The accompanying notes are an integral
part of the unaudited interim condensed financial statements.
The accompanying notes are an integral
part of the unaudited interim condensed financial statements.
The accompanying notes are an integral
part of the unaudited interim condensed financial statements.
The accompanying notes are an integral
part of the unaudited interim condensed financial statements.
The accompanying notes are an integral
part of the unaudited interim condensed financial statements.
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 September 30, 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, 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 three and nine months ended September 30, 2019, the Company recorded a post-impairment charge of approximately
$86,000 and $314,000, respectively. During the three and nine
months ended September 30, 2018, the Company did not record any post-impairment charges.
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.
|
|
|
|
|
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.
|
|
|
|
|
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.
|
|
|
|
|
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.
|
|
|
|
|
5.
|
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.
|
|
|
|
|
2.
|
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?
|
|
|
|
|
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?
|
Zion
commenced the data acquisition portion on the 3-D survey area consisting of 72 square kilometers focused on the eastern
portion of the Megiddo-Jezreel license. Acoustic Geophysical Services (“AGS”), our geophysical contractor,
completed mobilization in late August in which the seismic equipment was moved on location and testing completed. In
mid-September 2019 all parameter selections were approved. Following parameter selection, AGS began its seismic production
activities on September 25, 2019. Approximately 50% of the survey was completed by September 30, 2019. The remaining 50% of
the survey was completed in mid-October.
Zion has engaged Agile Seismic Processing
Services (“ASPS”), with offices located in Houston, Texas and Belgrade, Serbia, to handle the seismic data processing
and interpretation services. The geophysical dataset, which was delivered to ASPS in late October 2019, will be processed using
enhanced technologies.
Zion received a multi-year license extension
through December 2, 2020.
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 which was subsequently extended to December 2, 2020. The Company remained subject to the following updated key license
terms:
No.
|
|
Activity
Description
|
|
Execution
by:
|
1
|
|
Submit final report
on the results of drilling
|
|
31 May 2018
|
2
|
|
Submit program
for continuation of work under license
|
|
30 June 2018
|
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.
|
|
Activity
Description
|
|
Execution
by:
|
1
|
|
Submit program
for continuation of work under license
|
|
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.
|
|
Activity
Description
|
|
Execution
by:
|
1
|
|
Submit program
for continuation of work under license
|
|
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
|
|
Activity
Description
|
|
Execution
by:
|
3
|
|
Submit program
for continuation of work under license
|
|
28 February 2019
|
The continuation of work program was timely
submitted to Israel’s Petroleum Commissioner and subsequently approved.
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
|
|
Activity
description
|
|
Execution
by:
|
1
|
|
Submission of seismic
survey plan to the Commissioner and execution of an agreement with a contractor to perform
|
|
30 April 2019
|
2
|
|
Commence 3D seismic
survey in an area of approximately 50 square kilometers
|
|
1 August 2019
|
3
|
|
Transfer of field
material configuration and processed material to the Ministry pursuant to Ministry guidelines
|
|
15 December 2019
|
4
|
|
Submit interpretation
report
|
|
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 was necessary
for Zion to conduct a 3-D survey in an area of approximately 72 square kilometers. This required, among other things, extensive
permitting activities with relevant local landowners, the Israel Land Authority (“ILA”), certain authorities and others
throughout the seismic survey area and may not conclude prior to the rainy season in Israel. This in turn would result in additional
delays, as rain and mud are not conducive 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
|
|
Activity
description
|
|
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 72 square kilometers
|
|
1 April 2020
|
3
|
|
Transfer of field
material configuration and processed material to the Ministry pursuant to Ministry guidelines
|
|
15 August 2020
|
4
|
|
Submit interpretation
report
|
|
15 November, 2020
|
On May 1, 2019, Israel’s Petroleum
Commissioner granted Zion’s work program report extension.
As previously disclosed, the Company requires
authorization from 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. On July 1, 2019, an agreement was signed by the Company and the ILA by which the surface usage agreement was
extended through December 3, 2020.
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
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
and nine months ended September 30, 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 nine months ended September
30, 2019, the Company incurred a net loss of approximately $5.1 million and had an accumulated deficit of approximately $204 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 9,836,644 and 10,123,095
and 9,110,799 and 9,673,173 Common Stock equivalents in the three and nine-month periods ended September 30, 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,
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 three and nine months ended September 30, 2019, the Company recorded post-impairment charges
of approximately $86,000 and $314,000, respectively. During the three and nine months ended September 30, 2018, the Company
did not record any post-impairment charges.
Currently,
the Company has no economically recoverable reserves and no amortization base. The Company’s unproved oil and gas properties
consist of capitalized exploration costs of $8,709,000 and $6,714,000 as of September 30, 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
and non-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
and non-employees, including grants of stock options, are recognized as compensation expense in the financial statements based
on their fair values. That expense is recognized over 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.
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.
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
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.
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.
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.
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
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 September 30, 2019 and December 31, 2018, the Company
reclassified $43,000 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 nine months ended September
30, 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.
|
|
ii.
|
Options to purchase
100,000 shares of Common Stock were granted to one senior officer 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.
|
|
iii.
|
Options to purchase 100,000 shares
of Common Stock were granted to one senior officer at an exercise price of $0.01 per share. The options vested upon grant
and are exercisable through July 1, 2029. The fair value of the options at the date of grant amounted to approximately
$35,000.
|
|
iv.
|
Options to purchase
10,000 shares of Common Stock were granted to one staff member at an exercise price of $0.01 per share. The options vested
upon grant and are exercisable through September 1, 2029. The fair value of the options at the date of grant amounted to approximately
$3,000.
|
|
v.
|
Options to purchase 25,000 shares
of Common Stock were granted to one senior officer at an exercise price of $0.28 per share. The options vested upon grant
and are exercisable through September 3, 2029. The fair value of the options at the date of grant amounted to approximately
$7,000.
|
|
vi.
|
Options to purchase
215,000 shares of Common Stock were granted to 10 staff members and consultants at an exercise price of $0.01 per share. The
options vested upon grant and are exercisable through September 18, 2029. The fair value of the options at the date of grant
amounted to approximately $65,000.
|
During
the nine months ended September 30, 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.
|
|
|
|
|
iv.
|
Options to purchase 14,000 shares
of Common Stock to seven staff members at an exercise price of $0.01 per share. The options vested upon grant and are
exercisable through April 5, 2028. The fair value of the options at the date of grant amounted to approximately $62,000.
|
|
v.
|
Options to purchase
10,000 shares of Common Stock were granted to one staff member at an exercise price of $0.01 per share. The options vested
upon grant and are exercisable through September 1, 2029. The fair value of the options at the date of grant amounted to approximately
$18,000.
|
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
B. 2011 Non-Employee
Directors Stock Option Plan
During the nine months ended September
30, 2019, the Company grant 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 one board member at an exercise price of $0.28 per share. The options vested upon grant and are
exercisable through September 3, 2025. The fair value of the options at the date of grant amounted to approximately $7,000.
|
During
the nine months ended September 30, 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.
|
|
ii.
|
Options to purchase 25,000 shares
of Common Stock to one board members at an exercise price of $4.15 per share. The options vested upon grant and are exercisable
through September 3, 2025. The fair value of the options at the date of grant amounted to approximately $55,000.
|
|
iii.
|
Options to purchase
25,000 shares of Common Stock to one board members at an exercise price of $1.78 per share. The options vested upon grant
and are exercisable through September 3, 2025. The fair value of the options at the date of grant amounted to approximately
$25,000.
|
C. Stock Options
The stock option transactions since January
1, 2019 are shown in the table below:
|
|
Number of shares
|
|
|
Weighted Average exercise
price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2018
|
|
|
4,788,443
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
Changes during 2019 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others *
|
|
|
500,000
|
|
|
|
0.04
|
|
Expired/Cancelled/Forfeited
|
|
|
(410,693
|
)
|
|
|
2.06
|
|
Exercised
|
|
|
(67,500
|
)
|
|
|
0.01
|
|
Outstanding, September 30, 2019
|
|
|
4,810,250
|
|
|
|
1.19
|
|
Exercisable, September 30, 2019
|
|
|
4,760,250
|
|
|
|
1.21
|
|
*
|
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.
|
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
The following table summarizes information about stock options
outstanding as of September 30, 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
|
|
|
|
4.12
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
4.50
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
4.70
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
6.01
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
6.25
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
305,000
|
|
|
|
6.67
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
525,000
|
|
|
|
7.25
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
7.26
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
|
7.54
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
40,000
|
|
|
|
8.00
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
180,000
|
|
|
|
8.25
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
85,000
|
|
|
|
8.26
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
|
8.41
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
6,000
|
|
|
|
8.51
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
9.27
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
50,000
|
|
|
|
9.58
|
|
|
|
0.01
|
|
|
|
0.01
|
|
|
|
50,000
|
|
|
|
9.58
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
100,000
|
|
|
|
9.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.92
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
215,000
|
|
|
|
9.97
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
5.92
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
9.92
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
3.58
|
|
|
|
1.33
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
1.26
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
105,307
|
|
|
|
5.26
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
2.68
|
|
|
|
1.55
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
340,000
|
|
|
|
1.01
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
405,943
|
|
|
|
5.01
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.70
|
|
|
|
218,500
|
|
|
|
3.23
|
|
|
|
1.70
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.75
|
|
|
|
400,000
|
|
|
|
3.77
|
|
|
|
1.75
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.78
|
|
|
|
25,000
|
|
|
|
4.93
|
|
|
|
1.78
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
2.34
|
|
|
|
1.87
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
0.51
|
|
|
|
1.95
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
0.18
|
|
|
|
1.96
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
1.59
|
|
|
|
2.03
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.31
|
|
|
|
400,000
|
|
|
|
4.26
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.61
|
|
|
|
471,500
|
|
|
|
2.18
|
|
|
|
2.61
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.15
|
|
|
|
25,000
|
|
|
|
4.76
|
|
|
|
4.15
|
|
|
0.01
|
|
|
|
50,000
|
|
|
|
|
|
|
|
0.01
|
|
|
|
0.01-4.15
|
|
|
|
4,760,250
|
|
|
|
|
|
|
|
1.21
|
|
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 nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted-average fair value
of underlying stock at grant date
|
|
$
|
0.37
|
|
|
$
|
2.37
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
87%-110
|
%
|
|
|
68%-87
|
%
|
Risk-free interest rates
|
|
|
1.35%-2.53
|
%
|
|
|
2.01%-2.74
|
%
|
Expected lives (in years)
|
|
|
3.00-5.34
|
|
|
|
3.00-5.50
|
|
Weighted-average grant date fair value
|
|
$
|
0.36
|
|
|
$
|
1.61
|
|
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 nine months ended
September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Weighted-average fair value
of underlying stock at grant date
|
|
$
|
0.31
|
|
|
$
|
3.37
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
81%
|
|
|
|
73%-76
|
%
|
Risk-free interest rates
|
|
|
1.80%
|
|
|
|
2.46%-2.81
|
%
|
Expected lives (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average grant date fair value
|
|
$
|
0.30
|
|
|
$
|
3.36
|
|
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.
Zion Oil &
Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
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 September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
134
|
|
|
|
189
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
174
|
|
|
|
1,468
|
|
The following table sets forth information
about the compensation cost of warrant and option issuances recognized for non-employees:
For the three months ended September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
3
|
|
|
|
-
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
3
|
|
|
|
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 September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
—
|
|
|
|
11
|
|
|
|
|
|
|
|
|
For the nine months ended September 30,
|
|
2019
|
|
|
2018
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
—
|
|
|
|
339
|
|
As of September 30, 2019, there was approximately
$10,000 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 years 2019 and 2020.
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.
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.
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
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. Zion considers
this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On May 29, 2019, the Company extended the
termination date of the ZNWAD Warrant by one (1) year from the expiration date of May 2, 2020 to May 2, 2021. Zion considers this
warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
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.
On May 29, 2019, the Company extended the
termination date of the ZNWAE Warrant by one (1) year from the expiration date of May 1, 2020 to May 1, 2021. Zion considers this
warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
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.
On May 29, 2019, the Company
extended the termination date of the ZNWAF Warrant by one (1) year from the expiration date of August 14, 2020 to August 14,
2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this
extension.
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.”
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 launched
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.”
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity
(cont’d)
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 May 29, 2019, the Company
extended the termination date of the ZNWAH Warrant by one (1) year from the expiration date of April 2, 2020 to April 2,
2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this
extension.
On August 21, 2018, the Company initiated another Unit Option Program, and it terminated on September
26, 2018. The Unit Option Program 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 29, 2019 to
October 29, 2020.
On May 29, 2019, the Company
extended the termination date of the ZNWAJ Warrant by one (1) year from the expiration date of October 29, 2020 to October
29, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this
extension.
On December 10, 2018, the Company initiated another Unit Option Program and it terminated on January 23,
2019. The Unit Option Program 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 May 29, 2019, the Company
extended the termination date of the ZNWAK Warrant by one (1) year from the expiration date of February 25, 2020 to February
25, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this
extension.
On April 24, 2019, the Company’s most recent Unit Option Program began and it terminated on June
26, 2019, after the Company, on June 5, 2019, extended the termination date of the Unit Option Program.
The Unit Option Program consisted of Units of the Company’s securities where each Unit (priced at
$250.00 each) was 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
was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For
Plan participants who enrolled into the Unit Program with the purchase of at least one Unit and also enrolled in the separate Automatic
Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional twenty-five (25)
warrants at an exercise price of $2.00 during this Unit Option Program. The twenty-five (25) additional warrants were for enrolling
into the AMI program. Existing subscribers to the AMI were entitled to the additional twenty-five (25) warrants once, if they purchased
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 became exercisable on August
26, 2019 and continue to be exercisable through August 26, 2021 at a per share exercise price of $2.00.
For
the three and nine months ended September 30, 2019, net proceeds of approximately $3,262,000 and $8,898,000, respectively, were
raised under the DSPP program.
For
the three and nine months ended September 30, 2018, net proceeds of approximately $6,655,000 and $12,608,000, respectively,
were raised under the DSPP program.
The warrants represented by the ticker
ZNWAA are tradable on the NASDAQ market. However, all of the other warrants characterized above, in the table below, and throughout
this Form 10-Q, are not tradeable and are used internally for classification and accounting purposes only.
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
F. Warrant Descriptions
The price and the expiration dates for the series of warrants
to investors are as follows * :
|
|
|
|
Period
of Grant
|
|
US$
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
|
ZNWAA Warrants
|
|
B
|
|
March 2013 – December 2014
|
|
|
2.00
|
|
|
January 31, 2021
|
ZNWAD Warrants
|
|
A,B
|
|
January 2015 – March 2016
|
|
|
1.00
|
|
|
May 02, 2021
|
ZNWAE Warrants
|
|
B
|
|
November 2016 – March 2017
|
|
|
1.00
|
|
|
May 01, 2021
|
ZNWAF Warrants
|
|
A,B
|
|
May 2017 – July 2017
|
|
|
1.00
|
|
|
August 14, 2021
|
ZNWAG Warrants
|
|
|
|
October 2017 – December 2017
|
|
|
1.00
|
|
|
January 08, 2021
|
ZNWAH Warrants
|
|
A,B
|
|
February 2018
|
|
|
5.00
|
|
|
April 2, 2021
|
ZNWAI Warrants
|
|
A,B
|
|
April 2018 – May 2018
|
|
|
3.00
|
|
|
June 29, 2021
|
ZNWAJ Warrants
|
|
B
|
|
August 2018 – September 2018
|
|
|
1.00
|
|
|
October 29, 2021
|
ZNWAK Warrants
|
|
B
|
|
December 2018 – January 2019
|
|
|
0.01
|
|
|
February 25, 2021
|
ZNWAL Warrants
|
|
|
|
July 2019 – August 2019
|
|
|
2.00
|
|
|
August 26, 2021
|
*
|
Zion’s ZNWAB
Warrants expired on May 2, 2017, and the ZNWAC Warrants expired on May 2, 2018
|
A
|
On December 4, 2018,
the Company extended the termination date of the Warrants by one (1) year.
|
B
|
On May 29, 2019,
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.
On May 29, 2019, the Company extended
the termination date of the ZNWAI Warrant by one (1) year from the expiration date of June 29, 2020 to June 29, 2021.
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.
During the three and nine months ended September 30, 2019, no subscriptions rights were
issued, whereas during the three and nine months ended September 30, 2018, nil and 656,000 subscription rights were issued, respectively.
H. Warrant Table
The warrant transactions since January
1, 2019 are shown in the table below:
Warrants
|
|
Exercise
Price
|
|
|
Warrant Termination Date
|
|
Outstanding Balance, 12/31/18
|
|
|
Warrants Issued
|
|
|
Warrants Exercised
|
|
|
Warrants Expired
|
|
|
Outstanding Balance, 9/30/19
|
|
ZNWAA
|
|
$
|
2.00
|
|
|
01/31/2021
|
|
|
1,498,804
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
1,498,804
|
|
ZNWAD
|
|
$
|
1.00
|
|
|
05/02/2021
|
|
|
243,853
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
243,853
|
|
ZNWAE
|
|
$
|
1.00
|
|
|
05/02/2021
|
|
|
2,144,510
|
|
|
|
0
|
|
|
|
(40
|
)
|
|
|
0
|
|
|
|
2,144,470
|
|
ZNWAF
|
|
$
|
1.00
|
|
|
08/14/2021
|
|
|
359,610
|
|
|
|
0
|
|
|
|
(25
|
)
|
|
|
0
|
|
|
|
359,585
|
|
ZNWAG
|
|
$
|
1.00
|
|
|
01/08/2021
|
|
|
240,578
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
240,578
|
|
ZNWAH
|
|
$
|
5.00
|
|
|
04/19/2021
|
|
|
372,400
|
|
|
|
0
|
|
|
|
0
|
|
|
|
0
|
|
|
|
372,400
|
|
ZNWAI
|
|
$
|
3.00
|
|
|
06/29/2021
|
|
|
640,735
|
|
|
|
0
|
|
|
|
(5
|
)
|
|
|
0
|
|
|
|
640,730
|
|
ZNWAJ
|
|
$
|
1.00
|
|
|
10/29/2021
|
|
|
546,050
|
|
|
|
0
|
|
|
|
(50
|
)
|
|
|
0
|
|
|
|
546,000
|
|
ZNWAK
|
|
$
|
0.01
|
|
|
02/25/2021
|
|
|
0
|
|
|
|
673,600
|
|
|
|
(214,100
|
)
|
|
|
0
|
|
|
|
459,500
|
|
ZNWAL
|
|
$
|
2.00
|
|
|
08/26/2021
|
|
|
0
|
|
|
|
517,925
|
|
|
|
0
|
|
|
|
0
|
|
|
|
517,925
|
|
Outstanding warrants
|
|
|
|
|
|
|
|
|
6,046,540
|
|
|
|
1,191,525
|
|
|
|
(214,220
|
)
|
|
|
0
|
|
|
|
7,023,845
|
|
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved oil and gas properties, under the full cost method,
are comprised as follows:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other
operational related costs
|
|
|
1,247
|
|
|
|
1,242
|
|
Capitalized salary costs
|
|
|
1,715
|
|
|
|
1,579
|
|
Capitalized interest costs
|
|
|
858
|
|
|
|
677
|
|
Legal and seismic costs, license fees and other
preparation costs
|
|
|
4,871
|
|
|
|
3,216
|
|
Other costs
|
|
|
18
|
|
|
|
-
|
|
|
|
|
*8,709
|
|
|
|
*6,714
|
|
*
|
The unproved oil
and gas properties balance at September 30, 2019 and at December 31, 2018 contains approximately $884,000 and $2,946,000,
respectively, in unpaid amounts.
|
During the three months ended September 30, 2019 and 2018, Impairment
of unproved oil and gas properties comprised as follows:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
86
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
|
|
|
|
-
|
|
During the nine months ended September 30, 2019 and 2018, Impairment
of unproved oil and gas properties comprised as follows:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
244
|
|
|
|
-
|
|
Other costs
|
|
|
70
|
|
|
|
-
|
|
|
|
|
314
|
|
|
|
-
|
|
Changes in Unproved oil and gas properties during the nine
months ended September 30, 2019 and 2018 are as follows:
|
|
September 30,
2019
|
|
|
September 30,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
|
|
Drilling costs, and other
operational related costs
|
|
|
5
|
|
|
|
10,538
|
|
Capitalized salary costs
|
|
|
136
|
|
|
|
490
|
|
Capitalized interest costs
|
|
|
181
|
|
|
|
244
|
|
Legal and seismic costs, license fees and other
preparation costs
|
|
|
1,655
|
|
|
|
967
|
|
Other costs
|
|
|
18
|
|
|
|
149
|
|
|
|
|
*1,995
|
|
|
|
*12,388
|
|
|
·
|
Inclusive of non-cash
amounts of approximately $1,065,000 and $2,126,000 during the nine months ended September 30, 2019, and 2018, respectively.
|
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 and nine months ended
September 30, 2019, the Company recorded approximately $7,000 and 20,000, respectively, in amortization expense related to the
deferred financing costs, approximately $72,000 and $259,000, respectively, in debt discount amortization, and approximately $1,000
and $11,000, respectively, related to financing gains associated with notes converted to shares. During the three and nine months
ended September 30, 2018, the Company recorded approximately $7,000 and $20,000, respectively, in amortization expense related
to the deferred financing costs, approximately $59,000 and $220,000, respectively in debt discount amortization, and approximately
$1,000 and $85,000, respectively, related to financing expenses 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 10th 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 422,426 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 2, 2021, which means that the Company is not required
to periodically redeem or retire the Notes due May 2, 2021.
Zion Oil & Gas, Inc.
Condensed Notes to Financial Statements
(Unaudited)
Note 5 - Senior Convertible Bonds
(cont’d)
Through the three and nine months ended
September 30, 2019 approximately 16 and 138 convertible bonds of $100 each, respectively, have been converted at a conversion
rate of approximately $2.27 per share. As a result, the Company issued approximately 704 and 6,072 shares, respectively, of its
Common Stock and recorded approximately $1,000 and $11,000 in financial gains, respectively, during the same period.
Through the three and nine months
ended September 30, 2018 approximately 56 and 900 convertible bonds of $100 each, respectively, have been converted at a conversion
rate of approximately $2.27 per share. As a result, the Company issued approximately 3,000 and 40,000 shares, respectively, of
its Common Stock and recorded approximately $1,000 and $85,000 in financial expenses, respectively, during the same periods.
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, on the day
of issuance
|
|
$
|
3,470
|
|
|
$
|
3,470
|
|
Unamortized Debt discount, net
|
|
$
|
(734
|
)
|
|
$
|
(993
|
)
|
Bonds converted to shares
|
|
$
|
(217
|
)
|
|
$
|
(203
|
)
|
Offering cost, net
|
|
$
|
(43
|
)
|
|
$
|
(63
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
2,476
|
|
|
$
|
2,211
|
|
Capitalized interest for the three and
nine months ended September 30, 2019 were $143,000 and $181,000 compared to $88,000 and $244,000 for the three and nine months
ended September 30, 2018.
Interest expenses for the three and nine
months ended September 30, 2019 were $0 and $49,000 compared to $0 and $0 for the three and nine months ended September 30, 2018.
Note 6 - Derivative Liability
The Notes issued by the Company and discussed
in Note 5 contain a convertible option that gives rise to a derivative liability.
The debt instrument the Company issued
includes a make-whole provision, which provides that in the event of conversion by the investor under certain circumstances, the
issuer is required to deliver to the holder additional consideration beyond the settlement of the conversion obligation.
Because time value make-whole provisions
are not clearly and closely related to the debt host and would meet the definition of a derivative if considered freestanding,
they are evaluated under the indexation guidance to determine whether they would be afforded the scope exception pursuant to ASC
815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded conversion feature.
The Company has measured its derivative
liability at fair value and recognized the derivative value as a current liability and recorded the derivative value on its balance
sheet. Changes in the fair value recorded are recorded as a gain or loss in the accompanying statement of operations.
The valuation of the Notes was done by
using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’ terms and other parameters the Company
identified as relevant for the valuation of the Notes’ Fair Value.
The Binomial Model used the forecast of
the Company share price during the Note’s contractual term.
As of September 30, 2019, the Company’s liabilities that
are measured at fair value are as follows:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Fair value of derivative liability
|
|
|
173
|
|
|
|
173
|
|
|
|
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
|
|
Gain on derivative liability
|
|
|
(172
|
)
|
Derivative liability fair value at September 30, 2019
|
|
|
173
|
|
The following table presents the assumptions that were used
for the model as of September 30, 2019:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Convertible Option Fair Value
|
|
$
|
173,000
|
|
|
$
|
345,000
|
|
Annual Risk-free Rate
|
|
|
1.75
|
%
|
|
|
2.47
|
%
|
Volatility
|
|
|
111.58
|
%
|
|
|
115.35
|
%
|
Expected Term (years)
|
|
|
1.59
|
|
|
|
2.34
|
|
Convertible Notes Face Value
|
|
$
|
3,252,900
|
|
|
$
|
3,266,700
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
0.25
|
|
|
$
|
0.42
|
|
The
Company recognized a gain on derivative liability of $90,000 for the three months ended September 30, 2019 and a gain on derivative
liability of $172,000 for the nine months ended September 30, 2019. The Company recognized a gain on derivative liability of $3,448,000
for the three months ended September 30, 2018 and a gain on derivative liability of $882,000 for the nine months ended September
30, 2018. A slight change in an unobservable input like volatility could have a significant impact on the fair value measurement
of the derivative liability.
Note 7 - Right of use leases assets and leases obligations
The Company is a lessee in several non-cancelable
operating leases, primarily for transportation and office spaces.
The table below presents the operating
lease assets and liabilities recognized on the balance sheets as of September 30, 2019:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
$
|
639
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
224
|
|
|
$
|
-
|
|
Non-current operating lease liabilities
|
|
$
|
469
|
|
|
$
|
-
|
|
Total operating lease liabilities
|
|
$
|
693
|
|
|
$
|
-
|
|
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 September 30, 2019 are:
|
|
September 30,
2019
|
|
Weighted average remaining lease term (years)
|
|
|
3.5
|
|
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 September 30, 2019:
|
|
US$
thousands
|
|
|
|
|
|
October 1, 2019 through December 31, 2019
|
|
|
279
|
|
2020
|
|
|
228
|
|
2021
|
|
|
140
|
|
2022
|
|
|
140
|
|
2023
|
|
|
47
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted future minimum lease payments
|
|
|
834
|
|
Less: portion representing imputed interest
|
|
|
(141
|
)
|
Total undiscounted future minimum lease payments
|
|
|
693
|
|
Operating lease costs were $64,000
and $196,000 for the three and nine months ended September 30, 2019, respectively. 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 $69,000 and $208,000 for the three and nine months ended September
30, 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 $819,000 for the nine months ended September 30, 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. On April 29, 2019 Plaintiffs filed a Response to Defendants’ Motion
to Dismiss, and on May 29, 2019 Defendants filed a Reply to Plaintiffs’ Response.
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 June 3, 2019 Plaintiffs filed a Response
to Defendants’ Motion to Dismiss, and on July 3, 2019 Defendants filed a Reply to Plaintiffs’ Response.
On September 25, 2018, another lawsuit
was filed in the 68th 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 and the Company as a nominal defendant.
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. 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 alleged
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.
On August 10, 2019, Zion received two (2) additional shareholder requests from the same law firm to inspect
books and records pursuant to section 220 of the Delaware General Corporation Law for the purpose of investigating potential corporate
mismanagement and alleged breaches of fiduciary duty in connection with public statements made by the Company from February 1,
2018 to present. The Company's defense counsel has communicated with the requesting law firm and is in the process of furnishing
responsive documents.
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 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.
On April 8, 2019 the Energy Ministry issued
new procedural guidelines regarding a uniform reporting manner by which the rights holder in a license must submit a quarterly
report regarding a summary of license history, the nature, scope, location and results of the exploration work, specification of
the amounts expended for the exploration work, and the results and interpretation of the exploration work and basic data on which
these results and interpretation are based. The guidelines will be binding as from the date of submission of the report for the
third quarter 2019.
On July 18, 2019, the Energy Ministry issued a guidance document
entitled “Instructions for Submitting Guarantees with respect to Oil Rights granted pursuant to the Petroleum Law”
which states that onshore license applicants are required to deposit a base bank guarantee of $500,000. Furthermore, prior to drilling,
an onshore license holder is required to deposit an additional bank guarantee in the amount as determined by the Petroleum Commissioner
in accordance with the characteristics of the drilling and the drilling plan but no less than $250,000. The guarantee, as determined
by the Commissioner, shall be deposited with the Commissioner Office for each well separately drilled. The Petroleum Commissioner
has discretion to raise or lower those amounts or may also forfeit a Company’s existing guarantee and/or cancel a petroleum
right under certain circumstances.
In addition, new and extended insurance policy guidelines were added.
The Petroleum Commissioner may also view non-compliance with the new insurance provisions as breaching the work plan and the rights
granted and act accordingly.
The Company believes that these new
regulations are likely to result in an increase in 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 September 30, 2019, the Company
provided Israeli-required bank guarantees to various governmental bodies (approximately $1,183,000) and others (approximately
$87,000) with respect to its drilling operation in an aggregate amount of approximately $1,270,000. 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 September 30, 2019, the USD has
fluctuated by approximately 7.1% 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 September 30, 2019, we had cash, cash equivalents and
short-term bank deposits, inclusive of restricted cash, of approximately $4,642,000. The weighted average annual interest rate
related to our cash and cash equivalents for the nine months ended September 30, 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
$1,658,000 was collected through the Company’s ongoing DSPP program during the period October 1 through 31,
2019.
|