SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_____________________________
FORM 10-QSB
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended June 30, 2006
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Commission file number 333-131275
ZION OIL & GAS, INC.
(Name of Small Business Issuer as Specified in Its Charter)
Delaware
(State or other Jurisdiction
of Incorporation or Organization)
20-0065053
(I.R.S. Employer
Identification No.)
6510 Abrams Rd., Suite 300
Dallas, TX 75231
(Address of Principal Executive Offices)
(214) 221-4610
(Issuer's Telephone Number, Including Area Code)
Transitional Small Business Disclosure Format (Check one): Yes__ No X
1
ITEM 1.
FINANCIAL STATEMENTS
Balance Sheets -June 30, 2006 (unaudited) and December 31, 2005 (as restated).
3
Statements of Operations for the three months ended June 30, 2006 and 2005, and period from April 6, 2000 (inception) to June 30, 2006.
4
Statements of Changes in Stockholders' Equity for the three months ended June 30, 2006, and period from April 6, 2000 (inception) to June 30, 2006.
5
Statements of Cash Flows for the three months ended June 30, 2006 and 2005, and period from April 6, 2000 (inception) to March 31, 2006 (as restated).
Notes to Financial Statements
7
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
27
ITEM 3.
CONTROLS AND PROCEDURES
28
LEGAL PROCEEDINGS
CHANGES IN SECURITIES
Recent Sales of Unregistered Securities (as of June 30, 2006)
DEFAULTS UPON SENIOR SECURITIES
ITEM 4.
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5.
OTHER INFORMATION
ITEM 6.
EXHIBITS AND REPORTS ON FORM 8-K
Report on Form 8-K
Exhibit Index
29
2
(A Development Stage Company)
INTERIM FINANCIAL STATEMENTS
FOR
THE SIX MONTHS ENDING
JUNE 30, 2006
INDEX TO INTERIM FINANCIAL STATEMENTS
Page
Balance Sheets - June 30, 2006 and December 31, 2005............................................................................ 4
Statements of Operations for the three months ended June 30, 2006 and 2005.................................... 5
Statements of Changes in Stockholders' Equity........................................................................................ 6
Statements of Cash Flows for the three months ended June 30, 2006 and 2005...................................12
Notes to Financial Statements......................................................................................................................14
Balance Sheets
June 30,
December 31,
ASSETS
2006
2005
(Unaudited)
(Audited)
Current assets
Cash and cash equivalents
$ 270,043
$ 1,141,029
Inventories
149,801
Prepaid expenses and other
20,551
25,396
Deferred offering costs
324,854
126,030
Deferred financing costs
2,815
19,695
Refundable value added tax
6,143
29,401
Total current assets
774,207
1,491,352
Unproved oil and gas properties, full cost method
8,170,385
7,692,500
Property and equipment
Net of accumulated depreciation of $14,371 and $5,843
52,453
48,852
Other assets
Assets held for severance benefits
8,979
6,544
Total other assets
 8,979
 6,544
Total assets
$ 9,006,024
$ 9,239,248
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Notes payable to related parties
$ 81,000
Notes payable to other parties
62,500
-
Accounts payable
223,662
619,257
Accrued liabilities
  198,764
  292,001
Total current liabilities
  565,926
  992,258
Notes payable to related parties less current maturities
28,000
31,000
Provision for severance pay
54,434
48,318
Deferred officers compensation
1,343,757
929,007
Stockholders' equity
Common stock, par value $.01; 20,000,000 shares authorized;
June 30, 2006 - 8,017,788 shares; December 31, 2005 - 7,705,288 shares issued and outstanding
80,178
77,053
Additional paid in capital
12,721,047
11,991,988
Deficit accumulated in development stage
(5,787,318)
(4,830,376)
Total stockholders' equity
7,013,907
7,238,665
Total liabilities and stockholders equity
The accompanying notes are an integral part of these statements.
Statements of Operations (Unaudited)
Period from
April 6, 2000
(inception to)
Three months ended June 30
Six months ended June 30
June 30
Revenue
$ -
General and administrative expenses
Legal and professional
131,058
138,107
273,159
241,142
2,267,954
Salaries
203,563
242,785
437,399
284,017
1,899,417
Other
123,610
152,654
224,570
245,605
932,717
458,231
533,546
935,128
770,764
5,100,088
Loss from operations
(458,231)
(533,546)
(935,128)
(770,764)
(5,100,088)
Other income (expense)
Termination of initial public offering
(507,380)
Interest expense, net
(12,238)
(19,660)
(21,814)
(20,385)
(179,850)
Loss before income taxes
(470,469)
(553,206)
(956,942)
(791,149)
Income tax
Net loss
Net loss per share of common stock -
Basic and diluted
(0.06)
(0.08)
(0.12)
(0.13)
(1.37)
Weighted-average shares outstanding -
7,873,425
6,628,947
7,801,981
6,316,788
4,237,175
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Deficit
Accumulated
Additional
in
Preferred Stock
Common Stock
Paid-in
Development
Shares
Amount
Capital
Stage
Total
Balances, April 6, 2000
Issued for cash ($0.001 per share)
2,400,000
240
2,160
2,400
Issuance of shares and warrants in a private
offering which closed in January 2001
($1 per share)
100,000
10
99,990
Costs associated with the issuance of shares
(24,090)
Waived interest on conversion of debt
233
Value of warrants granted to employees
1,840
(5,597)
Balances, December 31, 2000
2,500,000
250
80,133
74,786
135,000
13
134,987
offering which closed in September 2001
125,000
12
124,988
Payment of accounts payable through
issuance of shares and warrants
40,000
39,996
Payment of note payable through
25,000
24,997
offering which closed in November 2001
175,000
18
174,982
(85,461)
843
37,503
Value of warrants granted to
directors and consultants
3,128
(206,707)
Balances, December 31, 2001
3,000,000
300
536,096
(212,304)
324,092
(Continued on following page)
6
(Continued)
Change in par value of common shares
from $0.0001 per share to $0.01 per share
29,700
(29,700)
Issuance of shares and warrants in
a private offering which closed in
January 2002 ($1 per share)
20,000
200
19,800
November 2002 ($10 per share)
25,400
254
21,500
215
253,531
254,000
issuance of preferred shares and warrants
12,700
127
126,873
127,000
issuance of common shares and warrants
111,000
1,110
131,390
132,500
5,000
50
49,950
50,000
Payment of accounts payable to employee
through issuance of shares upon
exercise of warrants
400,000
4,000
76,000
80,000
(159,449)
2,963
Deferred financing costs on debt
conversions/modifications
20,800
537
12,998
(403,114)
Balances, December 31, 2002
43,100
431
3,552,500
35,525
1,041,789
(615,418)
462,327
Issuance of shares in connection
with executive employment
500
49,500
Issuance of shares on warrants exercise
165,000
1,650
31,350
33,000
Issuance of dividend shares to
record holders as of December 31, 2002
4,310
43
(43)
February 2003 ($10 per share)
for cash consideration
10,500
105
104,895
105,000
for reduction of accounts payable
4,554
46
45,494
45,540
Issuance of shares and warrants as
compensation for extension of
$100,000 line of credit
1,000
9,990
10,000
Payment of account payable through
100
999
Conversion of preferred shares to common
shares in reincorporation merger
(63,564)
(636)
762,768
7,628
(6,992)
Issuance of shares in a private offering
which closed in July 2003 ($3 per share)
330
98,670
99,000
3,000
30
8,970
9,000
Issuance of shares upon
exercise of options and warrants:
24,750
124,083
1,241
142,217
143,458
exercise of warrants for cash consideration
63,500
635
82,115
82,750
issuance of shares
800
139,200
140,000
(58,484)
47,008
(9,812)
(873,310)
Balances, December 31, 2003
4,858,851
48,589
1,751,616
(1,488,728)
311,477
8
122,500
1,225
182,525
183,750
a private offering
251,250
2,512
1,002,488
1,005,000
Payment of officer salaries through
46,250
463
184,537
185,000
Payment of accounts payable to officers and
consultants upon exercise of warrants
80,186
802
98,644
99,446
Payment of director honorariums through
11,250
112
44,888
45,000
12,500
125
49,875
Payment of bridge loan through
1,250
498,750
500,000
Payment of bridge loan interest and commitment
fee through issuance of shares and warrants
7,500
75
29,925
30,000
Payment of bridge loan finders fee through
2,500
25
7,475
Payment of service bonus through issuance
of shares and warrants
(59,000)
40,625
30,383
(1,736,934)
Balances, December 31, 2004
5,537,787
55,378
3,882,531
(3,225,662)
712,247
9
Issuance of shares on warrants exercised:
for cash
493,167
4,932
872,319
877,251
for payment of deferred officer salaries
17,334
173
20,827
21,000
for exchange of shares of common stock
120,000
1,200
(1,200)
offering that closed in March 2005:
518,750
5,188
2,069,812
2,075,000
39,900
for payment of accounts payable
6,250
62
24,938
offering that closed in June 2005:
259,000
2,590
1,292,410
1,295,000
for payment of directors honoraria
14,000
140
69,860
70,000
14,970
15,000
Issuance of shares in a private
offering that closed in October 2005:
584,000
5,840
2,914,160
2,920,000
400
199,600
200,000
22,000
220
109,780
110,000
offering that closed in December 2005
439,200
440,000
Shares to be issued for services
provided by a director
41,666
Value of warrants and options granted to employees
215,845
Value of warrants granted to directors
and consultants
16,500
43,968
(275,098)
(1,607,714)
Balances, December 31, 2005
7,705,288
36,000
360
119,640
offering that closed in March 2006:
66,000
660
362,340
363,000
13,725
13,750
Shares issued for services
2,000
123,000
Issuance of shares and warrants in a private offering
8,000
80
43,920
44,000
Value of options granted to employees
126,054
(59,620)
Balances, June 30, 2006
8,017,788
$80,178
$12,721,047
($5,787,318)
$7,013,907
11
Statements of Cash Flows (Unaudited)
Six-month
period ended
(inception) to
June 30, 2006
June 30, 2005
Cash flow from operating activities
Net Loss
$ (956,942)
$ (791,149)
$ (5,787,318)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation
6,688
4,891
12,531
Officer, director and other fees, paid via common stock
251,054
153,950
1,429,150
Interest paid through issuance of common stock
17,500
Write-off of costs associated with public offering
507,380
Changes in assets and liabilities, net:
Increase in inventories
(149,801)
4,845
(228,555)
(20,551)
Increase in deferred offering costs
(198,824)
(524)
(324,854)
Refundable Value-Added tax
23,258
(199,668)
(6,143)
Severance pay
3,681
5,634
45,455
(381,845)
(541,035)
828,630
(93,237)
535,836
198,764
Increase in deferred officer's compensation
414,750
518,743
Net cash used in operating activities
(926,572)
(541,877)
(1,905,500)
Cash flows from investing activities
Acquisition of property and equipment
(10,289)
(64,984)
Investment in oil and gas properties
(477,885)
(2,492,688)
(8,169,114)
Net cash used in investing activities
(488,174)
(8,234,098)
Cash flows from financing activities
Deferred financing cost on debt conversions, net
16,880
9,318
86,563
Loan proceeds-related parties
258,620
Loan principal repayments-related party
(3,000)
(26,000)
(112,160)
Loan proceeds - other
562,500
Proceeds from sale of stock
527,000
4,437,251
10,492,151
Financing costs of issuing stock
(164,080)
(878,033)
Net cash provided by financing activities
543,760
4,256,489
10,409,641
Net increase (decrease) in cash
(870,986)
1,221,924
270,043
Cash - beginning of period
1,141,029
468,409
Cash - end of period
$ 1,690,333
STATEMENTS OF CASH FLOWS (Unaudited) (Continued)
SUPPLEMENTAL INFORMATION
Cash paid for interest
$ 10,227
$ 616
$ 44,884
Cash paid for income taxes
Non-cash operating and financing activities:
issuance of preferred and common stock
950,218
Payment of note payable through issuance
of common stock
575,000
issuance of note payable
34,678
Financing costs paid through issuance of
common stock
Increase in accounts payable for financing costs
381,549
Waived interest on debt conversion
4,039
Shares issued for services provided by director
166,666
22,950
469,412
32,626
Deferred financing costs on debt conversions
82,524
The accompanying notes are an integral part of these financial statements
NOTES TO FINANCIAL STATEMENTS (Unaudited)
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION
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 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 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 holds a petroleum exploration license on approximately 98,100 acres of unproved properties in north-central Israel called the "Ma'anit-Joseph License", issued to the Company by the State of Israel. The term on the license expires April 30, 2007 and it contained a commitment to drill or reenter a well on or before April 30, 2005.
On April 10, 2005 the Company commenced the reentry of the Ma'anit #1 and deepening of the well. On July 19, 2005 the well reached a depth of 15,509 feet and testing and completion began thereafter. During drilling and completion operations, the well had numerous significant oil and gas shows in different zones. At present, completion operations on the Ma'anit #1 well have been temporarily suspended and the drilling rig has been released. On March 15, 2006 the terms of the license were amended to provide that the Company commence the drilling of a new well to a depth of at least 4,400 meters or reenter the Ma'anit #1 well on or before March 1, 2007. The Company's engineers are designing a comprehensive completion procedure using a smaller and less expensive completion rig for the purpose of reentering the Ma'anit #1 well.
Declaration of a commercial discovery on the Ma'anit-Joseph License prior to the end of the license term, as may in certain circumstances be extended, will entitle the Company to receive a 30-year lease (extendable on certain conditions for an additional 20 years) subject to compliance with a field development work program and production.
Effective August 1, 2005, the Company received formal notification and documentation from the Minister of National Infrastructures and the Petroleum Commissioner granting the Company's application for a Preliminary Permit with Priority Rights for an area covering approximately 121,100 acres abutting on and immediately to the north of the Ma'anit-Joseph License. The permit is designated the "Asher" Permit and covers lands on Israel's coastal plain and Mt. Carmel range. The Asher Permit is for an 18-month period and is subject to a work program, with an estimated total cost as adjusted for the amended work program of $265,000, which requires the Company to perform certain geological and geophysical work. Upon satisfactory performance in accordance with the work program, as may be amended, on May 16, 2006, the Company will have priority rights for the grant of an exploration license for a period of up to seven years for a portion of the Asher Permit area not to exceed 400,000 dunam (approxi mately 98,800 acres), subject to the fulfillment of the requirements of the Petroleum Law. Work on the program is in progress.
Operations in Israel are conducted through a branch office and the License and Permit are each held directly in the name of the Company. At present it is expected that all future income will be derived from Israeli operations.
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 has created 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.
14
1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION (CONTINUED)
Basis of Presentation (Continued)
The accompanying unaudited interim financial statements were prepared in accordance with U.S. generally accepted accounting principles 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 U.S. 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, 2005 (as restated). The results of operations for the period ended June 30, 2006 are not necessarily indicative of the results that may be expected for the entire fiscal year or any other interim period.
Management Presentation and Liquidity
On February 17, 2004, the registration statement 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 $6,500,000 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 (approximately $3.7 million) that had been received relating 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. Since then Management raised capital through debt and private offerings and on January 25, 2006 filed a registration statement for a public offering with a lower minimum of $2,450,000. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Financial Statements in United States Dollars
The currency of the primary economic environment in which the operations of the Company are conducted is the United States dollar ("dollar"). Therefore, the dollar has been determined to be the Company's functional currency. Non-dollar transactions and balances have been translated into dollars in accordance with the principles set forth in Statement of Financial Accounting Standards (SFAS) No. 52 "Foreign Currency Translation" (SFAS No. 52).
Transactions in foreign currency (primarily in New Israeli Shekels - "NIS") are recorded at the exchange rate as of the transaction date except for activities relating to balance sheet items which are recorded at the appropriate exchange rate of the corresponding balance sheet item. Monetary assets and liabilities denominated in foreign currency are translated on the basis of the representative rate of exchange at the balance sheet date. Non monetary assets and liabilities denominated in foreign currency are stated at historical exchange rates. All exchange gains and losses from remeasurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations as they arise.
Cash
The Company maintains its cash balance at two banks with one bank located in the United States and one bank located in Israel. For purposes of the statement of cash flows, the Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents.
Inventories include equipment and materials to be used in future drilling and completion operations and are stated at the lower of cost or market value. Cost is determined by the weighted average method.
15
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Oil and Gas Properties
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 income from continuing operations before income taxes and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.
Abandonment of properties are accounted for as adjustments to capitalized costs with no loss recognized. During the six months ended June 30, 2006 and the year ended December 31, 2005 no unproved property was found to be impaired. 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.
The company has no economically recoverable reserves and no amortization base. Unproved oil and gas properties consist of capitalized exploration costs (all of which are excluded from the amortization base) of $477,885 for the six month period ended June 30, 2006, $6,296,291 for the year ended December 31, 2005, and $1,396,209 from inception (April 6, 2000) to December 31, 2004.
Property and Equipment
Property and equipment other than oil and gas property and equipment is recorded at cost and depreciated over their estimated useful lives of three to fourteen years.
Costs Associated With Public and Private Offerings
Costs associated with each specific private or public offering are accumulated until either the closing of the offering or its abandonment. If the offering is abandoned, the costs are expensed in the period the offering is abandoned. If the offering is completed and funds are raised, the accumulated costs are recorded as a reduction to the paid-in capital attributable to the offering. Financing costs not attributable to any specific offering are charged to expense as incurred.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting year. Actual results could differ from those estimates.
Adoption of Recently Issued Accounting Standards
SFAS 123R - Share Based Payments: Prior to January 1, 2006, the Company applied the fair-value based method of accounting for all of its stock-based compensation plan in accordance with the provisions of Financial Accounting Standards Board's Statement No. 123, "Accounting for Stock-Based Compensation" (Statement 123")
16
Adoption of Recently Issued Accounting Standards (Continued)
SFAS 123R-Share Based Payments (Continued): The fair value of stock-based compensation granted to employees and directors prior to July 15, 2003, the date of the Company's first filing with the U.S. Securities and Exchange Commission, in connection with its IPO, was estimated on the date of grant using the minimum-value method as permitted for private entities under Statement No. 123.
The fair value of stock-based compensation granted to employees and directors subsequent to July 15, 2003, is measured according to the Black Scholes option-pricing model and recognized over the requisite service period.
As of January 1, 2006, the Company adopted SFAS No. 123 (revised 2004) "Share-Based Payments" (SFAS 123R) using the modified prospective method, which requires measurement of compensation cost for all stock-based awards based upon the fair value on date of grant and recognition of compensation over the service period for awards expected to vest. Under this method, the Company will recognize compensation cost for awards granted beginning January 1, 2006, based on the Black Scholes option-pricing model. Furthermore, with the exception of stock options granted to employees prior to July 15, 2003, the date of the first filing with the U.S. Securities and Exchange Commission (SEC) in connection with the Initial Public Offering (IPO), the Company will recognize cost for unvested share-based awards as of January 1, 2006 based on the grant date fair value of those awards, adjusted for estimated forfeitures, if any, as previously calculated and reported.
The value of stock options, as noted, is recognized as compensation expense on a straight-line basis, over the requisite service period of the entire award, net of estimated forfeitures. On adoption of the modified prospective method in adopting SFAS 123R, the Company did not need to adjust the corresponding amounts included in these financial statements.
The adoption of SFAS 123R has had no effect on the Company's balance sheet or results of operations.
SFAS 151 - Inventory Costs, an Amendment of Accounting Research Bulletin ("ARB") No. 43: In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an amendment of Accounting Research Bulletin No. 43, Chapter 4" ("SFAS 151"). The amendments made by SFAS 151 clarify that abnormal amounts of idle facility expense, freight, handling costs and wasted materials (spoilage) should be recognized as current-period charges and require the allocation of fixed production overheads to inventory based on the normal capacity of the production facilities. The guidance is effective for inventory costs incurred during fiscal years beginning after June 15, 2005.
The adoption of this SFAS 151 has had no effect on the Company's balance sheet and results of operations.
SFAS 153 - Exchanges of Nonmonetary Assets, an Amendment of Accounting Principles Bulletin (APB) Opinion No. 29, "Accounting for Nonmonetary Transaction": In December 2004, the FASB issued SFAS No. 153, "Exchanges of Nonmonetary Assets - an amendment of Accounting Principles Bulletin (APB) Opinion No. 29, Accounting for Nonmonetary Transactions" ("SFAS 153"). The guidance in APB Opinion No. 29 is based on the principle that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. The guidance in Opinion No. 29, however, included certain exceptions to that principle. SFAS 153 amends Opinion No. 29 to eliminate the exception for nonmonetary assets exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets that do not have commercial substance. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result o f the exchange.
The adoption of SFAS 153 has had no effect on the Company's financial position and results of operations.
17
SFAS 154 - Accounting Changes and Errors Corrections: In May 2005, the FASB issued SFAS No. 154, "Accounting Changes and Errors Corrections" ("SFAS 154"). SFAS 154 replaces APB Opinion No. 20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting Changes in Interim Financial Statements", although it carries forward some of their provisions. SFAS 154 requires retrospective application to prior periods' financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. A change in depreciation, amortization, or depletion method for long-lived, nonfinancial assets will be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS 154 is effective for changes in accounting principle made in fiscal years beginning after December 15, 2005.
The adoption of SFAS 154 has had no effect on the Company's balance sheet or results of operations.
FIN 48 - Accounting for Uncertainty in Income Taxes: In June 2006, the Financial Accounting Standards Board ("FASB") issued Interpretation 58 "Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109" (FIN 48). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation is effective for fiscal years beginning after December 15, 2006 (January 1, 2007 for the Company). Any adjustments required upon the adoption of this interpretation must be recorded directly to retained earnings in the year of adoption and reported as a change in accounting principle.
The adoption of FIN 48 has had no effect on the Company's balance sheet or results of operations.
3. PROVISION FOR SEVERANCE PAY
Israeli law generally requires payment of severance pay upon dismissal of an employee or upon termination of employment in certain other circumstances. The following principal plans relate to the employees in Israel:
NOTES TO FINANCIAL STATEMENTS
4. UNPROVED OIL AND GAS PROPERTIES-FULL COST METHOD
Comprised as follows:
As of
December 31
Drilling operations, completion costs and other related costs
$ 6,880,178
$ 6,642,101
Capitalized salary costs
591,573
512,109
Legal costs and license fees
430,939
284,186
Other costs
267,695
254,104
$ 8,170,385
$ 7,692,500
5. STOCKHOLDERS' EQUITY
The Company has reserved 639,325 shares of common stock as of June 30, 2006 for the exercise of warrants and options. These warrants and options have been excluded from earnings per share calculations because they are anti-dilutive for all periods presented. These warrants and options could potentially dilute basic earnings per share in future years. The warrants and options exercise prices and expiration dates are as follows:
Exercise Price
Number
Expiration
Per Share ($)
of Shares
Date
To non-employees
3.00
December 31, 2006
5.00
December 31, 2008
To employees and directors
4.00
75,000
85,000
To investors
439,700
5.50
19,625
639,325
The warrant transactions April 6, 2000 (inception) are shown in the table below:
Weighted
Number of
average
shares
exercise price
Granted from April 6, 2000 (inception) to December 31, 2004 to:
Employees, officers and directors
1,460,936
1.10
Others
816,667
2.06
Expired/canceled
(300,000)
1.00
Exercised
(1,000,269)
0.67
Outstanding, December 31, 2004
977,334
2.37
19
5. STOCKHOLDERS' EQUITY (CONTINUED)
Granted to:
Employees, consultants, officers and directors as part of compensation
4.79
Private placement investors
281,700
5.02
(40,333)
1.39
(670,501)
1.58
Outstanding, December 31, 2005
668,200
4.78
Issued
7,125
(36,000)
3.33
Outstanding, June 30, 2006
4.87
Exercisable, June 30, 2006
The following table summarizes information about stock warrants and options outstanding as of June 30, 2006:
Shares underlying outstanding
warrants and options (all fully vested)
Range of
remaining
exercise
contractual
price ($)
outstanding
life (years)
0.50
534,700
0.85
2.50
3.00 - 5.50
Fair Value of Warrants and Options
Granted to employees
The following table sets forth information about the weighted-average fair value of warrants granted to employees and directors during the periods indicated, using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:
20
Fair Value of Warrants and Options (Continued)
Granted to non-employees
The following table sets forth information about the weighted-average fair value of warrants granted to non-employees during the periods indicated, using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:
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 during the first quarter of 2006 is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 107 (SAB 107), giving consideration to the contractual term of the options and their vesting schedules. The expected life of the option granted to non-employees equals their contractual term.
Due to the lack of sufficient history of the Company's own stock volatility, the Company estimates its own expected stock volatility based on the historic volatility for other oil exploration companies.
Private Placement Offerings
During 2000, John Brown purchased 2,400,000 shares at the then current par value ($0.001 per share) on his behalf and on behalf of 25 other founding shareholders. Between January 1, 2001 and December 31, 2004, the Company raised $3,125,540 in private placements from the sale (adjusted for the reincorporation merger on July 9, 2003) of 1,830,298 shares of common stock and: (i) warrants with an original expiration date of December 31, 2004 to purchase 275,833 shares of common stock at $1.00 per share; (ii) warrants with an original expiration date of December 31, 2004 to purchase 411,770 shares of common stock at $1.50 per share; and (iii) warrants with an original expiration date of December 31, 2006 to purchase 181,500 shares of common stock at $5.00 per share. The December 31, 2004 warrant expiration date was extended to January 31, 2005, by which date the warrants were converted.
Between January 1, 2005 and March 31, 2005, the Company raised $2,140,000 through the sale of 535,000 shares of common stock and warrants to purchase 214,000 shares of the Company's common stock in a private placement offering. The warrants are exercisable at $5.00 per share, expire December 31, 2006 and are designated "E Warrants." Between April 22 and June 10, 2005, the Company raised $1,380,000 through the sale of 276,000 shares of common stock and 55,200 E warrants. Between June 20, 2005 and October 24, 2005, the Company raised $3,230,000 through the sale of 646,000 shares of common stock.
21
Private Placement Offerings (Continued)
During December 2005 the Company raised $390,000 from the exercise of warrants to purchase 130,000 shares of common stock. During December 2005, the Company raised $440,000 from the sale of 80,000 shares of common stock and warrants to purchase 12,500 shares of common stock at $5.50 per share at any time from July 1, 2007 (as may be deferred by the Company for up to six months) through December 31, 2008 such warrants being designated as "G warrants".
During the first half of 2006 the Company (i) raised $407,000 from the sale of 74,000 shares of common stock and 7,125 G warrants; (ii) issued 2,500 shares of common stock for $13,750 in services; and (iii) issued 6,000 shares of common stock for $30,000 upon the exercise of E warrants; and (iv) issued 30,000 shares of common stock for $90,000 upon the exercise of $3.00 warrants.
Compensation Costs for Warrant and Option Issuances
The compensation cost of warrant and option issuances for the period ended June 30, 2006 and the year ended December 31, 2005 and for the period from April 6, 2000 (inception) to June 30, 2006 amounted to $91,512, $232,345 and $467,600, respectively.
As of June 30, 2006, there was $165,599 of unrecognized compensation cost, related to nonvested stock options granted under the Company's various stock option plans. That cost is expected to be recognized as follows:
2005 Stock Option Plan
During 2005, a stock option plan (the "Plan") was adopted by the Company, pursuant to which 1,000,000 shares of common stock are reserved for issuance to officers, directors, employees and consultants. The Plan will be administered by the Board of Directors or one or more committees appointed by the board (the "Administrator").
The Plan contemplates the issuance of stock options by the Company both as a private company and as a publicly traded company and will be available to residents of the United States, the State of Israel and other jurisdictions as determined by the administrator. The award of stock options under the Plan will be made pursuant to an agreement between the Company and each grantee. The agreement will, among other provisions, specify the number of shares subject to the option, intended tax qualifications, the exercise price, any vesting provisions and the term of the stock option grant, all of which shall be determined on behalf of the Company by the Administrator. The Plan will remain in effect for a term of ten years unless terminated or extended according to its provisions. As of the date of authorization of these financial statements no awards have been made under the Plan. See Note 9.
22
6. RELATED PARTY TRANSACTIONS
Cimarron Resources, Inc.
Notes payable to related parties includes $36,500 under a loan facility with Cimarron Resources, Inc. (Cimarron) a company owned by the CEO of the Company. Cimarron obtained the monies to lend to the Company through a loan facility with Bank One. The note accrues interest at Bank One's Prime Rate plus 2.5%. The terms of Cimarron's loan facility to Zion are a 100 month term loan repayable monthly commencing December 1, 2003 in $500 increments, with Cimarron having the option commencing January 15, 2005 to call the loan in whole or in $5,000 increments on 30 days notice which call option has subsequently been deferred until July 31, 2007.
Rappaport Loan
Notes payable to related parties includes a $75,000 note payable under a line of credit loan agreement with a shareholder of the Company. Any outstanding balance may be converted at the election of the lender to shares of common stock in increments of $5,000 at $4.00 per share. Outstanding balances will accrue interest at 10% per annum. At the direction of the shareholder, a commitment fee of $10,000 was paid to two children of the shareholder in the form of 12,000 shares of common stock and warrants to purchase 5,000 shares of the Company's common stock. See Note 9.
Robert E. Render
During the six months ended June 30, 2006, Mr. Render provided $15,000 of consulting services to the Company.
Richard J. Rinberg
In connection with arranging the "$300,000 loans", Mr. Richard J. Rinberg, prior to becoming a director, received a $7,500 fee paid in 2,500 shares of common stock.
During October 2005 Mr. Richard J. Rinberg was elected President of the Company and the board of directors approved an award to Mr. Rinberg of 200,000 shares of common stock valued at $500,000 as compensation for the two year period beginning November 1, 2005, subject to restrictions and vesting requirements. The company received a valuation from a firm of external valuers supporting this valuation. The Rinberg shares are subject to repurchase by the Company at $0.01 per share if Mr. Rinberg leaves his position with the Company, such repurchase rights being pro-rated over the 24-month period beginning November 1, 2005. In May 2006, the Company issued 200,000 shares of common stock to a trust company for the benefit of Richard Rinberg.
Other issuances
In respect of issuances to John Brown (related party) see Note 5.
7. INCOME TAXES
As at June 30, 2006, the Company has available net operating loss carry-forwards of approximately $4,953,000 to reduce future U.S. taxable income. These carry-forwards expire from 2020 to 2025.
As at June 30, 2006, the Company has available net operating loss carry-forwards of approximately $8,755,000 to reduce future Israeli taxable income.
23
8. COMMITMENTS AND CONTINGENCIES
Environmental Matters
The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures as they relate to the drilling of oil and gas wells in the operation thereof. Although environmental assessments are conducted on all purchased properties, in the Company's acquisition of existing or previously drilled well bores, the Company may not be aware of what environmental safeguards were taken at the time such wells were drilled or during such time the wells were operated.
Should it be determined that a liability exists with respect to any environmental clean up or restoration, the liability to cure such a violation could fall upon the Company. No claim has been made, nor is the Company aware of any contingent demands relating thereto. Liabilities for expenditures are recorded when environmental assessment and/or remediation is probable and the costs can be reasonably estimated.
Royalty Commitments
The Company is obligated, according to the Israeli Petroleum Law, 5712-1952 (the "Petroleum Law"), to pay royalties to the Government of Israel on the gross production of oil and gas from the oil and gas properties of the Company located in Israel (except those reserves serving to operate the wells and related equipment and facilities). The royalty rate stated in the Petroleum Law is 12.5% of the produced reserves. At March 31, 2006, the Company did not have any outstanding obligation in respect to royalty payments, since it is at the "exploration stage" and, to this date, no proved reserves have been found.
Long Term Incentive Plan
The Company has initiated the establishment of a long-term management incentive plan for key employees whereby a 1.5% overriding royalty or equivalent interest in the Ma'anit-Joseph license and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to key employees.
Charitable Trusts
The Company has initiated the establishment of two charitable trusts based in Israel and in the United States for the purpose of supporting charitable projects and other charities in Israel and the United States. A 3% overriding royalty or equivalent interest in the Ma'anit-Joseph License and such other oil and gas exploration and development rights as may in the future be acquired by the Company shall be assigned to each charitable organization (6% overriding interest in the aggregate).
Notes Payable to Other Parties
During May and June 2006, the Company borrowed $62,500 from five other parties. The notes payable are for a one-year period and bear interest at the rate of 8.00% per annum.
9. SUBSEQUENT EVENTS
Following the balance sheet date, the Company (i) raised $55,000 from the sale of 10,000 shares of common stock; (ii) issued 3,500 shares of common stock for $17,500 upon the exercise of E warrants; (iii) on July 5, 2006, options were awarded under the 2005 Stock Option Plan as follows: (a) to two directors for the purchase of 50,000 shares of common stock at $5.00 per share through December 31, 2008 at a value of $58,647; (b) to one employee for the purchase of 80,000 shares of common stock at $5.00 per share through December 31, 2010 (these options will vest in three equal tranches of 26,667 shares each on January 1, 2007, on January 1, 2008 and on January 1, 2009 at a value of $193,600 that will be charged according to the vesting periods, and the options may not be exercised prior to July 1, 2007 subject to deferral by the Company for a period of up to six months); and (c) to one employee for the purchase of 40,000 shares of common stock at $5.00 per share through December 31, 2010 (thes e options will vest in four equal tranches of four vesting periods of 10,000 shares each, on the grant date, on October 1, 2006, on October 1, 2007 and on October 1, 2008 at a value of $96,800.
24
9. SUBSEQUENT EVENTS (CONTINUED)
that will be charged according to the vesting periods, the options may not be exercised prior to July 1, 2007 subject to deferral by the Company for a period of up to six months); (iv) on July 31, 2006, the Rappaport loan (see Note 6) was further extended to a date 15 days following the initial closing of a public offering. In connection with this extension, the interest rate on the facility was increased to 12% per annum and Ms. Rappaport's option to convert monies outstanding under the facility to equity securities was mutually cancelled.
Introduction
The following discussion and analysis should be read in conjunction with our accompanying financial statements and the notes to those financial statements included elsewhere in this Quarterly Report. The following discussion includes forward-looking statements that reflect our plans, estimates and beliefs and involve risks and uncertainties. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed below and elsewhere in this Quarterly Report.
Overview
We are engaged in oil and natural gas exploration upon 219,000 acres of preliminary permit and license areas in the State of Israel. During the six years and three months between our formation and June 30, 2006, we have issued equity securities in the amount of $12,801,225 and have incurred an accumulated liability of $1,992,117 in order to operate our company and satisfy our work commitments under our agreements with the State of Israel. All of our officers and key employees have deferred the majority of their salaries and other compensation during this period. They have all exchanged portions of the deferred compensation from time to time for our equity securities, which (with four exceptions relating to employment stock options) have all been priced at the same price as the sales of our private equity capital.
On January 25, 2006, we filed a Registration Statement with the Securities and Exchange Commission on Form SB-2 and have since filed five amendments to that Statement for the registration of 2,672,000 shares of our common stock. This Registration Statement has not yet been declared effective by the Commission.
Neither our common stock nor our warrants are listed or traded on any stock exchange or organized market, and there is therefore no market for them.
Going Concern Basis
Our unaudited interim financial statements for the period ended June 30, 2006 have been prepared on a going concern basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. Since Zion is in the development stage, we have limited capital resources, insignificant revenue, and a loss from operations. The appropriateness of using the going concern basis is dependent upon our ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. The uncertainty of these conditions raises substantial doubt about our ability to continue as a going concern. The unaudited financial statements do not include any adjustments that might result from the outcome of this uncertainty. Uncertainties about our ability to continue as a going concern would be significantly reduced upon the closing of the initial public offering, if successful.
Liquidity and Capital Resources
Working capital (current assets minus current liabilities) was $208,281 and $499,094 at June 30, 2006 and December 31, 2005, respectively.
Net cash provided by financing activities was $543,760 and $4,256,489 for the six months ended June 30, 2006 and 2005, respectively, of which $467,380 in 2006 and $4,273,171 in 2005 was from the sale of equity securities, net of equity sales costs. The remainder was provided by loans (less repayments of loans). Net cash used in investing activities was $488,174 and $2,492,688 for the six months ended June 30, 2006 and 2005, respectively, virtually all of which was used for capitalized exploration costs on the license.
On June 30, 2006, we had cash and cash equivalents in the amount of $270,000 and accounts payable within the next 90 days of approximately $220,000 for a net of approximately $50,000. If we are not successful in completing the minimum offering, we will not have sufficient liquidity to meet our cash requirements for the next year and may be forced to seek buyers for portions of our petroleum interests. If the minimum amount is raised in the offering described above and we are able to raise an additional approximate amount of $1,250,000 from additional sources (including the exercise of warrants expiring December 31, 2006), we should have sufficient funds to satisfy our cash requirements through June 2007.
Results of Operations
We have no revenue generating operations as we are still an exploration stage company; however, drilling operations on the Ma'anit #1 commenced on April 10, 2005 and the rig was released seven months later. Almost all of our net loss for the six months ended June 30, 2006, comes from general and administrative expenses. Such expenses totaled $935,128, consisting of $273,159 for legal and professional costs, $437,399 for salaries, most of which is deferred compensation (a non-cash expense) of our directors, officers and key employees, and other costs in the amount of $224,570.
26
ITEM 3.CONTROLS AND PROCEDURES
We maintain controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission. Based upon their evaluation of those controls and procedures as of the end of the period covered by this Quarterly Report, our Chief Executive Officer and our principal financial officer concluded that our disclosure controls and procedures were adequate.
We made no changes in our internal controls over financial reporting that occurred subsequent to the date of the evaluation of those controls by our Chief Executive Officer and principal financial officer that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. CHANGES IN SECURITIES
1. Exercise of Outstanding Warrants.During the three months ended June 30, 2006, two of our shareholders exercised their rights under currently outstanding warrants to purchase 32,500 shares of common stock for cash consideration of $102,500. The sales of these securities were made in reliance upon Section 4(2) of the Securities Act, which provides exemptions for transactions not involving a public offering. All purchasers were existing stockholders of Zion and the shares purchased were purchased by way of warrants held by the stockholders that were originally issued in the connection with the purchase of notes payable issued by Zion or purchases of our common stock. The certificates evidencing the securities purchased bear legends stating that the shares are not to be offered, sold or transferred other than pursuant to an effective registration statement under the Securities Act or an exemption from such registration requirements.
2. President's Stock Award. Effective November 1, 2005, Mr. Richard Rinberg was elected our president. On May 22, 2006, In connection with this appointment, ESOP Trust Company (for the benefit of Mr. Rinberg) was issued 200,000 shares of Zion common stock, subject to certain pro-rated vesting requirements over the two year retention period and voting agreement requirements. Due to the nature of the restrictions and requirements related to the stock, the transaction was valued at $500,000, pro rated at $20,833 per month for the twenty-four month period commencing November 1, 2005. If Mr. Rinberg's retention is terminated prior to the end of the term, the company shall have the right to repurchase the unearned shares at par. The issuance of the shares of common stock was made in reliance upon Section 4(2) of the Securities Act, which provides exemptions for transactions not involving a public offering. The purchaser of the securities is a director and executive officer of Zi on.
ITEM 3.DEFAULTS UPON SENIOR SECURITIES.
ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None
ITEM 5.OTHER INFORMATION.
The financial statements for the years ended December 31, 2005 (previously unaudited) and 2004 and for the period from inception (April 6, 2000) until December 31, 2004 have been restated because we determined that we had not correctly recorded at fair value equity instruments issued to employees and non-employees for services rendered and in consideration for debt issuances and modifications for the period from inception until December 31, 2005. The net effect of the restatement increases: (i) total assets as of December 31, 2005 and 2004, respectively, by $20,966 (0.23%) and $10,589 (0.55%); (ii) net loss for the period from inception (April 6, 2000) until December 31, 2005 and 2004, respectively, by $425,271 (9.65%) and $175,835 (5.77%); (iii) additional paid-in-capital as of December 31, 2005 and 2004, respectively, by $446,237 (3.87%) and $186,424 (5.04%); and (iv) total stockholders' equity as of December 31, 2005 and 2004, respectively, by $20,966 (0.29%) and $10, 589 (1.51%).
ITEM 6.EXHIBITS.
31.1
Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Exchange Act
31.2
Certification of the Principal Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) under the Exchange Act
32.1
Section 1350 Certification of Chief Executive Officer
32.2
Section 1350 Certification of Principal Financial Officer
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. In accordance with the Exchange Act, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
(Registrant)
By:
/s/ Eugene A. Soltero
/s/David Patir
Eugene A. Soltero
David Patir, Senior Vice-President
Chief Executive Officer (Principal Executive Officer)
(Principal Financial and Accounting Officer)
Date:
September __, 2006