The warrants represented by the company notation
ZNWAA are tradeable on the OTCQX market under the symbol ZNOGW. However, all of the other warrants characterized above, in the table below,
and throughout this Form 10-Q, are not tradeable and are used internally for classification and accounting purposes only.
On April 2, 2018 the Company announced an offering
(“2018 Subscription Rights Offering”) through American Stock Transfer & Trust Company, LLC (the “Subscription Agent”),
at no cost to the shareholders, of non-transferable Subscription Rights (each “Right” and collectively, the “Rights”)
to purchase its securities to persons who owned shares of our Common Stock on April 13, 2018 (“the Record Date”). Pursuant
to the 2018 Subscription Rights Offering, each holder of shares of common stock on the Record Date received non-transferable Subscription
Rights, with each Right comprised of one share of the Company Common Stock, par value $0.01 per share (the “Common Stock”)
and one Common Stock Purchase Warrant to purchase an additional one share of Common Stock. Each Right could be exercised or subscribed
at a per Right subscription price of $5.00. Each Warrant affords the investor the opportunity to purchase one share of the Company
Common Stock at a warrant exercise price of $3.00. The warrant is referred to as “ZNWAI.”
The warrants became exercisable on June 29, 2018
and continued to be exercisable through June 29, 2020 at a per share exercise price of $3.00, after the Company, on December 4, 2018,
extended the termination date of the Warrant by one (1) year from the expiration date of June 29, 2019 to June 29, 2020.
On May 29, 2019, the Company extended the termination
date of the ZNWAI Warrant by one (1) year from the expiration date of June 29, 2020 to June 29, 2021.
On September 15, 2020, the Company extended the
termination date of the ZNWAI Warrant by two (2) years from the expiration date of June 29, 2021 to June 29, 2023. Zion considers this
warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
Each shareholder received .10 (one tenth) of a
Subscription Right (i.e. one Subscription Right for each 10 shares owned) for each share of the Company’s Common Stock owned on
the Record Date.
The 2018 Subscription Rights Offering terminated
on May 31, 2018. The Company raised net proceeds of approximately $3,038,000, from the subscription of Rights, after deducting fees and
expenses of $243,000 incurred in connection with the rights offering.
During the second quarter of 2022, all warrants
represented by ZNWAP and ZNWAR were exercised resulting in a net cash inflow of $364,979.
Changes in Unproved oil and gas properties during
the three and nine months ended September 30, 2022 and 2021 are as follows:
Please refer to Footnote 1 – Nature of Operations
and Going Concern for more information about Zion’s exploration activities.
The Company is a lessee in several non-cancellable
operating leases, primarily for transportation and office spaces.
The table below presents the operating lease assets
and liabilities recognized on the balance sheets as of September 30, 2022 and December 31, 2021:
The depreciable lives of operating lease assets
and leasehold improvements are limited by the expected lease term.
The Company’s leases generally do not provide
an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities.
The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an
amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company
used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.
The Company’s weighted average remaining
lease term and weighted average discount rate for operating leases as of September 30, 2022 are:
The table below reconciles the undiscounted future
minimum lease payments (displayed by year and in the aggregate) under non-cancellable operating leases with terms of more than one year
to the total operating lease liabilities recognized on the condensed balance sheets as of September 30, 2022:
Operating lease costs were $69,000 and $206,000
for the three and nine months ended September 30, 2022, respectively. Operating lease costs were $68,000 and $196,000 for the three and
nine months ended September 30, 2021, respectively. Operating lease costs are included within general and administrative expenses on the
statements of income.
Cash paid for amounts included in the measurement
of operating lease liabilities was $71,000 and $214,000 for the three and nine months ended September 30, 2022, respectively.
Cash paid for amounts included in the measurement of operating lease liabilities were $72,000 and $215,000 for the three and nine months
ended September 30, 2021. These amounts are included in operating activities in the statements of cash flows.
Right-of-use assets obtained in exchange for new
operating lease liabilities were nil and $136,000 the three and nine months ended September 30, 2022, respectively. Right-of-use
assets obtained in exchange for new operating lease liabilities were $nil and $128,000 for the three and nine months
ended September 30, 2021, respectively.
As previously disclosed by the Company, on June
21, 2018, the Fort Worth Regional Office of the SEC informed Zion that it was conducting a formal, non-public investigation and asked
that we provide certain information and documents in connection with its investigation. Since that date, we have fully cooperated with
the SEC on an on-going basis in connection with its investigation. Investigations of this nature are inherently uncertain and their results
cannot be predicted with certainty. Regardless of the outcome, an SEC investigation could have an adverse impact on us because of legal
costs, diversion of management resources, and other factors. The investigation could also result in reputational harm to Zion and may
have a material adverse effect on Zion’s current and future business and exploratory activities and its ability to raise capital
to continue our oil and gas exploratory activities.
From time to time, the Company may be subject
to routine litigation, claims or disputes in the ordinary course of business. The Company defends itself vigorously in all such matters.
However, we cannot predict the outcome or effect of any of the potential litigation, claims or disputes.
During March 2020, a global pandemic was declared by the World Health
Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly
impacted the economic conditions in the United States and Israel, as federal, state and local governments reacted to the public health
crisis, creating significant uncertainties in the United States, Israel and world economies. In the interest of public health and safety,
jurisdictions (international, national, state and local) where we have operations, restricted travel and required workforces to work from
home. As of the date of this report, the Company has adopted a hybrid model whereby many of our employees are working from a corporate
office two to three days per week and then working remotely the other two to three days per week. While there are various uncertainties
to navigate, the Company’s business activities are continuing.
The full extent of COVID-19’s impact on
our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and
spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of
the virus, its spread to other regions as well as the actions taken to contain it, among others.
The Company is engaged in oil and gas exploration
and production and may become subject to certain liabilities as they relate to environmental clean-up of well sites or other environmental
restoration procedures and other obligations as they relate to the drilling of oil and gas wells or the operation thereof. Various guidelines
have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries as it pertains
to oil and gas activities. Mention of these older guidelines was included in previous Zion filings.
The Company believes that these regulations will
result in an increase in the expenditures associated with obtaining new exploration rights and drilling new wells. The Company expects
that an additional financial burden could occur as a result of requiring cash reserves that could otherwise be used for operational purposes.
In addition, these regulations are likely to continue to increase the time needed to obtain all of the necessary authorizations and approvals
to drill and production test exploration wells.
As of September 30, 2022, the Company provided
Israeli-required bank guarantees to various governmental bodies (approximately $1,218,000) and others (approximately $63,000) with respect
to its drilling operation in an aggregate amount of approximately $1,281,000. The (cash) funds backing these guarantees are held in restricted
interest-bearing accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted.
Market risk is a broad term for the risk of economic
loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including
interest rates, foreign exchange rates, commodity prices and/or equity prices. In the normal course of doing business, we are exposed
to the risks associated with foreign currency exchange rates and changes in interest rates.
The primary objective of our investment activities
is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we
invest our excess cash in short-term bank deposits and money market funds that may invest in high quality debt instruments.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE FOLLOWING DISCUSSION SHOULD
BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS FORM
10-Q. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD
HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE DISCUSSION OF RISK FACTORS IN THE “DESCRIPTION OF BUSINESS” SECTION
OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2021, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.
Forward-Looking Statements
Certain statements made in
this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.
These statements may materially differ from actual results.
Forward-looking statements
can be identified by terminology such as “may”, “should”, “expects”, “intends”, “anticipates”,
“believes”, “estimates”, “predicts”, or “continue” or the negative of these terms or other
comparable terminology and include, without limitation, statements regarding:
| |
● |
The going concern qualification in our consolidated financial statements; |
| |
● |
our liquidity and our ability to raise capital to finance our overall exploration and development activities within our license area; |
| |
● |
our ability to continue meeting the requisite continued listing requirements by OTCQX; |
| |
● |
the outcome of the current SEC investigation against us; |
| |
● |
business interruptions from the COVID-19 pandemic; |
| |
● |
our ability to obtain new license areas to continue our petroleum exploration program; |
| |
● |
interruptions, increased consolidated financial costs and other adverse impacts of the coronavirus pandemic on the drilling and testing of our MJ#2 well and our capital raising efforts; |
| |
● |
our ability to explore for and develop natural gas and oil resources successfully and economically within our license area; |
| |
● |
our ability to maintain the exploration license rights to continue our petroleum exploration program; |
| |
● |
the availability of equipment, such as seismic equipment, drilling rigs, and production equipment as well as access to qualified personnel; |
| |
● |
the impact of governmental regulations, permitting and other legal requirements in Israel relating to onshore exploratory drilling; |
| |
● |
our estimates of the time frame within which future exploratory activities will be undertaken; |
| |
● |
changes in our exploration plans and related budgets; |
| |
● |
the quality of existing and future license areas with regard to, among other things, the existence of reserves in economic quantities; |
| |
● |
anticipated trends in our business; |
| |
● |
our future results of operations; |
| |
● |
our capital expenditure program; |
| |
● |
future market conditions in the oil and gas industry; |
| |
● |
the demand for oil and natural gas, both locally in Israel and globally; and |
| |
● |
The impact of fluctuating oil and gas prices on our exploration efforts |
Overview
Zion Oil and Gas, Inc., a
Delaware corporation, is an oil and gas exploration company with a history of 22 years of oil and gas exploration in Israel. We were incorporated
in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed our initial public offering in January 2007.
Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX Market under the symbol “ZNOG”
and our Common Stock warrant under the symbol “ZNOGW.”
The Company currently holds one active petroleum exploration license
onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately 99,000 acres. The NML 428 was awarded
on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. On April 29, 2021, Zion submitted
a request to the Ministry of Energy for a six-month extension to December 2, 2021. On May 30, 2021, the Ministry of Energy approved our
request for extension to December 2, 2021. On November 29, 2021, the Ministry of Energy approved our request for extension to August 1,
2022. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February 1, 2023. On July 31,
2022, the Ministry of Energy approved our request for extension to February 1, 2023. The ML 428 lies onshore, south and west of
the Sea of Galilee, and we continue our exploration focus here based on our studies as it appears to possess the key geologic ingredients
of an active petroleum system with significant exploration potential.
The Megiddo Jezreel #1 (“MJ #1”) site was completed in
early March 2017, after which a rented drilling rig and associated equipment were mobilized to the site. Performance and endurance tests
were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters
(approximately 16,600 feet). Thereafter, the Company obtained three open-hole wireline log suites (including a formation image log), and
the well was successfully cased and cemented. The Ministry of Energy approved the well testing protocol on April 29, 2018.
During the fourth quarter
of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain
hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash
impairment charge to its unproved oil and gas properties of $30,906,000. During the three and nine months ended September 30, 2022 and
2021, respectively, the Company did not record any post-impairment charges.
While the well was not commercially
viable, Zion learned a great deal from the drilling and testing of this well. We believe that the drilling and testing of this well carried
out the testing objectives which would support further evaluation and potential further exploration efforts within our License area. Zion
believed it was prudent and consistent with good industry practice to examine further these questions with a focused 3-D seismic imaging
shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion completed all of the acquisition, processing and interpretation
of the 3-D data and incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well.
On March 12, 2020, Zion entered
into a Purchase and Sale Agreement with Central European Drilling kft, a Hungarian corporation, to purchase an onshore oil and gas drilling
rig, drilling pipe, related equipment and spare parts for a purchase price of $5.6 million in cash, subject to acceptance testing and
potential downward adjustment. We remitted to the Seller $250,000 on February 6, 2020 as earnest money towards the Purchase Price. The
Closing anticipated by the Agreement took place on March 12, 2020 by the Seller’s execution and delivery of a Bill of Sale to us.
On March 13, 2020, the Seller retained the earnest money deposit, and the Company remitted $4,350,000 to the seller towards the purchase
price, and $1,000,000 (the “Holdback Amount”) was deposited in escrow with American Stock Transfer and Trust Company LLC.
On January 6, 2021, Zion completed its acceptance testing of the I-35 drilling rig and the Holdback Amount was remitted to Central European
Drilling.
The MJ-02 drilling plan was
approved by the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well on the same
pad site as the MJ#1 well. On November 23, 2021, Zion announced via a press release that it completed drilling the MJ-02 well to a total
depth of 5,531 meters (~18,141 feet) with a 6-inch open hole at that depth.
A full set of detailed and
comprehensive tests including neutron-density, sonic, gamma, and resistivity logs were acquired in December 2021, as a result of which
we identified encouraging zones of interest.
During the third quarter of
2022, Zion perforated and stimulated two deep zones.
On October 3, 2022, Zion sent
a database email update to its supporters announcing the following: (1) We are encouraged by the results of our recent testing operations,
especially the lower zone (approximately 20 meters in thickness), which is our primary zone of interest, (2) We are currently facing a
downhole obstacle in the form of heavy water influx from the upper zone inhibiting the potential flow of hydrocarbons from the lower zone
and (3) After consultation with outside experts, we plan to isolate and neutralize the heavy water influx by procuring a 4.5” packer
and installing it below the heavy water zone and above our primary zone.
Zion suspended its operations
at the MJ-02 pad site during October 2022 due to several Jewish holidays during the month. Beginning in early November 2022, Zion resumed
its testing operations after procuring the necessary equipment and personnel.
At present, we have no revenues
or operating income. Our ability to generate future revenues and operating cash flow will depend on the successful exploration and exploitation
of our current and any future petroleum rights or the acquisition of oil and/or gas producing properties, and the volume and timing of
such production. In addition, even if we are successful in producing oil and gas in commercial quantities, our results will depend upon
commodity prices for oil and gas, as well as operating expenses including taxes and royalties.
Our executive offices are
located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is (214) 221-4610. Our branch office’s
address in Israel is 9 Halamish Street, North Industrial Park, Caesarea 3088900, and the telephone number is +972-4-623-8500. Our website
address is: www.zionoil.com.
Current Exploration and Operation Efforts
Megiddo-Jezreel Petroleum License
The Company currently holds
one active petroleum exploration license onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately
99,000 acres – See Map 1. Under Israeli law, Zion has an exclusive right to oil and gas exploration in our license area in
that no other company may drill there. In the event we drill an oil or gas discovery in our license area, current Israeli law entitles
us to convert the relevant portions of our license to a 30-year production lease, extendable to 50 years, subject to compliance with a
field development work program and production.
The New Megiddo License 428
was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. On May 30, 2021, the Ministry
of Energy approved our request for extension to December 2, 2021. On November 29, 2021, the Ministry of Energy approved our request for
extension to August 1, 2022. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February
1, 2023. On July 31, 2022, the Ministry of Energy approved our request for extension to February 1, 2023. The New Megiddo License 428
area is the same area as the Megiddo-Jezreel License 401 area and lies onshore, South and West of the Sea of Galilee and we continue our
exploration focus here based on our studies as it appears to possess the key geologic ingredients of an active petroleum system with significant
exploration potential.
The MJ-02 drilling plan was
approved by the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well on the same
pad site as the MJ#1 well. On November 23, 2021, Zion announced via a press release that it completed drilling the MJ-02 well to a total
depth of 5,531 meters (~18,141 feet) with a 6-inch open hole at that depth.
A full set of detailed and
comprehensive tests including neutron-density, sonic, gamma, and resistivity logs were acquired in December 2021, as a result of which
we identified encouraging zones of interest.
During the third quarter of
2022, Zion perforated and stimulated two deep zones.
On October 3, 2022, Zion sent
a database email update to its supporters announcing the following: (1) We are encouraged by the results of our recent testing operations,
especially the lower zone (approximately 20 meters in thickness), which is our primary zone of interest, (2) We are currently facing a
downhole obstacle in the form of heavy water influx from the upper zone inhibiting the potential flow of hydrocarbons from the lower zone
and (3) After consultation with outside experts, we plan to isolate and neutralize the heavy water influx by procuring a 4.5” packer
and installing it below the heavy water zone and above our primary zone.
Zion suspended its operations
at the MJ-02 pad site during October 2022 due to several Jewish holidays during the month. Beginning in early November 2022, Zion resumed
its testing operations after procuring the necessary equipment and personnel.
I-35 Drilling Rig & Associated Equipment
| | |
Nine-month period ended September 30, 2022 | |
| | |
I-35
Drilling Rig | | |
Rig
Spare Parts | | |
Other
Drilling Assets | | |
Total | |
| | |
US$
thousands | | |
US$
thousands | | |
US$
thousands | | |
US$
thousands | |
| December 31, 2021 | |
| 5,859 | | |
| 642 | | |
| 333 | | |
| 6,834 | |
| Asset Additions | |
| - | | |
| 151 | | |
| 221 | | |
| 372 | |
| Asset Depreciation | |
| (476 | ) | |
| - | | |
| (84 | ) | |
| (560 | ) |
| Asset Disposals for Self-Consumption | |
| - | | |
| (202 | ) | |
| - | | |
| (202 | ) |
| September 30, 2022 | |
| 5,383 | | |
| 591 | | |
| 470 | | |
| 6,444 | |
Zion’s ability to fully
undertake all of these aforementioned activities is subject to its raising the needed capital from its continuing offerings, of which
no assurance can be provided.
Map 1. Zion’s New Megiddo License 428
as of September 30, 2022.
Zion’s Former Joseph License
Zion has plugged all of its
exploratory wells on its former Joseph License area, and the reserve pits have been evacuated, but acknowledges its obligation to complete
the abandonment of these well sites in accordance with guidance from the Energy Ministry, Environmental Ministry and local officials.
Onshore Licensing, Oil and Gas Exploration
and Environmental Guidelines
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 and other obligations as they relate to the drilling of oil and gas wells or the operation
thereof. Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner, the Energy Ministry,
and the Environmental Ministry in recent years as it pertains to oil and gas activities. Mention of these guidelines was included in previous
Zion Oil & Gas filings.
We acknowledge that these
new regulations are likely to increase the expenditures associated with obtaining new exploration rights and drilling new wells. The Company
expects that additional financial burdens could occur as a result of the Ministry requiring cash reserves that could otherwise be used
for operational purposes.
Capital Resources Highlights
We need to raise significant
funds to finance the continued exploration efforts and maintain orderly operations. To date, we have funded our operations through the
issuance of our securities and convertible debt. We will need to continue to raise funds through the issuance of equity and/or debt securities
(or securities convertible into or exchangeable for equity securities). No assurance can be provided that we will be successful in raising
the needed capital on terms favorable to us (or at all).
The Dividend Reinvestment and Stock Purchase
Plan
On March 13, 2014 Zion filed
a registration statement on Form S-3 that is part of a replacement registration statement that was filed with the SEC using a “shelf”
registration process. The registration statement was declared effective by the SEC on March 31, 2014. On February 23, 2017, the Company
filed a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration No. 333-193336), for which
the three year period ended March 31, 2017, along with the base Prospectus and Supplemental Prospectus. The Form S-3, as amended, and
the new base Prospectus became effective on March 10, 2017, along with the Prospectus Supplement that was filed and became effective on
March 10, 2017. The Prospectus Supplement under Registration No. 333-216191 describes the terms of the DSPP and replaces the prior Prospectus
Supplement, as amended, under the prior Registration No. 333-193336.
On March 27, 2014, we launched
our Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to which stockholders and interested investors can
purchase shares of the Company’s Common Stock as well as units of the Company’s securities directly from the Company. The
terms of the DSPP are described in the Prospectus Supplement originally filed on March 31, 2014 (the “Original Prospectus Supplement”)
with the Securities and Exchange Commission (“SEC”) under the Company’s effective registration Statement on Form S-3,
as thereafter amended.
Please see Footnote 3E (“Dividend
Reinvestment and Stock Purchase Plan (“DSPP”)), which is a part of this Form 10-Q filing, for details about specific unit
programs, dates, and filings during the years 2016 through 2022.
For the three and nine months
ended September 30, 2022, approximately $3,477,000 and $16,740,000, respectively, were raised under the DSPP program.
For the three and nine months
ended September 30, 2021, approximately $4,369,000 and $18,157,000, respectively, were raised under the DSPP program.
The warrants balances at December
31, 2021 and transactions since January 1, 2022 are shown in the table below:
| Warrants | |
Exercise
Price | | |
Warrant
Termination Date | |
Outstanding
Balance,
12/31/2021 | | |
Warrants
Issued | | |
Warrants
Exercised | | |
Warrants
Expired | | |
Outstanding
Balance,
09/30/2022 | |
| ZNWAA | |
$ | 2.00 | | |
01/31/2023 | |
| 1,498,804 | | |
| - | | |
| - | | |
| - | | |
| 1,498,804 | |
| ZNWAD | |
$ | 1.00 | | |
05/02/2023 | |
| 243,853 | | |
| - | | |
| - | | |
| - | | |
| 243,853 | |
| ZNWAE | |
$ | 1.00 | | |
05/01/2023 | |
| 2,144,099 | | |
| - | | |
| - | | |
| - | | |
| 2,144,099 | |
| ZNWAF | |
$ | 1.00 | | |
08/14/2023 | |
| 359,435 | | |
| - | | |
| - | | |
| - | | |
| 359,435 | |
| ZNWAG | |
$ | 1.00 | | |
01/08/2023 | |
| 240,068 | | |
| - | | |
| - | | |
| - | | |
| 240,068 | |
| ZNWAH | |
$ | 5.00 | | |
04/19/2023 | |
| 372,400 | | |
| - | | |
| - | | |
| - | | |
| 372,400 | |
| ZNWAI | |
$ | 3.00 | | |
06/29/2023 | |
| 640,710 | | |
| - | | |
| | | |
| - | | |
| 640,710 | |
| ZNWAJ | |
$ | 1.00 | | |
10/29/2023 | |
| 545,900 | | |
| - | | |
| - | | |
| - | | |
| 545,900 | |
| ZNWAK | |
$ | 0.01 | | |
02/25/2023 | |
| 431,675 | | |
| - | | |
| (6,900 | ) | |
| - | | |
| 424,775 | |
| ZNWAL | |
$ | 2.00 | | |
08/26/2023 | |
| 517,875 | | |
| - | | |
| - | | |
| - | | |
| 517,875 | |
| ZNWAM | |
$ | 1.00 | | |
07/15/2023 | |
| 4,376,000 | | |
| - | | |
| - | | |
| - | | |
| 4,376,000 | |
| ZNWAN | |
$ | 1.00 | | |
05/16/2023 | |
| 267,660 | | |
| 100 | | |
| - | | |
| - | | |
| 267,760 | |
| ZNWAO | |
$ | 0.25 | | |
06/12/2023 | |
| 174,970 | | |
| - | | |
| (310 | ) | |
| - | | |
| 174,660 | |
| ZNWAQ | |
$ | 0.25 | | |
07/06/2023 | |
| - | | |
| 23,428,348 | | |
| - | | |
| - | | |
| 23,428,348 | |
| ZNWAP | |
$ | 0.25 | | |
06/02/2023 | |
| 439,916 | | |
| - | | |
| (439,916 | ) | |
| - | | |
| - | |
| ZNWAR | |
$ | 0.25 | | |
06/23/2023 | |
| 1,020,000 | | |
| - | | |
| (1,020,000 | ) | |
| - | | |
| - | |
| Outstanding warrants | |
| | | |
| |
| 13,273,365 | | |
| 23,428,448 | | |
| (1,467,026 | ) | |
| - | | |
| 35,234,687 | |
During the third quarter of
2022, all warrants represented by ZNWAP and ZNWAR were exercised resulting in a net cash inflow of $364,979.
According to the warrant table,
the Company could potentially raise up to approximately $21,900,000 if all outstanding warrants were exercised by its holders.
Principal Components of our Cost Structure
Our operating and other expenses
primarily consist of the following:
| |
● |
Impairment of Unproved Oil and Gas Properties: Impairment expense is recognized if a determination is made that a well will not be commercially productive. The amounts include amounts paid in respect of the drilling operations as well as geological and geophysical costs and various amounts that were paid to Israeli regulatory authorities. |
| |
● |
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 is included in general and administrative expenses. General and administrative expenses also include non-cash stock-based compensation expense, investor relations related expenses, lease and insurance and related expenses. |
| |
● |
Depreciation, Depletion, Amortization and Accretion: The systematic expensing of the capital costs incurred to explore for natural gas and oil represents a principal component of our cost structure. As a full cost company, we capitalize all costs associated with our exploration, and apportion these costs to each unit of production, if any, through depreciation, depletion and amortization expense. As we have yet to have production, the costs of abandoned wells are written off immediately versus being included in this amortization pool. |
Going Concern Basis
Since we have limited capital
resources, no revenue to date and a loss from operations, our consolidated financial statements have been prepared on a going concern
basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. 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. Therefore, there is substantial doubt about our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
The Impact of COVID-19
During March 2020, a global pandemic was declared by the World Health
Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly
impacted the economic conditions in the United States and Israel, as federal, state and local governments react to the public health crisis,
creating significant uncertainties in the United States, Israel and world economies. In the interest of public health and safety, jurisdictions
(international, national, state and local) where we have operations, restricted travel and required workforces to work from home. As of
the date of this report, the Company adopted a hybrid model whereby many of our employees are working from corporate office two to three
days per week and then working remotely two to three days per week. While there are various uncertainties to navigate, the Company’s
business activities are continuing.
The full extent of COVID-19’s
impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the
duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the
severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.
The main area in which Zion
has experienced COVID-19’s impact has been in supply chain and/or logistics. We work with several suppliers worldwide for the procurement
of oil and gas parts, inventory items and related labor for our ongoing operations for the MJ-02 well. Production delays, factory shutdowns
and heavy demand by oil and gas operators worldwide for spare parts has created some challenges in obtaining these items in a timely fashion.
Critical Accounting Policies
Management’s discussion
and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expense
during the reporting period.
We have identified the accounting
principles which we believe are most critical to the reported financial status by considering accounting policies that involve the most
complex of subjective decisions or assessment.
Impairment of Oil and Gas Properties
We follow 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.
Our oil and gas properties
represent an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are found
or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has
occurred. The amount of any impairment is charged to expense since a reserve base has not yet been established. A further impairment requiring
a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.
Abandonment of properties
is accounted for as adjustments to capitalized costs. The net capitalized costs are subject to a “ceiling test” which limits
such costs to the aggregate of the estimated present value of future net revenues from proved reserves discounted at ten percent based
on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. The recoverability of
amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves, together with
obtaining the necessary financing to exploit such reserves and the achievement of profitable operations.
During the three and nine
months ended September 30, 2022, and 2021, respectively, the Company did not record any post-impairment charges.
The total net book value of
our unproved oil and gas properties under the full cost method is $59,169,000 and $46,950,000 at September 30, 2022 and at December 31,
2021, respectively.
Asset Retirement Obligation
We record a liability for
asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived assets.
Fair Value Considerations
We follow ASC 820, “Fair
Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No.
157 and related guidance. Those provisions relate to the Company’s financial assets and liabilities carried at fair value and the
fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related disclosure requirements,
and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value
is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset
or liability.
There are three levels of
inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning
the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. We use Level 1 inputs for
fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement
date. We use Level 2 inputs for fair value measurements whenever there are quoted prices for similar securities in an active market or
quoted prices for identical securities in an inactive market. We use observable market data whenever available. We use Level 3 inputs
in the Binomial Model used for the valuation of the derivative liability.
RESULTS OF OPERATIONS
| | |
For the three months ended
September 30, | | |
For the nine months ended
September 30, | |
| | |
2022 | | |
2021 | | |
2022 | | |
2021 | |
| | |
(US $ in thousands) | | |
(US $ in thousands) | |
| Operating costs and expenses: | |
| | |
| | |
| | |
| |
| General and administrative expenses | |
| 1,636 | | |
| 1,601 | | |
| 4,621 | | |
| 6,524 | |
| Other | |
| 719 | | |
| 697 | | |
| 2,376 | | |
| 2,553 | |
| Operating costs and expenses | |
| 2,355 | | |
| 2,298 | | |
| 6,997 | | |
| 9,077 | |
| | |
| | | |
| | | |
| | | |
| | |
| (Gain) on derivative liability | |
| - | | |
| - | | |
| - | | |
| (431 | ) |
| | |
| | | |
| | | |
| | | |
| | |
| Other (Gains) expenses, net | |
| 19 | | |
| 5 | | |
| 140 | | |
| 273 | |
| | |
| | | |
| | | |
| | | |
| | |
| Net loss | |
| 2,374 | | |
| 2,303 | | |
| 7,137 | | |
| 8,919 | |
Revenue. We currently
have no revenue generating operations.
Operating costs and expenses.
Operating costs and expenses for the three and nine months ended September 30, 2022 were $2,355,000 and $6,997,000, respectively,
compared to $2,298,000 and $9,077,000, respectively, for the three and nine months ended September 30, 2021.
Expenses were only $57,000
higher (2.5%), for the three months ended September 2022, when compared to the corresponding months in 2021. This is an immaterial variance.
Although the number of stock options granted was 3,905,000 higher during Q3 2022, this was almost completely offset by the low stock price
over the last few months.
Expenses were $2,080,000 lower
(22.9%), for the nine months ended September 2022, when compared to the corresponding months in 2021. Although we granted 10,830,000 more
options during 2022, the low stock price in 2022 more than offset the higher number of options granted.
General and administrative
expenses. General and administrative expenses for the three and nine months ended September 30, 2022 were $1,636,000 and $4,621,000,
respectively, compared to $1,601,000 and $6,524,000, respectively, for the three and nine months ended September 30, 2021. A major component
of general and administrative expenses is non-cash stock compensation expense in the form of stock options granted to employees, management
and directors. As stated in this filing, Zion does not have revenue generating operations. Historically, we have compensated our staff
in part by granting stock options in lieu of cash bonuses.
Zion granted the following
number of stock options during the quarters of 2021 and 2022:
| ● | March
31, 2021: 1,075,000 |
| | | |
| ● | June
30, 2021: 3,625,000 |
| | | |
| ● | September
30, 2021: 2,323,000 |
| | | |
| ● | March
31, 2022: 4,100,000 |
| | | |
| ● | June
30, 2022: 7,525,000 |
| | | |
| ● | September
30, 2022: 6,228,000 |
| ● | YTD
September 30, 2021: 7,023,000 |
| ● | YTD
September 30, 2022: 17,853,000 |
Expenses were only $35,000
higher (2.2%), for the three months ended September 2022, when compared to the corresponding months in 2021. Although the number of stock
options granted was 3,905,000 higher during Q3 2022, this was almost completely offset by the low stock price over the last few months.
Expenses were $1,903,000 lower (29.2%), for the nine months ended September
2022, when compared to the corresponding months in 2021. Although we granted 10,830,000 more options during 2022, the low stock price
in 2022 more than offset the higher number of options granted.
Other expense. Other
expenses during the three and nine months ended September 30, 2022 were $719,000 and $2,376,000, respectively, compared to $697,000 and
$2,553,000, respectively, for the three and nine months ended September 30, 2021. The expenses in this category are comprised of non-compensation
and non-professional expenses incurred.
Expenses were only $22,000
higher (3%), for the three months ended September 2022, when compared to the corresponding months in 2021. This is a very small increase
and no noticeable cause is identified.
Expenses were $177,000 lower
(7%), for the nine months ended September 2022, when compared to the corresponding months in 2021. The primary drivers of this decrease
was lower annual meeting expenses and Facebook spending in 2022 with a partial offset by an increase in insurance costs, primarily D&O
insurance premiums. Annual meeting expenses were significantly higher in 2021 due primarily to proxy solicitation costs to secure votes
for two important proposals.
(Gain) on derivative liability.
(Gain) on derivative liability during the three and nine months ended September 30, 2022 were nil and nil, respectively, compared to nil
and ($431,000), respectively, for the three and nine months ended September 30, 2021. In May 2021, Zion paid the annual interest and the
maturity of its convertible bond in Zion shares (in kind). At the present time, Zion does not expect to issue another convertible bond.
Other expense, net.
Other expense, net for the three and nine months ended September 30, 2022 were ($19,000) and $140,000, respectively, compared to $5,000
and $273,000, respectively, for the three and nine months ended September 30, 2021. The expenses in this category are comprised of foreign
currency exchange costs, primarily the New Israeli Shekel (NIS) to the US dollar, and financial expenses/income. Overall, for the nine
months ended September 30, 2022, total expenses in this category are $159,000 lower due to the relative strengthening of the USD to the
NIS during 2022.
Net Loss. Net loss
for the three and nine months ended September 30, 2022 was $2,374,000 and $7,137,000 compared to $2,303,000 and $8,919,000 for the three
and nine months ended September 30, 2021.
Liquidity and Capital Resources
Liquidity is a measure of
a company’s ability to meet potential cash requirements. As discussed above, we have historically met our capital requirements through
the issuance of common stock as well as proceeds from the exercise of warrants and options to purchase common shares.
Our ability to continue as
a going concern is dependent upon obtaining the necessary financing to complete further exploration and development activities and generate
profitable operations from our oil and natural gas interests in the future. Our current operations are dependent upon the adequacy of
our current assets to meet our current expenditure requirements and the accuracy of management’s estimates of those requirements. Should
those estimates be materially incorrect, our ability to continue as a going concern will be impaired. Our financial statements for
the three and nine months ended September 30, 2022 have been prepared on a going concern basis, which contemplates the realization of
assets and the settlement of liabilities and commitments in the normal course of business. We have incurred a history of operating
losses and negative cash flows from operations. Therefore, there is substantial doubt about our ability to continue as a going concern.
At September 30, 2022, we
had approximately $3,079,000 in cash and cash equivalents compared to $4,683,000 at December 31, 2021, which does not include any restricted
funds. Our working capital (current assets minus current liabilities) was $1,939,000 at September 30, 2022 and $3,303,000 at December
31, 2021.
As of September 30, 2022,
we provided bank guarantees to various governmental bodies (approximately $1,218,000) and others (approximately $63,000) in respect of
our drilling operation in the aggregate amount of approximately $1,281,000. The (cash) funds backing these guarantees are held in restricted
interest-bearing accounts in Israel and are reported on the Company’s balance sheets as fixed short-term bank deposits restricted.
During the nine months ended
September 30, 2022, cash used in operating activities totaled $4,719,000. Cash provided by financing activities during the nine months
ended September 30, 2022 was $16,473,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase
Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $13,333,000 for the
nine months ended September 30, 2022.
During the nine months ended
September 30, 2021, cash used in operating activities totaled $4,888,000. Cash provided by financing activities during the nine months
ended September 30, 2021 was $18,057,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase
Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $21,998,000 for the
nine months ended September 30, 2021.
Accounting standards require
management to evaluate our ability to continue as a going concern for a period of one year subsequent to the date of the filing of this
Form 10-Q. We expect to incur additional significant expenditures to further our exploration and development programs. While we raised
approximately $2,235,000 during the period October 1, 2022 through November 9, 2022, we will need to raise additional funds in order to continue
our exploration and development activities in our license area. Additionally, we estimate that, when we are not actively drilling a well,
our expenditures are approximately $600,000 per month excluding exploratory operational activities. However, when we are actively
drilling a well, we estimate an additional minimum expenditure of approximately $2,500,000 per month. The above estimates are subject
to change. Subject to the qualifications specified below, management believes that our existing cash balance, coupled with anticipated
proceeds under the DSPP, will be sufficient to finance our plan of operations through February 2023.
The recent outbreak of the
coronavirus has to date significantly disrupted business operations and resulted in significantly increased unemployment in the general
economy. The extent to which the coronavirus impacts our operations, specifically our capital raising efforts, as well as our ability
to continue our exploratory efforts, will depend on future developments, which are highly uncertain and cannot be predicted with confidence,
including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among others.
No assurance can be provided
that we will be able to raise the needed operating capital.
Even if we raise the needed
funds, there are factors that can nevertheless adversely impact our ability to fund our operating needs, including (without limitation),
unexpected or unforeseen cost overruns in planned non-drilling exploratory work in existing license areas, the costs associated with extended
delays in undertaking the required exploratory work, and plugging and abandonment activities which is typical of what we have experienced
in the past.
The financial information
contained in these consolidated financial statements has been prepared on a basis that assumes that we will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This
financial information and these consolidated financial statements do not include any adjustments that may result from the outcome of this
uncertainty.
Off-Balance Sheet Arrangements
We do not currently use any
off-balance sheet arrangements to enhance our liquidity or capital resource position, or for any other purpose.
Recently Issued Accounting Pronouncements
The Company does not believe
that the adoption of any recently issued accounting pronouncements in 2022 had a significant impact on our financial position, results
of operations, or cash flow.
