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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 . F- 15 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) O. |
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 2022 and 2021. P. |
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. Q. Other Comprehensive Income The Company does not have any activity that results in Other Comprehensive Income. F- 16 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) I-35 |
Drilling Rig & Associated Equipment I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$ thousands US$ thousands US$ thousands US$ thousands December 31, 2020 6,493 698 377 7,568 Asset Additions - 191 25 216 Asset Depreciation ( 634 ) - ( 69 ) ( 703 ) Asset Disposals for Self-Consumption - ( 247 ) - ( 247 ) December 31, 2021 5,859 642 333 6,834 Asset Additions - 179 221 400 Asset Depreciation ( 634 ) - ( 117 ) ( 751 ) Asset Disposals for Self-Consumption - ( 202 ) - ( 202 ) December 31, 2022 5,225 619 437 6,281 F- 17 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) Q. 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 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, 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. 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 recently issued accounting pronouncements in 2022 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, 2022, and 2021. In November 2021, the FASB issued ASU No. |
2021-10, Government Assistance (Topic 832): Disclosures by Business Entities about Government Assistance . The ASU requires entities |
to disclose information about certain types of government assistance they receive, including cash grants and tax credits. The new guidance |
requires expanded disclosure regarding the qualitative and quantitative characteristics of the nature, amount, timing, and significant |
terms and conditions of transactions with a government arising from a grant or other forms of assistance accounted for under a contribution |
model. The Company does not believe that this ASU will have any impact on its consolidated financial statements. In July 2021, the FASB issued ASU No. 2021-05, Leases (Topic 842): |
Lessors—Certain Leases with Variable Lease Payments . The ASU revises lessor lease classification guidance and requires accounting |
for certain leases with variable lease payments that do not depend on a reference index or rate as operating leases. Such classification |
is required if the lease would have been classified as a sales-type or direct financing lease in accordance with guidance in FASB ASC |
Topic 842 and the lessor would have otherwise recognized a day-one loss. The ASU is effective for fiscal years beginning after December |
15, 2021, including interim periods within those fiscal years. The Company adopted this guidance on January 1, 2022 using a prospective |
method, and the adoption did not have a material impact on our combined financial statements. On January 1, 2021, we adopted ASU No. 2019-12, Income Taxes (Topic |
740): Simplifying the Accounting for Income Taxes . The ASU removes certain exceptions from the guidance in ASC 740 related to intra-period |
tax allocations, interim calculations, and the recognition of deferred tax liabilities for outside basis differences and clarifies and |
simplifies several other aspects of accounting for income taxes. Different transition methods apply to the various income tax simplifications. |
For the changes requiring a retrospective or modified retrospective transition, the adoption of the new standard did not have a material |
impact to our consolidated financial statements. F- 18 Zion Oil & Gas, Inc. Notes to Consolidated Financial Statements Note 2 - Summary of Significant Accounting |
Policies (cont’d) Other Recent Accounting Pronouncements In September 2022, the FASB issued ASU No. 2022-04 , Liabilities |
– Supplier Finance Programs (Subtopic 405-50) . The ASU requires companies to disclose information about supplier finance programs, |
including key terms of the program, outstanding confirmed amounts as of the end of the period, a rollforward of such amounts during each |
annual period, and a description of where the amounts are presented. The new standard does not affect the recognition, measurement, or |
financial statement presentation of supplier finance obligations. The ASU is effective for fiscal years beginning after December 15, 2022, |
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