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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 measurab |
(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. 10 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 2 - Summary of Significant Accounting Policies (cont’d) F. Warrants In connection with the Dividend Reinvestment and |
Stock Purchase Plan (“DSPP”) financing arrangements, the Company has issued warrants to purchase shares of its common stock. |
The outstanding warrants are stand-alone instruments that are not puttable or mandatorily redeemable by the holder and are classified |
as equity awards. The Company measures the fair value of the awards using the Black-Scholes option pricing model as of the measurement |
date. Warrants issued in conjunction with the issuance of common stock are initially recorded and accounted as a part of the DSPP investment |
as additional paid-in capital of the common stock issued. All other warrants are recorded at fair value and expensed over the requisite |
service period, or at the date of issuance, if there is not a service period. Warrants granted in connection with ongoing arrangements |
are more fully described in Note 3, Stockholders’ Equity . G. Related parties Parties are considered to be related to the Company |
if the parties, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with |
the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal |
owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly |
influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully |
pursuing its own separate interests. All transactions with related parties are recorded at fair value of the goods or services exchanged. Zion did not have any related party transactions |
for the periods covered in this report. H. Recently Adopted Accounting |
Pronouncements ASU 2016-02 – 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 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 |
2020, 2021 and 2022 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. 11 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 2 - Summary of Significant Accounting Policies (cont’d) ASU 2020-03, “Codification Improvements to Financial Instruments” In March 2020, the FASB issued ASU 2020-03, “Codification |
Improvements to Financial Instruments”: The amendments in this update are to clarify, correct errors in, or make minor improvements |
to a variety of ASC topics. The changes in ASU 2020-03 are not expected to have a significant effect on current accounting practices. |
The ASU improves various financial instrument topics in the Codification to increase stakeholder awareness of the amendments and to expedite |
the improvement process by making the Codification easier to understand and easier to apply by eliminating inconsistencies and providing |
clarifications. The ASU is effective for smaller reporting companies for fiscal years beginning after December 15, 2022 with early application |
permitted. The Company is currently evaluating the impact the adoption of this guidance may have on its consolidated financial statements. In August 2020, the FASB issued Accounting Standards |
Update (“ASU”) No. 2020-06, Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging-Contracts |
in Entity’s Own Equity (Subtopic 815-40), Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity. |
The ASU simplifies accounting for convertible instruments by removing major separation models required under current GAAP. Consequently, |
more convertible debt instruments will be reported as a single liability instrument with no separate accounting for embedded conversion |
features. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception, |
which will permit more equity contracts to qualify for it. The ASU simplifies the diluted net income per share calculation in certain |
areas. The ASU is effective for annual and interim periods beginning after December 31, 2021, and early adoption is permitted for fiscal |
years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not believe that this ASU will |
have any impact on its consolidated financial statements. The Company does not believe that the adoption |
of any of the recently issued accounting pronouncements 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. See Note 5 for more complete details on balances at |
September 30, 2022 and December 31, 2021. It is the Company’s practice to review any |
newly established Accounting Standard Updates with each reporting period. As of September 30, 2022, and through the filing date of this |
report, no recently issued updates have been found applicable to have a material effect on the Company’s financial statements. I. Depreciation and Accounting |
for Drilling Rig and Related Equipment On March 12, 2020, Zion entered into a Purchase |
and Sale Agreement with Central European Drilling kft (“CED”), a Hungarian corporation, to purchase an onshore oil and gas |
drilling rig, drilling pipe, related equipment and spare parts for a purchase price of $ 5.6 million in cash, subject to acceptance testing |
and potential downward adjustment. 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 purchase closed during March 2020, |
it 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 uses the First In First Out (“FIFO”) |
method of accounting for the inventory spare parts, meaning that the earliest items purchased will be the first item charged to the well |
in which the inventory of spare parts gets consumed. It is also noteworthy that various components |
and systems on the rig will be subject to certifications by the manufacturer to ensure that the rig is maintained at optimal levels. Per |
standard practice in upstream oil and gas, each certification performed on our drilling rig increases the useful life of the rig by five |
years . The costs of each certification will be added to the drilling rig account, and our straight-line amortization will be adjusted |
accordingly. 12 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 2 - Summary of Significant Accounting Policies (cont’d) See the table below for a reconciliation of the rig-related activity |
during the nine months ended September 30, 2022: I-35 Drilling Rig & Associated Equipmen Nine-month period ended September 30, 2022 I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$ thousands US$ thousands US$ thousands US$ thousands December 31, 2021 5,859 642 333 6,834 Asset Additions - 151 221 372 Asset Depreciation ( 476 ) - ( 84 ) ( 560 ) Asset Disposals for Self-Consumption - ( 202 ) - ( 202 ) September 30, 2022 5,383 591 470 6,444 13 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity The Company’s shareholders approved the |
amendment of the Company’s Amended and Restated Certificate of Incorporation to increase the number of shares of common stock, par |
value $ 0.01 , that the Company is authorized to issue from 400,000,000 shares to 800,000,000 shares, effective June 9, 2021. A. 2011 Equity Incentive |
Stock Option Plan During the nine months ended September 30, 2022, |
the Company did not grant any options from the 2011 Equity Incentive Plan for employees, directors and consultants. During the nine months ended September 30, 2021, |
the Company granted the following options from the 2011 Equity Incentive Plan for employees, directors and consultants, to purchase shares |
of common stock as non-cash compensati i. Options to purchase 600,000 shares of Common Stock to six senior officers and three staff members 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 $ 456,000 . ii. Options to purchase 75,000 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, 2031 . The fair value of the options at the date of grant amounted to approximately $ 68,000 . These options were granted per the provisions under the Israeli Appendix to the Plan. iii. Options to purchase 1,800,000 shares of Common Stock to six senior officers and three staff members at an exercise price of $ 0.59 per share. The options vested upon grant and are exercisable through May 21, 2031. The fair value of the options at the date of grant amounted to approximately $ 885,000 . iv. Options to purchase 200,000 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 May 21, 2031 . The fair value of the options at the date of grant amounted to approximately $ 117,000 . These options were granted per the provisions under the Israeli Appendix to the Plan. 14 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity (cont’d) B. 2011 Non-Employee Directors |
Stock Option Plan During the nine months ended September 30, 2022, |
the Company did not grant any qualified (market value) options from the 2011 Non-Employee Directors Stock Option Plan to its directors. During the nine months ended September 30, 2021, |
the Company granted the following qualified (market value) and non-qualified options from the 2011 Non-Employee Directors Stock Option |
Plan for directors to purchase shares of common stock as non-cash compensati i. Options to purchase 350,000 shares of Common Stock to seven board members 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 $ 252,000 . ii. Options to purchase 50,000 shares of Common Stock to one board member 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 $ 45,000 . These options were granted per the provisions under the Israeli Appendix to the Plan. iii. Options to purchase 1,400,000 shares of Common Stock to six board members and one consultant at an exercise price of $ 0.59 per share. The options vested upon grant and are exercisable through May 21, 2027. The fair value of the options at the date of grant amounted to approximately $ 643,000 . iv. Options to purchase 200,000 shares of Common Stock to one board member at an exercise price of $ 0.01 per share. The options vested upon grant and are exercisable through May 21, 2027 . The fair value of the options at the date of grant amounted to approximately $ 116,000 . These options were granted per the provisions under the Israeli Appendix to the Plan. C. 2021 Incentive Stock |
Option Plan Effective June 9, 2021, the Company’s shareholders |
authorized the adoption of the Zion Oil & Gas, Inc. 2021 Omnibus Incentive Stock Option Plan (“Omnibus Plan”) for employees, |
directors and consultants, initially reserving for issuance thereunder 38,000,000 shares of common stock. The Omnibus Plan provides for the grant of incentive |