UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM
MARK ONE
for
the Quarterly Period ended
for the transition period from ________ to ________
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of | (I.R.S. Employer | |
| incorporation or organization) | Identification No.) | |
| (Address of principal executive offices) | Zip Code |
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
| N/A | N/A | N/A |
(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 Securities Exchange
Act of 1934 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.
Indicate
by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data
File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was required to submit and post such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ |
| ☐ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
As
of August 10, 2021, Zion Oil & Gas, Inc. had outstanding
INDEX PAGE
i
Zion Oil & Gas, Inc.
Consolidated Condensed Balance Sheets as of
| June 30, 2021 | December 31, 2020 | |||||||
| US$ thousands | US$ thousands | |||||||
| (Unaudited) | ||||||||
| Current assets | ||||||||
| Cash and cash equivalents | ||||||||
| Fixed short term bank and escrow deposits – restricted | ||||||||
| Prepaid expenses and other | ||||||||
| Other deposits | ||||||||
| Governmental receivables | ||||||||
| Other receivables | ||||||||
| Total current assets | ||||||||
| Unproved oil and gas properties, full cost method (see Note 4) | ||||||||
| Property and equipment at cost | ||||||||
| Drilling rig and related equipment, net of accumulated depreciation of $ | ||||||||
| Property and equipment, net of accumulated depreciation of $ | ||||||||
| Right of Use Lease Assets (see Note 7) | ||||||||
| Other assets | ||||||||
| Assets held for severance benefits | ||||||||
| Total other assets | ||||||||
| Total assets | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | ||||||||
| Lease obligation – current (see Note 7) | ||||||||
| Asset retirement obligation | ||||||||
| Derivative liability (see Note 6) | - | |||||||
| 10% Senior convertible bonds, net of unamortized deferred financing cost of and $ | - | |||||||
| Accrued liabilities | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities | ||||||||
| Lease obligation – non-current (see Note 7) | ||||||||
| Provision for severance pay | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Stockholders’ equity | ||||||||
| Common stock, par value $ | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | ||||||||
The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.
1
Zion Oil & Gas, Inc.
Consolidated Condensed Statements of Operations (Unaudited)
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, | June 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| US$ thousands | US$ thousands | US$ thousands | US$ thousands | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
| General and administrative | ||||||||||||||||
| Impairment of unproved oil and gas properties | ||||||||||||||||
| Other | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense), net | ||||||||||||||||
| Gain (loss) on derivative liability | ( | ) | ( | ) | ||||||||||||
| Foreign exchange gain (loss) | ( | ) | ( | ) | ( | ) | ||||||||||
| Financial expenses, net | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Loss, before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Income taxes | ||||||||||||||||
| Net loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net (loss), gain per share of common stock | ||||||||||||||||
| Basic and diluted (in US$) | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Weighted-average shares outstanding | ||||||||||||||||
| Basic and diluted (in thousands) | ||||||||||||||||
The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.
2
Zion Oil & Gas, Inc.
Consolidated Condensed Statement of Changes in Stockholders’ Equity (Unaudited)
For the three and six months ended June 30, 2021
| Common Stock | Additional paid-in | Accumulated | ||||||||||||||||||
| Shares | Amounts | Capital | deficit | Total | ||||||||||||||||
| thousands | US$ thousands | US$ thousands | US$ thousands | US$ thousands | ||||||||||||||||
| Balances as of December 31, 2020 | ( | ) | ||||||||||||||||||
| Funds received from sale of DSPP units and shares and exercise of warrants | ||||||||||||||||||||
| Costs associated with the issuance of shares | ( | ) | ( | ) | ||||||||||||||||
| Value of bonds converted to shares | ||||||||||||||||||||
| Bond interest paid in shares | ||||||||||||||||||||
| Bond principal paid in shares | ||||||||||||||||||||
| Funds received from option exercises | ||||||||||||||||||||
| Value of options granted to employees, directors and others as non-cash compensation | — | |||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balances as of June 30, 2021 | ( | ) | ||||||||||||||||||
| Common Stock | Additional paid-in | Accumulated | ||||||||||||||||||
| Shares | Amounts | Capital | deficit | Total | ||||||||||||||||
| thousands | US$ thousands | US$ thousands | US$ thousands | US$ thousands | ||||||||||||||||
| Balances as of March 31, 2021 | ( | ) | ||||||||||||||||||
| Funds received from sale of DSPP units and shares and exercise of warrants | ||||||||||||||||||||
| Costs associated with the issuance of shares | — | — | ( | ) | — | ( | ) | |||||||||||||
| Value of bonds converted to shares | ||||||||||||||||||||
| Bond interest paid in shares | — | |||||||||||||||||||
| Bond principal paid in shares | — | |||||||||||||||||||
| Funds received from option exercises | — | |||||||||||||||||||
| Value of options granted to employees, directors and others as non-cash compensation | — | — | — | |||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balances as of June 30, 2021 | ( | ) | ||||||||||||||||||
3
Zion Oil & Gas, Inc.
Consolidated Condensed Statement of Changes in Stockholders’ Equity (Unaudited)
For the three and six months ended June 30, 2020
| Common Stock | Additional paid-in | Accumulated | ||||||||||||||||||
| Shares | Amounts | Capital | deficit | Total | ||||||||||||||||
| thousands | US$ thousands | US$ thousands | US$ thousands | US$ | ||||||||||||||||
| Balances as of December 31, 2019 | ( | ) | ||||||||||||||||||
| Funds received from sale of DSPP units and shares and exercise of warrants | — | |||||||||||||||||||
| Value of bonds converted to shares | — | — | — | |||||||||||||||||
| Bond interest paid in shares | — | |||||||||||||||||||
| Funds received from option exercises | ||||||||||||||||||||
| Value of options granted to employees, directors and others as non-cash compensation | — | — | — | |||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balances as of June 30, 2020 | ( | ) | ||||||||||||||||||
| Common Stock | Additional paid-in | Accumulated | ||||||||||||||||||
| Shares | Amounts | Capital | deficit | Total | ||||||||||||||||
| thousands | US$ thousands | US$ thousands | US$ thousands | US$ thousands | ||||||||||||||||
| Balances as of March 31, 2020 | ( | ) | ||||||||||||||||||
| Funds received from sale of DSPP units and shares and exercise of warrants | — | |||||||||||||||||||
| Value of bonds converted to shares | ( | ) | ||||||||||||||||||
| Bond interest paid in shares | — | |||||||||||||||||||
| Funds received from option exercises | — | |||||||||||||||||||
| Value of options granted to employees, directors and others as non-cash compensation | — | |||||||||||||||||||
| Net loss | — | — | — | ( | ) | ( | ) | |||||||||||||
| Balances as of June 30, 2020 | ( | ) | ||||||||||||||||||
| * |
The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.
4
Zion Oil & Gas, Inc.
Consolidated Condensed Statements of Cash Flows (Unaudited)
| For the six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| US$ thousands | US$ thousands | |||||||
| Cash flows from operating activities | ||||||||
| Net loss | ( | ) | ( | ) | ||||
| Adjustments required to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation | ||||||||
| Cost of options issued to employees, directors and others as non-cash compensation | ||||||||
| Amortization of debt discount related to convertible bonds | ||||||||
| Non-cash interest expense | ||||||||
| Change in derivative liability | ( | ) | ||||||
| Change in assets and liabilities, net: | ||||||||
| Other deposits | ||||||||
| Prepaid expenses and other | ||||||||
| Governmental receivables | ||||||||
| Lease obligation – current | ( | ) | ( | ) | ||||
| Lease obligation – noncurrent | ( | ) | ( | ) | ||||
| Right of use lease assets | ||||||||
| Other receivables | ||||||||
| Severance payable, net | ( | ) | ||||||
| Accounts payable | ( | ) | ( | ) | ||||
| Asset retirement obligation | ( | ) | ||||||
| Accrued liabilities | ( | ) | ( | ) | ||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from investing activities | ||||||||
| Acquisition of property and equipment | ( | ) | ( | ) | ||||
| Acquisition of drilling rig and related equipment | ( | ) | ( | ) | ||||
| Investment in unproved oil and gas properties | ( | ) | ( | ) | ||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities | ||||||||
| Payments related to capital lease | ( | ) | ||||||
| Costs paid related to the issuance of new shares | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from issuance of stock and exercise of warrants | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase in cash, cash equivalents and restricted cash | ( | ) | ||||||
| Cash, cash equivalents and restricted cash – beginning of period | ||||||||
| Cash, cash equivalents and restricted cash – end of period | ||||||||
| Supplemental schedule of cash flow information | ||||||||
| Cash paid for interest | ||||||||
| Non-cash investing and financing activities: | ||||||||
| Convertible Bond interest paid in shares | ||||||||
| Convertible Bond principal paid in shares | ||||||||
| Unpaid investments in oil & gas properties | ||||||||
| 10% Senior Convertible Bonds converted to shares | ||||||||
| Capitalized convertible bond interest attributed to oil and gas properties | ||||||||
| New lease accounted for as a right of use lease asset | - | |||||||
| * | Less than one thousand |
The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.
5
Cash, cash equivalents and restricted cash, are comprised as follows:
| June 30, 2021 | December 31, 2020 | June 30, 2020 | December 31, 2019 | |||||||||||||
| US$ thousands | US$ thousands | US$ thousands | US$ thousands | |||||||||||||
| Cash and cash equivalents | ||||||||||||||||
| Restricted cash included in fixed short-term bank deposits | ||||||||||||||||
6
Zion Oil & Gas, Inc.
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 21 years of oil & gas exploration in Israel. As of June 30, 2021, the Company has no revenues from its oil and gas operations.
Zion maintains its corporate headquarters in Dallas, Texas. The Company also has 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 a drilling rig, related equipment and spare parts in the future, 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 New Megiddo License 428 (“NML 428”),
comprising approximately
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 $
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.
7
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 1 - Nature of Operations, Basis of Presentation and Going Concern (cont’d)
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. |
| 4. | MJ#1 encountered oil in the Triassic Mohilla formation which Zion believes may indicate the presence of an active deep petroleum system is in Zion’s license area. There did not appear to be any 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. |
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? |
As
a result of these unanswered questions and with the information gained drilling the MJ#1 well, Zion believed it was prudent and consistent
with good industry practice to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately
Zion’s geology team is continuing to work on a larger interpretation of 3D areas, along with potential exploration locations located in the western portion of the NML 428 area.
8
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 1 - Nature of Operations, Basis of Presentation and Going Concern (cont’d)
Megiddo-Jezreel Petroleum License, No. 401 (“MJL 401”) and New Megiddo License 428 (“NML 428”)
The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. This license effectively replaced the Megiddo-Jezreel License 401 as it has the same area and coordinates.
The MJ-02 drilling plan was approved by the Ministry
of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well.
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 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, 2020. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three and six months ended June 30, 2021 are not necessarily indicative of the operating results for the year ending December 31, 2021 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 of hydrocarbons.
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 consolidated 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 six months ended
June 30, 2021, the Company incurred a net loss of approximately $
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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
9
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 $
B. Use of Estimates
The preparation of the accompanying consolidated condensed 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 consolidated financial statements in future periods.
The full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact of COVID-19 within our consolidated financial statements, and although there is currently no major impact, there may be changes to those estimates in future periods. Actual results may differ from these estimates.
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 three and six months ended June 30, 2021, and 2020, respectively, the Company did not record any post-impairment charges.
Currently,
the Company has no economically recoverable reserves and no amortization base. The Company’s unproved oil and gas properties consist
of capitalized exploration costs of $
10
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 June 30, 2021, and December 31, 2020, 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 5).
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 consolidated 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.
11
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
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 stand-alone 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.
I. Recently Adopted Accounting Pronouncements
In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments”: The amendments in this update are to clarify, correct errors in, or make minor improvements to a variety of ASC topics. The changes in ASU 2020-03 are not expected to have a significant effect on current accounting practices. The ASU improves various financial instrument topics in the Codification to increase stakeholder awareness of the amendments and to expedite the improvement process by making the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 with early application permitted. The Company is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements.
12
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently evaluating the impact that this new guidance will have on its unaudited consolidated condensed financial statements.
The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.
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 (“CED”), a Hungarian corporation,
to purchase an onshore oil and gas drilling rig, drilling pipe, related equipment and spare parts for a purchase price of $
Since
the rig was purchased and closed during March 2020, this purchase was recorded on Zion’s books as a long-term fixed asset as a
component of Property and Equipment. The full purchase price of the drilling rig was $
In
accordance with GAAP accounting rules, per the matching principle, monthly depreciation begins the month following when the asset is
“placed in service.” The rig was placed in service in December 2020 with January 2021 representing the first month of depreciation.
Zion determined that the life of the I-35 drilling rig (the rig Zion purchased), is
The
$
Zion uses the First In First Out (“FIFO”) method of accounting for the inventory spare parts, meaning that the earliest items purchased will be the first item charged to the well in which the inventory spare parts gets consumed.
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
13
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 2 - Summary of Significant Accounting Policies (cont’d)
See the table below for a reconciliation of the rig-related activity during the six months ended June 30, 2021:
| Six-month period ended June 30, 2021 | ||||||||||||||||
| I-35
Drilling Rig | Rig
Spare Parts | Other
Drilling Assets | Total | |||||||||||||
| US$ thousands | US$ thousands | US$ thousands | US$ thousands | |||||||||||||
| December 31, 2020 | ||||||||||||||||
| Asset Additions | ||||||||||||||||
| Asset Depreciation | ( | ) | ( | ) | ||||||||||||
| Asset Disposals for Self-Consumption | ( | ) | ( | ) | ||||||||||||
| June 30, 2021 | ||||||||||||||||
14
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity
The Company’s shareholders approved the
amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of shares of common stock, par
value $
A. 2011 Equity Incentive Stock Option Plan
During the six months ended June 30, 2021, the Company granted the following options from the 2011 Equity Incentive Plan for employees, directors and consultants, to purchase shares of common stock as non-cash compensation:
| i. | Options to purchase |
| ii. | Options to purchase | |
|
| ||
| iii. | Options to purchase | |
| iv. | Options to purchase |
During the six months ended June 30, 2020, the Company granted the following options from the 2011 Equity Incentive Plan for employees, directors and consultants, to purchase shares of common stock as non-cash compensation:
| i. | Options to purchase |
15
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
B. 2011 Non-Employee Directors Stock Option Plan
During the six months ended June 30, 2021, the Company grant the following qualified (market value) and non-qualified options from the 2011 Non-Employee Directors Stock Option Plan for directors to purchase shares of common stock as non-cash compensation:
| i. | Options to purchase | |
| ii. | Options to purchase |
| iii. | Options to purchase | |
| iv. | Options to purchase |
During the six months ended June 30, 2020, the Company did not grant any qualified (market value) options from the 2011 Non-Employee Directors Stock Option Plan to its directors.
C. 2021 Incentive Stock Option Plan
Effective
June 9, 2021, the Company’s shareholders authorized the adoption of the Zion Oil & Gas, Inc. 2021 Omnibus Incentive Stock Option
Plan (“Omnibus Plan”) for employees, directors and consultants, initially reserving for issuance thereunder
The Omnibus Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The plan also permits cash payments under certain conditions.
The compensation committee of the Board of Directors
(comprised of independent directors) is responsible for determining the type of award, when and to whom awards are granted, the number
of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed
During the six months ended June 30, 2021, the Company granted the following options from the 2021 Equity Omnibus Plan for employees, directors and consultants, to purchase shares of common stock as non-cash compensation:
| i. | Options to purchase |
16
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, 2021 are shown in the table below:
| Number
of shares | Weighted
Average exercise price | |||||||
| US$ | ||||||||
| Outstanding, December 31, 2020 | ||||||||
| Changes during 2021 to: | ||||||||
| Granted to employees, officers, directors and others | ||||||||
| Expired/Cancelled/Forfeited | ( | ) | ||||||
| Exercised | ( | ) | ||||||
| Outstanding, June 30, 2021 | ||||||||
| Exercisable, June 30, 2021 | ||||||||
17
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
The following table summarizes information about stock options outstanding as of June 30, 2021:
| 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 | Weighted Average Exercise price | |||||||||||||||||||||||
| US$ | US$ | US$ | US$ | |||||||||||||||||||||||||||
18
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 six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| 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 | $ | $ | ||||||
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 six months ended June 30, | ||||||||
| 2021 | 2020 | |||||||
| 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.
19
Zion Oil & Gas, Inc.
Consolidated Condensed Notes to Financial Statements (Unaudited)
Note 3 - Stockholders’ Equity (cont’d)
D. Compensation Cost for Warrant and Option Issuances
The following table sets forth information about the compensation cost of warrant and option issuances recognized for employees and directors:
| For the three months ended June 30, | ||||||