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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. 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 |
June 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 June 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 six months ended June 30, 2022: I-35 Drilling Rig & Associated Equipmen Six-month period ended June 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 - 135 211 346 Asset Depreciation ( 317 ) - ( 54 ) ( 371 ) Asset Disposals for Self-Consumption - ( 171 ) - ( 171 ) June 30, 2022 5,542 606 490 6,638 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 six months ended June 30, 2022, the |
Company did not grant any options from the 2011 Equity Incentive Plan for employees, directors and consultants. During the six months ended June 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 six months ended June 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 six months ended June 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 |
stock options, nonqualified stock options, stock appreciation rights, restricted stock, bonus stock, awards in lieu of cash obligations, |
other stock-based awards and performance units. The plan also permits cash payments under certain conditions. The compensation committee of the Board of Directors |
(comprised of independent directors) is responsible for determining the type of award, when and to whom awards are granted, the number |
of shares and the terms of the awards and exercise prices. The options are exercisable for a period not to exceed ten years from the date |
of grant. During the six months ended June 30, 2022, the |
Company granted the following options from the 2021 Equity Omnibus Plan for employees, directors and consultants, to purchase shares of |
common stock as non-cash compensati i. Options to purchase 175,000 shares of Common Stock to six senior officers and one staff member at an exercise price of $ 0.1529 per share. The options vested upon grant and are exercisable through January 4, 2032. The fair value of the options at the date of grant amounted to approximately $ 22,000 . ii. Options to purchase 25,000 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 4, 2032. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $ 4,000 . 15 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity (cont’d) iii. Options to purchase 300,000 shares of Common Stock to one senior officer and one staff member at an exercise price of $ 0.01 per share. The options vested upon grant and are exercisable through January 5, 2032. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $ 39,000 . iv. Options to purchase 200,000 shares of Common Stock one board member at an exercise price of $ 0.01 per share. The options vested upon grant and are exercisable through January 5, 2032. These options were granted per the provisions under the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $ 29,000 . v. Options to purchase 1,600,000 shares of Common Stock to five senior officers and four staff members at an exercise price of $ 0.1529 per share. The options vest on January 5, 2023 (one year from the date of grant) and are exercisable through January 5, 2032. The fair value of the options at the date of grant amounted to approximately $ 209,000 , and will be recognized during the years 2022 and 2023. vi. Options to purchase 1,400,000 shares of Common Stock to seven board members, at an exercise price of $ 0.1529 per share. The options vest on January 5, 2023 (one year from the date of grant) and are exercisable through January 5, 2032. The fair value of the options at the date of grant amounted to approximately $ 182,000 , and will be recognized during the years 2022 and 2023. vii. Options to purchase 160,000 shares of Common Stock to four staff members, at an exercise price of $ 0.01 per share. The options vested upon grant and are exercisable through January 17, 2032 . These options were granted per the provisions under the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $ 23,000 . viii. Options to purchase 200,000 shares of Common Stock to six staff members at an exercise price of $ 0.14 per share. The options vest on January 17, 2023 (one year from the date of grant) and are exercisable through January 17, 2032. The fair value of the options at the date of grant amounted to approximately $ 26,000 , and will be recognized during the years 2022 and 2023. ix. Options to purchase 40,000 shares of Common Stock to two consultants at an exercise price of $ 0.14 per share. The options vest on January 17, 2023 (one year from the date of grant) and are exercisable through January 17, 2032. The fair value of the options at the date of grant amounted to approximately $ 5,000 , and will be recognized during the years 2022 and 2023. x. Options to purchase 25,000 shares of Common Stock to one board member, at an exercise price of $ 0.11 per share. The options vested upon grant and are exercisable through April 1, 2032. The fair value of the options at the date of grant amounted to approximately $ 2,000 . xi. Options to purchase 3,210,000 shares of Common Stock to five senior officers, two consultants and ten staff members at an exercise price of $ 0.15 per share. The options vest on April 15, 2023 (in one year) and are exercisable through April 15, 2032. The fair value of the options at the date of grant amounted to approximately $ 394,000 , and will be recognized during the years 2022 and 2023. xii. Options to purchase 1,090,000 shares of Common Stock to one senior officer, one board member and five staff members at an exercise price of $ 0.01 per share. The options vested upon grant and are exercisable through April 15, 2032. These options were granted per the provisions of the Israeli Appendix to the Plan. The fair value of the options at the date of grant amounted to approximately $ 149,000 . xiii. Options to purchase 3,200,000 shares of Common Stock to eight board members at an exercise price of $ 0.15 per share. The options vest on April 15, 2023 (in one year) and are exercisable through April 15, 2023. The fair value of the options at the date of grant amounted to approximately $ 393,000 . During the six months ended June 30, 2021, the |
Company granted the following options from the 2021 Equity Omnibus Plan for employees, directors and consultants, to purchase shares of |
common stock as non-cash compensati i. Options to purchase 25,000 shares of Common Stock to one board member at an exercise price of $ 0.29 per share. The options vested upon grant and are exercisable through June 15, 2031. The fair value of the options at the date of grant amounted to approximately $ 6,000 . 16 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity (cont’d) C. Stock Options The stock option transactions since January 1, |
2022 are shown in the table be Number of shares Weighted Average exercise price US$ Outstanding, December 31, 2021 9,741,750 0.64 Changes during 2022 t Granted to employees, officers, directors and others 11,625,000 0.13 Expired/Cancelled/Forfeited ( 610,000 ) 0.83 Exercised ( 105,000 ) 0.01 Outstanding, June 30, 2022 20,651,750 0.35 Exercisable, June 30, 2022 11,001,750 0.53 17 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity (cont’d) The following table summarizes information about |
stock options outstanding as of June 30, 2022: Shares underlying outstanding options (non-vested) Shares underlying outstanding options (fully vested) Range of exercise price Number outstanding Weighted average remaining contractual life (years) Weighted Average Exercise price Range of exercise price Number Outstanding Weighted average remaining contractual life (years) Weighted Average Exercise price US$ US$ US$ US$ 0.14 240,000 9.56 0.14 0.01 10,000 1.37 0.01 0.15 3,000,000 9.52 0.15 0.01 5,000 1.95 0.01 0.15 6,410,000 9.80 0.15 0.01 20,000 3.92 0.01 — — — — 0.01 130,000 4.50 0.01 — — — — 0.01 50,000 4.51 0.01 — — — — 0.01 60,000 4.79 0.01 — — — — 0.01 200,000 4.88 0.01 — — — — 0.01 40,000 5.25 0.01 — — — — 0.01 70,000 5.50 0.01 — — — — 0.01 25,000 5.51 0.01 — — — — 0.01 30,000 5.66 0.01 — — — — 0.01 4,000 5.76 0.01 — — — — 0.01 25,000 6.52 0.01 — — — — 0.01 35,000 7.21 0.01 — — — — 0.01 150,000 7.38 0.01 — — — — 0.01 35,000 7.51 0.01 — — — — 0.01 75,000 8.51 0.01 — — — — 0.01 200,000 8.89 0.01 — — — — 0.01 335,000 9.04 0.01 — — — — 0.01 10,000 9.17 0.01 — — — — 0.01 500,000 9.51 0.01 — — — — 0.01 110,000 9.55 0.01 — — — — 0.01 1,090,000 9.79 0.01 — — — — 0.15 200,000 9.51 0.15 — — — — 0.15 25,000 9.75 0.15 — — — — 0.16 340,000 3.44 0.16 — — — — 0.16 75,000 7.44 0.16 — — — — 0.18 25,000 3.42 0.18 — — — — 0.25 50,000 9.17 0.25 — — — — 0.25 363,000 9.17 0.25 — — — — 0.28 25,000 3.17 0.28 — — — — 0.28 25,000 7.17 0.28 — — — — 0.29 25,000 4.95 0.29 — — — — 0.39 1,435,000 9.02 0.39 — — — — 0.59 1,400,000 4.88 0.59 — — — — 0.59 1,600,000 8.89 0.59 — — — — 0.92 350,000 4.51 0.92 — — — — 0.92 600,000 8.51 0.92 — — — — 1.33 25,000 0.83 1.33 — — — — 1.38 105,307 2.51 1.38 — — — — 1.67 405,943 2.26 1.67 — — — — 1.70 218,500 0.47 1.70 — — — — 1.75 250,000 1.02 1.75 — — — — 1.78 25,000 2.18 1.78 — — — — 2.31 250,000 1.51 2.31 — — — — 4.15 25,000 2.01 4.15 0.14 - 0.15 9,650,000 0.15 0.01 - 4.15 11,001,750 0.53 18 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 3 - Stockholders’ Equity (cont’d) Granted to employees The following table sets forth information about |
the weighted-average fair value of options granted to employees and directors during the year, using the Black Scholes option-pricing |
model and the weighted-average assumptions used for such grants: For the six months ended June 30, 2022 2021 Weighted-average fair value of underlying stock at grant date $ 0.14 $ 0.67 Dividend yields — — Expected volatility 127 %- 135 % 120 %- 143 % Risk-free interest rates 1.37 %- 2.79 % 0.16 %- 0.84 % Expected lives (in years) 5.00 - 5.50 3.00 - 5.00 Weighted-average grant date fair value $ 0.13 $ 0.55 Granted to non-employees The following table sets forth information about |
the weighted-average fair value of options granted to non-employees during the year, using the Black Scholes option-pricing model and |
the weighted-average assumptions used for such grants: For the six months ended June 30, 2022 2021 Weighted-average fair value of underlying stock at grant date $ 0.14 $ 0.59 Dividend yields — — Expected volatility 103 % - 104 % 113 % Risk-free interest rates 1.78 % - 2.83 % 1.07 % Expected lives (in years) 10 6.00 Weighted-average grant date fair value $ 0.13 $ 0.50 The risk-free interest rate is based on the U.S. |
Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the options. The expected life represents the weighted average |
period of time that options granted are expected to be outstanding. The expected life of the options granted to employees and directors |
is calculated based on the Simplified Method as allowed under Staff Accounting Bulletin No. 110 (“SAB 110”), giving |
consideration to the contractual term of the options and their vesting schedules, as the Company does not have sufficient historical exercise |
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