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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, 2022, 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 regardin ● The |
going concern qualification in our consolidated financial statements; ● our ability to obtain new license areas to continue our petroleum |
exploration program; · ● 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; ● business interruptions from COVID-19 pandemic; ● interruptions, increased consolidated financial costs and other adverse impacts of the coronavirus pandemic on the drilling and testing of our petroleum exploration program and our capital raising efforts; ● our ability to explore for and develop natural gas and oil resources successfully and economically within a 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; 33 ● the quality of existing and future license areas with regard to, among other things, the existence of hydrocarbon 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 All |
references in this Quarterly Report to the “Company”, “Zion”, “we”, “us”, or “our”, |
are to Zion Oil and Gas, Inc., a Delaware corporation, and its wholly-owned subsidiaries, Zion Drilling, Inc. and Zion Drilling Services, Inc. described below. Current Exploration and Operation Efforts Zion Oil and Gas, Inc., a |
Delaware corporation, is an oil and gas exploration company with a history of 23 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 marketplace of OTC Markets, |
Inc. under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW.” On January 24, 2020, the Company |
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, the Company incorporated another wholly owned subsidiary, Zion Drilling Services, |
Inc., a Delaware corporation, to act as the contractor providing such drilling services. When the Company 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. The New Megiddo License 428 |
(“NML 428”) was initially awarded on December 3, 2020 for a six-month term and was extended several times before expiring |
on February 1, 2023. Zion Oil & Gas, Inc. filed an amended application with the Israel Ministry of Energy for a new exploratory license |
on January 24, 2023 covering the same area as its License No. 428, which expired on February 1, 2023. However, its original application |
to replace License No. 428 was filed on May 11, 2022, and a revised application was filed on August 29, 2022. Prior to the filing of this |
Quarterly Report, we received initial administrative approval from various departments within the Israel Ministry of Energy which puts |
us in an excellent position to obtain final approval of our license. 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. We are focusing on finalizing |
the technical and operational preparations for our re-entry of the MJ-01 well. I-35 Drilling Rig & Associated Equipment Three-month period ended March 31, 2023 I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$ thousands US$ thousands US$ thousands US$ thousands December 31, 2022 5,225 619 437 6,281 Asset Additions - - - - Asset Depreciation (159 ) - (32 ) (191 ) Asset Disposals for Self-Consumption - (10 ) - (10 ) March 31, 2023 5,066 609 405 6,080 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. 34 Map 1. Zion’s New Megiddo License 428 |
as of March 31, 2023. 35 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 3D (“Dividend |
Reinvestment and Stock Purchase Plan (“DSPP”)), which is a part of this Form 10-Q filing, for details about specific stock |
purchase and unit programs, dates, and filings during the years 2016 through 2023. For the three months ended |
March 31, 2023, and 2022, approximately $792,000, and $11,427,000 were raised under the DSPP program, respectively. The warrants balances at December |
31, 2022 and transactions since January 1, 2023 are shown in the table be Warrants Exercise Price Warrant Termination Date Outstanding Balance, 12/31/2022 Warrants Issued Warrants Exercised Warrants Expired Outstanding Balance, 03/31/2023 ZNWAA $ 2.00 01/31/2024 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 01/08/2024 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 424,225 - (9,050 ) (415,175 ) - ZNWAL $ 2.00 08/26/2023 517,875 - - - 517,875 ZNWAM $ 0.05 07/15/2023 4,376,000 - - - 4,376,000 ZNWAN $ 1.00 05/16/2023 267,760 - (50 ) - 267,710 ZNWAO $ 0.25 06/12/2023 174,660 - - - 174,660 ZNWAQ $ 0.05 07/06/2023 23,428,348 - - - 23,428,348 ZNWAV $ 0.05 06/28/2023 - 286,500 - - 286,500 Outstanding warrants 35,234,137 286,500 (9,100 ) (415,175 ) 35,096,362 36 Principal Components of our Cost Structure Our operating and other expenses |
primarily consist of the followin ● Impairment of Unproved Oil and Gas Properti 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 Expens 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 Accreti 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 for one year from the date the financials were issued. 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 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 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. 37 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 |
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