The accompanying notes are an integral
part of the unaudited interim consolidated condensed financial statements.
The accompanying notes are an integral
part of the unaudited interim consolidated condensed financial statements.
The accompanying
notes are an integral part of the unaudited interim consolidated condensed financial statements.
Consolidated 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 20
years of oil & gas exploration in Israel. As of March 31, 2020, the Company has no revenues from its oil and gas operations.
Zion maintains its corporate headquarters
in Dallas, Texas. The Company 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.
On January 24, 2020, Zion
incorporated a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning the rig and
related equipment and excess inventory, and on January 31, 2020, Zion incorporated another wholly owned subsidiary, Zion Drilling Services, Inc.,
a Delaware corporation, to act as the contractor providing such drilling services. When Zion is not using the rig for its own
exploration activities, Zion Drilling Services may contract with other operators in Israel to provide drilling services at
market rates then in effect.
Zion has the trademark “ZION DRILLING”
filed with the United States Patent and Trademark Office. Zion has the trademark filed with the World Intellectual Property Organization
in Geneva, Switzerland, pursuant to the Madrid Agreement and Protocol. In addition, Zion has the trademark filed with the Israeli
Trademark Office in Israel.
Exploration Rights/Exploration Activities
The Company currently holds one active
petroleum exploration license onshore Israel, the Megiddo-Jezreel License, comprising approximately 99,000 acres, which is
scheduled to terminate on December 2, 2020.
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 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 months ended March 31, 2020, and 2019,
the Company recorded a post-impairment charge of approximately $0 and $163,000, respectively.
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.
Consolidated 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 completed all of the land
compensation for the 3-D survey in November 2019. All land parcels and the kibbutz approved the completion of the geophysical
survey. Subsequently, the Contractor demobilized the equipment from Israel to Europe. All field data from acquisition was
delivered to Dallas, Texas and the Ministry of Energy in Israel. Additionally, the final acquisition reports from the
Contractor and Zion were delivered to the Ministry of Energy in December per the guidelines enacted in July 2019.
Zion and Agile Seismic Processing Services (“ASPS”)
are continuing to process and interpret the data set with state-of-the-art technologies allowing for comprehensive imaging at depth.
Zion’s previous 2-D data sets have been added into the 3-D volume allowing for further verification. Our estimated completion
date for the final volume is mid-May 2020 due to circumstances brought on by the coronavirus pandemic which are beyond the control
of both Zion and ASPS. While both parties are continuing to review and finalize the data, the timeframes are lengthened due to
the current work environment. Our questions from the MJ#1 well are being correlated with the 3-D data set to provide potential
solutions on a go forward basis.
Megiddo-Jezreel Petroleum License,
No. 401 (“MJL”)
The Megiddo-Jezreel License (No. 401) 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 current scheduled date of termination is December 2, 2020. The Megiddo-Jezreel License lies onshore, south
and west of the Sea of Galilee and we continue our exploration focus here as it appears to possess the key geologic ingredients
of an active petroleum system with significant exploration potential.
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:
|
1
|
|
Submit program for continuation of work under
license
|
|
28 February 2019
|
On February 24, 2019 and thereafter on
February 26, 2019 Zion submitted its proposed 2019 Work Program on the Megiddo-Jezreel License No. 401.
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 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 3D survey in an area of approximately 72 square kilometers. This required, among others, extensive permitting
activities with relevant local landowners, the ILA, certain authorities and others, and the seismic survey area may not conclude
prior to the beginning of the rainy season in Israel. This in turn would result in additional delay, as rain and mud are not conducive
to the performance of a seismic survey which includes extensive use of vibrators.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 1 - Nature of Operations, Basis of Presentation and
Going Concern (cont’d)
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 required 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.
B.
Basis of Presentation
The accompanying unaudited interim consolidated 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, 2019. The year-end balance sheet data presented for comparative purposes was derived from audited
financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months ended
March 31, 2020 are not necessarily indicative of the operating results for the year ending December 31, 2020 or for any other subsequent
interim period.
C.
Going Concern
The Company incurs cash outflows from
operations, and all exploration activities and overhead expenses to date have been financed by way of equity or debt financing.
The recoverability of the costs incurred to date is uncertain and dependent upon achieving significant commercial production.
The Company’s ability to continue
as a going concern is dependent upon obtaining the necessary financing to undertake further exploration and development activities
and ultimately generating profitable operations from its oil and natural gas interests in the future. The Company’s current
operations are dependent upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy
of management’s estimates of those requirements. Should those estimates be materially incorrect, the Company’s ability
to continue as a going concern may be impaired. The financial statements have been prepared on a going concern basis, which contemplates
realization of assets and liquidation of liabilities in the ordinary course of business. During the three months ended March 31,
2020, the Company incurred a net loss of approximately $1.61 million and had an accumulated deficit of approximately $207.4 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.
Zion Oil & Gas, Inc.
Consolidated 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 10,593,488 and 9,800,750 Common Stock equivalents
in the three-month period ended March 31, 2020 and 2019 respectively, would be anti-dilutive.
B.
Use of Estimates
The preparation of the accompanying financial
statements in conformity with accounting principles generally accepted in the United States of America requires management to
make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets
and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of revenues and expenses.
Such estimates include the valuation of unproved oil and gas properties, deferred tax assets, asset retirement obligations and
legal contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates
its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic
environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions
when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets have combined
to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined
with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing
changes in the economic environment will be reflected in the financial statements in future periods.
C. Oil and Gas Properties
and Impairment
The Company follows the full-cost method
of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil
and gas reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil and gas properties,
including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates
of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is included in loss from continuing operations before income taxes, and the adjusted
carrying amount of the proved properties is amortized on the unit-of-production method.
The Company’s oil and gas property
represents an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are
found or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if
impairment has occurred. The amount of any impairment is charged to expense since a reserve base has not yet been established.
Impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights
or other information.
During
the fourth quarter of 2018, the Company testing protocol was concluded at the Megiddo Jezreel #1 (“MJ #1”) well. The
test results confirmed that the MJ #1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result
of the above determination, in the year ended December 31, 2018, the Company recorded a non-cash impairment charge to its unproved
oil and gas properties of $30,906,000. During the three months ended March 31, 2020, and 2019, the Company recorded a post-impairment
charge of approximately $0 and $163,000, respectively (see Note 4).
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 $10,860,000 and $10,637,000 as of March 31, 2020, and December 31, 2019, respectively.
Zion Oil & Gas, Inc.
Consolidated 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.
The Company uses a three-tier fair value
hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and
liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy
requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining
fair value. The three tiers are defined as follows:
|
●
|
Level 1—Observable
inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;
|
|
●
|
Level 2—Observable
inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for
identical or similar assets and liabilities; and
|
|
●
|
Level 3—Unobservable
inputs that are supported by little or no market data, which require the Company to develop its own assumptions.
|
The Company’s
financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, are carried at historical
cost. At March 31, 2020, and December 31, 2019, the carrying amounts of these instruments approximated their fair values because
of the short-term nature of these instruments. Derivative instruments are carried at fair value, generally estimated using the
Binomial Model.
E.
Derivative Liabilities
In accordance with ASC 815-40-25 and ASC
815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the embedded derivatives associated
with the Convertible Bonds are accounted for as a liability during the term of the related Convertible Bonds (see Note 6).
F.
Stock-Based Compensation
ASC 718, “Compensation – Stock
Compensation,” prescribes accounting and reporting standards for all share-based payment transactions in which employee
services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other
equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including
grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values.
That expense is recognized over the period during which an employee is required to provide services in exchange for the award,
known as the requisite service period (usually the vesting period).
The Company accounts for stock-based compensation
issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity – Based Payments
to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever
is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based
payment transaction is determined at the earlier of performance commitment date or performance completion date.
G.
Warrants
In connection with the Dividend Reinvestment and Stock Purchase
Plan (“DSPP”) financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding
warrants are standalone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity
awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date.
Warrants issued in conjunction with the issuance of common stock are initially recorded and accounted as a part of the DSPP investment
as additional paid-in capital of the common stock issued. All other warrants are recorded at fair value and expensed over the requisite
service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements
are more fully described in Note 3, Stockholders’ Equity.
H.
Related parties
Parties are considered
to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled
by, or are under common control with the Company. Related parties also include principal owners of the Company, its management,
members of the immediate families of principal owners of the Company and its management and other parties with which the Company
may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that
one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions with related
parties are recorded at fair value of the goods or services exchanged. Zion did not have any related party transactions for the
periods covered in this report, with the exception of recurring monthly consulting fees paid to certain management personnel.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial
Statements (Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
I.
Recently Adopted Accounting Pronouncements
ASU 2016-02 and ASU 2018-01 – Leases
(Topic 842)
In February 2016, the Financial Accounting
Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”) in order to increase transparency
and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet for those leases
classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee should recognize a liability to make lease
payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term
on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018 (including interim periods within
those periods) using a modified retrospective approach and early adoption is permitted. Zion adopted ASU 2016-02 in the first
quarter of 2019. Presently, Zion has operating leases for office space in Dallas, Texas and in Caesarea, Israel plus various leases
for motor vehicles. These leases have been accounted for under ASU 2016-02 in 2019 by establishing a right-of-use asset and a
corresponding current lease liability and non-current lease liability. Zion is not subject to any loan covenants and therefore,
the increase in assets and liabilities does not have a material impact on its business.
In January 2018, the FASB issued
ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842.”
The amendments in this Update provide
an optional transition practical expedient to not evaluate under Topic 842 existing or expired land easements that were not previously
accounted for as leases under Topic 840, Leases. An entity that elects this practical expedient should evaluate new or modified
land easements under Topic 842 beginning at the date that the entity adopts Topic 842. An entity that does not elect this practical
expedient should evaluate all existing or expired land easements in connection with the adoption of the new lease requirements
in Topic 842 to assess whether they meet the definition of a lease. The Company does not have any land easements and believes
that this ASU 2018-01 has no effect on the Company.
ASU 2018-07
In June 2018, the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which simplifies
the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees,
with certain exceptions. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods
within those fiscal years. Early adoption is permitted. The adoption of ASU 2018-07 did not have any impact on the Company’s
consolidated financial statements.
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.
The Company does not believe that the
adoption of any recently issued accounting pronouncements in 2020 had a significant impact on our financial position, results
of operations, or cash flow, except for ASC Update No. 2016-02—Leases, which requires organizations to recognize lease assets
and lease liabilities on the balance sheet for 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. The Company adopted ASU 2016-02 in the first quarter of 2019. See Note 7 for more complete details on balances at
March 31, 2020, and December 31, 2019.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
J.
Depreciation and Accounting for Drilling Rig and Inventory
On March 12, 2020, Zion entered into a Purchase and Sale Agreement
with Central European Drilling kft, a Hungarian corporation, to purchase an onshore oil and gas drilling rig, drilling pipe, related
equipment and excess inventory for a purchase price of $5.6 million in cash, subject to acceptance testing and potential downward
adjustment. We remitted to the Seller $250,000 on February 6, 2020 as earnest money towards the purchase price. The Closing anticipated
by the Agreement also took place on March 12, 2020 by the Seller’s execution and delivery of a Bill of Sale to us. On March
13, 2020, the Seller retained the earnest money deposit, and the Company remitted $4,350,000 to the seller towards the purchase
price and $1,000,000 (the “Holdback Amount”) was deposited in escrow with American Stock Transfer and Trust Company
LLC, as escrow agent, through July 10, 2020, or as extended by mutual agreement of the parties, pending a determination, if any,
by us of any operating deficiency in the drilling rig. Should we determine in our sole opinion that the drilling rig is not in
satisfactory operating condition, then upon notice to the Seller, we and the Seller shall jointly determine if the operating deficiencies
identified by us existed prior to the closing of the transaction. If it is determined that these deficiencies existed prior to
the closing, then the Seller will undertake to cure the deficiencies within a reasonable time period. If the Seller is unable or
unwilling to cure the deficiencies within the time period agrees to between the parties, we may solicit third party bids to repair
the deficiencies and the cost thereof shall be paid out of the Holdback Amount.
The Drilling Rig will be imported into
Israel from Romania, where the Drilling Rig is currently stored. The State of Israel has imposed travel restrictions relating
to the Coronavirus outbreak, including a requirement that any person arriving into Israel, including the operating crew for the
Drilling Rig, will need to undergo a two week quarantine. In addition, the ports of entry into Israel through which the Drilling
rig will need to enter, may be undergoing work disruptions on account of the virus outbreak. Accordingly, it is not possible at
the present time to accurately estimate the time or resources that may be necessary to import the Drilling Rig onto the well site
or any delay arising as a consequence of the outbreak.
Since the rig was purchased and closed during
March 2020, it is sound accounting practice for this purchase to be recorded on Zion’s books as a long term fixed asset.
The full purchase price of the drilling rig was $5.6 million, inclusive of approximately $900,000 in spare parts inventory (“spare
parts” or “inventory”). The value of the inventory is contained inside the drilling rig and inventory account
on the balance sheet and not broken out separately. However, only $4,600,000 of the purchase price is charged to the drilling rig
and inventory account. The remaining $1,000,000 represents funds held in escrow until the rig undergoes acceptance testing in Israel.
This $1,000,000 is presently on our books as a fixed short term escrow deposit.
In accordance with GAAP accounting rules, per the matching principle,
monthly depreciation will be recorded beginning in the month that the asset is “placed in service.” The expectation
at this point in time is that this date would be sometime in Q3 2020 (however, this is subject to change given the coronavirus
pandemic and other logistical factors). Due to the high quality of the I-35 drilling rig (the rig Zion purchased), we believe that
the useful life is 10 years. Furthermore, we believe that straight-line depreciation is the best GAAP accounting method that most
appropriately reflects the matching principle.
As mentioned previously, there is approximately
$900,000 worth of consumable inventory included in the rig purchase. When the drilling rig and inventory items arrive at the Israeli
port or perhaps later at the well site, it is expected that there will be a verification/count of the inventory. Any such physical
documentation of such count(s) will be obtained and saved in our files. Zion will also plan to obtain a physical count of the
inventory at the end of each quarter, or as close to such date as practical, in accordance with our normal inventory procedures.
Zion will use the First In First Out (“FIFO”)
method of accounting for the inventory, meaning that the earliest items purchased will be the first item charged to the well in
which the inventory gets consumed.
Zion expects the useful life of the rig
to be 10 years. The depreciation method used will be straight line. It is also noteworthy that various components and systems
on the rig will be subject to certifications by the manufacturer to ensure that the rig is maintained at optimal levels. Per standard
practice in upstream oil and gas, each certification performed on our drilling rig increases the useful life of the rig by five
years. The costs of each certification will be added to the drilling rig account and our straight-line amortization will be adjusted
accordingly.
Note 3 - Stockholders’ Equity
A. 2011 Equity Incentive
Stock Option Plan
During the three months ended March 31,
2020, 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
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 6, 2030. The fair value of the options at the date of grant amounted to approximately
$57,000.
|
During the three months ended March 31,
2019, the Company granted the following options from the 2011 Equity Incentive Plan for employees, directors and consultants,
to purchase as non-cash compensation (the exercise of penny stock options are taxable 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
$10,000.
|
B. 2011 Non-Employee
Directors Stock Option Plan
During
the three months ended March 31, 2020, and 2019, the Company did not grant any qualified (market value) options from the 2011
Non-Employee Directors Stock Option Plan to its directors.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
C. Stock Options
The stock option transactions since January
1, 2020 are shown in the table below:
|
|
Number
of
shares
|
|
|
Weighted
Average
exercise
price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2019
|
|
|
5,195,250
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Changes during 2020 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others *
|
|
|
110,000
|
|
|
|
0.01
|
|
Expired/Cancelled/Forfeited
|
|
|
(25,000
|
)
|
|
|
0.01
|
|
Exercised
|
|
|
(387,500
|
)
|
|
|
0.01
|
|
Outstanding, March 31, 2020
|
|
|
4,892,750
|
|
|
|
1.19
|
|
Exercisable, March 31, 2020
|
|
|
4,892,750
|
|
|
|
1.19
|
|
*
|
The receipt of a
stock option grant by the grantee recipient is a non-taxable event according to the Internal Revenue Service. The grantee
who later chooses to exercise penny stock options must recognize the market value in income in the year of exercise.
|
The following table summarizes information about stock options
outstanding as of March 31, 2020:
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
|
|
|
|
10,000
|
|
|
|
3.62
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
4.20
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
20,000
|
|
|
|
6.17
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
130,000
|
|
|
|
6.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
|
7.04
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
40,000
|
|
|
|
7.50
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
97,500
|
|
|
|
7.75
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
7.76
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
|
7.91
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
6,000
|
|
|
|
8.01
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
8.77
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
50,000
|
|
|
|
9.08
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
95,000
|
|
|
|
9.25
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.42
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
205,000
|
|
|
|
9.46
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
435,000
|
|
|
|
9.63
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
85,000
|
|
|
|
9.76
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.16
|
|
|
|
340,000
|
|
|
|
5.69
|
|
|
|
0.16
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.16
|
|
|
|
150,000
|
|
|
|
9.69
|
|
|
|
0.16
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.18
|
|
|
|
25,000
|
|
|
|
5.67
|
|
|
|
0.18
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
5.42
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
9.42
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
3.07
|
|
|
|
1.33
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
108,000
|
|
|
|
0.76
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
105,307
|
|
|
|
4.76
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.55
|
|
|
|
400,000
|
|
|
|
2.18
|
|
|
|
1.55
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
340,000
|
|
|
|
0.50
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
405,943
|
|
|
|
4.51
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.70
|
|
|
|
218,500
|
|
|
|
2.72
|
|
|
|
1.70
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.75
|
|
|
|
400,000
|
|
|
|
3.27
|
|
|
|
1.75
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.78
|
|
|
|
25,000
|
|
|
|
4.43
|
|
|
|
1.78
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.87
|
|
|
|
25,000
|
|
|
|
1.84
|
|
|
|
1.87
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.95
|
|
|
|
25,000
|
|
|
|
0.01
|
|
|
|
1.95
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
1.08
|
|
|
|
2.03
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.31
|
|
|
|
400,000
|
|
|
|
3.76
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.61
|
|
|
|
471,500
|
|
|
|
1.68
|
|
|
|
2.61
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.15
|
|
|
|
25,000
|
|
|
|
4.26
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01-4.15
|
|
|
|
4,892,750
|
|
|
|
|
|
|
|
1.19
|
|
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
Granted to employees
The following table sets forth information
about the weighted-average fair value of options granted to employees and directors during the year, using the Black Scholes option-pricing
model and the weighted-average assumptions used for such grants:
|
|
For the three months ended
March
31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
0.52
|
|
|
$
|
0.42
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
103
|
%
|
|
|
87
|
%
|
Risk-free interest rates
|
|
|
1.61
|
%
|
|
|
2.53
|
%
|
Expected lives (in years)
|
|
|
5.00
|
|
|
|
5.00
|
|
Weighted-average grant date fair value
|
|
$
|
0.51
|
|
|
$
|
0.41
|
|
Granted to non-employees
The following table sets forth information
about the weighted-average fair value of options granted to non-employees during the year, using the Black Scholes option-pricing
model and the weighted-average assumptions used for such grants:
|
|
For the three months ended
March
31 ,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
—
|
|
|
$
|
—
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
—
|
|
|
|
—
|
|
Risk-free interest rates
|
|
|
—
|
|
|
|
—
|
|
Expected lives (in years)
|
|
|
—
|
|
|
|
—
|
|
Weighted-average grant date fair value
|
|
$
|
—
|
|
|
$
|
—
|
|
The risk-free interest rate is based on
the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options.
The expected life represents the weighted
average period of time that options granted are expected to be outstanding. The expected life of the options granted to employees
and directors is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 110 (“SAB 110”), giving
consideration to the contractual term of the options and their vesting schedules, as the Company does not have sufficient historical
exercise data at this time. The expected life of the option granted to non-employees equals their contractual term. In the case
of an extension of the option life, the calculation was made on the basis of the extended life.
D. Compensation
Cost for Warrant and Option Issuances
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for employees and
directors:
For the three months ended
March 31,
|
|
2020
|
|
|
2019
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
56
|
|
|
|
15
|
|
The following table sets forth information
about the compensation cost of warrant and option issuances recognized for non-employees:
For the three months ended
March 31,
|
|
2020
|
|
|
2019
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
—
|
|
|
|
—
|
|
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
The following table sets forth information
about the compensation cost of option issuances recognized for employees and non-employees and capitalized to Unproved Oil &
Gas properties:
For the three months ended
March 31,
|
|
2020
|
|
|
2019
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
—
|
|
|
|
—
|
|
E. Dividend Reinvestment
and Stock Purchase Plan (“DSPP”)
On March 27, 2014, we launched our 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 ZNWAB warrants first became
exercisable on May 2, 2016 and, in the case of ZNWAC on May 2, 2017 and in the case of ZNWAD on May 2, 2018, at a per share
exercise price of $1.00.
As of May 2, 2017, any outstanding ZNWAB
warrants expired.
As of May 2, 2018, any outstanding ZNWAC
warrants expired.
On 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.”
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial
Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
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.
An Amendment No. 2 to the Prospectus Supplement
(as described below) was filed on October 12, 2017.
Under Amendment No. 2, 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.”
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.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity
(cont’d)
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.
On December 9, 2019 Zion filed an Amendment No. 1 to the Registration
Statement on Form S-1 (File No. 333-235299) solely for the purpose of re-filing a revised Exhibit 5.1 to the Registration Statement.
This Amendment No. 1 does not modify any provision of the prospectus that forms a part of the Registration Statement and accordingly,
such prospectus has not been included herein.
For the three months ended March 31, 2020,
and 2019, approximately $9,109,000, and $2,528,000 was raised under the DSPP program, respectively.
The company raised approximately $1,404,000
from the period April 1, 2020 through May 6, 2020, 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-K, are not tradeable and are used internally for classification and accounting purposes only.
F.
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 (each “Right” and collectively, the “Rights”)
to purchase 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
Subscription 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 exercised or subscribed 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.
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
The 2018 Subscription Rights Offering terminated on May 31,
2018. The Company raised net proceeds of approximately $3,038,000, from the subscription of Rights, after deducting fees and expenses
of $243,000 incurred in connection with the rights offering.
G.
Warrants Extended
On December 4, 2018, the Company
executed an Amendment to certain Warrant Agent Agreements (the “Agreements”) between the Company and American Stock
Transfer & Trust Company (“AST”). The Company has implemented Agreements with AST as the Company’s
Warrant Agent (the “Warrant Agent”), under a Warrant Agent Agreement dated February 2, 2015 for the Warrant ZNWAD,
under a Warrant Agent Agreement dated February 1, 2018 for the Warrant ZNWAH, under a Warrant Agent Agreement dated April 2, 2018
for the Warrant ZNWAI and under a Warrant Agent Agreement dated August 21, 2018 for the Warrant ZNWAJ.
The Warrant ZNWAD had an expiration date
of May 2, 2019, the Warrant ZNWAH had an expiration date of April 19, 2019, the Warrant ZNWAI had an expiration date of June 29,
2019 and the Warrant ZNWAJ had an expiration date of October 29, 2019.
Pursuant to Section 3.2 of the Warrant
Agent Agreements, the Company in its sole discretion extended the termination date of the above Warrants by delaying the Expiration
Dates and such extension shall be identical in duration among all of the Warrants. The Company extended the duration of the Warrant
ZNWAD by one (1) year from the expiration date of May 2, 2019 to May 2, 2020. The Company extended the duration of the Warrant
ZNWAH by one (1) year from the expiration date of April 19, 2019 to April 19, 2020. The Company extended the duration of the Warrant
ZNWAI by one (1) year from the expiration date of June 29, 2019 to June 29, 2020. The Company extended the duration of the Warrant
ZNWAJ by one (1) year from the expiration date of October 29, 2019 to October 29, 2020.
On May 29, 2019, the Company executed an Amendment to certain
Warrant Agent Agreements (the “Agreements”) between the Company and American Stock Transfer& Trust Company, (“AST”).
The Company has implemented Agreements with AST as the Company’s Warrant Agent (the “Warrant Agent”), under a
Warrant Agent Agreement dated August 1, 2014 for the Warrant ZNWAA, under a Warrant Agent Agreement dated November 1, 2016 for
the Warrant ZNWAE, under a Warrant Agent Agreement dated May 22, 2017 for the Warrant ZNWAF, and under the Warrant Agent Agreement
dated December 7, 2018 for the warrant ZNWAK.
The Warrant ZNWAA has an expiration date
of January 31, 2020, Warrant ZNWAD has an has an expiration date of May 2, 2020, Warrant ZNWAE has an expiration date of May 1,
2020, Warrant ZNWAF has an expiration date of August 14, 2020, Warrant ZNWAH has an expiration date of April 19, 2020, Warrant
ZNWAI has an expiration date of June 29, 2020, Warrant ZNWAJ has an expiration date of October 29, 2020 and the Warrant ZNWAK
has an expiration date of February 25, 2020.
Pursuant to Section 3.2 of the Warrant Agent Agreements, on
May 29, 2019, the Company in its sole discretion extended the duration of the above Warrants by delaying the Expiration Dates and
such extension shall be identical in duration among all of the Warrants. The Company extended the duration of the Warrant ZNWAA
by one (1) year from the expiration date of January 31, 2020 to January 31, 2021. The Company extended the duration of the Warrant
ZNWAD by one (1) year from the expiration date of May 2, 2020 to May 2, 2021. The Company extended the duration of the Warrant
ZNWAE by one (1) year from the expiration date of May 1, 2020 to May 1, 2021. The Company extended the duration of the Warrant
ZNWAF by one (1) year from the expiration date of August 14, 2020 to August 14, 2021.The Company extended the duration of the Warrant
ZNWAH by one (1) year from the expiration date of April 19, 2020 to April 19, 2021. The Company extended the duration of the Warrant
ZNWAI by one (1) year from the expiration date of June 29, 2020 to June 29, 2021. The Company extended the duration of the Warrant
ZNWAJ by one (1) year from the expiration date of October 29, 2020 to October 29, 2021. The Company extended the duration of the
Warrant ZNWAK by one (1) year from the expiration date of February 25, 2020 to February 25, 2021.
H.
Warrant Table
The warrants balances at December 31, 2019 and transactions since January
1, 2020 are shown in the table below:
Warrants
|
|
Exercise
Price
|
|
|
Warrant Termination Date
|
|
Outstanding Balance, 12/31/2019
|
|
|
Warrants
Issued
|
|
|
Warrants Exercised
|
|
|
Warrants Expired
|
|
|
Outstanding Balance, 03/31/2020
|
|
ZNWAA
|
|
$
|
2.00
|
|
|
01/31/2021
|
|
|
1,498,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,498,804
|
|
ZNWAD
|
|
$
|
1.00
|
|
|
05/02/2021
|
|
|
243,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243,853
|
|
ZNWAE
|
|
$
|
1.00
|
|
|
05/02/2021
|
|
|
2,144,470
|
|
|
|
-
|
|
|
|
(196
|
)
|
|
|
-
|
|
|
|
2,144,274
|
|
ZNWAF
|
|
$
|
1.00
|
|
|
08/14/2021
|
|
|
359,585
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
359,585
|
|
ZNWAG
|
|
$
|
1.00
|
|
|
01/08/2021
|
|
|
240,578
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240,578
|
|
ZNWAH
|
|
$
|
5.00
|
|
|
04/19/2021
|
|
|
372,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
372,400
|
|
ZNWAI
|
|
$
|
3.00
|
|
|
06/29/2021
|
|
|
640,730
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
640,730
|
|
ZNWAJ
|
|
$
|
1.00
|
|
|
10/29/2021
|
|
|
546,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
546,000
|
|
ZNWAK
|
|
$
|
0.01
|
|
|
02/25/2021
|
|
|
457,725
|
|
|
|
-
|
|
|
|
(6,250
|
)
|
|
|
-
|
|
|
|
451,475
|
|
ZNWAL
|
|
$
|
2.00
|
|
|
08/26/2021
|
|
|
517,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517,925
|
|
Outstanding warrants
|
|
|
|
|
|
|
|
|
7,022,070
|
|
|
|
-
|
|
|
|
(6,446
|
)
|
|
|
-
|
|
|
|
7,015,624
|
|
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial
Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
I.
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.
|
Note 4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved oil and gas properties, under the full cost method,
are comprised as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
1,227
|
|
|
|
1,227
|
|
Capitalized salary costs
|
|
|
1,805
|
|
|
|
1,759
|
|
Capitalized interest costs
|
|
|
1,010
|
|
|
|
990
|
|
Legal and seismic costs, license fees and other preparation costs
|
|
|
6,786
|
|
|
|
6,636
|
|
Other costs
|
|
|
32
|
|
|
|
25
|
|
|
|
|
10,860
|
|
|
|
10,637
|
|
Impairment of unproved oil and gas properties comprised as
follows:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
-
|
|
|
|
142
|
|
Other costs
|
|
|
-
|
|
|
|
21
|
|
|
|
|
-
|
|
|
|
163
|
|
Changes in Unproved oil and gas properties during the three
months ended March 31, 2020 and 2019 are as follows:
|
|
March 31,
2020
|
|
|
March 31,
2019
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
-
|
|
|
|
-
|
|
Capitalized salary costs
|
|
|
46
|
|
|
|
46
|
|
Capitalized interest costs
|
|
|
20
|
|
|
|
10
|
|
Legal costs, license fees and other preparation costs
|
|
|
150
|
|
|
|
128
|
|
Other costs
|
|
|
7
|
|
|
|
2
|
|
|
|
|
*223
|
|
|
|
*186
|
|
*
|
Inclusive
of non-cash amounts of approximately $77,000, and $597,000 during the three months ended March 31, 2020, and 2019, respectively
|
Zion Oil & Gas, Inc.
Consolidated 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 convertible bonds or “Notes” in connection with the rights offering. The Company
received net proceeds of approximately $3,334,000, from the issuance of the Notes, after deducting fees and expenses of $136,000
incurred in connection with the offering. These costs have been discounted as deferred offering costs.
The Notes contain a convertible option
that gives rise to a derivative liability, which is accounted for separately from the Notes (see below and Note 6). Accordingly,
the Notes were initially recognized at fair value of approximately $1,844,000, which represents the principal amount of $3,470,000
from which a debt discount of approximately $1,626,000 (which is equal to the fair value of the convertible option) was deducted.
During the three months ended March 31,
2020 and 2019, the Company recorded approximately $6,000 and $6,000, respectively, in amortization expense related to the deferred
financing costs, approximately$116,000 and $93,000, respectively, in debt discount amortization net, and approximately $4,000
and $1,000, respectively, related to financing gains 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 4, 2020, the Company paid its annual 10% interest
to its bondholders of record on April 20, 2020. The interest was paid-in-kind (“PIK”) in the form of Common Stock.
An average of the Company stock price of $0.182 was determined based on the 30 trading days prior to the record date of April 20,
2020. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued 1.781,504 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.
Consolidated Condensed Notes to Financial
Statements (Unaudited)
Note
5 - Senior Convertible Bonds (cont’d)
Through the three months ended March 31,
2020 and 2019, approximately 39 and 10 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 1,700 and 440 shares of its Common Stock during
the same period, respectively, and recorded approximately $4,000 and $1,000 in financial income during the same period.
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, on the day
of issuance
|
|
$
|
3,470
|
|
|
$
|
3,470
|
|
Unamortized Debt discount, net
|
|
$
|
(523
|
)
|
|
$
|
(639
|
)
|
Bonds converted to shares
|
|
$
|
(224
|
)
|
|
$
|
(221
|
)
|
Offering cost, net
|
|
$
|
(30
|
)
|
|
$
|
(36
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
2,693
|
|
|
$
|
2,574
|
|
Capitalized interest for the three months
ended March 31, 2020 and 2019, was $20,000 and $10,000, respectively.
Interest expenses for the three months ended March 31, 2020
and 2019, was $61,000 and $71,000, respectively.
Note 6 - Derivative Liability
The Notes issued by the Company and discussed
in Note 5 contain a convertible option that gives rise to a derivative liability.
The debt instrument the Company issued
includes a make-whole provision, which provides that in the event of conversion by the investor under certain circumstances, the
issuer is required to deliver to the holder additional consideration beyond the settlement of the conversion obligation.
Because time value make-whole provisions
are not clearly and closely related to the debt host and would meet the definition of a derivative if considered freestanding,
they are evaluated under the indexation guidance to determine whether they would be afforded the scope exception pursuant to ASC
815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded conversion feature.
The Company has measured its derivative
liability at fair value and recognized the derivative value as a current liability and recorded the derivative value on its balance
sheet. Changes in the fair value recorded are recorded as a gain or loss in the accompanying statement of operations.
The valuation of the Notes was done by
using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’ terms and other parameters the Company
identified as relevant for the valuation of the Notes’ Fair Value.
The Binomial Model used the forecast of
the Company share price during the Note’s contractual term.
As
of March 31, 2020, the Company’s liabilities that are measured at fair value are as follows:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Fair value of derivative liability
|
|
|
113
|
|
|
|
113
|
|
|
|
129
|
|
|
|
129
|
|
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial
Statements (Unaudited)
Note 6 - Derivative Liability (cont’d)
Change in value of the derivative liability during 2020 is
as follows:
|
|
US$
thousands
|
|
|
|
|
|
Derivative liability fair value at December 31, 2019
|
|
|
129
|
|
Gain on derivative liability
|
|
|
(16
|
)
|
Derivative liability fair value at March 31, 2020
|
|
|
113
|
|
The
following table presents the assumptions that were used for the model as of March 31, 2020:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Convertible Option Fair Value of approximately
|
|
$
|
113,000
|
|
|
$
|
129,000
|
|
Annual Risk-free Rate
|
|
|
0.17
|
%
|
|
|
1.59
|
%
|
Volatility
|
|
|
115.23
|
%
|
|
|
121.68
|
%
|
Expected Term (years)
|
|
|
1.09
|
|
|
|
1.34
|
|
Convertible Notes Face Value
|
|
$
|
3,245,600
|
|
|
$
|
3,249,500
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
$
|
0.17
|
|
|
$
|
0.17
|
|
During the three months ended March 31,
2020, and 2019, the Company recorded unrealized gains (losses) of approximately $16,000, net, and ($378,000), net, respectively,
within the Statements of Operations on derivative liability. A slight change in an unobservable input like volatility could have
a significant impact on the fair value measurement of the derivative liability.
Note 7 – Right of use leases
assets and leases obligations
The Company is a lessee in several non-cancelable
operating leases, primarily for transportation and office spaces.
The
table below presents the operating lease assets and liabilities recognized on the balance sheets as of March 31, 2020:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
$
|
582
|
|
|
$
|
634
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
240
|
|
|
$
|
239
|
|
Non-current operating lease liabilities
|
|
$
|
377
|
|
|
$
|
450
|
|
Total operating lease liabilities
|
|
$
|
617
|
|
|
$
|
689
|
|
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to
Financial Statements (Unaudited)
Note 7 – Right of use leases assets and leases obligations
(cont’d)
The depreciable lives of operating lease
assets and leasehold improvements are limited by the expected lease term.
The Company’s leases generally do
not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring
operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur
at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within
a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that
commenced prior to that date.
The Company’s weighted average remaining
lease term and weighted average discount rate for operating leases as of March 31, 2020 are:
|
|
March 31,
2020
|
|
Weighted average remaining lease term (years)
|
|
|
3.1
|
|
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 consolidated condensed balance sheets as of March 31,
2020:
|
|
US$
thousands
|
|
|
|
|
|
April 1, 2020 through December 31, 2020
|
|
|
267
|
|
2021
|
|
|
158
|
|
2022
|
|
|
137
|
|
2023
|
|
|
114
|
|
2024
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted future minimum lease payments
|
|
|
676
|
|
Less: portion representing imputed interest
|
|
|
(49
|
)
|
Total undiscounted future minimum lease payments
|
|
|
617
|
|
Operating lease costs were $61,000
and $68,000 for the three months ended March 31, 2020, and 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 was $67,000 and $71,000 for the three months ended March 31, 2020, and 2019,
respectively, 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 $0 and $824,000 for the three months ended March 31,
2020 and 2019, respectively.
Zion Oil & Gas, Inc.
Consolidated 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. On March 4, 2020, the Court granted Defendants’
Motion and dismissed all claims granting Plaintiffs leave to amend. On March 30, 2020, the Lead Plaintiffs voluntarily dismissed
the Class Action with prejudice as to the Company and all other defendants.
The Company disputed the above claims and made an advance deposit
of $500,000 in 2018 to defense counsel for the cost of defending the litigation. The Company carries insurance that is applicable
to these claims. As of March 31, 2020, the Company is owed $140,000 from its defense counsel pertaining to the above legal claims.
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. Following discussion with counsel to
the shareholder, the Company’s counsel produced materials responsive to the shareholders’ request in January 2020.
On February 12, 2020, by letter to Zion’s
Board of Directors, one of the shareholders making the August 10, 2019 request demanded that the Board investigate, address, remedy,
and commence proceedings against certain of the Company’s current and former officers and directors for alleged breaches
of fiduciary duties, violations of section 10(b) and 20(a) of the Exchange Act, waste of corporate assets, unjust enrichment,
and violations of all other applicable laws. The shareholder alleges wrongdoing in connection with public statements made
by the Company from February 1, 2018 regarding the Company’s oil and gas exploration activities, the Company’s accounting
and disclosure of expenses, and the Board’s oversight of operations. The Board has hired an outside firm to investigate
the claims made against certain of the Company’s current and former officers and directors.
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.
C. Recent Market Conditions – Coronavirus Pandemic
During March 2020, a global pandemic was
declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”).
The pandemic has significantly impacted the economic conditions in the United States, with accelerated effects in February and
March, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United
States and world economies. In the interest of public health and safety, jurisdictions (international, national, state and local)
where we have operations, required workforces to work from home. As of the date of this report, our employees are working from
home. However, while there are various uncertainties to navigate, the Company’s business activities are continuing. The situation
is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether,
when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or
work from home arrangements.
Zion Oil & Gas, Inc.
Consolidated
Condensed Notes to Financial Statements (Unaudited)
Note 8 - Commitments and Contingencies (cont’d)
The full extent of COVID-19’s impact
on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the
duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning
the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
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 clean-up 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 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 March 31, 2020, the Company provided
Israeli-required bank guarantees to various governmental bodies (approximately $1,009,000) and others (approximately $84,000)
with respect to its drilling operation in an aggregate amount of approximately $1,093,000. The Company also paid $1,000,000 to
its escrow agent with respect to the purchase of a drilling rig in March 2020. The (cash) funds backing these guarantees are held
in restricted interest-bearing accounts and are reported on the Company’s balance sheets as fixed short-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, 2020 through March 31, 2020, the USD has fluctuated
by approximately 3.2% against the NIS (the USD has strengthened relative to the NIS). By contrast, during the period January 1,
2019 through December 31, 2019, the USD fluctuated by approximately 7.8% against the NIS (the USD weakened relative to the NIS).
Continued strengthening of the US dollar against the NIS will result in lower operating costs from NIS denominated expenses. To
date, we have not hedged any of our currency exchange rate risks, but we may do so in the future.
Interest Rate Risk. Our exposure
to market risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money
market funds. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject
to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments,
we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment
portfolio except for reduced income in a low interest rate environment. At March 31, 2020, we had cash, cash equivalents and short-term
bank deposits of approximately $7,544,000. The weighted average annual interest rate related to our cash and cash equivalents
for the three months ended March 31, 2020, exclusive of funds at US banks that earn no interest, was approximately .52%.
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 $1,404,000 was collected
through the Company’s DSPP program during the period April 1 through May 6, 2020.