-based) wells, as stated in Article 21 of
Israel’s Petroleum Regulations 5713 -1521. The guidelines are at least partially based on certain U.S. regulations, including
Texas Railroad Commission regulations required in Texas. The guidelines include, among other matters, standards for plugging wells,
temporary and permanent abandonment, reclamation, restoration, etc.
On January 21, 2016, the
Environmental Ministry published Professional Guidelines and Standards for Remediation of Land. The guidelines clarify and define
what is considered polluted land, remediation and the permitted methods to remediate polluted land, and it applies to oil and
gas exploration companies including Zion.
On June 28, 2016,
the Energy Ministry issued new guidelines for occupational health and safety practices regarding oil and gas drilling and production
activities per international norms, coupled with Israeli legal safety guidelines. These regulations focus on industry best practices
in the area of health, safety, and environmental (HS&E) factors as well as risk management. In addition, there is a new requirement
to have the Petroleum Commissioner’s approval over the safety standards which the operator seeks to apply.
We
do not know and cannot predict whether any new legislation in this area will be enacted and, if so, in what form and which of
its provisions, if any, will relate to and affect our activities, how and to what extent or what impact, if any, it might have
on our financial statements. There are no known proceedings instituted by governmental authorities, pending or known to be contemplated
against us under any environmental laws. We are not aware of any events of noncompliance in our operations in connection with
any environmental laws or regulations. However, we cannot predict whether any new or amended environmental laws or regulations
introduced in the future will have a material adverse effect on our future business.
The
Company believes that these new and/or revised regulations will significantly increase the complexity, time, and expenditures
associated with obtaining new exploration rights, drilling, and plugging/abandoning new wells, coupled with the heavy financial
burden of “locking away” significant amounts of cash that could otherwise be used for operational purposes.
Proposed
Fuel Market Law Legislation
In
March 2012, the Energy Ministry presented a draft law entitled “Fuel Market Law.” Under the proposal as
currently drafted, the following activities among others as they relate to crude oil and its products would require licenses
by the Director of the Fuel Authority in the Energy Ministry: import, export, refining, storage, dispensing and loading,
transport, marketing and sale. Further under the proposal a condition for the receipt of a license is that the licensee be a
corporation incorporated under the Israeli Companies Law. As currently drafted, the proposal does not provide for exceptions
for entities holding petroleum rights under the Petroleum Law; however, it is not certain that, even if enacted as currently
proposed, the provisions of the proposed law would supersede the provisions of the Petroleum Law. We submitted comments to
the Ministry with the aim of clarifying that any law to be presented for enactment clarify that the rights of holders of
licenses and leases granted under the Petroleum Law will not be compromised. In July of 2012 the Israeli Parliament approved
at the first hearing the draft Fuel Market Law.
We
do not know and cannot predict the results of any attempt to enact the proposed Fuel Market Law, as currently drafted or as may
be amended or, if enacted, the effect of such law on our rights under the Petroleum Law or the results of any legal challenge
to the law by a holder of a license or lease issued under the Petroleum Law.
Political
Climate
We
are directly influenced by the political, economic and military conditions affecting Israel. Specifically, we could be adversely
affected by:
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any
major hostilities involving Israel;
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the
interruption or curtailment of trade between Israel and its present trading partners;
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a
full or partial mobilization of the reserve forces of the Israeli army; and
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a
significant downturn in the economic or financial condition of Israel.
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Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel.
Any ongoing or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along Israel’s
borders, or political instability in the region could possibly disrupt international trading activities in Israel and may materially
and negatively affect our business conditions and could harm our prospects and business.
Civil
unrest could spread throughout the region or grow in intensity, leading to more regime changes resulting in governments that are
hostile to the United States and Israel, civil wars, or regional conflict. More recently, Russia initiated significant and
direct military intervention in Syria consisting of air strikes against ISIS and other parties. With ongoing operations by Russia,
the U.S. and other countries in areas in close proximity to Israel, there is an increased risk of deliberate and/or inadvertent
mishaps that could give rise to grave military and political consequences.
We
cannot predict the effect, if any, on our business of renewed hostilities between Israel and its neighbors or any other changes
in the political climate in the area.
Foundations
If
we are successful in finding commercial quantities of hydrocarbons in Israel, 6% of our gross revenues from production will go
to fund two charitable foundations that we established with the purpose of donating to charities in Israel, the U.S. and elsewhere
in the world.
For
charitable activities concerning Israel, the Bnei Joseph Foundation (R.A.) was established. On November 11, 2008, both the
Articles of Association and Incorporation Certificate were certified by the Registrar of Amutot (i.e. Charitable Foundations)
in Israel.
For
the U.S. and worldwide charitable activities, the Abraham Foundation in Geneva, Switzerland was established. On June 20,
2008, the Articles of Incorporation were executed and filed by the Swiss Notary in the Commercial Registrar in Geneva. On June
23, 2008, the initial organizational meeting of the founding members was convened in Israel. Regulations for the Organization
of the Abraham Foundation, signed by the founding members, were then filed with the Registrar. On November 19, 2008, the
Swiss Confederation approved the Foundation as an international foundation under the supervision of the federal government.
On December 8, 2008, the Republic of Geneva and the Federal government of Switzerland issued a tax ruling providing complete tax
exemption for the Foundation.
Our
shareholders, in a resolution passed at the 2002 Annual Meeting, gave authority to the Zion Board of Directors to transfer a 3%
overriding royalty interest to each of the two foundations with regard to the Joseph and Asher-Menashe licenses. In accordance
with that resolution, we took steps to legally donate a 3% overriding royalty interest to the Bnei Joseph Foundation (in Israel)
and a 3% overriding royalty interest to the Abraham Foundation (in Switzerland).
On
June 22, 2009, we received an official letter from the Commissioner informing us that the 3% overriding royalty interest to each
of the Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli Oil Register with regard to the Joseph
and Asher-Menashe licenses. On November 9, 2011, we received an official letter from the Commissioner informing us that the 3%
overriding royalty interest to each of the Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli
Oil Register with regard to the Jordan Valley License.
On
February 5, 2014, the Company submitted applications to the Petroleum Commissioner, requesting royalty interest transfers from
the Megiddo-Jezreel License of 3% overriding royalties to the Bnei Joseph Amutot and the Abraham Foundation, respectively. On
April 8, 2014, the transfers were approved by the Petroleum Commissioner and duly registered.
Available
Information
Zion’s
internet website address is “www.zionoil.com.” We make available, free of charge, on our website, and on our Zion
mobile application, under “SEC Reports,” our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports, as soon as
reasonably practicable after providing the SEC such reports.
Our
Corporate Governance Policy, the charters of the Audit Committee, the Compensation Committee and the Nominating and Governance
Committee, and the Code of Ethics for directors, officers, employees and financial officers are also available on our website
under “Corporate Governance” and in print to any stockholder who provides a written request to the Corporate Secretary
at Zion Oil & Gas, Inc., 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, Attn: Corporate Secretary.
We
file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents
with the SEC under the Securities Exchange Act of 1934, as amended. The public may read and copy any materials that we file with
the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet website
that contains reports, proxy and information statements, and other information regarding issuers, including Zion Oil & Gas,
Inc., that file electronically with the SEC. The public can obtain any document we file with the SEC at www.sec.gov. Information
contained on or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part
of this report or any other filing that we make with the SEC.
ITEM
1A. RISK FACTORS
In
evaluating our company, the risk factors described below should be considered carefully. The occurrence of one or more of these
events could significantly and adversely affect our business, prospects, financial condition and results of operations.
Risks
Associated with our Company
We
are a company with no current source of revenue. Our ability to continue in business depends upon our continued ability to obtain
significant financing from external sources and the ultimate success of our petroleum exploration efforts in onshore Israel, none
of which can be assured.
We
were incorporated in April 2000, and we have incurred negative cash flows from our operations, and presently all exploration activities
and overhead expenses are financed solely by way of the issue and sale of equity securities or debt instruments. The recoverability
of the costs we have incurred to date is uncertain and is dependent upon achieving commercial production or sale, none of which
can be assured. Our operations are subject to all of the risks inherent in exploration companies with no revenues or operating
income. Our potential for success must be considered in light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, especially the oil and gas exploration business, and in particular the
deep, wildcat exploratory wells in which we are engaged in Israel. We cannot warrant or provide any assurance that our business
objectives will be accomplished.
Our
ability to continue in business depends upon our continued ability to obtain the necessary financing from external sources to
undertake further exploration and development activities and generate profitable operations from oil and natural gas interests
in the future. We incurred net losses of $8,513,000 for the year ended December 31, 2016 and $7,306,000 for the year ended
December 31, 2015. The audited financial statements have contained a statement by the auditors that raises substantial doubt about
us being able to continue as a “going concern” unless we are able to raise additional capital.
We
expect to incur substantial expenditures in our exploration and development programs. Our existing cash balances will not
be sufficient to satisfy our exploration and development plans going forward, including drilling to the desired depth our planned
exploratory well. We are considering various alternatives to remedy any future shortfall in capital. We may deem it
necessary to raise capital through equity markets, debt markets or other financing arrangements, including participation arrangements
that may be available. We currently have a unit offering continuing through January 31, 2017, which was extended until March
31, 2017. Because of the current absence of any oil and natural gas reserves and revenues in our license areas, there can be no
assurance this capital will be available on commercially acceptable terms (or at all) and if it is not, we may be forced to substantially
curtail or cease exploration expenditures which could lead to our inability to meet all of our commitments.
Our
financial statements do not reflect the adjustments or reclassifications of assets and liabilities that would be necessary if
we are unable to continue as a going concern.
The
spudding of our next exploratory well is subject to many contingencies outside of our control, and any considerable delay in obtaining
all of the needed licenses, approvals and authorizations prior to actual drilling may severely impair our business.
Even
though our drill site is in its final completion stages and our drilling program has been formally approved, there remain several
risks and contingencies prior to actually spudding that well. The final step in the regulatory process is for Zion to submit our
Application for Permit to Drill to Israel’s Energy Ministry for their final approval. While Zion is well along on this regulatory
approval process, there is no assurance that we will ultimately be granted such final permission to drill. See the discussion
under “Energy Related Regulation — The Onshore Exploration Permitting Process in Israel;” “New Onshore
Licensing Guidelines;” and “Israeli Governmental Regulations.”
For
these reasons, although our next exploratory well is currently planned to spud in the second quarter of 2017, we cannot provide
full assurance that we will in fact be able to spud our planned exploratory well in the desired or planned time-frame.
We
require significant capital to realize our business plan.
Our planned work
program is expensive. We believe that our current cash resources are sufficient to allow us to undertake non-drilling
exploratory activities in our current license areas and in the additional areas of interest that we have identified which are
currently outside of our exploration license areas and otherwise meet our plans through May 31, 2017. We estimate that, when
we are not actively drilling a well, our monthly expenditure is approxim
ately
$500,000
per month. However, when we are engaged in active operations, we estimate that there is an additional cost of
approximately $2,500,000 per month. Additionally, the newly enacted onshore licensing and environmental and safety related
regulations promulgated by the various energy related ministries in Israel during 2015-2016 are likely to render obtaining
new explorations licenses increasingly expensive. For example, at the time of the award of any new exploration license, we
will be required to submit performance bank guarantees in the form of a restricted Israel cash deposits for 10% of the cost
of the planned drilling program as well as other amounts to cover potential environmental damages. See “Israel Energy
Related Governmental Regulations.”
We
have no commitments for any financing, and no assurance can be provided that we will be able to raise funds when needed. Further,
we cannot assure you that our actual cash requirements will not exceed our estimates. Even if we were to discover hydrocarbons
in commercial quantities, we will require additional financing to bring our interests into commercial operation and pay for operating
expenses until we achieve a positive cash flow. Additional capital also may be required in the event we incur any significant
unanticipated expenses.
Under
the current capital and credit market conditions, we may not be able to obtain additional equity or debt financing on acceptable
terms. 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 are unable to obtain additional financing, we may be unable to implement our business plan and our growth strategies, respond
to changing business or economic conditions and withstand adverse operating results. 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.
Additional
financing could cause your relative interest in our assets and potential earnings to be significantly diluted. Even if we have
exploration success, we may not be able to generate sufficient revenues to offset the cost of dry holes and general and administrative
expenses.
We
rely on independent experts and technical or operational service providers over whom we may have limited control.
The success of our oil
and gas exploration efforts is dependent upon the efforts of various third parties that we do not control. These third parties
provide critical drilling, engineering, logging, pressure pumping, geological, geophysical and other scientific analytical services,
including 2-D seismic imaging technology to explore for and develop oil and gas prospects. Given our small size and limited resources,
we do not have all the required expertise on staff. As a result, we rely upon various companies and other third parties
to assist us in identifying desirable hydrocarbon prospects to acquire and to provide us with technical assistance and services.
In addition, we rely upon the owners and operators of drilling rigs and related equipment.
If
any of these relationships with third-party service providers are terminated or are unavailable on commercially acceptable terms,
we may not be able to execute our business plan. Our limited control over the activities and business practices of these third
parties, any inability on our part to maintain satisfactory commercial relationships with them, their limited availability or
their failure to provide quality services could materially and adversely affect our business, results of operations and financial
condition.
We
have historically commenced exploration drilling operations without 3-D seismic surveys, thereby potentially increasing the risk
of drilling a non-producing or non-commercial well.
Larger
oil and gas exploration companies may choose to conduct extensive analytical pre-drilling testing such as 3-D seismic imaging,
the drilling of an expendable “pilot” well or “stratigraphic test” to collect data (logs, cores, fluid
samples, pressure data) to determine if drilling a well capable of producing oil or gas (full completion with casing and well
testing) is justified. The use of pilot or stratigraphic tests is often used in areas where there is little or no offset well
data, like Israel, where our exploration license area is located. While 3-D seismic imaging data is more useful than 2-D
data in identifying potential new drilling prospects, its acquisition and processing costs are many multiples greater than that
for 2-D data, and the Geophysical Institute of Israel (“GII”), our primary provider of geophysical data, has limited
ability to acquire and process onshore 3-D data in Israel. In addition to using 2-D seismic technology prior to drilling, we have
historically also utilized gravity and magnetic data, built cross section maps from offset wells and utilized geophysical analysis
from similar geologic targets. We believe that the additional months, delays and costs associated with more extensive pre-drilling
testing typically undertaken by larger oil and gas exploration companies is not necessarily justified when drilling vertical or
near-vertical exploration wells (as we have historically been doing). Nonetheless, the absence of more extensive pre-drilling
testing may potentially increase the risk of drilling a non-producing well, which would in turn result in increased costs and
expenses. Additionally, we are typically engaged in drilling deep onshore wildcat wells in Israel where only approximately 500
total wells have ever been drilled, the vast majority of which are relatively shallow. As such, exploration risks are inherently
very substantial.
Exploratory
well drilling locations that we decide to drill may not yield oil or natural gas in commercially viable quantities.
There is no way to predict
in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient quantities to recover
drilling or completion costs or to be economically viable. The use of technologies and the study of producing fields in the same
area will not enable us to know conclusively prior to drilling whether oil, natural gas liquids (NGLs) or natural gas will be
present or, if present, whether oil or natural gas will be present in sufficient quantities to be economically viable. Even if
sufficient amounts of oil, NGLs or natural gas exist, we may inadvertently damage the potentially productive hydrocarbon bearing
formation or experience mechanical difficulties while drilling or completing a well, resulting in a reduction in production from
the well or abandonment of the well. If we drill exploratory wells that we identify as dry holes in our future drilling locations,
our business may be materially harmed. We cannot assure you that the analogies we draw from available data from other wells, more
fully explored locations or producing fields will be applicable to our drilling locations. Ultimately, the cost of drilling, completing
and operating any well is often uncertain, and new wells may not be productive.
Deterioration
of political, economic and security conditions in Israel may adversely affect our operations.
Any
major hostilities involving Israel, a substantial decline in the prevailing regional security situation or the interruption or
curtailment of trade between Israel and its present trading partners could have a material adverse effect on our operations. See
the prior discussion on Political Climate.
Prolonged
and/or widespread regional conflict in the Middle East could have the following results, among others:
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capital
market reassessment of risk and subsequent redeployment of capital to more stable areas making it more difficult for us to
obtain financing for potential development projects;
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security
concerns in Israel, making it more difficult for our personnel or supplies to enter or exit the country;
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security
concerns leading to evacuation of our personnel;
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damage
to or destruction of our wells, production facilities, receiving terminals or other operating assets;
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inability
of our service and equipment providers to deliver items necessary for us to conduct our operations in Israel, resulting
in delays; and
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the
lack of availability of drilling rig and experienced crew, oilfield equipment or services if third party providers decide
to exit the region.
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Loss
of property and/or interruption of our business plans resulting from hostile acts could have a significant negative impact on
our earnings and cash flow. In addition, we may not have enough insurance to cover any loss of property or other claims resulting
from these risks.
We
have a history of losses and we cannot assure you that we will ever be profitable.
We
incurred net losses of $8,513,000 for the year ended December 31, 2016, and $7,306,000 for the year ended December 31, 2015. We
cannot provide any assurance that we will ever be profitable.
Earnings,
if any, will be diluted due to governmental royalty and charitable contributions.
We
are legally bound to pay a government royalty of 12.5% of gross sales revenues. Additionally, we are legally required to pay 6%
of gross sales revenue to two separate foundations (3% each to two separate foundations – see the separate section on foundations).
As our expenses increase with respect to the amount of sales, these donations and allocation could significantly dilute future
earnings and, thus, depress the price of the common stock.
Risks
Associated with our Business
We
are subject to increasing Israeli governmental regulations and environmental requirements that may cause us to incur substantial
incremental costs and/or delays in our drilling program.
Our business is subject
to laws and regulations promulgated by the State of Israel relating to the exploration for, and the development, production and
marketing of, crude oil and natural gas, as well as safety matters. Legal requirements are frequently changed and subject to interpretation,
and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. We may
be required to make substantial expenditures to comply with governmental laws and regulations.
Environmental laws and
regulations change frequently, and the implementation of new, or the modification of existing, laws or regulations could adversely
impact our operations. The discharge of natural gas, crude oil, or other pollutants into the air, soil or water may give rise
to substantial liabilities on our part to government agencies and third parties and may require us to incur substantial costs
of remediation. In addition, we may incur costs and penalties in addressing regulatory agency procedures regarding possible non-compliance.
Our
lack of diversification increases the risk of an investment in us, 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 a limited number of properties in Israel and exploitation of any significant reserves
that are found within our license areas. 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 are unable to diversify our operations, our financial condition and
results of operations could deteriorate.
We
currently have no proved reserves or current production and we may never have any.
We
do not have any proved reserves or current production of oil or gas. We cannot assure you that any wells will be completed or
produce oil or gas in commercially profitable quantities.
Oil
and gas exploration is an inherently risky business.
Exploratory
drilling involves enormous risks, including the risk that no commercially productive oil or natural gas reservoirs will be discovered.
Even when properly used and interpreted, seismic data analysis and other computer simulation techniques are only tools used to
assist geoscientists in trying to identify subsurface structures and the presence of an active petroleum system. They do not allow
the interpreter to know conclusively if hydrocarbons are present or economically available. The risk analysis techniques we use
in evaluating potential drilling sites rely on subjective judgments of our personnel and consultants. Additionally, we are typically
engaged in drilling deep onshore wildcat exploratory wells in Israel where only approximately 500 total wells have ever been drilled,
the vast majority of which are relatively shallower. As such, exploration risks are inherently very substantial.
A
substantial and extended decline in oil or natural gas prices could adversely impact our future rate of growth and the carrying
value of our unproved oil and gas assets.
Prices
for oil and natural gas fluctuate widely. Fluctuations in the prices of oil and natural gas will affect many aspects of our business,
including our ability to attract capital to finance our operations, our cost of capital, and the value of our unproved oil and
natural gas properties. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply
of and demand for oil and natural gas, market uncertainty and a wide variety of additional factors that are beyond our control,
such as the domestic and foreign supply of oil and natural gas, technological advances affecting energy consumption, and domestic
and foreign governmental regulations. Significant and extended reductions in oil and natural gas prices could require us
to reduce our capital expenditures and impair the carrying value of our assets.
The
price of oil has fallen precipitously since June 2014, when it was over $100 per barrel. During February 2016, the price
of a barrel of oil dipped under $30 for the first time in 12 years but has increased since then to a level of approximately $50
per barrel.
While there is much analysis
and speculation as to the cause of this fluctuation in the price and its predicted future course, there are many factors that
contribute to the price of oil, none of which the Company controls. The oil price is also impacted by actual supply and demand,
as well as by expectation. Demand for energy is closely related to economic activity which is compounded by key advances and innovation
in exploration techniques in recent years. Significant geopolitical events such as heightened conflict in the Middle East and
largescale terrorist activities can also impact the price of oil tremendously.
If
we are successful in finding commercial quantities of oil and/or gas, our revenues, operating results, financial condition and
ability to borrow funds or obtain additional capital will depend substantially on prevailing prices for oil and natural gas. Declines
in oil and gas prices may materially adversely affect our financial condition, liquidity, ability to obtain financing and operating
results. Lower oil and gas prices also may reduce the amount of oil and gas that we could produce economically.
Historically,
oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile,
making it impossible to predict with any certainty the future prices of oil and gas. The bottom line is that there are many and
varied causes for the fluctuation in the price of oil and natural gas, and we have no control over these factors.
The
insurance we carry is insufficient to cover all of the risks we face, which could result in significant financial exposure.
Exploration
for and production of crude oil and natural gas can be hazardous, involving natural disasters and other unplanned events such
as blowouts, well cratering, fire and explosion and loss of well control which can result in damage to or destruction of wells,
injury to persons, loss of life, or damage to property and the environment. Exploration and production activities are also subject
to risk from political developments such as terrorist acts, piracy, civil disturbances, war, expropriation or nationalization
of assets, which can cause loss of or damage to our property.
As
is customary within our industry, we maintain insurance against many, but not all, potential perils confronting our operations
and in coverage amounts and deductible levels that we believe to be economic. Consistent with that profile, our insurance program
is structured to provide us financial protection from unfavorable loss resulting from damages to or the loss of physical assets
or loss of human life, liability claims of third parties, and exploratory drilling interruption attributed to certain assets and
including such occurrences as well blowouts and resulting oil spills, at a level that balances cost of insurance with our assessment
of risk and our ability to achieve a reasonable rate of return on our investments. Although we believe the coverage and amounts
of insurance carried are adequate and consistent with industry practice, we do not have insurance protection against all the risks
we face. Because we chose not to insure certain risks, insurance may not be available at a level that balances the cost of insurance
and our desired rates of return, or actual losses exceed coverage limits. We regularly review our risks of loss and the cost and
availability of insurance and revise our insurance program accordingly.
If
an event occurs that is not covered by insurance or not fully protected by insured limits, it could have a significant adverse
impact on our financial condition, results of operations and cash flows.
We
face various risks associated with the trend toward increased activism against oil and gas exploration and development activities.
Opposition
toward oil and gas drilling and development activity has been growing globally and is particularly pronounced in Organization
for Economic Co-operation and Development (“OECD”) countries which include the U.S., the U.K and Israel. Companies
in the oil and gas industry, such as us, are often the target of activist efforts from both individuals and non-governmental organizations
regarding environmental compliance and business practices, potential damage to fresh water sources, and safety, among other topics.
Future activist efforts could result in the following:
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delay
or denial of drilling permits;
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shortening
of lease terms or reduction in lease size;
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restrictions
on installation or operation of gathering or processing facilities;
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restrictions
on the use of certain operating practices, such as hydraulic fracturing;
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legal
challenges or lawsuits;
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damaging
publicity about us;
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increased
costs of doing business;
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reduction
in demand for our products; and
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other
adverse effects on our ability to develop our properties and expand production.
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Our
need to incur costs associated with responding to these initiatives or complying with any resulting new legal or regulatory requirements
resulting from these activities that are substantial and not adequately provided for, could have a material adverse effect on
our business, financial condition and results of operations.
Economic
risks may adversely affect our operations and/or inhibit our ability to raise additional capital.
Economically,
our operations in Israel may be subject to:
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exchange
rate fluctuations;
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royalty
and tax increases and other risks arising out of Israeli State sovereignty over the mineral rights in Israel and its
taxing authority; and
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changes
in Israel’s economy that could lead to oil and gas price controls.
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Consequently,
our operations may be substantially affected by local economic factors beyond our control, any of which could negatively affect
our financial performance and prospects.
Legal
risks could negatively affect our market value.
Legally,
our operations in Israel may be subject to:
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changes
in the Petroleum Law resulting in modification of license and permit rights;
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adoption
of new legislation relating to the terms and conditions pursuant to which operations in the energy sector may be conducted;
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changes
in laws and policies affecting operations of foreign-based companies in Israel; and
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changes
in governmental energy and environmental policies or the personnel administering them.
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The
Israeli Energy Ministry has now enacted regulations relating to licensing requirements for entities engaged in the fuel sector
that would result in our having to obtain additional licenses to market and sell hydrocarbons that we may discover.
Further,
in the event of a legal dispute in Israel, we may be subject to the exclusive jurisdiction of Israeli courts or we may not be
successful in subjecting persons who are not United States residents to the jurisdiction of courts in the United States, either
of which could adversely affect the outcome of a dispute.
There
are limitations on the transfer of interests in our petroleum rights, which could impair our ability to raise additional funds
to execute our business plan
.
The
Israeli government has the right to approve any transfer of rights and interests in any license or other petroleum right we hold
or may be granted and any mortgage of any license or other petroleum rights to borrow money. If we attempt to raise additional
funds through borrowings or joint ventures with other companies and are unable to obtain required approvals from the government,
the value of your investment could be significantly diluted or even lost.
Our
dependence on the limited contractors, equipment and professional services available in Israel may result in increased costs and
possibly material delays in our work schedule
.
Due
to the lack of competitive resources in Israel, costs for our operations may be more expensive than costs for similar operations
in other parts of the world. We are also more likely to incur delays in our drilling schedule and be subject to a greater risk
of failure in meeting our required work schedule. Similarly, some of the oil field personnel we need to undertake our planned
operations are not necessarily available in Israel or available on short notice for work in Israel. Any or all of the factors
specified above may result in increased costs and delays in the work schedule.
Our
dependence on Israeli local licenses and permits as well as new regulations calling for enhanced bank guarantees and insurance
coverage may require more funds than we have budgeted and may cause delays in our work schedule.
In
connection with drilling operations, we are subject to a number of Israeli local licenses and permits. Some of these are issued
by the Israeli security forces, the Civil Aviation Authority, the Israeli Water Commission, the Israel Lands Authority, the holders
of the surface rights in the lands on which we intend to conduct drilling operations, local and regional planning commissions
and environmental authorities.
In
the event of a commercial discovery and depending on the nature of the discovery and the production and related distribution equipment
necessary to produce and sell the discovered hydrocarbons, we will be subject to additional licenses and permits, including from
various departments in the Energy Ministry, regional and local planning commissions, the environmental authorities and the Israel
Lands Authority. If we are unable to obtain some or all of these permits or the time required to obtain them is longer than anticipated,
we may have to alter or delay our planned work schedule, which would increase our costs.
If
we are successful in finding commercial quantities of oil and/or gas, our operations will be subject to laws and regulations relating
to the generation, storage, handling, emission, transportation and discharge of materials into the environment, which can adversely
affect the cost, manner or feasibility of our doing business. Many Israeli laws and regulations require permits for the operation
of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the
power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both.
If
compliance with environmental regulations is more expensive than anticipated, it could adversely impact the profitability of our
business.
Risks
of substantial costs and liabilities related to environmental compliance issues are inherent in oil and gas operations. It is
possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons
resulting from oil and gas exploration and production, would result in substantial costs and liabilities. This could also cause
our insurance premiums to be significantly greater than anticipated.
The
unavailability or high cost of drilling rigs, equipment, supplies, other oil field services and personnel could adversely affect
our ability to execute our exploration and development plans on a timely basis and within our budget.
Our
industry is cyclical and, from time to time, there is a shortage of drilling rigs, equipment, supplies and oilfield services.
There may also be a shortage of trained and experienced personnel. During these periods, the costs of such items are substantially
greater and their availability may be limited, particularly in locations that typically have limited availability of equipment
and personnel, such as the Eastern Mediterranean, where our operations are located. As a result, drilling rigs and oilfield services
may not be available at rates that provide a satisfactory return on our investment.
Additionally,
the oil and gas sector is going through very difficult financial times due to the persistently low oil and natural gas prices.
This has led to drilling services company reorganizations and even bankruptcies which could impact our ability to obtain drilling
equipment, crews, and services from the affected companies. All of these contingencies, over which we have little or no control,
can potentially disrupt our budgets and planned time frames.
Risks
Related to our Common Stock
We
will issue additional common stock in the future, which would dilute the ownership interests of our existing stockholders.
In the future, we anticipate
issuing additional securities in connection with capital raising efforts, including shares of our common stock or securities convertible
into or exchangeable for our common stock, resulting in the dilution of the ownership interests of our stockholders. We are authorized
under our amended and restated certificate of incorporation to issue 200,000,000 shares of common stock. As of February 28,
2017, there were 45,466,257 shares of
our common stock issued
and outstanding.
We have an effective
shelf registration statement on Form S-3/A (File No. 333-193336) from which additional shares of our common stock and other securities
can be issued. In addition, we may also issue additional shares of our common stock or securities convertible into or exchangeable
for our common stock in connection with the hiring of personnel, future acquisitions, future private placements of our securities
for capital raising purposes or for other business purposes. Future issuances of our common stock, or the perception that such
issuances could occur, could have a material adverse effect on the price of our common stock. The current registration statement
was declared effective by the SEC on March 27, 2014 and therefore, is effective until March 26, 2017 plus 180 days thereafter.
On February 23, 2017, the Company filed with the SEC a replacement shelf registration statement on Form S-3 (File No. 333-216191)
to become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the Registration Statement
shall become effective on such date as the SEC, acting pursuant to said Section 8(a), may determine.
On March 13, 2014, the
Company filed an S-3/A Form that is part of a replacement registration statement that was filed with the Securities and Exchange
Commission (the “SEC”) using a “shelf” registration process. From time to time, the Company may offer
up to
$102,000,000
of any combination of the securities described in this prospectus,
in the form of common stock, debt securities, warrants, and/or units.
When we offer a particular
series of securities, we will describe the intended use of the net proceeds from that offering in a prospectus supplement. The
actual amount of net proceeds we spend on a particular use will depend on many factors, including, our future capital expenditures,
the amount of cash required by our operations, and our 2future revenue growth, if any. Therefore, we will retain broad discretion
in the use of the net proceeds.
We
currently have a units offering continuing through March 31, 2017 under the S-3/A.
Because
the likelihood of paying cash dividends on our common stock is remote at this time, stockholders must look solely to appreciation
of our common stock to realize a gain on their investments.
We
do not know when or if we will pay dividends. We currently intend to retain future earnings, if any, to finance the expansion
of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors,
including our business, financial condition, results of operations, capital requirements and investment opportunities. Accordingly,
stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may
not occur.
Our
stock price and trading volume may be volatile, which could result in losses for our stockholders.
The
public market for our common stock has been characterized by significant price and volume fluctuations. There can be no assurance
that the market price of our common stock will not decline below its current or historic price ranges. The market price may
bear no relationship to the prospects, stage of development, existence of oil and gas reserves, revenues, earnings, assets or
potential of our company and may not be indicative of our future business performance. The trading price of our common stock
could be subject to wide fluctuations. Fluctuations in the price of oil and gas and related international political events
can be expected to affect the price of our common stock. In addition, the stock market in general has experienced extreme
price and volume fluctuations that have affected the market price for many companies, sometimes unrelated to the operating performance
of these companies. These market fluctuations, as well as general economic, political and market conditions, may have a material
adverse effect on the market price of our common stock.
Some
of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common
stock include:
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●
|
actual
or anticipated quarterly variations in our operating results,
|
|
●
|
changes
in expectations as to our future financial performance or changes in financial estimates, if any,
|
|
●
|
announcements
relating to our business or the business of our competitors,
|
|
●
|
conditions
generally affecting the oil and natural gas industry,
|
|
●
|
the
success of our operating strategy, and
|
|
●
|
the
operating and stock performance of other comparable companies.
|
Many
of these factors are beyond our control, and we cannot predict their potential effect on the price of our common stock. In addition,
the stock market is subject to extreme price and volume fluctuations. This volatility has had a significant effect on the
market price of securities issued by many companies for reasons unrelated to their operating performance and could have the same
effect on our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
ITEM
2. PROPERTIES
Zion
currently holds one active petroleum exploration license onshore Israel, the Megiddo-Jezreel License (with an area of approximately
99,000 acres). We have now selected the specific location of our next drilling prospect well location and hope to commence drilling
in the first half of 2017.
The
table below summarizes certain data for our license area for the year ended December 31, 2016:
Type of Right
|
|
Name
|
|
Area
(Approx. Acres)
|
|
|
Working
Interest
|
|
|
Expiration Date
|
|
License
|
|
Megiddo-Jezreel
|
|
|
98,842
|
|
|
|
100%
|
|
|
|
December 2, 2017
|
(1)(2)
|
(1)
|
After
the initial primary term of three years, extendable through December 2, 2020, one year at a time at the commissioner’s
discretion, subject to compliance with the terms of the license as may be amended.
|
(2)
|
Declaration
of a commercial discovery during the license term, as may in certain circumstances be extended for two years to define the
boundaries of the field, would entitle Zion to receive a 30-year lease (extendable for up to an additional 20 years (50
years in all) subject to compliance with a field development work program and production.
|
Surface
Rights
The
surface rights to drill site in Megiddo-Jezreel License area are held under a long-term lease by Kibbutz Sde Eliyahu. The rights
are owned by the State of Israel and administered by the Israel Lands Authority. Permission has been granted to Zion by both Kibbutz
Sde Eliyahu and the Israel Lands Authority for the use of the surface rights.
The
surface rights to former drill sites in the former Joseph License area are held under a long-term lease by Kibbutz Ma’anit.
The rights are owned by the State of Israel and administered by the Israel Lands Authority. Permission has been granted to Zion
by both Kibbutz Ma’anit and the Israel Lands Authority for the use of the surface rights. The Company has completed the
plugging obligations of all wells within the Joseph License area and acknowledges its obligation to complete the abandonment of
the wells in accordance with guidance from the Environmental Ministry in 2017 even though the Joseph License has expired.
The
surface rights to the former drill site in the former Asher-Menashe License area are held under a long-term lease by Kibbutz Ein
Carmel. The rights are owned by the State of Israel and administered by the Israel Lands Authority. Permission has been granted
to Zion by both Kibbutz Ein Carmel and the Israel Lands Authority for the use of the surface rights. The Company has completed
the plugging obligations of the only well within the Asher-Menashe License area and acknowledges its obligation to complete the
abandonment of the well in accordance with guidance from the Environmental Ministry in 2017 even though the Asher-Menashe License
has expired.
Summary
of Exploration Activities/Present Activities
Please
refer to the discussion above under Item 1, under the caption “Summary of Exploration Activities” and “Exploration
Plans Going Forward”.
Office
Properties
(i)
The Company had a lease for 3,600 square feet of corporate office space in Dallas, Texas, which expired on October 31, 2011. On
October 11, 2011, the Company and the landlord entered into an amended lease for its current office premises in Dallas, Texas
as well as the addition of adjacent space in the building for a total of 6,500 square feet. Pursuant to the lease amendment, the
lease term on the existing office space as well as the additional premises was extended to January 31, 2016.
Rent
was paid on a monthly basis and was $8,072 for each month during 2015 and through January 31, 2016.
On September 10, 2015,
the Company signed a new lease agreement with Hartman Income REIT Property Holdings, LLC (“Hartman”) for new premises
containing 7,276 square feet. The lease term is for 65 months from December 1, 2015 to April 30, 2021. Rent was abated for the
first five months (December 2015 through April 2016). Beginning in May 2016 and through April 2017, rent was paid on a monthly
basis in the base amount of $7,882 per month. Thereafter, from May 2017 through April 2018, rent is $8,186 per month; from May
2018 through April 2019, rent is $8,489 per month; from May 2019 through April 2020, rent is $8,792 per month; and from May 2020
through April 2021, rent is $9,095 per month. We are also obligated to pay our pro-rated portion of all taxes, utilities, and
insurance during the lease term.
On
June 14, 2016, the Company and Hartman signed a First Amendment to Lease Agreement whereby the premises were expanded to include
approximately 1,498 square feet, for a new total of approximately 8,774 square feet. The first amendment commencement date was
July 1, 2016 and the payment of monthly rent was revised. Beginning in July 2016 and extending through November 2016, rent is
to be paid on a monthly basis in the base amount of $7,882 per month. Beginning in December 2016 and extending through May 2017,
rent is to be paid monthly in the base amount of $9,505.17 per month. Beginning in June 2017 and extending through May 2018, rent
is to be paid monthly in the base amount of $9,870.75 per month. Beginning in June 2018 and extending through May 2019, rent is
to be paid monthly in the base amount of $10,236.33 per month. Beginning in June 2019 and extending through May 2020, rent is
to be paid monthly in the base amount of $10,601.92 per month. Beginning in June 2020 and extending through May 2021, rent is
to be paid monthly in the base amount of $10,967.50 per month.
(ii) On December 19,
2013, we signed a new lease agreement with Caesarea Asset Edmond Benjamin de Rothschild (2001) Ltd for new premises containing
6,566 square feet. The lease term is five years from February 1, 2014 to January 31, 2019. Rent is to be paid on a monthly
basis in the base amount of approximately NIS 37,800 per month (approximately $10,350 per month at the exchange rate in effect
on the date of this report) and is linked to an increase (but not a decrease) in the CPI. Zion is also obligated to pay all related
taxes, utilities, insurance and maintenance payments during the lease term. Pursuant to the lease, beginning March 2016, Zion
may terminate the agreement upon three months’ notice, provided the Company secures a replacement lessee approved by the
lessor at its discretion.
Zion
has an option to renew the lease for another five years, provided it is not in breach of the agreement, where it is required as
well to furnish a notice of intent to exercise the option six months prior to termination of lease and furnishes a bank guarantee
and insurance confirmation prior to commencement of option period. Under the lease agreement, the Company is authorized to further
sublease part of the leased premises to a third party that is pre-approved by the sub-lessor. Rent and its related taxes, utilities,
insurance and maintenance expenses for 2016 and 2015 were $285,000 and $282,000, respectively.
Geneva Branch
On
July 11, 2014, Zion Oil & Gas, Inc., Geneva Branch was registered in the Canton of Geneva, Switzerland. The legal Swiss
name for the foreign branch is “Zion Oil & Gas, Inc., Wilmington, Branch of Geneva”. The Zion Swiss Branch
has its registered office and its business office at 6 Avenue Jules Crosnier, 1206 Champel, Geneva, Switzerland. The purpose
of the branch is to operate a foreign treasury center for the Company.
ITEM
3. LEGAL PROCEEDINGS
On
September 12, 2008, the Company entered into a drilling contract with Aladdin Middle East Ltd. (“AME”) pursuant to
which AME shipped into Israel its 2,000 horsepower rig for use in the drilling contemplated by the Company’s business plan.
The rig was used to drill the Ma’anit-Rehoboth #2 well, the Elijah #3 and the Ma’anit-Joseph #3 well. Drilling operations
on the Ma’anit-Joseph #3 well were concluded in July 2011, whereupon the Company released the rig.
In May, 2012, the Company
and GuyneyYildizi Petrol UretimSondajMut, ve Tic A.S. (“GYP”), as successor in interest to AME, agreed that the Company
would pay GYP $627,000 in full and final settlement of past bills, and such amount was paid on May 15, 2012. However, the matter
related to GYP’s demand for $550,000 for rig demobilization was excluded from the settlement. The drilling contract between
the Company and AME provides that all disputes are to be settled by arbitration in London, United Kingdom.
On
December 22, 2015, Zion and GYP entered into a Settlement Agreement and Mutual Release resolving the arbitration by which Zion
is required to pay the sum of $550,000 to and/or for the benefit of GYP plus required value added tax (“VAT”) and
income tax withholding under Israeli tax law.
On
April 25, 2016, a Final Award by Consent was signed by the arbitrator incorporating the terms of the settlement.
ITEM
4. MINE SAFETY DISCLOSURES
Not
Applicable.
Notes
to Financial Statements
Note
1 - Nature of Operations and Basis of Presentation
A.
Nature of Operations
Zion
Oil & Gas, Inc., a Delaware corporation (“we,” “our,” “Zion” or the “Company”)
is an oil and gas exploration company with a history of 17 years of oil & gas exploration in Israel. As of December 31, 2016,
the Company has no revenues from its oil and gas operations.
Exploration
Rights/Exploration Activities
Zion
currently holds one active petroleum exploration license onshore Israel, the Megiddo-Jezreel License (“MJL”), comprising
approximately 99,000 acres. The Company has selected the specific drill pad location from which to drill its next exploration
well, which, unless extended, must be spud by June 30, 2017 as referenced below. The drilling of this well to the desired depth
is subject to the Company raising sufficient funds from equity or debt offerings, of which no assurance can be provided.
Depending
on the results of the planned exploratory well and having adequate cash resources, multiple wells could be drilled from this pad
site as several subsurface geologic targets can be reached using directional well trajectories.
Megiddo-Jezreel
Petroleum License (“MJL”)
The
MJL was awarded on December 3, 2013 for a three-year primary term through December 2, 2016, with the possibility of additional
one-year extensions up to a maximum of seven years. The MJL is onshore, south and west of the Sea of Galilee.
On
June 28, 2016, the Company submitted a third Application for Extension of Drilling Date, and on July 4, 2016, the Petroleum Commissioner
formally approved the application as follows:
No.
|
|
Activity Description
|
|
To be carried out by:
|
1
|
|
Sign contract with drilling contractor and forward to Petroleum Commissioner
|
|
13 October 2016
|
2
|
|
Submit detailed Engineering Plan to carry out the drilling
|
|
13 October 2016
|
3
|
|
Spudding in the license area
|
|
1 December 2016
|
4
|
|
Submit a final report on the results of the drilling
|
|
1 May 2017
|
5
|
|
Submit a plan for continued work in the license area
|
|
29 June 2017
|
The
Petroleum Commissioner modified Zion’s work plan deadlines and awarded the Company a one-year extension to December 2, 2017
on its MJL, subject to Zion signing a drilling contract and submitting a detailed engineering plan by October 13, 2016 and spudding
an exploratory well by December 1, 2016. The Company timely complied with two key Special Conditions of our existing license terms
established by the Israel Petroleum Commissioner, by providing on October 13, 2016 the fully executed drilling contract with S.A.
Daflog, S.R.L., an Israeli-registered related party entity to DAFORA S.A., and a Detailed Drilling Engineering Plan for the Megiddo-Jezreel
#1 well.
Zion
then sought an extension to both its spud date and license extension beyond the three-year primary term. Due in part to Zion’s
timely compliance with the two key Special Conditions of the Company’s work program, on November 29, 2016, the State of
Israel’s Petroleum Commissioner officially approved Zion’s drilling date and license extension request. Key details
of the extension are as outlined below:
No.
|
|
Activity Description
|
|
To be carried out by:
|
1
|
|
Begin drilling / spud well
|
|
30 June 2017
|
2
|
|
Submit final report on the results of drilling
|
|
1 November 2017
|
3
|
|
Submit a plan for continued work in the license area
|
|
1 December 2017
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
1 - Nature of Operations and Basis of Presentation
(cont’d)
As
previously reported, the Company needed authorization from the Israel land Authority (the “ILA”), the formal lessor
of the land to the kibbutz, to access and utilize the drill site. The Company received this authorization on July 4, 2016, effective
through January 3, 2017. This is in conjunction with our May 15, 2016 signed agreement with Kibbutz Sde Eliyahu on whose property
the drilling pad will be situated.
The drill site plan was prepared by an outside
engineering firm to accommodate DAFORA’s F-400 rig. The Company awarded the drill site construction contract to an Israeli
company named
Y. Bazelet and Aggregatim LTD
. The construction of the drill site and road was completed in February 2017.
Zion is in process of rig mobilization to the MJ#1 location to begin rig-up and acceptance testing. The drilling, completion and
testing of the well will be subject to raising the necessary capital of which no assurances can be provided.
Zion’s
Former Jordan Valley, Joseph, and Asher-Menashe Licenses
On
March 29, 2015, the Energy Ministry formally approved the Company’s application to merge the southernmost portion of the
Jordan Valley License into the Megiddo-Jezreel License. The Company has plugged all of its exploratory wells (in the former Joseph
and Asher-Menashe Licenses) but acknowledges its obligation to complete the abandonment of these well sites in accordance with
guidance from the Environmental Ministry and local officials.
B.
Basis of Presentation
To
date, the Company has not achieved a discovery of either oil or gas in commercial quantities. The Company incurs cash outflows
from operations and all exploration activities and overhead expenses to date have been financed by way of equity or debt financing.
The recoverability of the costs incurred to date is uncertain and dependent upon achieving significant commercial production.
The
Company’s ability to continue as a going concern is dependent upon obtaining the necessary financing to undertake
further exploration and development activities and ultimately generating profitable operations from its oil and natural gas
interests in the future. The Company’s current operations are dependent upon the adequacy of its current assets to meet
its current expenditure requirements and the accuracy of management’s estimates of those requirements. Should those
estimates be materially incorrect, the Company’s ability to continue as a going concern may be impaired. The financial
statements have been prepared on a going concern basis, which contemplates realization of assets and liquidation of
liabilities in the ordinary course of business. During the year ended December 31, 2016, the Company incurred a net loss of
approximately $8.5 million and had an accumulated deficit of approximately $150.6 million. These factors raise
substantial doubt about the Company’s ability to continue as a going concern.
The
Company expects to incur additional significant expenditures to further its exploration programs. Management is of the opinion
that its currently available cash resources are sufficient to finance its plan of operations through May 2017.
To
carry out further planned operations beyond that date, the Company must raise additional funds through additional equity and/or
debt issuances. There can be no assurance that this capital will be available through the current Unit Program scheduled to terminate
on March 31, 2017 or otherwise, and if it is not, the Company may be forced to curtail or cease exploration and development activities,
including the drilling of the planned MJ #1 exploratory well. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty (See also Note 12).
Note
2 - Summary of Significant Accounting Policies
A.
Financial Statements in United States Dollars
The
currency of the primary economic environment in which the operations of the Company are conducted is the United States dollar
(“dollar”). Therefore, the dollar has been determined to be the Company’s functional currency. Non-dollar transactions
and balances have been translated into dollars in accordance with the principles set forth in Accounting Standards Codification
(“ASC”) 830 “Foreign Currency Matters.” Transactions in foreign currency (primarily in New Israeli Shekels
– “NIS”) are recorded at the exchange rate as of the transaction date. Monetary assets and liabilities denominated
in foreign currency are translated on the basis of the representative rate of exchange at the balance sheet date. Non-monetary
assets and liabilities denominated in foreign currency are stated at historical exchange rates. All exchange gains and losses
from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations
as they arise.
B.
Cash and Cash Equivalents
The
Company maintains cash balances with five banks, of which three banks are located in the United States, one in the United Kingdom,
and one in Israel and money market mutual funds. For purposes of the statement of cash flows and balance sheet, the Company considers
all highly liquid investments with a maturity of three months or less to be cash equivalents. At times, the Company maintains
deposits in financial institutions in excess of federally insured limits. The Company has not experienced any losses in such accounts
and does not believe it is exposed to any significant credit risk on cash.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies
(cont’d)
C.
Fixed Short Term time deposits
Interest
bearing deposits for a period which exceeds three months but not more than 12 months and are not restricted are classified as
Fixed Short Term time deposits.
D.
Oil and Gas Properties and Impairment
The
Company follows the full-cost method of accounting for oil and gas properties. Accordingly, all costs associated with acquisition,
exploration and development of oil and gas reserves, including directly related overhead costs, are capitalized.
All
capitalized costs of oil and gas properties, including the estimated future costs to develop proved reserves, are amortized on
the unit-of-production method using estimates of proved reserves. Investments in unproved properties and major development projects
are not amortized until proved reserves associated with the projects can be determined or until impairment occurs. If the results
of an assessment indicate that the properties are impaired, the amount of the impairment is included in loss from continuing operations
before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.
The
Company’s oil and gas property represents an investment in unproved properties. These costs are excluded from the amortized
cost pool until proved reserves are found or until it is determined that the costs are impaired. All costs excluded are reviewed
at least quarterly to determine if impairment has occurred. The amount of any impairment is charged to expense since a reserve
base has not yet been established. Impairment requiring a charge to expense may be indicated through evaluation of drilling results,
relinquishing drilling rights or other information.
During
the year ended December 31, 2016, and 2015, the Company did not record a non-cash impairment charge of its unproved oil and gas
properties (see Note 4).
Currently,
the Company has no economically recoverable reserves and no amortization base. The Company’s unproved oil and gas properties
consist of capitalized exploration costs of $6,397,000 and $5,022,000 as of December 31, 2016, and 2015, respectively.
E.
Property and Equipment
Property
and equipment other than oil and gas property and equipment is recorded at cost and depreciated by the straight-line method over
its estimated useful lives of three to fourteen years. Depreciation charged to expense amounted to $56,000 and $61,000 for the
years ended December 31, 2016, and 2015, respectively. During the year ended December 31, 2016, the Company sold one motor vehicle.
Proceeds of $44,000 were received and a capital gain of $43,000 was recognized.
F.
Assets Held for Severance Benefits
Assets
held for employee severance benefits represent contributions to severance pay funds and insurance policies that are recorded
at their current redemption value.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies
(cont’d)
G.
Use of Estimates
The
preparation of the accompanying financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions about future events. These estimates and the underlying
assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported
amounts of revenues and expenses. Such estimates include the valuation of unproved oil and gas properties, deferred tax assets,
asset retirement obligations and legal contingencies. These estimates and assumptions are based on management’s best estimates
and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors,
including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts
such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency,
and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and
their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in
those estimates resulting from continuing changes in the economic environment will be reflected in the financial statements in
future periods.
H.
Income Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities
and their respective tax bases and operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to
be recovered or settled (see Note 9). The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in the statements of operations in the period that includes the enactment date.
Based
on Accounting Standards Codification (ASC) 740-10-25-6 “Income Taxes,” the Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. The Company accounts for interest and penalties related to unrecognized
tax benefits, if and when required, as part of income tax expense in the statements of operations. No liability for unrecognized
tax benefits was recognized as of December 31, 2016, and 2015.
I.
Environmental Costs and Loss Contingencies
Liabilities
for loss contingencies, including environmental remediation costs not within the scope of Financial Accounting Standards Board
(FASB) ASC Subtopic 410-20, Asset Retirement Obligations and Environmental Obligations – Asset Retirement Obligations, arising
from claims, assessments, litigation, fines, and penalties and other sources, are recorded when probable that a liability has
been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection
with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties that are probable
of realization are separately recorded as assets, and are not offset against the related environmental liability.
Accruals
for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of expected future
expenditures for environmental remediation obligations are not discounted to their present value.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies
(cont’d)
J. Asset
Retirement Obligation
Obligations
for dismantlement, restoration and removal of facilities and tangible equipment at the end of oil and gas property’s useful
life are recorded based on the estimate of the fair value of the liabilities in the period in which the obligation is incurred.
This requires the use of management’s estimates with respect to future abandonment costs, inflation, market risk premiums,
useful life and cost of capital. The estimate of asset retirement obligations does not give consideration to the value the related
assets could have to other parties, although it does take into account estimated residual salvage values. The obligation is recorded
if sufficient information about the timing and (or) method of settlement is available to reasonably estimate fair value (see Note
10B).
K.
Net Loss per Share Data
Basic
and diluted net loss per share of common stock, par value $0.01 per share (“Common Stock”) is presented in conformity
with ASC 260-10 “Earnings Per Share.” Diluted net loss per share is the same as basic net loss per share as the inclusion
of 6,701,596 and 4,644,348 Common Stock equivalents in 2016 and 2015 respectively, would be anti-dilutive.
L.
Stock Based Compensation
The
Company follows ASC 718-20-55, “Compensation – Stock Compensation” (“ASC 718-20-55”), which requires
measurement of compensation cost for all stock-based awards based upon the fair value on date of grant and recognition of compensation
over the service period for awards expected to vest. Under this method, the Company has recognized compensation cost for awards
granted beginning January 1, 2006, based on the Black-Scholes option-pricing method.
The
Company accounts for equity instruments issued to non-employees in accordance with the provisions of ASC 505, “Equity,”
using a fair-value approach.
As
noted, the value of stock option grants is recognized as a compensation expense, on a graded-vesting basis, over the requisite
service period of the entire award, net of estimated forfeitures unless vested.
M.
Fair Value Measurements
The
Company follows Accounting Standards Codification (ASC) 820, “Fair Value Measurements and Disclosures,” as amended
by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No. 157 and related guidance. Those provisions relate
to the Company’s financial assets and liabilities carried at fair value and the fair value disclosures related to financial
assets and liabilities. ASC 820 defines fair value, expands related disclosure requirements, and specifies a hierarchy of valuation
techniques based on the nature of the inputs used to develop the fair value measures. Fair value is defined 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, assuming the transaction occurs in the principal or most advantageous market for that asset or liability.
There
are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in
active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical
or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of
unobservable inputs.
The
Company uses Level 1 inputs for its fair value measurements whenever there is an active market, with actual quotes, market prices,
and observable inputs on the measurement date. The Company uses Level 2 inputs for fair value measurements whenever there are
quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market. The
Company uses Level 3 inputs in the Binomial Model used for the valuation of the derivative liability.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies
(cont’d)
N.
Derivative Liabilities
In
accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities
from Equity, the embedded derivatives associated with the Convertible Bonds are accounted for as a liability during the term
of the related Convertible Bonds (see Note 8).
O.
Recently Adopted Accounting Pronouncements
The
Company does not believe that the adoption of any recently issued accounting pronouncements in 2016 had a significant impact on
our financial position, results of operations, or cash flow, except for ASC Update No. 2015-03—Interest—Imputation
of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, which requires debt issuance costs to be presented
in the balance sheet as a direct deduction from the carrying value of the associated debt liability, consistent with the presentation
of a debt discount. For public business entities, the amendments in this Update are effective for financial statements issued
for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. At December 31, 2016, the Company
reclassified $118,000 in deferred offering costs from an asset account and applied it to the outstanding debt balance (see Note
7).
P.
Reclassifications
Certain
reclassifications have been made to conform the prior period’s financial information to the current period’s presentation.
Note
3 - Provision for Severance Pay
Israeli
law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other
circumstances. The following plans relate to the employees in Israel:
|
A.
|
The
liability in respect of certain of the Company’s employees is discharged in part by participating in a defined contribution
pension plan and making regular deposits with recognized pension funds.
|
The
deposits are based on certain components of the salaries of the said employees. The custody and management of the amounts so deposited
are independent of the Company’s control and accordingly such amounts funded (included in expenses on an accrual basis)
and related liabilities are not reflected in the balance sheet.
|
B.
|
The
Company’s liability for severance pay for its Israeli employees is calculated pursuant to Israeli severance pay law
based on the most recent salary of the employee multiplied by the number of years of employment, as of the balance sheet date.
Employees are entitled to one month’s salary for each year of employment, or a portion thereof. Certain senior executives
are entitled to receive additional severance pay. The Company’s liability for all of its Israeli employees is partly
provided for by monthly deposits in insurance policies and the remainder by an accrual in the financial statements. The value
of these policies is recorded as an asset in the Company’s balance sheet.
|
The
deposited funds include profits/loss accumulated up to the balance sheet date. The value of the deposited funds is based on current
redemption value of these policies.
|
C.
|
Withdrawals
from the funds may be made only upon termination of employment.
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - Provision for Severance Pay
(cont’d)
|
D.
|
As
of December 31, 2016, and 2015, the Company has a provision for severance pay of $206,000 and $249,000, respectively, of which
all was long-term. As of December 31, 2016, and 2015, the Company has $162,000 and $226,000, respectively, deposited in funds
managed by major Israeli financial institutions which are earmarked to cover severance pay liability. Such deposits are not
considered to be “plan assets” and are therefore included in other assets.
|
Note
4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved
oil and gas properties, under the full cost method, are comprised as follows
:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
|
|
Inventory, and other operational related costs
|
|
|
1,770
|
|
|
|
1,312
|
|
Capitalized salary costs
|
|
|
1,579
|
|
|
|
1,177
|
|
Legal costs, license fees and other preparation costs
|
|
|
3,018
|
|
|
|
2,506
|
|
Other costs
|
|
|
30
|
|
|
|
27
|
|
|
|
|
6,397
|
|
|
|
5,022
|
|
Note
5 - Accrued Liabilities
Accrued
liabilities are comprised as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
Employees related
|
|
|
190
|
|
|
|
196
|
|
Interest on Convertible bonds
|
|
|
231
|
|
|
|
-
|
|
Rights offering payables
|
|
|
8
|
|
|
|
540
|
|
Other
|
|
|
248
|
|
|
|
117
|
|
|
|
|
677
|
|
|
|
853
|
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
A.
Authorized Common Shares
The
Company’s Amended and Restated Certificate of Incorporation was amended effective June 11, 2015 to increase the number of
shares of Common Stock that the Company is authorized to issue from 100 million to 200 million shares.
B.
2005 Stock Option Plan
In
2005, a stock option plan (the “2005 Plan”) was adopted by the Company, pursuant to which 1,000,000 shares of Common
Stock are reserved for issuance to officers, directors, employees and consultants. The 2005 Plan is administered by the Board
of Directors or one or more committees appointed by the board (the “2005 Plan Administrator”).
The
2005 Plan contemplates the issuance of stock options by the Company both as a private company and as a publicly traded company
and is available to residents of the United States, the State of Israel and other jurisdictions as determined by the 2005 Plan
Administrator. Awards of stock options under the 2005 Plan are made pursuant to an agreement between the Company and each grantee.
The agreement will, among other provisions, specify the number of shares subject to the option, intended tax qualifications, the
exercise price, applicable vesting provisions and the term of the stock option grant, all of which are determined on behalf of
the Company by the 2005 Plan Administrator. The 2005 Plan remains in effect for a term of ten years unless terminated or extended
according to its provisions.
During
the year ended December 31, 2015, the Company granted the following options from the 2005 Stock Option Plan, to purchase:
|
i.
|
128,500
shares of Common Stock to senior officers, other staff members, and service providers at an exercise price of $1.38 per share.
The options vested upon grant and are exercisable through January 2, 2025. The fair value of the options at the date of grant
amounted to approximately $106,000.
|
|
|
|
|
ii.
|
25,000
shares of Common Stock to a senior officer at an exercise price of $1.38 per share. The options have a par value of $.01.
The options vested as scheduled on June 30, 2015 and are exercisable through January 1, 2025. The fair value of the options
at the date of grant amounted to approximately $21,000 and,
|
|
|
|
|
iii.
|
123,500
shares of Common Stock to directors, senior officers, other staff members, and service providers at an exercise price of $0.01
per share. The options vested upon grant and are exercisable through April 17, 2025. The fair value of the options at the
date of grant amounted to $220,000.
|
There
were no stock issuances from the 2005 Plan during the calendar year 2016.
C.
2011 Equity Incentive Stock Option Plan
In
June 2011, the Company’s shareholders authorized the adoption of the Zion Oil & Gas, Inc. 2011 Equity Incentive Plan
for employees and consultants (the “2011 Plan”), initially reserving for issuance thereunder 2,000,000 shares of Common
Stock.
The
2011 Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted
stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The 2011 plan also permits
cash payments under certain conditions.
The
compensation committee of the Board of Directors is responsible for determining the type of award, when and to whom awards are
granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to
exceed ten years from the date of grant.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
In
June 2015, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Equity Incentive Plan for employees and consultants reserving for issuance thereunder an additional four million shares of Common
Stock for a total of six million shares of Common Stock available thereunder.
During
the year ended December 31, 2016, the Company granted the following options from the 2011 Equity Incentive Plan for employees,
directors and consultants, to purchase:
|
i.
|
25,000
shares of Common Stock to a senior officer at an exercise price of $0.01. The options vested upon grant and are exercisable
through January 1, 2026. The fair value of the options at the date of grant amounted to approximately $46,000.
|
|
|
|
|
ii.
|
25,000
shares of Common Stock to a senior officer at an exercise price of $0.01. The options vested upon grant and are exercisable
through January 4, 2026. The fair value of the options at the date of grant amounted to approximately $47,000.
|
|
|
|
|
iii.
|
35,000
shares of Common Stock to a non-employee director and a staff member at an exercise price of $0.01 per share. The options
vested upon grant and are exercisable through January 15, 2026. The fair value of the options at the date of grant amounted
to approximately $59,000.
|
|
|
|
|
iv.
|
10,000
shares of Common Stock to one senior officer at an exercise price of $0.01 per share.
The options vested in equal quarterly installments over four consecutive quarters, beginning
with the quarter ended June 30, 2016 and are exercisable through April 3, 2026.
The fair value of the options at the date of grant amounted to approximately $18,000.
At December 31, 2016, 2,500 of said shares were unvested and the grantee was no longer
employed by the company.
|
|
|
|
|
v.
|
1,540,000
shares of Common Stock to senior officers, other staff members, directors and service
providers at an exercise price of $0.01. The options vested upon grant and are exercisable
through June 5, 2026. The fair value of the options at the date of grant amounted to
approximately $2,373,000.
|
|
vi.
|
100,000
shares of Common Stock to a senior officer at an exercise price of $0.01. The options vested upon grant and are exercisable
through June 30, 2026. The fair value of the options at the date of grant amounted to approximately $147,000.
|
|
|
|
|
vii.
|
30,000
shares of Common Stock to a consultant at an exercise price of $.01 per share. The options vested upon grant and are exercisable
through November 1, 2026. The fair value of the options at the date of grant amounted to approximately $36,000.
|
|
|
|
|
viii.
|
75,000
shares of Common Stock to senior officers at an exercise price of $0.01. The options vested upon grant and are exercisable
through December 31, 2026. The fair value of the options at the date of grant amounted to approximately $102,000.
|
During
the year ended December 31, 2015, the Company granted the following options from the 2011 Equity Incentive Plan for employees
and consultants, to purchase:
|
i.
|
10,000
shares of Common Stock to one senior officer at an exercise price of $0.01 per share. The options vest in equal quarterly
installments over four consecutive quarters, beginning with the quarter ended June 30, 2015 and are exercisable through
April 2, 2025. The fair value of the options at the date of grant amounted to approximately $18,000.
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
|
ii.
|
360,000
shares of Common Stock to staff members and service providers at an exercise price of $0.01 per share. The options vested
upon grant and are exercisable through August 3, 2025. The fair value of the options at the date of grant amounted to approximately
$630,000.
|
|
|
|
|
iii.
|
100,000
shares of Common Stock to one senior officer at an exercise price of $0.01 per share. The options vested upon grant and are
exercisable through September 3, 2025. The fair value of the options at the date of grant amounted to approximately $143,000.
|
|
|
|
|
iv.
|
225,000
shares of common stock to senior officers, and other staff members at an exercise price of $0.01 per share. The options vested
upon grant and are exercisable through September 30, 2025. The fair value of the options at the date of grant amounted to
approximately $311,000.
|
D.
2011 Non-Employee Directors Stock Option Plan
In
June 2011, the Company’s shareholders authorized the adoption of the Zion Oil & Gas, Inc. 2011 Non-Employee Directors
Stock Option Plan for non-employee directors (the “2011 Directors’ Plan”), initially reserving for issuance
thereunder 1,000,000 share of common stock. Under the 2011 Directors’ Plan, only non-qualified options may be issued, and
they will be exercisable for a period of six years from the date of grant.
The
Compensation Committee of the Board of Directors is responsible for determining the type of award, when to grant awards, to whom
awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period
not to exceed six years from the date of grant.
In
June 2015, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Non-Employee Directors Stock Option Plan, reserving for issuance thereunder an additional two million shares of Common Stock for
a total of three million shares of Common Stock available thereunder.
During
the year ended December 31, 2016, the Company granted the following options from the 2011 Non-Employee Directors Stock Option
Plan, to purchase:
|
i.
|
25,000
shares of Common Stock to a non-employee director at an exercise price of $1.87 per share. The options vested upon grant and
are exercisable through January 31, 2022. The fair value of the options at the date of grant amounted to approximately $20,000.
|
|
|
|
|
ii.
|
400,000
shares of Common Stock to non-employee directors at an exercise price of $1.55 per share. The options vested upon grant and
are exercisable through June 5, 2022. The fair value of the options at the date of grant amounted to approximately $239,000.
|
During
the year ended December 31, 2015, the Company granted the following options from the 2011 Non-Employee Directors Stock Option
Plan, to purchase:
|
i.
|
108,000
shares of Common Stock to non-employee directors at an exercise price of $1.38 per share. The options vested upon grant and
are exercisable through January 2, 2021. The fair value of the options at the date of grant amounted to approximately $68,000;
and
|
|
|
|
|
ii.
|
25,000
shares of Common Stock to a non-employee director at an exercise price of $2.03 per share. The options have a par value of
$.01. The options vested upon grant and are exercisable through May 1, 2021. The fair value of the options at the date of
grant amounted to approximately $23,000.
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
E.
Warrants and Options
The
Company has reserved 7,543,596 shares of common stock as of December 31, 2016, for the exercise of warrants and options to
employees and non-employees, of which 6,740,220 are exercisable. These warrants and options could potentially dilute basic earnings
per share in future years. The warrants and options exercise prices and expiration dates are as follows:
|
|
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Expiration
Date
|
|
Warrants or
Options
|
|
|
|
US$
|
|
|
|
|
|
|
|
To non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
November 11, 2023
|
|
Options
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
April 16, 2025
|
|
Options
|
|
|
|
1.67
|
|
|
|
115,000
|
|
|
October 01, 2024
|
|
Options
|
|
|
|
1.70
|
|
|
|
130,000
|
|
|
December 20, 2022
|
|
Options
|
|
|
|
2.61
|
|
|
|
77,000
|
|
|
December 04, 2022
|
|
Options
|
To employees and directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
20,000
|
|
|
January 31, 2020
|
|
Options
|
|
|
|
0.01
|
|
|
|
20,000
|
|
|
November 11, 2023
|
|
Options
|
|
|
|
0.01
|
|
|
|
45,000
|
|
|
March 31, 2024
|
|
Options
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
June 11, 2024
|
|
Options
|
|
|
|
0.01
|
|
|
|
4,500
|
|
|
April 16, 2025
|
|
Options
|
|
|
|
0.01
|
|
|
|
20,500
|
|
|
August 03, 2025
|
|
Options
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
October 01, 2025
|
|
Options
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
December 31, 2025
|
|
Options
|
|
|
|
0.01
|
|
|
|
552,000
|
|
|
June 05, 2026
|
|
Options
|
|
|
|
0.01
|
|
|
|
100,000
|
|
|
June 30, 2026
|
|
Options
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
December 31, 2026
|
|
Options
|
|
|
|
1.38
|
|
|
|
149,750
|
|
|
January 02, 2025
|
|
Options
|
|
|
|
1.38
|
|
|
|
108,000
|
|
|
January 02, 2021
|
|
Options
|
|
|
|
1.55
|
|
|
|
400,000
|
|
|
June 05, 2022
|
|
Options
|
|
|
|
1.67
|
|
|
|
390,000
|
|
|
October 01, 2020
|
|
Options
|
|
|
|
1.67
|
|
|
|
377,193
|
|
|
October 01, 2024
|
|
Options
|
|
|
|
1.70
|
|
|
|
120,000
|
|
|
December 20, 2018
|
|
Options
|
|
|
|
1.70
|
|
|
|
203,500
|
|
|
December 20, 2022
|
|
Options
|
|
|
|
1.73
|
|
|
|
25,000
|
|
|
January 09, 2019
|
|
Options
|
|
|
|
1.82
|
|
|
|
25,000
|
|
|
June 13, 2017
|
|
Options
|
|
|
|
1.86
|
|
|
|
25,000
|
|
|
December 03, 2018
|
|
Options
|
|
|
|
1.87
|
|
|
|
25,000
|
|
|
January 31, 2022
|
|
Options
|
|
|
|
1.95
|
|
|
|
25,000
|
|
|
April 02,2020
|
|
Options
|
|
|
|
1.96
|
|
|
|
25,000
|
|
|
September 3, 2019
|
|
Options
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
May 01, 2021
|
|
Options
|
|
|
|
2.28
|
|
|
|
25,000
|
|
|
July 10, 2019
|
|
Options
|
|
|
|
2.61
|
|
|
|
150,000
|
|
|
December 04, 2017
|
|
Options
|
|
|
|
2.61
|
|
|
|
904,500
|
|
|
December 04, 2021
|
|
Options
|
To investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.00
|
|
|
|
313,554
|
|
|
May 02, 2017
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
344,728
|
|
|
May 02, 2018
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
347,840
|
|
|
May 02, 2019
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
803,376
|
|
|
March 03, 2020
|
|
Warrants
|
|
|
|
2.00
|
|
|
|
1,567,155
|
|
|
January 31, 2020
|
|
Warrants
|
Total outstanding
|
|
|
1.53
|
*
|
|
|
7,543,596
|
|
|
|
*
Weighted Average
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
The
stock option transactions since January 1, 2015 are shown in the table below:
|
|
Number of
shares
|
|
|
Weighted Average
exercise price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2014
|
|
|
3,089,693
|
|
|
|
1.99
|
|
|
|
|
|
|
|
|
|
|
Changes during 2015 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others
|
|
|
1,280,000
|
|
|
|
0.33
|
|
Expired/Cancelled/Forfeited
|
|
|
(62,500
|
)
|
|
|
2.39
|
|
Exercised
|
|
|
(677,500
|
)
|
|
|
0.07
|
|
Outstanding, December 31, 2015
|
|
|
3,629,693
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
Changes during 2016 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others
|
|
|
2,265,000
|
|
|
|
0.27
|
|
Expired/Cancelled/Forfeited
|
|
|
(172,250
|
)
|
|
|
2.39
|
|
Exercised
|
|
|
(1,555,500
|
)
|
|
|
0.01
|
|
Outstanding, December 31, 2016
|
|
|
4,166,943
|
|
|
|
1.58
|
|
Exercisable, December 31, 2016
|
|
|
4,166,943
|
|
|
|
1.58
|
|
The
aggregate intrinsic value of options exercised during 2016 and 2015 was approximately $2,400,000 and $1,033,000 respectively.
The
aggregate intrinsic value of the outstanding options and warrants as of December 31, 2016, totaling 7,543,596 was approximately
$1,815,000.
The
following table summarizes information about stock options outstanding as of December 31, 2016:
Shares underlying outstanding options (fully vested)
|
|
Range of
exercise price
|
|
|
Number
Outstanding
|
|
|
Weighted average
remaining contractual
life (years)
|
|
|
Weighted Average
Exercise price
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
0.01
|
|
|
|
20,000
|
|
|
|
3.08
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
6.87
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
45,000
|
|
|
|
7.25
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
7.45
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
14,500
|
|
|
|
8.30
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
20,500
|
|
|
|
8.59
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
8.75
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
9.00
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
552,000
|
|
|
|
9.42
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
100,000
|
|
|
|
9.49
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
10.00
|
|
|
|
0.01
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
4.01
|
|
|
|
1.38
|
|
|
1.38
|
|
|
|
149,750
|
|
|
|
8.01
|
|
|
|
1.38
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
5.43
|
|
|
|
1.55
|
|
|
1.67
|
|
|
|
390,000
|
|
|
|
3.75
|
|
|
|
1.67
|
|
|
1.67
|
|
|
|
492,193
|
|
|
|
7.76
|
|
|
|
1.67
|
|
|
1.70
|
|
|
|
120,000
|
|
|
|
1.97
|
|
|
|
1.70
|
|
|
1.70
|
|
|
|
333,500
|
|
|
|
5.97
|
|
|
|
1.70
|
|
|
1.73
|
|
|
|
25,000
|
|
|
|
2.02
|
|
|
|
1.73
|
|
|
1.82
|
|
|
|
25,000
|
|
|
|
0.45
|
|
|
|
1.82
|
|
|
1.86
|
|
|
|
25,000
|
|
|
|
1.92
|
|
|
|
1.86
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
5.09
|
|
|
|
1.87
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
3.25
|
|
|
|
1.95
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
2.67
|
|
|
|
1.96
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
4.33
|
|
|
|
2.03
|
|
|
2.28
|
|
|
|
25,000
|
|
|
|
2.52
|
|
|
|
2.28
|
|
|
2.61
|
|
|
|
150,000
|
|
|
|
0.93
|
|
|
|
2.61
|
|
|
2.61
|
|
|
|
981,500
|
|
|
|
4.93
|
|
|
|
2.61
|
|
|
0.01-2.61
|
|
|
|
4,166,943
|
|
|
|
|
|
|
|
1.58
|
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
Granted
to employees
The
following table sets forth information about the weighted-average fair value of options granted to employees and directors during
the year, using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
1.56
|
|
|
$
|
1.53
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
57%-69
|
%
|
|
|
68%-70
|
%
|
Risk-free interest rates
|
|
|
0.94%-1.93
|
%
|
|
|
0.97%-1.6
|
%
|
Expected lives (in years)
|
|
|
3.00-5.50
|
|
|
|
3.00-5.50
|
|
Weighted-average grant date fair value
|
|
$
|
1.35
|
|
|
$
|
1.36
|
|
Granted
to non-employees
The
following table sets forth information about the weighted-average fair value of options granted to non-employees during the year,
using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:
|
|
For the year ended
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
1.51
|
|
|
$
|
1.74
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
69%-70
|
%
|
|
|
72%-74
|
%
|
Risk-free interest rates
|
|
|
1.73%-1.83
|
%
|
|
|
1.87%-2.23
|
%
|
Expected lives (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average grant date fair value
|
|
$
|
1.50
|
|
|
$
|
1.71
|
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
The
risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with
the expected life of the options.
The
expected life represents the weighted average period of time that options granted are expected to be outstanding. The expected
life of the options granted to employees and directors is calculated based on the Simplified Method as allowed under Staff Accounting
Bulletin No. 110 (“SAB 110”), giving consideration to the contractual term of the options and their
vesting schedules, as the Company does not have sufficient historical exercise data at this time. The expected life of the option
granted to non-employees equals their contractual term. In the case of an extension of the option life, the calculation was made
on the basis of the extended life.
F.
Compensation Cost for Warrant and Option Issuances
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for employees and
directors:
For the year ended December 31,
|
|
2016
|
|
|
2015
|
|
US$
|
|
|
US$
|
|
|
2,726,000
|
|
|
|
1,528,000
|
|
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:
For the year ended December 31,
|
|
2016
|
|
|
2015
|
|
US$
|
|
|
US$
|
|
|
360,000
|
|
|
|
265,000
|
|
The
following table sets forth information about the compensation cost of option issuances recognized for employees and capitalized
to Unproved Oil & Gas properties:
For the year ended December 31,
|
|
2016
|
|
|
2015
|
|
US$
|
|
|
US$
|
|
|
213,000
|
|
|
|
94,000
|
|
G.
Dividend Reinvestment and Stock Purchase Plan (“DSPP”)
On
March 27, 2014, the Company launched its Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to
which stockholders and interested investors can purchase shares of the Company’s Common Stock as well as units of the
Company’s securities. The terms of the DSPP are described in the Prospectus Supplement originally filed on March 31,
2014 (the “Original Prospectus Supplement”) with the Securities and Exchange Commission (“SEC”) under
the Company’s effective registration Statement on Form S-3, as thereafter amended. On January 13, 2015, the Company
amended the Original Prospectus Supplement (“Amendment No. 3”) to provide for a unit option (the “Unit
Option”) under the DSPP comprised of one share of Common Stock and three Common Stock purchase warrants with each unit
priced at $4.00. Each warrant afforded the investor or stockholder the opportunity to purchase the Company’s Common
Stock at a warrant exercise price of $1.00. Each of the three warrants series have different expiration dates that have been
extended.
On
December 28, 2015, Amendment No. 6 to the Original Prospectus Supplement was filed extending the scheduled termination date of
the Unit Option to March 31, 2016. On March 31, 2016, the Unit Option terminated. The number of warrants are not of a sufficient
quantity to justify OTC (over the counter) trading.
The
warrants became first exercisable on May 2, 2016 and continue to be exercisable through May 2, 2017 for ZNWAB (1 year), May 2,
2018 for ZNWAC (2 years) and May 2, 2019 for ZNWAD (3 years), respectively, at a per share exercise price of $1.00. Warrants for
approximately 286,000 shares of Common Stock were issued during the year ended December 31, 2016 (approximately 95,000 each of
ZNWAB, ZNWAC, and ZNWAD). As of December 31, 2016, the number of outstanding warrants for each warrant issue is as approximately:
314,000 of ZNWAB, 345,000 of ZNWAC, and 348,000 of ZNWAD. The Company issued approximately 132,000 shares of its Common Stock
as of December, 31 2016, resulting in cash proceeds of approximately $132,000.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
On
November 1, 2016, the Company launched a unit offering (the “Unit Program”) under the Company’s DSPP pursuant
to which stockholders and interested investors can purchase units comprised of seven (7) shares of Common Stock and seven (7)
Common Stock purchase warrants, at a per unit purchase price of $10. The warrant shall have the symbol “ZNWAE,” but
no assurance can be provided that the warrant will be approved for listing on the NASDAQ Global Market. The Company’s new
Unit Program is scheduled to terminate on March 31, 2017. Approximately 803,000 shares of stock, and a corresponding number of
warrants, were issued during the year ended December 31, 2016.
An
Amendment No. 8 to the Prospectus Supplement was filed on January 30, 2017. This Amendment No. 8 to Prospectus Supplement amends
the Prospectus Supplement as previously supplemented on July 31, 2014 (“Amendment No. 2 to Prospectus Supplement”).
This Amendment No. 8 to Prospectus Supplement should be read in conjunction with the Original Prospectus Supplement and the base
Prospectus effective March 27, 2014 and Amendment No. 2. This Amendment No. 8 is incorporated by reference into the Original Prospectus
Supplement. This Amendment No. 8 is not complete without, and may not be delivered or utilized except in connection with the Original
Prospectus Supplement, including any amendments or supplements thereto.
On
January 30, 2017, under the Unit Program of our DSPP, the Company extended the current Unit Option program that was filed under
Amendment No. 7, dated November 1, 2016. The Unit Program will continue as under Amendment No. 7, but with a revised time period.
Otherwise, the same Unit Program features, conditions and terms in the Prospectus Supplement and Amendment No. 2 apply.
The Company’s Unit Option Program began on November 1, 2016 and was to terminate January 31, 2017, but was extended until
March 31, 2017.
The
Unit Option Program enables participants to purchase Units of our securities where each Unit (priced at $10.00) is comprised of
seven (7) shares of Common Stock and seven (7) Common Stock purchase warrants. Each warrant affords the investor or stockholder
the opportunity to purchase one share of the Company’s Common Stock at a warrant exercise price of $1.00.
The
warrant shall have the symbol “ZNWAE,” but no assurance can be provided that the warrant will be approved for listing
on the NASDAQ Global Market.
All
warrants will first become exercisable on May 1, 2017, which is the 31
st
day following the Unit Option Termination
Date (i.e., on March 31, 2017) and continue to be exercisable through May 1, 2020 (3 years) at a per share exercise price of $1.00.
If the Common Stock of the Company trades above $5.00 per share as the closing price for 15 consecutive trading days at any time
prior to the expiration date of the warrant, the Company has the sole discretion to provide a Notice to warrant holders of an
early termination of the warrant within 60 days of the Notice. The Unit is priced at $10.00 per Unit and no change will be made
to the warrant exercise price of $1.00 per share.
Accordingly,
all references in the Original Prospectus Supplement and Amendment No. 2, concerning the Unit Option continue, except for the
substitution of the new Unit Option terms above. All other Plan features, conditions and terms remain unchanged.
For
the year ended December 31, 2016, approximately $4,338,000 was raised under the DSPP program. As a result, the Company issued
approximately 2,796,000 shares of its Common Stock during the same period.
The
total amount of funds received from the DSPP, including the exercise of warrants, from the inception date through December 31,
2016 is approximately $13,025,000.
H.
Rights Offering (July-September 2015)
On
July 6, 2015, the Company filed with the SEC the Prospectus Supplement (dated July 6, 2015) relating to the Company’s rights
offering of non-transferable subscription rights to the holders of the Company’s Common Stock as of record date of June
19, 2015 to purchase up to approximately 7,280,000 of subscription rights described below of the Company’s securities.
Under
the rights offering, the Company distributed, at no cost to stockholders, non-transferable subscription rights (each “Right”
and collectively the “Rights”) to purchase its Common Stock to persons who owned shares of its Common Stock on June
19, 2015 (the “record date”), with each Right consisting of four (4) shares of Common Stock.
Each
shareholder that participated received 0.20 of a subscription right for each share of Common Stock owned as of close of business
on the record date (i.e., ONE subscription right for each FIVE shares).
Each
whole subscription right represented the right to purchase four (4) shares of the Company’s Common Stock at a per Right
price of $7.00, or an average purchase price of $1.75 per share. The rights offering also included an over-subscription privilege.
On
September 30, 2015, the rights offering terminated as scheduled. The gross proceeds from the rights offering of approximately
$966,000, less fees and expenses incurred in connection with the rights offering, will be used by the Company to further its drilling
efforts and as otherwise provided in the prospectus. As a result of the rights offering, the Company issued approximately 553,000
shares of Common Stock.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
6 - Stockholders’ Equity
(cont’d)
I.
Rights Offering Senior Convertible Bonds Rights Offering (October 21, 2015 – March 31, 2016)
On
October 21, 2015, the Company filed with the SEC a prospectus supplement for a rights offering. Under the rights offering, the
Company distributed at no cost, 360,000 non-transferable subscription rights to subscribe for, on a per right basis, two 10% Convertible
Senior Bonds par $100 due May 2, 2021 (the “Notes due May 2012”), to persons who owned shares of the Company’s
Common Stock on October 15, 2015, the record date for the offering. Each whole subscription right entitled the participant to
purchase two convertible bonds at a purchase price of $100 per bond. Effective October 21, 2015, the Company executed a Supplemental
Indenture, as issuer, with the American Stock Transfer & Trust Company, LLC, a New York limited liability trust company (“AST”),
as trustee for the Notes (the “Indenture”).
The
offering was scheduled to terminate on January 15, 2016 but was extended to March 31, 2016. On March 31, 2016, the rights offering
terminated.
On
May 2, 2016, the Company issued approximately $3,470,000 aggregate principal amount of Notes due May 2021 in connection with the
rights offering. The Company received net proceeds of approximately $3,334,000, from the sale of the Notes, after deducting fees
and expenses of $136,000 incurred in connection with the rights offering. These costs have been discounted as deferred offering
costs (see also Note 7).
J.
12% Convertible Bonds Public Offering (May 31, 2016 – October 31, 2016)
On
May 31, 2016, the Company filed with the SEC a Prospectus Supplement, as subsequently amended on June 22, 2016 and August 30,
2016, for an offering of the Company’s 12% Convertible Senior Bonds due 2028 (the “Bonds;” each, a “Bond”)
in a minimum aggregate amount of $2,500,000,
on a "best efforts minimum/maximum offering,”
up
to a maximum amount of $12,000,000 (the “Follow On Public Offering”). The Follow On Public Offering was made available
through Network 1 Financial Securities, Inc. (“Network 1”) and other licensed broker/dealers. The “best efforts”
public offering period was scheduled to continue through September 1, 2016. This conditional closing was subject to extension
by the Company, in its sole discretion, for an additional 60-day period to which the Company elected, thereby extending the closing
to November 1, 2016. All offering proceeds were deposited into an escrow account at Ocean First Bank, which acted as the escrow
agent for the “best efforts” offering.
On
November 1, 2016, the Company closed its public bond offering. The minimum aggregate amount of $2,500,000 was not reached as of
the November 1, 2016 closing date. Ocean First Bank was duly authorized and effectively completed the prompt return of invested
funds, without deduction, to the rightful owners.
In connection with the “best efforts”
offering, the Company incurred and expensed to date approximately $83,000 of deferred issuance costs, which primarily consisted
of underwriter fees, legal and other professional service fees.
K.
Warrant Descriptions
The
price and the expiration dates for the series of warrants to investors are as follows:
|
|
Period of Grant
|
|
|
US$
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
ZNWAA Warrants
|
|
|
March 2013 – December 2014
|
|
|
|
2.00
|
|
|
January 31, 2020
|
ZNWAB Warrants
|
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2017
|
ZNWAC Warrants
|
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2018
|
ZNWAD Warrants
|
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2019
|
ZNWAE Warrants
|
|
|
November 2016 – March 2017
|
|
|
|
1.00
|
|
|
May 01, 2020
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
7 - Senior Convertible Bonds
Rights
Offering -10% Senior Convertible Notes due May 2, 2021
On
October 21, 2015, the Company filed with the SEC a prospectus supplement for a rights offering. Under the rights offering, the
Company distributed at no cost, 360,000 non-transferable subscription rights to subscribe for, on a per right basis, two 10% Convertible
Senior Bonds par $100 due May 2, 2021 (the “Notes”), to persons who owned shares of the Company’s Common Stock
on October 15, 2015, the record date for the offering. Each whole subscription right entitled the participant to purchase two
convertible bonds at a purchase price of $100 per bond. Effective October 21, 2015, the Company executed a Supplemental Indenture,
as issuer, with the American Stock Transfer & Trust Company, LLC, a New York limited liability trust company (“AST”),
as trustee for the Notes (the “Indenture”).
The
offering was scheduled to terminate on January 15, 2016 but was extended to March 31, 2016. On March 31, 2016, the rights offering
terminated.
On
May 2, 2016, the Company issued approximately $3,470,000 aggregate principal amount of Notes in connection with the rights
offering. The Company received net proceeds of approximately $3,334,000, from the sale of the Notes, after deducting fees and
expenses of $136,000 incurred in connection with the offering. These costs have been discounted as deferred offering costs.
The
Notes contain a convertible option that gives rise to a derivative liability, which is accounted for separately from the Notes
(see below and Note 8). Accordingly, the Notes were initially recognized at fair value of approximately $1,844,000, which represents
the principal amount of $3,470,000 from which a debt discount of approximately $1,626,000 (which is equal to the fair value of
the convertible option) was deducted.
During
the year ended December 31, 2016, the Company recorded approximately $18,000 in amortization expense related to the deferred
financing costs, and approximately $113,000 in debt discount amortization, net. The Notes are governed by the terms of the Indenture.
The Notes are senior unsecured obligations of the Company and bear interest at a rate of 10% per year, payable annually in arrears
on May 2 of each year, commencing May 2, 2017. The Notes will mature on May 2, 2021, unless earlier redeemed by the Company or
converted by the holder.
Interest
and principal may be paid, at the Company’s option, in cash or in shares of the Company’s Common Stock. The number
of shares for the payment of interest in shares of Common Stock, in lieu of the cash amount, will be based on the average of the
closing prices of the Company’s Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the record
date for the payment of interest; such record date has been designated and will always be the 10
th
business day prior
to the interest payment date on May 2 of each year. The number of shares for the payment of principal, in lieu of the cash amount,
shall be based upon the average of the closing price of the Company’s Common Stock as reported by Bloomberg L.P. for the
30 trading days preceding the principal repayment date; such record date has been designated as the trading day immediately prior
to the 30-day period preceding the maturity date of May 2, 2021. Fractional shares will not be issued and the final number of
shares will be rounded up to the next whole share.
At
any time prior to the close of business on the business day immediately preceding April 2, 2021, holders may convert their notes
into Common Stock at the conversion rate of 44 shares per $100 bond (which is equivalent to a conversion rate of approximately
$2.27 per share). The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including,
but not limited to, the issuance of stock dividends and payment of cash dividends.
Beginning
May 3, 2018, the Company is entitled to redeem for cash the outstanding Notes at an amount equal to the principal and accrued
and unpaid interest, plus a 10% premium. No “sinking fund” is provided for the Notes due May 2021, which means that
the Company is not required to periodically redeem or retire the Notes due May 2021.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
7 - Senior Convertible Bonds
(cont’d)
Through
the year ended December 31, 2016, approximately 129 convertible bonds of $100 each have been converted under this offering at
a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 5,700 shares of its Common Stock
during the same period.
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, net of debt discount on derivative liability of $1,626,000 on the day of issuance
|
|
$
|
1,844,000
|
|
|
|
-
|
|
Debt discount amortization, net
|
|
$
|
113,000
|
|
|
|
-
|
|
Bonds converted to shares
|
|
$
|
(13,000
|
)
|
|
|
-
|
|
Offering cost, net
|
|
$
|
(118,000
|
)
|
|
|
-
|
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
1,826,000
|
|
|
|
-
|
|
For
the year ended December 31, 2016, the Company recognized interest expense of approximately $231,000 related to the Notes, payable
for the first time and in arrears on May 2, 2017.
Note
8 - Derivative Liability
The
Notes issued by the Company and discussed in Note 7 contain a convertible option that gives rise to a derivative liability.
The
debt instrument the Company issued includes a make-whole provision, which provides that in the event of conversion by the investor
under certain circumstances, the issuer is required to deliver to the holder additional consideration beyond the settlement of
the conversion obligation.
Because
time value make-whole provisions are not clearly and closely related to the debt host and would meet the definition of a derivative
if considered freestanding, they should be evaluated under the indexation guidance to determine whether they would be afforded
the scope exception pursuant to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of
the embedded conversion feature.
The
Company has measured its derivative liability at fair value and recognized the derivative value as a current liability and recorded
the derivative value on its balance sheet. The fair value of the shares to be issued upon conversion of the Notes was recorded
as a derivative liability, with the change in the fair value recorded as a gain or loss in the accompanying statement of operations.
The
valuation of the Notes was done by using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’
terms and other parameters the Company identified as relevant for the valuation of the Notes’ Fair Value.
The
Binomial Model used the forecast of the Company share price during the Note’s contractual term.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
8 - Derivative Liability
(cont’d)
As
of December 31, 2016, the Company’s liabilities that are measured at fair value are as follows:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
Fair value of derivative liability at December 31, 2016
|
|
$
|
895,000
|
|
|
$
|
895,000
|
|
|
|
-
|
|
|
|
-
|
|
Change
in value of derivative liability during 2016 are as follows:
|
|
US$ thousands
|
|
|
|
|
|
Derivative liability fair value at May 2, 2016
|
|
|
1,626
|
|
Gain on derivative liability
|
|
|
(731
|
)
|
Derivative liability fair value at December 31, 2016
|
|
|
895
|
|
The
following table presents the assumptions that were used for the model as of December 31, 2016:
|
|
December 31,
2016
|
|
|
May 2,
2016
|
|
Convertible Option Fair Value of approximately
|
|
$
|
895,000
|
|
|
$
|
1,626,000
|
|
Annual Risk-free Rate
|
|
|
1.86
|
%
|
|
|
1.41
|
%
|
Volatility
|
|
|
57.56
|
%
|
|
|
63.15
|
%
|
Expected Term (years)
|
|
|
4.34
|
|
|
|
5.00
|
|
Convertible Notes Face Value
|
|
$
|
3,457,100
|
|
|
$
|
3,470,000
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
1.37
|
|
|
$
|
1.74
|
|
During
the year ended December 31, 2016, the Company recorded unrealized gains of approximately $731,000 (net) within the Statements
of Operations line item, gain on derivative liability. A slight change in an unobservable input like volatility could have a significant
impact on the fair value measurement of the derivative liability.
Note
9 - Income Taxes
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2016 and 2015 are presented below:
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
49,151
|
|
|
|
46,216
|
|
Other
|
|
|
2,891
|
|
|
|
2,221
|
|
Total gross deferred tax assets
|
|
|
52,042
|
|
|
|
48,437
|
|
Less – valuation allowance
|
|
|
(49,630
|
)
|
|
|
(46,740
|
)
|
Net deferred tax assets
|
|
|
2,412
|
|
|
|
1,697
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
11
|
|
|
|
10
|
|
Other
|
|
|
(248
|
)
|
|
|
-
|
|
Unproved oil and gas properties
|
|
|
(2,175
|
)
|
|
|
(1,707
|
)
|
Total gross deferred tax liabilities
|
|
|
(2,412
|
)
|
|
|
(1,697
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
—
|
|
|
|
—
|
|
In
assessing the likelihood of the realization of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets, including
net operating losses, is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible and tax carry forwards are utilizable.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
9 – Income Taxes
(cont’d)
Management
considers the scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in
making this assessment. In order to fully realize the deferred tax asset, the Company will need to generate future taxable income
of approximately $144,563,000 prior to the expiration of some of the net operating loss carry forwards between 2022 and 2037.
Based upon the level of historical taxable losses since the Company’s inception, management believes that the Company will
not likely realize the benefits of these deductible differences and tax carry forwards and thus, full valuation allowances have
been recorded at December 31, 2016 and 2015.
At
December 31, 2016, the Company has available federal net operating loss carry forwards of approximately $144,563,000 to reduce
future U.S. taxable income. These amounts expire from 2022 to 2037.
Income earned from activities in Israel is
subject to regular Israeli tax rates. For Israeli tax purposes, exploration costs on unproved properties are expensed. Tax losses
can be carried forward indefinitely. At December 31, 2016, the Company has available net operating loss carry forwards of approximately
$97,670,000 to reduce future Israeli taxable income.
Reconciliation
between the theoretical tax benefit on pre-tax reported (loss) and the actual income tax expense:
|
|
Year ended
December 31, 2016
|
|
|
Year ended
December 31, 2015
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Pre-tax loss as reported
|
|
|
(8,515
|
)
|
|
|
(7,306
|
)
|
|
|
|
|
|
|
|
|
|
U.S. statutory tax rate
|
|
|
34
|
%
|
|
|
34
|
%
|
Theoretical tax expense
|
|
|
(2,895
|
)
|
|
|
(2,484
|
)
|
|
|
|
|
|
|
|
|
|
Increase in income tax expense resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
5
|
|
|
|
3
|
|
Other differences
|
|
|
—
|
|
|
|
—
|
|
Change in valuation allowance
|
|
|
2,890
|
|
|
|
2,481
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
The
Company has no material unrecognized tax benefit which would favorably affect the effective income tax rate in future periods
and does not believe there will be any significant increases or decreases within the next twelve months. No interest or penalties
have been accrued.
The
Company has not received final tax assessments since incorporation. In accordance with the US tax regulations, the U.S. federal
income tax returns remain subject to examination for the years beginning in 2013.
The
Israeli branch has not received final tax assessments since incorporation. In accordance with the Israeli tax regulations, tax
returns submitted up to and including the 2012 tax year can be regarded as final.
Note
10 - Commitments and Contingencies
A.
Litigation
From
time to time, the Company may be subject to routine litigation, claims, or disputes in the ordinary course of business. The Company
defends itself vigorously in all such matters. In the opinion of management, no pending or known threatened claims, actions or
proceedings against the Company are expected to have a material adverse effect on its financial position, results of operations
or cash flows. However, the Company cannot predict with certainty the outcome or effect of any such litigation or investigatory
matters or any other pending litigation or claims. There can be no assurance as to the ultimate outcome of any such lawsuits and
investigations.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
10 - Commitments and Contingencies
(cont’d)
B.
Asset Retirement
The
Company currently estimates that the costs of plugging and decommissioning of the exploratory wells drilled to date in the Company
former Asher-Menashe and Joseph License areas to be approximately $200,000 based on current cost rather than Net Present Value.
The Company expects to incur such costs in 2017. Liabilities for expenditures are recorded when environmental assessment and/or
remediation is probable and the timing and costs can be reasonably estimated.
Changes
in Asset Retirement Obligations were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations, Beginning Balance
|
|
|
204
|
|
|
|
163
|
|
Liabilities Settled
|
|
|
(4
|
)
|
|
|
(249
|
)
|
Revision of Estimate
|
|
|
—
|
|
|
|
290
|
|
Retirement Obligations, Ending Balance
|
|
|
200
|
|
|
|
204
|
|
Liabilities
of approximately $4,000 and $249,000 were settled for the year ended December 31, 2016 and 2015, respectively; those liabilities
were related to the Asher-Menashe and Joseph License areas.
C.
Environmental and Onshore Licensing Regulatory Matters
The
Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental
cleanup of well sites or other environmental restoration procedures and other obligations as they relate to the drilling of oil
and gas wells or the operation thereof. Various guidelines have been published in Israel by the State of Israel’s Petroleum
Commissioner and Energy and Environmental Ministries since 2012 as it pertains to oil and gas activities. Mention of these guidelines
were included in previous Zion Oil & Gas filings.
On
January 11, 2015, the Energy Ministry issued revised guidelines (initially issued in February 2012) for onshore wellbore abandonment
that are based on US regulations on well abandonment found in 43 CFR, Section 3162.3-4; applicable Texas Railroad Commission guidelines;
and Well Abandonment and Inactive Well Practices for U.S. Exploration and Production Operations found in API Bulletin E3. This
guideline is effective April 1, 2015.
On
February 12, 2015, the Energy Ministry issued guidance for preparation and submission of the drilling program (first presented
on April 29, 2014), describing types of and purposes of production tests depending on the stage of development of a reservoir.
This guideline is effective April 1, 2015.
On
April 27, 2015, the Energy Ministry issued guidelines for well testing, establishing procedures and minimum requirements for pressure
testing, production flow testing, fluid analyses testing, etc.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
10 - Commitments and Contingencies
(cont’d)
On
August 13, 2015, the Energy Ministry issued a new guideline for hydraulic fracturing design and operations that are based on Canadian
regulations per Directive 083. This guideline is effective November 21, 2015. The procedures seek to prevent impacts on water
wells, non-saline aquifers and prevent surface impacts.
On
September 9, 2015, the Energy Ministry issued information relating to application forms for exploration drilling, detailing certain
operator requirements prior to drilling, including required submission of an Application for Permit to Drill (APD) and Supplemental
APD Information Sheet - Casing Design, both due 30 days prior to commencement of work. In addition, an Application for Permit
to Modify (APM) form is provided relating to changes to and modifications of already-approved drilling programs and other actions
that were omitted from the original application such as production testing, abandonment, etc. Also, an End of Operation Report
(EOR) form is provided to report the end of drilling or a temporary or a final end of operations.
On
May 16, 2016, the Energy Ministry issued new guidelines for the preparation and submission of a drilling program in accordance
with industry best practices or “Good Oilfield Practice.”
On
May 17, 2016, the Energy Ministry issued new guidelines for production testing in accordance with “Good Industry Practice”
detailing the applicable measures and reporting requirements.
On
June 28, 2016, the Energy Ministry issued new guidelines for occupational health and safety practices regarding oil and gas
drilling and production activities per international norms, coupled with Israeli legal safety guidelines. These regulations focus
on industry best practices in the area of health, safety, and environmental (HS&E) factors as well as risk management. In
addition, there is a new requirement to have the Petroleum Commissioner’s approval over the safety standards which the operator
seeks to apply.
The
Company believes that these new regulations are likely increase the expenditures associated with obtaining new exploration rights
and drilling new wells. The company expects that additional financial burden could occur as a result of requiring cash reserves
that could otherwise be used for operational purposes. These new regulations are likely to increase the time needed to obtain
all of the necessary authorizations and approvals prior to drilling.
D.
Charitable Foundations
Two
charitable foundations were established, one in Israel and one in Switzerland, for the purpose of supporting charitable projects
and other charities in Israel, the United States and internationally. A 3% royalty or equivalent interest in any Israeli oil and
gas interests as may now be held or, in the future be acquired, by the Company shall be assigned to each charitable organization
(6% interest in the aggregate). At December 31, 2016, the Company did not have any outstanding obligation in respect of the charitable
foundations, since to this date, no proved reserves have been found.
E.
Office and Vehicle Leases
|
(i)
|
On
September 10, 2015, the Company signed a new lease agreement with Hartman Income REIT
Property Holdings, LLC (“Hartman”) for new premises containing 7,276 square
feet. The lease term is for 65 months (about 5.5 years) from December 1, 2015 to April
30, 2021. Rent is abated for the first five (5) month which is December 2015 through
April 2016. Beginning in May 2016 and extending through April 2017, rent is to be paid
on a monthly basis in the base amount of $7,882 per month. Beginning in May 2017 and
extending through April 2018, rent is to be paid on a monthly basis in the base amount
of $8,186 per month. Beginning in May 2018 and extending through April 2019, rent is
to be paid on a monthly basis in the base amount of $8,489 per month. Beginning in May
2019 and extending through April 2020, rent is to be paid on a monthly basis in the base
amount of $8,792 per month. Beginning in May 2020 and extending through April 2021, rent
is to be paid on a monthly basis in the base amount of $9,095 per month. The Company
is also obligated to pay its pro-rated portion of all taxes, utilities, and insurance
during the lease term.
|
On
June 14, 2016, the Company and Hartman signed a First Amendment to Lease Agreement whereby the premises were expanded to include
approximately 1,498 square feet, for a new total of approximately 8,774 square feet. The first amendment commencement date was
July 1, 2016 and the payment of monthly rent was revised. Beginning in July 2016 and extending through November 2016, rent is
to be paid on a monthly basis in the base amount of $7,882 per month. Beginning in December 2016 and extending through May 2017,
rent is to be paid monthly in the base amount of $9,505.17 per month. Beginning in June 2017 and extending through May 2018, rent
is to be paid monthly in the base amount of $9,870.75 per month. Beginning in June 2018 and extending through May 2019, rent is
to be paid monthly in the base amount of $10,236.33 per month. Beginning in June 2019 and extending through May 2020, rent is
to be paid monthly in the base amount of $10,601.92 per month. Beginning in June 2020 and extending through May 2021, rent is
to be paid monthly in the base amount of $10,967.50 per month.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
10 - Commitments and Contingencies
(cont’d)
|
(ii)
|
The Company’s field office in Caesarea Israel
consisted of 6,566 square feet. The lease term is five years from February 1, 2014 to January 31, 2019. Rent is to be paid
on a monthly basis in the base amount of approximately NIS 37,800 per month (approximately $9,800) per month at the exchange rate
in effect on the date of this report and is linked to an increase (but not a decrease) in the CPI. The Company is also obligated
to pay all related taxes, utilities, insurance and maintenance payments during the lease term. Pursuant to the lease, two years
from the commencement of the lease term, the Company may terminate the agreement upon three months’ notice provided the
Company secures a replacement lessee approved by the lessor at its discretion.
|
The
Company has an option to renew the lease for another five years, provided it is not in breach of the agreement, where it is required
as well to furnish a notice of intent to exercise the option six months prior to termination of lease and furnishes
a bank guarantee and insurance confirmation prior to commencement of option period. Under the lease agreement, the Company is
authorized to further sublease part of the leased premises to a third party that is pre-approved by the sub-lessor. Rent and its
related taxes, utilities, insurance and maintenance expenses for 2016 and 2015 were $285,000 and $282,000, respectively.
The
future minimum lease payments as of December 31, 2016, are as follows:
|
|
US$
thousands
|
|
|
|
|
|
2017
|
|
|
290
|
|
2018
|
|
|
291
|
|
2019
|
|
|
139
|
|
2020
|
|
|
130
|
|
2021 and thereafter
|
|
|
55
|
|
|
|
|
905
|
|
F.
Former Drilling Contract with AME/GYP
On
September 12, 2008, the Company entered into a drilling contract with Aladdin Middle East Ltd. (“AME”) pursuant to
which AME shipped into Israel its 2,000 horsepower rig for use in the drilling contemplated by the Company’s business plan.
The rig was used to drill the Ma’anit-Rehoboth #2 well, the Elijah #3 and the Ma’anit-Joseph #3 well. Drilling operations
on the Ma’anit-Joseph #3 well were concluded in July 2011, whereupon the Company released the rig.
In
May, 2012, the Company and GuyneyYildizi Petrol UretimSondajMut, ve Tic A.S. (“GYP”), as successor in interest to
AME, agreed that the Company would pay GYP $627,000 in full and final settlement of past bills, and such amount was paid on May
15, 2012. However, the matter related to GYP’s demand for $550,000 for rig demobilization was excluded from the settlement.
The drilling contract between the Company and AME provides that all disputes are to be settled by arbitration in London, United
Kingdom.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
10 - Commitments and Contingencies
(cont’d)
On
December 22, 2015, Zion and GYP entered into a Settlement Agreement and Mutual Release resolving the arbitration by which Zion
is required to pay the sum of $550,000 to and/or for the benefit of GYP plus required value added tax (“VAT”) and
income tax withholding under Israeli tax law.
On
April 25, 2016, a Final Award by Consent was signed by the arbitrator incorporating the terms of the settlement.
G.
Bank Guarantees
As
of December 31, 2016, the Company provided bank guarantees to various governmental bodies (approximately $1,139,000) and others
(approximately $66,000) in respect of its drilling operation in an aggregate amount of approximately $1,205,000. The funds backing
these guarantees and additional amounts added to support currency fluctuations as required by the bank are held in interest-bearing
accounts and are reported on the Company’s balance sheets as “restricted cash.”
Note
11 - Risks and Uncertainties
We
are directly influenced by the political, economic and military conditions affecting Israel.
We
cannot predict the effect, if any, on our business of renewed hostilities between Israel and its neighbors or any other changes
in the political climate in the area. Deterioration of political, economic and security conditions in Israel may adversely affect
our operations.
We
are subject to increasing Israeli governmental regulations and environmental requirements that may cause us to incur substantial
incremental costs and/or delays in our drilling program.
Newly
enacted onshore licensing and environmental and safety related regulations promulgated by the various energy related ministries
in Israel during 2015-2016 have rendered obtaining new exploration licenses more time-consuming and expensive.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
11 – Risks and Uncertainties
(cont’d)
The
Company believes that these new and/or revised regulations will also significantly increase the time, effort, and expenditures
associated with obtaining all of the necessary authorizations and approvals prior to drilling any subsequent well.
Economic
risks may adversely affect our operations and/or inhibit our ability to raise additional capital.
Economically,
our operations in Israel may be subject to:
|
●
|
exchange
rate fluctuations between the Israeli shekel versus the US Dollar;
|
|
|
|
|
●
|
the
extreme latest change in the oil and gas commodities price and hence the cost of oilfield services and drilling equipment;
|
|
|
|
|
●
|
royalty
and tax increases and other risks arising out of Israeli State sovereignty over the mineral rights in Israel and its taxing
authority; and
|
|
|
|
|
●
|
changes
in Israel’s economy that could lead to legislation establishing oil and gas price controls.
|
Consequently,
our operations may be substantially affected by local economic factors beyond our control, any of which could negatively affect
our financial performance and prospects.
Legal
risks could negatively affect our market value.
Legally,
our operations in Israel may be subject to:
|
●
|
changes
in the Petroleum Law resulting in modification of license and permit rights;
|
|
|
|
|
●
|
adoption
of new legislation relating to the terms and conditions pursuant to which operations in the energy sector may be conducted;
|
|
|
|
|
●
|
changes
in laws and policies affecting operations of foreign-based companies in Israel; and
|
|
|
|
|
●
|
changes
in governmental energy and environmental policies or the personnel administering them.
|
Our
dependence on the limited contractors, equipment and professional services available in Israel may result in increased costs and
possibly material delays in our work schedule.
The
unavailability or high cost of drilling rigs, equipment, supplies, other oil field services and personnel could adversely affect
our ability to execute our exploration and development plans on a timely basis and within our budget.
Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may
vary materially from those indicated.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
12 - Subsequent Events
(i)
On January 1, 2017, the Company granted options from the 2011 Equity Incentive Plan for employees and consultants, to purchase
25,000 shares of Common Stock to a senior officer at an exercise price of $0.01 per share. The options vested upon grant and are
exercisable through December 31, 2026. The fair value of the options at the date of grant amounted to approximately $34,000.
(ii)
On January 2, 2017, the Company granted options from the 2011 Equity Incentive Plan for employees and consultants, to purchase
1,555,000 shares of Common Stock to senior officers, staff members and consultants at an exercise price of $0.01 per share. The
options vested upon grant and are exercisable through January 1, 2027. The fair value of the options at the date of grant amounted
to approximately $2,115,000.
(iii)
On January 5, 2017, the Company granted options from the 2011 Equity Incentive Plan for employees and consultants, to purchase
35,000 shares of Common Stock to senior officers at an exercise price of $0.01 per share. The options vested upon grant and are
exercisable through January 4, 2027. The fair value of the options at the date of grant amounted to approximately $48,000.
(iv)
On January 12, 2017, the Company granted options from the 2011 Non-Employee Directors Stock Option Plan, to purchase 20,000 shares
of Common Stock to a consultant at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through
January 11, 2027. The fair value of the options at the date of grant amounted to approximately $27,000.
(v) Approximately $2,300,000
was collected through the Company’s DSPP program during the period January 1, 2017 through February 28, 2017.
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