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Oil & Gas, Inc. Consolidated |
Condensed Notes to Financial Statements (Unaudited) Note |
2 - Summary of Significant Accounting Policies (cont’d) E. |
Stock-Based Compensation ASC |
718, “Compensation – Stock Compensation,” prescribes accounting and reporting standards for all share-based payment |
transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, |
options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, |
including grants of employee stock options, are recognized as compensation expense in the consolidated financial statements based on |
their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for |
the award, known as the requisite service period (usually the vesting period). The |
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, |
“Equity – Based Payments to Non-Employees.” Measurement of share-based payment transactions with non-employees is based |
on the fair value of whichever is more reliably 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. 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, with the exception of recurring monthly consulting fees paid to certain management personnel. 10 Zion |
Oil & Gas, Inc. Consolidated |
Condensed Notes to Financial Statements (Unaudited) Note |
2 - Summary of Significant Accounting Policies (cont’d) H. |
Recently Adopted Accounting Pronouncements 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 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 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 March 31, 2022 |
and December 31, 2021. 11 Zion |
Oil & Gas, Inc. Consolidated |
Condensed Notes to Financial Statements (Unaudited) Note |
2 - Summary of Significant Accounting Policies (cont’d) I. |
Depreciation and Accounting for Drilling Rig and Related Equipment On |
March 12, 2020, Zion entered into a Purchase and Sale Agreement with Central European Drilling kft (“CED”), a Hungarian corporation, |
to purchase an onshore oil and gas drilling rig, drilling pipe, related equipment and spare parts for a purchase price of $ 5.6 million |
in cash, subject to acceptance testing and potential downward adjustment. 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 |
uses the First In First Out (“FIFO”) method of accounting for the inventory spare parts, meaning that the earliest items |
purchased will be the first item charged to the well in which the inventory of spare parts gets consumed. It |
is also noteworthy that various components and systems on the rig will be subject to certifications by the manufacturer to ensure that |
the rig is maintained at optimal levels. Per standard practice in upstream oil and gas, each certification performed on our drilling |
rig increases the useful life of the rig by five years . The costs of each certification will be added to the drilling rig account, and |
our straight-line amortization will be adjusted accordingly. See |
the table below for a reconciliation of the rig-related activity during the quarter ended March 31, 2022: I-35 |
Drilling Rig & Associated Equipmen Three-month |
period ended March 31, 2022 I-35 Drilling Rig Rig Spare Parts Other Drilling Assets Total US$ |
thousands US$ |
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