ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Introduction
The following discussion and
analysis should be read in conjunction with our accompanying consolidated financial statements and the notes to those consolidated financial
statements included elsewhere in this Annual Report. Some of our discussion is forward-looking and involves risks and uncertainties. For
information regarding factors that could have a material adverse effect on our business, refer to Risk Factors under Item 1A of
this Report.
Overview
Zion Oil and Gas, Inc., a
Delaware corporation, is an oil and gas exploration company with a history of 23 years of oil and gas exploration in Israel. We were incorporated
in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed our initial public offering in January 2007.
Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX Market under the symbol “ZNOG”
and our Common Stock warrant under the symbol “ZNOGW.”
The Company held one active
petroleum exploration license onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately 99,000 acres.
The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. On April 29,
2021, Zion submitted a request to the Ministry of Energy for a six-month extension to December 2, 2021. On May 30, 2021, the Ministry
of Energy approved our request for extension to December 2, 2021. On November 29, 2021, the Ministry of Energy approved our request for
extension to August 1, 2022. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February
1, 2023. On July 31, 2022, the Ministry of Energy approved our request for extension to February 1, 2023. The NML 428 expired on February
1, 2023, but Zion applied for a replacement license prior to such expiration. The ML 428 lies onshore, south and west of the Sea of Galilee,
and we continue our exploration focus here based on our studies as it appears to possess the key geologic ingredients of an active petroleum
system with significant exploration potential.
See Item 1 for a detailed listing of our exploration activities, milestones
and/or timelines.
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I-35 Drilling Rig & Associated Equipment
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 $1,000,000 (the “Holdback Amount”) was deposited in escrow with American Stock Transfer and Trust Company LLC. On
January 6, 2021, Zion completed its acceptance testing of the I-35 drilling rig and the Holdback Amount was remitted to Central European
Drilling on January 8, 2021.
I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total
US$ thousands US$ thousands US$ thousands US$ thousands
Asset Disposals for Self-Consumption - (247 ) - (247 )
Asset Disposals for Self-Consumption - (202 ) - (202 )
Zion’s ability to fully
undertake all of these aforementioned activities was subject to its raising the needed capital through the issuance of our securities,
and we anticipate we will continue to need to raise funds through the issuance of equity securities (or securities convertible into or
exchangeable for equity securities). No assurance can be provided that we will be successful in raising the needed equity on favorable
terms (or at all).
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Our executive offices are
located at 12655 N Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is (214) 221-4610. Our field office in
Israel is located at 9 Halamish Street, North Industrial Park, Caesarea 3088900, and the telephone number is +972-4-623-8500.
Principal
Components of our Cost Structure
Our operating and other expenses
primarily consist of the following:
Going
Concern Basis
Since we have limited capital
resources, no revenue to date and a loss from operations, our consolidated financial statements have been prepared on a going concern
basis, which contemplates realization of assets and liquidation of liabilities in the ordinary course of business. The appropriateness
of using the going concern basis is dependent upon our ability to obtain additional financing or equity capital and, ultimately, to achieve
profitable operations. Therefore, there is substantial doubt about our ability to continue as a going concern. The consolidated financial
statements do not include any adjustments that might result from the outcome of this uncertainty.
Critical
Accounting Policies
Management’s discussion
and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared
in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure
of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expense
during the reporting period.
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We have identified the accounting
principles which we believe are most critical to the reported financial status by considering accounting policies that involve the most
complex of subjective decisions or assessment.
Impairment of Oil and Gas Properties
We follow the full-cost method
of accounting for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas
reserves, including directly related overhead costs, are capitalized.
All capitalized costs of oil
and gas properties, including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using
estimates of proved reserves. Investments in unproved properties and major development projects are not amortized until proved reserves
associated with the projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties
are impaired, the amount of the impairment is included in income from continuing operations before income taxes, and the adjusted carrying
amount of the unproved properties is amortized on the unit-of-production method.
Our oil and gas properties
represent an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are found
or until it is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has
occurred. The amount of any impairment is charged to expense since a reserve base has not yet been established. A further impairment requiring
a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.
Abandonment of properties
is accounted for as adjustments to capitalized costs. The net capitalized costs are subject to a “ceiling test” which limits
such costs to the aggregate of the estimated present value of future net revenues from proved reserves discounted at ten percent based
on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. The recoverability of
amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves, together with
obtaining the necessary financing to exploit such reserves and the achievement of profitable operations.
During the fourth quarter
of 2022, the Company testing protocol was concluded at the MJ-02 well. The test results confirmed that the MJ-02 well did not contain
hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2022, the Company recorded a non-cash
impairment charge to its unproved oil and gas properties of $45,615,000. During the year ended December 31, 2021, the Company did not
record any non-cash impairment charges (see Note 4).
The total net book value of
our unproved oil and gas properties under the full cost method is $15,889,000 and $46,950,000 at December 31, 2022 and 2021, respectively.
Currency Utilized
Although our oil & gas
properties and our principal operations are in Israel, we report all our transactions in United States dollars. Certain dollar amounts
in the consolidated financial statements may represent the dollar equivalent of other currencies.
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Valuation of Deferred Taxes
We record a valuation allowance
to reduce our deferred tax asset to the amount that we believe is likely to be realized in the future. In assessing the need for the valuation
allowance, we have considered not only future taxable income but also feasible and prudent tax planning strategies. In the event that
we were to determine that it would be likely that we would, in the future, realize our deferred tax assets in excess of the net recorded
amount, an adjustment to the deferred tax asset would be made. In the period that such a determination was made, the adjustment to the
deferred tax asset would produce an increase in our net income.
Asset Retirement Obligation
We record a liability for
asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of
the related long-lived assets.
Fair
Value Considerations
We follow ASC 820, “Fair
Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial Staff Position (FSP) No.
157 and related guidance. Those provisions relate to the Company’s financial assets and liabilities carried at fair value and the
fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related disclosure requirements,
and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair value measures. Fair value
is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous market for that asset
or liability.
There are three levels of
inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning
the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that
are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. We use Level 1 inputs for
fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement
date. We use Level 2 inputs for fair value measurements whenever there are quoted prices for similar securities in an active market or
quoted prices for identical securities in an inactive market. We use observable market data whenever available. We use Level 3 inputs
in the Binomial Model used for the valuation of the derivative liability.
RESULTS
OF OPERATIONS
The following table sets forth
our Statements of Operations data for the years ended December 31 (all data is in thousands of USD) for 2022 and 2021:
Operating costs and expenses:
General and administrative expenses 6,243 7,594
Impairment of unproved oil and gas properties 45,615 -
Gain on derivative liability - (431 )
FOR THE YEAR ENDED DECEMBER 31, 2022 COMPARED
TO DECEMBER 31, 2021
Revenue. We currently
have no revenue generating operations.
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Operating costs and expenses.
Operating costs and expenses for the year ended December 31, 2022 were $54,950,000 compared to $10,881,000 for the year ended December
31, 2021. The increase in costs in 2022 is primarily attributable to the recognition of an impairment charge of $45,615,000 during Q4
2022.
General and administrative
expenses. General and administrative expenses for the year ended December 31, 2022 were $6,243,000 compared to $7,594,000 for the
year ended December 31, 2021. A major component of general and administrative expenses is non-cash stock compensation expense in the form
of stock options granted to employees, management and directors. As stated in this filing, Zion does not have revenue generating operations.
Historically, we have compensated our staff in part by granting stock options in lieu of cash balances. However, though stock option grants
are intended to provide a financial incentive, there are no guarantees that stock options will be “in the money” and, in that
event, would maintain no value.
Zion granted the following
number of stock options during the quarters of 2021 and 2022:
Expenses were $1,351,000 lower
(17.8%) when compared to expenses for 2021. The primary driver of this variance was stock option expense. Although the number of stock
options granted was 10,830,000 higher during 2022, expenses were significantly lower due to low stock prices on various dates of grants
in 2022.
Other expenses. Other
expenses during the year ended December 31, 2022 were $3,092,000 compared to $3,287,000 for the year ended December 31, 2021. This is
a variance of $195,000 or 5.9%. The expenses in this category are comprised of non-compensation and non-professional expenses incurred.
The primary drivers of this decrease were lower annual meeting expenses and Facebook spending with a partial offset by an increase in
insurance costs. Annual meeting expenses were significantly higher in 2021 due primarily to proxy solicitation costs to secure votes for
two important proposals.
Impairment of unproved
oil and gas properties. Impairment of unproved oil and gas properties expenses during the year ended December 31, 2022 was $45,615,000
compared to nil for the year ended December 31, 2021. The expense recorded in 2022 is attributable to the impairment charge of $45,615,000
related to the MJ-2 well.
Gain on derivative liability.
Gain on derivative liability during the year ended December 31, 2022 was nil compared to ($431,000) for the year ended December 31,
2021. An embedded derivative was contained within the valuation of Zion’s $100 convertible bond offering which closed in March 2016
and was fully paid in May 2021. The (gain) on derivative liability during the year ended December 31, 2021 is primarily due to the change
in the share price of our common stock that occurred during the year ended December 31, 2021.
Other expense,
net. Other expense, net for the year ended December 31, 2022 was $127,000 compared to $271,000 for the year ended December 31,
2021. This is a variance of $144,000 or 52.8%. The decrease in these
expenses in 2022 is primarily attributable to financial expenses related to the Company’s convertible bonds which were paid in
2021.
Net Loss. Net loss
for the year ended December 31, 2022 was $55,077,000 compared to $10,721,000 for the year ended December 31, 2021. The primary driver
of the higher net loss in 2022 is the recognition of an impairment charge of $45,615,000 during Q4 2022.
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Liquidity and Capital Resources
Liquidity is a measure of
a company’s ability to meet potential cash requirements. As discussed above, we have historically met our capital requirements through
the issuance of common stock as well as proceeds from the exercise of warrants and options to purchase common shares.
Our ability to continue as
a going concern is dependent upon obtaining the necessary financing to complete further exploration and development activities and generate
profitable operations from our oil and natural gas interests in the future. Our current operations are dependent upon the adequacy of
our current assets to meet our current expenditure requirements and the accuracy of management’s estimates of those requirements. Should
those estimates be materially incorrect, our ability to continue as a going concern will be impaired. Our consolidated financial
statements for the year ended December 31, 2022 have been prepared on a going concern basis, which contemplates the realization of assets
and the settlement of liabilities and commitments in the normal course of business. We have incurred a history of operating losses
and negative cash flows from operations. Therefore, there is substantial doubt about our ability to continue as a going concern.
During the past two completed fiscal years, we have financed our operations
primarily from the proceeds of sales of our stock under the Dividend Reinvestment and Stock Purchase Plan. For the years ended December
31, 2022 and 2021, we raised approximately $19,129,000 and $26,219,000, respectively, under the Plan. Of the amounts raised, approximately
77% of the amounts raised in 2022 were attributable to two participants and 67% of the amounts raised in 2021 were attributable to two
participants. The cessation of funding from these participants may result in adverse consequences to our business, such as a delay in
our testing efforts, until we locate alternate sources for this funding.
At December 31, 2022, we had
approximately $1,735,000 in cash and cash equivalents compared to $4,683,000 at December 31, 2021. Our working capital (current assets
minus current liabilities) was $661,000 at December 31, 2022 and $3,303,000 at December 31, 2021.
As of December 31, 2022, and 2022, the Company provided Israeli-required
bank guarantees to various governmental bodies (approximately $1,278,000 and $1,189,000, respectively) and others (approximately $79,000
and $94,000, respectively) with respect to its drilling operation in an aggregate amount of approximately $1,357,000 and $1,283,000, respectively.
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.
During the years ended December
31, 2022 and 2021, cash used in operating activities totaled $5,704,000 and $5,813,000, respectively. Cash provided by financing
activities during the years ended December 31, 2022 and 2021 was $19,133,000 and $26,125,000, respectively, and is primarily attributable
to proceeds received from the Dividend Reinvestment and Stock Purchase Plan (the “DSPP” or “Plan”). Net cash used
in investing activities such as drilling costs for our MJ-02 exploratory well, purchase of equipment and spare parts was $16,267,000 and
$29,022,000 for the years ended December 31, 2022 and 2021, respectively.
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Accounting standards require management to evaluate our ability to
continue as a going concern for a period of one year subsequent to the date of the filing of this Form 10-K. We expect to incur additional
significant expenditures to further our exploration and development programs. While we raised approximately $738,000 during the
period January 1, 2023 through March 23, 2023, we will need to raise additional funds in order to continue our exploration and development
activities. Additionally, we estimate that, when we are not actively drilling a well, our expenditures are approximately $600,000 per
month excluding exploratory operational activities. However, when we are actively drilling a well, we estimate an additional minimum expenditure
of approximately $2,500,000 per month. The above estimates are subject to change. Subject to the qualifications specified below, management
believes that our existing cash balance, coupled with anticipated proceeds under the DSPP, will be sufficient to finance our plan of operations
through April 2023.
The outbreak of the coronavirus,
together with its subsequent variants, has significantly disrupted business operations and resulted in significantly increased unemployment
in the general economy. The extent to which the coronavirus impacts our operations, specifically our capital raising efforts, as well
as our ability to continue our exploratory efforts, will depend on future developments, which are highly uncertain and cannot be predicted
with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and
the actions to contain the coronavirus or treat its impact, among others.
No assurance can be provided
that we will be able to raise the needed operating capital.
Even if we raise the needed
funds, there are factors that can nevertheless adversely impact our ability to fund our operating needs, including (without limitation),
unexpected or unforeseen cost overruns in drilling and planned non-drilling exploratory work, the costs associated with extended delays
in undertaking the required exploratory work, and plugging and abandonment activities which is typical of what we have experienced in
the past.
The financial information
contained in these consolidated financial statements has been prepared on a basis that assumes that we will continue as a going concern,
which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This
financial information and these consolidated financial statements do not include any adjustments that may result from the outcome of this
uncertainty.
The Dividend Reinvestment and Stock Purchase
Plan
On March 13, 2014 Zion filed
a registration statement on Form S-3 that was part of a replacement registration statement that was filed with the SEC using a “shelf”
registration process. The registration statement was declared effective by the SEC on March 31, 2014. On February 23, 2017, the Company
filed a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration No. 333-193336), for which
the three year period ended March 31, 2017, along with the base Prospectus and Supplemental Prospectus. The Form S-3, as amended, and
the new base Prospectus became effective on March 10, 2017, along with the Prospectus Supplement that was filed and became effective on
March 10, 2017. The Prospectus Supplement under Registration No. 333-216191 describes the terms of the DSPP and replaces the prior Prospectus
Supplement, as amended, under the prior Registration No. 333-193336.
On March 27, 2014, we launched
our Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to which stockholders and interested investors can
purchase shares of the Company’s Common Stock as well as units of the Company’s securities directly from the Company. The
terms of the DSPP are described in the Prospectus Supplement originally filed on March 31, 2014 (the “Original Prospectus Supplement”)
with the Securities and Exchange Commission (“SEC”) under the Company’s effective registration Statement on Form S-3,
as thereafter amended.
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On January 13, 2015, the Company
amended the Original Prospectus Supplement (“Amendment No. 3”) to provide for a unit option (the “Unit Option”)
under the DSPP comprised of one share of Common Stock and three Common Stock purchase warrants with each unit priced at $4.00. Each warrant
afforded the participant the opportunity to purchase the Company’s Common Stock at a warrant exercise price of $1.00. Each of the
three warrants series had different expiration dates that had been extended.
The ZNWAB warrants first became
exercisable on May 2, 2016 and, in the case of ZNWAC on May 2, 2017 and in the case of ZNWAD on May 2, 2018, at a per share exercise price
of $1.00.
As of May 2, 2017, any outstanding
ZNWAB warrants expired.
As of May 2, 2018, any outstanding
ZNWAC warrants expired.
On May 29, 2019, the Company
extended the termination date of the ZNWAD Warrant by one (1) year from the expiration date of May 2, 2020 to May 2, 2021. Zion considers
this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On September 15, 2020, the
Company extended the termination date of the ZNWAD Warrant by two (2) years from the expiration date of May 2, 2021 to May 2, 2023. Zion
considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On November 1, 2016, the Company
launched a unit offering under the Company’s DSPP pursuant to which participants could purchase units comprised of seven shares
of Common Stock and seven Common Stock purchase warrants, at a per unit purchase price of $10. The warrant is referred to as “ZNWAE.”
The ZNWAE warrants became
exercisable on May 1, 2017 and continued to be exercisable through May 1, 2020 at a per share exercise price of $1.00.
On May 29, 2019, the Company
extended the termination date of the ZNWAE Warrant by one (1) year from the expiration date of May 1, 2020 to May 1, 2021. Zion considers
this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On September 15, 2020, the
Company extended the termination date of the ZNWAE Warrant by two (2) years from the expiration date of May 1, 2021 to May 1, 2023. Zion
considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
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.
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On May 22, 2017, the Company
launched a new unit offering. This unit offering consisted of a new combination of common stock and warrants, a new time period in which
to purchase under the program, and a new unit price, but otherwise the same unit program features, conditions and terms in the Prospectus
Supplement applied. The unit offering terminated on July 12, 2017. This unit offering enabled participants to purchase Units of the Company’s
securities where each Unit (priced at $250.00 each) was comprised of (i) the number of shares of Common Stock determined by dividing $250.00
(the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock as reported on the NASDAQ on
the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares of Common Stock at a warrant exercise
price of $1.00 per share. The warrant is referred to as “ZNWAF.”
All ZNWAF warrants became
exercisable on August 14, 2017 and continued to be exercisable through August 14, 2020 at a per share exercise price of $1.00.
On May 29, 2019, the Company
extended the termination date of the ZNWAF Warrant by one (1) year from the expiration date of August 14, 2020 to August 14, 2021. Zion
considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On September 15, 2020, the
Company extended the termination date of the ZNWAF Warrant by two (2) years from the expiration date of August 14, 2021 to August 14,
2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
The warrant terms provide
that if the Company’s Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time
prior to the expiration date of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon
providing 60 days advanced notice to the warrant holders.
An Amendment No. 2 to the
Prospectus Supplement (as described below) was filed on October 12, 2017.
Under Amendment No. 2, the
Company initiated another unit offering which terminated on December 6, 2017. This unit offering enabled participants to purchase Units
of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock
determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock
as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 15 shares of Common
Stock at a warrant exercise price of $1.00 per share. The warrant is referred to as “ZNWAG.”
The warrants became exercisable on January 8, 2018 and continue to
be exercisable through January 8, 2024 at a revised per share exercise price of $.25. The warrant terms provide that if the Company’s
Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date
of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon providing 60 days advanced
notice to the warrant holders.
On December 14, 2022, the
Company extended the termination date of the ZNWAG warrant by one (1) year from the expiration date of January 8, 2023 to January 8, 2024.
Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On February 1, 2018, the Company
launched another unit offering which terminated on February 28, 2018. The unit offering consisted of Units of our securities where each
Unit (priced at $250.00 each) was comprised of (i) 50 shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional
50 shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock
acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at
a warrant exercise price of $5.00. The warrant is referred to as “ZNWAH.”
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The warrants became exercisable
on April 2, 2018 and continued to be exercisable through April 2, 2020 at a per share exercise price of $5.00, after the Company, on December
4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of April 2, 2019 to April 2, 2020.
On May 29, 2019, the Company
extended the termination date of the ZNWAH Warrant by one (1) year from the expiration date of April 2, 2020 to April 2, 2021. Zion considers
this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On September 15, 2020, the
Company extended the termination date of the ZNWAH Warrant by two (2) years from the expiration date of April 2, 2021 to April 2, 2023.
Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On August 21, 2018, the Company
initiated another unit offering, and it terminated on September 26, 2018. The unit offering consisted of Units of the Company’s
securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing
$250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock as
reported on the NASDAQ on the Unit Purchase Date and (ii) Common Stock purchase warrants to purchase an additional twenty-five (25) shares
of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired
under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant
exercise price of $1.00. The warrant is referred to as “ZNWAJ.”
The warrants became exercisable
on October 29, 2018 and continued to be exercisable through October 29, 2020 at a per share exercise price of $1.00, after the Company,
on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of October 29, 2019 to October
29, 2020.
On May 29, 2019, the Company
extended the termination date of the ZNWAJ Warrant by one (1) year from the expiration date of October 29, 2020 to October 29, 2021. Zion
considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On September 15, 2020, the
Company extended the termination date of the ZNWAJ Warrant by two (2) years from the expiration date of October 29, 2021 to October 29,
2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
On December 10, 2018, the
Company initiated another unit offering, and it terminated on January 23, 2019. The unit offering consisted of Units of the Company’s
securities where each Unit (priced at $250.00 each) was comprised of (i) two hundred and fifty (250) shares of Common Stock and (ii) Common
Stock purchase warrants to purchase an additional 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.”
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.
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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 offering, and it terminated on June 26, 2019, after the Company, on June 5, 2019, extended the termination date
of the unit offering.
The unit offering consisted
of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) two hundred and fifty (250) shares
of Common Stock and (ii) Common Stock purchase warrants to purchase an additional fifty (50) shares of Common Stock at a per share exercise
price of $2.00. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants
acquired under the Units purchased. For Plan participants who enrolled into the Unit Program with the purchase of at least one Unit and
also enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received
an additional twenty-five (25) warrants at an exercise price of $2.00 during this Unit Option Program. The twenty-five (25) additional
warrants were for enrolling into the AMI program. Existing subscribers to the AMI were entitled to the additional twenty-five (25) warrants
once, if they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase
one share of our Common Stock at a warrant exercise price of $2.00. The warrant is referred to as “ZNWAL.”
The warrants became exercisable
on August 26, 2019 and continued to be exercisable through August 26, 2021 at a per share exercise price of $2.00.
On September 15, 2020, the
Company extended the termination date of the ZNWAL warrant by two (2) years from the expiration date of August 26, 2021 to August 26,
2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
Under our Plan, the Company
under a Request For Waiver Program executed Waiver Term Sheets of a unit option program consisting of a Unit (shares of stock and warrants)
of its securities and subsequently an option program consisting of shares of stock to a participant. The participant’s Plan account
was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant
the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant shall have the company notation
of “ZNWAM.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The
warrants became exercisable on January 15, 2021 and continue to be exercisable through July 15, 2023 at a per share exercise price of
$0.05.
On February 1, 2021, the Company
initiated a unit offering, and it terminated on March 17, 2021.
The unit offering consisted
of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of Common Stock shares
represented by the high-low average on the purchase date and (ii) Common Stock purchase warrants to purchase an additional twenty-five
(25) shares of Common Stock at a per share exercise price of $1.00. The investor’s Plan account was credited with the number of
shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the
Unit Program with the purchase of at least one Unit or who enrolled in the separate Automatic Monthly Investments (“AMI”)
program at a minimum of $50.00 per month or more, received an additional ten (10) warrants at an exercise price of $1.00 during this Unit
Option Program. The ten (10) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were also entitled
to the additional ten (10) warrants once, provided that they purchased at least one (1) unit during the Unit program. Each warrant affords
the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant is referred
to as “ZNWAN.”
The warrants became exercisable
on May 16, 2021 and continue to be exercisable through May 16, 2023 at a per share exercise price of $1.00.
On April 12, 2021, the Company
initiated a unit offering and it terminated on May 12, 2021.
39
The unit offering consisted
of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of Common Stock shares
represented by the high-low average on the purchase date and (ii) Common Stock purchase warrants to purchase an additional fifty (50)
shares of Common Stock at a per share exercise price of $.25. The investor’s Plan account was credited with the number of shares
of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the unit
offering with the purchase of at least one Unit or who enrolled in the separate Automatic Monthly Investments (“AMI”) program
at a minimum of $50.00 per month or more, received an additional fifty (50) warrants at an exercise price of $.25 during this Unit Option
Program. The fifty (50) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were also entitled
to the additional fifty (50) warrants once, provided that they purchased at least one (1) unit during the Unit program. Each warrant affords
the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant is referred
to as “ZNWAO.”
The warrants became exercisable
on June 12, 2021 and continue to be exercisable through June 12, 2023 at a per share exercise price of $.25.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet for a unit program consisting of a Unit (shares of stock and warrants)
to a participant. After conclusion of the program on May 28, 2021, the participant’s Plan account was credited with the number of
shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase
one share of our Common Stock at a warrant exercise price of $.25. The warrant has the company notation of “ZNWAP.” The warrants
will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants were issued and became exercisable
on June 2, 2021 and continue to be exercisable through June 2, 2022 at a per share exercise price of $.25.
On March 21, 2022, the
Company extended the termination date of the ZNWAP Warrant by one (1) year from the expiration date of June 2, 2022 to June 2, 2023. Zion
considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
During the second quarter
of 2022, all warrants represented by ZNWAP and ZNWAR were exercised resulting in a net cash inflow of approximately $365,000.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet for a program consisting of Zion securities to a participant. After conclusion
of the program on June 17, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common
Stock that were acquired.
Under our Plan, the Company under a Request For Waiver Program executed
a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants to a participant. After conclusion of the program
on June 18, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock and
Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant
exercise price of $.25. The warrant shall have the company notation of “ZNWAQ.” The warrants will not be registered for trading
on the OTCQX or any other stock market or trading market. The warrants were issued on May 5, 2022 and are exercisable through July 6,
2023 at a revised per share exercise price of $0.05.
On May 17, 2022, the Company
extended the termination date of the ZNWAQ Warrant by one (1) year from the expiration date of July 6, 2022 to July 6, 2023 and reduced
the exercise price to $0.05. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned
to this extension.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants
to a participant. After conclusion of the program on June 18, 2021, the participant’s Plan account was credited with the number
of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to
purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAR.”
The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants were issued and
became exercisable on June 22, 2021 and continue to be exercisable through June 22, 2022 at a per share exercise price of $.25. Additionally,
Zion incurred $115,000 in equity issuance costs to an outside party related to this waiver program.
40
On March 21, 2022, the Company
extended the termination date of the ZNWAR Warrant by one (1) year from the expiration date of June 22, 2022 to June 22, 2023. Zion considers
this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.
During the second quarter
of 2022, all warrants represented by ZNWAP and ZNWAR were exercised resulting in a net cash inflow of approximately $365,000.
Under our Plan, the
Company under a Request For Waiver Program executed a Waiver Term Sheet to a participant. After conclusion of the program on September
15, 2021, the participant’s Plan account was credited with the number of shares of the Company’s Common Stock that were acquired.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants
to a participant. After conclusion of the program on November 15, 2021, the participant’s Plan account was credited with the number
of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to
purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant shall have the company notation of “ZNWAS.”
The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued
and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a per share exercise price of
$.25.
On December 9, 2019 Zion filed
an Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-235299) solely for the purpose of re-filing a revised Exhibit
5.1 to the Registration Statement. This Amendment No. 1 does not modify any provision of the prospectus that forms a part of the Registration
Statement and accordingly, such prospectus has not been included herein.
On December 10, 2021 Zion
filed an Amendment No. 1 to the Registration Statement on Form S-3 (File No. 333-235299) for the purpose of converting the existing Form
S-1 to the Registration Statement on Form S-3. This Amendment No. 1 does not modify any provision of the prospectus that forms a part
of the Registration Statement and accordingly such prospectus has not been included herein.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants
to a participant. After conclusion of the program on September 30, 2022, the participant’s Plan account was credited with the number
of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to
purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAT.”
The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued
and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a per share exercise price of
$.25.
Under our Plan, the Company
under a Request For Waiver Program executed a Waiver Term Sheet of a unit program consisting of units of shares of stock and warrants
to a participant. After conclusion of the program on December 31, 2022, the participant’s Plan account was credited with the number
of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to
purchase one share of our Common Stock at a warrant exercise price of $.25. The warrant shall have the company notation of “ZNWAU.”
The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants will be issued
and become exercisable on November 15, 2025 and continue to be exercisable through December 31, 2025 at a per share exercise price of
$.25.
41
Under our Plan, the Company under a Request For Waiver Program executed
a Waiver Term Sheet program consisting of shares of stock to a participant. After conclusion of the program on May 1, 2023, the participant’s
Plan account will be credited with the number of shares of the Company’s Common Stock that will be acquired.
On March 13, 2023, Zion filed with the Securities
and Exchange Commission an Amendment No. 2 to the Prospectus Supplement dated as of December 15, 2021 and accompanying base prospectus
dated December 1, 2021 relating to the Company’s Dividend Reinvestment and Direct Stock Purchase Plan. The Prospectus forms a part
of the Company’s Registration Statement on Form S-3 (File No. 333-261452), as amended, which was declared effective by
the SEC on December 15, 2021.
An Amendment No. 2 to the Prospectus Supplement
was filed on March 13, 2023. This Amendment No. 2 to Prospectus Supplement amends the Prospectus Supplement. This Amendment No. 2 to Prospectus
Supplement should be read in conjunction with the Original Prospectus Supplement, the base Prospectus and Amendment No. 1. This Amendment
No. 2 is incorporated by reference into the Original Prospectus Supplement. This Amendment No. 2 is not complete without, and may not
be delivered or utilized except in connection with, the Original Prospectus Supplement, including any amendments or supplements thereto.
Amendment No. 2 - New Unit Option under the
Unit Program
Under our Plan, we are providing a Unit Option
under Amendment No. 2. Our Unit Program consists of the combination of Common Stock and warrants with basic Unit Program features, conditions
and terms outlined in the Original Prospectus Supplement and Amendment No. 1. Amendment No. 2 provides the option period, unit price and
the determination of the number of shares of Common Stock and warrants per unit. This Unit Option has up to three tranches of investment,
in which the second and third tranches are each subject to termination upon a total of $7,500,000 received from participants by the Company
during the first or second tranche. The first tranche period began on March 13, 2023 and terminates on March 26, 2023. The second tranche
begins on March 27, 2023 and terminates on April 9, 2023 and the third tranche begins on April 10, 2023 and terminates on April 27, 2023,
subject to early termination upon reaching $7,500,000 of funds received from participants by the Company under this Unit Option.
Our Unit Program consists of the combination of
Common Stock and warrants with basic Unit Program features, conditions and terms outlined in the Original Prospectus Supplement and Amendment
No. 1. Amendment No. 2 provides the option period, unit price and the determination of the number of shares of Common Stock and warrants
per unit. This Unit Option begins on March 13, 2023 with the first tranche and is scheduled to terminate on March 26, 2023. The second
and third tranches follow upon the dates provided above. The Unit Option consists of Units of our securities where each Unit (priced at
$250.00 each) is comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by
the average of the high and low sale prices of the Company’s publicly traded common stock as reported on the OTCQX on the Unit Purchase
Date and (ii) Common Stock purchase warrants to purchase an additional five hundred (500) shares of Common Stock at a per share exercise
price of $0.05. The participant’s Plan account will be 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 $0.05. The warrant shall have the Company notation of “ZNWAV” under the first
tranche, “ZNWAW” under the second tranche and “ZNWAX” under the third tranche. The warrants will not be registered
for trading on the OTCQX or any other stock market or trading market.
42
Plan participants, who enroll into the Unit Program
with the purchase of at least one Unit and enroll in the separate Automatic Monthly Investments (“AMI”) program at a minimum
of $50.00 per month, will receive an additional fifty (50) warrants at an exercise price of $0.05 during this Unit Option Program. The
fifty (50) additional warrants are for enrolling into the AMI program and shall have the Company notation of “ZNWAY.” Existing
subscribers to the AMI are entitled to the additional fifty (50) warrants, if they purchase at least one (1) Unit during the Unit program.
Plan participants, who enroll in the AMI at a minimum of $100 per month, will receive one hundred (100) ZNWAY warrants. Plan participants,
who enroll in the AMI at a minimum of $250 per month, will receive two hundred and fifty (250) ZNWAY warrants. Plan participants, who
enroll in the AMI at a minimum of $500 per month, will receive five hundred (500) ZNWAY warrants. The AMI program requires 90 days of
participation to receive the ZNWAY warrants. Existing AMI participants are entitled to participant in this monthly program by increasing
their monthly amount above the minimum $50.00 per month.
The ZNWAV warrants will become exercisable on March
31, 2023 and continue to be exercisable through June 28, 2023 at a per share exercise price of $0.05. The ZNWAW warrants will become exercisable
on April 14, 2023 and continue to be exercisable through July 13, 2023 at a per share exercise price of $0.05. The ZNWAX warrants will
become exercisable on May 2, 2023 and continue to be exercisable through July 31, 2023 at a per share exercise price of $0.05. The ZNWAY
warrants will become exercisable on June 12, 2023 and continue to be exercisable through September 10, 2023 at a per share exercise price
of $0.05.
During 2022, two participants who participated in that aspect of the
DSPP called “Request For Waiver” contributed approximately 77% of the cash raised through the DSPP. During 2021, two participants
who participated in the “Request for Waiver” aspect of the DSPP contributed approximately 67% of the cash raised through the
DSPP.
The company raised approximately
$738,000 from the period January 1, 2023 through March 23, 2023, under the DSPP program.
For the years ended December
31, 2022, and 2021, approximately $19,129,000, and $26,219,000 were 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.
2018 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 continued 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