February 24, 2006
Mr. Eugene A. Soltero
Chief Executive Officer
Zion Oil & Gas, Inc.
6510 Abrams Road, Suite 300
Dallas, Texas 75231
Re: Zion Oil & Gas, Inc.
Registration Statement on Form SB-2
Filed January 25, 2006
File No. 333-131275
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Filed April 15, 2005, as amended
File No. 333-107042
Dear Mr. Soltero:
We have reviewed your filings and have the following
comments.
Where indicated, we think you should revise your document in
response
to these comments. If you disagree, we will consider your
explanation as to why our comment is inapplicable or a revision is
unnecessary. Please be as detailed as necessary in your
explanation.
In some of our comments, we may ask you to provide us with
information so we may better understand your disclosure. After
reviewing this information, we may raise additional comments.
Please understand that the purpose of our review process is
to
assist you in your compliance with the applicable disclosure
requirements and to enhance the overall disclosure in your filing.
We look forward to working with you in these respects. We welcome
any questions you may have about our comments or on any other
aspect
of our review. Feel free to call us at the telephone numbers
listed
at the end of this letter.
Form SB-2
General
1. Many of our comments apply to disclosure that appears in more
than
one place. To eliminate the need for us to issue repetitive
comments, please make corresponding changes to all affected
disclosure, wherever it appears in your document.
2. Please advise whether affiliates or control persons of Zion may
purchase in the offering and, if so, their intentions to do,
including purchasing shares sufficient for you to meet the minimum
distribution.
3. At times, your disclosure appears inconsistent with the status
of
your current business operations. As appropriate, please revise
to
include necessary context, including an emphasis on your lack of
an
operating history and failure to generate any operating revenues
since inception. For example, it is premature to be discussing
marketing of production for the current Israeli market when you
continue to determine whether your properties even contain
hydrocarbons. Your registration statement should provide a fair
and
complete picture of your business, including balanced and accurate
disclosure.
4. Please update your disclosure with each amendment to the most
recent practicable date. For example, update the status of your
application with the American Stock Exchange. Also, provide an
updated consent from your independent accountant in each
subsequently
filed amendment.
Prospectus Summary, page 1
5. Please eliminate the suggestion that the summary "does not
contain
all of the information that may be important" to an investor.
Rather, make clear that this section summarizes all material
information contained in your prospectus.
6. You state that you are a "development stage oil and gas
exploration company..." As you do not have proven reserves, we
believe you should limit your discussion of business activities to
that of an "exploration stage" enterprise, until such time that
you
have proven reserves and are able to enter the development stage.
Please revise your document to remove all passages suggesting that
you may have progressed beyond the "exploration stage."
Risk Factors, page 3
7. All risk factors should be no longer than one or two short
paragraphs. Identify the risk, include a cross-reference to more
detailed disclosure elsewhere if appropriate, and eliminate all
excess detail. Many of your risk factors are too detailed, for
example "Our operations in Israel are subject to political and
economic risks." Where you discuss multiple risks under one
caption,
break the discussion into separate factors and include appropriate
captions for each.
8. Revise risk factor subheadings so that they clearly identify
the
risk to be discussed. Several of your risk factor captions are
too
vague and generic to adequately describe the risk that follows.
For
example, simply stating "We are a development stage company" and
"We
are committed to paying executive compensation for three years"
does
not disclose the resulting risk of harm to investors. Revise to
provide captions that concisely identify the risk.
9. Eliminate language that tends to mitigate the risk you discuss.
Examples include clauses that begin "although" or "while."
Instead,
focus on the underlying risk and the harm that could result. You
may
provide other details later in your document.
If compliance with environmental regulations is more expensive...,
page 9
10. If material, inform us of your potential exposure to and the
dollar amount of reserves established for exposure to
environmental
liabilities. We may have additional comments.
Earnings will be diluted due to charitable contributions...., page
10
11. Please explain how your key employees incentive plan differs
from
the required executive compensation payments.
Price of common stock was arbitrarily determined...., page 11
12. Briefly describe how you determined the offering price of your
common stock, particularly in light of the offering prices in your
private placements. See Item 505 of Regulation S-B.
Use of Proceeds, page 11
13. If you will use the proceeds to discharge debt, you should
state
the interest rate and maturity of the loan. Also, if that debt
was
incurred within one year, you should describe the use of proceeds
of
that debt. See Instruction 1 to Item 504 of Regulation S-B.
14. We note your statement, "In order to justify the costs of
drilling of additional wells, there should be the expectation that
each additional well would have initial production rates in excess
of
1,000 barrels of oil per day or six million cubic feet of gas per
day, or some combination of the two." The payout of well costs
implies a minimum hydrocarbon recovery at an assumed oil/gas
price.
Amend your document to discuss recoveries necessary to payout well
costs.
Plan of Operation and Management`s Discussion, page 14
15. Please describe any known trends or uncertainties that you
have
had or reasonably expect will have a material favorable or
unfavorable impact on short-term or long-term liquidity.
16. Please clarify whether you will have sufficient liquidity to
meet
your cash requirements for the next year.
General Operating Conditions, page 16
17. We note that your agreement with the Kibbutz for continued use
of
the surface rights is subject to the formal approval of the Israel
Lands Authority. Disclose when you expect the Israel Lands
Authority
to complete its approval process.
18. We note your discussion about Givot Olam Oil Exploration
L.P.`s
drilling activities on property just south of your Ma`anit #1
Well.
References to wells and other oil and natural gas properties that
exist in the area of your property may misguide investors into
inferring that your property may have commercially profitable
amounts
of oil or gas reserves, because of its proximity to these well and
properties. Remove information about wells, prospects or
companies
operating in or near to your property. Focus your disclosure on
your
property.
19. Here you state, "...the entire target section of Triassic Age
formation through which Givot Olam drilled (some 450 meters or
1,485
ft.) was "hydrocarbon saturated", meaning that all of the rock
drilled had its entire pore space filled with either oil and/or
gas."
Delete this statement since most known hydrocarbon reservoir rocks
contain both petroleum hydrocarbons and water.
20. You state, "Givot Olam also publicized that their consultant`s
technical report recommended completion of the zone of the Meged
#4
using one or more 1000 meter horizontal drain holes, each expected
to
have an initial production rate of 900 barrels of oil per day
declining to 250 barrels per day after two years." Amend your
document to make clear to the reader that you have no ownership in
Givot Olam`s production license or the acreage described in Givot
Olam`s public disclosures.
21. Delete the statement "...the lease area is estimated to
contain
approximately 956 million barrels of oil in place from Triassic
Age
formations, of which Givot Olam estimates that approximately 20%
may
be possible to develop and produce." as it refers to unproved
reserve
quantities.
Plan of Distribution, page 26
22. Please be advised that you should, before you request
acceleration, have the NASD issue a statement expressing no
objection
to the compensation paid to the underwriter or any other broker
dealer and other arrangements. Rule 461of Regulation C. Please
confirm that you understand this requirement.
Management, page 29
23. Please disclose the titles of the senior management positions
Mr.
Brown held at GTE Valentine and Magnetek, Inc.
24. Please disclose if any bankruptcy petition was filed by or
against any business of which your officer or director was a
general
partner or executive officer. See Item 401(d)(1) of Regulation S-
B.
Certain Relationships and Related Party Transactions, page 42
25. Disclose whether the transactions you describe were on terms
at
least as favorable to you as could have been obtained through
arm`s
length negotiations with unaffiliated third parties. Also,
discuss
how you intend to address future potential conflicts of interest,
and
state whether you have any policy regarding the terms of future
transactions with your affiliates.
26. We note that you entered into a two-year retention agreement,
commencing November 1, 2005, in connection with the election of
Mr.
Rinberg as your President, to be prepaid in the form of 200,000
shares of your common stock. We understand that you valued the
shares at $500,000, and have accounted for this transaction as
prepaid expenses, to be expensed pro-rata over a twenty-four month
period. Please tell us how you determined that $500,000 was the
fair
value of the shares, and why you believe it is appropriate to
account
for this transaction as a prepaid expense.
27. You state, "We believe that the foregoing transactions were on
no
less favorable terms than could have been obtained from
unaffiliated
third parties." According to paragraph 3 of SFAS 57, you must be
able to substantiate any implication that related party
transactions
were consummated on terms equivalent to those that prevail in
arm`s-
length transactions. Please disclose the basis for your
statement.
Description of Securities, page 53
28. Refer to the first paragraph under the subheading "Common
Stock."
The statement that the common stock will be, when issued and paid
for, "fully paid and nonassessable" is a legal conclusion that you
are not qualified to make. Also, it can only be made for
securities
that have already been issued or will be issued in this offering.
It
cannot be made for shares that you might sell in the future.
Delete
this statement.
Business and Properties, page 60
29. Please explain in more detail what "new exploratory trend
concept" is the first time you mention it and describe how it
affected your business plan.
30. Please provide the amount spent during each of the last two
fiscal years on research and development activities, as required
by
Item 101(b)(10) of Regulation S-B.
31. Please provide the costs and effects of compliance with
environmental laws, as required by Item 101(b)(11) of Regulation
S-B.
Business and Properties
Change in Accountants, page 74
32. We note that in October 2005 you appointed "KPMG-Somekh
Chaikin"
as your independent registered accounting firm. Please expand
your
disclosures to include who the principal auditor will be, along
with
their office location, as well as what the affiliation is between
KPMG and Somekh Chaikin. Further, describe where the majority of
your books, records, and management are located, and who will
perform
the majority of the audit work.
Tax Consequences, page 76
33. The statement that US investors is a tax conclusion which the
company is not qualified. As it appears to be based on opinion of
counsel as contained in Exhibt 8.1, revise your disclosure to
summarize that opinion and indicate that the disclosure is based
on
the opinion of Ray, Cho, Wiley, Van Brauman & Gibson, PLLC.
Exhibit 23.3 should be revised accordingly.
Where You Can Find More Information, page 77
34. Please revise your reference to the Securities and Exchange
Commission to reflect its current address at 100 F Street N.E,
Washington D.C. 20549.
Where You Can Find More Information, page 77
35. Please revise this section to include the SEC`s current
address.
Financial Statements
Note 1 - Nature of Operations and Basis of Presentation, page F-11
Basis of Presentation, page F-11
36. We note that, though your financial statements have been
prepared
on a going concern basis, there is substantial doubt about your
ability to continue as a going concern. This doubt is similarly
expressed by your accountant`s in their audit opinion to your
financial statements. However, you further state that your recent
successful private placement of common stock and warrants and
extension of your exploration license in Israel "has put much of
that
doubt to rest," which appears to contradict the current opinion of
your accountants. Please revise your disclosures in a way that
does
not imply that you disagree with your accountants, if true, and
that
sufficiently describes the steps you have taken and plan to take
to
overcome and mitigate the risk factors that exist.
Note 2 - Summary of Significant Accounting Policies, page F-12
Cash, page F-12
37. You state, "For purposes of the statement of cash flows, the
Company considers all highly liquid investments with a maturity of
three months or less when purchased to be cash equivalents."
However, according to paragraph 8 of SFAS 95, only investments
with
"original maturities", as defined in footnote 2 of that paragraph,
to
qualify under that definition. Please revise your disclosure
under
this heading, and in Note 2 to your interim financial statements,
to
clarify your policy with respect to investments you consider to be
cash equivalent.
Oil and Gas Properties, page F-12
38. Please expand your disclosures of oil and gas activities to
include all of the information required under Rule 4-10(c)(7)(ii)
of
Regulation S-X, for companies accounting for oil and gas
activities
using the full cost method. Please also address this in the
footnotes to your interim financial statements.
Stock-Based Compensation, page F-13
39. You explain that, prior to 2003, you accounted for stock-based
compensation under APB 25 and that no stock-based employee
compensation expense was reflected in net income for the year
ended
December 31, 2004, "as all stock options granted under those plans
had an exercise price equal to or greater than the fair market
value
of the underlying common stock on the date of the grant." Given
the
timing indicated by your disclosure, it appears that your
referenced
date should be December 31, 2002.
Note 5 - Related Party Transactions, page F-16
40. It appears that you have duplicated your accounts payable
disclosure in the first and last paragraphs within this footnote.
In
addition, it appears you have reflected different amounts at
December
31, 2004 and 2003 in each of these paragraphs. Please revise your
disclosure to reflect the correct amounts that are included in
your
accounts payable for the periods presented, and to eliminate any
duplicative language.
41. We note in your tabular presentation of notes payable to
related
parties that your principal payments extend through December 31,
2010. However, it appears you have included the total amount due
of
$144,000 as a current liability on your balance sheet. Please
expand
your disclosures to include the reasons you have classified the
full
balance of your notes payable to related parties as current, if
true,
or revise your financial statements to reflect payments due after
one
year as long-term liabilities.
Interim Financial Statements
Note 7 - Loan Transactions, page F-35
42. We note that on February 28, 2004, you entered into three
$100,000 loan agreements, which were further affected by certain
later transactions occurring on September 30, 2004 and November 4,
2004. Based on the dates of the events you indicate, it appears
that
this disclosure should also be included in the notes to your
audited
financial statements for the year ended December 31, 2004.
Alternatively, if the dates should reflect 2005 rather than 2004,
please revise your disclosure accordingly.
Part II
Recent Sales of Unregistered Securities, page II-2
43. If securities were issued for service, describe the nature and
amount of the services provided. See Item 701(c) of Regulation S-
B.
Exhibits
44. If a subscription agreement is to be used, it should be
attached
to the prospectus or filed as an exhibit.
Form 10-KSB for the Fiscal Year Ended December 31, 2004
Control and Procedures, page 8
45. This section indicates that your "...disclosure controls and
procedures were adequate." Revise to comply with Item 307 of
Regulation S-B. Specifically, disclose whether the disclosure
controls and procedures in place are "effective," as opposed to
"adequate." Consult sections II.I and III.E found in Release No.
33-
8238 for additional guidance.
We note that your controls and procedures are designed to ensure
that
information required to be disclosed in your SEC filings is
"recorded
processed, summarized and reported within the time periods
specified
in the rules and forms of the Securities and Exchange Commission."
Please confirm, if true, that your certifying officers concluded
that
your disclosure controls and procedures are also effective to
ensure
that information required to be disclosed in the reports that you
file or submit under the Exchange Act is accumulated and
communicated
to your management, including your chief executive officer and
chief
financial officer, to allow timely decisions regarding required
disclosure. See Exchange Act Rule 13a-15(e).
46. We note your statement that there were "no changes in [your]
internal controls over financial reporting that occurred
subsequent
to the date of the evaluation of those controls...." Please
confirm,
if true, that there were no changes that occurred during, rather
than
only subsequent to, the last fiscal quarter. See Item 308(c) of
Regulation S-B.
Exhibit 10.3
47. File an executed escrow agreement prior to effectiveness of
the
registration statement.
Closing Comments
As appropriate, please amend your registration statement in
response to these comments. You may wish to provide us with
marked
copies of the amendment to expedite our review. Please furnish a
cover letter with your amendment that keys your responses to our
comments and provides any requested information. Detailed cover
letters greatly facilitate our review. Please understand that we
may
have additional comments after reviewing your amendment and
responses
to our comments.
We urge all persons who are responsible for the accuracy and
adequacy of the disclosure in the filing to be certain that the
filing includes all information required under the Securities Act
of
1933 and that they have provided all information investors require
for an informed investment decision. Since the company and its
management are in possession of all facts relating to a company`s
disclosure, they are responsible for the accuracy and adequacy of
the
disclosures they have made.
Notwithstanding our comments, in the event the company
requests
acceleration of the effective date of the pending registration
statement, it should furnish a letter, at the time of such
request,
acknowledging that:
* should the Commission or the staff, acting pursuant to delegated
authority, declare the filing effective, it does not foreclose the
Commission from taking any action with respect to the filing;
* the action of the Commission or the staff, acting pursuant to
delegated authority, in declaring the filing effective, does not
relieve the company from its full responsibility for the adequacy
and
accuracy of the disclosure in the filing; and
* the company may not assert staff comments and the declaration of
effectiveness as a defense in any proceeding initiated by the
Commission or any person under the federal securities laws of the
United States.
In addition, please be advised that the Division of
Enforcement
has access to all information you provide to the staff of the
Division of Corporation Finance in connection with our review of
your
filing or in response to our comments on your filing.
We will consider a written request for acceleration of the
effective date of the registration statement as confirmation of
the
fact that those requesting acceleration are aware of their
respective
responsibilities under the Securities Act of 1933 and the
Securities
Exchange Act of 1934 as they relate to the proposed public
offering
of the securities specified in the above registration statement.
We
will act on the request and, pursuant to delegated authority,
grant
acceleration of the effective date.
We direct your attention to Rules 460 and 461 regarding
requesting acceleration of a registration statement. Please allow
adequate time after the filing of any amendment for further review
before submitting a request for acceleration. Please provide this
request at least two business days in advance of the requested
effective date.
Please contact Tracie Towner at (202) 551-3744 or, in her
absence, Donald Delaney at (202) 551-3863 if you have questions
regarding comments on the financial statements and related
matters.
Please contact Ronald Winfrey, Petroleum Engineer, at (202) 551-
3704
if you have questions regarding comments on the engineering
matters.
Please contact Jason Wynn at (202) 551-3756 or, in his absence, me
at
(202) 551-3740 with any other questions. Direct all
correspondence
to the following ZIP code: 20549-7010.
Sincerely,
H. Roger Schwall
Assistant Director
cc: T. Towner
D. Delaney
J. Wynn
R. Winfrey
via facsimile
Alice A. Waters, Esq.
(972) 938-9091
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Mr. Eugene A. Soltero
Zion Oil & Gas, Inc.
February 24, 2006
page 11
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
DIVISION OF CORPORATION FINANCE
MAIL STOP 7010