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 June 30, 2017, the Company had 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,
comprising approximately 99,000 acres. In December 2016, Zion and a local Israeli construction company executed a contract
for the civil works and drill site construction at the MJ #1 location. The site was completed in early March 2017. The drilling
rig and associated equipment were mobilized to the site, performance and endurance tested, and the Megiddo-Jezreel #1 (“MJ
#1) well was spud on June 5, 2017, well in advance of the June 30, 2017 deadline under the terms of the current license.
Depending
on the results of the currently drilling 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 an aggregate maximum of seven years. The MJL is onshore, south and west of
the Sea of Galilee.
Since
late November 2016 when the State of Israel’s Petroleum Commissioner officially approved Zion’s drilling date and
license extension request, the Company remains subject to the following key license terms:
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 March 2017.
As previously mentioned, the MJ #1 well was spud on June 5, 2017 and is currently drilling.
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 six months ended June 30, 2017 are not necessarily indicative of the operating results for the
year ending December 31, 2017 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 six months ended June 30, 2017, the Company incurred a net loss of approximately $8.3 million and had an accumulated
deficit of approximately $159 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, including the drilling of the MJ#1 well to the desired depth and the
subsequent testing, through January 2018.
To
carry out further planned operations beyond that date, the Company must raise additional funds through additional equity and/or
debt issuances or through profitable operations. There can be no assurance that this capital or positive operational income will
be available to the Company, and if it is not, the Company may be forced to curtail or cease exploration and development activities.
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
9,588,898
and 5,943,929 Common Stock equivalents in the six-month period ended
June 30, 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 $11,455,000 and $6,397,000 as of June 30, 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 six months ended June 30, 2017, the Company granted the following non-qualified options from the 2011 Equity Incentive Plan
for employees, directors and consultants, to purchase as non-cash compensation (taxable on the date of exercise):
i.
|
Options
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.
|
Options to purchase
1,555,000 shares of Common Stock to twenty three (23) 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.
|
Options to purchase
35,000 shares of Common Stock to two (2) 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.
|
Options 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.
|
Options to purchase
90,000 shares of Common Stock to five (5) staff members 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
$104,000.
|
B.
2011 Non-Employee Directors Stock Option Plan
During
the six months ended June 30, 2017, the Company granted the following qualified (market value) options from the 2011 Non-Employee
Directors Stock Option Plan for directors to purchase as non-cash compensation:
i.
|
Options
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 $10,000.
|
|
|
ii.
|
Options to purchase
400,000 shares of Common Stock to eight (8) board members at an exercise price of $1.75 per share. The options vested upon
grant and are exercisable through June 6, 2023. The fair value of the options at the date of grant amounted to approximately
$235,000.
|
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - Stockholders’ Equity
(cont’d)
C.
Stock Options
The
stock option transactions since January 1, 2017 are shown in the table below:
|
|
Number
of
shares
|
|
|
Weighted
Average
exercise
price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2016
|
|
|
4,166,943
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
Changes during 2017 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors
and others *
|
|
|
2,150,000
|
|
|
|
0.35
|
|
Expired/Cancelled/Forfeited
|
|
|
(210,000
|
)
|
|
|
2.12
|
|
Exercised
|
|
|
(1,384,500
|
)
|
|
|
0.01
|
|
Outstanding, June 30, 2017
|
|
|
4,722,443
|
|
|
|
1.45
|
|
Exercisable, June 30, 2017
|
|
|
4,722,443
|
|
|
|
1.45
|
|
*
The receipt of a non-qualified stock option grant by the grantee recipient is a non-taxable event according to the Internal Revenue
Service, but 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 June 30, 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
|
|
|
|
15,000
|
|
|
|
6.37
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
6.76
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
6.95
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
4,500
|
|
|
|
7.80
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
8.10
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
8.26
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
8.50
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
378,000
|
|
|
|
8.93
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
625,000
|
|
|
|
9.50
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.51
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
80,000
|
|
|
|
9.79
|
|
|
|
0.01
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
5.83
|
|
|
|
1.33
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
3.51
|
|
|
|
1.38
|
|
|
1.38
|
|
|
|
133,057
|
|
|
|
7.52
|
|
|
|
1.38
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
4.93
|
|
|
|
1.55
|
|
|
1.67
|
|
|
|
390,000
|
|
|
|
3.26
|
|
|
|
1.67
|
|
|
1.67
|
|
|
|
458,886
|
|
|
|
7.26
|
|
|
|
1.67
|
|
|
1.70
|
|
|
|
120,000
|
|
|
|
1.48
|
|
|
|
1.70
|
|
|
1.70
|
|
|
|
298,500
|
|
|
|
5.48
|
|
|
|
1.70
|
|
|
1.73
|
|
|
|
25,000
|
|
|
|
1.53
|
|
|
|
1.73
|
|
|
1.75
|
|
|
|
400,000
|
|
|
|
6.02
|
|
|
|
1.75
|
|
|
1.86
|
|
|
|
25,000
|
|
|
|
1.43
|
|
|
|
1.86
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
4.59
|
|
|
|
1.87
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
2.76
|
|
|
|
1.95
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
2.18
|
|
|
|
1.96
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
3.84
|
|
|
|
2.03
|
|
|
2.28
|
|
|
|
25,000
|
|
|
|
2.03
|
|
|
|
2.28
|
|
|
2.61
|
|
|
|
150,000
|
|
|
|
0.43
|
|
|
|
2.61
|
|
|
2.61
|
|
|
|
881,500
|
|
|
|
4.43
|
|
|
|
2.61
|
|
|
0.01-2.61
|
|
|
|
4,722,443
|
|
|
|
|
|
|
|
1.45
|
|
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 six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average fair value
of underlying stock at grant date
|
|
$
|
1.44
|
|
|
$
|
1.57
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
45%-60
|
%
|
|
|
57%-69
|
%
|
Risk-free interest rates
|
|
|
1.45%-1.94
|
%
|
|
|
0.94%-1.76
|
%
|
Expected lives (in years)
|
|
|
3.00-5.00
|
|
|
|
3.00-5.50
|
|
Weighted-average grant date fair value
|
|
$
|
1.18
|
|
|
$
|
1.34
|
|
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 six months ended
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average
fair value of underlying stock at grant date
|
|
$
|
1.36
|
|
|
$
|
1.55
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
68
|
%
|
|
|
70
|
%
|
%Risk-free interest
rates
|
|
|
2.36%-2.45
|
%
|
|
|
1.73
|
%
|
Expected lives (in
years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average grant
date fair value
|
|
$
|
1.36
|
|
|
$
|
1.54
|
|
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 six months ended June 30,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
2,364,000
|
|
|
|
2,469,000
|
|
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:
For
the six months ended June 30,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
210,000
|
|
|
|
324,000
|
|
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 six months ended June 30,
|
|
2017
|
|
|
2016
|
|
US$
|
|
|
US$
|
|
|
191,000
|
|
|
|
213,000
|
|
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 (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 (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.
As
of May 2, 2017, any outstanding ZNWAB warrants expired.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
3 - 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 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 has the symbol “ZNWAE.” On January
30, 2017, the Company extended the Unit 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 Program began on November 1, 2016
and was scheduled to terminate January 31, 2017, but was extended until March 31, 2017, when it terminated.
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.
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), for which the three (3) year period ended 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.
On May 22, 2017, the Company launched
a new unit offering (the "New Unit Program”). The New Unit Program consisted of a new combination of common stock and
warrants, a new time period in which to purchase under the program, and a new unit price, but otherwise the same unit program
features, conditions and terms in the Prospectus Supplement applied. The Company’s new unit program began on May 22,
2017 and terminated on July 12, 2017. This new Unit Option Program enabled participants to purchase Units of the Company's securities
where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing
$250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock
as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional twenty five
(25) shares of Common Stock. 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 has the symbol “ZNWAF.”
All ZNWAF warrants will
first become exercisable on August 14, 2017, which is the first trading day after the 31st day following the Unit Option Termination
Date (i.e., on July 12, 2017) and continue to be exercisable through August 14, 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 fifteen (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 sixty (60) days of the Notice.
As
of June 30, 2017, the number of outstanding warrants for each warrant issue is shown below:
Warrant
|
|
ZNWAA
|
|
|
ZNWAC
|
|
|
ZNWAD
|
|
|
ZNWAE
|
|
|
ZNWAF
|
|
Exercise Price/Warrant
|
|
$
|
2.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
Outstanding/Exercisable
Warrants as of June 30, 2017
|
|
|
1,561,595
|
|
|
|
300,912
|
|
|
|
316,637
|
|
|
|
3,706,361
|
|
|
|
163,450
|
|
For
the six months ended June 30, 2017, approximately $8,539,000 was raised under the DSPP program
The
total amount of funds received from the DSPP, including the exercise of warrants, from the inception date through June 30, 2017
is approximately $21,564,000.
E.
Warrant Descriptions
The
price and the expiration dates for the series of warrants to investors are as follows:
|
|
Period
of Grant
|
|
|
US$
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
ZNWAA Warrants
|
|
March 2013 – December 2014
|
|
|
|
2.00
|
|
|
January 31, 2020
|
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
|
ZNWAF Warrants
|
|
May 2017– July
2017
|
|
|
|
1.00
|
|
|
August 14, 2020
|
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:
|
|
June
30,
2017
|
|
|
December 31,
2016
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Inventory,
and other operational related costs
|
|
|
6,219
|
|
|
|
1,770
|
|
Capitalized
salary costs
|
|
|
1,890
|
|
|
|
1,579
|
|
Legal
costs, license fees and other preparation costs
|
|
|
3,276
|
|
|
|
3,018
|
|
Other
costs
|
|
|
70
|
|
|
|
30
|
|
|
|
|
11,455
|
|
|
|
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 six months ended June 30, 2017, the Company recorded approximately $14,000 in amortization expense related to the deferred
financing costs, and approximately $123,000 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.
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 289,213 shares to the accounts of its bondholders.
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.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
5 - Senior Convertible Bonds
(cont’d)
Through
the six months ended June 30, 2017, approximately 484 convertible bonds of $100 each have been converted under this offering at
a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 21,000 shares of its Common
Stock during the same period.
|
|
June
30,
2017
|
|
|
December 31,
2016
|
|
|
|
US$
|
|
|
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
|
|
$
|
236,000
|
|
|
$
|
113,000
|
|
Bonds converted to shares
|
|
$
|
(61,000
|
)
|
|
$
|
(13,000
|
)
|
Offering cost,
net
|
|
$
|
(104,000
|
)
|
|
$
|
(118,000
|
)
|
10% senior Convertible bonds –
Long Term Liability
|
|
$
|
1,915,000
|
|
|
$
|
1,826,000
|
|
The
Company recognized $171,000 and $231,000 in interest expense for the six months ended June 30, 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. 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.
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 June 30, 2017, the Company’s liabilities that are measured at fair value are as follows:
|
|
June
30, 2017
|
|
|
December
31, 2016
|
|
|
|
Level
3
|
|
|
Total
|
|
|
Level
3
|
|
|
Total
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
Fair value of derivative liability at June
30, 2017
|
|
$
|
3,475,000
|
|
|
$
|
3,475,000
|
|
|
$
|
895,000
|
|
|
$
|
895,000
|
|
Change
in value of derivative liability during 2017 are as follows:
|
|
US$
|
|
|
|
|
|
Derivative
liability fair value at December 31, 2016
|
|
|
895,000
|
|
Loss
on derivative liability
|
|
|
2,580,000
|
|
Derivative
liability fair value at June 30, 2017
|
|
|
3,475,000
|
|
The
following table presents the assumptions that were used for the model as of June 30, 2017:
|
|
June
30, 2017
|
|
|
December 31,
2016
|
|
Convertible Option Fair
Value of approximately
|
|
$
|
3,475,000
|
|
|
$
|
895,000
|
|
Annual Risk-free
Rate
|
|
|
1.75
|
%
|
|
|
1.86
|
%
|
Volatility
|
|
|
51.89
|
%
|
|
|
57.56
|
%
|
Expected Term (years)
|
|
|
3.84
|
|
|
|
4.34
|
|
Convertible Notes
Face Value
|
|
$
|
3,048,700
|
|
|
$
|
3,457,100
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
3.43
|
|
|
$
|
1.37
|
|
During the six months ended June 30, 2017,
the Company recorded a loss of approximately $2,580,000 (net) within the Statements of Operations line item, (loss) 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 $68,000 as of June 30, 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 June 30, 2017, the accumulated depreciation of the
capital lease asset amounted to approximately $3,000.
At
June 30, 2017, future minimum payments due under capital lease were:
|
|
US$
thousands
|
|
|
|
|
|
2017
|
|
|
7
|
|
2018
|
|
|
13
|
|
2019
|
|
|
13
|
|
2020
|
|
|
32
|
|
Less:
portion representing imputed interest
|
|
|
(12
|
)
|
Capital
lease obligations
|
|
|
53
|
|
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 June 30, 2017, the Company provided bank guarantees to various governmental bodies (approximately $1,803,000) and others (approximately
$85,000) with respect to its drilling operation in an aggregate amount of approximately $1,888,000. The (cash) funds backing these
guarantees and additional amounts added to support currency fluctuations as required by the bank are held in restricted interest-bearing
accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted.
Note
8 - Subsequent Events
Between July 1, 2017 through July 31,
2017, approximately $6,650,000 was raised through the Company’s DSPP Program, including its most recent New Unit Program
which terminated on July 12, 2017, as well as the exercise of outstanding warrants (ZNWAA, ZNWAC, ZNWAD, and ZNWAE) into Common
Stock.