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the consolidated financial statements. F- 7 Cash, cash equivalents and restricted cash, |
are comprised as follows: December 31, 2022 December 31, 2021 US$ thousands US$ thousands Cash and cash equivalents 1,735 4,683 Restricted cash included in fixed short-term bank deposits 1,379 1,269 3,114 5,952 F- 8 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Going Concern A. Nature of Operations Zion Oil & Gas, Inc., a Delaware corporation |
(“we,” “our,” “Zion” or the “Company”) is an oil and gas exploration company with a history |
of 23 years of oil & gas exploration in Israel. As of December 31, 2022, the Company has no revenues from its oil and gas operations. Zion maintains its corporate headquarters in Dallas, |
Texas. The Company also has branch offices in Caesarea, Israel and Geneva, Switzerland. The purpose of the Israel branch is to support |
the Company’s operations in Israel, and the purpose of the Switzerland branch is to operate a foreign treasury center for the Company. On January 24, 2020, Zion incorporated a wholly |
owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning a drilling rig, related equipment and spare parts, |
and on January 31, 2020, Zion incorporated another wholly owned subsidiary, Zion Drilling Services, Inc., a Delaware corporation, to act |
as the contractor providing such drilling services. When Zion is not using the rig for its own exploration activities, Zion Drilling Services |
may contract with other operators in Israel to provide drilling services at market rates then in effect. Zion has the trademark “ZION DRILLING” |
filed with the United States Patent and Trademark Office. Zion has the trademark filed with the World Intellectual Property Organization |
in Geneva, Switzerland, pursuant to the Madrid Agreement and Protocol. In addition, Zion has the trademark filed with the Israeli Trademark |
Office in Israel. Exploration |
Rights/Exploration Activities The Megiddo-Jezreel License 401 was awarded on |
December 3, 2013 for a three-year primary term through December 2, 2016 with the possibility of additional one-year extensions up to a |
maximum of seven years or December 3, 2020. The Megiddo Jezreel #1 (“MJ #1”) |
exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters (approximately 16,600 feet). |
Thereafter, the Company successfully cased and cemented the well while awaiting the approval of the testing protocol. The Ministry of |
Energy approved the well testing protocol on April 29, 2018. During the fourth quarter of 2018, the Company |
testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain hydrocarbons in commercial |
quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash impairment charge to |
its unproved oil and gas properties of $ 30,906,000 . F- 9 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Going Concern (cont’d) The New Megiddo License 428 (“NML 428”) (covering the same |
area as MJL 401) 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. This license effectively replaced |
the Megiddo-Jezreel License 401 as it has the same area and coordinates. The MJ-02 drilling plan had been approved by the |
Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory 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 followin (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 planned 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. During the fourth quarter of 2022, the Company |
testing protocol was concluded at the MJ-02 well. The test results confirmed that the MJ-02 well did not contain hydrocarbons in commercial |
quantities in the zones tested. As a result, in the year ended December 31, 2022, the Company recorded a non-cash impairment charge to |
its unproved oil and gas properties of $ 45,615,000 . During the year ended December 31, 2021, the Company did not record any non-cash |
impairment charge. On |
February 1, 2023, the NML 428 License expired, but Zion applied for a replacement license prior to such expiration. 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 . See more information about our exploration activities, |
see Item 1. F- 10 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 1 - Nature of Operations and Going Concern (cont’d) Zion’s Former Asher-Menashe License Zion plugged the exploratory well on its former |
Asher-Menashe License area, the reserve pit has been evacuated, and during the year 2019, Zion completed the abandonment of this well |
site in accordance with guidance from the Energy Ministry, Environmental Ministry and local officials (see Note 9C). 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 (see Note 9C). Uncertainty Due to Geopolitical Events Due to Russia’s invasion of Ukraine, |
which began in February 2022, and the resulting sanctions and other actions against Russia and Belarus, there has been uncertainty |
and disruption in the global economy. Although the Russian war against Ukraine did not have a material adverse impact on the Company’s |
financial results for the year ended December 31, 2022, at this time the Company is unable to fully assess the aggregate impact the |
Russian war against Ukraine will have on its business due to various uncertainties, which include, but are not limited to, the duration |
of the war, the war’s effect on the global economy, future energy pricing, its impact to the businesses of the Company’s, |
and actions that may be taken by governmental authorities related to the war. COVID-19 Update The continuing COVID-19 global pandemic has caused |
significant disruption to the economy and financial markets globally, and the full extent of the potential impacts of COVID-19 are not |
yet known. Circumstances caused by the COVID-19 pandemic are complex, and uncertain. The impact of COVID-19 has not been significant to |
the Company’s results of operations, financial condition, and liquidity and capital resources. Although no material impairment or |
other effects have been identified to date, there is substantial uncertainty in the nature and degree of its continued effects over time. |
That uncertainty affects management’s accounting estimates and assumptions, which could result in greater variability in a variety |
of areas that depend on these estimates and assumptions as additional events and information become known. The Company will continue to |
consider the potential impact of the COVID-19 pandemic on its business operations. B. |
Going Concern The Company incurs cash outflows from operations, |
and all exploration activities and overhead expenses to date have been financed by way of equity or debt financing. The recoverability |
of the costs incurred to date is uncertain and dependent upon achieving significant commercial production of hydrocarbons. The Company’s ability to continue as a going |
concern is dependent upon obtaining the necessary financing to undertake further exploration and development activities and ultimately |
generating profitable operations from its oil and natural gas interests in the future. The Company’s current operations are dependent |
upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy of management’s estimates |
of those requirements. Should those estimates be materially incorrect, the Company’s ability to continue as a going concern may |
be impaired. The consolidated financial statements have been prepared on a going concern basis, which contemplates realization of assets |
and liquidation of liabilities in the ordinary course of business. During the year ended December 31, 2022, the Company incurred a net |
loss of approximately $ 55.1 million and had an accumulated deficit of approximately $ 278.6 million. These factors raise substantial doubt |
about the Company’s ability to continue as a going concern. To carry out planned operations, the Company must |
raise additional funds through additional equity and/or debt issuances or through profitable operations. There can be no assurance that |
this capital or positive operational income will be available to the Company, and if it is not, the Company may be forced to curtail or |
cease exploration and development activities. The consolidated financial statements do not include any adjustments that might result from |
the outcome of this uncertainty (see also Note 11). F- 11 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note |
2 - Summary of Significant Accounting Policies A summary of the significant accounting policies |
applied in the presentation of the accompanying consolidated financial statements follows: A. Basis of Presentation |
and Foreign Currency Matters The accompanying consolidated financial statements |
have been prepared in conformity with accounting principles generally accepted in the United States of America (“US GAAP”). All amounts referred to in the notes to the consolidated |
financial statements are in United States Dollars ($) unless stated otherwise. The currency of the primary economic environment |
in which the operations of the Company are conducted is the United States dollar (“dollar”). Therefore, the dollar has been |
determined to be the Company’s functional currency. Non-dollar transactions and balances have been translated into dollars in accordance |
with the principles set forth in Accounting Standards Codification (“ASC”) 830 “Foreign Currency Matters.” Transactions |
in foreign currency (primarily in New Israeli Shekels – “NIS”) are recorded at the exchange rate as of the transaction |
date. Monetary assets and liabilities denominated in foreign currency are translated on the basis of the representative rate of exchange |
at the balance sheet date. Non-monetary assets and liabilities denominated in foreign currency are stated at historical exchange rates. |
All exchange gains and losses from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in |
the statement of operations as they arise. B. Cash and Cash Equivalents The Company maintains cash balances with six banks, |
of which three banks are located in the United States, one in the United Kingdom, and two in Israel. For purposes of the statement of |
cash flows and balance sheet, the Company considers all highly liquid investments with a maturity of three months or less to be cash equivalents. |
At times, the Company maintains deposits in financial institutions in excess of federally insured limits. The Company has not experienced |
any losses in such accounts and does not believe it is exposed to any significant credit risk on cash. C. Fixed Short-Term Time |
Deposits Interest bearing deposits for a period which exceeds |
three months but not more than 12 months and are not restricted are classified as Fixed Short-Term time deposits. D. |
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