10-Q 1 v132070_10q.htm
WASHINGTON, D.C. 20549
 
FORM 10-Q
 
MARK ONE
 
x Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period ended September 30, 2008; or
 
o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ________ to ________
 
COMMISSION FILE NUMBER: 001-33228
 
ZION OIL & GAS, INC.
(Exact name of registrant as specified in its charter)
 
Delaware
20-0065053
(State or other jurisdiction of incorporation or
organization)
(I.R.S. Employer Identification No.)
 
6510 Abrams Rd., Suite 300, Dallas, Texas 75231
(Address of principal executive offices, including zip code)
 
(214) 221-4610
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. 
Yes x No o
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “Smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer ¨ Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company x

Indicate by a check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o No x.
 
As of November 14 2008, Zion Oil & Gas, Inc. had outstanding 10,476,053 shares of common stock, par value $0.01 per share.

 
 

 

INDEX PAGE


 
Page
PART 1 – FINANCIAL INFORMATION
 
   
Item 1 - Financial Statements – Unaudited
 
 
 
Balance Sheets - September 30, 2008 and December 31, 2007
1
 
 
Statements of Operations for the three months and nine months ended September 30, 2008 and 2007 and the period from April 6, 2000 (inception) to September 30, 2008
2
 
 
Statements of Changes in Stockholders' Equity for the nine months ended September 30, 2008 and the period from April 6, 2000 (inception) to September 30, 2008
3
 
 
Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 and the period from April 6, 2000 (inception) to September 30, 2008
11
 
 
Notes to Unaudited Interim Financial Statements
13
 
 
Item 2 – Management's Discussion and Analysis of Financial Condition and Results of Operations
36
 
 
Item 4(T) - Controls and Procedures
44
 
 
PART II — OTHER INFORMATION
 
 
 
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds
45
 
 
Item 6 – Exhibits
46
 
 
SIGNATURES
47

 
 

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Balance Sheets (unaudited) as of


   
September 30
 
December 31
 
   
2008
 
2007
 
   
US$ thousands
 
US$ thousands
 
           
Current assets
         
Cash and cash equivalents
   
451
   
4,590
 
Prepaid expenses and other
   
500
   
61
 
Deferred offering costs
   
417
   
-
 
Refundable Value-Added Tax
   
24
   
65
 
Total current assets
   
1,392
   
4,716
 
               
Unproved oil and gas properties, full cost method
   
3,565
   
2,590
 
               
Property and equipment
             
Net of accumulated depreciation of $58 thousand and $33 thousand
   
88
   
73
 
               
Other assets
             
Assets held for severance benefits
   
69
   
42
 
Total other assets
   
69
   
42
 
               
Total assets
   
5,114
   
7,421
 
               
Liabilities and Stockholders’ Equity
             
               
Current liabilities
             
Accounts payable
   
42
   
128
 
Accrued liabilities
   
294
   
172
 
Deferred officers compensation
   
1,591
   
1,017
 
Total current liabilities
   
1,927
   
1,317
 
               
Provision for severance pay
   
183
   
316
 
               
Total liabilities
   
2,110
   
1,633
 
               
Commitments and contingencies (see Note 5)
             
               
Stockholders’ equity
             
Common stock, par value $.01; 2008 - 30,000,000 and 2007 - 20,000,000 shares authorized: 2008 – 10,125,059 shares issued and outstanding and 2007 – 10,120,893 shares issued and outstanding
   
101
   
101
 
Additional paid-in capital
   
26,351
   
26,074
 
Deficit accumulated in development stage
   
(23,448
)  
 
(20,387
)
Total stockholders’ equity
   
3,004
   
5,788
 
Total liabilities and stockholders' equity
   
5,114
   
7,421
 

The accompanying notes are an integral part of the unaudited interim financial statements.
 
 
1

 
 
Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statements of Operations (unaudited)

 
       
Period from
 
       
April 6, 2000 
 
   
For the three month period
 
For the nine month period
 
(inception) to
 
   
ended September 30
 
ended September 30
 
September 30 
 
   
2008
 
2007
 
2008
 
2007
 
2008
 
   
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
                       
Revenues
   
-
   
-
   
-
   
-
   
-
 
                                 
General and administrative expenses
                               
Legal and professional
   
179
   
290
   
779
   
883
   
4,858
 
Salaries
   
312
   
266
   
1,255
   
676
   
5,300
 
Other
   
374
   
255
   
1,096
   
769
   
3,353
 
Impairment of unproved oil and gas properties
   
-
   
-
   
-
   
9,494
   
9,494
 
Loss from operations
   
(865
)
 
(811
)
 
(3,130
)
 
(11,822
)
 
(23,005
)
                                 
Other expense, net
                               
Termination of initial public offering
   
-
   
-
   
-
   
-
   
(507
)
Other income, net
   
-
   
-
   
-
   
4
   
4
 
Interest income (expense), net
   
12
   
63
   
69
   
140
   
60
 
                                 
Loss before income taxes
   
(853
)  
 
(748
)
 
(3,061
)
 
(11,678
)
 
(23,448
)
Income taxes
   
-
   
-
   
-
   
-
   
-
 
                                 
Net loss
   
(853
)
 
(748
)
 
(3,061
)
 
(11,678
)
 
(23,448
)
                                 
Net loss per share of common stock - basic and diluted (in US$)
   
(0.08
)
 
(0.07
)
 
(0.30
)
 
(1.20
)
 
(4.16
)
                                 
Weighted-average shares outstanding-basic and diluted (in thousands)
   
10,125
   
10,121
   
10,122
   
9,712
   
5,642
 

The accompanying notes are an integral part of the unaudited interim financial statements.

 
2

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Changes in Stockholders' Equity (unaudited)


                
Deficit
     
               
Additional
 
Accumulated 
     
   
Preferred Stock
 
Common Stock
 
Paid-in
 
in development
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Balances April 6, 2000
   
-
   
-
   
-
   
-
   
-
   
-
   
-
 
Issued for cash ($0.001 per share)
   
-
   
-
   
2,400
   
* -
   
2
   
-
   
2
 
Issuance of shares and warrants in a private offering ($1 per share)
   
-
   
-
   
100
   
* -
   
100
   
-
   
100
 
Costs associated with the issuance of shares
   
-
   
-
   
-
   
-
   
(24
)
 
-
   
(24
)
Waived interest on conversion of debt
   
-
   
-
   
-
   
-
   
* -
   
-
   
* -
 
Value of warrants granted to employees
   
-
   
-
   
-
   
-
   
2
   
-
   
2
 
Net loss
   
-
   
-
   
-
   
-
   
-
   
(5
)
 
(5
)
Balances, December 31, 2000
   
-
   
-
   
2,500
   
* -
   
80
   
(5
)
 
75
 
Issuance of shares and warrants in a private offering in January 2001 ($1 per share)
   
-
   
-
   
135
   
* -
   
135
   
-
   
135
 
Issuance of shares and warrants in a private offering
which closed in September 2001 ($1 per share)
   
-
   
-
   
125
   
* -
   
125
   
-
   
125
 
Payment of accounts payable through issuance of shares and warrants
   
-
   
-
   
40
   
* -
   
40
   
-
   
40
 
Payment of note payable through issuance of shares and warrants
   
-
   
-
   
25
   
* -
   
25
   
-
   
25
 
Issuance of shares and warrants in a private offering which closed in November 2001 ($1 per share)
   
-
   
-
   
175
   
* -
   
175
   
-
   
175
 
Costs associated with the issuance of shares
   
-
   
-
   
-
   
-
   
(85
)
 
-
   
(85
)
Waived interest on conversion of debt
   
-
   
-
   
-
   
-
   
1
   
-
   
1
 
Value of warrants granted to employees
   
-
   
-
   
-
   
-
   
37
   
-
   
37
 
Value of warrants granted to directors and consultants
   
-
   
-
   
-
   
-
   
3
   
-
   
3
 
Net loss
   
-
   
-
   
-
   
-
   
-
   
(207
)
 
(207
)
Balances, December 31, 2001
   
-
   
-
   
3,000
   
* -
   
536
   
(212
)
 
324
 

* Represents an amount less than US$ 1 thousand.
 
 
3

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Changes in Stockholders' Equity (unaudited)(cont’d)


                
Deficit
     
               
Additional
 
Accumulated 
     
   
Preferred Stock
 
Common Stock
 
Paid-in
 
in development
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Change in par value of common shares from $ 0.0001 per share to $0.01 per share
   
-
   
-
   
-
   
30
   
(30
)
 
-
   
-
 
Issuance of shares and warrants in a private offering which closed in January 2002 ($1 per share)
   
-
   
-
   
20
   
* -
   
20
   
-
   
20
 
Issuance of shares and warrants in a private offering which closed in November 2002 ($10 per share)
   
25
   
* -
   
22
   
* -
   
254
   
-
   
254
 
Payment of accounts payable through issuance of preferred shares and warrants
   
13
   
* -
   
-
   
-
   
127
   
-
   
127
 
Payment of accounts payable through issuance of common shares and warrants
   
-
   
-
   
111
   
1
   
131
   
-
   
132
 
Payment of note payable through issuance of shares and warrants
   
5
   
* -
   
-
   
-
   
50
   
-
   
50
 
Payment of accounts payable to employee through issuance of shares upon exercise of warrants
   
-
   
-
   
400
   
4
   
76
   
-
   
80
 
Costs associated with the issuance of shares
   
-
   
-
   
-
   
-
   
(160
)
 
-
   
(160
)
Waived interest on conversion of debt
   
-
   
-
   
-
   
-
   
3
   
-
   
3
 
Deferred financing costs on debt conversions / modifications
   
-
   
-
   
-
   
-
   
21
   
-
   
21
 
Value of warrants granted to employees
   
-
   
-
   
-
   
-
   
1
   
-
   
1
 
Value of warrants granted to directors and consultants
   
-
   
-
   
-
   
-
   
13
   
-
   
13
 
Net loss
   
-
   
-
   
-
   
-
   
-
   
(403
)
 
(403
)
Balances, December 31, 2002
   
43
   
* -
   
3,553
   
35
   
1,042
   
(615
)
 
462
 

* Represents an amount less than US$ 1 thousand.
 
 
4

 
 
Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Changes in Stockholders' Equity (unaudited) (cont’d)


                
Deficit
     
               
Additional
 
Accumulated 
     
   
Preferred Stock
 
Common Stock
 
Paid-in
 
in development
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Issuance of shares in connection with executive employment
   
-
   
-
   
50
   
1
   
49
   
-
   
50
 
Issuance of share on warrants exercise
   
-
   
-
   
165
   
2
   
31
   
-
   
33
 
Issuance of dividend shares to record holders as of December 31, 2002
   
4
   
* -
   
-
   
-
   
* -
   
-
   
-
 
Issuance of shares and warrants in a private offering which closed in February 2003 ($10 per share):
                                           
for cash consideration
   
10
   
* -
   
-
   
-
   
105
   
-
   
105
 
for reduction of accounts payable
   
5
   
* -
   
-
   
-
   
45
   
-
   
45
 
Issuance of shares and warrants as compensation for extension of $100,000 line of credit
   
1
   
* -
   
-
   
-
   
10
   
-
   
10
 
Payment of account payable through issuance of shares and warrants
   
* -
   
* -
   
-
   
-
   
1
   
-
   
1
 
Conversion of preferred shares to common shares in reincorporation merger
   
(63
)
 
*(-
)
 
763
   
7
   
(7
)
 
-
   
-
 
Issuance of shares in a private offering which closed in July 2003 ($3 per share):
                                           
for cash consideration
   
-
   
-
   
33
   
* -
   
99
   
-
   
99
 
for reduction of accounts payable
   
-
   
-
   
3
   
* -
   
9
   
-
   
9
 
Issuance of shares upon exercise of warrants:
                                           
for cash consideration
   
-
   
-
   
25
   
* -
   
25
   
-
   
25
 
for reduction of accounts payable
   
-
   
-
   
124
   
1
   
142
   
-
   
143
 
Issuance of shares upon exercise of warrants for cash consideration
   
-
   
-
   
63
   
1
   
82
   
-
   
83
 
Payment of account payable through issuance of shares
   
-
   
-
   
80
   
1
   
139
   
-
   
140
 
Costs associated with the issuance of shares
   
-
   
-
   
-
   
-
   
(58
)
 
-
   
(58
)
Value of warrants granted to employees
   
-
   
-
   
-
   
-
   
47
   
-
   
47
 
Deferred financing costs on debt conversions / modifications
   
-
   
-
   
-
   
-
   
(10
)
 
-
   
(10
)
Net loss
   
-
   
-
   
-
   
-
   
-
   
(873
)
 
(873
)
Balances as at December 31, 2003
   
-
   
-
   
4,859
   
48
   
1,751
   
(1,488
)
 
311
 
 
* Represents an amount less than US$ 1 thousand.
 
 
5

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Changes in Stockholders' Equity (unaudited)(cont’d)

             
Deficit
     
       
Additional 
 
accumulated 
     
   
Common Stock
 
paid-in
 
in development
     
   
Shares
 
Amounts
 
capital 
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Issuance of shares on warrants exercise
   
123
   
1
   
183
   
-
   
184
 
Issuance of shares and warrants in a private offering
   
251
   
3
   
1,002
   
-
   
1,005
 
Payment of officer salaries through issuance of shares and warrants
   
46
   
1
   
184
   
-
   
185
 
Payment of accounts payable to officers and consultants upon exercise of warrants
   
80
   
1
   
99
   
-
   
100
 
Payment of director honorariums through issuance of shares and warrants
   
11
   
* -
   
45
   
-
   
45
 
Payment of account payable through issuance of shares and warrants
   
13
   
* -
   
50
   
-
   
50
 
Payment of bridge loan through issuance of shares and warrants
   
125
   
1
   
499
   
-
   
500
 
Payment of bridge loan interest and commitment fee through issuance of shares and warrants
   
8
   
* -
   
30
   
-
   
30
 
Payment of bridge loan finders fee through issuance of shares and warrants
   
2
   
* -
   
7
   
-
   
7
 
Payment of service bonus through issuance of shares and warrants
   
20
   
* -
   
20
   
-
   
20
 
Costs associated with the issuance of shares
   
-
   
-
   
(59
)
 
-
   
(59
)
Value of warrants granted to employees
   
-
   
-
   
41
   
-
   
41
 
Deferred financing costs on debt conversions / modifications
   
-
   
-
   
30
   
-
   
30
 
Net loss
   
-
   
-
   
-
   
(1,737
)
 
(1,737
)
Balances, December 31, 2004
   
5,538
   
55
   
3,882
   
(3,225
)
 
712
 

* Represents an amount less than US$ 1 thousand.

 
6

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Changes in Stockholders' Equity (unaudited) (cont’d)


            
Deficit
     
       
Additional 
 
accumulated 
     
   
Common Stock
 
paid-in
 
in development
     
   
Shares
 
Amounts
 
capital 
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Issuance of shares on warrants exercised:
                     
For cash
   
493
   
5
   
872
   
-
   
877
 
For payment of deferred officer salaries
   
17
   
* -
   
21
   
-
   
21
 
For exchange of shares of common stock
   
120
   
1
   
(1
)
 
-
   
-
 
Issuance of shares and warrants in a private offering that closed in March 2005:
                               
For cash
   
519
   
5
   
2,070
   
-
   
2,075
 
For payment of deferred officer salaries
   
10
   
* -
   
40
   
-
   
40
 
For payment of accounts payable
   
6
   
* -
   
25
   
-
   
25
 
Issuance of shares and warrants in a private offering that closed in June 2005:
                               
For cash
   
259
   
3
   
1,292
   
-
   
1,295
 
For payment of directors honoraria
   
14
   
* -
   
70
   
-
   
70
 
For payment of accounts payable
   
3
   
* -
   
15
   
-
   
15
 
Issuance of shares in a private offering that closed in October 2005:
                               
For cash
   
584
   
6
   
2,914
   
-
   
2,920
 
For payment of deferred officer salaries
   
40
   
* -
   
200
   
-
   
200
 
For payment of accounts payable
   
22
   
* -
   
110
   
-
   
110
 
Issuance of shares in a private offering that closed in December 2005
   
80
   
1
   
439
   
-
   
440
 
Shares to be issued for services provided by director
   
-
   
-
   
42
   
-
   
42
 
Value of warrants and options granted to employees
   
-
   
-
   
216
   
-
   
216
 
Value of warrants granted to directors and consultants
   
-
   
-
   
16
   
-
   
16
 
Deferred financing costs on debt conversions /modifications
   
-
   
-
   
44
   
-
   
44
 
Costs associated with the issuance of shares
   
-
   
-
   
(275
)
 
-
   
(275
)
Net loss
   
-
   
-
   
-
   
(1,605
)
 
(1,605
)
Balances, December 31, 2005
   
7,705
   
76
   
11,992
   
(4,830
)
 
7,238
 

* Represents an amount less than US$ 1 thousand.

 
7

 

Zion Oil & Gas, Inc.
(A Development Stage Company)

Statement of Changes in Stockholders' Equity (unaudited) (cont’d)


            
Deficit
     
       
Additional
 
accumulated
     
   
Common Stock
 
paid-in
 
in development
     
   
Shares
 
Amounts
 
capital
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Issuance of shares on warrants exercised:
                     
For cash
   
253
   
3
   
1,151
   
-
   
1,154
 
For debt
   
60
   
1
   
276
   
-
   
277
 
Issuance of shares and warrants in private offering closings in first quarter 2006:
                               
For cash
   
66
   
1
   
362
   
-
   
363
 
For payment of accounts
                               
Payable
   
3
   
* -
   
14
   
-
   
14
 
Shares issued for services provided by officer
   
200
   
2
   
248
   
-
   
250
 
Issuance of shares and warrants in a private offering that closed in September 2006 for cash
   
23
   
* -
   
126
   
-
   
126
 
Value of options granted to employees
   
-
   
-
   
162
   
-
   
162
 
Value of warrants granted to underwriter
   
-
   
-
   
20
   
-
   
20
 
Value of shares gifted to directors, employees and service providers
   
-
   
-
   
147
   
-
   
147
 
Costs associated with the issuance of shares
   
-
   
-
   
(681
)
 
-
   
(681
)
Funds received from public offering for subscription shares:
                               
For cash
   
410
   
4
   
2,867
   
-
   
2,871
 
For debt
   
27
   
* -
   
188
   
-
   
188
 
Net loss
   
-
   
-
   
-
   
(2,510
)
 
(2,510
)
Balances December 31, 2006
   
8,747
   
87
   
16,872
   
(7,340
)
 
9,619
 

* Represents an amount less than US$ 1 thousand.
 
 
8

 

Zion Oil & Gas, Inc.
(A Development Stage Company)

Statement of Changes in Stockholders' Equity (unaudited) (cont’d)


            
Deficit
     
       
Additional 
 
accumulated 
     
   
Common Stock
 
paid-in
 
in development
     
   
Shares
 
Amounts
 
capital 
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Funds received from public offering for subscription shares:
                     
For cash
   
1,336
   
14
   
9,338
   
-
   
9,352
 
For debt
   
33
   
* -
   
235
   
-
   
235
 
Compensation in respect of shares previously issued for services provided by officer
   
-
   
-
   
208
   
-
   
208
 
Value of options granted to employees
   
-
   
-
   
337
   
-
   
337
 
Value of warrants granted to underwriter
   
-
   
-
   
79
   
-
   
79
 
Value of shares granted to employees
   
5
   
*-
   
25
   
-
   
25
 
Value of shares gifted to employees
   
-
   
-
   
7
   
-
   
7
 
Costs associated with the issuance of shares
   
-
   
-
   
(1,027
)
 
-
   
(1,027
)
Net loss
   
-
   
-
   
-
   
(13,047
)
 
(13,047
)
Balances December 31, 2007
   
10,121
   
101
   
26,074
   
(20,387
)
 
5,788
 

* Represents an amount less than US$ 1 thousand.
 
 
9

 

Zion Oil & Gas, Inc.
(A Development Stage Company)

Statement of Changes in Stockholders' Equity (unaudited) (cont’d) 


           
Deficit
     
       
Additional
 
accumulated
     
   
Common Stock
 
paid-in
 
in development
     
   
Shares
 
Amounts
 
capital
 
stage
 
Total
 
   
Thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
US$ thousands
 
Value of options granted to employees
   
-
   
-
   
252
   
-
   
252
 
Value of shares granted to employees
   
4
   
*-
   
25
   
-
   
25
 
Net loss
   
-
   
-
   
-
   
(3,061
)
 
(3,061
)
Balances September 30, 2008
   
10,125
   
101
   
26,351
   
(23,448
)
 
3,004
 

* Represents an amount less than US$ 1 thousand.

The accompanying notes are an integral part of the unaudited interim financial statements.
 
 
10

 

Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Cash Flows (unaudited)


            
Period from
 
       
April 6, 2000
 
   
For the nine month 
 
(inception) to
 
   
period  ended September 30
 
September 30
 
   
2008
 
2007
 
2008
 
   
US$ thousands
 
US$ thousands
 
US$ thousands
 
Cash flows from operating activities
             
Net loss
   
(3,061
)
 
(11,678
)
 
(23,448
)
Adjustments required to reconcile net loss to net cash
                   
used in operating activities:
                   
Depreciation
   
24
   
10
   
61
 
Officer, director and other fees, paid via common stock
   
25
   
220
   
2,086
 
Cost of warrants issued to employees, directors and others
   
252
   
57
   
1,304
 
Interest paid through issuance of common stock
   
-
   
-
   
17
 
Write-off of costs associated with public offering
   
-
   
-
   
507
 
Loss on disposal of equipment
   
-
   
4
   
4
 
Impairment of unproved oil and gas properties
   
-
   
9,494
   
9,494
 
Change in assets and liabilities, net:
                   
Decrease in inventories
   
-
   
1
   
150
 
Prepaid expenses and other
   
(439
)
 
(63
)
 
(500
)
Increase in deferred offering costs
   
(417
)
 
-
   
(417
)
Decrease/(increase) in refundable value-added tax
   
41
   
(59
)
 
(24
)
Severance pay, net
   
3
   
99
   
277
 
(Decrease)/increase in accounts payable
   
(86
)
 
(203
)
 
685
 
(Decrease)/increase in accrued liabilities
   
(41
)
 
(586
)
 
132
 
Increase/(decrease) in deferred officers' compensation
   
574
   
(266
)
 
1,591
 
Net cash used in operating activities
   
(3,125
)
 
(2,970
)
 
(8,081
)
                     
Cash flows from investing activities
                   
Acquisition of property and equipment
   
(39
)
 
(33
)
 
(153
)
Investment in unproved oil and gas properties
   
(975
)
 
(2,620
)
 
(13,209
)
Net cash used in investing activities
   
(1,014
)
 
(2,653
)
 
(13,362
)
                     
Cash flows from financing activities
                   
Deferred financing costs on debt conversions and modification
   
-
   
-
   
89
 
Loan proceeds – related party
   
-
   
-
   
259
 
Loan principal repayments – related party
   
-
   
(107
)
 
(259
)
Loan proceeds – other
   
-
   
-
   
500
 
Proceeds from sale of stock
   
-
   
9,352
   
23,775
 
Financing costs of issuing stock
   
-
   
(1,027
)
 
(2,470
)
Net cash provided by financing activities
   
-
   
8,218
   
21,894
 
                     
Net increase(decrease) in cash
   
(4,139
)
 
2,595
   
451
 
Cash and cash equivalents– beginning of period
   
4,590
   
3,370
   
-
 
Cash and cash equivalents– end of period
   
451
   
5,965
   
451
 
 
 
11

 
 
Zion Oil & Gas, Inc.
(A Development Stage Company)
 
Statement of Cash Flows (unaudited) (cont'd)


            
Period from
 
           
April 6, 2000
 
   
For the nine month 
 
(inception) to
 
   
period  ended September 30
 
September 30
 
   
2008
 
2007
 
2008
 
   
US$ thousands
 
US$ thousands
 
US$ thousands
 
Supplemental information
             
               
Cash paid for interest
   
-
   
1
   
58
 
Cash paid for income taxes
   
-
   
-
   
-
 
                     
Non-cash operating, investing and financing activities:
                   
                     
Payment of accounts payable through issuance of preferred and common stock
   
-
   
235
   
1,186
 
Payment of note payable through issuance of common stock
   
-
   
-
   
575
 
Payment of accounts payable through issuance of note payable
   
-
   
-
   
35
 
Financing costs paid through issuance of common stock
   
-
   
-
   
25
 
Increase in accounts payable for financing costs
   
-
   
-
   
382
 
Waived interest on debt conversions
   
-
   
-
   
4
 
Shares issued for debt conversion
   
-
   
-
   
188
 
Shares issued for services provided by officer
   
-
   
188
   
500
 
Value of warrants and options granted to employees
   
252
   
(22
)
 
1,094
 
Value of warrants granted to directors and consultants
   
-
   
-
   
33
 
Value of warrants granted to underwriters
   
-
   
79
   
79
 
Value of shares granted to employees
   
25
   
25
   
45
 
Value of shares gifted to directors, employees and service providers
   
-
   
7
   
154
 
Deferred financing costs
   
-
   
-
   
89
 
Transfer of inventory to oil and gas properties
   
-
   
-
   
150
 

The accompanying notes are an integral part of the unaudited interim financial statements.

 
12

 

Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008


Note 1 - Nature of Operations and Basis of Presentation

A.
Nature of Operations

Effective July 9, 2003, Zion Oil & Gas, Inc., a Florida corporation (“Zion Florida”) was merged into its wholly owned Delaware subsidiary, Zion Oil & Gas, Inc. (the “Company”), the purpose of which was solely to reincorporate from Florida to Delaware in anticipation of a public offering. Upon the reincorporation, all the outstanding shares of common stock in Zion Florida were converted into common stock, par value $0.01 (the “Common Stock”) of the Company on a one-to-one basis and all the outstanding shares of preferred stock in Zion Florida were converted into Common Stock of the Company at the ratio of twelve shares of Common Stock for each share of preferred stock. All of the outstanding warrants and options of Zion Florida were converted into equivalent warrants and options of the Company.
 
The Company currently holds two petroleum exploration licenses granted pursuant to the Israeli Petroleum Law as follows:
 
(1) The “Asher-Menashe License,” which covers an area of approximately 78,824 acres located on the Israeli coastal plain and the Mt. Carmel range between Caesarea in the south and Haifa in the north. The Asher-Menashe License has a three-year term, which commenced on June 10, 2007 and runs through June 9, 2010, and may be extended for additional periods up to a maximum of seven years as provided by the Israeli Petroleum Law. The Asher-Menashe License was issued following the Company's successful completion of the work program under the 121,000 acre Asher Permit, originally granted to the Company effective August 1, 2005, in the course of which the Company developed three leads. Under the terms of the Asher-Menashe License, the Company must commence the drilling of a well to a depth of at least 4,000 meters (about 13,200 feet) by July 1, 2009, which date may be extended by the Israeli Petroleum Commissioner.
 
(2) The “Joseph License,” which covers approximately 83,272 acres on the Israeli coastal plain south of the Asher-Menashe License between Caesarea in the north and Netanya in the south. The Joseph License has a three-year term which commenced on October 11, 2007 and runs through October 10, 2010 and may be extended for additional periods up to a maximum of seven years as provided by the Israeli Petroleum Law. The area covered by the Company’s Joseph License covers approximately 85% of the area subject to the 98,100 acre Ma’anit-Joseph License, which had been held by the Company until it was formally surrendered on June 22, 2007 in accordance with the provisions of the Israeli Petroleum Law following the abandonment of the Ma’anit #1 well drilled by the Company. The areas covered by the Joseph License include the Ma’anit structure, on which the company drilled the Ma’anit #1 well and the Joseph lead developed by the Company under the Ma’anit-Joseph License and it’s previously held Joseph Permit. Under the terms of the Joseph License, the Company must commence the drilling of a well to a depth of at least 4,500 meters (about 14,850 feet) by July 1, 2009, which date may be extended by the Israeli Petroleum Commissioner.

In the event of a discovery on either of the Licenses held, Zion will be entitled to convert the relevant portions of the license to a 30-year production lease, extendable to 50 years, subject to compliance with a field development work program and production.

 
13

 

Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008


Note 1 - Nature of Operations and Basis of Presentation (cont’d)

A.
Nature of Operations (cont’d)
 
In 2005, in accordance with terms of the Ma’anit-Joseph License, the Company drilled the Ma’anit #1 well on the Ma’anit prospect. Drilling breaks and shows of hydrocarbons were recorded from approximately 12,000 feet to the total depth of approximately 15,500 feet. Due to mechanical problems that prevented the Company from isolating highly conductive water bearing zones from the tighter hydrocarbon bearing formations, the shows were never successfully tested. Despite the encouraging, but inconclusive results, the Company determined that the well was incapable of producing oil and/or gas in commercial quantities. As a result, the well was abandoned in June 2007, following analysis of the results of the remedial workover operations conducted between April and June 2007 (See Note 2A).
 
On September 12, 2008, the Company entered into a drilling contract with Aladdin Middle East Ltd. (“AME”), a Delaware corporation with offices in Wichita, Kansas and in Ankara, Turkey, pursuant to which AME will be arranging for the transportation into Israel of its 2,000 horsepower rig to be used to conduct the drilling contemplated by the Company’s business plan. It is currently anticipated that the rig will arrive in Israel in January 2009. It is planned to use the rig initially for the re-entry and drilling of the Ma’anit Rehoboth #2 well.

The contract, which is based in large part on the International Association of Drilling Contractors Form Daywork Drilling Contract, provides for the well to be drilled on a daywork basis with payment to Aladdin at the rate of $28.5 thousand per drilling day, and other scheduled rates for non-operating days. The contract also provides for a mobilization and de-mobilization fee of $675 thousand each. To date, the Company has paid AME $475 thousand on account of mobilization fees, with the remaining $200 thousand payable upon delivery of the rig to Israeli customs. Demobilization fees are payable as follows: $506.25 thousand at such time as operations on the final well are completed and $168.75 thousand upon delivery of the rig to Israeli customs in anticipation of its departure from Israel; provided, that, in the event that AME enters into a drilling contract with another operator in Israel, then the demobilization fee will be reduced if and to the extent that AME receives funds from such other operator. As security for these and related fees, the contract provides that within 10 days after written notice by AME of the mobilization of the drilling rig, the Company is to provide for a letter of credit to AME in the amount of $675 thousand. The letter of credit is to be returned to the Company upon AME’s receipt of all amounts to which it is entitled under the contract. The contract also provides for termination fees of $1,225 thousand, less any amounts previously paid to AME, if the Company terminates the contract. In the event that AME is unable to mobilize the drilling rig by June 30, 2009, the Company is entitled to terminate the contract without any further obligation or payment under the contract.

The commencement of the drilling program is subject to the receipt of various government permits. While we and AME are currently working toward obtaining the requisite permits, there can be no assurance that the necessary permits will be obtained by the time the rig arrives in Israel or within a time frame that will allow us to commence drilling by the currently contemplated date of January 2009.
 
 
14

 

Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008


Note 1 - Nature of Operations and Basis of Presentation (cont’d)

 
A.
Nature of Operations (cont’d)

Operations in Israel are conducted through a branch office. The Asher-Menashe License and Joseph License are held directly in the name of the Company. At present, it is expected that, other than investment income, any and all future income will be derived from Israeli operations.

B.
Management Presentation and Liquidity

On February 17, 2004, a registration statement filed by the Company with the Securities and Exchange Commission was declared effective to offer 7,000,000 shares of the Company’s common stock to the public. The minimum offering requirement of $6,500 thousand was not subscribed by the offering termination date of August 30, 2004. As a result, no securities were sold to the public, all escrow subscription funds that had been received pursuant to the offering were sent back to the subscribers by the escrow agent, and the Company removed from registration the 7,000,000 shares of the Company’s common stock.

Between September 2004 and through September 2006, the Company raised capital through debt and private offerings and the exercise of outstanding warrants. During 2006, $1,934 thousand was raised in private equity financings and warrant exercises, as described below.
 
On January 25, 2006 the Company filed a registration statement for a public offering on a “best efforts” basis (the “Public Offering”) of between 350,000 and 2,000,000 shares of common stock at $7.00 per share with a minimum offering requirement of $2,450 thousand (350,000 shares) and a maximum of $14,000 thousand (2,000,000 shares). The registration statement was declared effective by the Securities and Exchange Commission on September 26, 2006. On December 29, 2006, the Company completed the first closing of its Public Offering in which it accepted subscriptions in the amount of $3,059 thousand in consideration of the issuance of 436,907 shares of common stock. Between January 1, 2007 and May 25, 2007, the Company completed additional closings in which it accepted additional subscriptions for 1,369,428 shares of its common stock in the amount of $9,587 thousand bringing the total amount raised in the Public Offering through its termination following the May 25, 2007 closing to $12,645 thousand.

On February 1, 2008, the Company filed a registration statement with the Securities and Exchange Commission (the “2008 Registration Statement”) in connection with a public offering (the “Follow on Offering”) of 2,500,000 units (the “Units) consisting of one share of the Company’s common stock and one common share purchase warrant (exercisable at $7 per share), with each Unit priced at $10 (the “Unit Offering”). The Unit Offering has a minimum closing requirement of $3,250,000 (325,000 units) (the “Minimum Unit Offering”). On April 22, 2008, the Company filed Amendment No. 1 to the 2008 Registration Statement and on May 2, 2008, filed Amendment No. 2 to the 2008 Registration Statement. The 2008 Registration Statement was declared effective on May 14, 2008. On October 24, 2008, the Company held an initial closing on the Unit Offering on 350,994 units ($3,509 thousand) (See Note 6). The Company received net proceeds of $3,269 thousand from the initial closing of the Unit Offering, prior to the deduction of $417 thousand in deferred offering costs. The Unit Offering will remain open until the earlier to occur of (i) January 9, 2009, (ii) the date on which 2,500,000 Units have been subscribed and accepted, and (iii) such date as announced by the Company on no less than two trading days’ prior notice.
 
 
15

 

Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008


Note 1 - Nature of Operations and Basis of Presentation (cont’d)

B.
Management Presentation and Liquidity (cont’d)

In the opinion of management, all adjustments considered necessary for a fair presentation of financial position, results of operations, and changes in financial position have been included. See Note 2A for a discussion of the Company’s recording an impairment of unproved oil and gas properties following the cessation of operations on the Ma’anit #1 well and the formal relinquishment of the Ma’anit-Joseph License in June 2007.

C.
Basis of Presentation

The unaudited interim 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. Since the Company is in the development stage, it has limited capital resources, no revenue, and a loss from operations. The appropriateness of using the going concern basis is dependent upon the Company's ability to obtain additional financing or equity capital to finance its current operations and, ultimately, to achieve profitable operations. The uncertainty of these conditions raises substantial doubt about the Company's ability to continue as a going concern. The unaudited interim financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The accompanying unaudited interim financial statements were prepared in accordance with accounting principles generally accepted in the United States for the preparation of interim financial statements and, therefore, do not include all disclosures necessary for a complete presentation of financial condition, results of operations, and cash flows in conformity with generally accepted accounting principles used in annual financial statements. All adjustments, which are, in the opinion of management, of a normal recurring nature and are necessary for a fair presentation of the interim financial statements, have been included. Nevertheless, these financial statements should be read in conjunction with the financial statements and related notes included in the Company's annual financial statements for the year ended December 31, 2007. The results of operations for the period ended September 30, 2008 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.

Note 2 - Summary of Significant Accounting Policies

A.
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.
 
 
16

 
 
Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008

 
Note 2 - Summary of Significant Accounting Policies (cont’d)

A.
Oil and Gas Properties and Impairment (cont’d)

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 income from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.

The Company’s oil and gas property represents an investment in an unproved property and a major development project on that property. 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 as a reserve base has not yet been established. An impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

Abandonment of properties is accounted for as adjustments to capitalized costs. The net capitalized costs are subject to a “ceiling test,” which limits such costs to the aggregate of the estimated present value of future net revenues from proved reserves discounted at ten percent based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. The recoverability of amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves, together with obtaining the necessary financing to exploit such reserves and the achievement of profitable operations.

In June 2007, following the analysis of the results of the testing of the Company’s Ma’anit #1 well workover and an evaluation of the mechanical condition of the well, the Company determined that the well was incapable of producing oil and/or gas in commercial quantities. Considering the desire to optimize drilling operations on the Company’s planned Ma’anit-Rehoboth #2, the Company decided to cease operations on the Ma’anit #1 well and, as required by the Israeli Petroleum Law, formally relinquish the Ma’anit-Joseph License. It is the current intent of the Company to use the Ma’anit #1 wellbore, down to approximately 3,200 meters, as the upper part of the wellbore for the planned Ma’anit-Rehoboth #2 well. Plans are that this well will be directionally drilled from that point to penetrate the middle and the lower Triassic, which is still considered highly prospective by the Company. In addition, the Company intends to drill down to the Permian section of the upper Paleozoic formation.

Immediately after the relinquishment of the Ma’anit-Joseph License, the Company filed an application with the Petroleum Commissioner for a petroleum exploration license, the Joseph License, covering approximately 83,272 acres of the original Ma’anit-Joseph License including the Ma’anit structure on which the Ma’anit #1 well was drilled, which License was subsequently granted on October 11, 2007. As a result of the unsuccessful Ma’anit #1 well and formal relinquishment of the Ma’anit-Joseph License, the Company recorded an impairment of $9,494 thousand to its unproved oil and gas properties.
 
 
17

 
 
Zion Oil & Gas Inc
(A Development Stage Company)
 
Notes to the Unaudited Interim Financial Statements as of September 30, 2008


Note 2 - Summary of Significant Accounting Policies (cont’d)

A.
Oil and Gas Properties and Impairment (cont’d)

The Company’s ability to maintain present operations is dependent on two petroleum exploration licenses: (a) The Joseph License, in respect of which the planning of and preparations for the drilling of a well are under way (See Note 1A); and (b) the Asher-Menashe License, in respect of which a geophysical program commenced in December 2007. (See Note 5I)