Zion Oil & Gas Inc (ZNOG)

[lucky, mydog]

Whistleblower Tip Under Section 21F of the Securities Exchange Act of 1934
Company / Issuer: Zion Oil & Gas, Inc. (“ZN”, “Zion”, or the “Company”) Headquarters: Dallas, TX Industry: Oil & Gas
I. Overview
II. Zion Oil & Gas, Inc. is a religious-affinity fraud that targets supporters of
Evangelical Christian and conservative Jewish faiths. Zion raises equity capital, purportedly to fund drilling activities in the search for oil and gas in Israel. However, nearly half of the capital raised is instead paid to Zion’s directors and executive officers and for additional marketing expenses to maintain the fraud.
III. Zion Oil & Gas, Inc. is actively using fraudulent accounting to effectuate and
perpetuate their religious-affinity fraud.
IV. Zion Oil & Gas, Inc. has made -and continues to make- materially false and
misleading statements, including via material omissions, including but not limited to the number of people it employs and consequently the very nature of its operations.
V. Zion Oil & Gas, Inc. has repeatedly made and continues to make false and misleading statements, including material omissions, with regards to key mechanisms of its Dividend Reinvestment and Stock Purchase Program (“DSPP”).
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
I. Overview
Over its nearly 20-year history, Zion Oil & Gas, Inc. has never produced a barrel of oil. It is a wildcatter that has never drilled a successful well. Despite its allegedly holy mission, Zion appears to be simply drilling for dollars. Unsophisticated, largely retail and international ‘investors’ are buying into the vision that Zion and its founder, John Brown, have espoused for years, which is that it is God’s will, derived from chosen scripture that oil will be found in Israel as part of the End of Days and the apocalypse. Zion is a religious-affinity fraud.
Zion has carefully managed its fundraising for years, moving to a unique direct stock purchase model focused on religious channels, rather than using investment banks and broker/dealers to raise money in the capital markets. The Company goes to great lengths to make investing in its direct programs easy for even the smallest of investors while utilizing promotional materials for the sale of stock and warrant units. New stock & warrant units are created often to solicit and induce current and future stock purchases. Indeed, based on a review of social media posts, some ZN investors appear to view their investments as religious donations or back-stopped from losses by God’s will. Targeting unsophisticated investors, international investors and those capital providers willing to invest based on faith may not be fraudulent, but utilizing fraudulent accounting to do so is.
Zion’s questionable and fraudulent accounting, including its capitalization of operating expenses, appears to be part of a sustained and concerted effort to falsify and minimize operational cash burn. Indeed, the costs for Zion’s employee base, combined with non-discretionary, non-compensation marketing expenses suggest a cost structure well in excess of what Zion has been expensing and disclosing in public filings. It further defies explanation how any company managing its own capital raises could issue $4.3 million of equity capital on $8.9 million of operating expenses in 2016 and then raise $23.5 million of equity on identical operating expenses of $8.9 million in 2017. Somehow Zion did just that, which would indicate world-class operating leverage by a company that over its 18-years of disclosing public financials has never generated a single dollar of revenue.
For at least the last 5 years, the only means through which Zion has been able to raise equity capital has been via its DSPP program. DSPPs are vehicles typically geared for individual investors to make small and regular stock purchases without the burden of transaction fees, among other benefits. Zion’s public filings are indicative of substantial undisclosed institutional involvement as well as gaming of Zion Units (combined packages of stocks and warrants), which could only be done with the Company and perhaps the transfer agent’s involvement and knowledge. Additionally, ZN has made numerous false and misleading statements in publicly filed SEC documents relating to its DSPP program.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
II. Zion Oil & Gas, Inc. is a religious-affinity fraud that targets supporters of Evangelical Christian and conservative Jewish faiths. Zion raises equity capital, purportedly to fund drilling activities in the search for oil and gas in Israel. However, nearly half of the capital raised is instead paid to Zion’s directors and executive officers and for additional marketing expenses to maintain the fraud.
Per the SEC1:
“Affinity fraud refers to investment scams that prey upon members of identifiable groups, such as religious or ethnic communities, the elderly, or professional groups. The fraudsters who promote affinity scams frequently are - or pretend to be - members of the group. They often enlist respected community or religious leaders from within the group to spread the word about the scheme by convincing those people that a fraudulent investment is legitimate and worthwhile. Many times, those leaders become unwitting victims of the fraudster's ruse.
These scams exploit the trust and friendship that exist in groups of people who have something in common. Because of the tight-knit structure of many groups, it can be difficult for regulators or law enforcement officials to detect an affinity scam. Victims often fail to notify authorities or pursue their legal remedies and instead try to work things out within the group. This is particularly true where the fraudsters have used respected community or religious leaders to convince others to join the investment.
Many affinity scams involve "Ponzi" or pyramid schemes, where new investor money is used to make payments to earlier investors to give the false illusion that the investment is successful. This ploy is used to trick new investors to invest in the scheme and to lull existing investors into believing their investments are safe and secure. In reality, the fraudster almost always steals investor money for personal use. Both types of schemes depend on an unending supply of new investors - when the inevitable occurs, and the supply of investors dries up, the whole scheme collapses and investors discover that most or all of their money is gone.”
From Zion website 2:
“Zion’s vision, as exemplified by its Founder and Chairman, John Brown, of finding oil and/or natural gas in Israel, is Biblically inspired. The vision is based, in part, on Biblical references alluding to the presence of oil and/or natural gas in territories within the State of Israel that were formerly within certain ancient Biblical tribal areas.”
“Supporting the Vision. All Plan purchases support the search for oil in Israel, because the shares of stock are purchased directly from Zion from our pool of authorized and unissued Common Stock. This means new capital for the company to use for oil exploration. Zion does not receive this new capital when traded on the
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
market only. Zion has reserved up to 15,000,000 shares of its authorized and unissued shares of Common Stock to purchases under the Plan.”
Zion’s SEC filings provide public financials dating back to 2000. From 2000 to present, the Company has never had any revenue, but rather the business model has simply consisted of operating expenses and capital expenditures. Cash comes in mostly through equity transactions (and to a lesser extent convertible bonds) and it is spent on a bloated, overpaid and undisclosed employee base. Drilling is delayed and extended beyond original estimates, allowing for additional fundraising. Between 2007 and 2017, only 51% of the capital raised from equity and unit transactions has been spent allegedly drilling in Israel. Just under half (48%) of the capital raise since 2007 has been spent on general and administrative (“G&A”) expenses. G&A includes employee compensation and ‘marketing expenses’ related to additional capital raises. Even the paltry amount of capital disclosed as being spent drilling is likely being overstated by Zion. The hamster wheel of fundraising that the Zion fraud requires never really ends. Hiding the costs of such fundraising is part of the Zion fraud.
1 https://www.sec.gov/investor/pubs/affinity.htm 2 https://www.zionoil.com/dspp/dspp-faq/
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
III. Zion Oil & Gas, Inc. is actively using fraudulent accounting to effectuate
and perpetuate their religious-affinity fraud
Zion has been careful in the manner in which it runs its religious-affinity fraud, allowing it to survive and flourish for many years. A forensic review of many years of SEC filings, however, raises a number of red flags and accounting issues. In particular, ZN appears to clearly be capitalizing operating expenses, which is likely a means to hide the manner in which they raise capital.
Due to recently imposed disclosed rules ZN appears to have inadvertently highlighted their fraudulent accounting and material misstatements.
From ZN’s 2017 proxy, dated 4/13/18 3:
“CEO Pay Ratio
On our filer status determination date of December 31, 2017, Zion had an aggregate market value held by its non-affiliates of $75 million or more as of June 30, 2017 and entered into an accelerated filer status for the annual report that was filed for 2017 on March 12, 2018 and now is required to provide pay ratio disclosure for the first full fiscal year after January 1, 2017 in the 2019 proxy statement. Nevertheless, Zion has elected to voluntarily disclose our CEO to median employee pay ratio in this proxy statement.
We believe the executive compensation program must be consistent and internally equitable to motivate our employees to perform in ways that enhance the company and shareholder value. The Compensation Committee monitors the relationship between the pay of our executive officers and the pay of our non-executive employees. The Compensation Committee reviewed a comparison of our CEO’s annual total compensation in 2017 to that of all other Company employees for the same period. The calculation of annual total compensation of all employees was determined in the same manner as the “Total Compensation” shown for our CEO in the “Executive Compensation” table on page 20 of this Proxy Statement. Pay elements that were included in the annual total compensation for each employee are: (1) salary received in 2017; (2) bonuses; (3) option awards; and (4) all other compensation that includes auto related expenses, insurance related expenses, other personal benefits and Israel related social benefits. Our calculation includes all employees as of December 31, 2017. We determined the compensation of our median employee by:
(1) calculating the annual total compensation described above for each of our employees; (2) ranking the annual total compensation of all employees inclusive of the CEO from lowest to highest (a list of 37 employees and consultants), and (3) chose the employee ranked 19th as the “Median Employee”.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Zion’s CEO, Mr. Carrillo, had 2017 annual total compensation of $448,902, consisting of salary, bonuses, option awards and all other compensation, as reflected in the Executive Compensation table included in this Proxy Statement. Our median employee’s annual total compensation for 2017 was $139,000. We estimate that Mr. Carrillo’s annual total compensation was approximately 3.2 times that of our median employee in 2017.”
Zion’s latest 10-K, filed 3/18/18 4, indicates 28 “employees and contractors” as of December 31, 2017. The subsequently filed (4/13/18) Proxy statement, in conflict with the 10-K, indicates 37 “employees and consultants” as of December 31, 2017. This conflict is a clue into the deception and the need for said deception in order to maintain a façade.
It is worth noting that the company uses similar but not identical words in the 10-k and the Proxy- contractors and consultants. A review of these two words in both the 10-k and the Proxy indicates that the company uses the terms interchangeably when referring to the number of employees. This is clearly illustrated in the 10-K, where the company states, in a section labeled “Employees & Contractors”, that “[they] regularly utilize independent consultants and contractors”. This is after the company states 28 as the indicative employee count number which means that neither term is additive to the total disclosed
The table below shows the number of employees disclosed in Form 10-Ks in recent years:
Source: Company filings
In its 10-K text, ZN discusses its monthly expenditures in periods when it is and is not actively drilling. In 2012, the company claimed it had 22 employees and had monthly non-drilling period expenditures of $520,000. By 2017, the company’s employee base had increased to 37 per the proxy (28 per the 10-K) and yet monthly non-drilling expenditures decreased to $500,000 per day. No disclosure or indications of any cost savings or increased efficiencies during this period is made by the Company. The numbers seem highly inconsistent at best and perhaps even simply fabricated out of thin air. Along those same lines, consider that the market price for rigs collapsed alongside oil starting in 2014, yet ZN has indicated to its shareholders and constituents that they saw no price declines in the dayrates for their rigs.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Monthly expenditures in the table below align with General and Administrative expenses disclosed on Zion’s income statements. Other operational expenses, which are described as non-compensation, non-professional marketing and investor relations expenses, are not included in the table below which is derived from text in ZN’s Form 10-K’s. As an example, in 2017 the Company stated: “We estimate that, when we are not actively drilling a well, our monthly expenditure is approximately $500,000 per month. However, when we are drilling or testing, as we are now, we estimate that there is an additional cost of approximately $2,500,000 per month.” $500,000 per month is $6 million per year, roughly what ZN reports as general and administrative expenses, thereby seemingly excluding ‘Other’ expenses, which are material, essential and non-discretionary.
To the extent that ZN is excluding other operating expenses from its 10-K, S-3 and other SEC filings, those statements are false and misleading.
Without the marketing expense embedded in the other operational expense line items, Zion would be unable to raise the amount of equity capital it needs to perpetuate its fraud.
While the Company could argue its text relates to cash costs only, given ZN has given penny warrants to contractors/consultants in the past, not disclosing non-cash costs would also be false and misleading.
Source: Company filings
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
ZN currently reports two line items for its operating expenses. General and administrative and Other.
Per the company:
“General and Administrative Expenses: Overhead, including payroll and benefits for our corporate staff, costs of managing our exploratory operations, audit and other professional fees, and legal compliance are included in general and administrative expense. General and administrative expenses also include non-cash stock-based compensation expense, investor relations related expenses, lease and insurance and related expenses.”
“Other general and administrative expenses are comprised of non-compensation and non-professional expenses incurred. The 2017 increase is primarily attributable to marketing expenses associated with investor relations activities.”
Prior to 2014, General and Administrative expense was further broken down into ‘Legal and Professional’ expenses and “Salaries.” Between 2007 and 2014, Salaries represented between 55% and 77% of the combined line items and averaged 69%.
The analysis below will show that ZN must be capitalizing employee expenses beyond the modest amount of salaries actually disclosed as capitalized. By utilizing data provided in SEC filings disclosing cash and total named management and board of director compensation, disclosed office lease expenses, recently reported number of employees, and median employee compensation, one can estimate cash and total General and Administrative (“G&A”) costs. The numbers simply don’t work, even with conservative assumptions on what constitutes salaries or G&A.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Whether looking at total, or cash-only, compensation, the math suggests Zion cannot be expensing all of its employee and other G&A costs.
Total compensation
Source: Company filings
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Cash-only compensation
Source: Company filings
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
This analysis reveals the impossibility of Zion fully expensing all of its employee compensation expenses. Zion is capitalizing operational expenses beyond what is disclosed. Numerous data points in SEC filings and other public sources indicate a much larger employee base than what had been previously disclosed in SEC filings. This disparity, likely borne from the need for covert fundraising, is a symptom of the imbalances that can emerge from intentional distortions of financial statements. Capitalizing expenses is then a cosmetic treatment of the symptoms, ultimately to hide the disease of religious-affinity fraud. It should be noted that even when not discounting total G&A to account for salaries only, but then offsetting with office lease and other expenses it is difficult to make the math work in any manner to suggest ZN is properly accounting for operating expenses.
There are other instances in which ZN takes tremendous liberties in its decisions to expense or capitalize. In 2011 and 2014, ZN disclosed that Other operating expenses increased due to “drilling and production related expenses” and “operational expenses in regard to re-entry and testing of the Elijah #3 well,” respectively. These accounting items were not proper and appear to be used to explain away higher operating expenses. ZN uses full-cost accounting for its oil and gas reserves. Per accounting rules there should never be any operating expenses related to drilling or reserves unless the assets are producing, which has never occurred at ZN. Said differently, all costs related to wells and drilling should be capitalized until the wells produce.
Specific to 2014 Other operating expenses, the decision to expense rather than capitalize well-related costs led to what were either curious accounting entries or a broader attempt to “fudge” the numbers without submitting amended SEC filings. Other operating expenses were reported as $2,513,000 through nine months of 2014. Full-year Other operating expenses were reported as $2,541,000, indicating only $28,000 of such expenses in the fourth quarter of 2014 versus the same line item averaging $838,000 per quarter over the first three quarters of the year. More tellingly, the numbers filed with the SEC for Other operating expenses during 2015 make no sense and would seem to indicate a company playing fast and loose with decisions on expensing versus capitalizing. Other operating expenses were $2,013,000 through the first nine months of 2015, but $1,790,000 for full-year 2015, indicating negative $223,000 of Other operating expenses during the fourth quarter of 2015. No explanation was given and no prior filings were amended. Of note, during 2015 the Company also took a $910,000 provision for arbitration related liabilities in its General and Administrative line items. Despite settling the liability for much less (~$550,000), there was never a reversal of the difference between the outcome and the provision.
It is no wonder the Company has to capitalize, rather than expense, operating costs. Simple searches of Linkedin and other online resources show nearly 150 current and former employees, not only in Dallas and Israel as disclosed by Zion, but also strangely in far off places such as India, Nigeria, the U.K., New Zealand, China, France, and a slew of other countries. Perhaps coincidentally, when reviewing social media
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
posts on the Zion page or comments on the Company webpage, many current and potential investors seem to be located in India, Nigeria, Indonesia, Philippines, New Zealand and other locations that seem strange for a small company out of Dallas, Texas with no history of revenues and drilling operations solely in Israel. Running a global marketing enterprise requires large numbers of people, making it a costly and difficult to conceal endeavor.
3https://www.sec.gov/Archives/edgar/data/1131312/000121390018004416/def 14a0418_zionoilandgas.htm
4https://www.sec.gov/Archives/edgar/data/1131312/000121390018002832/f10 k2017_zionoilandgas.htm
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
IV. Zion Oil & Gas, Inc. has made -and continues to make- materially false and
misleading statements, including via material omissions, including with regard to the number of people it employs and consequently the very nature of its operations
Zion repeatedly discloses that Other operating expenses related to “non- compensation, non-professional expenses” that are primarily attributable to “marketing and investor relations related expenses.” A review of the Linkedin profiles of current and former investor relations managers gives a glimpse as to the true nature of ‘investor relations’ at Zion 5:
• “trained and supervised a team of company representatives who communicated directly with potential investors in a series of private and public stock offerings”
• “...web database for tracking the communications with potential investors and shareholders. Trained the underwriter’s brokers to use the database for the company’s successful IPO”
• “Hired and managed a team of 7 to manage the 350% direct equity increase and 400% growth in direct investors.”
• “Created new online user experience toward equity raising online internationally with ~$20 million through the website.”
• “...worked directly with investors to raise almost $13 million from a Best Efforts Offering.”
• “Managed effective calling team to inform and facilitate purchasing of stock”
• “Placed banner advertising on Christian/conservative web sites, increasing number of visitors to company website.”
• “SEO (Search Engine Optimization) services”
• “Solicitation as well as assist with Stock Offerings to raise capital”
• “Implemented $250K - $500K marketing campaigns, and developed IR management systems where a small team could handle the support of the influx of new and existing investors.”
Solicitation, marketing campaigns, calling teams. Rather than drilling wells, ZN’s primary business is raising capital and running a global marketing scheme in the form of a religious boiler room. Indeed, one former investor relations manager notes she gave the Company’s broker access to their database of current and potential investors, which were seemingly culled from a number of religious channels. Based on that brokers’ FINRA background, that could only be described as leading the religious lambs to financial slaughter.
In addition to the Company’s inconsistent disclosure relating to the number of people it employs, an analysis of Linkedin further indicates Zion is materially misrepresenting the number of employees it has, in addition to the location of its
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
offices. Indeed, nearly 150 people identify themselves as current or former Zion employees on Linkedin. On Glassdoor, a current or former ‘Senior Shareholder Account Representative’ indicated they were working out of the Ogden, Utah office, while individuals representing themselves on Linkedin as Zion employees show locations in the U.K., New Zealand, India, Nigeria and elsewhere.
Highlighting the fraudulent nature of Zion’s fundraising, some individuals appear to be creating and maintaining false identities relating to the company, likely as part of the marketing scheme. Indeed, David Roman and Solomon Smith Randolph (alleged employees) appear to be the same person. Further, an entity in New Zealand with ties to Zion (visited their offices per Facebook check in) and an ‘investing’ outfit out of the U.K. run by a Nigerian (posted a comment on the Zion website) appear to raise funds using similar religious reasoning and scripture to Zion, perhaps indicating an attempt to fund raise for, but not in the name of Zion 6.
Less than half of the capital raised since ZN became a public company has been spent drilling wells. The question is how do they keep this scam alive despite the lack of revenue, cash flow or positive drilling results and why are investors pouring money into the Company from around the world. The answer appears to be that the Company uses a worldwide network of websites, radio & TV programs, social media, ministries, charities and other such channels to promote their stock. ZN also used or currently uses internal and third-party phone call solicitation as part of its investor relation program. Zion is a fundraising operation as much or more than it is an oil & gas exploration company.
As noted by Andrew J. Summey (current investor relations manager), on his Linkedin profile, Zion utilizes large marketing campaigns running in the hundreds of thousands of dollars each. Additionally, Mr. Summey discloses that more than half of the capital raised by the Company since 2013 has been raised from international ‘investors.’ The mission critical nature of these fundraising operations and the financial, regulatory, currency and other risks related to them are not disclosed, intentionally so, through material omissions.
One promotional video from ZN states that their recent ‘exciting news’ is a “sign of Biblical Prophecy” coming to pass 7. The Jeremiah Ministries has a detailed webpage showing 8 reasons to invest in Zion Oil 8. David Jeremiah, a conservative evangelical minister routinely promotes Zion during his sermons 9. These are paid promotions and despite SEC rules prohibiting such promotions without disclosure of payment, neither the company nor the recipients of Zion’s ‘marketing’ ever disclose such payments.
It is a high probability that ZN capitalizes a portion of its marketing and promotional expenses. Since 2007, the Company has spent between 4% and 89% of the equity capital raised in the year the financing was done on ‘Other’ expenses. As an example, in 2013 ZN raised $2.5 million of equity capital, but spent at least $2.2 million to raise that capital on “non-compensation” ‘marketing’ and ‘investor relations.’ The
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
large fluctuations in these expenses relative to capital raised in the period are difficult to comprehend, without a portion of such expenses continuously being capitalized.
The ongoing nature and recipients of these material expenses are never disclosed. More importantly, it seems neither reasonable nor statistically possible that ZN spent $2.5 million of non-personnel IR and marketing expenses to raise $3.4 million of equity in 2014 and $2.7 million of the same expenses to raise $23.5 million of equity in 2017. As shown below, while the stock price was hovering between $1.50 and $2.00 in early 2014, ZN was paying over $2.50 in marketing expense for every new share issued, clearly indicating a material expense that should require additional disclosure. It seems unlikely, if not highly improbable that the nominal dollars reported in Other expenses would stay relatively flat and range bound regardless of the amount of equity capital ZN raised. Either they have a historically efficient campaign, or more likely, expenses that should be run through operations are being capitalized.
Zion has plenty of flexibility to do just that. The implied drilling rig dayrates disclosed by ZN in their SEC filings are roughly triple what an operator in the U.S. would pay for a higher-specification, more capable drilling rig. While Israel is certainly more expensive to drill in than the U.S., with fewer rig operators and options, these stated and implied dayrates seem intentionally excessive, designed to allow for room to expense additional stock marketing expenses. Likewise capitalized G&G (geological and geophysical) costs are recently excessive and unexplainable. Between 2012 and 2017, the company spent $9.1 million in G&G costs versus $12.1 million of drilling costs. G&G costs were 75% of what drilling expenses were, which is not reasonable or likely. During the 2007-2011 timeframe G&G costs were only 4% of drilling costs.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
Source: Company filings
5https://www.linkedin.com/in/andrewsummey/ https://www.linkedin.com/in/amelinda-parkinson-322a2a7/ https://www.linkedin.com/in/karen-soltero-8435513/ https://www.linkedin.com/in/bpmccullough/ https://www.linkedin.com/in/brittanyleemartin/
6 https://www.linkedin.com/in/david-roman-57791911b/ https://www.linkedin.com/in/solomon-smith-randolph-a05987a8/ https://www.facebook.com/profile.php?id=100013285902369 https://www.facebook.com/jcinvest729/ http://www.tradefig.com/blog/2015/03/04/Profit-Of-Zoom.aspx
7 https://americanvision.org/14021/oil-in-israel-prophecy-being-fulfilled/ 8http://www.jeremiah111.org/Israel%20Future%20Topics/why_should_i_invest_i n_zion_oil.htm 9https://www.youtube.com/watch?v=17ubcV568-E
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
V. Zion Oil & Gas, Inc. has repeatedly made and continues to make false and misleading statements, including material omissions, with regards to key mechanisms of its Dividend Reinvestment and Stock Purchase Program (“DSPP”).
• Between May 22, 2017 and July 12, 2017, 63.2 million ZN shares traded, or about 1.8 million per day versus the average leading up to that period being closer to 200,000 shares per day. The Company did begin drilling a well during that period, however there was no material news to move the stock from $1.60 per share to a high of $6.90 per share on July 7, 2017, when over 16 million shares traded.
What was material was the sale of a new unit program, the “ZNWAF” units. It is likely an individual or individuals fraudulently gamed the price of Zion’s stock to enrich themselves at the expense of other shareholders, likely with the knowledge of the Company:
From the 2017 Form 10-K:
“On May 22, 2017, we launched a new unit offering (the "New Unit Program”). The New Unit Program consisted of a new combination of common stock and warrants, a new time period in which to purchase under the program, and a new unit price, but otherwise the same unit program features, conditions and terms in the Prospectus Supplement applied. The new unit program began on May 22, 2017 and terminated on July 12, 2017. This new Unit Option Program enabled participants to purchase Units of the Company's securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares of Common Stock. Each warrant affords the participant the opportunity to purchase one share of the Company’s Common Stock at a warrant exercise price of $1.00.
The warrant has the symbol “ZNWAF.”
All ZNWAF warrants became exercisable on August 14, 2017, which is the first trading day after the 31st day following the Unit Option Termination Date (i.e., on July 12, 2017) and continue to be exercisable through August 14, 2020 (3 years) at a per share exercise price of $1.00. If the Common Stock of the Company trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company has the sole discretion to provide a Notice to warrant
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
holders of an early termination of the warrant within sixty 60 days of the Notice.”
Zion had approximately 50 million shares outstanding during the period of the ZNWAF units/warrants were eligible for purchase. The ZNWAF warrants were ‘In-the-Money’ at any price above the $1.00 strike. If an individual or individuals were able to drive the price of Zion stock higher, the amount of embedded ‘free’ optionality in the warrants increased. That appears to be exactly what happened.
ZN structured the right to cancel the warrants if the stock was above $5 for 15 consecutive trading days. The stock was driven to above $5 for a few days just before the unit offering closed and subsequently dropped below that price, maintaining value for the warrants. What is noteworthy, among many items, is that from the day of the unit announcement to the last day they could be purchased, 63.2 million shares traded. Over the next month, 35.1 million shares traded. Short interest went from 752,064 shares on 6/15/17 to 3,604,407 shares on July 31, 2017. It is reasonable and conservative to estimate that 50% of ZN’s outstanding shares are held in its DSPP at its transfer agent, American Stock Transfer & Trust Company, LLC (“AST”). Thus, the true float is closer to 25 million shares. Said differently, the true float turned over 4x from the time of the unit announcement to a month after, despite the warrants not being exercisable during that timeframe.
Together with the sharp increase in short interest, it would appear an individual or individuals circumvented the spirit, if not the letter, of the ZNWAF offering documents to lock in an arbitrage and/or game the offering (buy units, short stock to get a free warrant or buy units and sell stock immediately for free warrants). This could have only been done with knowledge of the Company and AST (via unit purchase, warrants exercise and sale) and potentially one or more broker/dealers (short stock and stock sales). Further, given the volume of stock trading during the period surrounding the unit offering, it is highly likely one or more individuals conspired to move ZN stock higher through a series of wash or other fraudulent trades in order to increase the value embedded in the $1.00 warrants.
As the issuer of the warrants and with knowledge of the amount of shares held inside the DSPP at AST, Zion should have, but did not, disclose that the ZNWAF unit/warrant offering had a significant risk of being fraudulently gamed to the detriment of others. The stock trading volume, the short interest increase and the spikes in prices and volume suggested something was awry but ZN never updated any offering documents to highlight the risk of the ‘free options’ embedded in the units being arbitraged and gamed. It is also highly likely that AST is lending DSPP shares out, without sufficient
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
disclosure given it seems difficult to otherwise find sufficient borrow for the short interest increases during this timeframe.
• Zion appears to have one or more individuals purchase large blocks of stock without disclosing the agent utilized.
In its first quarter 2018 Form 10-Q, ZN disclosed that one investor purchased the “ZNWAH” unit/warrants (singular Investor & Plan in Company text):
“On February 1, 2018, the Company’s latest Unit Option began and terminated on February 28, 2018. The Unit Option consisted of Units of our securities where each Unit (priced at $250.00 each) was comprised of (i) 50 shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional 50 shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $5.00.
The warrant has the symbol “ZNWAH.”
Additionally, starting November 1, 2016 and ending March 31, 2017, investors were able to purchase through ZN’s DSPP their “ZNWAE” unit/warrants, which offered seven shares of stock and seven $1.00 warrants for $10 per unit. In its first quarter 2017 Form 10-Q, Zion disclosed a $650,000 “subscription receivable for the sale of stock.” The Company further discloses that the $650,000 receivable funds were received in April 2017. Due to the retail nature of the ZN DSPP it is highly unlikely a number of small accounts aggregated to $650,000 exactly and were all allowed to come into the unit program despite late payment. Rather, the receivable – which has never been disclosed prior to or subsequent to this one event – is likely a large institutional purchase.
In its prospectus supplement dated 4/2/18 Zion states:
“We may sell the securities directly to or through underwriters, dealers or agents. We, and our underwriters or agents, reserve the right to accept or reject all or part of any proposed purchase of securities. Currently, we sell securities directly through our Dividend Reinvestment and Common Stock Purchase Plan. If we do offer securities through underwriters or agents, we will include in the applicable prospectus supplement:
o the names of those underwriters or agents; o applicable fees, discounts and commissions to be paid to them; o details regarding over-allotment options, if any; and
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
o the net proceeds to us.”
No such disclosures have ever been made. It seems obvious, however, that ZN is utilizing agented transactions due to the large institutional sized purchases disclosed. Further, such a view is consistent with an entity capitalizing rather than expensing such costs to appear more nimble than it is. It is also consistent with a company that has indicated in the past that it has shared investor and potential investor databases with aggressive broker/dealers. Of note, investors looking to purchase more than $10,000 of stock through ZN’s DSPP must receive permission from the company first, while those purchasing in excess of $10,000 in units do not require company approval. Further, at the company’s discretion, they can give large purchasers of stock a discount of up to 10%. Similar to the arbitrage and gaming of the ZNWAF unit/warrants the Company allowed, Zion appears to cater to larger stock purchasers to the detriment of smaller purchasers without fully disclosing the nature of these relationships, nor the agent or transfer agent involvement.
It is nearly impossible to grasp ZN raising $23.5 million in equity capital in 2017 versus $4.4 million in 2016 utilizing the same employee-driven DSPP customer relations and sales tactics, with no increase in operating expenses. Its seems more likely given the data points that ZN uses a network of sales agents to sell its stock. If however, ZN investor relations employees are soliciting investors and selling stock (as indicated on some of their Linkedin profile), it is inconsistent with a DSPP. Rather than allowing investors to purchase stock they are selling it. Indeed in either scenario, the Company appears to be using the DSPP as a means to continuously issue stock utilizing less stringent SEC reporting (simple amendment to existing Prospectus). Further, if they are utilizing agented purchases of larger blocks of stock, the DSPP is effectively a creeping secondary.
• In its Prospectus Supplement dated 4/2/18 relating to the DSPP program and rights offering, Zion makes false and misleading statements, including material omissions. In its Use of Proceeds section of the document, ZN states:
“Our work program calls for the use the net proceeds from sale of the Rights under this offering for (i) production testing and production of wells on the Megiddo-Jezreel License area, (ii) further exploration, facilities and midstream construction, (iii) carrying out geological and geophysical studies furthering our oil and gas exploration program in the License area and (iv) general corporate purposes.”
In the Use of Proceeds table, ZN shows an indicative proceeds of $28.35 million, with 68% of the proceeds going to operations, production testing and production of wells at Megiddo-Jezreel, 21% toward general corporate
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
purposes (G&A expenses and working capital) and 11% toward additional G&G expenses.
Since its inception, G&A expenses represent 48% of all equity capital raised. Indicating that 21% of the current capital raise will go toward general corporate purposes, including G&A, is false and misleading. Further, the company does not disclose that some of the proceeds will be spent on ‘Other’ expenses, which are effectively marketing costs to raise more equity. It is material and should be disclosed if a company is raising capital and a portion of the use of proceeds is to raise additional capital.
• Through material omissions, Zion never discloses risks related to its funding sources. Loss of faith is a material risk. By relying on undisclosed marketing channels including ministries, religious websites, Facebook and other forms of social media, fundraising is driven by faith in the message, backed by scripture. Loss of faith in the management team or the vision will create a ‘death spiral’ whereby every successive capital raise gets more difficult, ultimately leading to the frauds’ demise. This risk is never disclosed.
• In its Prospectus dated 4/2/18 ZN makes false and misleading statements related to the pricing of its units and subscription rights. Indeed in the same paragraph the Company states that the subscription right price has no relevance to book value, while also stating book value was taken into consideration.
“Our Board of Directors set all of the terms and conditions of the rights offering, including the per Right subscription price. The $5.00 per Right subscription price was based on several factors, including the book value of our common stock (which includes the value of our unproved oil and gas properties), the amount of proceeds desired, our need for equity capital, the need to provide an incentive to our current shareholders to exercise rights in the rights offering, the historic and current market price of our common stock, the historic volatility of the market price of our common stock, our business prospects and alternatives available to us for raising equity capital. The subscription price of $5.00 per Right does not necessarily bear any relationship to our past operations, cash flows, book value, current financial condition, or any other established criteria for value. You should not consider the subscription price as an indication of the value of our company or our common stock.”
Importantly, this paragraph also reveals the motivation to give warrants away, typically for free as they are ‘In the Money.’ Pricing is set to induce current and potential investors to exercise warrants and rights, which provide and ongoing source of cash on top of newly issued shares and units.
Whistleblower Tip [21F SEC Exchange Act 1934] Company: Zion Oil & Gas, Inc. (NASD:ZN)
• All Prospectus and SEC filings relating the DSPP program have false and misleading statements and material omissions relating to ZN’s fraudulent accounting practices, the deception relating to its operations and larger than disclosed employee base and the logistics and undisclosed participants involved in its DSPP program.