0001213900-23-038553.txt : 20230511 0001213900-23-038553.hdr.sgml : 20230511 20230511163107 ACCESSION NUMBER: 0001213900-23-038553 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 58 CONFORMED PERIOD OF REPORT: 20230331 FILED AS OF DATE: 20230511 DATE AS OF CHANGE: 20230511 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ZION OIL & GAS INC CENTRAL INDEX KEY: 0001131312 STANDARD INDUSTRIAL CLASSIFICATION: OIL AND GAS FIELD EXPLORATION SERVICES [1382] IRS NUMBER: 200065053 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-33228 FILM NUMBER: 23911570 BUSINESS ADDRESS: STREET 1: 12655 NORTH CENTRAL EXPRESSWAY STREET 2: SUITE 1000 CITY: DALLAS STATE: TX ZIP: 75243 BUSINESS PHONE: 2142214610 MAIL ADDRESS: STREET 1: 12655 NORTH CENTRAL EXPRESSWAY STREET 2: SUITE 1000 CITY: DALLAS STATE: TX ZIP: 75243 10-Q 1 f10q0323_zionoil.htm QUARTERLY REPORT

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

MARK ONE

Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the Quarterly Period ended March 31, 2023;

 

Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

 

for the transition period from ________ to ________

 

ZION OIL & GAS, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   20-0065053
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)
     
12655 N Central Expressway, Suite 1000, Dallas, TX   75243
(Address of principal executive offices)   Zip Code

 

(214) 221-4610

(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒   No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒   No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
    Emerging growth company

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐   No

 

As of May 9, 2023, Zion Oil & Gas, Inc. had outstanding 540,313,673 shares of common stock, par value $0.01 per share.

 

 

 

 

 

 

INDEX PAGE

 

    Page
PART I — FINANCIAL INFORMATION
     
Item 1 – Financial Statements – Unaudited    
     
Consolidated Condensed Balance Sheets – March 31, 2023 and December 31, 2022   1
     
Consolidated Condensed Statements of Operations for the three months ended March 31, 2023 and 2022   2
     
Consolidated Condensed Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2023 and 2022   3
     
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2023 and 2022   4
     
Notes to Consolidated Condensed Financial Statements   6
     
Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations   33
     
Item 3 – Quantitative and Qualitative Disclosures About Market Risk   41
     
Item 4 – Controls and Procedures   41
     
PART II — OTHER INFORMATION
     
Item 1 – Legal Proceedings   42
     
Item 1A – Risk Factors   42
     
Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds   42
     
Item 3 – Defaults upon Senior Securities   42
     
Item 4 – Mine Safety Disclosures   42
     
Item 5 – Other Information   42
     
Item 6 – Exhibits   42
     
Exhibit Index   43
     
SIGNATURES   44

 

i

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Balance Sheets as of

 

   March 31,
2023
   December 31,
2022
 
   US$
thousands
   US$
thousands
 
Current assets 

(Unaudited)

     
Cash and cash equivalents   799    1,735 
Fixed short term bank and escrow deposits – restricted   1,360    1,379 
Prepaid expenses and other current assets   581    600 
Other deposits   155    483 
Governmental receivables   26    267 
Other receivables   139    143 
Total current assets   3,060    4,607 
           
Unproved oil and gas properties, full cost method (see Note 4)   16,057    15,889 
           
Property and equipment at cost          
Drilling rig and related equipment, net of accumulated depreciation of $1,645 and $1,455 (see note 2I)   6,080    6,281 
Property and equipment, net of accumulated depreciation of $657 and $647   102    112 
    6,182    6,393 
           
Right of Use Lease Assets (see Note 5)   135    202 
           
Other assets          
Assets held for severance benefits   425    424 
Total other assets   425    424 
           
Total assets   25,859    27,515 
           
Liabilities and Stockholders’ Equity          
           
Current liabilities          
Accounts payable   2,017    2,147 
Lease obligation – current (see Note 5)   125    196 
Asset retirement obligation   571    571 
Accrued liabilities   495    1,032 
Total current liabilities   3,208    3,946 
           
Long-term liabilities          
Lease obligation – non-current (see Note 5)   12    12 
Provision for severance pay   461    457 
Total long-term liabilities   473    469 
           
Total liabilities   3,681    4,415 
           
Commitments and contingencies (see Note 6)   
 
    
 
 
           
Stockholders’ equity          
Common stock, par value $.01; Authorized: 800,000,000 shares at March 31, 2023: Issued and outstanding: 533,713,261 and 524,231,493 shares at March 31, 2023 and December 31, 2022, respectively   5,337    5,242 
Additional paid-in capital   297,582    296,460 
Accumulated deficit   (280,741)   (278,602)
Total stockholders’ equity   22,178    23,100 
           
Total liabilities and stockholders’ equity   25,859    27,515 

 

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

 

1

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Statements of Operations (Unaudited)

 

   For the
three months ended
 
   March 31, 
   2023   2022 
   US$
thousands
   US$
thousands
 
   (Unaudited)   (Unaudited) 
General and administrative   1,503    1,435 
Other   583    711 
Post impairment of unproved oil and gas properties   45    
-
 
Loss from operations   (2,131)   (2,146)
           
Other expense, net          
Foreign exchange (loss)   (2)   (9)
Financial (expenses), net   (6)   (11)
           
Loss, before income taxes   (2,139)   (2,166)
Income taxes   
-
    
-
 
           
Net loss   (2,139)   (2,166)
           
Net loss, per share of common stock          
Basic and diluted (in US$)
   (0.004)   (0.005)
           
Weighted-average shares outstanding          
Basic and diluted (in thousands)
   531,023    404,817 

 

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

 

2

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Statement of Changes in Stockholders’ Equity (Unaudited)

 

For the three months ended March 31, 2023 

 

   Common Stock   Additional
paid-in
   Accumulated     
   Shares   Amounts   Capital   deficit   Total 
   thousands  

US$

thousands

  

US$

thousands

  

US$

thousands

  

US$

thousands

 
Balances as of December 31, 2022   524,231    5,242    296,460    (278,602)   23,100 
Funds received from sale of DSPP units and shares and exercise of warrants   9,357    94    698    
    792 
Funds received from option exercises   125    1    7    
    8 
Value of options granted to employees, directors and others as non-cash compensation       
    417    
    417 
Net loss       
    
    (2,139)   (2,139)
Balances as of March 31, 2023   533,713    5,337    297,582    (280,741)   22,178

 

*Less than one thousand.

 

For the three months ended March 31, 2022 

 

   Common Stock   Additional
paid-in
   Accumulated     
   Shares   Amounts   Capital   deficit   Total 
   thousands  

US$

thousands

  

US$

thousands

  

US$

thousands

  

US$

thousands

 
Balances as of December 31, 2021   364,324    3,643    277,258    (223,525)   57,376 
Funds received from sale of DSPP units and shares and exercise of warrants   102,219    1,022    10,405    
    11,427 
Funds received from option exercises   50    1    
    
    1 
Value of options granted to employees, directors and others as non-cash compensation       
    215    
    215 
Net loss       
    
    (2,166)   (2,166)
Balances as of March 31, 2022   466,593    4,666    287,878    (225,691)   66,853 

 

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

 

3

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Statements of Cash Flows (Unaudited)

 

   For the
three months ended
March 31,
 
   2023   2022 
   US$
thousands
   US$
thousands
 
   (Unaudited)   (Unaudited) 
Cash flows from operating activities        
Net loss   (2,139)   (2,166)
Adjustments required to reconcile net loss to net cash used in operating activities:          
Depreciation   200    195 
Cost of options issued to employees, directors and others as non-cash compensation   417    208 
Post impairment of unproved oil and gas properties   45    
-
 
Change in assets and liabilities, net:          
Other deposits   328    12 
Prepaid expenses and other   19    (575)
Governmental receivables   241    562 
Lease obligation – current   (71)   (34)
Lease obligation – non current   -    (40)
Right of use lease assets   67    64 
Other receivables   4    107 
Severance payable, net   3    - 
Accounts payable   26    (331)
Accrued liabilities   (57)   (93)
Net cash used in operating activities   (917)   (2,091)
           
Cash flows from investing activities          
Acquisition of property and equipment   
-
    (12)
Acquisition of drilling rig and related equipment   
-
    (122)
Investment in unproved oil and gas properties   (838)   (3,665)
Net cash used in investing activities   (838)   (3,799)
           
Cash flows from financing activities          
Proceeds from exercise of stock options   8    1 
Proceeds from issuance of stock and exercise of warrants   792    9,427 
Net cash provided by financing activities   800    9,428 
           
Net (decrease)/increase in cash, cash equivalents and restricted cash   (955)   3,538 
Cash, cash equivalents and restricted cash – beginning of period   3,114    5,952 
Cash, cash equivalents and restricted cash – end of period   2,159    9,490 
           
Supplemental schedule of cash flow information          
           
Non-cash investing and financing activities:          
Non-cash equity receivables   
-
    2,000 
Unpaid investments in oil & gas properties   1,515    1,130 
Capitalized convertible bond interest attributed to oil and gas properties   
-
    
-
 
Cost of options issued to employees attributed to oil and gas properties   
-
    7 

 

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

 

4

 

 

Cash, cash equivalents and restricted cash, are comprised as follows:

 

   March 31,
2023
   December 31,
2022
 
   US$ thousands   US$ thousands 
Cash and cash equivalents   799    1,735 
Restricted cash included in fixed long-term bank deposits   1,360    1,379 
    2,159    3,114 

 

5

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 1 - Nature of Operations, Basis of Presentation 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 March 31, 2023, 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

 

New Megiddo License 428 (“NML 428”)

 

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.

 

6

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 1 - Nature of Operations, Basis of Presentation and Going Concern (cont’d)

 

B. Basis of Presentation 

 

The accompanying unaudited interim consolidated condensed financial statements of Zion Oil & Gas, Inc. have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with Article 8-03 of Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, all adjustments, consisting only of normal recurring accruals necessary for a fair statement of financial position, results of operations and cash flows, have been included. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with the financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not include all disclosures required by GAAP. The results of operations for the three months ended March 31, 2023 are not necessarily indicative of the operating results for the year ending December 31, 2023 or for any other subsequent interim period.

 

C. 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 three months ended March 31, 2023, the Company incurred a net loss of approximately $2.2 million and had an accumulated deficit of approximately $281 million. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the date the financials were issued.

 

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 

 

7

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 2 - Summary of Significant Accounting Policies

 

A. Net Loss per Share Data 

 

Basic and diluted net loss per share of common stock, par value $0.01 per share (“Common Stock”) is presented in conformity with ASC 260-10 “Earnings Per Share.” Diluted net loss per share is the same as basic net loss per share as the inclusion of 57,997,687 and 23,144,603 Common Stock equivalents in 2023, and 2022 respectively, would be anti-dilutive.

 

B. Use of Estimates 

 

The preparation of the accompanying consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities reported, disclosures about contingent assets and liabilities, and reported amounts of expenses. Such estimates include the valuation of unproved oil and gas properties, deferred tax assets, asset retirement obligations, borrowing rate of interest consideration for leases accounting and legal contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets have combined to increase the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.

 

The full extent to which the COVID-19 pandemic may directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact of COVID-19 within our consolidated financial statements, and although there is currently no major impact, there may be changes to those estimates in future periods. Actual results may differ from these estimates.

 

C. Oil and Gas Properties and Impairment 

 

The Company follows 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 loss from continuing operations before income taxes, and the adjusted carrying amount of the proved properties is amortized on the unit-of-production method.

 

8

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 2 - Summary of Significant Accounting Policies (cont’d)

 

The Company’s oil and gas property represents 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. Impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

 

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 three months ended March 31, 2023, the Company recorded post-impairment charges of $45,000. During the three months ended March 31, 2022, the Company did not record any post-impairment charges.

 

Currently, the Company has no economically recoverable reserves and no amortization base. The Company’s unproved oil and gas properties consist of capitalized exploration costs of $16,057,000 and $15,889,000 as of March 31, 2023 and December 31, 2022, respectively.

 

D. Fair Value Measurements 

 

The Company follows Accounting Standards Codification (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 to sell 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.

 

The Company uses a three-tier fair value hierarchy to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined as follows:

 

Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets;

 

Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and

 

Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions.

 

The Company’s financial instruments, including cash and cash equivalents, accounts payable and accrued liabilities, are carried at historical cost. At March 31, 2023, and December 31, 2022, the carrying amounts of these instruments approximated their fair values because of the short-term nature of these instruments.  

 

9

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 2 - Summary of Significant Accounting Policies (cont’d)

 

E. Stock-Based Compensation 

 

ASC 718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the consolidated financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, “Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of performance commitment date or performance completion date.

 

F. Warrants 

 

In connection with the Dividend Reinvestment and Stock Purchase Plan (“DSPP”) financing arrangements, the Company has issued warrants to purchase shares of its common stock. The outstanding warrants are stand-alone instruments that are not puttable or mandatorily redeemable by the holder and are classified as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement date. Warrants issued in conjunction with the issuance of common stock are initially recorded and accounted as a part of the DSPP investment as additional paid-in capital of the common stock issued. All other warrants are recorded at fair value and expensed over the requisite service period or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements are more fully described in Note 3, Stockholders’ Equity.

 

G. Related parties 

 

Parties are considered to be related to the Company if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. All transactions with related parties are recorded at fair value of the goods or services exchanged.

 

Zion did not have any related party transactions for the periods covered in this report.

 

10

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 2 - Summary of Significant Accounting Policies (cont’d)

 

H. Recently Adopted Accounting Pronouncements 

 

In March 2020, the FASB issued ASU 2020-03, “Codification Improvements to Financial Instruments”: The amendments in this update are to clarify, correct errors in, or make minor improvements to a variety of ASC topics. The changes in ASU 2020-03 are not expected to have a significant effect on current accounting practices. The ASU improves various financial instrument topics in the Codification to increase stakeholder awareness of the amendments and to expedite the improvement process by making the Codification easier to understand and easier to apply by eliminating inconsistencies and providing clarifications. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 with early application permitted. Zion adopted ASU 2020-03 in the first quarter of 2023. The adoption of this ASU did not have any impact on its consolidated financial statements.

 

 In October 2021, the FASB issued ASU No. 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers. The ASU requires companies to apply the definition of a performance obligation under ASC 606 to recognize and measure contract assets and contract liabilities relating to contracts with customers acquired in a business combination. Prior to the adoption of this ASU, an acquirer generally recognized assets acquired and liabilities assumed in a business combination, including contract assets and contract liabilities arising from revenue contracts with customers, at fair value on the acquisition date. The ASU results in the acquirer recording acquired contract assets and liabilities on the same basis that would have been recorded by the acquiree before the acquisition under ASC 606. The ASU is effective for fiscal years beginning after December 15, 2022, with early adoption permitted. Zion adopted ASU 2021-08 in the first quarter of 2023. The adoption of this ASU did not have a material impact on our consolidated financial statements; the impact in future periods will be dependent upon the contract assets acquired and contract liabilities assumed in any future business combinations.

 

In September 2022, the FASB issued ASU No. 2022-04, Liabilities – Supplier Finance Programs (Subtopic 405-50). The ASU requires companies to disclose information about supplier finance programs, including key terms of the program, outstanding confirmed amounts as of the end of the period, a roll forward of such amounts during each annual period, and a description of where the amounts are presented. The new standard does not affect the recognition, measurement, or financial statement presentation of supplier finance obligations. The ASU is effective for fiscal years beginning after December 15, 2022, including interim periods, except for roll forward information, which is effective for fiscal years beginning after December 15, 2023. The adoption of this ASU did not have any impact on its consolidated financial statements.

 

Other Recent Accounting Pronouncements

 

The Company does not believe that the adoption of any recently issued accounting pronouncements in 2023 had a significant impact on our consolidated financial position, results of operations, or cash flow.

 

11

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 2 - Summary of Significant Accounting Policies (cont’d)

 

I. Depreciation and Accounting for Drilling Rig and Related Equipment 

 

On March 12, 2020, Zion entered into a Purchase and Sale Agreement with Central European Drilling kft (“CED”), 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. 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 on January 8, 2021.

 

The full purchase price of the drilling rig was $5.6 million, inclusive of approximately $540,000 allocated in spare parts and $48,000 allocated in additional separate assets. The value of the spare parts and separate assets are captured in separate ledger accounts, but reported as one line item with the drilling rig on the balance sheet.

 

In accordance with GAAP accounting rules, per the matching principle, monthly depreciation begins the month following when the asset is “placed in service.” The rig was placed in service in December 2020 with January 2021 representing the first month of depreciation. Zion determined that the life of the I-35 drilling rig (the rig Zion purchased), is 10 years. Zion will depreciate the rig on a straight-line basis.

 

Zion uses the First In First Out (“FIFO”) method of accounting for the inventory spare parts, meaning that the earliest items purchased will be the first item charged to the well in which the inventory of spare parts gets consumed.

 

It is also noteworthy that various components and systems on the rig will be subject to certifications by the manufacturer to ensure that the rig is maintained at optimal levels. Per standard practice in upstream oil and gas, each certification performed on our drilling rig increases the useful life of the rig by five years. The costs of each certification will be added to the drilling rig account, and our straight-line amortization will be adjusted accordingly.

 

See the table below for a reconciliation of the rig-related activity during the quarter ended March 31, 2023:

 

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 

 

12

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity

 

The Company’s shareholders approved the amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of shares of common stock, par value $0.01, that the Company is authorized to issue from 400,000,000 shares to 800,000,000 shares, effective June 9, 2021.

 

A. 2021 Omnibus Incentive Stock Option Plan

 

Effective June 9, 2021, the Company’s shareholders authorized the adoption of the Zion Oil & Gas, Inc. 2021 Omnibus Incentive Stock Option Plan (“Omnibus Plan”) for employees, directors and consultants, initially reserving for issuance thereunder 38,000,000 shares of common stock.

 

The Omnibus Plan provides for the grant of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, other stock-based awards and performance units. The plan also permits cash payments under certain conditions.

 

The compensation committee of the Board of Directors (comprised of independent directors) is responsible for determining the type of award, when and to whom awards are granted, the number of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date of grant.

 

During the three months ended March 31, 2023, the Company granted the following options from the 2021 Equity Omnibus Plan for employees, directors and consultants, to purchase shares of common stock as non-cash compensation:

 

  i. Options to purchase 175,000 shares of Common Stock to five senior officers and one staff member at an exercise price of $0.0615 per share. The options vested upon grant and are exercisable through January 4, 2033. The fair value of the options at the date of grant amounted to approximately $9,000.

 

  ii. Options to purchase 25,000 shares of Common Stock to one senior officer at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 4, 2033. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $1,500.

 

13

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

During the three months ended March 31, 2022, the Company granted the following options from the 2021 Equity Omnibus Plan for employees, directors and consultants, to purchase shares of common stock as non-cash compensation:

 

  i. Options to purchase 175,000 shares of Common Stock to six senior officers and one staff member at an exercise price of $0.1529 per share. The options vested upon grant and are exercisable through January 4, 2032. The fair value of the options at the date of grant amounted to approximately $22,000.

 

  ii. Options to purchase 25,000 shares of Common Stock to one senior officer at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 4, 2032. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $4,000.

 

  iii. Options to purchase 300,000 shares of Common Stock to one senior officer and one staff member at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 5, 2032. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $39,000

 

  iv. Options to purchase 200,000 shares of Common Stock one board member at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 5, 2032. These options were granted per the provisions under the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $29,000

 

  v. Options to purchase 1,600,000 shares of Common Stock to five senior officers and four staff members at an exercise price of $0.1529 per share. The options vest on January 5, 2023 (one year from the date of grant) and are exercisable through January 5, 2032. The fair value of the options at the date of grant amounted to approximately $209,000, and will be recognized during the years 2022 and 2023.

 

  vi. Options to purchase 1,400,000 shares of Common Stock to seven board members, at an exercise price of $0.1529 per share. The options vest on January 5, 2023 (one year from the date of grant) and are exercisable through January 5, 2032. The fair value of the options at the date of grant amounted to approximately $182,000, and will be recognized during the years 2022 and 2023.
     
  vii. Options to purchase 160,000 shares of Common Stock to four staff members, at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 17, 2032. These options were granted per the provisions under the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $23,000.
     
  viii. Options to purchase 200,000 shares of Common Stock to six staff members at an exercise price of $0.14 per share. The options vest on January 17, 2023 (one year from the date of grant) and are exercisable through January 17, 2032. The fair value of the options at the date of grant amounted to approximately $26,000, and will be recognized during the years 2022 and 2023.
     
  ix. Options to purchase 40,000 shares of Common Stock to two consultants at an exercise price of $0.14 per share. The options vest on January 17, 2023 (one year from the date of grant) and are exercisable through January 17, 2032. The fair value of the options at the date of grant amounted to approximately $5,000, and will be recognized during the years 2022 and 2023.

 

14

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

B. Stock Options 

 

The stock option transactions since January 1, 2023 are shown in the table below:

 

   Number of
shares
   Weighted
Average
exercise
price
 
       US$ 
Outstanding, December 31, 2022   26,391,250    0.30 
           
Changes during 2023 to:          
Granted to employees, officers, directors and others   200,000    0.06 
Expired/Cancelled/Forfeited   
-
    
-
 
Exercised   (125,000)   0.06 
Outstanding, March 31, 2023   26,466,250    0.30 
Exercisable, March 31, 2023   14,901,250    0.40 

 

15

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

The following table summarizes information about stock options outstanding as of March 31, 2023:

 

Shares underlying outstanding options (non-vested)   Shares underlying outstanding options (fully vested) 
Range of
exercise
price
   Number
outstanding
   Weighted
average
remaining
contractual
life (years)
   Weighted
Average
Exercise
price
   Range of
exercise
price
   Number
Outstanding
   Weighted
average
remaining
contractual
life (years)
   Weighted
Average
Exercise
price
 
US$           US$   US$           US$ 
 0.15    6,410,000    9.05    0.15    0.01    10,000    0.62    0.01 
 0.18    5,155,000    9.49    0.18    0.01    5,000    1.20    0.01 
                 0.01    20,000    3.17    0.01 
                 0.01    130,000    3.75    0.01 
                 0.01    50,000    3.76    0.01 
                 0.01    60,000    4.04    0.01 
                 0.01    200,000    4.13    0.01 
                 0.01    40,000    4.50    0.01 
                 0.01    70,000    4.75    0.01 
                 0.01    25,000    4.76    0.01 
                 0.01    30,000    4.91    0.01 
                 0.01    4,000    5.01    0.01 
                 0.01    25,000    5.77    0.01 
                 0.01    35,000    6.46    0.01 
                 0.01    150,000    6.63    0.01 
                 0.01    35,000    6.76    0.01 
                 0.01    75,000    7.76    0.01 
                 0.01    200,000    8.14    0.01 
                 0.01    300,000    8.29    0.01 
                 0.01    10,000    8.42    0.01 
                 0.01    500,000    8.76    0.01 
                 0.01    55,000    8.80    0.01 
                 0.01    960,000    9.04    0.01 
                 0.01    75,000    9.37    0.01 
                 0.01    10,000    9.42    0.01 
                 0.01    795,000    9.48    0.01 
                 0.01    25,000    9.76    0.01 
                 0.06    50,000    9.76    0.06 
                 0.14    240,000    8.80    0.14 
                 0.15    25,000    8.76    0.15 
                 0.15    3,200,000    9.00    0.15 
                 0.16    340,000    2.69    0.16 
                 0.16    75,000    6.69    0.16 
                 0.18    25,000    2.67    0.18 
                 0.24    25,000    9.34    0.24 
                 0.24    118,000    9.37    0.24 
                 0.25    50,000    8.42    0.25 
                 0.25    363,000    8.42    0.25 
                 0.28    25,000    2.42    0.28 
                 0.28    25,000    6.42    0.28 
                 0.29    25,000    4.20    0.29 
                 0.39    1,435,000    8.27    0.39 
                 0.59    1,400,000    4.13    0.59 
                 0.59    1,600,000    8.14    0.59 
                 0.92    350,000    3.76    0.92 
                 0.92    550,000    7.76    0.92 
                 1.33    25,000    0.07    1.33 
                 1.38    105,307    1.76    1.38 
                 1.67    405,943    1.51    1.67 
                 1.75    250,000    0.27    1.75 
                 1.78    25,000    1.43    1.78 
                 2.31    250,000    0.76    2.31 
                 4.15    25,000    1.26    4.15 
 0.15-0.18     11,565,000         0.16    0.01-4.15    14,901,250         0.40 

 

16

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

Granted to employees

 

The following table sets forth information about the weighted-average fair value of options granted to employees and directors during the year, using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:

 

   For the three months ended March 31, 
   2023   2022 
Weighted-average fair value of underlying stock at grant date  $0.06   $0.15 
Dividend yields   
     
Expected volatility   137%   127%-133%
Risk-free interest rates   3.85%   1.37%-1.55%
Expected lives (in years)   5.00    5.00-5.50 
Weighted-average grant date fair value  $0.06   $0.13 

 

Granted to non-employees

 

The following table sets forth information about the weighted-average fair value of options granted to non-employees during the year, using the Black Scholes option-pricing model and the weighted-average assumptions used for such grants:

 

   For the three months ended
March 31,
 
   2023   2022 
Weighted-average fair value of underlying stock at grant date   
   $0.15 
Dividend yields   
     
Expected volatility   
%   103%
Risk-free interest rates   
%   1.78%
Expected lives (in years)   
    10 
Weighted-average grant date fair value   
   $0.14 

 

There were no warrants or options granted to non-employees for the 3 months ended March 31, 2023. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options.

 

The expected life represents the weighted average period of time that options granted are expected to be outstanding. The expected life of the options granted to employees and directors is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 110 (“SAB 110”), giving consideration to the contractual term of the options and their vesting schedules, as the Company does not have sufficient historical exercise data at this time. The expected life of the option granted to non-employees equals their contractual term. In the case of an extension of the option life, the calculation was made on the basis of the extended life.

 

17

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

C. Compensation Cost for Warrant and Option Issuances 

 

The following table sets forth information about the compensation cost of warrant and option issuances recognized for employees and directors:

 

For the three months ended March 31,  
2023     2022  
US$ thousands     US$ thousands  
  415       214  

 

The following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:

 

For the three months ended March 31,  
2023     2022  
US$ thousands     US$ thousands  
  2       1  

 

The following table sets forth information about the compensation cost of option issuances recognized for employees and non-employees and capitalized to Unproved Oil & Gas properties:

 

For the three months ended March 31,  
2023     2022  
US$ thousands     US$ thousands  
        7  

 

As of March 31, 2023, there was $434,000 of unrecognized compensation cost related to non-vested stock options granted under the Company’s various stock option plans. That cost is expected to be recognized during 2023.

 

18

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

D. Dividend Reinvestment and Stock Purchase Plan (“DSPP ”)

 

On March 13, 2014 Zion filed a registration statement on Form S-3 that was 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.

 

On January 13, 2015, the Company amended the Original Prospectus Supplement (“Amendment No. 3”) to provide for a unit option (the “Unit Option”) under the DSPP comprised of one share of Common Stock and three Common Stock purchase warrants with each unit priced at $4.00. Each warrant afforded the participant the opportunity to purchase the Company’s Common Stock at a warrant exercise price of $1.00. Each of the three warrants series had different expiration dates that had been extended.

 

The ZNWAB warrants first became exercisable on May 2, 2016 and, in the case of ZNWAC on May 2, 2017 and in the case of ZNWAD on May 2, 2018, at a per share exercise price of $1.00.

 

As of May 2, 2017, any outstanding ZNWAB warrants expired.

 

As of May 2, 2018, any outstanding ZNWAC warrants expired.

 

On May 29, 2019, the Company extended the termination date of the ZNWAD Warrant by one (1) year from the expiration date of May 2, 2020 to May 2, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAD Warrant by two (2) years from the expiration date of May 2, 2021 to May 2, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On November 1, 2016, the Company launched a unit offering under the Company’s DSPP pursuant to which participants could purchase units comprised of seven shares of Common Stock and seven Common Stock purchase warrants, at a per unit purchase price of $10. The warrant is referred to as “ZNWAE.”

 

The ZNWAE warrants became exercisable on May 1, 2017 and continued to be exercisable through May 1, 2020 at a per share exercise price of $1.00.

 

On May 29, 2019, the Company extended the termination date of the ZNWAE Warrant by one (1) year from the expiration date of May 1, 2020 to May 1, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAE Warrant by two (2) years from the expiration date of May 1, 2021 to May 1, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

19

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share at the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company may, in its sole discretion, accelerate the termination of the warrant upon providing 60 days advanced notice to the warrant holders.

 

On May 22, 2017, the Company launched a new unit offering. This unit offering consisted of a new combination of common stock and warrants, a new time period in which to purchase under the program, and a new unit price, but otherwise the same unit program features, conditions and terms in the Prospectus Supplement applied. The unit offering terminated on July 12, 2017. This program enabled participants to purchase Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares of Common Stock at a warrant exercise price of $1.00 per share. The warrant is referred to as “ZNWAF.”

 

All ZNWAF warrants became exercisable on August 14, 2017 and continued to be exercisable through August 14, 2020 at a per share exercise price of $1.00.

 

On May 29, 2019, the Company extended the termination date of the ZNWAF Warrant by one (1) year from the expiration date of August 14, 2020 to August 14, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAF Warrant by two (2) years from the expiration date of August 14, 2021 to August 14, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon providing 60 days advanced notice to the warrant holders.

 

An Amendment No. 2 to the Prospectus Supplement (as described below) was filed on October 12, 2017.

 

Under Amendment No. 2, the Company initiated another unit offering which terminated on December 6, 2017. This unit offering enabled participants to purchase Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 15 shares of Common Stock at a warrant exercise price of $1.00 per share. The warrant is referred to as “ZNWAG.” 

 

The warrants became exercisable on January 8, 2018 and continue to be exercisable through January 8, 2024 at a revised per share exercise price of $.25. The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon providing 60 days advanced notice to the warrant holders.

 

20

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

On December 14, 2022, the Company extended the termination date of the ZNWAG warrant by one (1) year from the expiration date of January 8, 2023 to January 8, 2024. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On February 1, 2018, the Company launched another unit offering which terminated on February 28, 2018. The unit offering consisted of Units of our securities where each Unit (priced at $250.00 each) was comprised of (i) 50 shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional 50 shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $5.00. The warrant is referred to as “ZNWAH.”

 

The warrants became exercisable on April 2, 2018 and continued to be exercisable through April 2, 2020 at a per share exercise price of $5.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of April 2, 2019 to April 2, 2020.

 

On May 29, 2019, the Company extended the termination date of the ZNWAH Warrant by one (1) year from the expiration date of April 2, 2020 to April 2, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAH Warrant by two (2) years from the expiration date of April 2, 2021 to April 2, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On August 21, 2018, the Company initiated another unit offering, and it terminated on September 26, 2018. The offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock as reported on the NASDAQ on the Unit Purchase Date and (ii) Common Stock purchase warrants to purchase an additional twenty-five (25) shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $1.00. The warrant is referred to as “ZNWAJ.”

 

The warrants became exercisable on October 29, 2018 and continued to be exercisable through October 29, 2020 at a per share exercise price of $1.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of October 29, 2019 to October 29, 2020.

 

On May 29, 2019, the Company extended the termination date of the ZNWAJ Warrant by one (1) year from the expiration date of October 29, 2020 to October 29, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAJ Warrant by two (2) years from the expiration date of October 29, 2021 to October 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.

 

On December 10, 2018, the Company initiated another unit offering, and it terminated on January 23, 2019. The offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) is comprised of (i) two hundred and fifty (250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional two hundred and fifty (250) shares of Common Stock at a per share exercise price of $0.01. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that are acquired under the Units purchased. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $0.01. The warrant is referred to as “ZNWAK.”

 

21

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

The warrants became exercisable on February 25, 2019 and continued to be exercisable through February 25, 2020 at a per share exercise price of $0.01.

 

On May 29, 2019, the Company extended the termination date of the ZNWAK Warrant by one (1) year from the expiration date of February 25, 2020 to February 25, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On September 15, 2020, the Company extended the termination date of the ZNWAK Warrant by two (2) years from the expiration date of February 25, 2021 to February 25, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

As of February 25, 2023, any outstanding ZNWAK warrants expired.

 

On April 24, 2019, the Company initiated another unit offering and it terminated on June 26, 2019, after the Company, on June 5, 2019, extended the termination date of the unit offering.

 

The unit offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) two hundred and fifty (250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional fifty (50) shares of Common Stock at a per share exercise price of $2.00. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the Unit Program with the purchase of at least one Unit and also enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional twenty-five (25) warrants at an exercise price of $2.00 during this Unit Option Program. The twenty-five (25) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were entitled to the additional twenty-five (25) warrants once, if they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $2.00. The warrant is referred to as “ZNWAL.

 

The warrants became exercisable on August 26, 2019 and continued to be exercisable through August 26, 2021 at a per share exercise price of $2.00.

 

On September 15, 2020, the Company extended the termination date of the ZNWAL Warrant by two (2) years from the expiration date of August 26, 2021 to August 26, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

Under our Plan, the Company under a Request For Waiver Program executed Waiver Term Sheets of a unit option program consisting of a Unit (shares of stock and warrants) of its securities and subsequently an option program consisting of shares of stock to a participant. The participant’s Plan account was credited with the number of shares of the Company’s Common Stock and warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant shall have the company notation of “ZNWAM.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants became exercisable on January 15, 2021 and continue to be exercisable through July 15, 2023 at a revised per share exercise price of $.05.

 

On March 21, 2022, the Company extended the termination date of the ZNWAM warrant by one (1) year from the expiration date of July 15, 2022 to July 15, 2023 and revised the exercise price to $0.05. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

On February 1, 2021, the Company initiated a unit offering and it terminated on March 17, 2021.

 

22

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

The unit offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of Common Stock shares represented by the high-low average on the purchase date and (ii) Common Stock purchase warrants to purchase an additional twenty-five (25) shares of Common Stock at a per share exercise price of $1.00. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the Unit Program with the purchase of at least one Unit or who enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional ten (10) warrants at an exercise price of $1.00 during this Unit Option Program. The ten (10) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were also entitled to the additional ten (10) warrants once, provided that they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant is referred to as “ZNWAN.”

 

The warrants became exercisable on May 16, 2021 and continue to be exercisable through May 16, 2023 at a per share exercise price of $1.00.

 

On April 12, 2021, the Company initiated a unit offering and it terminated on May 12, 2021.

 

The unit offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of Common Stock shares represented by the high-low average on the purchase date and (ii) Common Stock purchase warrants to purchase an additional fifty (50) shares of Common Stock at a per share exercise price of $.25. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the unit offering with the purchase of at least one Unit or who enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional fifty (50) warrants at an exercise price of $.25 during this Unit Option Program. The fifty (50) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were also entitled to the additional fifty (50) warrants once, provided that they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant is referred to as “ZNWAO.”

 

The warrants became exercisable on June 12, 2021 and continue to be exercisable through June 12, 2023 at a per share exercise price of $.25.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet for a unit program consisting of a Unit (shares of stock and warrants) to a participant. After conclusion of the program on May 28, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant has the company notation of “ZNWAP.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants were issued and became exercisable on June 2, 2021 and continue to be exercisable through June 2, 2022 at a per share exercise price of $.25.

 

On March 21, 2022, the Company extended the termination date of the ZNWAP Warrant by one (1) year from the expiration date of June 2, 2022 to June 2, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet for a program consisting of Zion securities to a participant. After conclusion of the program on June 17, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock that were acquired. 

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program on June 18, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAQ.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants were issued on May 5, 2022 and are exercisable through July 6, 2023 at a revised per share exercise price of $.05.

 

23

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program on June 18, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAR.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants were issued and became exercisable on June 22, 2021 and continue to be exercisable through June 22, 2022 at a per share exercise price of $.25. Additionally, Zion incurred $115,000 in equity issuance costs to an outside party related to this waiver program.

 

On March 21, 2022, the Company extended the termination date of the ZNWAR Warrant by one (1) year from the expiration date of June 22, 2022 to June 22, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet to a participant. After conclusion of the program on September 15, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock that were acquired.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program on November 15, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and warrants that will be acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant shall have the company notation of “ZNWAS.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a revised per share exercise price of $.25.

 

On December 9, 2019 Zion filed an Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-235299) solely for the purpose of re-filing a revised Exhibit 5.1 to the Registration Statement. This Amendment No. 1 does not modify any provision of the prospectus that forms a part of the Registration Statement and accordingly, such prospectus has not been included herein.

 

On December 10, 2021 Zion filed an Amendment No. 1 to the Registration Statement on Form S-3 (File No. 333-235299) for the purpose of converting the existing Form S-1 to the Registration Statement on Form S-3. This Amendment No. 1 does not modify any provision of the prospectus that forms a part of the Registration Statement and accordingly such prospectus has not been included herein.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program on September 30, 2022, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAT.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a per share exercise price of $.25.

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program on December 31, 2022, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAU.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a per share exercise price of $.25.

 

24

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

Under our Plan, the Company under a Request For Waiver Program executed a Waiver Term Sheet of a program consisting of shares of stock to a participant. After conclusion of the program on June 16, 2023, the participant’s Plan account will be credited with the number of shares of the Company’s Common Stock that will be acquired.

 

On March 13, 2023, Zion filed with the Securities and Exchange Commission an Amendment No. 2 to the Prospectus Supplement dated as of December 15, 2021 and accompanying base prospectus dated December 1, 2021 relating to the Company’s Dividend Reinvestment and Direct Stock Purchase Plan. This Amendment No. 2 to Prospectus Supplement amends the Prospectus Supplement. The Prospectus forms a part of the Company’s Registration Statement on Form S-3 (File No. 333-261452), as amended, which was declared effective by the SEC on December 15, 2021.

 

Amendment No. 2 - New Unit Option under the Unit Program

 

Under our Plan, we provided a Unit Option under Amendment No. 2. Our Unit Program consisted of the combination of Common Stock and warrants with basic Unit Program features, conditions and terms outlined in the Original Prospectus Supplement and Amendment No. 1. Amendment No. 2 provided the option period, unit price and the determination of the number of shares of Common Stock and warrants per unit. This Unit Option had up to three tranches of investment, in which the second and third tranches were each subject to termination upon a total of $7,500,000 received from participants by the Company during the first or second tranche. The first tranche period began on March 13, 2023 and terminated on March 26, 2023. The second tranche began on March 27, 2023 and terminated on April 9, 2023 and the third tranche began on April 10, 2023 and terminated on April 27, 2023.

 

The Unit Option consisted of Units of our securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock as reported on the OTCQX on the Unit Purchase Date and (ii) Common Stock purchase warrants to purchase an additional five hundred (500) shares of Common Stock at a per share exercise price of $0.05. The participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired under the Units purchased. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $0.05. The warrant shall have the Company notation of “ZNWAV” under the first tranche, “ZNWAW” under the second tranche and “ZNWAX” under the third tranche. The warrants will not be registered for trading on the OTCQX or any other stock market or trading market.

 

Plan participants, who enrolled into the Unit Program with the purchase of at least one Unit and enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month, received an additional fifty (50) warrants at an exercise price of $0.05 during this Unit Option Program. The fifty (50) additional warrants were for enrolling into the AMI program and shall have the Company notation of “ZNWAY.” Existing subscribers to the AMI are entitled to the additional fifty (50) warrants, if they purchase at least one (1) Unit during the Unit program. Plan participants, who enroll in the AMI at a minimum of $100 per month, will receive one hundred (100) ZNWAY warrants. Plan participants, who enroll in the AMI at a minimum of $250 per month, will receive two hundred and fifty (250) ZNWAY warrants. Plan participants, who enroll in the AMI at a minimum of $500 per month, will receive five hundred (500) ZNWAY warrants. The AMI program requires 90 days of participation to receive the ZNWAY warrants. Existing AMI participants are entitled to participate in this monthly program by increasing their monthly amount above the minimum $50.00 per month.

 

The ZNWAV warrants became exercisable on March 31, 2023 and continue to be exercisable through June 28, 2023 at a per share exercise price of $0.05. The ZNWAW warrants became exercisable on April 14, 2023 and continue to be exercisable through July 13, 2023 at a per share exercise price of $0.05. The ZNWAX warrants became exercisable on May 2, 2023 and continue to be exercisable through July 31, 2023 at a per share exercise price of $0.05. The ZNWAY warrants will become exercisable on June 12, 2023 and will continue to be exercisable through September 10, 2023 at a per share exercise price of $0.05.

 

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 company raised approximately $761,000 from the period April 1, 2023 through May 9, 2023, under the DSPP program.

 

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.

 

25

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

E. Warrant Table 

 

The warrants balances at December 31, 2022 and transactions since January 1, 2023 are shown in the table below:

 

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 

 

26

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 3 - Stockholders’ Equity (cont’d)

 

F. Warrant Descriptions 

 

The price and the expiration dates for the series of warrants to investors are as follows *:

 

        Period of Grant   US$     Expiration Date
ZNWAA Warrants   B,C,G   March 2013 – December 2014     2.00     January 31, 2024
ZNWAD Warrants  

H

  January 2015 – March 2016     1.00     May 02, 2023
ZNWAE Warrants  

H

  November 2016 – March 2017     1.00     May 01, 2023
ZNWAF Warrants   A,B,C   May 2017 – July 2017     1.00     August 14, 2023
ZNWAG Warrants   C,G   October 2017 – December 2017     1.00     January 08, 2024
ZNWAH Warrants  

H

  February 2018     5.00     April 19, 2023
ZNWAI Warrants   A,B,C   April 2018 – May 2018     3.00     June 29, 2023
ZNWAJ Warrants   B,C   August 2018 – September 2018     1.00     October 29, 2023
ZNWAK Warrants   H   December 2018 – January 2019     0.01     February 25, 2023
ZNWAL Warrants   C   July 2019 – August 2019     2.00     August 26, 2023
ZNWAM Warrants   D,I   January 2021 – March 2021    

0.05

    July 15, 2023
ZNWAN Warrants       May – June 2021     1.00     May 16, 2023
ZNWAO Warrants       June 2021     0.25     June 12, 2023
ZNWAQ Warrants   E,I   June 2021     0.05     July 6, 2023
ZNWAS Warrants   F   August 2021 – March 2022     0.25     December 31, 2025
ZNWAT Warrants   F   August – September 2022     0.25     December 31, 2025
ZNWAU Warrants   F   October – November 2022      0.25      December 31, 2025
ZNWAV Warrants   J   March 2023     0.05     June 28, 2023
ZNWAW Warrants   J   March – April 2023     0.05     July 13, 2023
ZNWAX Warrants   J   April 2023     0.05     July 31, 2023
ZNWAY Warrants   K   March – April 2023     0.05     Sept 10, 2023

 

* Zion’s ZNWAB Warrants expired on May 2, 2017, the ZNWAC Warrants expired on May 2, 2018, the ZNWAD Warrants expired on May 2, 2023, the ZNWAE Warrants expired on May 1, 2023, the ZNWAH Warrants expired on April 19, 2023, and the ZNWAK Warrants expired on February 25, 2023.

 

A On December 4, 2018, the Company extended the expiration date of the Warrants by one (1) year.
B On May 29, 2019, the Company extended the expiration date of the Warrants by one (1) year.
C On September 15, 2020, the Company extended the expiration date of the Warrants by two (2) years.
D On March 21, 2022, the Company extended the expiration date of the Warrants by one (1) year.
E These warrants were issued on May 5, 2022, and on May 17, 2022, the Company extended the expiration date of the Warrants by one (1) year.
F These warrants will be issued and become exercisable beginning on November 15, 2025 and expire on December 31, 2025.
G On December 14, 2022, the Company extended the expiration date of the Warrants by one (1) year.
H These warrants are now expired as of the report date.
I The warrant exercise price was lowered to $0.05 on December 28, 2022.
J

On March 13, 2023, The Company announced a new Unit Offering, inclusive of three tranches of warrants (ZNWAV, ZNWAW and ZNWAX).

KThe ZNWAY warrants are associated with Automatic Monthly Investments (“AMI”) connected with participation in the unit offering announced on March 13, 2023

 

27

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 4 - Unproved Oil and Gas Properties, Full Cost Method

 

Unproved oil and gas properties, under the full cost method, are comprised as follows:

 

 

   March 31,
2023
   December 31,
2022
 
   US$
thousands
   US$
thousands
 
Excluded from amortization base:        
Drilling costs, and other operational related costs   2,414    2,362 
Capitalized salary costs   2,368    2,342 
Capitalized interest costs   1,418    1,418 
Legal and seismic costs, license fees and other preparation costs   9,818    9,728 
Other costs   39    39 
    16,057    15,889 

 

Impairment of unproved oil and gas properties comprised as follows: 

 

   For the three months ended
March 31,
 
   2023   2022 
   US$
thousands
   US$
thousands
 
Excluded from amortization base:        
Drilling costs, and other operational related costs   11    
-
 
Capitalized salary costs   
-
    
-
 
Capitalized interest costs   
-
    
-
 
Legal and seismic costs, license fees and other preparation costs   34    
-
 
    45    
-
 

 

 

Changes in Unproved oil and gas properties during the three months ended March 31, 2023 and 2022 are as follows:

 

   March 31,
2023
   March 31,
2022
 
   US$ thousands   US$ thousands 
Excluded from amortization base:        
Drilling costs, and other operational related costs   63    628 
Capitalized salary costs   26    52 
Capitalized interest costs   
-
    
-
 
Legal and seismic costs, license fees and other preparation costs   124    469 
Other costs   
-
    
-
 
Impairment of unproved oil and gas properties   (45)   
-
 
    *168   *1,149

 

 

*Inclusive of non-cash amounts of approximately $1,515,000, and $1,137,000 during the three months ended March 31, 2023, and 2022, respectively

 

Please refer to Footnote 1 – Nature of Operations and Going Concern for more information about Zion’s exploration activities.

 

28

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 5 - Right of use lease assets and lease obligations 

 

The Company is a lessee in several non-cancellable operating leases for transportation and office space.

 

The table below presents the operating lease assets and liabilities recognized on the balance sheets as of March 31, 2023 and December 31, 2022: 

 

   March 31,
2023
   December 31,
2022
 
   US$
thousands
   US$
thousands
 
Operating lease assets  $135   $202 
           
Operating lease liabilities:          
Current operating lease liabilities  $125   $196 
Non-current operating lease liabilities  $12   $12 
Total operating lease liabilities  $137   $208 

 

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 March 31, 2023 are:

 

   March 31,
2023
 
Weighted average remaining lease term (years)   0.75 
Weighted average discount rate   4.9%

 

29

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 5 - Right of use lease assets and leases obligations (cont’d)

 

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 March 31, 2023:

 

   US$
thousands
 
2023   128 
2024   11 
2025   
-
 
2026   
-
 
Thereafter   
-
 
Total undiscounted future minimum lease payments   139 
Less: portion representing imputed interest   (2)
Total undiscounted future minimum lease payments   137 

 

Operating lease costs were $69,000 and $68,000 for the three months ended March 31, 2023, and 2022, respectively. Operating lease costs are included within general and administrative expenses on the statements of operations.

 

Cash paid for amounts included in the measurement of operating lease liabilities was $70,000 and $72,000 for the three months ended March 31, 2023, and 2022, respectively, and this amount is 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 $nil for the three months ended March 31, 2023, and 2022, respectively.

 

30

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 6 - Commitments and Contingencies

 

A. Securities and Exchange Commission (“SEC”) Investigation 

 

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.

 

On April 5, 2023, the Company received from the Fort Worth Regional Office of the SEC written notice to the Company concluding the investigation as to the Company and that the SEC does “not intend to recommend an enforcement action by the Commission against Zion.

 

B. Litigation 

 

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. 

 

The Company is not subject to any litigation at the present time. 

 

C. Market Conditions – Coronavirus Pandemic 

 

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. However, as of the date of this report, most of our employees are working at our physical offices, but have the ability to work from home as needed. While there are various uncertainties to navigate, the Company’s business activities are continuing. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or work from home arrangements.

 

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.

 

D. Environmental and Onshore Licensing Regulatory Matters 

 

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 March 31, 2023, and December 31, 2022, the Company accrued $nil and $nil for license regulatory matters.

 

E. Bank Guarantees 

 

As of March 31, 2023, the Company provided Israeli-required bank guarantees to various governmental bodies (approximately $1,042,000) and others (approximately $76,000) with respect to its drilling operation in an aggregate amount of approximately $1,118,000. 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.

 

31

 

 

Zion Oil & Gas, Inc.

 

Consolidated Condensed Notes to Financial Statements (Unaudited)

 

Note 6 - Commitments and Contingencies (cont’d)

 

F. Risks 

 

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.

 

Foreign Currency Exchange Rate Risks. A portion of our expenses, primarily labor expenses and certain supplier contracts, are denominated in New Israeli Shekels (“NIS”). As a result, we have significant exposure to the risk of fluctuating exchange rates with the U.S. Dollar (“USD”), our primary reporting currency. During the period January 1, 2023 through March 31, 2023, the USD has fluctuated by approximately 2.7% against the NIS (the USD strengthened relative to the NIS). Also, during the period January 1, 2022 through December 31, 2022, the USD fluctuated by approximately 13.2% against the NIS (the USD strengthened relative to the NIS). Continued strengthening of the US dollar against the NIS will result in lower operating costs from NIS denominated expenses. To date, we have not hedged any of our currency exchange rate risks, but we may do so in the future.

 

Interest Rate Risk. Our exposure to market risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money market funds. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment. At March 31, 2023, we had cash, cash equivalents and short-term bank deposits of approximately $2,159,000. The weighted average annual interest rate related to our cash and cash equivalents for the three months ended March 31, 2023, exclusive of funds at US banks that earn no interest, was approximately 2.61%.

 

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.

 

Note 7 - Subsequent Events

 

  (i) Approximately $761,000 was collected through the Company’s DSPP program during the period April 1 through May 9, 2023.

 

32

 

 

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, 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 regarding: 

 

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 below:

 

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 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 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 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 months ended March 31, 2023, and 2022, respectively, the Company recorded $45,000 and nil post-impairment charges.

 

The total net book value of our unproved oil and gas properties under the full cost method is $16,057,000 and $15,889,000 at March 31, 2023 and at December 31, 2022, 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.

 

38

 

 

RESULTS OF OPERATIONS  

 

   For the
three months ended
March 31,
 
   2023   2022 
   (US $ in thousands) 
Operating costs and expenses:        
General and administrative expenses   1,503    1,435 
Other   583    711 
Impairment of unproved oil and gas properties   45    - 
Subtotal Operating costs and expenses   2,131    2,146 
           
Other expense, net   8    20 
Net loss   2,139    2,166 

 

Revenue. We currently have no revenue generating operations.

 

Operating costs and expenses. Operating costs and expenses for the three months ended March 31, 2023 were $2,131,000 compared to $2,146,000 for the three months ended March 31, 2022.

 

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2023 were $1,503,000, compared to $1,435,000 for the three months ended March 31, 2022. The increase in General and administrative expenses during the three months ended March 31, 2023 is primarily attributable to higher non-cash expenses recorded in connection with stock option grants.

 

Other expense. Other expense during the three months ended March 31, 2023 was $583,000 compared to $711,000 for the three months ended March 31, 2022. Other general and administrative expenses are comprised of non-compensation and non-professional expenses incurred. The decrease in other expenses is primarily attributable to lower marketing expenses associated with investor relations activities.

 

Impairment of unproved oil and gas properties. Impairment of unproved oil and gas properties expenses during the three months ended March 31, 2023 was $45,000 compared to nil for the three months ended March 31, 2022. The expenses recorded in 2023 are post impairment charges to the impairment recorded during 2022 related to the MJ-2 well.

 

Other expense, net. Other expense, net for the three months ended March 31, 2023 was $8,000, compared to $20,000 for the three months ended March 31, 2022.

 

Net Loss. Net loss for the three months ended March 31, 2023 was $2,139,000 compared to $2,166,000 for the three months ended March 31, 2022. The $27,000 lower net loss in 2023 is an immaterial difference compared to 2022.

 

39

 

 

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 months ended March 31, 2023 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 for one year from the date the financials were issued.

 

At March 31, 2023, we had approximately $799,000 in cash and cash equivalents compared to $1,735,000 at December 31, 2022, which does not include any restricted funds. Our working capital (current assets minus current liabilities) was ($148,000) at March 31, 2023 and $661,000 at December 31, 2022.

 

As of March 31, 2023, we provided bank guarantees to various governmental bodies (approximately $1,042,000) and others (approximately $76,000) in respect of our drilling operation in the aggregate amount of approximately $1,118,000. 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 three months ended March 31, 2023, and 2022, cash used in operating activities totaled $917,000, and $2,091,000, respectively. Cash provided by financing activities during the three months ended March 31, 2023, and 2022, was $800,000, and $9,428,000, respectively, and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan (the “DSPP” or “Plan”). Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $838,000 and $3,799,000 for the three months ended March 31, 2023, and 2022, respectively.

 

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 $761,000 during  the period April 1, 2023 through May 9, 2023, 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 May 2023.

 

The 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 for one year from the date the financials were issued, 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. 

 

40

 

 

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 2023 had a significant impact on our financial position, results of operations, or cash flow.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

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.

 

Foreign Currency Exchange Rate Risks. A portion of our expenses, primarily labor expenses and certain supplier contracts, are denominated in New Israeli Shekels (“NIS”). As a result, we have significant exposure to the risk of fluctuating exchange rates with the U.S. Dollar (“USD”), our primary reporting currency. During the period January 1, 2023 through March 31, 2023, the USD has fluctuated by approximately 2.7% against the NIS (the USD strengthened relative to the NIS). Also, during the period January 1, 2022 through December 31, 2022, the USD fluctuated by approximately 13.2% against the NIS (the USD strengthened relative to the NIS). Continued strengthening of the US dollar against the NIS will result in lower operating costs from NIS denominated expenses. To date, we have not hedged any of our currency exchange rate risks, but we may do so in the future.

 

Interest Rate Risk. Our exposure to market risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money market funds. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment. At March 31, 2023 we had cash, cash equivalents and short-term and long-term bank deposits of approximately $2,159,000. The weighted average annual interest rate related to our cash and cash equivalents for the three months ended March 31, 2023, exclusive of funds at US banks that earn no interest, was approximately 2.61%.

 

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 4. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. As of March 31, 2023, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2023.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in internal controls over financial reporting that occurred during the quarter ended March 31, 2023 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

 

41

 

 

PART II—OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

Securities and Exchange Commission (“SEC”) Investigation

 

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.

 

On April 5, 2023, the Company received from the Fort Worth Regional Office of the SEC written notice to the Company concluding the investigation as to the Company and that the SEC does “not intend to recommend an enforcement action by the Commission against Zion.”

 

Litigation

 

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. 

 

The Company is not subject to any litigation at the present time. 

 

ITEM 1A. RISK FACTORS

 

During the quarter ended March 31, 2023, there were no material changes to the risk factors previously reported in our Annual Report on Form 10-K for the year ended December 31, 2022. 

 

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

None.

 

ITEM 5. OTHER INFORMATION:

 

None.

 

ITEM 6. EXHIBITS

 

42

 

 

Exhibit Index:

 

31.1   Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 under the Exchange Act
     
31.2   Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 under the Exchange Act
     
32.1   Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only)
     
32.2   Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only)
     
101.INS   XBRL Instance Document
     
101.SCH   Inline XBRL Taxonomy Extension Schema Document
     
101.CAL   Inline XBRL Taxonomy Extension Calculation Linkbase Document
     
101.DEF   Inline XBRL Taxonomy Extension Definition Linkbase Document
     
101.LAB   Inline XBRL Taxonomy Extension Label Linkbase Document
     
101.PRE   Inline XBRL Taxonomy Extension Presentation Linkbase Document
     
104   Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

 

43

 

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

ZION OIL & GAS, INC.    
(Registrant)    
     
By: /s/ Robert W.A. Dunn   By: /s/ Michael B. Croswell Jr.
  Robert W. A. Dunn     Michael B. Croswell Jr.
  Chief Executive Officer     Chief Financial Officer
  (Principal Executive Officer)     (Principal Financial and Accounting Officer)
         
Date: May 11, 2023   Date: May 11, 2023

 

 

44

 

 

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