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may contract with other operators in Israel to provide drilling services at market rates then in effect. Zion has the trademark “ZION DRILLING” |
filed with the United States Patent and Trademark Office. Zion has the trademark filed with the World Intellectual Property Organization |
in Geneva, Switzerland, pursuant to the Madrid Agreement and Protocol. In addition, Zion has the trademark filed with the Israeli Trademark |
Office in Israel. Exploration Rights/Exploration Activities Megiddo-Jezreel Petroleum License, No. 401 |
(“MJL 401”) and New Megiddo License 428 (“NML 428”) The Megiddo-Jezreel License 401 was awarded on December 3, 2013 for |
a three-year primary term through December 2, 2016 with the possibility of additional one-year extensions up to a maximum of seven years |
or December 3, 2020. The Megiddo-Jezreel License 401 lies onshore, south and west of the Sea of Galilee, and we continue our exploration |
focus here based on our studies as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration |
potential. The NML 428 (covering the same area as MJL 401) |
was awarded on December 3, 2020 for a nine-month term with the possibility of an additional six-month extension. On April 29, 2021, Zion |
submitted a request to the Ministry of Energy for a six-month extension to December 2, 2021. On May 30, 2021, the Ministry of Energy approved |
our request for extension to December 2, 2021. On November 29, 2021, the Ministry of Energy approved our request for extension to August |
1, 2022. On July 25, 2022, Zion submitted a request to the Ministry of Energy for a six-month extension to February 1, 2023. On July 31, |
2022, the Ministry of Energy approved our request for extension to February 1, 2023. This license effectively replaced the Megiddo-Jezreel |
License 401 as it has the same area and coordinates. Zion spudded its MJ-02 exploratory well on January |
6, 2021. On November 23, 2021, Zion announced via a press release that it completed drilling the MJ-02 well to a total depth of 5,531 |
meters (~18,141 feet) with a 6 inch open hole at that depth. A full set of detailed and comprehensive tests including neutron-density, |
sonic, gamma, and resistivity logs were acquired in December 2021, as a result of which we identified encouraging zones of interest. During the third quarter of 2022, Zion perforated |
and stimulated two deep zones. On October 3, 2022, Zion sent a database email |
update to its supporters announcing the followin (1) We are encouraged by the results of our recent testing operations, especially the |
lower zone (approximately 20 meters in thickness), which is our primary zone of interest, (2) We are currently facing a downhole obstacle |
in the form of heavy water influx from the upper zone inhibiting the potential flow of hydrocarbons from the lower zone and (3) After |
consultation with outside experts, we plan to isolate and neutralize the heavy water influx by procuring a 4.5” packer and installing |
it below the heavy water zone and above our primary zone. Zion suspended its operations at the MJ-02 pad site during October |
2022 due to several Jewish holidays during the month. Beginning in early November 2022, Zion resumed its testing operations after procuring |
the necessary equipment and personnel. 7 Zion Oil & Gas, Inc. Consolidated Condensed Notes to Financial Statements |
(Unaudited) Note 1 - Nature of Operations, Basis of Presentation and Going Concern (cont’d) B. Basis of Presentation The accompanying unaudited interim consolidated condensed financial |
statements of Zion Oil & Gas, Inc. have been prepared in accordance with accounting principles generally accepted in the United States |
of America (“GAAP”) for interim financial information and with Article 8-03 of Regulation S-X. Accordingly, they do not |
include all of the information and notes required by GAAP for complete financial statements. In the opinion of management, 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 and nine months ended September 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 nine months ended September 30, 2022, the Company incurred |
a net loss of approximately $ 7.1 million and had an accumulated deficit of approximately $ 230.7 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 53,985,877 and 41,395,169 and 21,810,891 and 17,471,772 Common Stock equivalents in the three and nine-month period ended September 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 nine months ended September |
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 $ 59,169,000 and $ 46,950,000 as of September 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 September |
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,” |
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