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all adjustments, consisting only of normal recurring accruals necessary for a fair statement of financial position, results of operations |
and cash flows, have been included. The information included in this Quarterly Report on Form 10-Q should be read in conjunction with |
the financial statements and the accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December |
31, 2021. The year-end balance sheet data presented for comparative purposes was derived from audited financial statements, but does not |
include all disclosures required by GAAP. The results of operations for the three months ended June 30, 2022 are not necessarily indicative |
of the operating results for the year ending December 31, 2022 or for any other subsequent interim period. C. Going Concern The Company incurs cash outflows from operations, |
and all exploration activities and overhead expenses to date have been financed by way of equity or debt financing. The recoverability |
of the costs incurred to date is uncertain and dependent upon achieving significant commercial production of hydrocarbons. The |
Company’s ability to continue as a going concern is dependent upon obtaining the necessary financing to undertake further exploration |
and development activities and ultimately generating profitable operations from its oil and natural gas interests in the future. The Company’s |
current operations are dependent upon the adequacy of its current assets to meet its current expenditure requirements and the accuracy |
of management’s estimates of those requirements. Should those estimates be materially incorrect, the Company’s ability to |
continue as a going concern may be impaired. The consolidated financial statements have been prepared on a going concern basis, which |
contemplates realization of assets and liquidation of liabilities in the ordinary course of business. During the six months ended June |
30, 2022, the Company incurred a net loss of approximately $ 4.8 million and had an accumulated deficit of approximately $ 228.3 million. |
These factors raise substantial doubt about the Company’s |
ability to continue as a going concern. To carry out planned operations, the Company must |
raise additional funds through additional equity and/or debt issuances or through profitable operations. There can be no assurance that |
this capital or positive operational income will be available to the Company, and if it is not, the Company may be forced to curtail or |
cease exploration and development activities. The consolidated financial statements do not include any adjustments that might result from |
the outcome of this uncertainty 8 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 2 - Summary of Significant Accounting |
Policies A. Net Gain (Loss) per |
Share Data Basic and diluted net (loss) gain per share of |
common stock, par value $ 0.01 per share (“Common Stock”), is presented in conformity with ASC 260-10 “Earnings Per Share.” |
Diluted net loss per share is the same as basic net loss per share, as the inclusion of 37,061,435 and 34,216,856 and 16,426,527 and 15,248,643 Common Stock equivalents in the three and six-month period ended June 30, 2022 and 2021 respectively, would be anti-dilutive. B. Use of Estimates The preparation of the accompanying consolidated |
financial statements in conformity with accounting principles generally accepted in the United States of America requires management to |
make estimates and assumptions about future events. These estimates and the underlying assumptions affect the amounts of assets and liabilities |
reported, disclosures about contingent assets and liabilities, and reported amounts of expenses. Such estimates include the valuation |
of unproved oil and gas properties, deferred tax assets, asset retirement obligations, borrowing rate of interest consideration for leases |
accounting and legal contingencies. These estimates and assumptions are based on management’s best estimates and judgment. Management |
evaluates its estimates and assumptions on an ongoing basis using historical experience and other factors, including the current economic |
environment, which management believes to be reasonable under the circumstances. The Company adjusts such estimates and assumptions when |
facts and circumstances dictate. Illiquid credit markets, volatile equity, foreign currency, and energy markets have combined to increase |
the uncertainty inherent in such estimates and assumptions. As future events and their effects cannot be determined with precision, actual |
results could differ significantly from these estimates. Changes in those estimates resulting from continuing changes in the economic |
environment will be reflected in the consolidated financial statements in future periods. The full extent to which the COVID-19 pandemic |
may directly or indirectly impact our business, results of operations and financial condition, will depend on future developments that |
are uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to contain it or treat |
COVID-19, as well as the economic impact on local, regional, national and international markets. We have made estimates of the impact |
of COVID-19 within our consolidated financial statements, and although there is currently no major impact, there may be changes to those |
estimates in future periods. Actual results may differ from these estimates. C. Oil and Gas Properties |
and Impairment The Company follows the full-cost method of accounting |
for oil and gas properties. Accordingly, all costs associated with acquisition, exploration and development of oil and gas reserves, including |
directly related overhead costs, are capitalized. All capitalized costs of oil and gas properties, |
including the estimated future costs to develop proved reserves, are amortized on the unit-of-production method using estimates of proved |
reserves. Investments in unproved properties and major development projects are not amortized until proved reserves associated with the |
projects can be determined or until impairment occurs. If the results of an assessment indicate that the properties are impaired, the |
amount of the impairment is included in loss from continuing operations before income taxes, and the adjusted carrying amount of the proved |
properties is amortized on the unit-of-production method. The Company’s oil and gas property represents |
an investment in unproved properties. These costs are excluded from the amortized cost pool until proved reserves are found or until it |
is determined that the costs are impaired. All costs excluded are reviewed at least quarterly to determine if impairment has occurred. |
The amount of any impairment is charged to expense since a reserve base has not yet been established. Impairment requiring a charge to |
expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information. During the three and six months ended June 30, |
2022, and 2021, respectively, the Company did not record any post-impairment charges. Currently, |
the Company has no economically recoverable reserves and no amortization base. The Company’s unproved oil and gas properties consist |
of capitalized exploration costs of $ 53,250,000 and $ 46,950,000 as of June 30, 2022 and December 31, 2021, respectively. 9 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 2 - Summary of Significant Accounting Policies (cont’d) D. |
Fair Value Measurements The Company follows Accounting Standards Codification |
(ASC) 820, “Fair Value Measurements and Disclosures,” as amended by Financial Accounting Standards Board (FASB) Financial |
Staff Position (FSP) No. 157 and related guidance. Those provisions relate to the Company’s financial assets and liabilities carried |
at fair value and the fair value disclosures related to financial assets and liabilities. ASC 820 defines fair value, expands related |
disclosure requirements, and specifies a hierarchy of valuation techniques based on the nature of the inputs used to develop the fair |
value measures. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly |
transaction between market participants at the measurement date, assuming the transaction occurs in the principal or most advantageous |
market for that asset or liability. The Company uses a three-tier fair value hierarchy |
to classify and disclose all assets and liabilities measured at fair value on a recurring basis, as well as assets and liabilities measured |
at fair value on a non-recurring basis, in periods subsequent to their initial measurement. The hierarchy requires the Company to use |
observable inputs when available, and to minimize the use of unobservable inputs, when determining fair value. The three tiers are defined |
as follows: ● Level 1—Observable inputs that reflect quoted market prices (unadjusted) for identical assets or liabilities in active markets; ● Level 2—Observable inputs other than quoted prices in active markets that are observable either directly or indirectly in the marketplace for identical or similar assets and liabilities; and ● Level 3—Unobservable inputs that are supported by little or no market data, which require the Company to develop its own assumptions. The Company’s financial |
instruments, including cash and cash equivalents, accounts payable and accrued liabilities, are carried at historical cost. At June 30, |
2022, and December 31, 2021, the carrying amounts of these instruments approximated their fair values because of the short-term nature |
of these instruments. Derivative instruments are carried at fair value, generally estimated using the Binomial Model. 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. 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 |
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