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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. 37 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 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 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. 38 Map 1. Zion’s New Megiddo License 428 |
as of September 30, 2022. 39 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. 40 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 be 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. 41 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. 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. 42 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 |
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