Indicate by check mark whether the registrant
has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared
or issued its report. ☒
The registrant had 239,385,588 shares of
common stock, par value $0.01, outstanding as of March 22, 2021.
More specifically, our forward-looking statements may include,
among others, statements relating to our schedule, business plan, targets, estimates or results of our applications for new exploration
rights and future exploration plans, including the number, timing and results of wells, the timing and risk involved in drilling
follow-up wells, planned expenditures, prospects budgeted and other future capital expenditures, risk profile of oil and gas exploration,
acquisition and interpretation of seismic data (including number, timing and size of projects), planned evaluation of prospects,
probability of prospects having oil and natural gas, expected production or reserves, acreage, working capital requirements, hedging
activities, the availability of expected sources of liquidity to implement our business strategy, future hiring, future exploration
activity, production rates, all and any other statements regarding future operations, consolidated financial results, business
plans and cash needs and other statements that are not historical fact.
PART
I
ITEM
1. BUSINESS
Overview
Zion
Oil and Gas, Inc., a Delaware corporation, is an oil and gas exploration company with a history of 21 years of oil and gas exploration
in Israel. We were incorporated in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed
our initial public offering in January 2007. Our common stock, par value $0.01 per share (the “Common Stock”) currently
trades on the OTCQX Market under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW.”
The Company currently
holds one active petroleum exploration license onshore Israel, the New Megiddo License 428, which was granted on December 3, 2020
and overlaps the previous Megiddo-Jezreel License 401, comprising approximately 99,000 acres. The terms of the new license
are effective through June 2, 2021 and is extendable for a six-month period.
The Megiddo Jezreel #1
(“MJ #1”) site was completed in early March 2017, after which the drilling rig and associated equipment were mobilized
to the site. Performance and endurance tests were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled
to a total depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company obtained three open-hole
wireline log suites (including a formation image log), and the well was successfully cased and cemented. The Ministry of Energy
approved the well testing protocol on April 29, 2018.
During the fourth quarter
of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not
contain hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company
recorded a non-cash impairment charge to its unproved oil and gas properties of $30,906,000. During the year ended December 31,
2020, the Company did not record any post-impairment charges. The Company recorded a post-impairment charge of $314,000 for the
year ended December 31, 2019.
While the well was
not commercially viable, Zion learned a great deal from the drilling and testing of this well. We believe that the drilling and
testing of this well carried out the testing objectives which would support further evaluation and potential further exploration
efforts within our License area. Zion believed it was prudent and consistent with good industry practice to try and answer some
of these questions with a focused 3-D seismic imaging shoot of approximately 72 square kilometers surrounding the MJ#1 well. As
of the date of this report, Zion has completed all of the acquisition, processing and interpretation of the 3-D data and has incorporated
its expanded knowledge base into the drilling of our current drilling MJ-02 exploratory well.
On March 12, 2020,
Zion entered into a Purchase and Sale Agreement with Central European Drilling kft, a Hungarian corporation, to purchase an onshore
oil and gas drilling rig, drilling pipe, related equipment and spare parts for a purchase price of $5.6 million in cash, subject
to acceptance testing and potential downward adjustment. We remitted to the Seller $250,000 on February 6, 2020 as earnest money
towards the Purchase Price. The Closing anticipated by the Agreement took place on March 12, 2020 by the Seller’s execution
and delivery of a Bill of Sale to us. On March 13, 2020, the Seller retained the earnest money deposit, and the Company remitted
$4,350,000 to the seller towards the purchase price and $1,000,000 (the “Holdback Amount”) was deposited in escrow
with American Stock Transfer and Trust Company LLC. On January 6, 2021, Zion completed its acceptance testing of the I-35 drilling
rig and the Holdback Amount was remitted to Central European Drilling.
The MJ-02 drilling plan
was approved by the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well.
Zion plans to reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately
150 days.
As of the date of this
report, our drilling of the MJ-02 well is continuing as planned.
At
present, we have no revenues or operating income. Our ability to generate future revenues and operating cash flow will depend
on the successful exploration and exploitation of our current and any future petroleum rights or the acquisition of oil and/or
gas producing properties, and the volume and timing of such production. In addition, even if we are successful in producing oil
and gas in commercial quantities, our results will depend upon commodity prices for oil and gas, as well as operating expenses
including taxes and royalties.
Our
executive offices are located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is
(214) 221-4610. Our branch office’s address in Israel is 9 Halamish Street, North Industrial Park, Caesarea 3088900, and
the telephone number is +972-4-623-8500. Our website address is: www.zionoil.com.
Company
Background
In
1983, during a visit to Israel, John M. Brown (our CEO, Founder and Chairman of the Board of Directors) became inspired and dedicated
to finding oil and gas in Israel. During the next 17 years he made several trips each year to Israel, hired oil and gas consultants
in Israel and Texas, met with Israeli government officials, made direct investments with local exploration companies, and assisted
Israeli exploration companies in raising money for oil and gas exploration in Israel. This activity led Mr. Brown to form Zion
Oil & Gas, Inc. in April 2000, in order to receive the award of a small onshore petroleum license from the Israeli government.
Zion’s
vision, as guided by John Brown, of finding oil and/or natural gas in Israel, is biblically inspired. The vision is based, in
part, on biblical references alluding to the presence of oil and/or natural gas in territories within the State of Israel that
were formerly within certain ancient biblical tribal areas. While John Brown provides the broad vision and goals for our company,
the actions taken by the Zion Board of Directors and management team as it actively explores for oil and gas in Israel, are based
on modern science and good business practice. Zion’s oil and gas exploration activities are supported by appropriate geological,
geophysical and other science-based studies and surveys typically carried out by companies engaged in oil and gas exploration
activities.
Upon
the award of our first petroleum right in May 2000, the Israeli government provided us access to most of its data with respect
to previous exploration in the area, including geologic reports, seismic records and profiles, drilling reports, well files, gravity
surveys, geochemical surveys and regional maps. We also gathered information concerning prior and ongoing geological, geophysical
and drilling activity relevant to our planned activities from a variety of publicly accessible sources. Subsequently, we have
acquired additional studies on our own such as seismic and other geophysical and geological surveys.
ZION’S
CURRENT EXPLORATION LICENSE AREA
Zion currently holds
one active petroleum exploration license onshore Israel, the New Megiddo License 428 (covering an area of approximately 99,000
acres – See Map 1). Under Israeli law, Zion has an exclusive right to oil and gas exploration in our license area in that
no other company may drill there. In the event we drill an oil or gas discovery in our license area, current Israeli law entitles
us to convert the relevant portions of our license to a 30-year production lease, extendable to 50 years, subject to compliance
with a field development work program and production.
The New Megiddo License
428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. The New Megiddo
License 428 area lies onshore, south and west of the Sea of Galilee and we continue our exploration focus here as it appears to
possess the key geologic ingredients of an active petroleum system with significant exploration potential.
Map 1. Zion’s New Megiddo Petroleum
Exploration License as of December 31, 2020.
Summary
of Current and Former Company License Areas
Megiddo-Jezreel
Petroleum License
The Megiddo-Jezreel License
401 was awarded on December 3, 2013 for a three-year primary term through December 2, 2016 with the possibility of additional
one-year extensions up to a maximum of seven years. The Megiddo-Jezreel License 401 lies onshore, south and west of the Sea of
Galilee, and we continue our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum
system with significant exploration potential. In November 2016, the State of Israel’s Petroleum Commission officially approved
Zion’s drilling date and license extension request to December 2, 2017.
On January 31, 2019, Zion submitted its Application for Extension
of Continued Work Program Due Date on the Megiddo-Jezreel License 401. The additional time was necessary to finalize the
work program. On February 3, 2019 Israel’s Petroleum Commissioner granted Zion’s work program report extension to February
28, 2019, as shown below:
Number
|
|
Activity
Description
|
|
Execution
by:
|
1
|
|
Submit
program for continuation of work under license
|
|
28
February 2019
|
On February 24, 2019
and thereafter on February 26, 2019 Zion submitted its proposed 2019 Work Program on the Megiddo-Jezreel License 401.
On February 28, 2019 Israel’s
Petroleum Commissioner officially approved the revised and updated Work Program on the Megiddo-Jezreel License 401 as shown below:
Number
|
|
Activity
description
|
|
Execution
by:
|
1
|
|
Submission
of seismic survey plan to the Commissioner and execution of an agreement with a contractor to perform
|
|
30
April 2019
|
2
|
|
Commence
3D seismic survey in an area of approximately 50 square kilometers
|
|
1
August 2019
|
3
|
|
Transfer
of field material configuration and processed material to the Ministry pursuant to Ministry guidelines
|
|
15
December 2019
|
4
|
|
Submit
interpretation report
|
|
20
February 2020
|
On April 30, 2019 Zion submitted its Application for Extension
of Continued Work Program Due Date on the Megiddo-Jezreel License 401. The additional time was necessary for Zion to conduct a
3-D survey in an area of approximately 72 square kilometers. This required, among others, extensive permitting activities with
relevant local landowners, the Israel Land Authority (“ILA”), certain authorities and others, and the seismic survey
might not conclude prior to the beginning of the rainy season in Israel. This in turn would result in additional delay, as rain
and mud are not conducive to the performance of a seismic survey which includes extensive use of vibrators.
Zion
proposed new timelines and activity descriptions are shown below:
Number
|
|
Activity
description
|
|
Execution
by:
|
1
|
|
Submission
of seismic survey plan to the Commissioner and execution of an agreement with a contractor to perform
|
|
30
November 2019
|
2
|
|
Commence
3D seismic survey in an area of approximately 72 square kilometers
|
|
1
April 2020
|
3
|
|
Transfer
of field material configuration and processed material to the Ministry pursuant to Ministry guidelines
|
|
15
August 2020
|
4
|
|
Submit
interpretation report
|
|
15
November, 2020
|
On
May 1, 2019, Israel’s Petroleum Commissioner granted Zion’s work program report extension.
Zion
fulfilled all of its commitments and activities per the new timelines shown above.
As
previously disclosed, the Company required authorization from the ILA, the formal lessor of the land to Kibbutz Sde Eliyahu, on
whose property the drilling pad is currently situated, to access and utilize the drill site (“surface use agreement”).
The Company received this authorization on July 4, 2016. This was preceded by the Company’s May 15, 2016 signed agreement
with the kibbutz. On January 11, 2017, an agreement was signed by the Company and the ILA by which the surface usage agreement
was extended through December 3, 2017. On December 31, 2017, an agreement was signed by the Company and the ILA by which the surface
usage agreement was extended through December 3, 2019. On July 1, 2019, an agreement was signed by the Company and the ILA by
which the surface usage agreement was extended through December 3, 2020.
The MJ-02 drilling plan was approved by the Ministry of Energy
on July 29, 2020. The New Megiddo License 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional
six-month extension. The New Megiddo License 428 area is the same area as the Megiddo-Jezreel License 401 area and lies onshore,
south and west of the Sea of Galilee and we continue our exploration focus here as it appears to possess the key geologic ingredients
of an active petroleum system with significant exploration potential.
On January 6, 2021, Zion officially spudded its MJ-02 exploratory
well. Zion plans to reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately
150 days. As of the date of this report, our drilling of the MJ-02 well is continuing as planned.
Zion’s
Former Joseph License
Zion
has plugged all of its exploratory wells on its former Joseph License area, and the reserve pits have been evacuated, but acknowledges
its obligation to complete the abandonment of these well sites in accordance with guidance from the Energy Ministry, Environmental
Ministry and local officials.
Exploration
Plans Going Forward
The Company currently holds one active petroleum exploration
license onshore Israel, the New Megiddo License 428, comprising approximately 99,000 acres. The Megiddo Jezreel #1 (“MJ
#1”) site was completed in early March 2017, after which the drilling rig and associated equipment were mobilized to the
site. Performance and endurance tests were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled to a
total depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company obtained three open-hole wireline
log suites (including a formation image log), and the well was successfully cased and cemented. The Ministry of Energy approved
the well testing protocol on April 29, 2018.
During
the fourth quarter of 2018, the Company testing protocol was concluded at the MJL well. The test results confirmed that the MJ
#1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31,
2018, the Company recorded a non-cash impairment charge to its unproved oil and gas properties of $30,906,000. The Company recorded
a post-impairment charge of $314,000 for the year ended December 31, 2019. During the year ended December 31, 2020, the Company
did not record any post-impairment charges.
The
MJ#1 well provided Zion with information Zion believes is important for potential future exploration efforts within its license
area. As with many frontier wildcat wells, the MJ#1 also left several questions unanswered.
While
not meant to be an exhaustive list, a summary of what Zion believes to be key information learned in the MJ#1 well is as follows:
|
1.
|
The
MJ#1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well. In our opinion,
this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from
an organic-rich source rock.
|
|
|
|
|
2.
|
The
known organic rich (potentially hydrocarbon bearing) Senonian age source rocks that are typically present in this part of
Israel were not encountered as expected. Zion expected these source rocks to be encountered at approximately 1,000 meters
in the MJ#1 well.
|
|
|
|
|
3.
|
MJ#1
had natural fractures, permeability (the ability of fluid to move through the rock) and porosity (pore space in rock) that
allowed the sustained flow of formation fluid in the shallower Jurassic and lower Cretaceous age formations between approximately
1,200 and 1,800 meters. While no hydrocarbons were encountered, Zion believes this fact is nonetheless significant because
it provides important information about possible reservoir pressures and the ability of fluids to move within the formation
and to the surface.
|
|
|
|
|
4.
|
MJ#1
encountered oil in the Triassic Mohilla formation which Zion believes suggests an active deep petroleum system is in Zion’s
license area. There was no natural permeability or porosity in the Triassic Mohilla formation to allow formation fluid to
reach the surface naturally during testing, and thus the MJ#1 was not producible or commercial.
|
|
|
|
|
5.
|
The
depths and thickness of the formations we encountered varied greatly from pre-drill estimates. This required the MJ#1 to be
drilled to a much greater depth than previously expected. Zion has tied these revised formation depths to seismic data which
will allow for more accurate interpretation and mapping in the future.
|
A
summary of what Zion believes to be some key questions left to be answered are:
|
1.
|
Is
the missing shallow Senonian age source rock a result of regional erosion, or is it missing because of a fault that cut the
well-bore and could be reasonably expected to be encountered in the vicinity of the MJ#1 drill site? Zion believes this is
an important question to answer because if the Senonian source rocks do exist in this area, the high temperatures encountered
are sufficient to mature these source rocks and generate oil.
|
|
2.
|
Do
the unusually high shallow subsurface temperatures extend regionally beyond the MJ#1 well, which could allow for the generation
of hydrocarbons in the Senonian age source rock within our license area?
|
|
3.
|
As
a consequence of seismic remapping, where does the MJ#1 well lie relative to the potential traps at the Jurassic and Triassic
levels and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps?
|
As
a result of these unanswered questions and with the information gained drilling the MJ#1 well, Zion believes it is prudent and
consistent with good industry practice to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately
72 square kilometers surrounding the MJ#1 well. Zion has completed all of the acquisition, processing and interpretation of the
3-D data and has incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well.
The Geology team is continuing on a larger interpretation of
3-D areas, along with potential exploration locations located in the western portion of the New Megiddo License 428 area.
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. We remitted to the Seller $250,000 on February 6, 2020
as earnest money towards the Purchase Price. The Closing anticipated by the Agreement took place on March 12, 2020 by the
Seller’s execution and delivery of a Bill of Sale to us. On March 13, 2020, the Seller retained the earnest money deposit,
and the Company remitted $4,350,000 to the seller towards the purchase price and $1,000,000 (the “Holdback Amount”)
was deposited in escrow with American Stock Transfer and Trust Company LLC.
I-35 Drilling Rig
& Associated Equipment
31 December 2020
|
|
12 Month Period 31/12/2020
|
|
|
|
|
|
|
|
|
|
Other Drilling
|
|
|
|
|
|
|
I-35
Drilling Rig
|
|
|
Rig Spare Parts
|
|
|
Assets
|
|
|
Total
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
31 December 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Purchase Price (1)
|
|
|
4,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash as Holdback in Escrow (1)
|
|
|
500
|
|
|
|
500
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocations
|
|
|
(88
|
)
|
|
|
40
|
|
|
|
48
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Costs (2)
|
|
|
1,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Additions
|
|
|
-
|
|
|
|
158
|
|
|
|
329
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2020
|
|
|
6,494
|
|
|
|
698
|
|
|
|
376
|
|
|
|
7,568
|
|
|
(1)
|
These are the
initial cash payments for the purchase of the I-35 drilling rig in early 2020
|
|
(2)
|
Capitalized costs
include inspection, quarantine, labor, transportation, insurance, and other costs required
to place the I-35 drilling rig in service initially, per GAAP.
|
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.
As mentioned previously,
the MJ-02 drilling plan was approved by the Ministry of Energy on July 29, 2020. The New Megiddo License 428 was awarded on December
3, 2020 for a six-month term with the possibility of an additional six-month extension. The New Megiddo License 428 area is the
same area as the Megiddo Jezreel license 401 area and lies onshore, south and west of the Sea of Galilee and we continue our exploration
focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential.
On January 6, 2021, Zion officially spudded its MJ-02 exploratory
well. Zion plans to reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately
150 days. As of the date of this report, our drilling of the MJ-02 well is continuing as planned.
Exploration
Expenditures
The
following table summarizes the amounts we expended on our exploration efforts between 2019 and 2020:
|
|
2020
|
|
|
2019
|
|
|
|
US$
(000)
|
|
|
US$
(000)
|
|
I-35 Drilling Rig & Associated Equipment Megiddo License
428
|
|
|
7,568
|
|
|
|
-
|
|
Geological & Geophysical Operations
|
|
|
762
|
|
|
|
3,119
|
|
Equipment purchases
|
|
|
1,241
|
|
|
|
87
|
|
Location construction
|
|
|
236
|
|
|
|
25
|
|
Plug & Abandonment Operations
|
|
|
-
|
|
|
|
78
|
|
Exploratory Drilling Operations
|
|
|
649
|
|
|
|
1,005
|
|
Joseph License (expired on October 10, 2013) Plug & Abandonment Operations
|
|
|
13
|
|
|
|
-
|
|
Asher-Menashe License (expired on June 9, 2014) Plug & Abandonment
Operations
|
|
|
-
|
|
|
|
56
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
10,469
|
|
|
|
4,370
|
|
Employees
& Contractors
As
of December 31, 2020, we had 26 employees and contractors of whom all but four are on a full-time basis. Included in this number
are certain contractors who provide services to Zion on an ongoing basis. Of the 26 total headcount, 18 work out of our Dallas
office and 8 work out of the Caesarea, Israel office. None of our current employees or contractors are subject to any collective
bargaining agreements, and there have been no strikes.
We
regularly utilize independent consultants and contractors to perform various professional services, particularly for services
connected to drilling operations, such as specialized drilling, health and safety, engineering, logging, cementing and well-testing.
Competition
and Markets
The
oil and gas exploration industry in Israel currently consists of a number of exploration companies. These include relatively small
local or foreign companies (such as Zion Oil & Gas, Genie Oil & Gas/Afek, and Givot Olam), as well as larger consortia
of local Israeli and foreign participants (Noble Energy Inc./Delek Group Ltd.). Most groups are engaged primarily in offshore
activities, which is not an area in which we are currently active. So long as we hold our current license, Israeli law conveys
an exclusive exploration right to Zion such that no additional companies may compete in our license area.
Historically,
Israel (particularly onshore) has not been an area of interest for international integrated or large or mid-size independent oil
and gas exploration companies for various reasons, one of which is likely geopolitical. Since the announcement of the Tamar and
Leviathan discoveries during 2009 and 2010, this situation has changed somewhat. Limited availability in Israel of oil field service
companies, equipment and personnel continues to present obstacles, especially during periods of decreased activity and risk aversion
in the current market. We attempt to enhance our position by developing and maintaining good professional relations with oil field
service providers and by demonstrating a high level of credibility in making and meeting commercial commitments.
The
oil and gas industry is cyclical, and from time to time there is a shortage of drilling rigs, equipment, supplies and qualified
personnel. During these periods, the costs and delivery times of rigs, equipment and supplies can vary greatly. If the unavailability
or high cost of drilling and completion rigs, equipment, supplies or qualified personnel was particularly severe in the areas
where we operate, we could be materially and adversely affected. We will continue to monitor the market and build service provider
relationships in order to help mitigate concentration risk.
If
any exploratory well that we drill is commercially productive, we would install the appropriate production equipment which includes,
among other items, oil and gas separation facilities and storage tanks. Under the terms of the Petroleum Law, we may be required
by the Minister of Energy and Water Resources to offer first refusal for any oil and gas discovered to Israeli domestic purchasers
at market prices.
Since
Israel imports almost all of its crude oil needs and the market for crude oil in Israel is limited to two local oil refineries,
no special marketing strategy needs to be adopted initially with regard to any oil that we may ultimately discover. We believe
that we would have a ready local market for our oil at market prices in addition to having the option of exporting to the international
market, if any of our future exploratory wells are commercially productive.
Israel’s
Petroleum Law
Our business in Israel
is subject to regulation by the State of Israel under the Petroleum Law. The administration and implementation of the Petroleum
Law are vested in the Minister of Energy (“Energy Minister”), the Petroleum Commissioner and an advisory council. The
following discussion includes a brief summary review of certain provisions of the Petroleum Law as currently in effect. This review
is not complete, and it should not be relied on as a definitive restatement of the law related to petroleum exploration and production
activities in Israel.
Petroleum resources
are owned by the State of Israel, regardless of whether they are located on state lands or the offshore continental shelf. No person
is allowed to explore for or produce petroleum without being granted a specific right under the Petroleum Law. Israeli law provides
for three types of rights, two relevant to the exploration stage and the third for the production stage.
Preliminary permit.
The "preliminary permit" allows a prospector to conduct preliminary investigations, such as field geology, airborne magnetometer
surveys and seismic data acquisition, but does not allow test drilling. It may be granted for a period not to exceed 18 months.
The holder of a preliminary permit is entitled to request a priority right on the permit area, which, if granted, prevents an award
of petroleum rights on the permit area to any other party. There are no restrictions as to size of the permit area or to the number
of permits that may be held by one prospector. However, Israeli policy is to award an area no larger than that for which the applicant
has a reasonable plan of operation and has shown evidence of the necessary financial resources to execute the plan.
License. The next
level of petroleum right is the “license,” bestowing an exclusive right for further exploration work and requiring
the drilling of one or more test wells. The initial term of a license is up to three years, and it may be extended for up to an
additional four years (in one year increments). In the event of a discovery, the license may be extended for an additional two
years. A license area may not exceed 400,000 dunams (approximately 98,842 acres). One dunam is equal to 1,000 square meters
(approximately 0.24711 of an acre). No one entity may hold more than 12 licenses or hold more than a total of four million
dunam in aggregate license area.
Production
lease. Upon discovery of petroleum in commercial quantities, a licensee has a statutory “right” to receive a production
“lease.” The initial lease term is 30 years, extendable for an additional 20 years (up to a maximum period of 50 years).
A lease confers upon the lessee the exclusive right to explore for and produce petroleum in the lease area and requires the lessee
to produce petroleum in commercial quantities (and pursue test and development drilling). The lessee is entitled to transport
and market the petroleum produced, subject, however, to the right of the government to require the lessee to supply local needs
first, at market price.
Petroleum
rights fees. The holders of licenses and leases are required to pay fees to the government of Israel to maintain the rights.
The fees vary according to the nature of the right, the size and location (onshore or offshore) of the right, acreage subject
to the right and, in the case of a license, the period during which the license has been maintained.
Requirements
and entitlements of holders of petroleum rights. The holder of a petroleum right (license or lease) is required to conduct
its operations in accordance with a work program set as part of the petroleum right, with due diligence and in accordance with
the accepted practice in the petroleum industry. The holder is required to submit progress and final reports; provided, however,
the information disclosed in such reports remains confidential for as long as the holder owns a petroleum right on the area concerned.
If
the holder of a petroleum right does not comply with the work program provided by the terms of the right, the Petroleum Commissioner
may issue a notice requiring that the holder cure the default within 60 days of the giving of the notice, together with a warning
that failure to comply within the 60-day cure period may entail cancellation of the right. If the petroleum right is cancelled
following such notice, the holder of the right may, within 30 days of the date of notice of the Commissioner’s decision,
appeal such cancellation to the Energy Minister. No petroleum right shall be cancelled until the Energy Minister has ruled on
the appeal.
We
are obligated, according to the Petroleum Law, to pay royalties to the Government of Israel on the gross production of oil and
gas from the oil and gas properties of Zion located in Israel (excluding those reserves serving to operate the wells and related
equipment and facilities). The royalty rate stated in the Petroleum Law is 12.5% of the produced reserves. At December 31,
2020 and 2019, the Company did not have any outstanding obligation with respect to royalty payments, since it is in the development
stage and, to this date, no proved reserves have been found.
In
March 2011, the Israeli parliament enacted the Petroleum Profits Taxation Law, 2011, which imposes a new levy on oil and gas production.
Under the new tax regime, the Israeli Government repealed the percentage depletion deduction and imposed a levy at an initial
rate of 20% on profits from oil and gas which will gradually rise to 45.52% for 2016 onwards, depending on the levy coefficient
(the R-Factor). The R-Factor refers to the percentage of the amount invested in the exploration, the development and the establishment
of the project, so that the 20% rate will be imposed only after a recovery of 150% of the amount invested (R-Factor of 1.5) and
will range linearly up to 45.52% after a recovery of 230% of the amount invested (R-Factor of 2.3). For purposes of the levy rate
calculation, the minimal gas sale price that will be accepted by the State is the bi-annual average local price. The present 12.5%
royalty imposed on oil revenues remains unchanged.
The
grant of a petroleum right does not automatically entitle its holder to enter upon the land to which the right applies or to carry
out exploration and production work thereon. Entry requires the consent of the private or public holders of the surface rights
and of other public regulatory bodies (e.g. planning and building authorities, Nature Reserves Authority, municipal and security
authorities, etc.). The holder of a petroleum right may request the government to acquire, on its behalf, land needed for petroleum
purposes. The petroleum right holder is required to obtain all other necessary approvals.
Petroleum
Taxation. Our activities in Israel will be subject to taxation both in Israel and in the United States. Under the U.S. Internal
Revenue Code, we will be entitled to claim either a deduction or a foreign tax credit with respect to Israeli income taxes paid
or incurred on our Israeli source oil and gas income. As a general rule, we anticipate that it will be more advantageous for us
to claim a credit rather than a deduction for applicable Israeli income taxes on our U.S tax return. A tax treaty exists between
the U.S. and Israel that would provide opportunity to use the tax credit.
Exploration
and development expenses. Under current US and Israeli tax laws, exploration and development expenses incurred by a holder
of a petroleum right can, at the option of such holder, either be expensed in the year incurred or capitalized and expensed (or
amortized) over a period of years. Most of our expenses to date have been expensed for both U.S. and Israeli income tax purposes.
Depletion
allowances. Until 2011, the holder of an interest in a petroleum license or lease was allowed a deduction for income tax purposes
on account of the depletion of the petroleum reserve relating to such interest. This may have been by way of percentage depletion
or cost depletion, whichever is greater. In 2010, the Finance Minister of Israel established an advisory committee to study the
country’s fiscal policy as it relates to the upstream oil and natural gas sector, as well as various options, including
an increase in royalties or cancellation of tax incentives. In January 2011, the Finance Ministry advisory committee issued its
final recommendations which included cancellation of currently existing tax incentives, including the depletion allowance. In
2011, the depletion allowance was abolished.
Corporate
tax. Under current Israeli tax laws, whether a company is registered in Israel or is a foreign company operating in Israel
through a branch, it is subject to Israeli Companies Tax on its taxable income (including capital gains) from Israeli sources
at a flat rate of 23%, effective January 1, 2019.
Import
duties. Insofar as similar items are not available in Israel, the Petroleum Law provides that the owner of a petroleum right
may import into Israel, free of most customs, purchase taxes and other import duties, all machinery, equipment, installations,
fuel, structures, transport facilities, etc. (apart from consumer goods and private cars and similar vehicles) that are required
for the petroleum exploration and production purposes, subject to the requirement that security be provided to ensure that the
equipment is exported out of Israel within the agreed upon time frame.
Israeli
Energy Related Regulations
Our
operations are subject to legal and regulatory oversight by energy-related ministries or other agencies of Israel, each having
jurisdiction over certain relevant energy or hydrocarbons laws.
The
Onshore Petroleum Exploration Permitting Process in Israel
The
permitting process in Israel with respect to petroleum exploration continues to undergo significant modification, the result of
which is to considerably increase the complexity, time period, and expenditures needed to obtain the necessary permits to undertake
exploratory drilling once a drilling prospect has been identified. Applications for new exploration licenses need to comply with
more demanding requirements relating to a license applicant’s financial capability, experience and access to experienced
personnel. Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and
Environmental Ministries since 2012 as it pertains to oil and gas activities. Mention of these guidelines was included in previous
Zion Oil & Gas filings.
On
March 15, 2018, the Energy Ministry issued new guidelines regarding a uniform reporting manner by which the operator must submit
to the Commissioner data and materials regarding lawful exploration and production activities. The guidelines detail the timeline,
data, forms, format, media and materials (such as rock cuttings, cores, gas and oil samples) that must be submitted for seismic
and drilling activities.
On
April 8, 2019 the Energy Ministry issued new procedural guidelines regarding a uniform reporting manner by which the rights holder
in a license must submit a quarterly report regarding a summary of license history, the nature, scope, location and results of
the exploration work, specification of the amounts expended for the exploration work, and the results and interpretation of the
exploration work and basic data on which these results and interpretation are based. The guidelines are binding as from the date
of submission of the report for the third quarter 2019.
On
July 18, 2019, the Energy Ministry issued a guidance document entitled “Instructions for Submitting Guarantees with respect
to Oil Rights granted pursuant to the Petroleum Law” which states that onshore license applicants are required to deposit
a base bank guarantee of $500,000. Furthermore, prior to drilling, an onshore license holder is required to deposit an additional
bank guarantee in the amount as determined by the Petroleum Commissioner in accordance with the characteristics of the drilling
and the drilling plan but no less than $250,000. The guarantee, as determined by the Commissioner, shall be deposited with the
Commissioner Office for each well separately drilled. The Petroleum Commissioner has discretion to raise or lower those amounts
or may also forfeit a Company’s existing guarantee and/or cancel a petroleum right under certain circumstances.
In
addition, new and extended insurance policy guidelines were added. The Petroleum Commissioner may also view non-compliance with
the new insurance provisions as breaching the work plan and the rights granted and act accordingly.
On June 2, 2020, the
Energy Ministry issued a guidance document titled “Commissioner for Petroleum Affairs Guidelines: Extraordinary Incidences
Report.” These guidelines describe the reporting procedure regarding incidences that are out of the ordinary during pre-drilling,
drilling and production activities including incidences that cause bodily injury or damage to property or environment or incidences
that are a cause of delay or abort of drilling activities.
On September 15, 2020,
the Energy Ministry issued a guidance document titled “Principles for Submission of an Application for a Preliminary Permit
with Priority Rights.” Pursuant to this document, applicants for a Preliminary Permit need to comply with more demanding
requirements relating to a preliminary permit applicant’s financial capability, experience and access to experienced personnel.
The
Company believes that these new regulations are likely to 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 new 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.
Environmental&
Safety / Planning & Building
Oil
and gas drilling operations could potentially harm the environment if there are polluting spills caused by the loss of well control.
The Petroleum Law and regulations provide that the conduct of petroleum exploration and drilling operations be pursued in compliance
with “good oil field practices” and that measures of due care be taken to avoid seepage of oil, gas and well fluids
into the ground and from one geologic formation to another. The Petroleum Law and regulations also require that, upon the abandonment
of a well, it be adequately plugged and marked. Recently, as a condition for issuing the required permit for the construction
of a drilling site, the planning commissions have required the submission of a site remediation plan, subject to approval of the
environmental authorities. Our operations are also subject to claims for personal injury and property damage caused by the
release of chemicals or petroleum substances by us or others in connection with the conduct of petroleum operations on our behalf.
Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental
Ministries since 2012 as it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil&
Gas filings.
We
do not know and cannot predict whether any new legislation in this area will be enacted and, if so, in what form and which of
its provisions, if any, will relate to and affect our activities, how and to what extent or what impact, if any, it might have
on our financial statements. There are no known proceedings instituted by governmental authorities, pending or known to be contemplated
against us under any environmental laws. We are not aware of any events of noncompliance in our operations in connection with
any environmental laws or regulations. However, we cannot predict whether any new or amended environmental laws or regulations
introduced in the future will have a material adverse effect on our future business.
The
Company believes that these new and/or revised regulations will significantly increase the complexity, time, and expenditures
associated with obtaining new exploration rights, drilling, and plugging/abandoning new wells, coupled with the heavy financial
burden of “locking away” significant amounts of cash that could otherwise be used for operational purposes.
Political
Climate
We
are directly influenced by the political, economic and military conditions affecting Israel. Specifically, we could be adversely
affected by:
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any
major hostilities involving Israel;
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the
interruption or curtailment of trade between Israel and its present trading partners;
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a
full or partial mobilization of the reserve forces of the Israeli army; and
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a
significant downturn in the economic or financial condition of Israel.
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Since
the establishment of the State of Israel in 1948, a number of armed conflicts have taken place between Israel and its Arab neighbors,
and a state of hostility, varying from time to time in intensity and degree, has led to security and economic problems for Israel.
Any ongoing or future violence between Israel and the Palestinians, armed conflicts, terrorist activities, tension along Israel’s
borders, or political instability in the region could possibly disrupt international trading activities in Israel and may materially
and negatively affect our business conditions and could harm our prospects and business.
Civil
unrest could spread throughout the region or grow in intensity, leading to more regime changes resulting in governments that are
hostile to the United States and Israel, civil wars, or regional conflict. More recently, Russia initiated significant and
direct military intervention in Syria consisting of air strikes against ISIS and other parties. With ongoing operations by Russia,
the U.S. and other countries in areas in close proximity to Israel, there is an increased risk of deliberate and/or inadvertent
mishaps that could give rise to grave military and political consequences.
We
cannot predict the effect, if any, on our business of renewed hostilities between Israel and its neighbors or any other changes
in the political climate in the area.
Foundations
If
we are successful in finding commercial quantities of hydrocarbons in Israel, 6% of our gross revenues from production will go
to fund two charitable foundations that we established with the purpose of donating to charities in Israel, the U.S. and elsewhere
in the world.
For
charitable activities concerning Israel, the Bnei Joseph Foundation (R.A.) was established. On November 11, 2008, both the
Articles of Association and Incorporation Certificate were certified by the Registrar of Amutot (i.e. Charitable Foundations)
in Israel.
For
the U.S. and worldwide charitable activities, the Abraham Foundation in Geneva, Switzerland was established. On June 20,
2008, the Articles of Incorporation were executed and filed by the Swiss Notary in the Commercial Registrar in Geneva. On June
23, 2008, the initial organizational meeting of the founding members was convened in Israel. Regulations for the Organization
of the Abraham Foundation, signed by the founding members, were then filed with the Registrar. On November 19, 2008, the
Swiss Confederation approved the Foundation as an international foundation under the supervision of the federal government.
On December 8, 2008, the Republic of Geneva and the Federal government of Switzerland issued a tax ruling providing complete tax
exemption for the Foundation.
Our
shareholders, in a resolution passed at the 2002 Annual Meeting, gave authority to the Zion Board of Directors to transfer a 3%
overriding royalty interest to each of the two foundations with regard to the Joseph and Asher-Menashe licenses. In accordance
with that resolution, we took steps to legally donate a 3% overriding royalty interest to the Bnei Joseph Foundation (in Israel)
and a 3% overriding royalty interest to the Abraham Foundation (in Switzerland).
On
June 22, 2009, we received an official letter from the Commissioner informing us that the 3% overriding royalty interest to each
of the Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli Oil Register with regard to the Joseph
and Asher-Menashe licenses. On November 9, 2011, we received an official letter from the Commissioner informing us that the 3%
overriding royalty interest to each of the Bnei Joseph Foundation and the Abraham Foundation had been registered in the Israeli
Oil Register with regard to the Jordan Valley License.
On February 5, 2014,
the Company submitted applications to the Petroleum Commissioner, requesting royalty interest transfers from the Megiddo-Jezreel
License 401 of 3% overriding royalties to the Bnei Joseph Amutot and the Abraham Foundation, respectively. On April 8, 2014, the
transfers were approved by the Petroleum Commissioner and duly registered.
On January 14, 2021, the
Company submitted applications to the Petroleum Commissioner, requesting royalty interest transfers from the New Megiddo License
428 of 3% overriding royalties to each of the Bnei Joseph Amutot and the Abraham Foundation, respectively. The transfers are waiting
for approval by the Petroleum Commissioner and for registration.
Subsidiaries
On January 24, 2020, Zion
incorporated a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning a drilling rig
and 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.
Available
Information
Zion’s
internet website address is “www.zionoil.com.” We make available, free of charge, on our website, and on our Zion
mobile application, under “SEC Reports,” our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K, Forms 3, 4 and 5 filed on behalf of directors and executive officers and amendments to those reports, as soon as
reasonably practicable after providing the SEC such reports.
Our
Corporate Governance Policy, the charters of the Audit Committee, the Compensation Committee and the Nominating and Governance
Committee, and the Code of Ethics for directors, officers, employees and financial officers are also available on our website
under “Corporate Governance” and in print to any stockholder who provides a written request to the Corporate Secretary
at Zion Oil & Gas, Inc., 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, Attn: Corporate Secretary.
We
file annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and other documents
with the SEC under the Securities Exchange Act of 1934, as amended. The public may read and copy any materials that we file with
the SEC at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information
on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an internet website
that contains reports, proxy and information statements, and other information regarding issuers, including Zion Oil & Gas,
Inc., that file electronically with the SEC. The public can obtain any document we file with the SEC at www.sec.gov. Information
contained on or connected to our website is not incorporated by reference into this Form 10-K and should not be considered part
of this report or any other filing that we make with the SEC.
ITEM
1A. RISK FACTORS
In
evaluating our company, the risk factors described below should be considered carefully. The occurrence of one or more of these
events could significantly and adversely affect our business, prospects, financial condition and results of operations.
Risks
Associated with our Company
We
are a company with no current source of revenue. Our ability to continue in business depends upon our continued ability to obtain
significant financing from external sources and the ultimate success of our petroleum exploration efforts in onshore Israel, none
of which can be assured.
We
were incorporated in April 2000, and we have incurred negative cash flows from our operations, and presently all exploration activities
and overhead expenses are financed solely by way of the issue and sale of equity securities or debt instruments. The recoverability
of the costs we have incurred to date is uncertain and is dependent upon achieving commercial production or sale, none of which
can be assured. Our operations are subject to all of the risks inherent in exploration companies with no revenues or operating
income. Our potential for success must be considered in light of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with a new business, especially the oil and gas exploration business, and in particular the
deep, wildcat exploratory wells in which we are engaged in Israel. We cannot warrant or provide any assurance that our business
objectives will be accomplished.
Our ability to continue in business depends upon our continued
ability to obtain the necessary financing from external sources to undertake further exploration and development activities and
generate profitable operations from oil and natural gas interests in the future. We incurred net losses of $6,996,000 for the year
ended December 31, 2020, and $6,693,000 for the year ended December 31, 2019. The audited consolidated financial statements
have contained a statement by the auditors that raises substantial doubt about us being able to continue as a “going concern”
unless we are able to raise additional capital.
We
expect to incur substantial expenditures in our exploration and development programs. Our existing cash balances will not
be sufficient to satisfy our exploration and development plans going forward. We are considering various alternatives to
remedy any future shortfall in capital. We may deem it necessary to raise capital through equity markets, debt markets or
other financing arrangements, including participation arrangements that may be available. Because of the current absence of any
oil and natural gas reserves and revenues in our license areas, there can be no assurance that our capital will be available on
commercially acceptable terms (or at all) and if it is not, we may be forced to substantially curtail or cease exploration expenditures
which could lead to our inability to meet all of our commitments.
Our
independent registered public accounting firm has included an explanatory paragraph relating to our ability to continue as a going
concern in its report on our audited consolidated financial statements included in this prospectus. Our audited consolidated financial
statements at December 31, 2020 and 2019 and for the years then ended were prepared assuming that we will continue as a going
concern.
Such
an opinion could materially limit our ability to raise additional funds through the issuance of new debt or equity securities
or otherwise. Our ability to continue as a going concern is contingent upon, among other factors, the sale of the shares of our
common stock in this offering or obtaining alternate financing. We cannot provide any assurance that we will be able to raise
additional capital.
We
may not be able to maintain the listing of our common stock on the OTCQX Market, which could adversely affect our liquidity and
the trading volume and market price of our common stock, and decrease your investment.
Effective
September 3, 2020, our common stock began trading, and is currently listed, on the OTCQX Market. The maintenance requirements
for listing are to maintain a minimum bid price of $0.10 per share as of the close of business for at least one of every 30 consecutive
calendar days, a market capitalization of at least $5 million for at least one of every 30 consecutive calendar days, and at least
two Market Makers publish priced quotations on OTC Link ATS within 90 days of the Company joining OTCQX. In the event that the
Company’s bid price, the market capitalization, or the number of Market Makers fall below the minimum criteria, a cure period
of 180 calendar days to regain compliance shall begin, during which time the applicable criteria must be met for 10 consecutive
trading days.
No
assurance be provided that we will be able to maintain continued listing on OTCQX. Delisting from the OTCQX Market may have an
adverse effect on our ability to raise the capital needed to continue our oil and gas exploration efforts and maintain operations.
We
are involved in an ongoing government investigation by the United States Securities and Exchange Commission, the results of which
may have a material adverse effect on our consolidated financial condition and business.
On
June 21, 2018, the Fort Worth Regional Office of the SEC informed Zion that it was conducting a formal, non-public investigation
and asked that we provide certain information and documents in connection with its investigation. Since that date, we have fully
cooperated with the SEC on an on-going basis in connection with its investigation. Investigations of this nature are inherently
uncertain and their results cannot be predicted with certainty. Regardless of the outcome, an SEC investigation could have an
adverse impact on us because of legal costs, diversion of management resources, and other factors. The investigation could also
result in reputational harm to Zion and may have a material adverse effect on Zion’s current and future business and exploratory
activities and its ability to raise capital to continue our oil and gas exploratory activities.
The
recent outbreak of Covid-19 or the coronavirus may interrupt or delay our exploration activities in the MJL and could affect our
capital raising efforts on which we rely to continue our exploration program and maintain our operations, thereby adversely affecting
our business.
As
disclosed, we purchased a drilling rig, drill pipe, related equipment and spare parts to further explore for hydrocarbons in our
MJL. The drilling rig was imported into Israel in November 2020, rigged up in December 2020, and, effective on January 6, 2021,
began drilling our MJ-02 exploratory well. Due to extensive delays resulting from the COVID-19 outbreak, we were not able to transport
the drilling rig, equipment and spare parts we purchased in March, 2020 into Israel in the second quarter of 2020, as originally
scheduled.
We
cannot predict the impact, if any, that the outbreak of the coronavirus will have on the ongoing drilling and/or testing of our
MJ-02 well. In an effort to combat the coronavirus, the Israeli authorities have mandated severe restrictions on the day-to-day
operations of businesses, including closures of airports, required quarantine periods of any persons entering Israel as well as
rules relating to the conduct of business. At the present time, we cannot predict the impact, if any, of these regulations on
our planned operations.
In
addition, the coronavirus is adversely affecting the global economy and resulting in, amongst other things, significant unemployment
and business shutdown, leading to potentially a protracted business recession. Any such development may adversely affect our capital
raising efforts, on which we rely to continue our exploration program and maintain operations.
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.
Our
sole exploratory license granted on December 3, 2020 is scheduled to expire in June 2021. We have not applied for any other license
area and no assurance can be given that we will be awarded another exploratory license.
We currently hold one active petroleum exploration license onshore
Israel, the New Megiddo License 428, comprising approximately 99,000 acres. The New Megiddo License 428 was granted on December
3, 2020 and is valid for six months. This license has the potential to be extended for an additional six months, or to December
2021. No assurance can be given that we will be given additional extension on this present license. Additionally, we have not applied
for any other license area and no assurance can be provided that a license will be granted to us if we apply.
Our
ongoing exploration and development efforts are subject to many contingencies outside of our control, and any considerable delay
in obtaining all of the needed licenses, approvals and authorizations may severely impair our business.
On January 6, 2021, we spudded our MJ-02 exploratory well. Zion
plans to reach a total depth of approximately 5,800 meters (~19,024 feet). As of the date of this report, our drilling of the MJ-02
well is continuing as planned.
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.
We
require significant capital to realize our business plan.
Our
ongoing work program is expensive. We believe that our current cash resources are sufficient to allow us to undertake
exploratory activities in our current license area through May 2021. We estimate that, when we are not actively drilling a
well, our monthly expenditure is approximately $600,000 per month. However, when we are drilling, or testing, we estimate
that there is an additional cost of approximately $2,000,000 - $3,000,000 per month. Additionally, the newly enacted onshore
licensing and environmental and safety related regulations promulgated by the various energy related ministries in Israel
during 2019-2020 are likely to render obtaining new explorations licenses increasingly expensive. For example, at the time of
the award of any new exploration license, we will be required to submit performance bank guarantees in the form of a
restricted Israel cash deposits for 10% of the cost of the planned drilling program as well as other amounts to cover
potential environmental damages. See “Israel Energy Related Governmental Regulations.”
No
assurance can be provided that we will be able to raise funds when needed. Further, we cannot assure you that our actual cash
requirements will not exceed our estimates. Even if we were to discover hydrocarbons in commercial quantities, we will require
additional financing to bring our interests into commercial operation and pay for operating expenses until we achieve a positive
cash flow. Additional capital also may be required in the event we incur any significant unanticipated expenses.
Under
the current capital and credit market conditions, we may not be able to obtain additional equity or debt financing on acceptable
terms. Even if financing is available, it may not be available on terms that are favorable to us or in sufficient amounts to satisfy
our requirements.
If
we are unable to obtain additional financing, we may be unable to implement our business plan and our growth strategies, respond
to changing business or economic conditions and withstand adverse operating results. If we are unable to raise further financing
when required, our planned exploration activities may have to be scaled down or even ceased, and our ability to generate revenues
in the future would be negatively affected.
Additional
financing could cause your relative interest in our assets and potential earnings to be significantly diluted. Even if we have
exploration success, we may not be able to generate sufficient revenues to offset the cost of dry holes and general and administrative
expenses.
If
we cannot obtain any necessary petroleum exploration licenses, then our business may be severely impaired.
Our ability to obtain
desired exploration licenses on acceptable terms is subject to change in regulations and policies and to the discretion of the
applicable government agencies in Israel. Additionally, the onshore licensing and environmental and safety related regulations
promulgated by the various energy related ministries in Israel during 2011-2012 are likely to render obtaining any necessary exploration
licenses increasingly expensive and more time consuming. Accordingly, there can be no assurance that we will be able to obtain
new or additional exploration rights. If we are unable for whatever reason to obtain the license applications that we deem necessary
or desirable, our business may be severely impaired.
We
rely on independent experts and technical or operational service providers over whom we may have limited control.
The
success of our oil and gas exploration efforts is dependent upon the efforts of various third parties that we do not control.
These third parties provide critical drilling, engineering, logging, pressure pumping, geological, geophysical and other scientific
analytical services, including 2-D and 3-D seismic imaging technology to explore for and develop oil and gas prospects. Given
our small size and limited resources, we do not have all the required expertise on staff. As a result, we rely upon various
companies and other third parties to assist us in identifying desirable hydrocarbon prospects to acquire and to provide us with
technical assistance and services. In addition, we rely upon the owners and operators of oilfield service equipment.
If
any of these relationships with third-party service providers are terminated or are unavailable on commercially acceptable terms,
we may not be able to execute our business plan. Our limited control over the activities and business practices of these third
parties, any inability on our part to maintain satisfactory commercial relationships with them, their limited availability or
their failure to provide quality services could materially and adversely affect our business, results of operations and financial
condition.
Exploratory
well drilling locations that we decide to drill may not yield oil or natural gas in commercially viable quantities.
There
is no way to predict in advance of drilling and testing whether any particular location will yield oil or natural gas in sufficient
quantities to recover drilling or completion costs or to be economically viable. The use of technologies and the study of producing
fields in the same area, if any, will not enable us to know conclusively prior to drilling whether oil, natural gas liquids (NGLs)
or natural gas will be present or, if present, whether oil or natural gas will be present in sufficient quantities to be economically
viable. Even if sufficient amounts of oil, NGLs or natural gas exist, we may inadvertently damage the potentially productive hydrocarbon
bearing formation or experience mechanical difficulties while drilling or completing a well, resulting in a reduction in production
from the well or abandonment of the well. If we drill exploratory wells that we identify as dry holes in our future drilling locations,
our business may be materially harmed. We cannot assure you that the analogies we draw from available data from other wells, more
fully explored locations or producing fields will be applicable to our drilling locations. Ultimately, the cost of drilling, completing
and operating any well is often uncertain, and new wells may not be productive.
Deterioration
of political, economic and security conditions in Israel may adversely affect our operations.
Any
major hostilities involving Israel, a substantial decline in the prevailing regional security situation or the interruption or
curtailment of trade between Israel and its present trading partners could have a material adverse effect on our operations. See
the prior discussion on Political Climate.
Prolonged
and/or widespread regional conflict in the Middle East could have the following results, among others:
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capital
market reassessment of risk and subsequent redeployment of capital to more stable areas making it more difficult for us to
obtain financing for potential development projects;
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security
concerns in Israel, making it more difficult for our personnel or supplies to enter or exit the country;
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security
concerns leading to evacuation of our personnel;
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damage
to or destruction of our wells, production facilities, receiving terminals or other operating assets;
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inability
of our service and equipment providers to deliver items necessary for us to conduct our operations in Israel, resulting
in delays; and
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the
lack of availability of experienced crew, oilfield equipment or services if third party providers decide to exit the region.
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Loss
of property and/or interruption of our business plans resulting from hostile acts could have a significant negative impact on
our earnings and cash flow. In addition, we may not have enough insurance to cover any loss of property or other claims resulting
from these risks.
We
have a history of losses and we cannot assure you that we will ever be profitable.
We incurred net losses of $6,996,000 for the year ended December
31, 2020, and $6,693,000 for the year ended December 31, 2019. We cannot provide any assurance that we will ever be profitable.
Earnings,
if any, will be diluted due to governmental royalty and charitable contributions.
We
are legally bound to pay a government royalty of 12.5% of gross sales revenues. Additionally, we are legally required to pay 6%
of gross sales revenue to two separate foundations (3% each to two separate foundations – see the separate section on foundations).
As our expenses increase with respect to the amount of sales, these donations and allocation could significantly dilute future
earnings and, thus, depress the price of the common stock.
Risks
Associated with our Business
We
are subject to increasing Israeli governmental regulations and environmental requirements that may cause us to incur substantial
incremental costs and/or delays in our drilling program.
Our
business is subject to laws and regulations promulgated by the State of Israel relating to the exploration for, and the development,
production and marketing of, crude oil and natural gas, as well as safety matters. Legal requirements are frequently changed and
subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect
on our operations. We may be required to make substantial expenditures to comply with governmental laws and regulations.
Environmental
laws and regulations change frequently, and the implementation of new, or the modification of existing, laws or regulations could
adversely impact our operations. The discharge of natural gas, crude oil, or other pollutants into the air, soil or water may
give rise to substantial liabilities on our part to government agencies and third parties and may require us to incur substantial
costs of remediation. In addition, we may incur costs and penalties in addressing regulatory agency procedures regarding possible
non-compliance.
Our
lack of diversification increases the risk of an investment in us, and our financial condition and results of operations may deteriorate
if we fail to diversify.
Our
business focus is on oil and gas exploration on a limited number of properties in Israel and exploitation of any significant reserves
that are found within our license areas. As a result, we lack diversification, in terms of both the nature and geographic scope
of our business. We will likely be impacted more acutely by factors affecting our industry or the regions in which we operate
than we would if our business were more diversified. If we are unable to diversify our operations, our financial condition and
results of operations could deteriorate.
We
currently have no proved reserves or current production and we may never have any.
We
do not have any proved reserves or current production of oil or gas. We cannot assure you that any wells will be completed or
produce oil or gas in commercially profitable quantities.
Oil
and gas exploration is an inherently risky business.
Exploratory
drilling involves enormous risks, including the risk that no commercially productive oil or natural gas reservoirs will be discovered.
Even when properly used and interpreted, seismic data analysis and other computer simulation techniques are only tools used to
assist geoscientists in trying to identify subsurface structures and the presence of an active petroleum system. They do not allow
the interpreter to know conclusively if hydrocarbons are present or economically available. The risk analysis techniques we use
in evaluating potential drilling sites rely on subjective judgments of our personnel and consultants. Additionally, we are typically
engaged in drilling deep onshore wildcat exploratory wells in Israel where only approximately 500 total wells have ever been drilled,
the vast majority of which are relatively shallow. As such, exploration risks are inherently very substantial.
A
substantial and extended decline in oil or natural gas prices could adversely impact our future rate of growth and the carrying
value of our unproved oil and gas assets.
Prices
for oil and natural gas fluctuate widely. Fluctuations in the prices of oil and natural gas will affect many aspects of our business,
including our ability to attract capital to finance our operations, our cost of capital, and the value of any unproved oil and
natural gas properties. Prices for oil and natural gas may fluctuate widely in response to relatively minor changes in the supply
of and demand for oil and natural gas, market uncertainty and a wide variety of additional factors that are beyond our control,
such as the domestic and foreign supply of oil and natural gas, technological advances affecting energy consumption, and domestic
and foreign governmental regulations. Significant and extended reductions in oil and natural gas prices could require us
to reduce our capital expenditures and impair the carrying value of our assets.
While
there is much analysis and speculation as to the cause of this fluctuation in the price and its predicted future course, there
are many factors that contribute to the price of oil, none of which the Company controls. The oil price is also impacted by actual
supply and demand, as well as by expectation. Demand for energy is closely related to economic activity which is compounded by
key advances and innovation in exploration techniques in recent years. Significant geopolitical events such as heightened conflict
in the Middle East and large-scale terrorist activities can also impact the price of oil tremendously.
If
we are successful in finding commercial quantities of oil and/or gas, our revenues, operating results, financial condition and
ability to borrow funds or obtain additional capital will depend substantially on prevailing prices for oil and natural gas. Declines
in oil and gas prices may materially adversely affect our financial condition, liquidity, ability to obtain financing and operating
results. Lower oil and gas prices also may reduce the amount of oil and gas that we could produce economically.
Historically,
oil and gas prices and markets have been volatile, with prices fluctuating widely, and they are likely to continue to be volatile,
making it impossible to predict with any certainty the future prices of oil and gas. The bottom line is that there are many and
varied causes for the fluctuation in the price of oil and natural gas, and we have no control over these factors.
Because
a certain portion of our expenses is incurred in currencies other than the U.S. dollar, our results of operations may be adversely
impacted by currency fluctuations and inflation.
Although
our reporting and functional currency is the U.S. dollar, we pay a substantial portion of our expenses in New Israeli Shekel (NIS).
As a result, we are exposed to the currency fluctuation risks. For example, if the U.S. dollar weakens against the NIS, our reported
financial results in U.S. dollars may be lower than anticipated. We may, in the future, decide to enter into currency hedging
transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of the currencies mentioned above
in relation to the U.S. dollar. These measures, however, may not adequately protect us from material adverse effects.
The
insurance we carry may be insufficient to cover all of the risks we face, which could result in significant financial exposure.
Exploration
for and production of crude oil and natural gas can be hazardous, involving natural disasters and other unplanned events such
as blowouts, well cratering, fire and explosion and loss of well control which can result in damage to or destruction of wells,
injury to persons, loss of life, or damage to property and the environment. Exploration and production activities are also subject
to risk from political developments such as terrorist acts, piracy, civil disturbances, war, expropriation or nationalization
of assets, which can cause loss of or damage to our property.
As
is customary within our industry, we maintain insurance against many, but not all, potential perils confronting our operations
and in coverage amounts and deductible levels that we believe to be economic. Consistent with that profile, our insurance program
is structured to provide us financial protection from unfavorable loss resulting from damages to or the loss of physical assets
or loss of human life, liability claims of third parties, and exploratory drilling interruption attributed to certain assets and
including such occurrences as well blowouts and resulting oil spills, at a level that balances cost of insurance with our assessment
of risk and our ability to achieve a reasonable rate of return on our investments. Although we believe the coverage and amounts
of insurance carried are adequate and consistent with industry practice, we do not have insurance protection against all the risks
we face. Because we chose not to insure certain risks, insurance may not be available at a level that balances the cost of insurance
and our desired rates of return, or actual losses exceed coverage limits. We regularly review our risks of loss and the cost and
availability of insurance and revise our insurance program accordingly.
If
an event occurs that is not covered by insurance or not fully protected by insured limits, it could have a significant adverse
impact on our financial condition, results of operations and cash flows.
We
face various risks associated with the trend toward increased activism against oil and gas exploration and development activities.
Opposition
toward oil and gas drilling and development activity has been growing globally and is particularly pronounced in Organization
for Economic Co-operation and Development (“OECD”) countries which include the U.S., the U.K and Israel. Companies
in the oil and gas industry, such as us, are often the target of activist efforts from both individuals and non-governmental organizations
regarding environmental compliance and business practices, potential damage to fresh water sources, and safety, among other topics.
Future activist efforts could result in the following:
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delay
or denial of drilling or other exploration permits;
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shortening
of lease terms or reduction in lease size;
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restrictions
on installation or operation of gathering or processing facilities;
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restrictions
on the use of certain operating practices, such as hydraulic fracturing;
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legal
challenges or lawsuits;
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damaging
publicity about us;
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increased
costs of doing business;
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reduction
in demand for our products; and
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other
adverse effects on our ability to develop our properties and expand production.
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Our
need to incur costs associated with responding to these initiatives or complying with any resulting new legal or regulatory requirements
resulting from these activities that are substantial and not adequately provided for, could have a material adverse effect on
our business, financial condition and results of operations.
Economic
risks may adversely affect our operations and/or inhibit our ability to raise additional capital.
Economically,
our operations in Israel may be subject to:
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exchange
rate fluctuations;
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royalty
and tax increases and other risks arising out of Israeli State sovereignty over the mineral rights in Israel and its
taxing authority; and
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changes
in Israel’s economy that could lead to oil and gas price controls.
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Consequently,
our operations may be substantially affected by local economic factors beyond our control, any of which could negatively affect
our financial performance and prospects.
Legal
risks could negatively affect our market value.
Legally,
our operations in Israel may be subject to:
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changes
in the Petroleum Law resulting in modification of license and permit rights;
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adoption
of new legislation relating to the terms and conditions pursuant to which operations in the energy sector may be conducted;
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changes
in laws and policies affecting operations of foreign-based companies in Israel; and
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changes
in governmental energy and environmental policies or the personnel administering them.
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The
Israeli Energy Ministry has now enacted regulations relating to licensing requirements for entities engaged in the fuel sector
that would result in our having to obtain additional licenses to market and sell hydrocarbons that we may discover.
Further,
in the event of a legal dispute in Israel, we may be subject to the exclusive jurisdiction of Israeli courts or we may not be
successful in subjecting persons who are not United States residents to the jurisdiction of courts in the United States, either
of which could adversely affect the outcome of a dispute.
There
are limitations on the transfer of interests in our petroleum rights, which could impair our ability to raise additional funds
to execute our business plan.
The
Israeli government has the right to approve any transfer of rights and interests in any license or other petroleum right we hold
or may be granted and any mortgage of any license or other petroleum rights to borrow money. If we attempt to raise additional
funds through borrowings or joint ventures with other companies and are unable to obtain required approvals from the government,
the value of your investment could be significantly diluted or even lost.
Our
dependence on the limited contractors, equipment and professional services available in Israel may result in increased costs and
possibly material delays in our work schedule.
Due
to the lack of competitive resources in Israel, costs for our operations may be more expensive than costs for similar operations
in other parts of the world. We are also more likely to incur delays in our exploration schedules and be subject to a greater
risk of failure in meeting our required work schedule. Similarly, some of the oil field personnel we need to undertake our planned
operations are not necessarily available in Israel or available on short notice for work in Israel. Any or all of the factors
specified above may result in increased costs and delays in the work schedule.
Our
dependence on Israeli local licenses and permits as well as new regulations calling for enhanced bank guarantees and insurance
coverage may require more funds than we have budgeted and may cause delays in our work schedule.
In
connection with drilling operations, we are subject to a number of Israeli local licenses and permits. Some of these are issued
by the Israeli Defense Forces, the Civil Aviation Authority, the Israeli Water Commission, the Israel Lands Authority, the holders
of the surface rights in the lands on which we intend to conduct drilling operations, local and regional planning commissions
and environmental authorities.
In
the event of a commercial discovery and depending on the nature of the discovery and the production and related distribution equipment
necessary to produce and sell the discovered hydrocarbons, we will be subject to additional licenses and permits, including from
various departments in the Energy Ministry, regional and local planning commissions, the environmental authorities and the Israel
Lands Authority. If we are unable to obtain some or all of these permits or the time required to obtain them is longer than anticipated,
we may have to alter or delay our planned work schedule, which would increase our costs.
If
we are successful in finding commercial quantities of oil and/or gas, our operations will be subject to laws and regulations relating
to the generation, storage, handling, emission, transportation and discharge of materials into the environment, which can adversely
affect the cost, manner or feasibility of our doing business. Many Israeli laws and regulations require permits for the operation
of various facilities, and these permits are subject to revocation, modification and renewal. Governmental authorities have the
power to enforce compliance with their regulations, and violations could subject us to fines, injunctions or both.
If
compliance with environmental regulations is more expensive than anticipated, it could adversely impact the profitability of our
business.
Risks
of substantial costs and liabilities related to environmental compliance issues are inherent in oil and gas operations. It is
possible that other developments, such as stricter environmental laws and regulations, and claims for damages to property or persons
resulting from oil and gas exploration and production, would result in substantial costs and liabilities. This could also cause
our insurance premiums to be significantly greater than anticipated.
The
unavailability or high cost of equipment, supplies, other oil field services and personnel could adversely affect our ability
to execute our exploration and development plans on a timely basis and within our budget.
Our
industry is cyclical and, from time to time, there is a shortage of equipment, supplies and oilfield services. There may also
be a shortage of trained and experienced personnel. During these periods, the costs of such items are substantially greater and
their availability may be limited, particularly in locations that typically have limited availability of equipment and personnel,
such as the Eastern Mediterranean, where our operations are located. As a result, equipment, supplies and oilfield services may
not be available at rates that provide a satisfactory return on our investment.
Risks
Related to our Common Stock
We
will issue additional common stock in the future, which would dilute the ownership interests of our existing stockholders.
In the future, we anticipate
issuing additional securities in connection with capital raising efforts, including shares of our common stock or securities convertible
into or exchangeable for our common stock, resulting in the dilution of the ownership interests of our stockholders. We are authorized
under our amended and restated certificate of incorporation to issue 400,000,000 shares of common stock. As of March 22, 2021,
there were approximately 239,385,588 shares of our common stock issued and outstanding.
When
we offer a particular series of securities, we will describe the intended use of the net proceeds from that offering in a prospectus
supplement. The actual amount of net proceeds we spend on a particular use will depend on many factors, including, our future
capital expenditures, the amount of cash required by our operations, and our future revenue growth, if any. Therefore, we will
retain broad discretion in the use of the net proceeds.
Because
the likelihood of paying cash dividends on our common stock is remote at this time, stockholders must look solely to appreciation
of our common stock to realize a gain on their investments.
We
do not know when or if we will pay dividends. We currently intend to retain future earnings, if any, to finance the expansion
of our business. Our future dividend policy is within the discretion of our board of directors and will depend upon various factors,
including our business, financial condition, results of operations, capital requirements and investment opportunities. Accordingly,
stockholders must look solely to appreciation of our common stock to realize a gain on their investment. This appreciation may
not occur.
Our
stock price and trading volume may be volatile, which could result in losses for our stockholders.
The
public market for our common stock has been characterized by significant price and volume fluctuations. There can be no assurance
that the market price of our common stock will not decline below its current or historic price ranges. The market price may
bear no relationship to the prospects, stage of development, existence of oil and gas reserves, revenues, earnings, assets or
potential of our company and may not be indicative of our future business performance. The trading price of our common stock
could be subject to wide fluctuations. Fluctuations in the price of oil and gas and related international political events
can be expected to affect the price of our common stock. In addition, the stock market in general has experienced extreme
price and volume fluctuations that have affected the market price for many companies, sometimes unrelated to the operating performance
of these companies. These market fluctuations, as well as general economic, political and market conditions, may have a material
adverse effect on the market price of our common stock.
Some
of the factors that could negatively affect our share price or result in fluctuations in the price or trading volume of our common
stock include:
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actual
or anticipated quarterly variations in our operating results,
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developments
in the SEC investigation,
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changes
in expectations as to our future financial performance or changes in financial estimates, if any,
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announcements
relating to our business or the business of our competitors,
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conditions
generally affecting the oil and natural gas industry,
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the
success of our operating strategy,
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the
operating and stock performance of other comparable companies, and
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The
continued listing of our stock on a recognized stock exchange
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Many
of these factors are beyond our control, and we cannot predict their potential effect on the price of our common stock.
ITEM
1B. UNRESOLVED STAFF COMMENTS
Not
Applicable.
ITEM
2. PROPERTIES
The Company currently holds one active petroleum exploration
license onshore Israel, the New Megiddo License 428, comprising approximately 99,000 acres. This License was awarded on December
3, 2020 and has the same area and coordinates as the replaced License 401.
Please
refer to the discussion above under Item 1, under the caption “Summary of Exploration Activities” and “Exploration
Plans Going Forward”.
The
table below summarizes certain data for our license area for the year ended December 31, 2020:
Type of Right
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Name
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Area
(Approx. Acres)
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Working
Interest
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Expiration Date
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License
428
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Megiddo-Jezreel
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98,842
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100
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%
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June
2, 2021 (1)
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(1)
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Declaration
of a commercial discovery during the license term, as may in certain circumstances be
extended for two years to define the boundaries of the field, would entitle Zion to receive
a 30-year lease (extendable for up to an additional 20 years (50 years in all) subject
to compliance with a field development work program and production.
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Surface
Rights
The surface rights to the drill site in the New Megiddo License
428 area are held under a long-term lease by Kibbutz Sde Eliyahu. The rights are owned by the State of Israel and administered
by the Israel Lands Authority. Permission has been granted to Zion by both Kibbutz Sde Eliyahu and the Israel Lands Authority for
the use of the surface rights.
The
surface rights to former drill sites in the former Joseph License area are held under a long-term lease by Kibbutz Ma’anit.
The rights are owned by the State of Israel and administered by the Israel Lands Authority. Permission has been granted to Zion
by both Kibbutz Ma’anit and the Israel Lands Authority for the use of the surface rights. The Company has completed the
plugging obligations of all wells within the Joseph License area and acknowledges its obligation to complete the abandonment of
the wells in accordance with guidance from the Environmental Ministry in 2021 even though the Joseph License has expired.
The
surface rights to the former drill site in the former Asher-Menashe License area are held under a long-term lease by Kibbutz Ein
Carmel. The rights are owned by the State of Israel and administered by the Israel Lands Authority. Permission has been granted
to Zion by both Kibbutz Ein Carmel and the Israel Lands Authority for the use of the surface rights. The Company has completed
the plugging obligations of the only well within the Asher-Menashe License area and also completed the abandonment of the well
in accordance with guidance from the Environmental Ministry in 2020.
Summary
of Exploration Activities/Present Activities
Please
refer to the discussion above under Item 1, under the caption “Summary of Exploration Activities” and “Exploration
Plans Going Forward.”
Office
Properties
(i)
On September 10, 2015, the Company signed a lease agreement with Hartman Income REIT Property Holdings, LLC (“Hartman”)
for premises containing 7,276 square feet. The lease term is for 65 months from December 1, 2015 to April 30, 2021. Rent was abated
for the first five months (December 2015 through April 2016). Beginning in May 2016 and through April 2017, rent was paid on a
monthly basis in the base amount of $7,882 per month. Thereafter, from May 2017 through April 2018, rent was paid on a monthly
basis in the amount of $8,186 per month; from May 2018 through April 2019, rent is $8,489 per month; from May 2019 through April
2020, rent is $8,792 per month; and from May 2020 through April 2021, rent is $9,095 per month. We are also obligated to pay our
pro-rated portion of all taxes, utilities, and insurance during the lease term.
On
June 14, 2016, the Company and Hartman signed a First Amendment to Lease Agreement whereby the premises were expanded to include
approximately 1,498 square feet, for a new total of approximately 8,774 square feet. The first amendment commencement date was
July 1, 2016 and the payment of monthly rent was revised. Beginning in July 2016 and extending through November 2016, rent was
paid on a monthly basis in the base amount of $7,882 per month. Beginning in December 2016 and extending through May 2017, rent
was paid monthly in the base amount of $9,505.17 per month. Beginning in June 2017 and extending through May 2018, rent was paid
monthly in the base amount of $9,870.75 per month. Beginning in June 2018 and extending through May 2019, rent was to be paid
monthly in the base amount of $10,236.33 per month. Beginning in June 2019 and extending through May 2020, rent is to be paid
monthly in the base amount of $10,601.92 per month. Beginning in June 2020 and extending through May 2021, rent is to be paid
monthly in the base amount of $10,967.50 per month.
(ii)
The Company’s field office in Caesarea Israel consists of 6,566 square feet. The lease term was five years from February 1,
2014 to January 31, 2019. Rent was to be paid on a monthly basis in the base amount of approximately NIS 37,800 per month (approximately
$11,750) per month at the exchange rate in effect on the date of this report and is linked to an increase (but not a decrease)
in the CPI. The Company is also obligated to pay all related taxes, utilities, insurance and maintenance payments during the lease
term. Pursuant to the lease, two years from the commencement of the lease term, the Company may terminate the agreement upon three
months’ notice provided the Company secures a replacement lessee approved by the lessor at its discretion.
The
Company has an option to renew the lease for another five years, provided it is not in breach of the agreement, where it is required
as well to furnish a notice of intent to exercise the option six months prior to termination of lease, and it furnishes
a bank guarantee and insurance confirmation prior to commencement of option period.
The
Company exercised the above-mentioned option on September 25, 2018. Rent is to be paid on a monthly basis in the base amount of
approximately NIS 39,200 per month (approximately $12,200) at the exchange rate in effect on the date of this report and is linked
to an increase (but not a decrease) in the CPI. The Company has an option to renew the lease for another five years from February
1, 2024 to January 31, 2029, provided it is not in breach of the agreement, where it is required as well to furnish a notice
of intent to exercise the option six months prior to termination of lease, and it furnishes a bank guarantee and insurance
confirmation prior to commencement of the option period. In the event that the Company does exercise the option to renew the lease,
the Company would pay the lessor an amount of approximately NIS 85,000 (approximately $26,400) at the exchange rate in effect
on the date of this report and is linked to an increase (but not a decrease) in the CPI.
Under
the lease agreement, the Company is authorized to further sublease part of the leased premises to a third party that is pre-approved
by the sub-lessor. Rent and its related taxes, utilities, insurance and maintenance expenses for 2020 and 2019 were $319,000 and
$348,000 respectively.
Geneva
Branch
On
July 11, 2014, Zion Oil & Gas, Inc., Geneva Branch was registered in the Canton of Geneva, Switzerland. The legal Swiss
name for the foreign branch is “Zion Oil & Gas, Inc., Wilmington, Branch of Geneva”. The Zion Swiss Branch
has its registered office and its business office at 6 Avenue Jules Crosnier, 1206 Champel, Geneva, Switzerland. The purpose
of the branch is to operate a foreign treasury center for the Company.
ITEM
3. 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.
Since that date, we have fully cooperated with the SEC on an on-going basis in connection with its investigation. Investigations
of this nature are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, an SEC
investigation could have an adverse impact on us because of legal costs, diversion of management resources, and other factors.
The investigation could also result in reputational harm to Zion and may have a material adverse effect on Zion’s current
and future business and exploratory activities and its ability to raise capital to continue our oil and gas exploratory activities.
The
Company cannot predict when this matter will be resolved or what, if any, action the SEC may take following the conclusion of
the investigation.
Litigation
Following
the commencement of the SEC investigation, on August 9, 2018, a putative class action (the “class action”) Complaint
was filed against Zion, Victor G. Carrillo, the Company’s Chief Executive Officer at such time, and Michael B. Croswell
Jr., the Company’s Chief Financial Officer (collectively, the “Defendants”) in the U.S. District Court for the
Northern District of Texas. On November 16, 2018, the Court entered an Order in the class action appointing lead plaintiffs and
approving lead counsel and on January 22, 2019, an Amended Complaint was filed. On February 1, 2019, a Corrected Amended Class
Action Complaint was filed. The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”) and Rule 10b-5 promulgated thereunder by the SEC and Section 11 of the Securities Act of 1933 (the “Securities
Act”) against all defendants and alleges violations of Section 20(a) of the Exchange Act and Section 15 of the Securities
Act against the individual defendants. The alleged class period is from February 13, 2018 through November 20, 2018. On March
13, 2019, a Motion to Dismiss Plaintiffs’ Corrected Amended Complaint was filed on behalf of Zion, Victor Carrillo and Michael
B. Croswell, Jr., pleading numerous grounds in support of their Motion to Dismiss. On April 29, 2019 Plaintiffs filed a Response
to Defendants’ Motion to Dismiss, and on May 29, 2019 Defendants filed a Reply to Plaintiffs’ Response. On March 4,
2020, the Court granted Defendants’ Motion and dismissed all claims granting Plaintiffs leave to amend. On March 30,
2020, the Lead Plaintiffs voluntarily dismissed the Class Action with prejudice as to the Company and all other defendants.
The
Company disputed the above claims and made an advance deposit of $500,000 in 2018 to defense counsel for the cost of defending
the litigation. The Company carries insurance that is applicable to these claims. During May 2020, the Company received a refund
of approximately $142,000 from its defense in reconciliation of the advance deposit to actual legal expenses.
On
October 29, 2018, Zion received a shareholder request to inspect books and records pursuant to Section 220 of the Delaware
General Corporation Law for the purpose of investigating potential corporate mismanagement and alleged breaches of fiduciary duty
in connection with public statements made by the Company from March 12, 2018 to May 30, 2018. The Company responded to this request.
On August 9, 2019,
Zion received two (2) additional shareholder requests from the same law firm to inspect books and records pursuant to section 220
of the Delaware General Corporation Law for the purpose of investigating potential corporate mismanagement and alleged breaches
of fiduciary duty in connection with public statements made by the Company from February 1, 2018 to present. Following discussion
with counsel to the shareholder, the Company’s counsel produced materials responsive to the shareholders’ requests
in January 2020.
On February 12, 2020,
by letter to Zion’s Board of Directors, one of the shareholders making the August 9, 2019 request demanded that the Board
investigate, address, remedy, and commence proceedings against certain of the Company’s current and former officers and directors
for alleged breaches of fiduciary duties, violations of section 10(b) and 20(a) of the Exchange Act, waste of corporate assets,
unjust enrichment, and violations of all other applicable laws. The shareholder alleges wrongdoing in connection with public statements
made by the Company from February 1, 2018 regarding the Company’s oil and gas exploration activities, the Company’s
accounting and disclosure of expenses, and the Board’s oversight of operations. The Board hired independent counsel to investigate
the claims made against certain of the Company’s current and former officers and directors. That investigation concluded
and, based on the findings and recommendations of independent counsel, the Board decided not to pursue claims against any current
or former officer or director. On July 14, 2020, Zion received a request from the same shareholder making the February 12, 2020
demand to inspect books and records pursuant to Section 220 of the Delaware General Corporation Law for the purpose of evaluating
the Board’s decision to reject the litigation demand. The Company responded to this request in August 2020. The Company has
not received any further communication from the shareholder following the August 2020 response.
From
time to time, the Company may also 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 litigation
or any other pending litigation or claims.
ITEM
4. MINE SAFETY DISCLOSURES
Not
Applicable.
Notes
to Consolidated Financial Statements
Note
1 - Nature of Operations and Going Concern
A.
Nature of Operations
Zion
Oil & Gas, Inc., a Delaware corporation (“we,” “our,” “Zion” or the “Company”)
is an oil and gas exploration company with a history of 21 years of oil & gas exploration in Israel. As of December 31, 2020,
the Company has no revenues from its oil and gas operations.
Zion
maintains its corporate headquarters in Dallas, Texas. The Company also has branch offices in Caesarea, Israel and Geneva, Switzerland.
The purpose of the Israel branch is to support the Company’s operations in Israel, and the purpose of the Switzerland branch
is to operate a foreign treasury center for the Company.
On January 24, 2020, Zion incorporated
a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning a drilling rig, related equipment
and spare parts, and on January 31, 2020, Zion incorporated another wholly owned subsidiary, Zion Drilling Services, Inc., a Delaware
corporation, to act as the contractor providing such drilling services. When Zion is not using the rig for its own exploration
activities, Zion Drilling Services may contract with other operators in Israel to provide drilling services at market rates then
in effect.
Zion
has the trademark “ZION DRILLING” filed with the United States Patent and Trademark Office. Zion has the trademark
filed with the World Intellectual Property Organization in Geneva, Switzerland, pursuant to the Madrid Agreement and Protocol.
In addition, Zion has the trademark filed with the Israeli Trademark Office in Israel.
Exploration
Rights/Exploration Activities
The Company currently holds one active petroleum exploration
license onshore Israel, the New Megiddo License 428, comprising approximately 99,000 acres. The New Megiddo License 428 was
awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. The New Megiddo License
428 lies onshore, south and west of the Sea of Galilee and we continue our exploration focus here as it appears to possess the
key geologic ingredients of an active petroleum system with significant exploration potential.
The
Megiddo Jezreel #1 (“MJ #1”) exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”)
of 5,060 meters (approximately 16,600 feet). Thereafter, the Company successfully cased and cemented the well while awaiting the
approval of the testing protocol. The Ministry of Energy approved the well testing protocol on April 29, 2018.
During the fourth quarter of 2018, the
Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain hydrocarbons
in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash
impairment charge to its unproved oil and gas properties of $30,906,000. During the year ended December 31, 2020, the Company
did not record any post-impairment charges. The Company recorded a post-impairment charge of $314,000 for the year ended December
31, 2019.
The
MJ#1 well provided Zion with information Zion believes is important for potential future exploration efforts within its license
area. As with many frontier wildcat wells, the MJ#1 also left several questions unanswered.
While
not meant to be an exhaustive list, a summary of what Zion believes to be key information learned in the MJ#1 well is as follows:
|
1.
|
The
MJ#1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well. In our opinion,
this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from
an organic-rich source rock.
|
|
2.
|
The
known organic rich (potentially hydrocarbon bearing) Senonian age source rocks that are typically present in this part of
Israel were not encountered as expected. Zion expected these source rocks to be encountered at approximately 1,000 meters
in the MJ#1 well.
|
|
3.
|
MJ#1
had natural fractures, permeability (the ability of fluid to move through the rock) and porosity (pore space in rock) that
allowed the sustained flow of formation fluid in the shallower Jurassic and lower Cretaceous age formations between approximately
1,200 and 1,800 meters. While no hydrocarbons were encountered, Zion believes this fact is nonetheless significant because
it provides important information about possible reservoir pressures and the ability of fluids to move within the formation
and to the surface.
|
|
4.
|
MJ#1
encountered oil in the Triassic Mohilla formation which Zion believes suggests an active deep petroleum system is in Zion’s
license area. There was no natural permeability or porosity in the Triassic Mohilla formation to allow formation fluid to
reach the surface naturally during testing, and thus the MJ#1 was not producible or commercial
|
|
5.
|
The
depths and thickness of the formations we encountered varied greatly from pre-drill estimates. This required the MJ#1 to be
drilled to a much greater depth than previously expected. Zion has tied these revised formation depths to seismic data which
will allow for more accurate interpretation and mapping in the future.
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
1 - Nature of Operations and Going Concern (cont’d)
A
summary of what Zion believes to be some key questions left to be answered are:
|
1.
|
Is
the missing shallow Senonian age source rock a result of regional erosion, or is it missing because of a fault that cut the
well-bore and could be reasonably expected to be encountered in the vicinity of the MJ#1 drill site? Zion believes this is
an important question to answer because if the Senonian source rocks do exist in this area, the high temperatures encountered
are sufficient to mature these source rocks and generate oil.
|
|
2.
|
Do
the unusually high shallow subsurface temperatures extend regionally beyond the MJ#1 well, which could allow for the generation
of hydrocarbons in the Senonian age source rock within our license area?
|
|
3.
|
As
a consequence of seismic remapping, where does the MJ#1 well lie relative to the potential traps at the Jurassic and Triassic
levels and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps?
|
As a result of these unanswered questions
and with the information gained drilling the MJ#1 well, Zion believed it was prudent and consistent with good industry practice
to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately 72 square kilometers surrounding
the MJ#1 well. As of the date of this report, Zion has completed all of the acquisition, processing and interpretation of the
3-D data and has incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well (see further
details below).
The Geology team is continuing on a larger interpretation of
3D areas, along with potential exploration locations located in the western portion of the New Megiddo License 428 area.
Megiddo-Jezreel
Petroleum License (“MJL”)
The Megiddo-Jezreel License 401 was awarded
on December 3, 2013 for a three-year primary term through December 2, 2016 with the possibility of additional one-year extensions
up to a maximum of seven years. The Megiddo-Jezreel License 401 lies onshore, south and west of the Sea of Galilee, and we continue
our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant
exploration potential.
The New Megiddo License 428 was awarded
on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. The New Megiddo License 428
effectively replaces the Megiddo-Jezreel License 401 as it has the same area and coordinates.
The MJ-02 drilling plan was approved by
the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well. Zion plans to
reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately 150 days.
As of the date of this
report, our drilling of the MJ-02 well is continuing as planned.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
1 - Nature of Operations and Going Concern (cont’d)
Zion’s
Former Asher-Menashe License
Zion plugged the exploratory well on its
former Asher-Menashe License area, the reserve pit has been evacuated, and during the year 2019, Zion completed the abandonment
of this well site in accordance with guidance from the Energy Ministry, Environmental Ministry and local officials (see Note 11C).
Zion’s
Former Joseph License
Zion
has plugged all of its exploratory wells on its former Joseph License area, and the reserve pits have been evacuated, but acknowledges
its obligation to complete the abandonment of these well sites in accordance with guidance from the Energy Ministry, Environmental
Ministry and local officials (see Note 11C).
B.
Going Concern
The
Company incurs cash outflows from operations, and all exploration activities and overhead expenses to date have been financed
by way of equity or debt financing. The recoverability of the costs incurred to date is uncertain and dependent upon achieving
significant commercial production.
The Company’s ability to continue as a going concern is
dependent upon obtaining the necessary financing to undertake further exploration and development activities and ultimately generating
profitable operations from its oil and natural gas interests in the future. The Company’s current operations are dependent
upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy of management’s estimates
of those requirements. Should those estimates be materially incorrect, the Company’s ability to continue as a going concern
may be impaired. The consolidated financial statements have been prepared on a going concern basis, which contemplates realization
of assets and liquidation of liabilities in the ordinary course of business. During the year ended December 31, 2020, the Company
incurred a net loss of approximately $7.0 million and had an accumulated deficit of approximately $212.8 million. These factors
raise substantial doubt about the Company’s ability to continue as a going concern.
To carry out planned operations, the Company must raise additional
funds through additional equity and/or debt issuances or through profitable operations. There can be no assurance that this capital
or positive operational income will be available to the Company, and if it is not, the Company may be forced to curtail or cease
exploration and development activities. The consolidated financial statements do not include any adjustments that might result
from the outcome of this uncertainty (see also Note 13).
Note
2 - Summary of Significant Accounting Policies
A.
Consolidated Financial Statements in United States Dollars
The
currency of the primary economic environment in which the operations of the Company are conducted is the United States dollar
(“dollar”). Therefore, the dollar has been determined to be the Company’s functional currency. Non-dollar transactions
and balances have been translated into dollars in accordance with the principles set forth in Accounting Standards Codification
(“ASC”) 830 “Foreign Currency Matters.” Transactions in foreign currency (primarily in New Israeli Shekels
– “NIS”) are recorded at the exchange rate as of the transaction date. Monetary assets and liabilities denominated
in foreign currency are translated on the basis of the representative rate of exchange at the balance sheet date. Non-monetary
assets and liabilities denominated in foreign currency are stated at historical exchange rates. All exchange gains and losses
from re-measurement of monetary balance sheet items denominated in non-dollar currencies are reflected in the statement of operations
as they arise.
B.
Cash and Cash Equivalents
The
Company maintains cash balances with six banks, of which three banks are located in the United States, one in the United Kingdom,
and two in Israel. For purposes of the statement of cash flows and balance sheet, the Company considers all highly liquid investments
with a maturity of three months or less to be cash equivalents. At times, the Company maintains deposits in financial institutions
in excess of federally insured limits. The Company has not experienced any losses in such accounts and does not believe it is
exposed to any significant credit risk on cash.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
C.
Fixed Short-Term Time Deposits
Interest
bearing deposits for a period which exceeds three months but not more than 12 months and are not restricted are classified as
Fixed Short-Term time deposits.
D.
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.
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 2018, the
Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain hydrocarbons
in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash
impairment charge to its unproved oil and gas properties of $30,906,000. The Company recorded a post-impairment charge of $314,000
for the year ended December 31, 2019 (see note 4). During the year ended December 31, 2020, 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 $15,526,000 and $10,637,000 as of December 31, 2020, and 2019, respectively.
F.
Property and Equipment
Property and equipment other than oil and
gas property and equipment is recorded at cost and depreciated by the straight-line method over its estimated useful life of 3
to 14 years. Depreciation charged to expense amounted to $60,000, and $49,000 for the years ended December 31, 2020, and 2019,
respectively. See Footnote 2R for a discussion of the purchase of our drilling rig and related equipment.
G.
Assets Held for Severance Benefits
Assets
held for employee severance benefits represent contributions to severance pay funds and insurance policies that are recorded
at their current redemption value.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
H.
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 revenues and expenses. Such estimates include
the valuation of unproved oil and gas properties, deferred tax assets, asset retirement obligations 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.
I.
Income Taxes
Income taxes are accounted for under the asset and liability
method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between
the consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating
loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled (see Note 9). The effect
on deferred tax assets and liabilities of a change in tax rates is recognized in the statements of operations in the period that
includes the enactment date.
Based
on Accounting Standards Codification (ASC) 740-10-25-6 “Income Taxes,” the Company recognizes the effect of income
tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured
at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in
the period in which the change in judgment occurs. The Company accounts for interest and penalties related to unrecognized
tax benefits, if and when required, as part of income tax expense in the statements of operations. No liability for unrecognized
tax benefits was recognized as of December 31, 2020, and 2019.
J.
Environmental Costs and Loss Contingencies
Liabilities
for loss contingencies, including environmental remediation costs not within the scope of Financial Accounting Standards Board
(FASB) ASC Subtopic 410-20, Asset Retirement Obligations and Environmental Obligations – Asset Retirement Obligations, arising
from claims, assessments, litigation, fines, and penalties and other sources, are recorded when probable that a liability has
been incurred and the amount of the assessment and/or remediation can be reasonably estimated. Legal costs incurred in connection
with loss contingencies are expensed as incurred. Recoveries of environmental remediation costs from third parties that are probable
of realization are separately recorded as assets, and are not offset against the related environmental liability.
Accruals
for estimated losses from environmental remediation obligations generally are recognized no later than completion of the remedial
feasibility study. Such accruals are adjusted as further information develops or circumstances change. Costs of expected future
expenditures for environmental remediation obligations are not discounted to their present value.
K. Asset
Retirement Obligation
Obligations
for dismantlement, restoration and removal of facilities and tangible equipment at the end of oil and gas property’s useful
life are recorded based on the estimate of the fair value of the liabilities in the period in which the obligation is incurred.
This requires the use of management’s estimates with respect to future abandonment costs, inflation, market risk premiums,
useful life and cost of capital. The estimate of asset retirement obligations does not give consideration to the value the related
assets could have to other parties. The obligation is recorded if sufficient information about the timing and (or) method of settlement
is available to reasonably estimate fair value (see Note 11C).
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
L.
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 10,308,375 and 9,884,762 Common Stock equivalents in 2020, and 2019 respectively, would be anti-dilutive.
M.
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.
N.
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.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
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 December 31, 2020 and 2019, the carrying amounts of these instruments approximated their fair values because of the short-term
nature of these instruments. Derivative instruments are carried at fair value, generally estimated using the Binomial Model.
O.
Derivative Liabilities
In
accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities
from Equity, the embedded derivatives associated with the Convertible Bonds are accounted for as a liability during the term
of the related Convertible Bonds (see Note 8).
P.
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 6,
Stockholders’ Equity.
Q.
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
fiscal years ending December 2020 and 2019, respectively, with the exception of recurring monthly consulting fees paid to certain
management personnel.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
R. 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. We remitted to the Seller $250,000 on February 6, 2020 as earnest money
towards the purchase price. The Closing anticipated by the Agreement took place on March 12, 2020 by the Seller’s execution
and delivery of a Bill of Sale to us. On March 13, 2020, the Seller retained the earnest money deposit, and the Company remitted
$4,350,000 to the seller towards the purchase price and $1,000,000 (the “Holdback Amount”) was deposited in escrow
with American Stock Transfer and Trust Company LLC, as escrow agent, through November 30, 2020, or as extended by mutual agreement
of the parties, pending a determination, if any, by us of any operating deficiency in the drilling rig. 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.
Since the rig was purchased and closed during March 2020, this
purchase was recorded on Zion’s books as a long-term fixed asset as a component of Property and Equipment. 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.
The $540,000 in spare parts was the original
cost to CED. These items were received and counted by Zion upon receipt. All records and files are maintained by Zion. Zion plans
to obtain a physical count of the equipment items at the end of each quarter, or as close to such date as practical, in accordance
with our normal procedures.
Zion will use the First In First Out (“FIFO”) method
of accounting for the inventory spare parts, meaning that the earliest items purchased will be the first item charged to the well
in which the inventory spare parts gets consumed.
It is also noteworthy that various components
and systems on the rig will be subject to certifications by the manufacturer to ensure that the rig is maintained at optimal levels.
Per standard practice in upstream oil and gas, each certification performed on our drilling rig increases the useful life of the
rig by five years. The costs of each certification will be added to the drilling rig account and our straight-line amortization
will be adjusted accordingly.
I-35 Drilling Rig & Associated Equipment
31 December 2020
|
|
12 Month Period 12/31/2020
|
|
|
|
I-35 Drilling Rig
|
|
|
Rig Spare Parts
|
|
|
Other Drilling
Assets
|
|
|
Total
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
31 December 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Purchase Price (1)
|
|
|
4,600
|
|
|
|
-
|
|
|
|
-
|
|
|
|
4,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Cash as Holdback in Escrow (1)
|
|
|
500
|
|
|
|
500
|
|
|
|
-
|
|
|
|
1,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase Price Allocations
|
|
|
(88
|
)
|
|
|
40
|
|
|
|
48
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capitalized Costs (2)
|
|
|
1,481
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,481
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Additions
|
|
|
-
|
|
|
|
158
|
|
|
|
329
|
|
|
|
486
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset Disposals
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31 December 2020
|
|
|
6,494
|
|
|
|
698
|
|
|
|
376
|
|
|
|
7,568
|
|
(1)
|
These are the initial cash payments for the purchase of the I-35 drilling rig in early 2020
|
(2)
|
Capitalized costs include inspection, quarantine, labor, transportation, insurance, and other costs required to place the I-35 drilling rig in service initially, per GAAP.
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
2 - Summary of Significant Accounting Policies (cont’d)
S.
Recently Adopted Accounting Pronouncements
ASU
2016-02 and ASU 2018-01 – Leases (Topic 842)
In
February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842) (“ASU
2016-02”) in order to increase transparency and comparability among organizations by recognizing lease assets and lease
liabilities on the balance sheet for those leases classified as operating leases under previous GAAP. ASU 2016-02 requires that
a lessee should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right
to use the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after
December 15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption
is permitted. Zion adopted ASU 2016-02 in the first quarter of 2019. Presently, Zion has operating leases for office space in
Dallas, Texas and in Caesarea, Israel plus various leases for motor vehicles. These leases have been accounted for under ASU 2016-02
in 2019 and 2020 by establishing a right-of-use asset and a corresponding current lease liability and non-current lease liability.
Zion is not subject to any loan covenants and therefore, the increase in assets and liabilities does not have a material impact
on its business.
In
January 2018, the FASB issued ASU 2018-01, “Land Easement Practical Expedient for Transition to Topic 842.”
The
amendments in this Update provide an optional transition practical expedient to not evaluate under Topic 842 existing or expired
land easements that were not previously accounted for as leases under Topic 840, Leases. An entity that elects this practical
expedient should evaluate new or modified land easements under Topic 842 beginning at the date that the entity adopts Topic 842.
An entity that does not elect this practical expedient should evaluate all existing or expired land easements in connection with
the adoption of the new lease requirements in Topic 842 to assess whether they meet the definition of a lease. The Company does
not have any land easements and believes that this ASU 2018-01 has no effect on the Company.
ASU
2016-15 – “Classification of Certain Cash Receipts and Cash Payments”
In August 2016, the FASB issued AS 2016-15, “Classification
of Certain Cash Receipts and Cash Payments”, which clarifies how certain cash receipts and cash payments are presented and
classified in the statement of cash flows. The effective date for ASU 2016-15 is for fiscal years beginning after December 15,
2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does
not believe that this ASU has any impact on our consolidated financial statements.
ASU
2018-05 – Income Taxes (Topic 740)
In March 2018, the FASB issued ASU 2018-05, “Amendments
to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This ASU expresses the view of the staff regarding
application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017, the date on which the Tax Cuts
and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget
for Fiscal Year 2018) was signed into law. The Company is currently evaluating the impact of adopting ASU 2018-05 on our consolidated
financial statements.
The Company does not believe that the adoption of any recently
issued accounting pronouncements in 2020 had a significant impact on our consolidated financial position, results of operations,
or cash flow, except for ASC Update No. 2016-02—Leases, which requires organizations to recognize lease assets and lease
liabilities on the balance sheet for leases classified as operating leases under previous GAAP. ASU 2016-02 requires that a lessee
should recognize a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use
the underlying asset for the lease term on the balance sheet. ASU 2016-02 is effective for fiscal years beginning after December
15, 2018 (including interim periods within those periods) using a modified retrospective approach and early adoption is permitted.
The Company adopted ASU 2016-02 in the first quarter of 2019. See Note 10 for more complete details on balances at December 31,
2020, and 2019.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
3 - Provision for Severance Pay
Israeli
law generally requires payment of severance pay upon dismissal of an Israeli employee or upon termination of employment in certain
other circumstances. The following plans relate to the employees in Israel:
|
A.
|
The
liability in respect of certain of the Company’s employees is discharged in part by participating in a defined contribution
pension plan and making regular deposits with recognized pension funds. The deposits are based on certain components of the
salaries of the said employees. The custody and management of the amounts so deposited are independent of the Company’s
control.
|
|
B.
|
The
Company’s liability for severance pay for its Israeli employees is calculated pursuant to Israeli severance pay law
based on the most recent salary of the employee multiplied by the number of years of employment, as of the balance sheet
date. Employees are entitled to one month’s salary for each year of employment, or a portion thereof. Certain senior
executives are entitled to receive additional severance pay. The Company’s liability for all of its Israeli employees
is partly provided for by monthly deposits in insurance policies and the remainder by an accrual in the consolidated
financial statements. The value of these policies is recorded as an asset in the Company’s balance sheet.
|
The
deposited funds include profits/loss accumulated up to the balance sheet date. The value of the deposited funds is based on current
redemption value of these policies.
|
C.
|
Withdrawals
from the funds may be made only upon termination of employment.
|
|
D.
|
As
of December 31, 2020, and 2019, the Company had a provision for severance pay of $505,000 and $402,000, respectively, of which
all was long-term. As of December 31, 2020, and 2019, the Company had $446,000 and $371,000, respectively, deposited in funds
managed by major Israeli financial institutions which are earmarked to cover severance pay liability. Such deposits are not
considered to be “plan assets” and are therefore included in other assets.
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
4 - Unproved Oil and Gas Properties, Full Cost Method
Unproved
oil and gas properties, under the full cost method, are comprised as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
4,232
|
|
|
|
1,227
|
|
Capitalized salary costs
|
|
|
1,967
|
|
|
|
1,759
|
|
Capitalized interest costs
|
|
|
1,314
|
|
|
|
990
|
|
Legal and seismic costs, license fees and other preparation costs
|
|
|
7,974
|
|
|
|
6,636
|
|
Other costs
|
|
|
39
|
|
|
|
25
|
|
|
|
|
15,526
|
|
|
|
10,637
|
|
Impairment
of unproved oil and gas properties comprised as follows:
|
|
For the year ended
December
31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
-
|
|
|
|
244
|
|
Capitalized salary costs
|
|
|
-
|
|
|
|
-
|
|
Legal and seismic costs, license fees and other preparation costs
|
|
|
-
|
|
|
|
-
|
|
Other costs
|
|
|
-
|
|
|
|
70
|
|
|
|
|
-
|
|
|
|
314
|
|
Changes
in Unproved oil and gas properties during the years ended December 31, 2020, and 2019, are as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Excluded from amortization base:
|
|
|
|
|
|
|
Drilling costs, and other operational related costs
|
|
|
3,005
|
|
|
|
229
|
|
Capitalized salary costs
|
|
|
208
|
|
|
|
180
|
|
Capitalized interest costs
|
|
|
324
|
|
|
|
313
|
|
Legal and seismic costs, license fees and other preparation costs
|
|
|
1,338
|
|
|
|
3,420
|
|
Other costs
|
|
|
14
|
|
|
|
95
|
|
Impairment of unproved oil and gas properties
|
|
|
-
|
|
|
|
(314
|
)
|
|
|
|
*4,889
|
|
|
|
*3,923
|
|
*
|
Inclusive
of non-cash amounts of approximately $1,676,000, and $332,000 during the years 2020, and 2019, respectively
|
Please
refer to Footnote 1 – Nature of Operations and Going Concern for more information about Zion’s exploration activities.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
5 - Accrued Liabilities
Accrued
liabilities are comprised as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Drilling provisions (a)
|
|
|
1,340
|
|
|
|
16
|
|
Employees related
|
|
|
198
|
|
|
|
357
|
|
Interest on convertible bonds
|
|
|
216
|
|
|
|
217
|
|
Audit and Legal Costs
|
|
|
162
|
|
|
|
160
|
|
Other
|
|
|
71
|
|
|
|
76
|
|
|
|
|
1,987
|
|
|
|
826
|
|
|
(a)
|
This includes $1,000,000 in accrued invoices related to
rig purchases. Subsequently, on January 6, 2021, Zion completed its acceptance testing of the I-35 drilling rig and this amount
was remitted to Central European Drilling on January 8, 2021.
|
Note
6 - Stockholders’ Equity
A.
2011 Equity Incentive Stock Option Plan
In June 2011, the Company’s shareholders
authorized the adoption of the Zion Oil & Gas, Inc. 2011 Equity Incentive Plan for employees and consultants (the “2011
Plan”), initially reserving for issuance thereunder 2,000,000 shares of Common Stock.
The
2011 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 2011 plan also permits
cash payments under certain conditions.
The
compensation committee of the Board of 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 10 years from the date of grant.
In
June 2015, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Equity Incentive Plan for employees and consultants reserving for issuance thereunder an additional 4,000,000 shares of Common
Stock for a total of 6,000,000 shares of Common Stock available thereunder.
In
June 2017, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Plan for employees and consultants reserving for issuance thereunder an additional 10,000,000 shares of Common Stock for a total
of 16,000,000 shares of Common Stock available thereunder.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
During
the year ended December 31, 2020, the Company granted the following non-qualified options from the 2011 Plan for employees, directors
and consultants, to purchase as non-cash compensation (taxable on the date of exercise):
|
i.
|
Options
to purchase 110,000 shares of Common Stock to five senior officers at an exercise price of $0.01 per share. The options vested
upon grant and are exercisable through January 6, 2030. The fair value of the options at the date of grant amounted to approximately
$57,000.
|
|
ii.
|
Options
to purchase 10,000 shares of Common Stock were granted to one staff member at an exercise price of $0.01 per share. The options
vested upon grant and are exercisable through September 1, 2030. The fair value of the options at the date of grant amounted
to approximately $2,000.
|
During
the year ended December 31, 2019, the Company granted the following non-qualified options from the 2011 Plan for employees, directors
and consultants, to purchase as non-cash compensation (taxable on the date of exercise):
|
i.
|
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 6, 2029. The fair value of the options at the date of grant amounted to approximately
$10,000.
|
|
ii.
|
Options
to purchase 100,000 shares of Common Stock were granted to one senior officer at an exercise price of $0.01 per share. The
options are exercisable through May 1, 2029. However, the vesting and exercisability of these options is subject to the following
schedule: (a) 50,000 options vest on September 1, 2019 and (b) the remaining 50,000 options vest on January 1, 2020. The fair
value of the options at the date of grant amounted to $55,000.
|
|
iii.
|
Options
to purchase 100,000 shares of Common Stock were granted to one senior officer at an exercise
price of $0.01 per share. The options vested upon grant and are exercisable through July
1, 2029. The fair value of the options at the date of grant amounted to approximately
$35,000.
|
|
iv.
|
Options
to purchase 10,000 shares of Common Stock were granted to one staff member at an exercise price of $0.01 per share. The options
vested upon grant and are exercisable through September 1, 2029. The fair value of the options at the date of grant amounted
to approximately $3,000.
|
|
v.
|
Options
to purchase 25,000 shares of Common Stock were granted to one senior officer at an exercise
price of $0.28 per share. The options vested upon grant and are exercisable through September
3, 2029. The fair value of the options at the date of grant amounted to approximately
$7,000.
|
|
vi.
|
Options
to purchase 215,000 shares of Common Stock were granted to 10 staff members and consultants
at an exercise price of $0.01 per share. The options vested upon grant and are exercisable
through September 18, 2029. The fair value of the options at the date of grant amounted
to approximately $65,000.
|
|
vii.
|
Options
to purchase 510,000 shares of Common Stock were granted to 19 senior officers, staff
members and consultants at an exercise price of $0.01 per share. The options vested upon
grant and are exercisable through November 18, 2029. The fair value of the options at
the date of grant amounted to approximately $73,000.
|
|
viii.
|
Options
to purchase 150,000 shares of Common Stock were granted to one senior officer and one consultant at an exercise price of $0.16
per share. The options vested upon grant and are exercisable through December 10, 2029. The fair value of the options at the
date of grant amounted to approximately $18,000.
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
B.
2011 Non-Employee Directors Stock Option Plan
In
June 2011, the Company’s shareholders authorized the adoption of the Zion Oil & Gas, Inc. 2011 Non-Employee Directors
Stock Option Plan for non-employee directors (the “2011 Directors’ Plan”), initially reserving for issuance
thereunder 1,000,000 shares of common stock. Under the 2011 Directors’ Plan, only qualified options may be issued, and they
will be exercisable for a period of six years from the date of grant.
The
Compensation Committee of the Board of Directors is responsible for determining the type of award, when to grant awards, 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 six years from the date of grant.
In
June 2015, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Directors Plan, reserving for issuance thereunder an additional 2,000,000 shares of Common Stock for a total of 3,000,000 shares
of Common Stock available thereunder.
In
June 2017, the Company’s stockholders approved an increase in the number of shares of Common Stock available under the 2011
Directors Plan, reserving for issuance thereunder an additional 4,000,000 shares of Common Stock for a total of 7,000,000 shares
of Common Stock available thereunder.
During
the year ended December 31, 2020, the Company did not grant any qualified (market value) options from the 2011 Non-Employee Directors
Stock Option Plan to its directors.
During
the year ended December 31, 2019, the Company granted the following qualified (market value) options from the 2011 Non-Employee
Directors Stock Option Plan for directors to purchase as non-cash compensation:
|
i.
|
Options
to purchase 25,000 shares of Common Stock to one board member at an exercise price of
$0.28 per share. The options vested upon grant and are exercisable through September
3, 2025. The fair value of the options at the date of grant amounted to approximately
$7,000.
|
|
ii.
|
Options
to purchase 25,000 shares of Common Stock to one board member at an exercise price of
$0.18 per share. The options vested upon grant and are exercisable through December 2,
2025. The fair value of the options at the date of grant amounted to approximately $3,000.
|
|
iii.
|
Options
to purchase 340,000 shares of Common Stock to four board members at an exercise price of $0.16 per share. The options vested
upon grant and are exercisable through December 10, 2025. The fair value of the options at the date of grant amounted to approximately
$37,000.
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
C.
Warrants and Options
The
Company has reserved 10,798,789 shares of common stock as of December 31, 2020, for the exercise of warrants and options
to employees and non-employees, of which 10,798,789 are exercisable. These warrants and options could potentially dilute basic
earnings per share in future years. The warrants and options exercise prices and expiration dates are as follows:
|
|
Exercise
Price
|
|
|
Number
of
Shares
|
|
|
Expiration
Date
|
|
Warrants
or
Options
|
|
|
US$
|
|
|
|
|
|
|
|
|
To
non-employees
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
October
01, 2027
|
|
Options
|
|
|
|
0.01
|
|
|
|
7,500
|
|
|
January
01, 2028
|
|
Options
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
February
28, 2028
|
|
Options
|
|
|
|
0.01
|
|
|
|
80,000
|
|
|
November
18, 2029
|
|
Options
|
|
|
|
0.16
|
|
|
|
75,000
|
|
|
December
10, 2029
|
|
Options
|
|
|
|
1.67
|
|
|
|
105,000
|
|
|
October
01, 2024
|
|
Options
|
|
|
|
1.70
|
|
|
|
115,000
|
|
|
December
20, 2022
|
|
Options
|
|
|
|
2.61
|
|
|
|
97,000
|
|
|
December
04, 2021
|
|
Options
|
To
employees and directors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
November
11, 2023
|
|
Options
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
June
11, 2024
|
|
Options
|
|
|
|
0.01
|
|
|
|
20,000
|
|
|
June
05, 2026
|
|
Options
|
|
|
|
0.01
|
|
|
|
130,000
|
|
|
January
01, 2027
|
|
Options
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
April
17, 2027
|
|
Options
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
October
01, 2027
|
|
Options
|
|
|
|
0.01
|
|
|
|
90,000
|
|
|
January
01, 2028
|
|
Options
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
January
04, 2028
|
|
Options
|
|
|
|
0.01
|
|
|
|
6,000
|
|
|
April
06, 2028
|
|
Options
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
January
6, 2029
|
|
Options
|
|
|
|
0.01
|
|
|
|
50,000
|
|
|
May
01, 2029
|
|
Options
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
September
01, 2029
|
|
Options
|
|
|
|
0.01
|
|
|
|
125,000
|
|
|
September
18, 2029
|
|
Options
|
|
|
|
0.01
|
|
|
|
290,000
|
|
|
November
18, 2029
|
|
Options
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
January
05, 2030
|
|
Options
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
September
02, 2030
|
|
Options
|
|
|
|
0.16
|
|
|
|
340,000
|
|
|
December
10, 2025
|
|
Options
|
|
|
|
0.16
|
|
|
|
75,000
|
|
|
December
10, 2029
|
|
Options
|
|
|
|
0.18
|
|
|
|
25,000
|
|
|
December
02, 2025
|
|
Options
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
September
03, 2025
|
|
Options
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
September
03, 2029
|
|
Options
|
|
|
|
1.33
|
|
|
|
25,000
|
|
|
May
01, 2023
|
|
Options
|
|
|
|
1.38
|
|
|
|
105,307
|
|
|
January
02, 2025
|
|
Options
|
|
|
|
1.55
|
|
|
|
250,000
|
|
|
June
05, 2022
|
|
Options
|
|
|
|
1.67
|
|
|
|
300,943
|
|
|
October
01, 2024
|
|
Options
|
|
|
|
1.70
|
|
|
|
103,500
|
|
|
December
20, 2022
|
|
Options
|
|
|
|
1.75
|
|
|
|
250,000
|
|
|
June
07, 2023
|
|
Options
|
|
|
|
1.78
|
|
|
|
25,000
|
|
|
September
04, 2024
|
|
Options
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
May
01, 2021
|
|
Options
|
|
|
|
2.31
|
|
|
|
250,000
|
|
|
January
01, 2024
|
|
Options
|
|
|
|
2.61
|
|
|
|
374,500
|
|
|
December
04, 2021
|
|
Options
|
|
|
|
4.15
|
|
|
|
25,000
|
|
|
July
02, 2024
|
|
Options
|
To
investors
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01
|
|
|
|
437,875
|
|
|
February
25, 2023
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
243,853
|
|
|
May
02, 2023
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
545,900
|
|
|
October
29, 2023
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
2,144,099
|
|
|
March
03, 2023
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
359,435
|
|
|
August
14, 2023
|
|
Warrants
|
|
|
|
1.00
|
|
|
|
240,068
|
|
|
January
08, 2023
|
|
Warrants
|
|
|
|
2.00
|
|
|
|
1,498,804
|
|
|
January
31, 2023
|
|
Warrants
|
|
|
|
2.00
|
|
|
|
517,875
|
|
|
August
25, 2023
|
|
Warrants
|
|
|
|
3.00
|
|
|
|
640,730
|
|
|
June
29, 2023
|
|
Warrants
|
|
|
|
5.00
|
|
|
|
372,400
|
|
|
April
19, 2023
|
|
Warrants
|
Total
outstanding
|
|
|
1.45
|
*
|
|
|
10,798,789
|
|
|
|
|
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
The
stock option transactions since January 1, 2019 are shown in the table below:
|
|
Number
of
shares
|
|
|
Weighted
Average
exercise
price
|
|
|
|
|
|
|
US$
|
|
Outstanding, December 31, 2018
|
|
|
4,788,443
|
|
|
|
1.37
|
|
|
|
|
|
|
|
|
|
|
Changes during 2019 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others
|
|
|
1,525,000
|
|
|
|
0.06
|
|
Expired/Cancelled/Forfeited
|
|
|
(410,693
|
)
|
|
|
2.06
|
|
Exercised
|
|
|
(707,500
|
)
|
|
|
0.01
|
|
Outstanding, December 31, 2019
|
|
|
5,195,250
|
|
|
|
1.12
|
|
|
|
|
|
|
|
|
|
|
Changes during 2020 to:
|
|
|
|
|
|
|
|
|
Granted to employees, officers, directors and others*
|
|
|
120,000
|
|
|
|
0.01
|
|
Expired/Cancelled/Forfeited
|
|
|
(865,000
|
)
|
|
|
1.74
|
|
Exercised
|
|
|
(652,500
|
)
|
|
|
0.01
|
|
Outstanding, December 31, 2020
|
|
|
3.797,750
|
|
|
|
1.14
|
|
Exercisable, December 31, 2020
|
|
|
3,797,750
|
|
|
|
1.14
|
|
The
aggregate intrinsic value of options exercised during 2020, and 2019 was approximately $137,000, and $155,000 respectively.
The
aggregate intrinsic value of the outstanding options and warrants as of December 31, 2020, totaling 10,798,789 was approximately
$1,757,000.
The
aggregate intrinsic value of the outstanding options and warrants as of December 31, 2019, totaling 12,217,320 was approximately
$339,000.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
The
following table summarizes information about stock options outstanding as of December 31, 2020:
Shares
underlying outstanding options (non-vested)
|
|
|
Shares
underlying outstanding options (fully vested)
|
|
Range
of
exercise
price
|
|
|
Number
outstanding
|
|
|
Weighted
average remaining contractual
life (years)
|
|
|
Weighted
Average
Exercise
price
|
|
|
Range
of exercise
price
|
|
|
Number
Outstanding
|
|
|
Weighted
average
remaining contractual
life (years)
|
|
|
Weighted
Average
Exercise
price
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
US$
|
|
|
|
|
|
|
|
|
US$
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
2.86
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
5,000
|
|
|
|
3.45
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
20,000
|
|
|
|
5.42
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
130,000
|
|
|
|
6.00
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
|
6.29
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
40,000
|
|
|
|
6.74
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
97,500
|
|
|
|
7.00
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
7.00
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
30,000
|
|
|
|
7.15
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
6,000
|
|
|
|
7.26
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
25,000
|
|
|
|
8.01
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
50,000
|
|
|
|
8.33
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10.000
|
|
|
|
8.66
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
125,000
|
|
|
|
8.71
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
370,000
|
|
|
|
8.88
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
60,000
|
|
|
|
9.01
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.01
|
|
|
|
10,000
|
|
|
|
9.67
|
|
|
|
0.01
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.16
|
|
|
|
340,000
|
|
|
|
4.94
|
|
|
|
0.16
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.16
|
|
|
|
150,000
|
|
|
|
8.94
|
|
|
|
0.16
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.18
|
|
|
|
25,000
|
|
|
|
4.91
|
|
|
|
0.18
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
4.67
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
0.28
|
|
|
|
25,000
|
|
|
|
8.67
|
|
|
|
0.28
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.33
|
|
|
|
25,000
|
|
|
|
2.32
|
|
|
|
1.33
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.38
|
|
|
|
105,307
|
|
|
|
4.01
|
|
|
|
1.38
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.55
|
|
|
|
250,000
|
|
|
|
1.43
|
|
|
|
1.55
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.67
|
|
|
|
405,943
|
|
|
|
3.75
|
|
|
|
1.67
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.70
|
|
|
|
218,500
|
|
|
|
1.97
|
|
|
|
1.70
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.75
|
|
|
|
250,000
|
|
|
|
2.43
|
|
|
|
1.75
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1.78
|
|
|
|
25,000
|
|
|
|
3.68
|
|
|
|
1.78
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.03
|
|
|
|
25,000
|
|
|
|
0.33
|
|
|
|
2.03
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2.31
|
|
|
|
250,000
|
|
|
|
3.00
|
|
|
|
2.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.61
|
|
|
|
471,500
|
|
|
|
0.93
|
|
|
|
2.61
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
4.15
|
|
|
|
25,000
|
|
|
|
3.50
|
|
|
|
4.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0.01-4.15
|
|
|
|
3,797,750
|
|
|
|
|
|
|
|
1.14
|
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - 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 year
ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of underlying
stock at grant date
|
|
$
|
0.50
|
|
|
$
|
0.24
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
90%-103%
|
|
|
|
87%-113%
|
|
Risk-free interest rates
|
|
|
0.26%-1.61%
|
|
|
|
1.35%-2.53%
|
|
Expected life (in years)
|
|
|
5.00
|
|
|
|
3.00-5.34
|
|
Weighted-average grant date fair value
|
|
$
|
0.49
|
|
|
$
|
0.21
|
|
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 year
ended
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Weighted-average fair value of underlying stock at grant date
|
|
$
|
—
|
|
|
$
|
0.16
|
|
Dividend yields
|
|
|
—
|
|
|
|
—
|
|
Expected volatility
|
|
|
—
|
|
|
|
81%-82%
|
|
Risk-free interest rates
|
|
|
—
|
|
|
|
1.80%-1.85%
|
|
Expected life (in years)
|
|
|
—
|
|
|
|
10.00
|
|
Weighted-average grant date fair value
|
|
$
|
—
|
|
|
$
|
0.15
|
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
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.
D.
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 year ended December 31,
|
2020
|
|
2019
|
US$
thousands
|
|
US$
thousands
|
59
|
|
286
|
The
following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:
For
the year ended December 31,
|
2020
|
|
2019
|
US$
thousands
|
|
US$
thousands
|
—
|
|
33
|
The
following table sets forth information about the compensation cost of option issuances recognized and capitalized to Unproved
Oil & Gas properties:
For
the year ended December 31,
|
2020
|
|
2019
|
US$
thousands
|
|
US$
thousands
|
—
|
|
3
|
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
E.
Dividend Reinvestment and Stock Purchase Plan (“DSPP”)
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.
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 (the “Unit Program”) 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.
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.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
On
May 22, 2017, the Company launched a new unit offering (the “New Unit Program”). The New Unit Program 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 New Unit Program
terminated on July 12, 2017. This New Unit 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 Option Program which terminated on December 6, 2017. This Unit Option Program
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, 2021 at a per share exercise
price of $1.00. 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.
On
February 1, 2018, the Company launched another Unit Option Program which terminated on February 28, 2018. The Unit Option 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.”
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
The
warrants became exercisable on April 2, 2018 and continue 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 Option Program, and it terminated on September 26, 2018. The Unit Option Program
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 Option Program, and it terminated on January 23, 2019. The Unit Option Program
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.”
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - 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.
On April 24, 2019, the Company initiated
another Unit Option Program and it terminated on June 26, 2019, after the Company, on June 5, 2019, extended the termination date
of the Unit Option Program.
The
Unit Option Program 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 continue 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. During 2020,
the participant contributed approximately 85% of the cash raised through the DSPP. 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, 2022 at a per share exercise
price of $1.00.
On February 1, 2021, the Company initiated
its most recent Unit Option Program and it terminated on March 17, 2021.
The Unit Option Program
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.”
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
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.
The company raised approximately $2,164,000
from the period January 1, 2021 through March 22, 2021, under the DSPP program.
For
the years ended December 31, 2020, and 2019, approximately $28,390,000, and $14,232,000 was raised under the DSPP program, respectively.
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-K, are not tradeable and are used internally for classification and accounting purposes only.
F.
Subscription Rights Offering
On
April 2, 2018 the Company announced an offering (“2018 Subscription Rights Offering”) through American Stock Transfer
& Trust Company, LLC (the “Subscription Agent”), at no cost to the shareholders, of non-transferable Subscription
Rights (each “Right” and collectively, the “Rights”) to purchase its securities to persons who owned shares
of our Common Stock on April 13, 2018 (“the Record Date”). Pursuant to the 2018 Subscription Rights Offering, each
holder of shares of common stock on the Record Date received non-transferable Subscription Rights, with each Right comprised
of one share of the Company Common Stock, par value $0.01 per share (the “Common Stock”) and one Common
Stock Purchase Warrant to purchase an additional one share of Common Stock. Each Right could be exercised or subscribed at a per
Right subscription price of $5.00. Each Warrant affords the investor the opportunity to purchase one share of the Company
Common Stock at a warrant exercise price of $3.00. The warrant is referred to as “ZNWAI.”
The
warrants became exercisable on June 29, 2018 and continue to be exercisable through June 29, 2020 at a per share exercise price
of $3.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration
date of June 29, 2019 to June 29, 2020.
On
May 29, 2019, the Company extended the termination date of the ZNWAI Warrant by one (1) year from the expiration date of June
29, 2020 to June 29, 2021.
On
September 15, 2020, the Company extended the termination date of the ZNWAI Warrant by two (2) years from the expiration date of
June 29, 2021 to June 29, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value
assigned to this extension.
Each
shareholder received .10 (one tenth) of a Subscription Right (i.e. one Subscription Right for each 10 shares owned) for each share
of the Company’s Common Stock owned on the Record Date.
The
2018 Subscription Rights Offering terminated on May 31, 2018. The Company raised net proceeds of approximately $3,038,000, from
the subscription of Rights, after deducting fees and expenses of $243,000 incurred in connection with the rights offering.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
G.
Warrant Table
The
Warrants transactions since January 1, 2019 are shown in the table below:
Changes
during 2019 to:
Warrants
|
|
Exercise
Price
|
|
|
Warrant Termination Date
|
|
Outstanding Balance, 12/31/2018
|
|
|
Warrants Issued
|
|
|
Warrants Exercised
|
|
|
Warrants Expired
|
|
|
Outstanding Balance, 12/31/2019
|
|
ZNWAA
|
|
$
|
2.00
|
|
|
01/31/2023
|
|
|
1,498,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,498,804
|
|
ZNWAD
|
|
$
|
1.00
|
|
|
05/02/2023
|
|
|
243,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243,853
|
|
ZNWAE
|
|
$
|
1.00
|
|
|
05/02/2023
|
|
|
2,144,510
|
|
|
|
-
|
|
|
|
(40
|
)
|
|
|
-
|
|
|
|
2,144,470
|
|
ZNWAF
|
|
$
|
1.00
|
|
|
08/14/2023
|
|
|
359,610
|
|
|
|
-
|
|
|
|
(25
|
)
|
|
|
-
|
|
|
|
359,585
|
|
ZNWAG
|
|
$
|
1.00
|
|
|
01/08/2023
|
|
|
240,578
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
240,578
|
|
ZNWAH
|
|
$
|
5.00
|
|
|
04/19/2023
|
|
|
372,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
372,400
|
|
ZNWAI
|
|
$
|
3.00
|
|
|
06/29/2023
|
|
|
640,735
|
|
|
|
-
|
|
|
|
(5
|
)
|
|
|
-
|
|
|
|
640,730
|
|
ZNWAJ
|
|
$
|
1.00
|
|
|
10/29/2023
|
|
|
546,050
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
546,000
|
|
ZNWAK
|
|
$
|
0.01
|
|
|
02/25/2023
|
|
|
-
|
|
|
|
673,600
|
|
|
|
(215,875
|
)
|
|
|
-
|
|
|
|
457,725
|
|
ZNWAL
|
|
$
|
2.00
|
|
|
08/26/2023
|
|
|
-
|
|
|
|
517,925
|
|
|
|
-
|
|
|
|
-
|
|
|
|
517,925
|
|
Outstanding warrants
|
|
|
|
|
|
|
|
|
6,046,540
|
|
|
|
1,191,525
|
|
|
|
(215,995
|
)
|
|
|
0
|
|
|
|
7,022,070
|
|
Changes during 2020 to:
Warrants
|
|
Exercise
Price
|
|
|
|
Warrant
Termination Date
|
|
Outstanding
Balance, 12/31/2019
|
|
|
Warrants
Issued
|
|
|
Warrants
Exercised
|
|
|
Warrants
Expired
|
|
|
Outstanding
Balance, 12/31/2020
|
|
ZNWAA
|
|
$
|
2.00
|
|
|
|
01/31/2023
|
|
|
1,498,804
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,498,804
|
|
ZNWAD
|
|
$
|
1.00
|
|
|
|
05/02/2023
|
|
|
243,853
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
243,853
|
|
ZNWAE
|
|
$
|
1.00
|
|
|
|
05/02/2023
|
|
|
2,144,470
|
|
|
|
-
|
|
|
|
(371
|
)
|
|
|
-
|
|
|
|
2,144,099
|
|
ZNWAF
|
|
$
|
1.00
|
|
|
|
08/14/2023
|
|
|
359,585
|
|
|
|
-
|
|
|
|
(150
|
)
|
|
|
-
|
|
|
|
359,435
|
|
ZNWAG
|
|
$
|
1.00
|
|
|
|
01/08/2023
|
|
|
240,578
|
|
|
|
-
|
|
|
|
(510
|
)
|
|
|
-
|
|
|
|
240,068
|
|
ZNWAH
|
|
$
|
5.00
|
|
|
|
04/19/2023
|
|
|
372,400
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
372,400
|
|
ZNWAI
|
|
$
|
3.00
|
|
|
|
06/29/2023
|
|
|
640,730
|
|
|
|
-
|
|
|
|
(100
|
)
|
|
|
-
|
|
|
|
640,630
|
|
ZNWAJ
|
|
$
|
1.00
|
|
|
|
10/29/2023
|
|
|
546,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
546,000
|
|
ZNWAK
|
|
$
|
0.01
|
|
|
|
02/25/2023
|
|
|
457,725
|
|
|
|
-
|
|
|
|
(19,850
|
)
|
|
|
-
|
|
|
|
437,875
|
|
ZNWAL
|
|
$
|
2.00
|
|
|
|
08/26/2023
|
|
|
517,925
|
|
|
|
-
|
|
|
|
(50
|
)
|
|
|
-
|
|
|
|
517,875
|
|
Outstanding
warrants
|
|
|
|
|
|
|
|
|
|
7,022,070
|
|
|
|
-
|
|
|
|
(21,031
|
)
|
|
|
-
|
|
|
|
7,001,039
|
|
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
6 - Stockholders’ Equity (cont’d)
H. Senior Convertible Bonds Rights Offering (October
21, 2015 – March 31, 2016)
On October 21, 2015, the Company filed
with the SEC a prospectus supplement for a rights offering. Under this rights offering, we distributed at no cost, 360,000 non-transferable
subscription rights to subscribe for, on a per right basis, two 10% Convertible Senior Bonds par $100 due May 2, 2021 (the “Notes”),
to shareholders of the Company’s Common Stock on October 15, 2015, the record date for the offering. Each whole subscription
right entitled the participant to purchase two convertible bonds at a purchase price of $100 per bond. Effective October 21, 2015,
the Company executed a Supplemental Indenture, as issuer, with the American Stock Transfer & Trust Company, LLC, a New York
limited liability trust company (“AST”), as trustee for the Notes (the “Indenture”).
On March 31, 2016, the rights offering
terminated.
On May 2, 2016, the Company issued approximately
$3,470,000 aggregate principal amount of convertible bonds or Notes in connection with the rights offering. The Company received
net proceeds of approximately $3,334,000, from the issuance of the Notes, after deducting fees and expenses of $136,000 incurred
in connection with the offering. These costs have been discounted as deferred offering costs (See note 7).
I.
Warrant Descriptions
The
price and the expiration dates for the series of warrants to investors are as follows *:
|
|
|
|
Period of Grant
|
|
|
US$
|
|
|
Expiration Date
|
|
|
|
|
|
|
|
|
|
|
|
ZNWAA Warrants
|
|
B ,C
|
|
|
March 2013 – December 2014
|
|
|
|
2.00
|
|
|
January 31, 2023
|
ZNWAD Warrants
|
|
A,B,C
|
|
|
January 2015 – March 2016
|
|
|
|
1.00
|
|
|
May 02, 2023
|
ZNWAE Warrants
|
|
B,C
|
|
|
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
|
|
|
October 2017 – December 2017
|
|
|
|
1.00
|
|
|
January 08, 2023
|
ZNWAH Warrants
|
|
A,B,C
|
|
|
February
2018
|
|
|
|
5.00
|
|
|
April 2, 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
|
|
B,C
|
|
|
December
2018 – January 2019
|
|
|
|
0.01
|
|
|
February 25, 2023
|
ZNWAL Warrants
|
|
C
|
|
|
July
2019 – August 2019
|
|
|
|
2.00
|
|
|
August 26, 2023
|
*
|
Zion’s ZNWAB Warrants expired on May 2,
2017, and the ZNWAC Warrants expired on May 2, 2018
|
A
|
On December 4, 2018, the Company extended the
termination date of the Warrants by one (1) year.
|
B
|
On May 29, 2019, the Company extended the termination
date of the Warrants by one (1) year.
|
C
|
On September 15, 2020, the Company extended
the termination date of the Warrants by two (2) years.
|
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
7 - Senior Convertible Bonds
Rights
Offering -10% Senior Convertible Notes due May 2, 2021
See
Note 6, Paragraph H for a description of the rights offering.
The
Notes contain a convertible option that gives rise to a derivative liability, which is accounted for separately from the Notes
(see below and Note 6). Accordingly, the Notes were initially recognized at fair value of approximately $1,844,000, which represents
the principal amount of $3,470,000 from which a debt discount of approximately $1,626,000 (which is equal to the fair value of
the convertible option) was deducted.
During
the years ended December 31, 2020, and 2019, the Company recorded approximately $27,000 and $27,000 respectively, in amortization
expense related to the deferred financing costs, approximately $459,000 and $354,000 respectively in debt discount amortization,
net, and approximately $3,000 and $15,000, respectively, related to financing gains associated with notes converted to shares.
The
Notes are governed by the terms of the Indenture. The Notes are senior unsecured obligations of the Company and bear interest
at a rate of 10% per year, payable annually in arrears on May 2 of each year, commencing May 2, 2017. The Notes will mature on
May 2, 2021, unless earlier redeemed by the Company or converted by the holder.
Interest
and principal may be paid, at the Company’s option, in cash or in shares of the Company’s Common Stock. The number
of shares for the payment of interest in shares of Common Stock, in lieu of the cash amount, will be based on the average of the
closing prices of the Company’s Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the record
date for the payment of interest; such record date has been designated and will always be the 10th business day prior
to the interest payment date on May 2 of each year. The number of shares for the payment of principal, in lieu of the cash amount,
shall be based upon the average of the closing price of the Company’s Common Stock as reported by Bloomberg L.P. for the
30 trading days preceding the principal repayment date; such record date has been designated as the trading day immediately prior
to the 30-day period preceding the maturity date of May 2, 2021. Fractional shares were not issued, and the final number of shares
were rounded up to the next whole share.
On May
4, 2020, the Company paid its annual 10% interest to its bondholders of record on April 20, 2020. The interest was paid-in-kind
(“PIK”) in the form of Common Stock. An average of the Company stock price of $0.182 was determined based on the 30
trading days prior to the record date of April 20, 2020. This figure was used to divide into 10% of the par value of the bonds
held by the holders. The Company issued 1,781,504 shares to the accounts of its bondholders.
On May
2, 2019, the Company paid its annual 10% interest to its bondholders of record on April 18, 2019. The interest was paid-in-kind
(“PIK”) in the form of Common Stock. An average of the Company stock price of $0.774 was determined based on the 30
trading days prior to the record date of April 18, 2019. This figure was used to divide into 10% of the par value of the bonds
held by the holders. The Company issued 422,426 shares to the accounts of its bondholders.
At
any time prior to the close of business on the business day immediately preceding April 2, 2021, holders may convert their notes
into Common Stock at the conversion rate of 44 shares per $100 bond (which is equivalent to a conversion rate of approximately
$2.27 per share). The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including,
but not limited to, the issuance of stock dividends and payment of cash dividends.
Beginning
May 3, 2018, the Company was entitled to redeem for cash the outstanding Notes at an amount equal to the principal and accrued
and unpaid interest, plus a 10% premium. No “sinking fund” is provided for the Notes due May 2, 2021, which means
that the Company is not required to periodically redeem or retire the Notes due May 2, 2021.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
7 - Senior Convertible Bonds (cont’d)
Through
the years ended December 31, 2020 and 2019, approximately 28 and 172 convertible bonds of $100 each, respectively, have been converted
at a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 1,200 and 8,000 shares of
its Common Stock during the same period, respectively, and recorded approximately $3,000 and $15,000 in financial income during
the same period.
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
10% Senior Convertible Bonds, on the day
of issuance
|
|
$
|
3,470
|
|
|
$
|
3,470
|
|
Unamortized Debt discount, net
|
|
$
|
(205
|
)
|
|
$
|
(639
|
)
|
Bonds converted to shares
|
|
$
|
(223
|
)
|
|
$
|
(221
|
)
|
Offering cost, net
|
|
$
|
(9
|
)
|
|
$
|
(36
|
)
|
10% senior Convertible bonds – Long Term Liability
|
|
$
|
3,033
|
|
|
$
|
2,574
|
|
Capitalized interest for the year ended December 31, 2020 and
2019, was $324,000 and $313,000, respectively.
Interest
expenses for the year ended December 31, 2020 and 2019, was $0 and $0.
Note
8 - Derivative Liability
The
Notes issued by the Company and discussed in Note 7 contain a convertible option that gives rise to a derivative liability.
The
debt instrument the Company issued includes a make-whole provision, which provides that in the event of conversion by the investor
under certain circumstances, the issuer is required to deliver to the holder additional consideration beyond the settlement of
the conversion obligation.
Because
time value make-whole provisions are not clearly and closely related to the debt host and would meet the definition of a derivative
if considered freestanding, they are evaluated under the indexation guidance to determine whether they would be afforded the scope
exception pursuant to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded
conversion feature.
The
Company has measured its derivative liability at fair value and recognized the derivative value as a current liability and recorded
the derivative value on its balance sheet. Changes in the fair value recorded are recorded as a gain or loss in the accompanying
statement of operations.
The
valuation of the Notes was done by using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’
terms and other parameters the Company identified as relevant for the valuation of the Notes’ Fair Value.
The
Binomial Model used the forecast of the Company share price during the Note’s contractual term.
Zion
Oil & Gas, Inc.
Notes
to Financial Statements
Note
8 - Derivative Liability (cont’d)
As
of December 31, 2020, and 2019 the Company’s liabilities that are measured at fair value are as follows:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
Level 3
|
|
|
Total
|
|
|
Level 3
|
|
|
Total
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$
thousands
|
|
Fair value of derivative liability
|
|
|
431
|
|
|
|
431
|
|
|
|
129
|
|
|
|
129
|
|
Change
in fair value of derivative liability during 2019 are as follows:
|
|
US$ thousands
|
|
|
|
|
|
Derivative liability fair value at December 31, 2018
|
|
|
345
|
|
Gain on derivative liability
|
|
|
(216
|
)
|
Derivative liability fair value at December 31, 2019
|
|
|
129
|
|
Change
in fair value of derivative liability during 2020 are as follows:
|
|
US$ thousands
|
|
|
|
|
|
Derivative liability fair value at December 31, 2019
|
|
|
129
|
|
Loss on derivative liability
|
|
|
302
|
|
Derivative liability fair value at December 31, 2020
|
|
|
431
|
|
The
following table presents the assumptions that were used for the model as of December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
Convertible Option Fair Value of approximately
|
|
|
431,000
|
|
|
|
129,000
|
|
Annual Risk-free Rate
|
|
|
.09
|
%
|
|
|
1.59
|
%
|
Volatility
|
|
|
163.57
|
%
|
|
|
121.687
|
%
|
Expected Term (years)
|
|
|
.33
|
|
|
|
1.34
|
|
Convertible Notes Face Value
|
|
|
3,246,700
|
|
|
|
3,249,500
|
|
Expected annual yield on Regular Notes
|
|
|
28.77
|
%
|
|
|
28.77
|
%
|
Price of the Underlying Stock
|
|
|
0.90
|
|
|
|
0.17
|
|
During the years ended December 31, 2020, and 2019, the Company
recorded (losses) unrealized gains of approximately ($302,000), net, and $216,000, net, respectively, within the Statements of
Operations on derivative liability.
A
slight change in an unobservable input like volatility could have a significant impact on the fair value measurement of the derivative
liability.
Zion
Oil & Gas, Inc.
Notes
to Consolidated Financial Statements
Note
9 - Income Taxes
The
Company had no income tax expense due to the operating loss incurred for the years ended December 31, 2020 and 2019.
The
tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities
at December 31, 2020 and 2019 are presented below:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Deferred tax assets:
|
|
|
|
|
|
|
Net operating loss carry forwards
|
|
|
44,580
|
|
|
|
42,224
|
|
Other
|
|
|
2,640
|
|
|
|
2,531
|
|
Total gross deferred tax assets
|
|
|
47,220
|
|
|
|
44,755
|
|
Less – valuation allowance
|
|
|
(43,669
|
)
|
|
|
(42,216
|
)
|
Net deferred tax assets
|
|
|
3,551
|
|
|
|
2,539
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
12
|
|
|
|
9
|
|
Other
|
|
|
(303
|
)
|
|
|
(314
|
)
|
Unproved oil and gas properties
|
|
|
(3,260
|
)
|
|
|
(2,234
|
)
|
Total gross deferred tax liabilities
|
|
|
(3,551
|
)
|
|
|
(2,539
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
|
—
|
|
|
|
—
|
|
In
assessing the likelihood of the realization of deferred tax assets, management considers whether it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets, including
net operating losses, is dependent upon the generation of future taxable income during the periods in which those temporary differences
become deductible and tax carry forwards are utilizable.
Management considers the scheduled reversal of deferred tax
liabilities, projected future taxable income, and tax planning strategies in making this assessment. In order to fully realize
the deferred tax asset, the Company will need to generate future taxable income of approximately $212,285,759 prior to the expiration
of some of the net operating loss carry forwards between 2022 and 2041. Based upon the level of historical taxable losses since
the Company’s inception, management believes that the Company will not likely realize the benefits of these deductible differences
and tax carry forwards and thus, full valuation allowances have been recorded at December 31, 2020 and 2019.
The Company continuously monitors all shareholders
that might reach a 5% ownership in the common stock for various purposes, in addition to the I.R.C §382/383 limitation on
net operating loss (“NOL”) carry forwards following an ownership change. Sections 382/383 limit the use of corporate
NOLs following an ownership change. Section 382(g) defines an ownership change generally as a greater than 50% change in the ownership
of stock among certain 5% shareholders over a three-year period. For the tax year 2019, the Company became aware of one individual
owning greater than 5%, as evidenced by the filing of a Section 13(G) report with the SEC. However, there have been no changes
in stock ownership to trigger sections 382/383.
At December 31, 2020, the Company has available federal net
operating loss carry forwards of approximately $212,285,759 to reduce future U.S. taxable income.
The Tax Cuts and Jobs Act (TCJA) removed
the 2-year carryback provision, extended the 20-year carryforward provision out indefinitely, and limited carryforwards to 80%
of net income in any future year. Net operating losses originating in tax years beginning prior to Jan. 1, 2018, are still subject
to the former carryover rules of 100% of net income and 20 taxable years following the taxable year of loss. I.R.C. §172.
The Employee Retention Tax Credit (ERTC)
was enacted by The CARES Act in March 2020. Zion has filed the requisite form with the IRS to reduce its payroll tax expense by
$65,000 for 2020.
Income earned from activities in Israel
is subject to regular Israeli tax rates. For Israeli tax purposes, exploration costs on unproved properties are expensed. Tax
losses can be carried forward indefinitely. At December 31, 2020, the Company has available net operating loss carry forwards
of approximately $162,525,000 to reduce future Israeli taxable income.
It has been determined that the operations of both
the branches (Israel and Switzerland) should have been reported on Form 8858, Information Return of US Person With Respect to
Foreign Disregarded Entitles and Foreign Branches, within the 2018 and 2019 Forms 1120. Both the Israel and Switzerland branches
meet the criteria of a foreign branch per Treasury Regulation Section 1.367(a)-6T(g). Zion will be filing amended returns for
2018 and 2019 to include Form 8858 along with an explanation of why the forms were not included in the original returns. The Form
8858 will be filed for all subsequent years unless the applicable law changes. The potential risk associated with non-filing is
a $40,000 penalty (2 years’ worth of filings at $10,000 for each branch) and a 10% reduction in foreign tax credit. The
Company believes the penalties will abated upon showing reasonable cause for the omission. The foreign tax credit listed above
is not relevant to the company.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
9 - Income Taxes (cont’d)
On July 11, 2014, Zion Oil & Gas,
Inc. registered the Geneva Branch in the Canton of Geneva, Switzerland. The legal Swiss name for the foreign branch is “Zion
Oil & Gas, Inc., Wilmington, Branch of Geneva.” The Geneva Branch has its registered office and its business office
at 6 Avenue Jules Crosnier, 1206 Champel, Case Postale 295, 1211 Geneva 12, Switzerland. The purpose of the branch is to operate
a foreign treasury center for the Company. As such, the Geneva branch is not expected to have taxable income in any future year.
Reconciliation
between the theoretical tax benefit on pre-tax reported (loss) and the actual income tax expense:
|
|
Year ended
December 31,
2020
|
|
|
Year ended
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
Pre-tax loss as reported
|
|
|
(6,996
|
)
|
|
|
(6,690
|
)
|
|
|
|
|
|
|
|
|
|
U.S. statutory tax rate
|
|
|
21
|
%
|
|
|
21
|
%
|
Theoretical tax expense
|
|
|
(1,469
|
)
|
|
|
(1,405
|
)
|
|
|
|
|
|
|
|
|
|
Increase in income tax expense resulting from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Permanent differences
|
|
|
16
|
|
|
|
14
|
|
Change in valuation allowance
|
|
|
1,453
|
|
|
|
1,391
|
|
Income tax expense
|
|
|
—
|
|
|
|
—
|
|
The
Company has no material unrecognized tax benefit which would favorably affect the effective income tax rate in future periods
and does not believe there will be any significant increases or decreases within the next twelve months. No interest or penalties
have been accrued.
The
Company has not received final tax assessments since incorporation. In accordance with the US tax regulations, the U.S. federal
income tax returns remain subject to examination for the years beginning in 2017.
The
Israeli branch has not received final tax assessments since incorporation. In accordance with the Israeli tax regulations, tax
returns submitted up to and including the 2015 tax year can be regarded as final.
Note
10 - Right of use leases assets and leases obligations
The
Company is a lessee in several non-cancellable operating leases, primarily for transportation and office spaces.
The table below presents the operating lease assets and liabilities
recognized on the balance sheets as of December 31, 2020 and 2019:
|
|
December 31,
2020
|
|
|
December 31,
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Operating lease assets
|
|
$
|
438
|
|
|
$
|
634
|
|
|
|
|
|
|
|
|
|
|
Operating lease liabilities:
|
|
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
$
|
191
|
|
|
$
|
239
|
|
Non-current operating lease liabilities
|
|
$
|
307
|
|
|
$
|
450
|
|
Total operating lease liabilities
|
|
$
|
498
|
|
|
$
|
689
|
|
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
10 - Right of use leases assets and leases obligations (cont’d)
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 December 31,
2020 are:
|
|
December 31,
2020
|
|
Weighted average remaining lease term (years)
|
|
|
2.8
|
|
Weighted average discount rate
|
|
|
5.9
|
%
|
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 December 31, 2020:
|
|
US$
thousands
|
|
|
|
|
|
2021
|
|
|
212
|
|
2022
|
|
|
157
|
|
2023
|
|
|
157
|
|
2024
|
|
|
13
|
|
2025
|
|
|
-
|
|
Thereafter
|
|
|
-
|
|
Total undiscounted future minimum lease payments
|
|
|
539
|
|
Less: portion representing imputed interest
|
|
|
(41
|
)
|
Total undiscounted future minimum lease payments
|
|
|
498
|
|
Operating
lease costs were $246,000 and $245,000 for the year ended December 31, 2020, and 2019, respectively. Operating lease costs
are included within general and administrative expenses on the statements of income.
Cash paid for amounts included in the
measurement of operating lease liabilities was $272,000 and $262,000 for the year ended December 31, 2020, and 2019,
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 $17,000 and $876,000 for the year ended December 31,
2020, and 2019, respectively.
Note
11 - 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.
Since that date, we have fully cooperated with the SEC on an on-going basis in connection with its investigation. Investigations
of this nature are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, an SEC
investigation could have an adverse impact on us because of legal costs, diversion of management resources, and other factors.
The investigation could also result in reputational harm to Zion and may have a material adverse effect on Zion’s current
and future business and exploratory activities and its ability to raise capital to continue our oil and gas exploratory activities.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
B.
Litigation
Following
the commencement of the SEC investigation, on August 9, 2018, a putative class action (the “class action”) Complaint
was filed against Zion, Victor G. Carrillo, the Company’s Chief Executive Officer at such time, and Michael B. Croswell
Jr., the Company’s Chief Financial Officer (collectively, the “Defendants”) in the U.S. District Court for the
Northern District of Texas. On November 16, 2018, the Court entered an Order in the class action appointing lead plaintiffs and
approving lead counsel and on January 22, 2019, an Amended Complaint was filed. On February 1, 2019, a Corrected Amended Class
Action Complaint was filed. The suit alleges violations of Section 10(b) of the Securities Exchange Act of 1934 (the “Exchange
Act”) and Rule 10b-5 promulgated thereunder by the SEC and Section 11 of the Securities Act of 1933 (the “Securities
Act”) against all defendants and alleges violations of Section 20(a) of the Exchange Act and Section 15 of the Securities
Act against the individual defendants. The alleged class period is from February 13, 2018 through November 20, 2018. On March
13, 2019, a Motion to Dismiss Plaintiffs’ Corrected Amended Complaint was filed on behalf of Zion, Victor Carrillo and Michael
B. Croswell, Jr., pleading numerous grounds in support of their Motion to Dismiss. On April 29, 2019 Plaintiffs filed a Response
to Defendants’ Motion to Dismiss, and on May 29, 2019 Defendants filed a Reply to Plaintiffs’ Response. On March 4,
2020, the Court granted Defendants’ Motion and dismissed all claims granting Plaintiffs leave to amend. On March 30,
2020, the Lead Plaintiffs voluntarily dismissed the Class Action with prejudice as to the Company and all other defendants.
The
Company disputed the above claims and made an advance deposit of $500,000 in 2018 to defense counsel for the cost of defending
the litigation. The Company carries insurance that is applicable to these claims. During May 2020, the Company received a refund
of approximately $142,000 from its defense counsel pertaining to the above legal claims.
On
October 29, 2018, Zion received a shareholder request to inspect books and records pursuant to Section 220 of the Delaware
General Corporation Law for the purpose of investigating potential corporate mismanagement and alleged breaches of fiduciary duty
in connection with public statements made by the Company from March 12, 2018 to May 30, 2018. The Company responded to this
request.
On
August 9, 2019, Zion received two (2) additional shareholder requests from the same law firm to inspect books and records pursuant
to section 220 of the Delaware General Corporation Law for the purpose of investigating potential corporate mismanagement and
alleged breaches of fiduciary duty in connection with public statements made by the Company from February 1, 2018 to present.
Following discussion with counsel to the shareholder, the Company’s counsel produced materials responsive to the shareholders’
request in January 2020.
On February 12, 2020, by letter to Zion’s
Board of Directors, one of the shareholders making the August 9, 2019 request demanded that the Board investigate, address, remedy,
and commence proceedings against certain of the Company’s current and former officers and directors for alleged breaches
of fiduciary duties, violations of section 10(b) and 20(a) of the Exchange Act, waste of corporate assets, unjust enrichment, and
violations of all other applicable laws. The shareholder alleges wrongdoing in connection with public statements made by
the Company from February 1, 2018 regarding the Company’s oil and gas exploration activities, the Company’s accounting
and disclosure of expenses, and the Board’s oversight of operations. The Board hired independent counsel to investigate the
claims made against certain of the Company’s current and former officers and directors. That investigation concluded and,
based on the findings and recommendations of independent counsel, the Board decided not to pursue claims against any current or
former officer or director. On July 14, 2020, Zion received a request from the same shareholder making the February 12, 2020 demand
to inspect books and records pursuant to Section 220 of the Delaware General Corporation Law for the purpose of evaluating the
Board’s decision to reject the litigation demand. The Company responded to this request in August 2020. The Company has not
received any further communication from the shareholder following the August 2020 response.
From
time to time, the Company may also 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 litigation
or any other pending litigation or claims.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
C.
Asset Retirement
The Company currently estimates that the costs of plugging and
decommissioning of the exploratory wells drilled to date in the former Joseph License area and the present New Megiddo License
428 to be approximately $571,000 based on current cost rather than Net Present Value. The Company expects to incur such costs during
2021. Liabilities for expenditures are recorded when environmental assessment and/or remediation is probable and the timing and
costs can be reasonably estimated.
Changes
in Asset Retirement Obligations were as follows:
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
US$
thousands
|
|
|
US$
thousands
|
|
|
|
|
|
|
|
|
Asset Retirement Obligations, Beginning Balance
|
|
|
585
|
|
|
|
720
|
|
Liabilities Settled
|
|
|
(14
|
)
|
|
|
(135
|
)
|
Revision of Estimate
|
|
|
-
|
|
|
|
-
|
|
Retirement Obligations, Ending Balance
|
|
|
571
|
|
|
|
585
|
|
Liabilities of approximately $14,000 and $135,000 were
settled for the year ended December 31, 2020 and 2019, respectively; those liabilities were related to the currently existing New
Megiddo License 428 area and Asher-Menashe and Joseph License areas.
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.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
On
April 8, 2019 the Energy Ministry issued new procedural guidelines regarding a uniform reporting manner by which the rights holder
in a license must submit a quarterly report regarding a summary of license history, the nature, scope, location and results of
the exploration work, specification of the amounts expended for the exploration work, and the results and interpretation of the
exploration work and basic data on which these results and interpretation are based.
On
July 18, 2019, the Energy Ministry issued a guidance document entitled “Instructions for Submitting Guarantees with respect
to Oil Rights granted pursuant to the Petroleum Law” which states that onshore license applicants are required to deposit
a base bank guarantee of $500,000. Furthermore, prior to drilling, an onshore license holder is required to deposit an additional
bank guarantee in the amount as determined by the Petroleum Commissioner in accordance with the characteristics of the drilling
and the drilling plan but no less than $250,000. The guarantee, as determined by the Commissioner, shall be deposited with the
Commissioner Office for each well separately drilled. The Petroleum Commissioner has discretion to raise or lower those amounts
or may also forfeit a Company’s existing guarantee and/or cancel a petroleum right under certain circumstances.
In
addition, new and extended insurance policy guidelines were added. The Petroleum Commissioner may also view non-compliance with
the new insurance provisions as breaching the work plan and the rights granted and act accordingly.
The
Company believes that these new 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 new 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 December 31, 2020 and 2019, the Company accrued $0 for license regulatory matters.
E.
Charitable Foundations
Two
charitable foundations were established, one in Israel and one in Switzerland, for the purpose of supporting charitable projects
and other charities in Israel, the United States and internationally. A 3% royalty or equivalent interest in any Israeli oil and
gas interests as may now be held or, in the future be acquired, by the Company was assigned to each charitable organization (6%
interest in the aggregate). At December 31, 2020 and 2019, the Company did not have any outstanding obligation in respect of the
charitable foundations, since to this date, no proved reserves have been found.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
F.
Office and Vehicle Leases
(i) On
September 10, 2015, the Company signed a new lease agreement with Hartman Income REIT Property Holdings, LLC (“Hartman”)
for new premises containing 7,276 square feet. The lease term is for 65 months (about 5.5 years) from December 1, 2015 to April
30, 2021. Rent is abated for the first five (5) month which is December 2015 through April 2016. Beginning in May 2016 and extending
through April 2017, rent is to be paid on a monthly basis in the base amount of $7,882 per month. Beginning in May 2017 and extending
through April 2018, rent is to be paid on a monthly basis in the base amount of $8,186 per month. Beginning in May 2018 and extending
through April 2019, rent is to be paid on a monthly basis in the base amount of $8,489 per month. Beginning in May 2019 and extending
through April 2020, rent is to be paid on a monthly basis in the base amount of $8,792 per month. Beginning in May 2020 and extending
through April 2021, rent is to be paid on a monthly basis in the base amount of $9,095 per month. The Company is also obligated
to pay its pro-rated portion of all taxes, utilities, and insurance during the lease term.
On
June 14, 2016, the Company and Hartman signed a First Amendment to Lease Agreement whereby the premises were expanded to include
approximately 1,498 square feet, for a new total of approximately 8,774 square feet. The first amendment commencement date was
July 1, 2016 and the payment of monthly rent was revised. Beginning in July 2016 and extending through November 2016, rent is
to be paid on a monthly basis in the base amount of $7,882 per month. Beginning in December 2016 and extending through May 2017,
rent is to be paid monthly in the base amount of $9,505.17 per month. Beginning in June 2017 and extending through May 2018, rent
is to be paid monthly in the base amount of $9,870.75 per month. Beginning in June 2018 and extending through May 2019, rent is
to be paid monthly in the base amount of $10,236.33 per month. Beginning in June 2019 and extending through May 2020, rent is
to be paid monthly in the base amount of $10,601.92 per month. Beginning in June 2020 and extending through May 2021, rent is
to be paid monthly in the base amount of $10,967.50 per month. This lease is treated as an operating lease.
(ii)
On August 14, 2017, the Company and David McDavid Plano Lincoln Mercury (as Lessor) signed a motor vehicle lease agreement for
a 2017 Lincoln MKZ. The first payment of $873.87 was due on August 14, 2017 and this was paid on or around that date. The lease
calls for 38 additional payments of $873.87 so that the sum of all 39 payments is $34,080.93. At the inception of the lease, and
in addition to the sum of the 39 payments, a one-time payment of $5,000 was made. The value at the end of the lease has a residual
value of $18,565.70 per the terms of the lease agreement. Additionally, the Company must pay to the Lessor $.20 cents per mile
for each mile in excess of 82,081 miles. This lease is treated as an operating lease.
The
Lincoln MKZ was turned back in to the dealership in November 2020 and the lease was effectively terminated without any payment
for excess mileage.
(iii) On November 13, 2020, the Company
and GM Financial (as Lessor) signed a motor vehicle lease agreement for a 2020 Chevy Equinox. The first payment of $447.77 was
due on November 13, 2020 and this was paid on or around that date. The lease calls for 38 additional payments of $447.77 so that
the sum of all 39 payments is $17,463.03. At the inception of the lease, and in addition to the sum of the 39 payments, lease
signing bonuses provided an initial $1,500 reduction of the lease cost on November 13, 2020. The value at the end of the lease
has a residual value of $15,193.60 per the terms of the lease agreement. Additionally, the Company must pay to the Lessor $.25
cents per mile for each mile in excess of 20,000 annual miles. This lease is treated as an operating lease.
At
December 31, 2020, and continuing through the date of this Form 10-K report, all payments have paid on time to the Lessor, and
the Company is in good standing with regard to this lease agreement.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
(iv) The Company’s field office
in Caesarea Israel consists of 6,566 square feet. The lease term is five years from February 1, 2014 to January 31, 2019.
Rent is to be paid on a monthly basis in the base amount of approximately NIS 37,800 per month (approximately $11,750) per month
at the exchange rate in effect on the date of this report and is linked to an increase (but not a decrease) in the CPI. The Company
is also obligated to pay all related taxes, utilities, insurance and maintenance payments during the lease term. Pursuant to the
lease, two years from the commencement of the lease term, the Company may terminate the agreement upon three months’ notice
provided the Company secures a replacement lessee approved by the lessor at its discretion.
The Company has an option to renew the
lease for another five years, provided it is not in breach of the agreement, where it is required as well to furnish a notice
of intent to exercise the option six months prior to termination of lease, and it furnishes a bank guarantee and insurance
confirmation prior to commencement of the option period.
The
Company exercised the above-mentioned option on September 25, 2018. Rent is to be paid on a monthly basis in the base amount of
approximately NIS 39,200 per month (approximately $12,200) at the exchange rate in effect on the date of this report and is linked
to an increase (but not a decrease) in the CPI. The Company has an option to renew the lease for another five years from February
1, 2024 to January 31, 2029, provided it is not in breach of the agreement, where it is required as well to furnish a notice
of intent to exercise the option six months prior to termination of lease, and it furnishes a bank guarantee and insurance
confirmation prior to commencement of the option period. In the event that the Company does not exercise the option to renew the
lease, the Company would pay the lessor an amount of approximately NIS 85,000 (approximately $26,400) at the exchange rate in
effect on the date of this report and is linked to an increase (but not a decrease) in the CPI.
Under
the lease agreement, the Company is authorized to further sublease part of the leased premises to a third party that is pre-approved
by the sub-lessor. Rent and its related taxes, utilities, insurance and maintenance expenses for 2020, and 2019 were $319,000
and 348,000 respectively.
The
future minimum lease payments as of December 31, 2020, are as follows:
|
|
US$
thousands
|
|
|
|
|
|
2021
|
|
|
260
|
|
2022
|
|
|
205
|
|
2023
|
|
|
205
|
|
2024
|
|
|
17
|
|
2025 and thereafter
|
|
|
-
|
|
|
|
|
687
|
|
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
11 - Commitments and Contingencies (cont’d)
G.
Bank Guarantees
As of December 31, 2020, the Company provided Israeli-required
bank guarantees to various governmental bodies (approximately $1,876,000) and others (approximately $88,000) with respect to its
drilling operation in an aggregate amount of approximately $1,964,000. The Company also paid $1,000,000 to its escrow agent with
respect to the purchase of a drilling rig in March 2020. The (cash) funds backing these guarantees are held in restricted interest-bearing
accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted. The
$1,000,000 balance was remitted to the seller of the I-35 drilling rig on January 6, 2021.
H.
Capitalized lease
During 2017, the Company signed a capital
lease agreement to purchase a vehicle, on which a down payment of $15,000 was paid by the Company. The lease period was for 44
months (approximately 3.7 years, hereinafter the “lease period”) starting on March 25, 2017 and ended on October 24,
2020. The lease provided for a monthly payment in the amount of approximately NIS 4,000 (approximately $1,250) per month, at the
exchange rate in effect for the date of this report and was linked to an increase (but not a decrease) in CPI. The lease contained
a purchase option at the end of the lease period in the amount of approximately NIS 75,000 (approximately $23,300) at the exchange
rate in effect on the date of this report and is linked to an increase (but not a decrease) in CPI. The Company chose to exercise
the purchase option in October 2020.
A
capital lease asset and a capital lease obligation were recognized in the Company’s balance sheet in the amount of approximately
$71,000, based on the fair value of the vehicle at the starting date of the lease. The net carrying value of the capital lease
asset was approximately $31,000 and $42,000 as of December 31, 2020 and 2019, respectively. The capital lease asset is being depreciated
using the straight-line method over its estimated useful life expectancy of approximately seven years. As of December 31, 2020,
and 2019, the accumulated depreciation of the capital lease asset amounted to approximately $40,000 and $29,000, respectively.
At
December 31, 2020, future minimum payments due under capital lease were:
|
|
US$
thousands
|
|
|
|
|
|
Capital lease liability at December 31, 2019
|
|
|
30
|
|
Payments during 2020
|
|
|
(30
|
)
|
Capital lease liability at December 31, 2020
|
|
|
-
|
|
I.
Recent 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 has significantly impacted the economic conditions in the United
States and Israel, as federal, state and local governments react to the public health crisis, creating significant uncertainties
in the United States, Israel and world economies. In the interest of public health and safety, jurisdictions (international, national,
state and local) where we have operations, restricted travel and required workforces to work from home. As of the date of this
report, many of our employees are working from home. However, 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.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
12 - Risks and Uncertainties
We
are directly influenced by the political, economic and military conditions affecting Israel.
We
cannot predict the effect, if any, on our business of renewed hostilities between Israel and its neighbors or any other changes
in the political climate in the area. Deterioration of political, economic and security conditions in Israel may adversely affect
our operations.
We
are subject to increasing Israeli governmental regulations and environmental requirements that may cause us to incur substantial
incremental costs and/or delays in our drilling program.
Newly
enacted onshore licensing and environmental and safety related regulations promulgated by the various energy related ministries
in Israel during 2019-2020 have rendered obtaining and drilling under new exploration licenses more time-consuming and expensive.
The
Company believes that these new and/or revised regulations will also significantly increase the time, effort, and expenditures
associated with obtaining all of the necessary authorizations and approvals prior to drilling and production testing its current
and any subsequent well(s).
Economic
risks may adversely affect our operations and/or inhibit our ability to raise additional capital.
Economically,
our operations in Israel may be subject to:
|
●
|
exchange
rate fluctuations between the Israeli shekel versus the US Dollar;
|
|
●
|
any
significant changes in oil and gas commodities pricing and hence the cost of oilfield
services and drilling equipment;
|
|
●
|
royalty and tax
increases and other risks arising out of Israeli state sovereignty over the mineral rights in Israel and its taxing authority;
and
|
|
●
|
changes
in Israel’s economy that could lead to legislation establishing oil and gas price
controls.
|
Consequently,
our operations may be substantially affected by local economic factors beyond our control, any of which could negatively affect
our financial performance and prospects.
Legal
risks could negatively affect our market value.
Legally,
our operations in Israel may be subject to:
|
●
|
changes
in the Petroleum Law resulting in modification of license and permit rights;
|
|
●
|
adoption
of new legislation relating to the terms and conditions pursuant to which operations
in the energy sector may be conducted;
|
|
●
|
changes
in laws and policies affecting operations of foreign-based companies in Israel; and
|
|
●
|
changes
in governmental energy and environmental policies or the personnel administering them.
|
Our
dependence on the limited contractors, equipment and professional services available in Israel may result in increased costs and
possibly material delays in our work schedule.
The
unavailability or high cost of equipment, supplies, other oil field services and personnel could adversely affect our ability
to execute our exploration and development plans on a timely basis and within our budget.
Should
one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual outcomes may
vary materially from those indicated.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
12 - Risks and Uncertainties (cont’d)
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, 2020 through December 31,
2020, the USD has fluctuated by approximately 7.0% against the NIS (the USD has weakened relative to the NIS). Also, during the
period January 1, 2019 through December 31, 2019, the USD fluctuated by approximately 7.8% against the NIS (the USD has weakened
relative to the NIS). Continued weakening of the US dollar against the NIS will result in higher 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 December 31, 2020, we
had cash, cash equivalents and short-term and long-term bank deposits of approximately $14,662,000. The weighted average annual
interest rate related to our cash and cash equivalents for the year ended December 31, 2020, exclusive of funds at US banks that
earn no interest, was approximately 0.29%.
The
primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly
increasing risk. To achieve this objective, we invest our excess cash in short-term bank deposits and money market funds that
may invest in high quality debt instruments.
Zion
Oil & Gas, Inc.
Notes to Consolidated Financial Statements
Note
13 - Selected Quarterly Information (Unaudited)
The following represents selected quarterly consolidated financial
information for 2020 and 2019:
|
|
For the three months ended
|
|
|
|
March 31
|
|
|
June 30
|
|
|
September 30
|
|
|
December 31
|
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
|
US$ thousands
|
|
2020:
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas
sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
(loss) gain
|
|
|
(1,608
|
)
|
|
|
(1,924
|
)
|
|
|
(1,796
|
)
|
|
|
(1,668
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss)
gain per share – basic and diluted
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
|
|
(0.01
|
)
|
Weighted-average shares outstanding–basic
and diluted (in thousands)
|
|
|
138,813
|
|
|
|
172,361
|
|
|
|
202,877
|
|
|
|
235,477
|
|
2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Oil and gas sales
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain
|
|
|
(2,170
|
)
|
|
|
(1,313
|
)
|
|
|
(1,619
|
)
|
|
|
(1,591
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) gain per share –
basic and diluted
|
|
|
(0.03
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
Weighted-average shares outstanding–basic
and diluted (in thousands)
|
|
|
69,987
|
|
|
|
74,126
|
|
|
|
82,001
|
|
|
|
100,769
|
|
Note
14 - Subsequent Events
(i)
On January 4, 2021, the Company granted options under the 2011 Equity Incentive Plan to six senior officers, to purchase 150,000
shares of Common Stock at an exercise price of $0.915 per share. The options vested upon grant and are exercisable through January
4, 2031. The fair value of the options at the date of grant amounted to approximately $114,000.
(ii)
On January 4, 2021, the Company granted options under the 2011 Equity Incentive Plan to six senior officers, to purchase 250,000
shares of Common Stock at an exercise price of $0.915 per share. The options vested upon grant and are exercisable through January
4, 2031. The fair value of the options at the date of grant amounted to approximately $190,000.
(iii)
On January 4, 2021, the Company granted options under the 2011 Equity Incentive Plan to one senior officer, to purchase 75,000
shares of Common Stock at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January
6, 2031. The fair value of the options at the date of grant amounted to approximately $68,000.
(iv)
On January 4, 2021, the Company granted options under the 2011 Equity Incentive Plan to three employees, to purchase 150,000 shares
of Common Stock at an exercise price of $0.915 per share. The options vested upon grant and are exercisable through January 4,
2031. The fair value of the options at the date of grant amounted to approximately $114,000.
(v)
On January 4, 2021, the Company granted options under the 2011 Non Employee Directors Plan to eight directors, to purchase
400,000 shares of Common Stock at an exercise price of $0.915 per share. The options vested upon grant and are exercisable
through January 4, 2027. The fair value of the options at the date of grant amounted to approximately $289,000.
(vi)
On January 4, 2021, the Company granted options under the 2011 Non Employee Directors Plan to one director, to purchase 50,000
shares of Common Stock at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January
4, 2027. The fair value of the options at the date of grant amounted to approximately $46,000.
(vii)
Approximately $2,164,000 was collected through the Company’s DSPP program during the period January 1, 2021 through
March 22, 2021. This amount excludes cash received in early January which was shown as a receivable at December 31, 2020.
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