Condensed
Notes to Financial Statements (Unaudited)
Note
1 - Nature of Operations, Basis of Presentation and Going Concern
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 19 years of oil & gas exploration in Israel. As of March 31, 2019,
the Company has no revenues from its oil and gas operations.
Zion
maintains its corporate headquarters in Dallas, Texas. We also have branch offices in Caesarea, Israel and Geneva, Switzerland.
The purpose of the Israel branch is to support the Company’s operations in Israel, and the purpose of the Switzerland branch
is to operate a foreign treasury center for the Company.
Exploration
Rights/Exploration Activities
The
Company currently holds one active petroleum exploration license onshore Israel, the Megiddo-Jezreel License, comprising approximately
99,000 acres. The Megiddo Jezreel #1 (“MJ #1”) exploratory well was spud on June 5, 2017 and drilled to a total
depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company successfully cased and cemented
the well while awaiting the approval of the testing protocol. The Ministry of Energy approved the well testing protocol on April
29, 2018.
During
the fourth quarter of 2018, the Company’s testing protocol was concluded at the MJ #1 well. The test results confirmed that
the MJ #1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result of the above determination,
in the year ended December 31, 2018, the Company recorded a non-cash impairment charge to its unproved oil and gas properties
of $30,906,000. During the first quarter of 2019, the Company recorded a post-impairment charge of approximately $163,000.
The
MJ#1 well provided Zion with information Zion believes is important for potential future exploration efforts within its license
area. As with many frontier wildcat wells, the MJ#1 also left several questions unanswered.
While
not meant to be an exhaustive list, a summary of what Zion believes to be key information learned in the MJ#1 well is as follows:
|
1.
|
The
MJ#1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well. In our opinion,
this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from
an organic-rich source rock.
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2.
|
The
known organic rich (potentially hydrocarbon bearing) Senonian age source rocks that are typically present in this part of
Israel were not encountered as expected. Zion expected these source rocks to be encountered at approximately 1,000 meters
in the MJ#1 well.
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|
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3.
|
MJ#1
had natural fractures, permeability (the ability of fluid to move through the rock) and porosity (pore space in rock) that
allowed the sustained flow of formation fluid in the shallower Jurassic and lower Cretaceous age formations between approximately
1,200 and 1,800 meters. While no hydrocarbons were encountered, Zion believes this fact is nonetheless significant because
it provides important information about possible reservoir pressures and the ability of fluids to move within the formation
and to the surface.
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4.
|
MJ#1
encountered oil in the Triassic Mohilla formation which Zion believes suggests an active deep petroleum system is in Zion’s
license area. There was no natural permeability or porosity in the Triassic Mohilla formation to allow formation fluid to
reach the surface naturally during testing and thus the MJ#1 was not producible or commercial.
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5.
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The
depths and thickness of the formations we encountered varied greatly from pre-drill estimates. This required the MJ#1 to be
drilled to a much greater depth than previously expected. Zion has tied these revised formation depths to seismic data which
will allow for more accurate interpretation and mapping in the future.
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
1 - Nature of Operations, Basis of Presentation and Going Concern
(cont’d)
A
summary of what Zion believes to be some key questions left to be answered are:
|
1.
|
Is
the missing shallow Senonian age source rock a result of regional erosion, or is it missing because of a fault that cut the
well-bore and could be reasonably expected to be encountered in the vicinity of the MJ#1 drill site? Zion believes this is
an important question to answer because if the Senonian source rocks do exist in this area, the high temperatures encountered
are sufficient to mature these source rocks and generate oil.
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2.
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Do
the unusually high shallow subsurface temperatures extend regionally beyond the MJ#1 well, which could allow for the generation
of hydrocarbons in the Senonian age source rock within our license area?
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3.
|
As
a consequence of seismic remapping, where does the MJ#1 well lie relative to the potential traps at the Jurassic and Triassic
levels and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps?
|
As
a result of these unanswered questions and with the information gained drilling the MJ#1 well, Zion now believes it is prudent
and consistent with good industry practice to try and answer some of these questions with a focused 3D seismic imaging shoot of
approximately 60 square kilometers surrounding the MJ#1 well.
Zion
received a multi-year license extension through December 2, 2020. The Company has completed preliminary field scouting and a suggested
final survey design for the proposed 3D seismic survey. The permitting process has begun, as well as identifying potential seismic
source equipment and wireless geophones to record the signal, which Zion believes it might be necessary to import. Contracts with
seismic services providers will need to be negotiated along with potential surface damages to crops, irrigation piping and other
surface features. Once data acquisition is completed, interpretation is the final step and will involve integration with, and
modification of, previous work by Zion technical staff.
Zion’s
ability to fully undertake all of these aforementioned activities is subject to its raising the needed capital from its continuing
offerings, of which no assurance can be provided.
Megiddo-Jezreel
Petroleum License, No. 401 (“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 lies onshore, south and west of the Sea of Galilee, and the Company
continues its exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with
significant exploration potential. In late November 2016, The State of Israel’s Petroleum Commissioner officially approved
Zion’s drilling date and license extension request.
On
October 30, 2017, the Company sought a multi-year extension to its existing license. After receiving feedback from Israel’s
Petroleum Commissioner, the Company submitted a revised extension request on November 9, 2017. On November 20, 2017, Israel’s
Petroleum Commissioner officially approved the Company’s multi-year extension request on its Megiddo-Jezreel License No.
401, extending its validity to December 2, 2019. Until recently, the Company remained subject to the following updated key license
terms:
No.
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Activity
Description
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|
Execution
by:
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1
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|
Submit
final report on the results of drilling
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31
May 2018
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2
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Submit
program for continuation of work under license
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30
June 2018
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On
June 1, 2018, Zion submitted its
Megiddo-Jezreel #1 End of Well Report (EOWR)
for the Megiddo-Jezreel License No. 401,
thus fulfilling its No. 1 Final Report license work plan obligation, shown above.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
1 - Nature of Operations, Basis of Presentation and Going Concern
(cont’d)
On
June 14, 2018 Zion submitted its
Application for Extension of Continued Work Program
Due Date on the Megiddo-Jezreel License No. 401
. The additional time was necessary because we had still not completed
testing and evaluating all planned testing zones. On July 1, 2018, Israel’s Petroleum Commissioner granted Zion’s
work program report extension to November 1, 2018, as shown below.
No.
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|
Activity
Description
|
|
Execution
by:
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1
|
|
Submit
program for continuation of work under license
|
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1
November 2018
|
On
October 16, 2018 Zion submitted its
Application for Extension of Continued Work Program
Due Date on the Megiddo-Jezreel License No. 401
. The additional time was necessary because we had still not completed
testing and evaluating all planned testing zones. On October 28, 2018, Israel’s Petroleum Commissioner granted Zion’s
work program report extension to January 31, 2019, as shown below.
No.
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Activity
Description
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|
Execution
by:
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1
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|
Submit
program for continuation of work under license
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31
January 2019
|
On
January 31, 2019, Zion submitted its
Application for Extension of Continued Work Program
Due Date on the Megiddo-Jezreel License No. 401
. The additional time was necessary to finalize the work program. On
February 3, 2019 Israel’s Petroleum Commissioner granted Zion’s work program report extension to February 28, 2019,
as shown below:
Number
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|
Activity
Description
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|
Execution
by:
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3
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Submit
program for continuation of work under license
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28
February 2019
|
The
continuation of work program was timely submitted to Israel’s Petroleum Commissioner and subsequently approved.
Number
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Activity
Description
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1
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Received
approval for an extension of the MJ#1 License through December 2, 2020
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28
February 2019
|
On
February 24, 2019 and thereafter on February 26, 2019 Zion submitted its
proposed 2019
WORK PROGRAM ON the Megiddo-Jezreel License No. 401.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
1 - Nature of Operations, Basis of Presentation and Going Concern
(cont’d)
On
February 28, 2019 Israel’s Petroleum Commissioner officially approved the revised and updated Work Program on the Megiddo-Jezreel
License No. 401 as shown below
:
Number
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Activity
description
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|
Execution
by:
|
1
|
|
Submission
of seismic survey plan to the Commissioner and execution of an agreement with a contractor to perform
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30
April 2019
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2
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Commence
3D seismic survey in an area of approximately 50 square kilometers
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1
August 2019
|
3
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Transfer
of field material configuration and processed material to the Ministry pursuant to Ministry guidelines
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15
December 2019
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4
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Submit
interpretation report
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20
February 2020
|
On
February 24, 2019 Zion submitted a request to the Commissioner to extend the Megiddo-Jezreel License No. 401 up to December 2,
2020.
On
February 28, 2019 the Commissioner approved the extension of the Megiddo-Jezreel License No. 401 up to December 2, 2020.
On
April 30, 2019 Zion submitted its
Application for Extension of Continued Work Program
Due Date on the Megiddo-Jezreel License No. 401
. The additional time is necessary because Zion intends to conduct a
3D survey in an area of approximately 60 square kilometers. This requires, amongst others, extensive permitting activities with
relevant local landowners, the ILA, certain authorities and others throughout the seismic survey area and in all likelihood will
not conclude prior to the beginning of the Jewish holidays in October and rainy season. This in turn would result in additional
delay, as rain and mud are not conductive to the performance of a seismic survey which includes extensive use of vibrators.
Zion’s
proposed new timelines and activity descriptions are shown below:
Number
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|
Activity
description
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|
Execution
by:
|
1
|
|
Submission
of seismic survey plan to the Commissioner and execution of an agreement with a contractor to perform
|
|
30
November, 2019
|
2
|
|
Commence
3D seismic survey in an area of approximately 60 square kilometers
|
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1
April, 2020
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3
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|
Transfer
of field material configuration and processed material to the Ministry pursuant to Ministry guidelines
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15
August 2020
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4
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Submit
interpretation report
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15
November, 2020
|
On
May 1, 2019, Israel’s Petroleum Commissioner granted Zion’s work program report extension to November 1, 2019,
as shown below.
As
previously disclosed, the Company required authorization from the Israel Land Authority (the “ILA”), the formal lessor
of the land to Kibbutz Sde Eliyahu, on whose property the drilling pad is currently situated, to access and utilize the drill
site (“surface use agreement”). The Company received this authorization on July 4, 2016. This was preceded by the
Company’s May 15, 2016 signed agreement with the kibbutz. On January 11, 2017, an agreement was signed by the Company and
the ILA by which the surface usage agreement was extended through December 3, 2017. On December 31, 2017, an agreement was signed
by the Company and the ILA by which the surface usage agreement was extended through December 3, 2019.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
1 - Nature of Operations, Basis of Presentation and Going Concern
(cont’d)
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 condensed 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, 2018. 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, 2019 are not necessarily indicative of the operating results
for the year ending December 31, 2019 or for any other subsequent interim period.
C.
Going Concern
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 three months ended March 31, 2019, the Company incurred a net loss of approximately $2.2 million and had an accumulated
deficit of approximately $201 million. These factors raise substantial doubt about the Company’s ability to continue as
a going concern.
To
carry out planned operations, 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.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
2 - Summary of Significant Accounting Policies
A.
Net Gain (Loss) per Share Data
Basic
and diluted net (loss) gain 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 9,651,835 and 9,651,569 Common Stock equivalents in the three-month period ended March 31, 2019 and 2018 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.
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.
During
the fourth quarter of 2018, the Company testing protocol was concluded at the Megiddo Jezreel #1 (“MJ #1”) well. The
test results confirmed that the MJ #1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result
of the above determination, in the year ended December 31, 2018, the Company recorded a non-cash impairment charge to its unproved
oil and gas properties of $30,906,000 (see Note 4). During the first quarter of 2019, the Company recorded a post-impairment charge
of approximately $163,000.
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 $6,900,000 and $6,714,000 as of March 31, 2019, and December 31, 2018, respectively.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
2 - Summary of Significant Accounting Policies
(cont’d)
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.
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.
Stock-Based Compensation
ASC
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based
payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering
to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the financial statements
based on their fair values. That expense is recognized over the period during which an employee is required to provide services
in exchange for the award, known as the requisite service period (usually the vesting period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC
505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees
is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments
issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance
completion date.
G.
Related parties
Parties
are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control,
are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company,
its management, members of the immediate families of principal owners of the Company and its management and other parties with
which the Company may deal if one party controls or can significantly influence the management or operating policies of the other
to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions
with related parties are recorded at fair value of the goods or services exchanged.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
2 - Summary of Significant Accounting Policies
(cont’d)
H.
Recently Adopted Accounting Pronouncements
ASU 2016-02 and ASU 2018-01 – Leases
(Topic 842)
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) in order to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases classified
as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease payments
(the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term on the balance
sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within those periods)
using a modified retrospective approach and early adoption is permitted. Zion adopted ASU 2016-02 in the first quarter of 2019.
Presently, Zion has operating leases for office space in Dallas, Texas and in Caesarea, Israel plus various leases for motor vehicles.
These leases have been accounted for under ASU 2016-02 in 2019 by establishing a right-of-use asset and a corresponding current
lease liability and non-current lease liability. Zion is not subject to any loan covenants and therefore, the increase in assets
and liabilities does not have a material impact on its business.
In January 2018, the FASB issued ASU
2018-01, “Land Easement Practical Expedient for Transition to “Topic 842.”
The amendments in this Update provide an optional
transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously accounted
for as leases under Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified land easements
under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical expedient
should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements in Topic 842
to assess whether they meet the definition of a lease. The Company does not have any land easements and believes that this ASU
2018-01 has no effect on the Company.
ASU 2016-15 and ASU
2016-08 – Statement of Cash Flows (Topic 230)
In August 2016, the
FASB issued AS 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies how certain cash
receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15 is for
fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early
adoption is permitted. The Company is currently evaluating the impact of adopting ASU 2016-15 on our financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230) (“ASU 2016-18”), which requires that restricted cash and restricted cash equivalents
be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total cash amounts shown
on the statement of cash flows. The effective date for ASU 2016-18 is for fiscal years beginning after December 15, 2017, and
interim periods within those fiscal years. Early adoption is permitted.
We adopted ASU 2016-18
effective January 1, 2018. The adoption of ASU 2016-18 had no impact on our retained earnings, and no impact to our net income
on an ongoing basis. Adoption of the new standard requires that a statement of cash flows explain the change during the period
in the total of cash, cash equivalents and amounts generally described as restricted cash, or restricted cash equivalents. The
amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents
when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The amendments
have been applied using a retrospective transition method to each period presented, as required. The period ended March 31, 2019
has been reclassified to reflect this change.
ASU
2018-05 – Income Taxes (Topic 740)
In March 2018, the FASB issued ASU 2018-05, “Amendments
to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This ASU expresses the view of the staff regarding
application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017, the date on which the Tax Cuts
and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget
for Fiscal Year 2018) was signed into law. The Company is currently evaluating the impact of adopting ASU 2018-05 on our financial
statements.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
2 - Summary of Significant Accounting Policies
(cont’d)
ASU
2016-09
In
March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation, or ASU No. 2016-09. The areas for simplification
in this Update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences,
classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities,
the amendments in this Update are effective for annual periods beginning after December 15, 2016, and interim periods within those
annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim
period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity
that elects early adoption must adopt all of the amendments in the same period. Amendments related to the timing of when excess
tax benefits are recognized, minimum statutory withholding requirements, forfeitures, and intrinsic value should be applied using
a modified retrospective transition method by means of a cumulative-effect adjustment to equity as of the beginning of the period
in which the guidance is adopted. Amendments related to the presentation of employee taxes paid on the statement of cash flows
when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments
requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating
expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess
tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method.
The Company believes that this ASU No. 2016-09 has no impact on our financial statements.
The
Company does not believe that the adoption of any recently issued accounting pronouncements in 2019 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 March 31, 2019 and December
31, 2018, the Company reclassified $57,000 and $63,000, respectively, in deferred offering costs from an asset account and applied
it to the outstanding debt balance (see Note 5).
Note
3 - Stockholders’ Equity
A.
2011 Equity Incentive Stock Option Plan
During
the three months ended March 31, 2019, the Company granted the following options from the 2011 Equity Incentive Plan for employees,
directors and consultants, to purchase as non-cash compensation (the exercise of penny stock options is taxable at full market
value on the date of exercise):
|
i.
|
Options
to purchase 25,000 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 January 6, 2029. The fair value of the options at the date of grant amounted to approximately
$10,000.
|
During the three months ended March 31, 2018, the
Company granted the following options from the 2011 Equity Incentive Plan for employees, directors and consultants, to purchase
as non-cash compensation (the exercise of penny stock options are taxable on the date of exercise):
|
i.
|
Options to purchase 330,000 shares of Common Stock to 23 senior officers, staff members and consultants at an exercise price of $.01 per share. The options have vesting schedules of 165,000 shares on June 30, 2018 and 165,000 shares on December 31, 2018. The options are exercisable through January 1, 2028. The fair value of the options at the date of grant amounted to approximately $759,000.
|
|
|
|
|
ii.
|
Options to purchase 110,000 shares of Common Stock to five senior officers at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 4, 2028. The fair value of the options at the date of grant amounted to approximately $250,000.
|
|
|
|
|
iii.
|
Options to purchase 55,000 shares of Common Stock to three consultants an exercise price of $0.01 per share. The options vested upon grant. However, the exercisability of these options is according to the following schedule: (a) 27,500 options are exercisable on June 30, 2018 and (b) the remaining 27,500 options are exercisable on June 30, 2019. The fair value of the options at the date of grant amounted to $222,000.
|
B.
2011 Non-Employee Directors Stock Option Plan
During
the three months ended March 31, 2019, the Company did not grant any qualified (market value) options from the 2011 Non-Employee
Directors Stock Option Plan to its directors.
During the three months ended March 31, 2018, 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 400,000 shares of Common Stock to eight board members at an exercise price of $2.31 per share. The options vested upon grant and are exercisable through January 1, 2024. The fair value of the options at the date of grant amounted to approximately $428,000.
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
3 - Stockholders’ Equity
(cont’d)
C.
Stock Options
The
stock option transactions since January 1, 2019 are shown in the table below:
|
|
Number of
shares
|
|
|
Weighted Average
exercise price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2018
|
|
|
4,788,443
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
Changes during 2019 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others *
|
|
|
25,000
|
|
|
|
0.01
|
|
Expired/Cancelled/Forfeited
|
|
|
(330,693
|
)
|
|
|
2.11
|
|
Exercised
|
|
|
(52,500
|
)
|
|
|
0.01
|
|
Outstanding, March 31, 2019
|
|
|
4,430,250
|
|
|
|
1.33
|
|
Exercisable, March 31, 2019
|
|
|
4,420,250
|
|
|
|
1.33
|
|
*
|
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 penny 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, 2019:
Shares
underlying outstanding options (non-vested)
|
|
|
Shares
underlying outstanding options (fully vested)
|
|
Range
of
exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
Weighted
Average
Exercise
price
|
|
|
Range
of exercise
price
|
|
|
Number
Outstanding
|
|
|
Weighted
average remaining contractual life (years)
|
|
|
Weighted
Average
Exercise
price
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
4.62
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
5.00
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
5.20
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
6.50
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
6.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
305,000
|
|
|
|
7.18
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
525,000
|
|
|
|
7.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
7.76
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
|
8.04
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
8.75
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
|
8.50
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
180,000
|
|
|
|
8.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
85,000
|
|
|
|
8.76
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
*45,000
|
|
|
|
8.91
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
6,000
|
|
|
|
9.01
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
9.77
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
4.08
|
|
|
|
1.33
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
1.76
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
113,057
|
|
|
|
5.76
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
3.18
|
|
|
|
1.55
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
340,000
|
|
|
|
1.51
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
428,193
|
|
|
|
5.51
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.70
|
|
|
|
233,500
|
|
|
|
3.73
|
|
|
|
1.70
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.75
|
|
|
|
400,000
|
|
|
|
4.27
|
|
|
|
1.75
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.78
|
|
|
|
25,000
|
|
|
|
5.44
|
|
|
|
1.78
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
2.84
|
|
|
|
1.87
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
1.01
|
|
|
|
1.95
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
0.43
|
|
|
|
1.96
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
2.09
|
|
|
|
2.03
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.31
|
|
|
|
400,000
|
|
|
|
4.76
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.61
|
|
|
|
481,500
|
|
|
|
2.68
|
|
|
|
2.61
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.15
|
|
|
|
25,000
|
|
|
|
5.26
|
|
|
|
4.15
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01-4.15
|
|
|
|
4,420,250
|
|
|
|
|
|
|
|
1.32
|
|
*
|
27,500
are exercisable on June 30, 2019.
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
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,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
0.42
|
|
|
$
|
2.31
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
87
|
%
|
|
|
68%-70
|
%
|
Risk-free interest rates
|
|
|
2.53
|
%
|
|
|
2.01%-2.25
|
%
|
Expected lives (in years)
|
|
|
5.00
|
|
|
|
3.50-5.50
|
|
Weighted-average grant date fair value
|
|
$
|
0.41
|
|
|
$
|
1.69
|
|
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,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted-average
fair value of underlying stock at grant date
|
|
$
|
—
|
|
|
$
|
3.37
|
|
Dividend
yields
|
|
|
—
|
|
|
|
—
|
|
Expected
volatility
|
|
|
—
|
|
|
|
73%-76
|
%
|
Risk-free
interest rates
|
|
|
—
|
|
|
|
2.46%-2.81
|
%
|
Expected
lives (in years)
|
|
|
—
|
|
|
|
10.00
|
|
Weighted-average
grant date fair value
|
|
$
|
—
|
|
|
$
|
3.36
|
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
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.
D.
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,
|
|
2019
|
|
|
2018
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
15
|
|
|
|
943
|
|
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,
|
|
2019
|
|
|
2018
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
—
|
|
|
|
302
|
|
The
following table sets forth information about the compensation cost of option issuances recognized for employees and non-employees
and capitalized to Unproved Oil & Gas properties:
For
the three months ended March 31,
|
|
2019
|
|
|
2018
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
—
|
|
|
|
297
|
|
As
of March 31, 2019, there was approximately $5,000 of unrecognized compensation cost, related to non-vested stock options granted
under the Company’s various stock option plans. The cost is expected to be recognized during the year 2019.
E.
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 directly from the Company. 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.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
3 - Stockholders’ Equity
(cont’d)
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 participant the opportunity to purchase the Company’s Common Stock
at a warrant exercise price of $1.00. Each of the three warrants series has different expiration dates that have been extended.
The
warrants became exercisable on May 2, 2016 and, in the case of ZNWAB continued to be exercisable through May 2, 2017 (1 year)
and, in the case of ZNWAC continued to be exercisable through 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.
As
of May 2, 2018, any outstanding ZNWAC warrants expired.
On
December 4, 2018, the Company extended the termination date of the ZNWAD Warrant by one (1) year from the expiration date of May
2, 2019 to May 2, 2020.
On
November 1, 2016, the Company launched a unit offering (the “Unit Program”) under the Company’s DSPP pursuant
to which participants could purchase units comprised of seven shares of Common Stock and seven Common Stock purchase warrants,
at a per unit purchase price of $10. The warrant is referred to as “ZNWAE.”
The
ZNWAE warrants became exercisable on May 1, 2017 and continue to be exercisable through May 1, 2020 at a per share exercise price
of $1.00. The warrant terms provide that 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 may, in its sole discretion,
accelerate the termination of the warrant upon providing 60 days advanced notice to the 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 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 New Unit Program
terminated on July 12, 2017. This New Unit Program enabled participants to purchase Units of the Company’s securities where
each Unit (priced at $250.00 each) was comprised of (i) the 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 Common Stock as reported on the NASDAQ
on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares of Common Stock at a warrant
exercise price of $1.00 per share. The warrant is referred to as “ZNWAF.”
All
ZNWAF warrants became exercisable on August 14, 2017 and continue to be exercisable through August 14, 2020 at a per share exercise
price of $1.00. The warrant terms provide that if the Company’s Common Stock 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 accelerate the termination date of the warrant upon providing 60 days advanced notice to the warrant holders.
On
October 16, 2017, the Company initiated another Unit Option Program which terminated on December 6, 2017. This 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 Common Stock as reported on the NASDAQ on the unit purchase date and (ii) Common
Stock purchase warrants to purchase an additional 15 shares of Common Stock at a warrant exercise price of $1.00 per share. The
warrant is referred to as “ZNWAG.”
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
3 - Stockholders’ Equity
(cont’d)
The
warrants became exercisable on January 8, 2018 and continue to be exercisable through January 8, 2021 at a per share exercise
price of $1.00. The warrant terms provide that if the Company’s Common Stock 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 accelerate the termination date of the warrant upon providing 60 days advanced notice to the warrant holders.
On
February 1, 2018, the Company initiated another Unit Option Program which terminated on February 28, 2018. The Unit Option consisted
of Units of our securities where each Unit (priced at $250.00 each) was comprised of (i) 50 shares of Common Stock and (ii) Common
Stock purchase warrants to purchase an additional 50 shares of Common Stock. The investor’s Plan account was credited with
the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor
the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $5.00. The warrant is referred to
as “ZNWAH.”
The
warrants became exercisable on April 2, 2018 and continue to be exercisable through April 2, 2020 at a per share exercise price
of $5.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration
date of April 2, 2019 to April 2, 2020.
On
August 21, 2018, the Company initiated another Unit Option, and it terminated on September 26, 2018. The Unit Option consisted
of 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. The investor’s Plan account was credited with the number of shares
of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase
one share of Company Common Stock at a warrant exercise price of $1.00. The warrant is referred to as “ZNWAJ.”
The
warrants became exercisable on October 29, 2018 and continue to be exercisable through October 29, 2020 at a per share exercise
price of $1.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the
expiration date of October 19, 2019 to October 29, 2020.
On
December 10, 2018, the Company initiated another Unit Option and it terminated on January 23, 2019. The Unit Option consisted
of Units of the Company’s securities where each Unit (priced at $250.00 each) is comprised of (i) two hundred and fifty
(250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional two hundred and fifty (250) shares
of Common Stock at a per share exercise price of $0.01. The investor’s Plan account was credited with the number of shares
of the Company’s Common Stock and Warrants that are acquired under the Units purchased. Each warrant affords the participant
the opportunity to purchase one share of our Common Stock at a warrant exercise price of $0.01. The warrant is referred to as
“ZNWAK.”
The
warrants became exercisable on February 25, 2019 and continue to be exercisable through February 25, 2020 at a per share exercise
price of $0.01.
On
April 24, 2019, the Company’s most recent Unit Option began and is scheduled to terminate on June 6, 2019. The Unit Option
consists of Units of the Company’s securities where each Unit (priced at $250.00 each) is comprised of (i) two hundred and
fifty (250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional fifty (50) shares of Common
Stock at a per share exercise price of $2.00. The investor’s Plan account will be credited with the number of shares of
the Company’s Common Stock and Warrants that are acquired under the Units purchased. For Plan participants who enroll into
the Unit Program with the purchase of at least one Unit and also enroll in the separate Automatic Monthly Investments (“AMI”)
program at a minimum of $50.00 per month or more, will receive an additional twenty-five (25) warrants at an exercise price of
$2.00 during this Unit Option Program. The twenty-five (25) additional warrants are for enrolling into the AMI program. Existing
subscribers to the AMI are entitled to the additional twenty-five (25) warrants once, if they purchase at least one (1) unit during
the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant
exercise price of $2.00. The warrant is referred to as “ZNWAL.”
The
warrants will become exercisable on August 6, 2019 and continue to be exercisable through August 6, 2021 at a per share exercise
price of $2.00.
For
the three months ended March 31, 2019, net proceeds of approximately $2,528,000 was raised under the DSPP program.
The
warrants represented by the ticker ZNWAA are tradable on the NASDAQ market. However, all of the other warrants characterized above,
in the table below, and throughout this Form 10-Q, are not tradeable and are used internally for classification and accounting
purposes only.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
3 - Stockholders’ Equity
(cont’d)
F.
Warrant Descriptions
The
price and the expiration dates for the series of warrants to investors are as follows * :
|
|
Period
of Grant
|
|
US$
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
ZNWAA
Warrants
|
|
March 2013 – December 2014
|
|
|
2.00
|
|
|
January 31, 2020
|
ZNWAD
Warrants**
|
|
January 2015 – March 2016
|
|
|
1.00
|
|
|
May 02, 2020
|
ZNWAE
Warrants
|
|
November 2016 – March 2017
|
|
|
1.00
|
|
|
May 01, 2020
|
ZNWAF
Warrants**
|
|
May
2017 – July 2017
|
|
|
1.00
|
|
|
August
14, 2020
|
ZNWAG
Warrants
|
|
October 2017 – December 2017
|
|
|
1.00
|
|
|
January 08, 2021
|
ZNWAH
Warrants**
|
|
February
2018
|
|
|
5.00
|
|
|
April
2, 2020
|
ZNWAI
Warrants**
|
|
April
2018 – May 2018
|
|
|
3.00
|
|
|
June
29, 2020
|
ZNWAJ
Warrants
|
|
August
2018 – September 2018
|
|
|
1.00
|
|
|
October
29, 2020
|
ZNWAK
Warrants
|
|
December
2018 – January 2019
|
|
|
0.01
|
|
|
February
25, 2020
|
*
|
Zion’s
ZNWAB Warrants expired on May 2, 2017 and its ZNWAC Warrants expired on May 2, 2018
|
**
|
On
December 4, 2018, the Company extended the termination date of the Warrants by one (1) year.
|
G.
Subscription Rights Offering
On
April 2, 2018 the Company announced an offering (“2018 Subscription Rights Offering”) through American Stock Transfer
& Trust Company, LLC (the “Subscription Agent”), at no cost to the shareholders, of non-transferable Subscription
Rights to purchase Rights (each “Right” and collectively, the “Rights”) of its securities to persons who
owned shares of our Common Stock on April 13, 2018 (“the Record Date”). Pursuant to the 2018 Subscription Rights Offering,
each holder of shares of common stock on the Record Date received non-transferable rights to subscribe for Rights, with each
Right comprised of one share of the Company Common Stock, par value $0.01 per share (the “Common Stock”)
and one Common Stock Purchase Warrant to purchase an additional one share of Common Stock. Each Right could be purchased at a
per Right subscription price of $5.00. Each Warrant affords the investor the opportunity to purchase one share of the Company
Common Stock at a warrant exercise price of $3.00. The warrant is referred to as “ZNWAI.”
The
warrants became exercisable on June 29, 2018 and continue to be exercisable through June 29, 2020 at a per share exercise price
of $3.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration
date of June 29, 2019 to June 29, 2020.
Each
shareholder received .10 (one tenth) of a subscription right (i.e. one subscription right for each 10 shares owned) for each share
of the Company’s Common Stock owned on the Record Date.
The
2018 Subscription Rights Offering terminated on May 31, 2018. The Company raised net proceeds of approximately $3,038,000, from
the Rights Offering, after deducting related fees and expenses of $243,000.
H.
Warrant Table
The
warrant transactions since January 1, 2019 are shown in the table below:
Warrants
|
|
Exercise Price
|
|
|
Warrant Termination Date
|
|
|
Beg Balance, 12/31/18
|
|
|
Warrants Issued
|
|
|
Warrants Exercised
|
|
|
Warrants Expired
|
|
|
Outstanding Balance, 3/31/19
|
|
ZNWAA
|
|
$
|
2.00
|
|
|
1/31/2020
|
|
|
|
1,498,804
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,498,804
|
|
ZNWAD
|
|
$
|
1.00
|
|
|
5/2/2020
|
|
|
|
243,853
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
243,853
|
|
ZNWAE
|
|
$
|
1.00
|
|
|
5/2/2020
|
|
|
|
2,144,510
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
2,144,510
|
|
ZNWAF
|
|
$
|
1.00
|
|
|
8/14/2020
|
|
|
|
359,610
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
359,610
|
|
ZNWAG
|
|
$
|
1.00
|
|
|
1/8/2021
|
|
|
|
240,578
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
240,578
|
|
ZNWAH
|
|
$
|
5.00
|
|
|
4/19/2020
|
|
|
|
372,400
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
372,400
|
|
ZNWAI
|
|
$
|
3.00
|
|
|
6/29/2020
|
|
|
|
640,735
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
640,735
|
|
ZNWAJ
|
|
$
|
1.00
|
|
|
10/29/2020
|
|
|
|
546,050
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
546,050
|
|
ZNWAK
|
|
$
|
0.01
|
|
|
2/25/2020
|
|
|
|
0
|
|
|
|
673,650
|
|
|
|
(157,605
|
)
|
|
|
0
|
|
|
|
516,045
|
|
Outstanding warrants
|
|
|
|
|
|
|
|
6,046,540
|
|
|
|
673,650
|
|
|
|
(157,605
|
)
|
|
|
0
|
|
|
|
6,562,585
|
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
3 - Stockholders’ Equity
(cont’d)
I.
Warrants Extended
On
December 4, 2018, the Company executed an Amendment to certain Warrant Agent Agreements (the “Agreements”) between
the Company and American Stock Transfer & Trust Company (“AST”). The Company has implemented Agreements with AST
as the Company’s Warrant Agent (the “Warrant Agent”), under a Warrant Agent Agreement dated February 2, 2015
for the Warrant ZNWAD, under a Warrant Agent Agreement dated February 1, 2018 for the Warrant ZNWAH, under a Warrant Agent Agreement
dated April 2, 2018 for the Warrant ZNWAI and under a Warrant Agent Agreement dated August 21, 2018 for the Warrant ZNWAJ.
The
Warrant ZNWAD had an expiration date of May 2, 2019, the Warrant ZNWAH had an expiration date of April 19, 2019, the Warrant ZNWAI
had an expiration date of June 29, 2019 and the Warrant ZNWAJ had an expiration date of October 29, 2019.
Pursuant
to Section 3.2 of the Warrant Agent Agreements, the Company in its sole discretion extended the termination date of the above
Warrants by delaying the Expiration Dates, and such extension was to be identical in duration among all of the Warrants. The Company
extended the duration of the Warrant ZNWAD by one (1) year from the expiration date of May 2, 2019 to May 2, 2020. The Company
extended the duration of the Warrant ZNWAH by one (1) year from the expiration date of April 19, 2019 to April 19, 2020. The Company
extended the duration of the Warrant ZNWAI by one (1) year from the expiration date of June 29, 2019 to June 29, 2020. The Company
extended the duration of the Warrant ZNWAJ by one (1) year from the expiration date of October 29, 2019 to October 29, 2020.
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,
2019
|
|
|
December 31,
2018
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
1,242
|
|
|
|
1,242
|
|
Capitalized salary costs
|
|
|
1,625
|
|
|
|
1,579
|
|
Capitalized interest costs
|
|
|
687
|
|
|
|
677
|
|
Legal costs, license fees and other preparation costs
|
|
|
3,344
|
|
|
|
3,216
|
|
Other costs
|
|
|
2
|
|
|
|
-
|
|
|
|
|
6,900
|
|
|
|
6,714
|
|
*
|
The
unproved oil and gas properties balance at March 31, 2019 contains approximately $587,000 in unpaid amounts.
|
Impairment
of unproved oil and gas properties comprised as follows:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
US$ thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
142
|
|
|
|
-
|
|
Other costs
|
|
|
21
|
|
|
|
-
|
|
|
|
|
163
|
|
|
|
-
|
|
Changes
in Unproved oil and gas properties during the three months ended March 31, 2019 and 2018 are as follows:
|
|
March 31,
2019
|
|
|
March 31,
2018
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
-
|
|
|
|
3,466
|
|
Capitalized salary costs
|
|
|
46
|
|
|
|
337
|
|
Capitalized interest costs
|
|
|
10
|
|
|
|
86
|
|
Legal costs, license fees and other preparation costs
|
|
|
128
|
|
|
|
278
|
|
Other costs
|
|
|
2
|
|
|
|
72
|
|
|
|
|
186
|
|
|
|
4,239
|
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
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 shareholders 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”).
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 issuance 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 6). 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, 2019, the Company recorded approximately $6,000 in amortization expense related to the deferred
financing costs, approximately $93,000 in debt discount amortization, and approximately $1,000 related to financing costs associated
with notes converted to shares. 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 were not issued, and the final number of shares
were rounded up to the next whole share.
On May 2, 2019, the Company paid its
annual 10% interest to its bondholders of record on April 18, 2019. The interest was paid-in-kind (“PIK”) in the form
of Common Stock. An average of the Company stock price of $0.774 was determined based on the 30 trading days prior to the record
date of April 18, 2019. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company
issued 422,248 shares to the accounts of its bondholders.
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 was 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.
Condensed
Notes to Financial Statements (Unaudited)
Note
5 - Senior Convertible Bonds
(cont’d)
Through
the three months ended March 31, 2019 approximately 10 convertible bonds of $100 each, have been converted at a conversion rate
of approximately $2.27 per share. As a result, the Company issued approximately 440 shares of its Common Stock and recorded approximately
($1,000) in financial expenses during the same period.
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, on the day of issuance
|
|
$
|
3,470
|
|
|
$
|
3,470
|
|
Unamortized Debt discount, net
|
|
$
|
(900
|
)
|
|
$
|
(993
|
)
|
Bonds converted to shares
|
|
$
|
(204
|
)
|
|
$
|
(203
|
)
|
Offering cost, net
|
|
$
|
(57
|
)
|
|
$
|
(63
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
2,309
|
|
|
$
|
2,211
|
|
The Company recognized $10,000 and $86,000 in capitalized
interest for the three months ended March 31, 2019, and 2018, respectively.
The Company recognized $71,000 and $0 interest
expense for the three months ended March 31, 2019, and 2018, respectively.
Note
6 - Derivative Liability
The
Notes issued by the Company and discussed in Note 5 contain a convertible option that gives rise to a derivative liability.
The
debt instrument the Company issued includes a make-whole provision, which provides that in the event of conversion by the investor
under certain circumstances, the issuer is required to deliver to the holder additional consideration beyond the settlement of
the conversion obligation.
Because
time value make-whole provisions are not clearly and closely related to the debt host and would meet the definition of a derivative
if considered freestanding, they are evaluated under the indexation guidance to determine whether they would be afforded the scope
exception pursuant to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded
conversion feature.
The
Company has measured its derivative liability at fair value and recognized the derivative value as a current liability and recorded
the derivative value on its balance sheet. The fair value of the shares to be issued upon conversion of the Notes was recorded
as a derivative liability, with the change in the fair value recorded as a gain or loss in the accompanying statement of operations.
The
valuation of the Notes was done by using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’
terms and other parameters the Company identified as relevant for the valuation of the Notes’ Fair Value.
The
Binomial Model used the forecast of the Company share price during the Note’s contractual term.
As
of March 31, 2019, the Company’s liabilities that are measured at fair value are as follows:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Fair value of derivative liability
|
|
|
723
|
|
|
|
723
|
|
|
|
345
|
|
|
|
345
|
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
6 - Derivative Liability
(cont’d)
Change
in value of derivative liability during 2019 are as follows:
|
|
US$
thousands
|
|
|
|
|
|
Derivative liability fair value at December 31, 2018
|
|
|
345
|
|
Loss on derivative liability
|
|
|
378
|
|
Derivative liability fair value at March 31, 2019
|
|
|
723
|
|
The
following table presents the assumptions that were used for the model as of March 31, 2019:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Convertible Option Fair Value of approximately
|
|
$
|
723,000
|
|
|
$
|
345,000
|
|
Annual Risk-free Rate
|
|
|
2.27
|
%
|
|
|
2.47
|
%
|
Volatility
|
|
|
123.19
|
%
|
|
|
115.35
|
%
|
Expected Term (years)
|
|
|
2.09
|
|
|
|
2.34
|
|
Convertible Notes Face Value
|
|
$
|
3,265,700
|
|
|
$
|
3,266,700
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
0.76
|
|
|
$
|
0.42
|
|
During
the three months ended March 31, 2019, the Company recorded a loss of approximately $378,000 (net) within the Statements of Operations
on derivative liability. A slight change in an unobservable input like volatility could have a significant impact on the fair
value measurement of the derivative liability.
Note
7 – Right of use leases assets and leases obligations
The
Company is a lessee in several non-cancelable operating leases, primarily for transportation and office spaces.
The
table below presents the operating lease assets and liabilities recognized on the balance sheets as of
March 31, 2019:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
$
|
730
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
210
|
|
|
$
|
-
|
|
Non-current operating lease liabilities
|
|
$
|
564
|
|
|
$
|
-
|
|
Total operating lease liabilities
|
|
$
|
774
|
|
|
$
|
-
|
|
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
7 – Right of use leases assets and leases obligations
(cont’d)
The
depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term.
The
Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the
discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest
rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over
the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019
for operating leases that commenced prior to that date.
The
Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of March 31, 2019 are:
|
|
March 31,
2019
|
|
Weighted average remaining lease term (years)
|
|
|
3.8
|
|
Weighted average discount rate
|
|
|
6.0
|
%
|
The
table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancelable
operating leases with terms of more than one year to the total operating lease liabilities recognized on the condensed balance sheets as of March 31, 2019:
|
|
US$
thousands
|
|
|
|
|
|
April 1, 2019 through December 31, 2019
|
|
|
271
|
|
2020
|
|
|
271
|
|
2021
|
|
|
156
|
|
2022
|
|
|
134
|
|
2023
|
|
|
112
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted future minimum lease payments
|
|
|
944
|
|
Less: portion representing imputed interest
|
|
|
(170
|
)
|
Total undiscounted future minimum lease payments
|
|
|
774
|
|
Operating
lease costs were $68,000 for the three months ended March 31, 2019. Operating lease costs are included within
general and administrative expenses on the statements of income.
Cash
paid for amounts included in the measurement of operating lease liabilities were $71,000 for the three months ended March 31,
2019, and this amount is included in operating activities in the statements of cash flows. Right-of-use
assets obtained in exchange for new operating lease liabilities were $824,000 for the three months ended March 31,
2019.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
8 - Commitments and Contingencies
A.
Securities and Exchange Commission (“SEC”) Investigation
As
previously disclosed by the Company, on June 21, 2018, Zion received a subpoena to produce documents from the Fort Worth office
of the SEC informing the Company of the existence of a non-public, fact-finding inquiry into the Company. Prior to the receipt
of the subpoena on June 21, 2018, Zion had no previous communication with the SEC on this issue and was unaware of this investigation.
The SEC stated that “the investigation and the subpoena do not mean that we have concluded that [Zion] or anyone else has
violated the law.” To date, Zion has furnished all required documents to the SEC and will continue
to fully cooperate with the investigation.
The
Company cannot predict when this matter will be resolved or what further action, if any, the SEC may take in connection with it.
B.
Litigation
Following
the commencement of the SEC investigation, on August 9, 2018, a putative class action (the “class action”) Complaint
was filed against Zion, Victor G. Carrillo, the Company’s Chief Executive Officer at such time, and Michael B. Croswell
Jr., the Company’s Chief Financial Officer (collectively, the “Defendants”) in the U.S. District Court for the
Northern District of Texas. On November 16, 2018, the Court entered an Order in the class action appointing lead plaintiffs and
approving lead counsel and on January 22, 2019, an Amended Complaint was filed. On February 1, 2019, a Corrected Amended Class
Action Complaint was filed. The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”) and Rule 10b-5 promulgated thereunder by the SEC and Section 11 of the Securities Act of 1933 (the “Securities
Act”) against all defendants and alleges violations of Section 20(a) of the Exchange Act and Section 15 of the Securities
Act against the individual defendants. The alleged class period is from February 13, 2018 through November 20, 2018. On March
13, 2019, a Motion to Dismiss Plaintiffs’ Corrected Amended Complaint was filed on behalf of Zion, Victor Carrillo and Michael
B. Croswell, Jr., pleading numerous grounds in support of their Motion to Dismiss.
By
Verified Consolidated Stockholder Derivative Complaint filed on March 4, 2019, three (3) stockholder derivative lawsuits previously
filed in federal district court in Delaware on September 10, 2018, November 1, 2018, and November 21, 2018 were consolidated into
one lawsuit filed derivatively and purportedly on behalf of the Company against Victor G. Carrillo, Michael B. Croswell, Jr.,
John M. Brown, Dustin L. Guinn, Forest A. Garb, Kent S. Siegel, Paul Oroian, William H. Avery, the Estate of Yehezkel Druckman,
Lee Russell, Justin W. Furnace, Gene Scammahorn, Ralph F. DeVore, and Martin M. van Brauman. The suit alleges breach of fiduciary
duty, unjust enrichment, violations of Section 14(a) of the Exchange Act and conspiracy to “facilitate and disguise”
other alleged wrongdoings. The “Relevant Period” of alleged wrongdoing spans from February 13, 2018 and continues
through the present. The suit seeks unspecified damages to be awarded to the Company, orders directing the Company and individual
defendants to make certain corporate governance reforms, restitution, and fees and costs. On April 18, 2019, a Motion to Dismiss
Plaintiffs’ Complaint was filed on behalf of all defendants pleading numerous grounds in support of their Motion to Dismiss.
On
September 25, 2018, another lawsuit was filed in the 68
th
district court, Dallas County, Texas derivatively and purportedly
on behalf of the Company against John M. Brown, Forrest A. Garb, Kent S. Siegel, Michael B. Croswell, Jr., Dustin L. Guinn, Victor
G. Carrillo, Paul Oroian, William H. Avery, Justin W. Furnace, Gene Scammahorn, Martin M. van Brauman, and Lee R. Russell. This
suit alleges claims for breaches of fiduciary duty and unjust enrichment against the individual defendants in connection with
certain public statements made by the Company from March 12, 2018 to May 30, 2018, and the Company as a nominal defendant. On
March 29, 2019, this lawsuit was voluntarily dismissed by Plaintiff without prejudice to its subsequent refiling.
On
October 29, 2018, Zion received a shareholder request to inspect books and records pursuant to Section 220 of the Delaware
General Corporation Law for the purpose of investigating potential corporate mismanagement and breaches of fiduciary duty in connection
with public statements made by the Company from March 12, 2018 to May 30, 2018. The Company responded to this request.
The
Company disputes the above claims and has made an advanced deposit of $500,000 to defense counsel for the cost of defending the
litigation. The Company carries insurance that is applicable to these claims. Because of the uncertainties of litigation, it is
not feasible to predict or determine the outcome of these matters, to guarantee that there will be no liability, or to reasonably
estimate any loss in excess of its coverage. However, the Company intends to pursue a vigorous defense to the claims.
From
time to time, the Company may also be subject to routine litigation, claims or disputes in the ordinary course of business. The
Company defends itself vigorously in all such matters. However, we cannot predict the outcome or effect of any of the litigation
or any other pending litigation or claims.
Zion
Oil & Gas, Inc.
Condensed
Notes to Financial Statements (Unaudited)
Note
8 - Commitments and Contingencies
(cont’d)
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 as it pertains to oil and gas activities. Mention of these older guidelines
was included in previous Zion Oil & Gas filings.
On
March 15, 2018, the Energy Ministry issued new guidelines regarding a uniform reporting manner by which the operator must submit
to the Commissioner data and materials regarding lawful exploration and production activities. The guidelines detail the timeline,
data, forms, format, media and materials (such as rock cuttings, cores, gas and oil samples) that must be submitted for seismic
and drilling activities.
The
Company believes that these new regulations are likely to continue to increase the expenditures associated with obtaining new
exploration rights and drilling new wells. The Company expects that an additional financial burden could occur as a result of
requiring cash reserves that could otherwise be used for operational purposes. In addition, these new regulations are likely to
continue to increase the time needed to obtain all of the necessary authorizations and approvals to drill and production test
exploration wells.
D.
Bank Guarantees
As
of March 31, 2019, the Company provided Israeli-required bank guarantees to various governmental bodies (approximately $1,009,000)
and others (approximately $82,000) with respect to its drilling operation in an aggregate amount of approximately $1,091,000.
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, and fixed long-term bank deposits – restricted.
E.
Risks
Market
risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes
may be the result of various factors, including interest rates, foreign exchange rates, commodity prices and/or equity prices.
In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes
in interest rates.
Foreign
Currency Exchange Rate Risks.
A portion of our expenses, primarily labor expenses and certain supplier contracts, are
denominated in New Israeli Shekels (“NIS”). As a result, we have significant exposure to the risk of fluctuating exchange
rates with the U.S. Dollar (“USD”), our primary reporting currency. During the period January 1, 2019 through March
31, 2019, the USD has fluctuated by approximately (3.1%) against the NIS (the USD has weakened relative to the NIS). By contrast,
during the period January 1, 2018 through December 31, 2018, the USD fluctuated by approximately 8.1% against the NIS (the USD
strengthened relative to the NIS). Continued weakening of the US dollar against the NIS will result in higher operating costs
from NIS denominated expenses. To date, we have not hedged any of our currency exchange rate risks, but we may do so in the future.
Interest
Rate Risk.
Our exposure to market risk relates to our cash and investments. We maintain an investment portfolio of short
term bank deposits and money market funds. The securities in our investment portfolio are not leveraged, and are, due to their
very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the
short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative
impact on the value of our investment portfolio except for reduced income in a low interest rate environment. At March 31, 2019,
we had cash, cash equivalents and short-term bank deposits, long term bank deposits, inclusive of restricted cash, of approximately
$3,135,000. The weighted average annual interest rate related to our cash and cash equivalents for the three months ended March
31, 2019 was approximately 0.13%.
The
primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest our excess cash in short-term bank deposits and money market funds that
may invest in high quality debt instruments.
Note
9 - Subsequent Events
(i)
Approximately $504,000 was collected through the Company’s DSPP program during the period April 1 through 30, 2019.
(ii)
On May 1, 2019, options to purchase 100,000 shares of Common Stock were granted to one senior office at an exercise price of $0.01
per share. The options are exercisable through May 1, 2029. However, the vesting and exercisability of these options is subject
to the following schedule: (a) 50,000 options vest on September 1, 2019 and (b) the remaining 50,000 options vest on January 1,
2020. The fair value of the options at the date of grant amounted to $55,000.