Notes to Financial Statements (Unaudited)
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 March 31, 2017,
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 completed construction of and mobilized the drilling rig to the drill pad location
from which it will 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
affiliate of 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 disclosed, 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. This is in conjunction with our May 15, 2016
signed agreement with Kibbutz Sde Eliyahu on whose property the drilling pad is currently situated. On January 11, 2017, an agreement
was signed by the Company and the ILA by which the land usage permission agreement was extended up to and including December 3,
2017.
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 and the construction of the drill site and road was completed in February 2017. Zion is finalizing the
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
The
accompanying unaudited interim financial statements of Zion Oil & Gas, Inc. have been prepared in accordance with accounting
principles generally accepted in the United States of America (“GAAP”) for interim financial information and with
Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete
financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals necessary for
a fair statement of financial position, results of operations and cash flows, have been included. The information included in
this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included
in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. The year-end balance sheet data presented
for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP.
The results of operations for the three months ended March 31, 2017 are not necessarily indicative of the operating results for
the year ending December 31, 2016 or for any other subsequent interim period.
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.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
1 - Nature of Operations and Basis of Presentation
(cont’d)
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 three months ended March 31, 2017, the Company incurred a net loss of approximately $3.4 million and had an accumulated
deficit of approximately $154 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 June 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 to the Company, 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 7).
Note
2 - Summary of Significant Accounting Policies
A.
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 9,698,413 and 5,711,104 Common Stock equivalents in the three-month period ended March 31, 2017 and 2016 respectively, would
be anti-dilutive.
B.
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.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies
(cont’d)
C.
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 proved 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.
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 $8,452,000 and $6,397,000 as of March 31, 2017, and December 31, 2016, respectively.
D.
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)
E.
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 6).
F.
Recently Adopted Accounting Pronouncements
The Company does not believe that the
adoption of any recently issued accounting pronouncements in 2017 had a significant impact on our financial position, results
of operations, or cash flow.
Note
3 - Stockholders’ Equity
A.
2011 Equity Incentive Stock Option Plan
During
the three months ended March 31, 2017, the Company granted the following options from the 2011 Equity Incentive Plan for employees,
directors and consultants, to purchase as non-cash compensation:
|
i.
|
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.
|
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 $2,116
,000.
|
|
|
|
|
iii.
|
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.
|
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 $27,000
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - Stockholders’ Equity
(cont’d)
B.
Stock Options
The
stock option transactions since January 1, 2017 are shown in the table below:
|
|
Number of
shares
|
|
|
Weighted Average
exercise price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2016
|
|
|
4,166,943
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
Changes during 2017 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others *
|
|
|
1,635,000
|
|
|
|
0.01
|
|
Expired/Cancelled/Forfeited
|
|
|
(185,000
|
)
|
|
|
2.16
|
|
Exercised
|
|
|
(1,224,000
|
)
|
|
|
0.01
|
|
Outstanding, March 31, 2017
|
|
|
4,392,943
|
|
|
|
1.41
|
|
Exercisable, March 31, 2017
|
|
|
4,392,943
|
|
|
|
1.41
|
|
*
The receipt of a stock option grant by the grantee recipient is a non-taxable event according to the Internal Revenue Service.
The grantee who later chooses to exercise stock options must recognize the market value in income in the year of exercise.
The
following table summarizes information about stock options outstanding as of March 31, 2017:
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
|
|
|
|
6.62
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
7.01
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
7.20
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
4,500
|
|
|
|
8.05
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
20,500
|
|
|
|
8.35
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
8.51
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
8.75
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
408,000
|
|
|
|
9.18
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
735,000
|
|
|
|
9.75
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.76
|
|
|
|
0.01
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
3.76
|
|
|
|
1.38
|
|
|
1.38
|
|
|
|
133,057
|
|
|
|
7.76
|
|
|
|
1.38
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
5.18
|
|
|
|
1.55
|
|
|
1.67
|
|
|
|
390,000
|
|
|
|
3.51
|
|
|
|
1.67
|
|
|
1.67
|
|
|
|
458,886
|
|
|
|
7.51
|
|
|
|
1.67
|
|
|
1.70
|
|
|
|
120,000
|
|
|
|
1.73
|
|
|
|
1.70
|
|
|
1.70
|
|
|
|
298,500
|
|
|
|
5.73
|
|
|
|
1.70
|
|
|
1.73
|
|
|
|
25,000
|
|
|
|
1.78
|
|
|
|
1.73
|
|
|
1.82
|
|
|
|
25,000
|
|
|
|
0.20
|
|
|
|
1.82
|
|
|
1.86
|
|
|
|
25,000
|
|
|
|
1.68
|
|
|
|
1.86
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
4.84
|
|
|
|
1.87
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
3.01
|
|
|
|
1.95
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
2.43
|
|
|
|
1.96
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
4.09
|
|
|
|
2.03
|
|
|
2.28
|
|
|
|
25,000
|
|
|
|
2.28
|
|
|
|
2.28
|
|
|
2.61
|
|
|
|
150,000
|
|
|
|
0.68
|
|
|
|
2.61
|
|
|
2.61
|
|
|
|
881,500
|
|
|
|
4.68
|
|
|
|
2.61
|
|
|
0.01-2.61
|
|
|
|
4,392,943
|
|
|
|
|
|
|
|
1.41
|
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - 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 three months
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average
fair value of underlying stock at grant date
|
|
$
|
1.37
|
|
|
$
|
1.81
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
60
|
%
|
|
|
62%-69
|
%
|
Risk-free interest rates
|
|
|
1.86%-1.93
|
%
|
|
|
1.01%-1.76
|
%
|
Expected lives (in years)
|
|
|
5.00
|
|
|
|
3.00-5.50
|
|
Weighted-average grant date fair value
|
|
$
|
1.36
|
|
|
$
|
1.56
|
|
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 three months
ended March 31,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
1.36
|
|
|
$
|
—
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
68
|
%
|
|
|
—
|
|
Risk-free interest rates
|
|
|
2.36%-2.45
|
%
|
|
|
—
|
|
Expected lives (in years)
|
|
|
10.00
|
|
|
|
—
|
|
Weighted-average grant date fair value
|
|
$
|
1.36
|
|
|
$
|
—
|
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - 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.
C.
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 three months ended March 31,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
2,015,000
|
|
|
|
172,000
|
|
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:
For the three months ended March 31,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
210,000
|
|
|
|
--
|
|
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 three months ended March 31,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
191,000
|
|
|
|
--
|
|
D.
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
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - Stockholders’ Equity
(cont’d)
(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.
The warrants became first exercisable
on May 2, 2016 and, in the case of ZNWAB continued to be exercisable through May 2, 2017, 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.
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 could 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.” On
January 30, 2017, the Company extended the Unit Option program that was filed under Amendment No. 7, dated November 1, 2016. The
Unit Program continued 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 applied. 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. This Unit Program terminated on March 31,
2017.
The
ZNWAE warrants became 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 Company’s Common Stock trades above $5.00 per share at 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 terminate the warrant early upon providing
60 days advanced notice to warrant holders.
As
of March 31, 2017, the number of outstanding warrants for each warrant issue is shown below:
Warrant
|
|
ZNWAA
|
|
|
ZNWAB
|
|
|
ZNWAC
|
|
|
ZNWAD
|
|
|
ZNWAE
|
|
Exercise Price/Warrant
|
|
$
|
2.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Outstanding/Exercisable Warrants @ March 31, 2017
|
|
|
1,566,595
|
|
|
|
289,446
|
|
|
|
333,273
|
|
|
|
340,558
|
|
|
|
4,028,598
|
|
As
of May 2, 2017, any outstanding ZNWAB warrants expired.
For
the three months ended March 31, 2017, approximately $5,218,000 was raised under the DSPP program, of which $650,000 is recognized
as other receivables as of March 31, 2017. During April 2017, all the funds were collected. As a result, the Company issued approximately
3,717,000 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 March 31, 2017
is approximately $18,243,000.
On
February 23, 2017, the Company filed a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration
No. 333-193336), in which the three (3) year period was ending March 31, 2017, along with the base Prospectus and Supplemental
Prospectus. The Form S-3, as amended, and the new base Prospectus became effective on March 10, 2017, along with the Prospectus
Supplement that was filed and became effective on March 10, 2017. The Prospectus Supplement under Registration No. 333-216191
describes the terms of the DSPP and replaces the prior Prospectus Supplement, as amended, under the prior Registration No. 333-193336.
E.
Warrant Descriptions
The
price and the expiration dates for the series of warrants to investors are as follows:
|
|
Period of Grant
|
|
US$
|
|
|
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
|
*
Unexercised ZNWAB warrants were expired as of the filing date of this report.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved
oil and gas properties, under the full cost method, are comprised as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Inventory, and other operational related costs
|
|
|
3,477
|
|
|
|
1,770
|
|
Capitalized salary costs
|
|
|
1,824
|
|
|
|
1,579
|
|
Legal costs, license fees and other preparation costs
|
|
|
3,121
|
|
|
|
3,018
|
|
Other costs
|
|
|
30
|
|
|
|
30
|
|
|
|
|
8,452
|
|
|
|
6,397
|
|
Note
5 - 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 three months ended March 31, 2017, the Company recorded approximately $7,000 in amortization expense related to the deferred
financing costs, and approximately $51,000 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
5 - Senior Convertible Bonds
(cont’d)
Through
the three months ended March 31, 2017, approximately 14 convertible bonds of $100 each have been converted under this offering
at a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 600 shares of its Common
Stock during the same period.
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, net of debt discount on derivative liability of $1,626,000 on the day of issuance
|
|
$
|
1,844,000
|
|
|
$
|
1,844,000
|
|
Debt discount amortization, net
|
|
$
|
164,000
|
|
|
$
|
113,000
|
|
Bonds converted to shares
|
|
$
|
(14,000
|
)
|
|
$
|
(13,000
|
)
|
Offering cost, net
|
|
$
|
(111,000
|
)
|
|
$
|
(118,000
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
1,883,000
|
|
|
$
|
1,826,000
|
|
The
Company recognized $86,000 and $231,000 in interest expense for the three months ended March 31, 2017, and for the year ended
December 31, 2016, respectively, related to the Notes, payable for the first time and in arrears on May 2, 2017. See Subsequent
Events for data on the payment of interest in kind on May 2, 2017.
Note
6 - Derivative Liability
The
Notes issued by the Company and discussed in Note 5 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
6 - Derivative Liability
(cont’d)
As
of March 31, 2017, the Company’s liabilities that are measured at fair value are as follows:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
Fair value of derivative liability at March 31, 2017
|
|
$
|
622,000
|
|
|
$
|
622,000
|
|
|
$
|
895,000
|
|
|
$
|
895,000
|
|
Change
in value of derivative liability during 2017 are as follows:
|
|
US$ thousands
|
|
|
|
|
|
Derivative liability fair value at December 31, 2016
|
|
|
895
|
|
Gain on derivative liability
|
|
|
(273
|
)
|
Derivative liability fair value at March 31, 2017
|
|
|
622
|
|
The
following table presents the assumptions that were used for the model as of March 31, 2017:
|
|
March 31,
2017
|
|
|
December 31,
2016
|
|
Convertible Option Fair Value of approximately
|
|
$
|
622,000
|
|
|
$
|
895,000
|
|
Annual Risk-free Rate
|
|
|
1.75
|
%
|
|
|
1.86
|
%
|
Volatility
|
|
|
49.86
|
%
|
|
|
57.56
|
%
|
Expected Term (years)
|
|
|
4.09
|
|
|
|
4.34
|
|
Convertible Notes Face Value
|
|
$
|
3,455,700
|
|
|
$
|
3,457,100
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
1.20
|
|
|
$
|
1.37
|
|
During
the three months ended March 31, 2017, the Company recorded unrealized gains of approximately $273,000 (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
7 - 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
7 - Commitments and Contingencies
(cont’d)
B.
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
was included in previous Zion Oil & Gas filings.
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 both the time and the expenditures associated with obtaining new
exploration rights and drilling new wells.
C.
Capitalized lease
During
2017, the Company signed a capital lease agreement to purchase a vehicle, on which a down payment of $15,000 was paid by the Company.
The lease period is for 44 months (approximately 3.7 years, hereinafter the “lease period”) starting on March 25,
2017 and ending on October 24, 2020. The lease bears a monthly payment in the amount of approximately NIS 4,000 (approximately
$1,100) per month, at the exchange rate in effect for the date of this report and is linked to an increase (but not a decrease)
in CPI. The lease bears a purchase option in the end of the lease period in the amount of approximately NIS 75,000 (approximately
$21,000) at the exchange rate in effect on the date of this report and is linked to an increase (but not a decrease) in CPI.
A
capital lease asset and a capital lease obligation were recognized in the Company's balance sheet in the amount of approximately
$71,000, based on the fair value of the vehicle at the starting date of the lease. The net carrying value of the capital lease
asset was approximately $71,000 as of March 31, 2017. The capital lease asset is being depreciated using the straight-line
method over its estimated useful life expectancy of approximately seven years. As of March 31, 2017, the accumulated depreciation
of the capital lease asset amounted to less than $1,000.
At
March 31, 2017, future minimum payments due under capital lease were:
|
|
US$
thousands
|
|
|
|
|
|
2017
|
|
|
10
|
|
2018
|
|
|
13
|
|
2019
|
|
|
13
|
|
2020
|
|
|
32
|
|
Less: portion representing imputed interest
|
|
|
(12
|
)
|
Capital lease obligations
|
|
|
56
|
|
The Financial Accounting Standards Board (“FASB”) has
been contemplating changes that impact capital leases. Any final changes resulting from the FASB are not expected to have a material
impact on Zion’s financial statements as it relates to the capital lease described above.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
7 - Commitments and Contingencies
(cont’d)
D.
Bank Guarantees
As
of March 31, 2017, the Company provided bank guarantees to various governmental bodies (approximately $1,662,000) and others (approximately
$81,000) in respect of its drilling operation in an aggregate amount of approximately $1,743,000. 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 fixed short and long term bank deposits – restricted.
Note
8 - Subsequent Events
(i) On April 17, 2017, the Company granted
options under the 2011 Equity Incentive Plan to employees and consultants to purchase 90,000 shares of Common Stock at an exercise
price of $0.01 per share. The options vested upon grant and are exercisable through April 17, 2027. The fair value of the options
at the date of grant amounted to approximately $104,000.
(ii) Approximately $225,000 was collected through
the Company’s DSPP Program during the period April 1 through April 30, 2017.
(iii) On May 1, 2017, the Company granted options under the 2011 Non-Employee Directors Stock Option Plan,
to purchase 25,000 shares of Common Stock to a new board member at an exercise price of $1.33 per share. The options vested upon
grant and are exercisable through May 1, 2023. The fair value of the options at the date of grant amounted to approximately $11,000.00.
(iv) On May 2, 2017, the Company paid
its annual 10% interest to its bondholders of record on April 18, 2017. The interest was paid-in-kind (“PIK”) in the
form of Common Stock. An average Zion stock price of $1.196 was determined based on the 30 trading days prior to the record date
of April 18, 2017. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued
288,965 shares to the accounts of its bondholders.