The accompanying notes are an integral part
of the unaudited interim financial statements.
The accompanying notes are an integral part of the unaudited
interim financial statements.
The accompanying notes are an integral part
of the unaudited interim financial statements.
Notes to Financial Statements (Unaudited)
Note 1 - Nature of Operations and Basis of Presentation
A. Nature of Operations
Zion Oil & Gas, Inc., a Delaware corporation
(“we,” “our,” “Zion” or the “Company”) is an oil and gas exploration company with
a history of 17 years of oil & gas exploration in Israel. As of September 30, 2017, the Company had no revenues from its oil
and gas operations.
Exploration Rights/Exploration Activities
Zion currently holds one active petroleum
exploration license onshore Israel, the Megiddo-Jezreel License, comprising approximately 99,000 acres. In December 2016,
Zion and a local Israeli construction company signed a contract for the civil works and drill site construction at the Megiddo-Jezreel
#1 (“MJ #1”) location. The site was completed in early March 2017. The drilling rig and associated equipment were
mobilized to the site, performance and endurance tested, and the MJ #1 exploratory well was spud on June 5, 2017, well ahead of
the June 30, 2017 deadline under the terms of the current license. The MJ #1 well is currently at a depth of 3,342 meters (10,965
feet) as of October 31, 2017 with a planned total depth of up to 4,500 meters (14,765 feet).
Depending on the results of the currently
drilling MJ #1 well and having adequate cash resources, multiple wells could be drilled from this pad site as several subsurface
geologic targets are reachable using directional well trajectories.
Megiddo-Jezreel Petroleum License (“MJL”)
The MJL was awarded on December 3, 2013
for a three-year primary term through December 2, 2016, with the possibility of additional one-year extensions up to an aggregate
maximum of seven years. The MJL is onshore, south and west of the Sea of Galilee.
Since late November 2016 when the State
of Israel’s Petroleum Commissioner officially approved Zion’s drilling date and license extension request, the Company
remains subject to the following key license terms:
No.
|
|
Activity Description
|
|
To be carried out by:
|
1
|
|
Begin drilling / spud well
|
|
30 June 2017
|
2
|
|
Submit final report on the results of drilling
|
|
1 November 2017
|
3
|
|
Submit a plan for continued work in the license area
|
|
1 December 2017
|
On
October
30, 2017, Zion submitted a license extension request to the Petroleum Commissioner for a three-year extension of the MJL
through December 2, 2020 with
the following key license
terms:
No.
|
|
Activity
Description
|
|
To
be carried out by:
|
1
|
|
Submit
final report on the results of drilling
|
|
31
May 2018
|
2
|
|
Submit
a plan for continued work in the license area
|
|
30
June 2018
|
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
(cont’d)
As previously disclosed, the Company
needed authorization from the Israel land Authority (the “ILA”), the formal lessor of the land to 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 land usage permission agreement
was extended up to and including December 3, 2017.
Upon the Petroleum Commissioner’s
approval of the MJL extension request, the Company will seek from the ILA a one-year extension of the surface use agreement to
December 3, 2018.
Zion’s Former Jordan Valley, Joseph,
and Asher-Menashe Licenses
On March 29, 2015, the Energy Ministry
formally approved the Company’s application to merge the southernmost portion of the Jordan Valley License into the Megiddo-Jezreel
License. The Company has plugged all of its exploratory wells (in the former Joseph and Asher-Menashe Licenses) but acknowledges
its obligation to complete the abandonment of these well sites in accordance with guidance from the Environmental Ministry and
local officials.
B. Basis of Presentation
The accompanying unaudited interim financial
statements of Zion Oil & Gas, Inc. have been prepared in accordance with accounting principles generally accepted in the United
States of America (“GAAP”) for interim financial information and with Article 8-03 of Regulation S-X. Accordingly,
they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management,
all adjustments, consisting only of normal recurring accruals necessary for a fair statement of financial position, results of
operations and cash flows, have been included. The information included in this Quarterly Report on Form 10-Q should be read in
conjunction with the financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016. The year-end balance sheet data presented for comparative purposes was derived from audited
financial statements, but does not include all disclosures required by GAAP. The results of operations for the nine months ended
September 30, 2017 are not necessarily indicative of the operating results for the year ending December 31, 2017 or for any other
subsequent interim period.
To date, the Company has not achieved a
discovery of either oil or gas in commercial quantities. The Company incurs cash outflows from operations, and all exploration
activities and overhead expenses to date have been financed by way of equity or debt financing. The recoverability of the costs
incurred to date is uncertain and dependent upon achieving significant commercial production.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 1 - Nature of Operations and Basis of Presentation
(cont’d)
The Company’s ability to continue
as a going concern is dependent upon obtaining the necessary financing to undertake further exploration and development activities
and ultimately generating profitable operations from its oil and natural gas interests in the future. The Company’s current
operations are dependent upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy
of management’s estimates of those requirements. Should those estimates be materially incorrect, the Company’s ability
to continue as a going concern may be impaired. The financial statements have been prepared on a going concern basis, which contemplates
realization of assets and liquidation of liabilities in the ordinary course of business. During the nine months ended September
30, 2017, the Company incurred a net loss of approximately $9.8 million and had an accumulated deficit of approximately $160.4 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 (See also Note 7).
Note 2 - Summary of Significant Accounting
Policies
A. Net Loss per Share
Data
Basic and diluted net loss per share of
common stock, par value $0.01 per share (“Common Stock”), is presented in conformity with ASC 260-10 “Earnings
Per Share.” Diluted net loss per share is the same as basic net loss per share, as the inclusion of
9,059,091
and 5,915,442 Common Stock equivalents in the nine-month period ended September 30, 2017 and 2016 respectively, would be
anti-dilutive.
B. Use of Estimates
The preparation of the accompanying financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to make
estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and
liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses. Such
estimates include the valuation of unproved oil and gas properties, deferred tax assets, asset retirement obligations and legal
contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates
its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions
when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets have combined
to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing
changes in the economic environment will be reflected in the financial statements in future periods.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting
Policies
(cont’d)
C. Oil and Gas Properties
and Impairment
The Company follows the full-cost method
of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil
and gas reserves, including directly related overhead costs and accrued interest on convertible debt, are capitalized.
All capitalized costs of oil and gas properties,
including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates
of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated
with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are
impaired, the amount of the impairment is included in loss from continuing operations before income taxes, and the adjusted carrying
amount of the proved properties is amortized on the unit-of-production method.
The Company’s oil and gas property
represents an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are
found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if
impairment has occurred. The amount of any impairment is charged to expense since a reserve base has not yet been established.
Impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights
or other information.
Currently, the Company has no economically
recoverable reserves and no amortization base. The Company’s unproved oil and gas properties consist of capitalized exploration
costs of $16,891,000 and $6,397,000 as of September 30, 2017, and December 31, 2016, respectively. The September 30, 2017 value
is significantly higher than the December 31, 2016 value as a result of the Company’s drilling activities since June 5,
2017.
D. Fair Value Measurements
The Company follows Accounting Standards
Codification (ASC) 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board
(FASB) Financial Staff Position (FSP) No. 157 and related guidance. Those provisions relate to the Company’s financial assets
and liabilities carried at fair value and the fair value disclosures related to financial assets and liabilities. ASC 820 defines
fair value, expands related disclosure requirements, and specifies a hierarchy of valuation techniques based on the nature of the
inputs used to develop the fair value measures. Fair value is defined as the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date, assuming the transaction
occurs in the principal or most advantageous market for that asset or liability.
There are three levels of inputs to fair
value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the
use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets
that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs.
The Company uses Level 1 inputs for its
fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement
date. The Company uses Level 2 inputs for fair value measurements whenever there are quoted prices for similar securities in an
active market or quoted prices for identical securities in an inactive market. The Company uses Level 3 inputs in the Binomial
Model used for the valuation of the derivative liability.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 2 - Summary of Significant Accounting
Policies
(cont’d)
E. Derivative Liabilities
In accordance with ASC 815-40-25 and ASC
815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the embedded derivatives associated
with the Convertible Bonds are accounted for as a liability during the term of the related Convertible Bonds (see Note 6).
F. Recently Adopted
Accounting Pronouncements
The Company does not believe that the adoption
of any recently issued accounting pronouncements in 2017 had a significant impact on our financial position, results of operations,
or cash flow.
Note 3 - Stockholders’ Equity
A. 2011 Equity Incentive
Stock Option Plan
During the nine months ended September
30, 2017, the Company granted the following non-qualified options from the 2011 Equity Incentive Plan for employees, directors
and consultants, to purchase as non-cash compensation (taxable on the date of exercise):
|
i.
|
Options to purchase
25,000 shares of Common Stock to a senior officer at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through December 31, 2026. The fair
value of the options at the date of grant amounted to approximately $34,000.
|
|
|
|
|
ii.
|
Options to purchase 1,555,000 shares of Common Stock to 23 senior officers, staff members and consultants at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 1, 2027. The fair value of the options at the date of grant amounted to approximately $2,116,000.
|
|
|
|
|
iii.
|
Options to purchase 35,000 shares of Common Stock to two senior officers at
an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 4, 2027. The fair value of the options at the date of grant amounted to approximately $48,000.
|
|
|
|
|
iv.
|
Options to purchase
20,000 shares of Common Stock to a consultant at
an
exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 11, 2027. The fair value
of the options at the date of grant amounted to approximately $27,000.
|
|
|
|
|
v.
|
Options to purchase 90,000 shares of Common Stock to five staff members at
an exercise price of $0.01 per share. The options vested upon grant and are exercisable through April 17, 2027. The fair value
of the options at the date of grant amounted to approximately $104,000.
|
|
|
|
|
vi.
|
Options to purchase
10,000 shares of Common Stock to one staff member
at
an exercise price of $0.01 per share. The options vested upon grant and are exercisable through September 1, 2027. The fair value
of the options at the date of grant amounted to approximately $35,000.
|
B. 2011 Non-Employee
Directors Stock Option Plan
During the nine months ended September
30, 2017, the Company granted the following qualified (market value) options from the 2011 Non-Employee Directors Stock Option
Plan for directors to purchase as non-cash compensation:
|
i.
|
Options to
purchase 25,000 shares of Common Stock to a new board member at an exercise price of $1.33 per share. The options vested
upon grant and are exercisable through May 1, 2023. The fair value of the options at the date of grant amounted to
approximately $10,000.
|
|
|
|
|
ii.
|
Options to purchase
400,000 shares of Common Stock to eight board members at an exercise price of $1.75 per share. The options vested upon grant
and are exercisable through June 6, 2023. The fair value of the options at the date of grant amounted to approximately
$235,000.
|
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 3 - Stockholders’ Equity
(cont’d)
C. Stock Options
The stock option transactions since January
1, 2017 are shown in the table below:
|
|
Number of
shares
|
|
|
Weighted Average
exercise price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2016
|
|
|
4,166,943
|
|
|
|
1.58
|
|
|
|
|
|
|
|
|
|
|
Changes during 2017 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others *
|
|
|
2,160,000
|
|
|
|
0.35
|
|
Expired/Cancelled/Forfeited
|
|
|
(210,000
|
)
|
|
|
2.12
|
|
Exercised
|
|
|
(1,657,500
|
)
|
|
|
0.33
|
|
Outstanding, September 30, 2017
|
|
|
4,459,443
|
|
|
|
1.42
|
|
Exercisable, September 30, 2017
|
|
|
4,459,443
|
|
|
|
1.42
|
|
* The receipt of a non-qualified stock
option grant by the grantee recipient is a non-taxable event according to the Internal Revenue Service, but the grantee who later
chooses to exercise stock options must recognize the market value in income in the year of exercise.
The following table summarizes information
about stock options outstanding as of September 30, 2017:
Shares underlying outstanding options (fully vested)
|
|
Range of
exercise price
|
|
|
Number
Outstanding
|
|
|
Weighted average
remaining contractual
life (years)
|
|
|
Weighted Average
Exercise price
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
6.12
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
6.50
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
6.70
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
4,500
|
|
|
|
7.55
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
15,000
|
|
|
|
7.85
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
8.01
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
8.25
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
355,000
|
|
|
|
8.67
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
585,000
|
|
|
|
9.25
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.26
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
80,000
|
|
|
|
9.54
|
|
|
|
0.01
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.92
|
|
|
|
0.01
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
5.58
|
|
|
|
1.33
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
3.26
|
|
|
|
1.38
|
|
|
1.38
|
|
|
|
123,057
|
|
|
|
7.26
|
|
|
|
1.38
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
4.68
|
|
|
|
1.55
|
|
|
1.67
|
|
|
|
390,000
|
|
|
|
3.01
|
|
|
|
1.67
|
|
|
1.67
|
|
|
|
458,886
|
|
|
|
7.01
|
|
|
|
1.67
|
|
|
1.70
|
|
|
|
120,000
|
|
|
|
1.22
|
|
|
|
1.70
|
|
|
1.70
|
|
|
|
298,500
|
|
|
|
5.22
|
|
|
|
1.70
|
|
|
1.73
|
|
|
|
25,000
|
|
|
|
1.28
|
|
|
|
1.73
|
|
|
1.75
|
|
|
|
400,000
|
|
|
|
5.77
|
|
|
|
1.75
|
|
|
1.86
|
|
|
|
25,000
|
|
|
|
1.18
|
|
|
|
1.86
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
4.34
|
|
|
|
1.87
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
2.51
|
|
|
|
1.95
|
|
|
1.96
|
|
|
|
25,000
|
|
|
|
1.93
|
|
|
|
1.96
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
3.59
|
|
|
|
2.03
|
|
|
2.28
|
|
|
|
25,000
|
|
|
|
1.78
|
|
|
|
2.28
|
|
|
2.61
|
|
|
|
150,000
|
|
|
|
0.18
|
|
|
|
2.61
|
|
|
2.61
|
|
|
|
681,500
|
|
|
|
4.18
|
|
|
|
2.61
|
|
|
0.01-2.61
|
|
|
|
4,459,443
|
|
|
|
|
|
|
|
1.42
|
|
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 3 - Stockholders’ Equity
(cont’d)
Granted to employees
The following table sets forth information
about the weighted-average fair value of options granted to employees and directors during the year, using the Black Scholes option-pricing
model and the weighted-average assumptions used for such grants:
|
|
For the nine months ended
September 30,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average
fair value of underlying stock at grant date
|
|
$
|
1.42
|
|
|
$
|
1.56
|
|
Dividend
yields
|
|
|
—
|
|
|
|
—
|
|
Expected
volatility
|
|
|
45%-69
|
%
|
|
|
57%-69
|
%
|
Risk-free
interest rates
|
|
|
1.45%-1.94
|
%
|
|
|
0.94%-1.76
|
%
|
Expected
lives (in years)
|
|
|
3.00-5.00
|
|
|
|
3.00-5.50
|
|
Weighted-average
grant date fair value
|
|
$
|
1.20
|
|
|
$
|
1.27
|
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
Weighted-average
fair value of underlying stock at grant date
|
|
$
|
1.36
|
|
|
$
|
1.55
|
|
Dividend
yields
|
|
|
—
|
|
|
|
—
|
|
Expected
volatility
|
|
|
68
|
%
|
|
|
70
|
%
|
%Risk-free
interest rates
|
|
|
2.36%-2.45
|
%
|
|
|
1.73
|
%
|
Expected
lives (in years)
|
|
|
10.00
|
|
|
|
10.00
|
|
Weighted-average
grant date fair value
|
|
$
|
1.36
|
|
|
$
|
1.54
|
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options.
The expected life represents the weighted
average period of time that options granted are expected to be outstanding. The expected life of the options granted to employees
and directors is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 110 (“SAB 110”), giving
consideration to the contractual term of the options and their vesting schedules, as the Company does not have sufficient historical
exercise data at this time. The expected life of the option granted to non-employees equals their contractual term. In the case
of an extension of the option life, the calculation was made on the basis of the extended life.
C. Compensation Cost
for Warrant and Option Issuances
The following table sets forth information
about the compensation cost of warrant and option issuances recognized for employees and directors:
For the nine months ended September 30,
|
2017
|
|
2016
|
US$
|
|
US$
|
2,399,000
|
|
2,621,000
|
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 3 - Stockholders’ Equity
(cont’d)
The following table sets forth information
about the compensation cost of warrant and option issuances recognized for non-employees:
For the nine months ended September 30,
|
2017
|
|
2016
|
US$
|
|
US$
|
210,000
|
|
324,000
|
The following table sets forth information
about the compensation cost of option issuances recognized for employees and capitalized to Unproved Oil & Gas properties:
For the nine months ended September 30,
|
2017
|
|
2016
|
US$
|
|
US$
|
191,000
|
|
213,000
|
D. Dividend Reinvestment
and Stock Purchase Plan (“DSPP”)
On March 27, 2014, the Company launched
its Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to which stockholders and interested investors
can purchase shares of the Company’s Common Stock as well as units of the Company’s securities. The terms of the DSPP
are described in the Prospectus Supplement originally filed on March 31, 2014 (the “Original Prospectus Supplement”)
with the Securities and Exchange Commission (“SEC”) under the Company’s effective registration Statement on Form
S-3, as thereafter amended.
On January 13, 2015, the Company amended
the Original Prospectus Supplement (“Amendment No. 3”) to provide for a unit option (the “Unit Option”)
under the DSPP comprised of one share of Common Stock and three Common Stock purchase warrants with each unit priced at $4.00.
Each warrant afforded the 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 first exercisable on
May 2, 2016 and, in the case of ZNWAB continued to be exercisable through May 2, 2017 (1 year), May 2, 2018 for ZNWAC (2 years)
and May 2, 2019 for ZNWAD (3 years), respectively, at a per share exercise price of $1.00.
As of May 2, 2017, any outstanding ZNWAB
warrants expired.
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 has the symbol “ZNWAE.” On January 30, 2017, the Company extended the Unit Program that was filed under
Amendment No. 7, dated November 1, 2016. The Unit Program continued as under Amendment No. 7, but with a revised time period.
Otherwise, the same Unit Program features, conditions and terms in the Prospectus Supplement and Amendment No. 2 applied. The
Company’s Unit Program began on November 1, 2016 and was scheduled to terminate January 31, 2017, but was extended until
March 31, 2017, when it terminated.
The ZNWAE warrants became exercisable on
May 1, 2017, which is the 31
st
day following the Unit Option Termination Date (i.e., on March 31, 2017) and continue
to be exercisable through May 1, 2020 (3 years) at a per share exercise price of $1.00. If the Company’s Common Stock trades
above $5.00 per share at the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant,
the Company has the sole discretion to terminate the warrant early upon providing 60 days advanced notice to warrant holders.
On February 23, 2017, the Company filed
a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration No. 333-193336), for which
the three year period ended March 31, 2017, along with the base Prospectus and Supplemental Prospectus. The Form S-3, as amended,
and the new base Prospectus became effective on March 10, 2017, along with the Prospectus Supplement that was filed and became
effective on March 10, 2017. The Prospectus Supplement under Registration No. 333-216191 describes the terms of the DSPP and replaces
the prior Prospectus Supplement, as amended, under the prior Registration No. 333-193336.
On May 22, 2017, the Company launched
a new unit offering (the "New Unit Program”). The New Unit Program consisted of a new combination of common stock and
warrants, a new time period in which to purchase under the program, and a new unit price, but otherwise the same unit program
features, conditions and terms in the Prospectus Supplement applied. The Company’s new unit program began on May 22,
2017 and terminated on July 12, 2017. This new Unit Option Program enabled participants to purchase Units of the Company's securities
where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing
$250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock
as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares
of Common Stock. Each warrant affords the participant the opportunity to purchase one share of the Company’s Common Stock
at a warrant exercise price of $1.00.
The warrant has the symbol “ZNWAF.”
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 3 - Stockholders’ Equity
(cont’d)
All ZNWAF warrants became exercisable on
August 14, 2017, which is the first trading day after the 31st day following the Unit Option Termination Date (i.e., on July 12,
2017) and continue to be exercisable through August 14, 2020 (3 years) at a per share exercise price of $1.00. If the Common Stock
of the Company trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration
date of the warrant, the Company has the sole discretion to provide a Notice to warrant holders of an early termination of the
warrant within sixty (60 days of the Notice.
As
of September 30, 2017, the number of outstanding warrants for each warrant issue is shown below
:
|
|
ZNWAA
|
|
|
ZNWAB
|
|
|
ZNWAC
|
|
|
ZNWAD
|
|
|
ZNWAE
|
|
|
ZNWAF
|
|
|
Total
|
|
Outstanding warrants, December 31, 2016
|
|
|
1,567,155
|
|
|
|
313,554
|
|
|
|
344,728
|
|
|
|
347,840
|
|
|
|
803,376
|
|
|
|
0
|
|
|
|
3,376,653
|
|
Exercise Price
|
|
$
|
2.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
|
|
Warrant Termination Date
|
|
|
1/31/2020
|
|
|
|
5/2/2017
|
|
|
|
5/2/2018
|
|
|
|
5/2/2019
|
|
|
|
5/1/2020
|
|
|
|
8/14/2020
|
|
|
|
|
|
Warrants
Issued
during 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,262,742
|
|
|
|
683,865
|
|
|
|
3,946,607
|
|
Warrants
Exercised
into ZN shares, during 2017
|
|
|
(27,852
|
)
|
|
|
(206,737
|
)
|
|
|
(63,020
|
)
|
|
|
(48,597
|
)
|
|
|
(983,024
|
)
|
|
|
(158,065
|
)
|
|
|
(1,487,295
|
)
|
Warrants Expired
|
|
|
|
|
|
|
(106,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(106,817
|
)
|
Outstanding warrants, September 30, 2017
|
|
|
1,539,303
|
|
|
|
0
|
|
|
|
281,708
|
|
|
|
299,243
|
|
|
|
3,083,094
|
|
|
|
525,800
|
|
|
|
5,729,148
|
|
|
|
ZNWAA
|
|
|
ZNWAB
|
|
|
ZNWAC
|
|
|
ZNWAD
|
|
|
ZNWAE
|
|
|
ZNWAF
|
|
|
Total
|
|
Outstanding warrants, June 30, 2017
|
|
|
1,561,595
|
|
|
|
0
|
|
|
|
300,912
|
|
|
|
316,637
|
|
|
|
3,706,361
|
|
|
|
163,450
|
|
|
|
6,048,955
|
|
Exercise Price
|
|
$
|
2.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
$
|
1.00
|
|
|
|
|
|
Warrant Termination Date
|
|
|
1/31/2020
|
|
|
|
5/2/2017
|
|
|
|
5/2/2018
|
|
|
|
5/2/2019
|
|
|
|
5/1/2020
|
|
|
|
8/14/2020
|
|
|
|
|
|
Warrants
Issued
during 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
520,415
|
|
|
|
520,415
|
|
Warrants
Exercised
into ZN shares, during 2017
|
|
|
(22,292
|
)
|
|
|
0
|
|
|
|
(19,204
|
)
|
|
|
(17,394
|
)
|
|
|
(623,267
|
)
|
|
|
(158,065
|
)
|
|
|
(840,222
|
)
|
Warrants Expired
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0
|
|
Outstanding warrants, September 30, 2017
|
|
|
1,539,303
|
|
|
|
0
|
|
|
|
281,708
|
|
|
|
299,243
|
|
|
|
3,083,094
|
|
|
|
525,800
|
|
|
|
5,729,148
|
|
An Amendment No. 2 to the Prospectus Supplement
(as described below) was filed on October 12, 2017.
Under Amendment No. 2, the Company’s
latest Unit Option Program began on October 16, 2017 and is scheduled to terminate on December 6, 2017. This latest Unit Option
Program enables participants to purchase Units of the Company’s securities where each Unit (priced at $250.00 each) is 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 15 shares of Common Stock. Each warrant affords the investor
or stockholder the opportunity to purchase one share of the Company’s Common Stock at a warrant exercise price of $1.00.
The warrant shall have the symbol “ZNWAG.”
The warrants will become exercisable on
January 8, 2018, which is the first trading day after the 31
st
day following the Unit Option Termination Date (i.e.,
on December 6, 2017) and continue to be exercisable through January 8, 2021 (3 years) at a per share exercise price of $1.00
For the nine months ended September 30,
2017, approximately $15,353,000 was raised under the DSPP program.
E. Warrant Descriptions
The price and the expiration dates for the series of warrants
to investors are as follows:
|
|
Period
of Grant
|
|
|
US$
|
|
|
Expiration
Date
|
|
|
|
|
|
|
|
|
|
ZNWAA Warrants
|
|
March 2013 – December 2014
|
|
|
|
2.00
|
|
|
January 31, 2020
|
ZNWAC Warrants
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2018
|
ZNWAD Warrants
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2019
|
ZNWAE Warrants
|
|
November 2016 – March 2017
|
|
|
|
1.00
|
|
|
May 01, 2020
|
ZNWAF Warrants
|
|
May 2017 – July
2017
|
|
|
|
1.00
|
|
|
August 14, 2020
|
ZNWAG Warrants
|
|
October 2017 – December 2017
|
|
|
|
1.00
|
|
|
January 8, 2021
|
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved oil and gas properties, under the full cost method,
are comprised as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
|
|
|
|
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Inventory, and other operational related costs
|
|
|
10,731
|
|
|
|
1,770
|
|
Capitalized salary costs
|
|
|
1,936
|
|
|
|
1,579
|
|
Capitalized interest costs
|
|
|
258
|
|
|
|
-
|
|
Legal costs, license fees and other preparation costs
|
|
|
3,838
|
|
|
|
3,018
|
|
Other costs
|
|
|
128
|
|
|
|
30
|
|
|
|
|
16,891
|
|
|
|
6,397
|
|
Note 5 - Senior Convertible Bonds
Rights Offering -10% Senior Convertible
Notes due May 2, 2021
On October 21, 2015, the Company filed
with the SEC a prospectus supplement for a rights offering. Under the rights offering, the Company distributed at no cost, 360,000
non-transferable subscription rights to subscribe for, on a per right basis, two 10% Convertible Senior Bonds par $100 due May
2, 2021 (the “Notes”), to persons who owned shares of the Company’s Common Stock on October 15, 2015, the record
date for the offering. Each whole subscription right entitled the participant to purchase two convertible bonds at a purchase price
of $100 per bond. Effective October 21, 2015, the Company executed a Supplemental Indenture, as issuer, with the American Stock
Transfer & Trust Company, LLC, a New York limited liability trust company (“AST”), as trustee for the Notes (the
“Indenture”).
The offering was scheduled to terminate
on January 15, 2016 but was extended to March 31, 2016. On March 31, 2016, the rights offering terminated.
On May 2, 2016, the Company issued approximately
$3,470,000 aggregate principal amount of Notes in connection with the rights offering. The Company received net proceeds of
approximately $3,334,000, from the sale of the Notes, after deducting fees and expenses of $136,000 incurred in connection with
the offering. These costs have been discounted as deferred offering costs.
The Notes contain a convertible option
that gives rise to a derivative liability, which is accounted for separately from the Notes (see below and Note 8). Accordingly,
the Notes were initially recognized at fair value of approximately $1,844,000, which represents the principal amount of $3,470,000
from which a debt discount of approximately $1,626,000 (which is equal to the fair value of the convertible option) was deducted.
During the nine months ended September
30, 2017, the Company recorded approximately $21,000 in amortization expense related to the deferred financing costs, and
approximately $189,000 in debt discount amortization, net. The Notes are governed by the terms of the Indenture. The Notes are
senior unsecured obligations of the Company and bear interest at a rate of 10% per year, payable annually in arrears on May 2 of
each year, commencing May 2, 2017. The Notes will mature on May 2, 2021, unless earlier redeemed by the Company or converted by
the holder.
Interest and principal may be paid,
at the Company’s option, in cash or in shares of the Company’s Common Stock. The number of shares for the payment
of interest in shares of Common Stock, in lieu of the cash amount, will be based on the average of the closing prices of the Company’s
Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the record date for the payment of interest; such
record date has been designated and will always be the 10
th
business day prior to the interest payment date on May
2 of each year. The number of shares for the payment of principal, in lieu of the cash amount, shall be based upon the average
of the closing price of the Company’s Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the principal
repayment date; such record date has been designated as the trading day immediately prior to the 30-day period preceding the maturity
date of May 2, 2021. Fractional shares will not be issued and the final number of shares will be rounded up to the next whole
share.
On May 2, 2017, the Company paid its annual
10% interest to its bondholders of record on April 18, 2017. The interest was paid-in-kind (“PIK”) in the form of
Common Stock. An average Zion stock price of $1.196 was determined based on the 30 trading days prior to the record date of April
18, 2017. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued 289,213
shares to the accounts of its bondholders.
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.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 5 - Senior Convertible Bonds
(cont’d)
Beginning May 3, 2018, the Company is entitled
to redeem for cash the outstanding Notes at an amount equal to the principal and accrued and unpaid interest, plus a 10% premium.
No “sinking fund” is provided for the Notes due May 2021, which means that the Company is not required to periodically
redeem or retire the Notes.
Through the nine months ended September
30, 2017, approximately 954 convertible bonds of $100 each have been converted under this offering at a conversion rate of approximately
$2.27 per share. As a result, the Company issued approximately 42,000 shares of its Common Stock during the same period.
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, net of debt discount on derivative liability of $1,626,000 on the day of issuance
|
|
$
|
1,844,000
|
|
|
$
|
1,844,000
|
|
Debt discount amortization, net
|
|
$
|
302,000
|
|
|
$
|
113,000
|
|
Bonds converted to shares
|
|
$
|
(108,000
|
)
|
|
$
|
(13,000
|
)
|
Offering cost, net
|
|
$
|
(97,000
|
)
|
|
$
|
(118,000
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
1,941,000
|
|
|
$
|
1,826,000
|
|
The Company recognized $258,000 in capitalized
interest for the nine months ended September 30, 2017. The Company recognized $231, 000 as interest expense for the year ended
December 31, 2016. On May 2, 2017, the Company paid its annual 10% interest to its bondholders of record on April 18, 2017. The
interest was paid-in-kind.
Note 6 - Derivative Liability
The Notes issued by the Company and discussed
in Note 5 contain a convertible option that gives rise to a derivative liability.
The debt instrument the Company issued
includes a make-whole provision, which provides that in the event of conversion by the investor under certain circumstances, the
issuer is required to deliver to the holder additional consideration beyond the settlement of the conversion obligation.
Because time value make-whole provisions
are not clearly and closely related to the debt host and would meet the definition of a derivative if considered freestanding,
they should be evaluated under the indexation guidance to determine whether they would be afforded the scope exception pursuant
to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded conversion feature.
The Company has measured its derivative
liability at fair value and recognized the derivative value as a current liability and recorded the derivative value on its balance
sheet. The fair value of the shares to be issued upon conversion of the Notes was recorded as a derivative liability, with the
change in the fair value recorded as a gain or loss in the accompanying statement of operations.
The valuation of the Notes was done by
using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’ terms and other parameters the Company
identified as relevant for the valuation of the Notes’ Fair Value.
The Binomial Model used the forecast of
the Company share price during the Note’s contractual term.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 6 - Derivative Liability
(cont’d)
As of September 30, 2017, the Company’s liabilities that
are measured at fair value are as follows:
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
|
|
|
|
|
|
US$
|
|
|
|
|
Fair value of derivative liability at September 30, 2017
|
|
$
|
3,562,000
|
|
|
$
|
3,562,000
|
|
|
$
|
895,000
|
|
|
$
|
895,000
|
|
Change in value of derivative liability during 2017 are as follows:
|
|
US$
|
|
|
|
|
|
Derivative liability fair value at December 31, 2016
|
|
|
895,000
|
|
Loss on derivative liability
|
|
|
2,667,000
|
|
Derivative liability fair value at September 30, 2017
|
|
|
3,562,000
|
|
The following table presents the assumptions that were used
for the model as of September 30, 2017:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Convertible Option Fair Value of approximately
|
|
$
|
3,562,000
|
|
|
$
|
895,000
|
|
Annual Risk-free Rate
|
|
|
1.73
|
%
|
|
|
1.86
|
%
|
Volatility
|
|
|
64.34
|
%
|
|
|
57.56
|
%
|
Expected Term (years)
|
|
|
3.59
|
|
|
|
4.34
|
|
Convertible Notes Face Value
|
|
$
|
3,361,700
|
|
|
$
|
3,457,100
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
3.41
|
|
|
$
|
1.37
|
|
During the nine months ended September
30, 2017, the Company recorded a loss of approximately $2,667,000 (net) within the Statements of Operations line item, (loss) gain
on derivative liability. A slight change in an unobservable input like volatility could have a significant impact on the fair value
measurement of the derivative liability.
Note 7 - Commitments and Contingencies
A. Litigation
From time to time, the Company may be subject
to routine litigation, claims, or disputes in the ordinary course of business. The Company defends itself vigorously in all such
matters. In the opinion of management, no pending or known threatened claims, actions or proceedings against the Company are expected
to have a material adverse effect on its financial position, results of operations or cash flows. However, the Company cannot predict
with certainty the outcome or effect of any such litigation or investigatory matters or any other pending litigation or claims.
There can be no assurance as to the ultimate outcome of any such lawsuits and investigations.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 7 - Commitments and Contingencies
(cont’d)
B. Environmental and
Onshore Licensing Regulatory Matters
The Company is engaged in oil and gas exploration
and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental
restoration procedures and other obligations as they relate to the drilling of oil and gas wells or the operation thereof. Various
guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries
since 2012 as it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil & Gas filings.
On May 16, 2016, the Energy Ministry
issued new guidelines for the preparation and submission of a drilling program in accordance with industry best practices or “Good
Oilfield Practice.”
On May 17, 2016, the Energy Ministry
issued new guidelines for production testing in accordance with “Good Industry Practice” detailing the applicable measures
and reporting requirements.
On June 28, 2016, the Energy Ministry
issued new guidelines for occupational health and safety practices regarding oil and gas drilling and production activities per
international norms, coupled with Israeli legal safety guidelines. These regulations focus on industry best practices in the area
of health, safety, and environmental (HS&E) factors as well as risk management. In addition, there is a new requirement to
have the Petroleum Commissioner’s approval over the safety standards which the operator seeks to apply.
The Company believes that these new regulations
are likely increase both the time and the expenditures associated with obtaining new exploration rights and drilling new wells.
C. Capitalized lease
During 2017, the Company signed a capital
lease agreement to purchase a vehicle, on which a down payment of $15,000 was paid by the Company. The lease period is for 44 months
(approximately 3.7 years, hereinafter the “lease period”) starting on March 25, 2017 and ending on October 24, 2020.
The lease bears a monthly payment in the amount of approximately NIS 4,000 (approximately $1,100) per month, at the exchange rate
in effect for the date of this report and is linked to an increase (but not a decrease) in CPI. The lease bears a purchase option
in the end of the lease period in the amount of approximately NIS 75,000 (approximately $21,000) at the exchange rate in effect
on the date of this report and is linked to an increase (but not a decrease) in CPI.
A capital lease asset and a capital lease
obligation were recognized in the Company's balance sheet in the amount of approximately $71,000, based on the fair value of the
vehicle at the starting date of the lease. The net carrying value of the capital lease asset was approximately $66,000 as of September
30, 2017. The capital lease asset is being depreciated using the straight-line method over its estimated useful life expectancy
of approximately seven years. As of September 30, 2017, the accumulated depreciation of the capital lease asset amounted to approximately
$5,000.
At September 30, 2017, future minimum payments
due under capital lease were:
|
|
US$
thousands
|
|
|
|
|
|
2017
|
|
|
5
|
|
2018
|
|
|
13
|
|
2019
|
|
|
13
|
|
2020
|
|
|
32
|
|
Less: portion representing imputed interest
|
|
|
(12
|
)
|
Capital lease obligations
|
|
|
51
|
|
The Financial Accounting Standards Board
(“FASB”) has been contemplating changes that impact capital leases. Any final changes resulting from the FASB are not
expected to have a material impact on Zion’s financial statements as it relates to the capital lease described above.
Zion Oil & Gas, Inc.
Notes to Financial Statements
Note 7 - Commitments and Contingencies
(cont’d)
D. Bank Guarantees
As of September 30, 2017, the Company
provided Israeli-required bank guarantees to various governmental bodies (approximately $1,825,000) and others (approximately
$84,000) with respect to its drilling operation in an aggregate amount of approximately $1,909,000. The (cash) funds backing these
guarantees and additional amounts added to support currency fluctuations as required by the bank are held in restricted interest-bearing
accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted.
Note 8 - Subsequent Events
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(i)
|
On October 2, 2017, the Company granted options under the 2011 Equity Incentive Plan to one employee to purchase
30,000 shares of Common Stock at an exercise price of $.01 per share. These options have vesting schedules of 10,000 shares on
each of December 31, 2017, June 30, 2018 and June 30, 2019, respectively. The options are exercisable through October 2, 2027.
The fair value of the options at the date of grant amounted to approximately $101,000.
|
|
(ii)
|
On October 2, 2017, the Company granted
options under the 2011 Equity Incentive Plan to one consultant to purchase 10,000 shares of Common Stock at an exercise price of
$.01 per share. The options vested upon grant and are exercisable through October 2, 2027. The fair value of the options at the
date of grant amounted to approximately $34,000
.
|
|
|
|
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(iii)
|
On
October 25, 2017, the Company granted options under the 2011 Equity Incentive Plan to
one consultant to purchase 12,500 shares of Common Stock at an exercise price of $.01
per share. The vesting of the aforementioned options occurs on December 31, 2017 provided
that the consultant maintains his contractual agreement with the Company through December
31, 2017. If the consultant fails to honor his existing contractual relationship through
December 31, 2017, the stock option grant will become null and void. The fair value of
the options at the date of grant amounted to approximately $31,000.
|
|
(iv)
|
Between
October 1, 2017 and October 31, 2017, approximately $1,775,000
was raised
through the Company’s DSPP Program.
|