ZION OIL & GAS INC - FORM 10-Q

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EX-32.2 - CERTIFICATION - ZION OIL & GAS INC	f10q0321ex32-2_zionoilgas.htm
EX-32.1 - CERTIFICATION - ZION OIL & GAS INC	f10q0321ex32-1_zionoilgas.htm
EX-31.2 - CERTIFICATION - ZION OIL & GAS INC	f10q0321ex31-2_zionoilgas.htm
EX-31.1 - CERTIFICATION - ZION OIL & GAS INC	f10q0321ex31-1_zionoilgas.htm
EX-10.1 - EMPLOYMENT AGREEMENT DATED JANUARY 1, 2021 AND MADE EFFECTIVE JANUARY 1, 2021 BE - ZION OIL & GAS INC	f10q0321ex10-1_zionoilgas.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

MARK ONE

☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the Quarterly Period ended March 31, 2021; or

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

for the transition period from ________ to ________

ZION OIL & GAS, INC.

(Exact name of registrant as specified in its charter)

Delaware		20-0065053
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

12655 N Central Expressway, Suite 1000, Dallas, TX		75243
(Address of principal executive offices)		Zip Code

(214) 221-4610

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	☐	Accelerated filer	☐
Non-accelerated filer	☐	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of May 12, 2021, Zion Oil & Gas, Inc. had outstanding 248,881,698 shares of common stock, par value $0.01 per share.

INDEX PAGE

	Page

PART I — FINANCIAL INFORMATION

Item 1 – Financial Statements – Unaudited

Consolidated Condensed Balance Sheets – March 31, 2021 and December 31, 2020	1

Consolidated Condensed Statements of Operations for the three months ended March 31, 2021 and 2020	2

Consolidated Condensed Statement of Changes in Stockholders’ Equity for the three months ended March 31, 2021 and 2020	3

Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2021 and 2020	4

Notes to Consolidated Condensed Financial Statements	6

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3 – Quantitative and Qualitative Disclosures About Market Risk	42

Item 4 – Controls and Procedures	42

PART II — OTHER INFORMATION

Item 1 – Legal Proceedings	43

Item 1A – Risk Factors	44

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds	44

Item 3 – Defaults upon Senior Securities	44

Item 4 – Mine Safety Disclosures	44

Item 5 – Other Information	44

Item 6 – Exhibits	45

Exhibit Index	45

SIGNATURES	46

Zion Oil & Gas, Inc.

Consolidated Condensed Balance Sheets as of

	March 31, 2021			December 31, 2020
	US$ thousands			US$ thousands
	(Unaudited)
Current assets
Cash and cash equivalents		6,293			11,708
Fixed short term bank and escrow deposits – restricted		1,954			2,954
Prepaid expenses and other		1,370			1,900
Other deposits		576			597
Governmental receivables		1,685			2,040
Other receivables		90			195
Total current assets		11,968			19,394

Unproved oil and gas properties, full cost method (see Note 4)		23,702			15,526

Property and equipment at cost
Drilling rig and related equipment, net of accumulated depreciation of $169 and nil (see note 2J)		7,417			7,568
Property and equipment, net of accumulated depreciation of $574 and $564		141			131
		7,558			7,699

Right of Use Lease Assets (see Note 7)		382			438

Other assets

Assets held for severance benefits		461			446
Total other assets		461			446

Total assets		44,071			43,503

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable		1,896			1,369
Lease obligation – current (see Note 7)		156			191
Asset retirement obligation		571			571
Derivative liability (see Note 6)		5			431
10% Senior convertible bonds, net of unamortized deferred financing cost of $3 and $9 and unamortized debt discount of $60 and $205 at March 31, 2021 and December 31, 2020, respectively (see Note 5)		3,174			3,033
Accrued liabilities		1,312			1,987
Total current liabilities		7,114			7,582

Long-term liabilities
Lease obligation – non-current (see Note 7)		262			307
Provision for severance pay		475			505
Total long-term liabilities		737			812

Total liabilities		7,851			8,394

Commitments and contingencies (see Note 8)

Stockholders’ equity
Common stock, par value $.01; Authorized: 400,000,000 shares at March 31, 2021: Issued and outstanding: 241,350,523 and 237,381,555 shares at March 31, 2021 and December 31, 2020, respectively		2,414			2,374
Additional paid-in capital		249,170			245,539
Accumulated deficit		(215,364	)		(212,804	)
Total stockholders’ equity		36,220			35,109

Total liabilities and stockholders’ equity		44,071			43,503

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

Zion Oil & Gas, Inc.

Consolidated Condensed Statements of Operations (Unaudited)

	For the three months ended
	March 31,
	2021			2020
	US$ thousands			US$ thousands
	(Unaudited)			(Unaudited)
General and administrative		1,971			975
Other		792			468
Loss from operations		(2,763	)		(1,443	)

Other expense, net
Gain on derivative liability		426			16
Foreign exchange gain/(loss)		(63	)		11
Financial (expenses), net		(160	)		(192	)

Loss, before income taxes		(2,560	)		(1,608	)
Income taxes		-			-

Net loss		(2,560	)		(1,608	)

Net loss, per share of common stock
Basic and diluted (in US$)		(0.01	)		(0.01	)

Weighted-average shares outstanding
Basic and diluted (in thousands)		238,941			138,813

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

Zion Oil & Gas, Inc.

Consolidated Condensed Statement of Changes in Stockholders’ Equity (Unaudited)

For the three months ended March 31, 2021

	Common Stock				Additional paid-in		Accumulated
	Shares		Amounts		Capital		deficit			Total
	thousands		US$ thousands		US$ thousands		US$ thousands			US$ thousands

Balances as of December 31, 2020		237,382		2,374		245,539		(212,804	)		35,109
Funds received from sale of DSPP units and shares		3,848		39		2,810		—			2,849
Value of bonds converted to shares		4		*		—		—			—
Funds received from option exercises		117		1		—		—			1
Value of options granted to employees, directors and others as non-cash compensation		—		—		821		—			821
Net loss		—		—		—		(2,560	)		(2,560	)
Balances as of March 31, 2021		241,351		2,414		249,170		(215,364	)		36,220

For the three months ended March 31, 2020

	Common Stock				Additional paid-in		Accumulated
	Shares		Amounts		Capital		deficit			Total
	thousands		US$ thousands		US$ thousands		US$ thousands			US$ thousands

Balances as of December 31, 2019		123,973		1,240		217,892		(205,808	)		13,324
Funds received from sale of DSPP units and shares		40,328		403		8,706		—			9,109
Value of bonds converted to shares		2		*		—		—			—
Funds received from option exercises		388		4		—		—			4
Value of options granted to employees, directors and others as non-cash compensation		—		—		56		—			56
Net loss		—		—		—		(1,608	)		(1,608	)
Balances as of March 31, 2020		164,691		1,647		226,654		(207,416	)		20,885

Less than one thousand.

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

Zion Oil & Gas, Inc.

Consolidated Condensed Statements of Cash Flows (Unaudited)

	For the three months ended March 31,
	2021			2020
	US$ thousands			US$ thousands
	(Unaudited)			(Unaudited)
Cash flows from operating activities
Net loss		(2,560	)		(1,608	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation		179			15
Cost of options issued to employees, directors and others as non-cash compensation		821			56
Amortization of debt discount related to convertible bonds		141			180
Non-cash interest expense		-			-
Change in derivative liability		(426	)		(16	)
Change in assets and liabilities, net:
Other deposits		21			197
Prepaid expenses and other		530			(163	)
Governmental receivables		355			24
Lease obligation – current		(35	)		1
Lease obligation – non current		(45	)		(73	)
Right of use lease assets		56			52
Other receivables		105			(199	)
Severance payable, net		(45	)		-
Accounts payable		(150	)		110
Asset retirement obligation		-			(14	)
Accrued liabilities		(1,088	)		(288	)
Net cash used in operating activities		(2,141	)		(1,726	)

Cash flows from investing activities
Acquisition of property and equipment		(20	)		(3	)
Acquisition of drilling rig and related equipment		(76	)		(4,609	)
Investment in unproved oil and gas properties		(7,028	)		(162	)
Net cash used in investing activities		(7,124	)		(4,774	)

Cash flows from financing activities
Payments related to capital lease		-			(4	)
Proceeds from exercise of stock options		1			4
Proceeds from issuance of stock and exercise of warrants		2,849			9,109
Net cash provided by financing activities		2,850			9,109

Net (decrease)/increase in cash, cash equivalents and restricted cash		(6,415	)		2,609
Cash, cash equivalents and restricted cash – beginning of period		14,662			5,935
Cash, cash equivalents and restricted cash – end of period		8,247			8,544

Supplemental schedule of cash flow information
Cash paid for interest		-			1

Non-cash investing and financing activities:
					-
Unpaid investments in oil & gas properties		2,363			57
Capitalized convertible bond interest attributed to oil and gas properties		79			20

Less than one thousand

The accompanying notes are an integral part of the unaudited interim consolidated condensed financial statements.

Cash, cash equivalents and restricted cash, are comprised as follows:

	March 31, 2021		December 31, 2020
	US$ thousands		US$ thousands
Cash and cash equivalents		6,293		11,708
Restricted cash included in fixed long-term bank deposits		1,954		2,954
		8, 247		14,662

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 1 - Nature of Operations, Basis of Presentation and Going Concern

A. Nature of Operations

Zion Oil & Gas, Inc., a Delaware corporation (“we,” “our,” “Zion” or the “Company”) is an oil and gas exploration company with a history of 21 years of oil & gas exploration in Israel. As of March 31, 2021, the Company has no revenues from its oil and gas operations.

Zion maintains its corporate headquarters in Dallas, Texas. The Company also has branch offices in Caesarea, Israel and Geneva, Switzerland. The purpose of the Israel branch is to support the Company’s operations in Israel, and the purpose of the Switzerland branch is to operate a foreign treasury center for the Company.

On January 24, 2020, Zion incorporated a wholly owned subsidiary, Zion Drilling, Inc., a Delaware corporation, for the purpose of owning a drilling rig, related equipment and spare parts, and on January 31, 2020, Zion incorporated another wholly owned subsidiary, Zion Drilling Services, Inc., a Delaware corporation, to act as the contractor providing such drilling services. When Zion is not using the rig for its own exploration activities, Zion Drilling Services 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

The Company currently holds one active petroleum exploration license onshore Israel, the New Megiddo License 428 (“NML 428”), comprising approximately 99,000 acres. The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. This license lies onshore, south and west of the Sea of Galilee and we continue our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential.

The Megiddo Jezreel #1 (“MJ #1”) exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company successfully cased and cemented the well while awaiting the approval of the testing protocol. The Ministry of Energy approved the well testing protocol on April 29, 2018.

During the fourth quarter of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2018, the Company recorded a non-cash impairment charge to its unproved oil and gas properties of $30,906,000. During the three months ended March 31, 2021, and 2020, respectively, the Company did not record any post-impairment charges.

The MJ#1 well provided Zion with information Zion believes is important for potential future exploration efforts within its license area. As with many frontier wildcat wells, the MJ#1 also left several questions unanswered.

While not meant to be an exhaustive list, a summary of what Zion believes to be key information learned in the MJ#1 well is as follows:

The MJ#1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well. In our opinion, this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from an organic-rich source rock.

The known organic rich (potentially hydrocarbon bearing) Senonian age source rocks that are typically present in this part of Israel were not encountered as expected. Zion expected these source rocks to be encountered at approximately 1,000 meters in the MJ#1 well.

MJ#1 had natural fractures, permeability (the ability of fluid to move through the rock) and porosity (pore space in rock) that allowed the sustained flow of formation fluid in the shallower Jurassic and lower Cretaceous age formations between approximately 1,200 and 1,800 meters. While no hydrocarbons were encountered, Zion believes this fact is nonetheless significant because it provides important information about possible reservoir pressures and the ability of fluids to move within the formation and to the surface.

MJ#1 encountered oil in the Triassic Mohilla formation which Zion believes suggests an active deep petroleum system is in Zion’s license area. There was no natural permeability or porosity in the Triassic Mohilla formation to allow formation fluid to reach the surface naturally during testing, and thus the MJ#1 was not producible or commercial

The depths and thickness of the formations we encountered varied greatly from pre-drill estimates. This required the MJ#1 to be drilled to a much greater depth than previously expected. Zion has tied these revised formation depths to seismic data which will allow for more accurate interpretation and mapping in the future.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 1 - Nature of Operations, Basis of Presentation and Going Concern (cont’d)

A summary of what Zion believes to be some key questions left to be answered are:

Is the missing shallow Senonian age source rock a result of regional erosion, or is it missing because of a fault that cut the well-bore and could be reasonably expected to be encountered in the vicinity of the MJ#1 drill site? Zion believes this is an important question to answer because if the Senonian source rocks do exist in this area, the high temperatures encountered are sufficient to mature these source rocks and generate oil.

Do the unusually high shallow subsurface temperatures extend regionally beyond the MJ#1 well, which could allow for the generation of hydrocarbons in the Senonian age source rock within our license area?

As a consequence of seismic remapping, where does the MJ#1 well lie relative to the potential traps at the Jurassic and Triassic levels and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps?

As a result of these unanswered questions and with the information gained drilling the MJ#1 well, Zion believed it was prudent and consistent with good industry practice to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion has completed all of the acquisition, processing and interpretation of the 3-D data and has incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well (see further details below).

Zion’s geology team is continuing on a larger interpretation of 3D areas, along with potential exploration locations located in the western portion of the NML 428 area.

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. The Megiddo-Jezreel License 401 lies onshore, south and west of the Sea of Galilee, and we continue our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential.

The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. This license effectively replaced the Megiddo-Jezreel License 401 as it has the same area and coordinates.

The MJ-02 drilling plan was approved by the Ministry of Energy on July 29, 2020. On January 6, 2021, Zion officially spudded its MJ-02 exploratory well. Zion plans to reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately 150 days.

As of the date of this report, our drilling of the MJ-02 well is continuing as planned.

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, 2020. 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 March 31, 2021 are not necessarily indicative of the operating results for the year ending December 31, 2021 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.

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 three months ended March 31, 2021, the Company incurred a net loss of approximately $2.6 million and had an accumulated deficit of approximately $215.4 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.

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 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 10,969,456 and 10,593,488 Common Stock equivalents in 2021, and 2020 respectively, would be anti-dilutive.

B. Use of Estimates

The preparation of the accompanying consolidated condensed 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 revenues and expenses. Such estimates include the valuation of unproved oil and gas properties, deferred tax assets, asset retirement obligations 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 months ended March 31, 2021, and 2020, 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 $23,702,000 and $15,526,000 as of March 31, 2021 and December 31, 2020, respectively.

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 March 31, 2021, and December 31, 2020, 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. Derivative Liabilities

In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the embedded derivatives associated with the Convertible Bonds are accounted for as a liability during the term of the related Convertible Bonds (see Note 5).

F. 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 measurable: (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.

G. 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.

H. 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.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 2 - Summary of Significant Accounting Policies (cont’d)

I. Recently Adopted Accounting Pronouncements

ASU 2016-15 – “Classification of Certain Cash Receipts and Cash Payments”

In August 2016, the FASB issued AS 2016-15, “Classification of Certain Cash Receipts and Cash Payments”, which clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The effective date for ASU 2016-15 is for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. Early adoption is permitted. The Company does not believe that this ASU has any impact on our consolidated financial statements.

ASU 2018-05 – Income Taxes (Topic 740)

In March 2018, the FASB issued ASU 2018-05, “Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118”. This ASU expresses the view of the staff regarding application of Topic 740, Income Taxes, in the reporting period that includes December 22, 2017, the date on which the Tax Cuts and Jobs Act (H.R.1, An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year 2018) was signed into law. The Company is currently evaluating the impact of adopting ASU 2018-05 on our consolidated financial statements.

Effective January 1, 2019, the Company adopted Accounting Standards Update (“ASU”) No. 2016-02, Leases (“ASU 2016-02”) using the required modified retrospective approach. ASU 2016-02 requires lessees to record most leases on their balance sheets but recognize expenses on their income statements in a manner similar to current accounting. See discussion in Note 7 for more detail on the Company’s accounting policy with respect to lease accounting.

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 Financial Accounting Standards Board (“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 Contract’s 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 is currently evaluating the impact that this new guidance will have on its unaudited consolidated condensed financial statements.

The Company does not discuss recent pronouncements that are not anticipated to have an impact on or are unrelated to its financial condition, results of operations, cash flows or disclosures.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 2 - Summary of Significant Accounting Policies (cont’d)

J. Depreciation and Accounting for Drilling Rig and Inventory

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 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.

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 quarter ended March 31, 2021:

I-35 Drilling Rig & Associated Equipment:

	Three-month period ended March 31, 2021
	I-35 Drilling Rig			Rig Spare Parts			Other Drilling Assets		Total
	US$ thousands			US$ thousands			US$ thousands		US$ thousands
December 31, 2020		6,494			698			376		7,568

Asset Additions		-			50			26		76

Asset Depreciation		(169	)		-			-		(169	)

Asset Disposals for Self-Consumption		-			(58	)		-		(58	)

March 31, 2021		6,325			690			402		7,417

Note 3 - Stockholders’ Equity

The Company’s shareholders approved amending 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 200,000,000 shares to 400,000,000 shares, effective June 11, 2020.

A. 2011 Equity Incentive Stock Option Plan

During the three months ended March 31, 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 compensation:

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 were granted 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.

During the three months ended March 31, 2020, 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 compensation (the exercise of penny stock options is taxable at full market value on the date of exercise):

Options to purchase 110,000 shares of Common Stock to five senior officers at an exercise price of $0.01 per share. The options vested upon grant and are exercisable through January 6, 2030. The fair value of the options at the date of grant amounted to approximately $57,000.

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 three months ended March 31, 2021, the Company grant 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 compensation:

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 were granted 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.

During the three months ended March 31, 2020, the Company did not grant any qualified (market value) options from the 2011 Non-Employee Directors Stock Option Plan to its directors.

C. Stock Options

The stock option transactions since January 1, 2021 are shown in the table below:

	Number of shares			Weighted Average exercise price
				US$
Outstanding, December 31, 2020		3,797,750			1.14

Changes during 2021 to:
Granted to employees, officers, directors and others		1,075,000			0.81
Expired/Cancelled/Forfeited		-			-
Exercised		(117,000	)		0.01
Outstanding, March 31, 2021		4,755,750			1.09
Exercisable, March 31, 2021		4,755,750			1.09

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 March 31, 2021:

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$
	—		—		—		—		0.01		10,000		2.62		0.01
	—		—		—		—		0.01		5,000		3.20		0.01
	—		—		—		—		0.01		20,000		5.17		0.01
	—		—		—		—		0.01		130,000		5.75		0.01
	—		—		—		—		0.01		50,000		5.76		0.01
	—		—		—		—		0.01		60,000		6.04		0.01
	—		—		—		—		0.01		40,000		6.50		0.01
	—		—		—		—		0.01		87,500		6.75		0.01
	—		—		—		—		0.01		25,000		6.76		0.01
	—		—		—		—		0.01		30,000		6.91		0.01
	—		—		—		—		0.01		4,000		7.01		0.01
	—		—		—		—		0.01		25,000		7.77		0.01
	—		—		—		—		0.01		50.000		8.08		0.01
	—		—		—		—		0.01		105,000		8.46		0.01
	—		—		—		—		0.01		305,000		8.63		0.01
	—		—		—		—		0.01		60,000		8.76		0.01
	—		—		—		—		0.01		75,000		9.76		0.01
	—		—		—		—		0.16		340,000		5.19		0.16
	—		—		—		—		0.16		150,000		9.19		0.16
	—		—		—		—		0.18		25,000		5.17		0.18
	—		—		—		—		0.28		25,000		4.92		0.28
	—		—		—		—		0.28		25,000		8.92		0.28
	—		—		—		—		0.92		350,000		5.76		0.92
	—		—		—		—		0.92		600,000		9.76		0.92
	—		—		—		—		1.33		25,000		2.57		1.33
	—		—		—		—		1.38		108,000		0.26		1.38
	—		—		—		—		1.38		105,307		4.26		1.38
	—		—		—		—		1.55		250,000		1.68		1.55
	—		—		—		—		1.67		405,943		4.01		1.67
	—		—		—		—		1.70		218,500		2.22		1.70
	—		—		—		—		1.75		250,000		2.76		1.75
	—		—		—		—		1.78		25,000		3.93		1.78
	—		—		—		—		2.03		25,000		0.58		2.03
	—		—		—		—		2.31		250,000		3.25		2.31
									2.61		471,500		1.18		2.61
	—		—		—		—		4.15		25,000		3.76		4.15
									0.01-4.15		4,755,750				1.09

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 three months ended March 31,
	2021			2020
Weighted-average fair value of underlying stock at grant date	$	0.92		$	0.52
Dividend yields		—			—
Expected volatility		121%-143	%		103	%
Risk-free interest rates		0.16%-0.38	%		1.61	%
Expected lives (in years)		3.00-5.00			5.00
Weighted-average grant date fair value	$	0.77		$	0.51

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 three months ended March 31,
	2021		2020
Weighted-average fair value of underlying stock at grant date	$	—	$	—
Dividend yields		—		—
Expected volatility		—		—
Risk-free interest rates		—		—
Expected lives (in years)		—		—
Weighted-average grant date fair value	$	—	$	—

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 data at this time. The expected life of the option granted to non-employees equals their contractual term. In the case of an extension of the option life, the calculation was made on the basis of the extended life.

D. Compensation Cost for Warrant and Option Issuances

The following table sets forth information about the compensation cost of warrant and option issuances recognized for employees and directors:

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

The following table sets forth information about the compensation cost of warrant and option issuances recognized for non-employees:

The following table sets forth information about the compensation cost of option issuances recognized for employees and non-employees and capitalized to Unproved Oil & Gas properties:

E. Dividend Reinvestment and Stock Purchase Plan (“DSPP”)

On March 13, 2014 Zion filed a registration statement on Form S-3 that is part of a replacement registration statement that was filed with the SEC using a “shelf” registration process. The registration statement was declared effective by the SEC on March 31, 2014. On February 23, 2017, the Company filed a Form S-3 with the SEC (Registration No. 333-216191) as a replacement for the Form S-3 (Registration No. 333-193336), for which the three year period ended March 31, 2017, along with the base Prospectus and Supplemental Prospectus. The Form S-3, as amended, and the new base Prospectus became effective on March 10, 2017, along with the Prospectus Supplement that was filed and became effective on March 10, 2017. The Prospectus Supplement under Registration No. 333-216191 describes the terms of the DSPP and replaces the prior Prospectus Supplement, as amended, under the prior Registration No. 333-193336.

On March 27, 2014, we launched our Dividend Reinvestment and Stock Purchase Plan (the “DSPP”) pursuant to which stockholders and interested investors can purchase shares of the Company’s Common Stock as well as units of the Company’s securities directly from the Company. The terms of the DSPP are described in the Prospectus Supplement originally filed on March 31, 2014 (the “Original Prospectus Supplement”) with the Securities and Exchange Commission (“SEC”) under the Company’s effective registration Statement on Form S-3, as thereafter amended.

The ZNWAB warrants first became exercisable on May 2, 2016 and, in the case of ZNWAC on May 2, 2017 and in the case of ZNWAD on May 2, 2018, at a per share exercise price of $1.00.

As of May 2, 2017, any outstanding ZNWAB warrants expired.

As of May 2, 2018, any outstanding ZNWAC warrants expired.

On May 29, 2019, the Company extended the termination date of the ZNWAD Warrant by one (1) year from the expiration date of May 2, 2020 to May 2, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAD Warrant by two (2) years from the expiration date of May 2, 2021 to May 2, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

On November 1, 2016, the Company launched a unit offering under the Company’s DSPP pursuant to which participants could purchase units comprised of seven shares of Common Stock and seven Common Stock purchase warrants, at a per unit purchase price of $10. The warrant is referred to as “ZNWAE.”

The ZNWAE warrants became exercisable on May 1, 2017 and continued to be exercisable through May 1, 2020 at a per share exercise price of $1.00.

On May 29, 2019, the Company extended the termination date of the ZNWAE Warrant by one (1) year from the expiration date of May 1, 2020 to May 1, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAE Warrant by two (2) years from the expiration date of May 1, 2021 to May 1, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share at the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company may, in its sole discretion, accelerate the termination of the warrant upon providing 60 days advance notice to the warrant holders

On May 22, 2017, the Company launched a new unit offering. This unit offering consisted of a new combination of common stock and warrants, a new time period in which to purchase under the program, and a new unit price, but otherwise the same unit program features, conditions and terms in the Prospectus Supplement applied. The unit program terminated on July 12, 2017. This program enabled participants to purchase Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 25 shares of Common Stock at a warrant exercise price of $1.00 per share. The warrant is referred to as “ZNWAF.”

All ZNWAF warrants became exercisable on August 14, 2017 and continued to be exercisable through August 14, 2020 at a per share exercise price of $1.00.

On May 29, 2019, the Company extended the termination date of the ZNWAF Warrant by one (1) year from the expiration date of August 14, 2020 to August 14, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAF Warrant by two (2) years from the expiration date of August 14, 2021 to August 14, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon providing 60 days advance notice to the warrant holders.

An Amendment No. 2 to the Prospectus Supplement (as described below) was filed on October 12, 2017.

Under Amendment No. 2, the Company initiated another Unit Option Program which terminated on December 6, 2017. This Unit Option Program enabled participants to purchase Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s Common Stock as reported on the NASDAQ on the unit purchase date and (ii) Common Stock purchase warrants to purchase an additional 15 shares of Common Stock at a warrant exercise price of $1.00 per share. The warrant is referred to as “ZNWAG.”

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

The warrants became exercisable on January 8, 2018 and continue to be exercisable through January 8, 2023 at a per share exercise price of $1.00. The warrant terms provide that if the Company’s Common Stock trades above $5.00 per share as the closing price for 15 consecutive trading days at any time prior to the expiration date of the warrant, the Company has the sole discretion to accelerate the termination date of the warrant upon providing 60 days advance notice to the warrant holders.

On February 1, 2018, the Company launched another Unit Option Program which terminated on February 28, 2018. The Unit Option consisted of Units of our securities where each Unit (priced at $250.00 each) was comprised of (i) 50 shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional 50 shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $5.00. The warrant is referred to as “ZNWAH.”

The warrants became exercisable on April 2, 2018 and continued to be exercisable through April 2, 2020 at a per share exercise price of $5.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of April 2, 2019 to April 2, 2020.

On May 29, 2019, the Company extended the termination date of the ZNWAH Warrant by one (1) year from the expiration date of April 2, 2020 to April 2, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAH Warrant by two (2) years from the expiration date of April 2, 2021 to April 2, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On August 21, 2018, the Company initiated another unit offering, and it terminated on September 26, 2018. The offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) a certain number of shares of Common Stock determined by dividing $250.00 (the price of one Unit) by the average of the high and low sale prices of the Company’s publicly traded common stock as reported on the NASDAQ on the Unit Purchase Date and (ii) Common Stock purchase warrants to purchase an additional twenty-five (25) shares of Common Stock. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock acquired under the Units purchased. Each warrant affords the investor the opportunity to purchase one share of Company Common Stock at a warrant exercise price of $1.00. The warrant is referred to as “ZNWAJ.”

The warrants became exercisable on October 29, 2018 and continued to be exercisable through October 29, 2020 at a per share exercise price of $1.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of October 29, 2019 to October 29, 2020.

On May 29, 2019, the Company extended the termination date of the ZNWAJ Warrant by one (1) year from the expiration date of October 29, 2020 to October 29, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAJ Warrant by two (2) years from the expiration date of October 29, 2021 to October 29, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On December 10, 2018, the Company initiated another unit offering, and it terminated on January 23, 2019. The offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) is comprised of (i) two hundred and fifty (250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional two hundred and fifty (250) shares of Common Stock at a per share exercise price of $0.01. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that are acquired under the Units purchased. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $0.01. The warrant is referred to as “ZNWAK.”

The warrants became exercisable on February 25, 2019 and continued to be exercisable through February 25, 2020 at a per share exercise price of $0.01.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

On May 29, 2019, the Company extended the termination date of the ZNWAK Warrant by one (1) year from the expiration date of February 25, 2020 to February 25, 2021. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On September 15, 2020, the Company extended the termination date of the ZNWAK Warrant by two (2) years from the expiration date of February 25, 2021 to February 25, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

On April 24, 2019, the Company initiated another unit offering and it terminated on June 26, 2019, after the Company, on June 5, 2019, extended the termination date of the unit offering.

The unit offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) two hundred and fifty (250) shares of Common Stock and (ii) Common Stock purchase warrants to purchase an additional fifty (50) shares of Common Stock at a per share exercise price of $2.00. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the Unit Program with the purchase of at least one Unit and also enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional twenty-five (25) warrants at an exercise price of $2.00 during this unit offering. The twenty-five (25) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were entitled to the additional twenty-five (25) warrants once, if they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $2.00. The warrant is referred to as “ZNWAL.”

The warrants became exercisable on August 26, 2019 and continue to be exercisable through August 26, 2021 at a per share exercise price of $2.00.

On September 15, 2020, the Company extended the termination date of the ZNWAL Warrant by two (2) years from the expiration date of August 26, 2021 to August 26, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

Under our Plan, the Company under a Request For Waiver Program executed Waiver Term Sheets of a unit option program consisting of a Unit (shares of stock and warrants) of its securities and subsequently an option program consisting of shares of stock to a participant. The participant’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants that were acquired. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant shall have the company notation of “ZNWAM.” The warrants will not be registered for trading on the OTCQX or any other stock market or trading market. The warrants became exercisable on January 15, 2021 and continue to be exercisable through July 15, 2022 at a per share exercise price of $1.00.

On February 1, 2021, the Company initiated a unit offering and it terminated on March 17, 2021.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

The unit offering consisted of Units of the Company’s securities where each Unit (priced at $250.00 each) was comprised of (i) the number of Common Stock shares represented by the high-low average on the purchase date and (ii) Common Stock purchase warrants to purchase an additional twenty-five (25) shares of Common Stock at a per share exercise price of $1.00. The investor’s Plan account was credited with the number of shares of the Company’s Common Stock and Warrants acquired under the Units purchased. For Plan participants who enrolled into the unit offering with the purchase of at least one Unit or who enrolled in the separate Automatic Monthly Investments (“AMI”) program at a minimum of $50.00 per month or more, received an additional ten (10) warrants at an exercise price of $1.00 during this Unit Option Program. The ten (10) additional warrants were for enrolling into the AMI program. Existing subscribers to the AMI were also entitled to the additional ten (10) warrants once, provided that they purchased at least one (1) unit during the Unit program. Each warrant affords the participant the opportunity to purchase one share of our Common Stock at a warrant exercise price of $1.00. The warrant is referred to as “ZNWAN.”

On December 9, 2019 Zion filed an Amendment No. 1 to the Registration Statement on Form S-1 (File No. 333-235299) solely for the purpose of re-filing a revised Exhibit 5.1 to the Registration Statement. This Amendment No. 1 does not modify any provision of the prospectus that forms a part of the Registration Statement and accordingly, such prospectus has not been included herein.

For the three months ended March 31, 2021, and 2020, approximately $2,849,000, and $9,109,000 were raised under the DSPP program, respectively.

The company raised approximately $1,180,000 from the period April 1, 2021 through May 13, 2021, under the DSPP program.

The warrants represented by the company notation ZNWAA are tradeable on the OTCQX market under the symbol ZNOGW. However, all of the other warrants described above, in the table below, and throughout this Form 10-Q, are not tradeable and are used internally for classification and accounting purposes only.

F. Subscription Rights Offering

On April 2, 2018 the Company announced an offering (“2018 Subscription Rights Offering”) through American Stock Transfer & Trust Company, LLC (the “Subscription Agent”), at no cost to the shareholders, of non-transferable Subscription Rights (each “Right” and collectively, the “Rights”) to purchase its securities to persons who owned shares of our Common Stock on April 13, 2018 (“the Record Date”). Pursuant to the 2018 Subscription Rights Offering, each holder of shares of common stock on the Record Date received non-transferable Subscription Rights, with each Right comprised of one share of the Company Common Stock, par value $0.01 per share (the “Common Stock”) and one Common Stock Purchase Warrant to purchase an additional one share of Common Stock. Each Right could be exercised or subscribed at a per Right subscription price of $5.00. Each Warrant affords the investor the opportunity to purchase one share of the Company Common Stock at a warrant exercise price of $3.00. The warrant is referred to as “ZNWAI.”

The warrants became exercisable on June 29, 2018 and continue to be exercisable through June 29, 2020 at a per share exercise price of $3.00, after the Company, on December 4, 2018, extended the termination date of the Warrant by one (1) year from the expiration date of June 29, 2019 to June 29, 2020.

On May 29, 2019, the Company extended the termination date of the ZNWAI Warrant by one (1) year from the expiration date of June 29, 2020 to June 29, 2021.

On September 15, 2020, the Company extended the termination date of the ZNWAI Warrant by two (2) years from the expiration date of June 29, 2021 to June 29, 2023. Zion considers this warrant as permanent equity per ASC 815-40-35-2. As such, there is no value assigned to this extension.

Each shareholder received.10 (one tenth) of a Subscription Right (i.e. one Subscription Right for each 10 shares owned) for each share of the Company’s Common Stock owned on the Record Date.

The 2018 Subscription Rights Offering terminated on May 31, 2018. The Company raised net proceeds of approximately $3,038,000, from the subscription of Rights, after deducting fees and expenses of $243,000 incurred in connection with the rights offering.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

G. Warrant Table

The warrants balances at December 31, 2020 and transactions since January 1, 2021 are shown in the table below:

Warrants	Exercise Price		Warrant Termination Date	Outstanding Balance, 12/31/2020		Warrants Issued		Warrants Exercised			Warrants Expired		Outstanding Balance, 03/31/2021
ZNWAA	$	2.00	01/31/2023		1,498,804		-		-			-		1,498,804
ZNWAD	$	1.00	05/02/2023		243,853		-		-			-		243,853
ZNWAE	$	1.00	05/02/2023		2,144,099		-		-			-		2,144,099
ZNWAF	$	1.00	08/14/2023		359,435		-		-			-		359,435
ZNWAG	$	1.00	01/08/2023		240,068		-		-			-		240,068
ZNWAH	$	5.00	04/19/2023		372,400		-		-			-		372,400
ZNWAI	$	3.00	06/29/2023		640,630		-		(20	)		-		640,610
ZNWAJ	$	1.00	10/29/2023		546,000		-		-			-		546,000
ZNWAK	$	0.01	02/25/2023		437,875		-		(3,920	)		-		433,955
ZNWAL	$	2.00	08/26/2023		517,875		-		-			-		517,875
ZNWAM	$	1.00	07/15/2022		-		4,376,000					-		4,376,000
Outstanding warrants					7,001,039		4,376,000		(3,940	)		-		11,373,099

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 3 - Stockholders’ Equity (cont’d)

H. Warrant Descriptions

The price and the expiration dates for the series of warrants to investors are as follows * :

		Period of Grant	US$	Expiration Date

ZNWAA Warrants	B,C	March 2013 – December 2014	2.00	January 31, 2023
ZNWAD Warrants	A,B,C	January 2015 – March 2016	1.00	May 02, 2023
ZNWAE Warrants	B,C	November 2016 – March 2017	1.00	May 01, 2023
ZNWAF Warrants	A,B,C	May 2017 – July 2017	1.00	August 14, 2023
ZNWAG Warrants	C	October 2017 – December 2017	1.00	January 08, 2023
ZNWAH Warrants	A,B,C	February 2018	5.00	April 2, 2023
ZNWAI Warrants	A,B,C	April 2018 – May 2018	3.00	June 29, 2023
ZNWAJ Warrants	B,C	August 2018 – September 2018	1.00	October 29, 2023
ZNWAK Warrants	B,C	December 2018 – January 2019	0.01	February 25, 2023
ZNWAL Warrants	C	July 2019 – August 2019	2.00	August 26, 2023
ZNWAM Warrants		January 2021 – March 2021	1.00	July 15, 2022

*	Zion’s ZNWAB Warrants expired on May 2, 2017, and the ZNWAC Warrants expired on May 2, 2018
A	On December 4, 2018, the Company extended the termination date of the Warrants by one (1) year.
B	On May 29, 2019, the Company extended the termination date of the Warrants by one (1) year.
C	On September 15, 2020, the Company extended the termination date of the Warrants by two (2) years.

Note 4 - Unproved Oil and Gas Properties, Full Cost Method

Unproved oil and gas properties, under the full cost method, are comprised as follows:

	March 31, 2021		December 31, 2020
	US$ thousands		US$ thousands
Excluded from amortization base:
Drilling costs, and other operational related costs		11,234		4,232
Capitalized salary costs		2,028		1,967
Capitalized interest costs		1,393		1,314
Legal and seismic costs, license fees and other preparation costs		9,008		7,974
Other costs		39		39
		23,702		15,526

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 4 - Unproved Oil and Gas Properties, Full Cost Method (cont’d)

Changes in Unproved oil and gas properties during the three months ended March 31, 2021 and 2020 are as follows:

	March 31, 2021		March 31, 2020
	US$ thousands		US$ thousands
Excluded from amortization base:
Drilling costs, and other operational related costs		7,002		-
Capitalized salary costs		61		46
Capitalized interest costs		79		20
Legal and seismic costs, license fees and other preparation costs		1,034		150
Other costs		-		7
		*8,176		*223

*	Inclusive of non-cash amounts of approximately $2,442,000, and $77,000 during the three months ended March 31, 2021, and 2020, respectively

Please refer to Footnote 1 – Nature of Operations and Going Concern for more information about Zion’s exploration activities.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 5 - Senior Convertible Bonds

Rights Offering -10% Senior Convertible Notes due May 2, 2021 and paid on May 3, 2021

On October 21, 2015, the Company filed with the SEC a prospectus supplement for a rights offering. Under this rights offering, we distributed at no cost, 360,000 non-transferable subscription rights to subscribe for, on a per right basis, two 10% Convertible Senior Bonds par $100 due May 2, 2021 (the “Notes”), to shareholders of the Company’s Common Stock on October 15, 2015, the record date for the offering. Each whole subscription right entitled the participant to purchase two convertible bonds at a purchase price of $100 per bond. Effective October 21, 2015, the Company executed a Supplemental Indenture, as issuer, with the American Stock Transfer & Trust Company, LLC, a New York limited liability trust company (“AST”), as trustee for the Notes (the “Indenture”).

On March 31, 2016, the rights offering terminated.

On May 2, 2016, the Company issued approximately $3,470,000 aggregate principal amount of convertible bonds or Notes in connection with the rights offering. The Company received net proceeds of approximately $3,334,000, from the issuance of the Notes, after deducting fees and expenses of $136,000 incurred in connection with the offering. These costs have been discounted as deferred offering costs.

The Notes contained a convertible option that gave rise to a derivative liability, which was accounted for separately from the Notes (see below). Accordingly, the Notes were initially recognized at fair value of approximately $1,844,000, which represents the principal amount of $3,470,000 from which a debt discount of approximately $1,626,000 (which is equal to the fair value of the convertible option) was deducted.

During the three months ended March 31, 2021, and 2020, the Company recorded approximately $7,000 and $6,000 respectively, in amortization expense related to the deferred financing costs, approximately $144,000 and $116,000 respectively in debt discount amortization, net, and approximately $10,000 and $4,000, respectively, related to financing gains associated with notes converted to shares.

The Notes were governed by the terms of the Indenture. The Notes were senior unsecured obligations of the Company and had an interest rate of 10% per year, payable annually in arrears on May 2 of each year, commencing May 2, 2017. The Notes matured on May 2, 2021, and the annual interest and principal were paid on May 3, 2021 (see below).

Interest and principal may be paid, at the Company’s option, in cash or in shares of the Company’s Common Stock. The number of shares for the payment of interest in shares of Common Stock, in lieu of the cash amount, will be based on the average of the closing prices of the Company’s Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the record date for the payment of interest; such record date has been designated and will always be the 10^th business day prior to the interest payment date on May 2 of each year. The number of shares for the payment of principal, in lieu of the cash amount, shall be based upon the average of the closing price of the Company’s Common Stock as reported by Bloomberg L.P. for the 30 trading days preceding the principal repayment date; such record date has been designated as the trading day immediately prior to the 30-day period preceding the maturity date of May 2, 2021. Fractional shares were not issued, and the final number of shares were rounded up to the next whole share.

On May 3, 2021, the Company paid its annual 10% interest to its bondholders of record on April 20, 2021. The interest was paid-in-kind (“PIK”) in the form of Common Stock. An average of the Company stock price of $.606 was determined based on the 30 trading days prior to the record date of April 20, 2021. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued 529,892 shares to the accounts of its bondholders. Additionally, on May 3, 2021, the Company issued 5,296,308 shares to the accounts of its bondholders in payment of the principal amount of the convertible bonds. As of the date of this report, the Company fully paid its annual interest over the course of five years, as well as the principal amount of the bonds and its obligation is completed.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 5 - Senior Convertible Bonds (cont’d)

Through the three months ended March 31, 2021, approximately 100 convertible bonds of $100 each were converted at a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 4,400 shares of its Common Stock during the same period and recorded approximately $10,000 in financial income during the same period.

	March 31, 2021			December 31, 2020
	US$ thousands			US$ thousands

10% Senior Convertible Bonds, on the day of issuance	$	3,470		$	3,470
Unamortized Debt discount, net	$	(61	)	$	(205	)
Bonds converted to shares	$	(233	)	$	(223	)
Offering cost, net	$	(2	)	$	(9	)
10% senior Convertible bond - Liability	$	3,174		$	3,033

Capitalized interest for the three months ended March 31, 2021 and 2020 was $79,000 and $20,000, respectively.

Interest expense for the three months ended March 31, 2021 and 2020 was nil and $61,000, respectively.

Note 6 - Derivative Liability

The Notes issued by the Company and discussed in Note 5 contained a convertible option that gives rise to a derivative liability.

The debt instrument the Company issued included a make-whole provision, which provides that in the event of conversion by the investor under certain circumstances, the issuer is required to deliver to the holder additional consideration beyond the settlement of the conversion obligation.

Because time value make-whole provisions are not clearly and closely related to the debt host and would meet the definition of a derivative if considered freestanding, they are evaluated under the indexation guidance to determine whether they would be afforded the scope exception pursuant to ASC 815-10-15-74(a). This evaluation is generally performed in conjunction with the analysis of the embedded conversion feature.

The Company has measured its derivative liability at fair value and recognized the derivative value as a current liability and recorded the derivative value on its balance sheet. Changes in the fair value recorded are recorded as a gain or loss in the accompanying statement of operations.

The valuation of the Notes was done by using the Binomial Model, a well-accepted option-pricing model, and based on the Notes’ terms and other parameters the Company identified as relevant for the valuation of the Notes’ Fair Value.

The Binomial Model used the forecast of the Company share price during the Note’s contractual term.

As of March 31, 2021 and December 31, 2020, the Company’s liabilities that are measured at fair value are as follows:

March 31,
2021

December 31,
2020

Level 3

Total

Level 3

Total

US$
thousands

Fair value of derivative liability

431

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 6 - Derivative Liability (cont’d)

Change in value of the derivative liability during 2021 is as follows:

	US$ thousands

Derivative liability fair value at December 31, 2020		431
Gain on derivative liability		(426	)
Derivative liability fair value at March 31, 2021		5

The following table presents the assumptions that were used for the model as of March 31, 2021:

	March 31, 2021			December 31, 2020
Convertible Option Fair Value of approximately	$	5,000		$	431,000
Annual Risk-free Rate		0.01	%		.09	%
Volatility		44.33	%		163.57	%
Expected Term (years)		0.09			.33
Convertible Notes Face Value	$	3,236,700		$	3,246,700
Expected annual yield on Regular Notes		28.77	%		28.77	%
Price of the Underlying Stock	$	0.61		$	0.90

During the three months ended March 31, 2021 and 2020, the Company recorded unrealized gains of approximately $426,000, net, and $16,000, net, respectively, within the Statements of Operations on derivative liability.

Note 7 - Right of use leases assets and lease obligations

The Company is a lessee in several non-cancellable operating leases, primarily for transportation and office spaces.

The table below presents the operating lease assets and liabilities recognized on the balance sheets as of March 31, 2021 and December 31, 2020:

	March 31, 2021		December 31, 2020
	US$ thousands		US$ thousands

Operating lease assets	$	382	$	438

Operating lease liabilities:
Current operating lease liabilities	$	156	$	191
Non-current operating lease liabilities	$	262	$	307
Total operating lease liabilities	$	418	$	498

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 7 - Right of use leases assets and leases obligations (cont’d)

The depreciable lives of operating lease assets and leasehold improvements are limited by the expected lease term.

The Company’s leases generally do not provide an implicit rate, and therefore the Company uses its incremental borrowing rate as the discount rate when measuring operating lease liabilities. The incremental borrowing rate represents an estimate of the interest rate the Company would incur at lease commencement to borrow an amount equal to the lease payments on a collateralized basis over the term of a lease within a particular currency environment. The Company used incremental borrowing rates as of January 1, 2019 for operating leases that commenced prior to that date.

The Company’s weighted average remaining lease term and weighted average discount rate for operating leases as of March 31, 2021 are:

	March 31, 2021
Weighted average remaining lease term (years)		2.7
Weighted average discount rate		5.9	%

The table below reconciles the undiscounted future minimum lease payments (displayed by year and in the aggregate) under non-cancellable operating leases with terms of more than one year to the total operating lease liabilities recognized on the condensed balance sheets as of March 31, 2021:

	US$ thousands

April 1, 2021 through December 31, 2021		173
2022		151
2023		126
2024		-
Thereafter		-
Total undiscounted future minimum lease payments		450
Less: portion representing imputed interest		(32	)
Total undiscounted future minimum lease payments		418

Operating lease costs were $63,000 and $61,000 for the three months ended March 31, 2021, and 2020, respectively. Operating lease costs are included within general and administrative expenses on the statements of income.

Cash paid for amounts included in the measurement of operating lease liabilities was $71,000 and $67,000 for the three months ended March 31, 2021, and 2020, respectively, and this amount is included in operating activities in the statements of cash flows. Right-of-use assets obtained in exchange for new operating lease liabilities were $0 and $0 for the three months ended March 31, 2021, and 2020, respectively.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 8 - Commitments and Contingencies

A. Securities and Exchange Commission (“SEC”) Investigation

As previously disclosed by the Company, on June 21, 2018, the Fort Worth Regional Office of the SEC informed Zion that it was conducting a formal, non-public investigation and asked that we provide certain information and documents in connection with its investigation. Since that date, we have fully cooperated with the SEC on an on-going basis in connection with its investigation. Investigations of this nature are inherently uncertain and their results cannot be predicted with certainty. Regardless of the outcome, an SEC investigation could have an adverse impact on us because of legal costs, diversion of management resources, and other factors. The investigation could also result in reputational harm to Zion and may have a material adverse effect on Zion’s current and future business and exploratory activities and its ability to raise capital to continue our oil and gas exploratory activities.

B. Litigation

On October 29, 2018, Zion received a shareholder request to inspect books and records pursuant to Section 220 of the Delaware General Corporation Law for the purpose of investigating potential corporate mismanagement and alleged breaches of fiduciary duty in connection with public statements made by the Company from March 12, 2018 to May 30, 2018. The Company responded to this request.

On August 9, 2019, Zion received two (2) additional shareholder requests from the same law firm to inspect books and records pursuant to section 220 of the Delaware General Corporation Law for the purpose of investigating potential corporate mismanagement and alleged breaches of fiduciary duty in connection with public statements made by the Company from February 1, 2018 to present. Following discussion with counsel to the shareholder, the Company’s counsel produced materials responsive to the shareholders’ request in January 2020.

On February 12, 2020, by letter to Zion’s Board of Directors, one of the shareholders making the August 9, 2019 request demanded that the Board investigate, address, remedy, and commence proceedings against certain of the Company’s current and former officers and directors for alleged breaches of fiduciary duties, violations of section 10(b) and 20(a) of the Exchange Act, waste of corporate assets, unjust enrichment, and violations of all other applicable laws. The shareholder alleges wrongdoing in connection with public statements made by the Company from February 1, 2018 regarding the Company’s oil and gas exploration activities, the Company’s accounting and disclosure of expenses, and the Board’s oversight of operations. The Board hired independent counsel to investigate the claims made against certain of the Company’s current and former officers and directors. That investigation concluded and, based on the findings and recommendations of independent counsel, the Board decided not to pursue claims against any current or former officer or director. On July 14, 2020, Zion received a request from the same shareholder making the February 12, 2020 demand to inspect books and records pursuant to Section 220 of the Delaware General Corporation Law for the purpose of evaluating the Board’s decision to reject the litigation demand. The Company responded to this request in August 2020. The Company has not received any further communication from the shareholder following the August 2020 response.

From time to time, the Company may also be subject to routine litigation, claims or disputes in the ordinary course of business. The Company defends itself vigorously in all such matters. However, we cannot predict the outcome or effect of any of the potential litigation, claims or disputes.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 8 - Commitments and Contingencies (cont’d)

C. Recent Market Conditions – Coronavirus Pandemic

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (“COVID-19”). The pandemic has significantly impacted the economic conditions in the United States and Israel, as federal, state and local governments react to the public health crisis, creating significant uncertainties in the United States, Israel and world economies. In the interest of public health and safety, jurisdictions (international, national, state and local) where we have operations, restricted travel and required workforces to work from home. As of the date of this report, many of our employees are working from home. However, while there are various uncertainties to navigate, the Company’s business activities are continuing. The situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. We cannot predict whether, when or the manner in which the conditions surrounding COVID-19 will change including the timing of lifting any restrictions or work from home arrangements.

The full extent of COVID-19’s impact on our operations and financial performance depends on future developments that are uncertain and unpredictable, including the duration and spread of the pandemic, its impact on capital and financial markets and any new information that may emerge concerning the severity of the virus, its spread to other regions as well as the actions taken to contain it, among others.

D. Environmental and Onshore Licensing Regulatory Matters

The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental clean-up of well sites or other environmental restoration procedures and other obligations as they relate to the drilling of oil and gas wells or the operation thereof. Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner and Energy and Environmental Ministries as it pertains to oil and gas activities. Mention of these older guidelines was included in previous Zion filings.

On April 8, 2019 the Energy Ministry issued new procedural guidelines regarding a uniform reporting manner by which the rights holder in a license must submit a quarterly report regarding a summary of license history, the nature, scope, location and results of the exploration work, specification of the amounts expended for the exploration work, and the results and interpretation of the exploration work and basic data on which these results and interpretation are based.

On July 18, 2019, the Energy Ministry issued a guidance document entitled “Instructions for Submitting Guarantees with respect to Oil Rights granted pursuant to the Petroleum Law” which states that onshore license applicants are required to deposit a base bank guarantee of $500,000. Furthermore, prior to drilling, an onshore license holder is required to deposit an additional bank guarantee in the amount as determined by the Petroleum Commissioner in accordance with the characteristics of the drilling and the drilling plan but no less than $250,000. The guarantee, as determined by the Commissioner, shall be deposited with the Commissioner Office for each well separately drilled. The Petroleum Commissioner has discretion to raise or lower those amounts or may also forfeit a Company’s existing guarantee and/or cancel a petroleum right under certain circumstances.

In addition, new and extended insurance policy guidelines were added. The Petroleum Commissioner may also view non-compliance with the new insurance provisions as breaching the work plan and the rights granted and act accordingly.

The Company believes that these new regulations will result in an increase in the expenditures associated with obtaining new exploration rights and drilling new wells. The Company expects that an additional financial burden could occur as a result of requiring cash reserves that could otherwise be used for operational purposes. In addition, these new regulations are likely to continue to increase the time needed to obtain all of the necessary authorizations and approvals to drill and production test exploration wells.

As of March 31, 2021, and December 31, 2020, the Company accrued $0 for license regulatory matters.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

Note 8 - Commitments and Contingencies (cont’d)

E. Bank Guarantees

As of March 31, 2021, the Company provided Israeli-required bank guarantees to various governmental bodies (approximately $1,843,000) and others (approximately $85,000) with respect to its drilling operation in an aggregate amount of approximately $1,928,000. The (cash) funds backing these guarantees are held in restricted interest-bearing accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits – restricted.

F. Risks

Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange rates, commodity prices and/or equity prices. In the normal course of doing business, we are exposed to the risks associated with foreign currency exchange rates and changes in interest rates.

Foreign Currency Exchange Rate Risks. A portion of our expenses, primarily labor expenses and certain supplier contracts, are denominated in New Israeli Shekels (“NIS”). As a result, we have significant exposure to the risk of fluctuating exchange rates with the U.S. Dollar (“USD”), our primary reporting currency. During the period January 1, 2021 through March 31, 2021, the USD has fluctuated by approximately 3.4% against the NIS (the USD strengthened relative to the NIS). By contrast, during the period January 1, 2020 through December 31, 2020, the USD fluctuated by approximately 7.0% against the NIS (the USD weakened relative to the NIS). Continued strengthening of the US dollar against the NIS will result in lower operating costs from NIS denominated expenses. To date, we have not hedged any of our currency exchange rate risks, but we may do so in the future.

Interest Rate Risk. Our exposure to market risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money market funds. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment. At March 31, 2021, we had cash, cash equivalents and short-term bank deposits of approximately $8,247,000. The weighted average annual interest rate related to our cash and cash equivalents for the three months ended March 31, 2021, exclusive of funds at US banks that earn no interest, was approximately 0.13%.

The primary objective of our investment activities is to preserve principal while at the same time maximizing yields without significantly increasing risk. To achieve this objective, we invest our excess cash in short-term bank deposits and money market funds that may invest in high quality debt instruments.

Note 9 - Subsequent Events

(i)

Approximately $1,180,000 was collected through the Company’s DSPP program during the period April 1 through May 13, 2021.

ITEM 2.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM FINANCIAL STATEMENTS AND THE RELATED NOTES TO THOSE STATEMENTS INCLUDED IN THIS FORM 10-Q. SOME OF OUR DISCUSSION IS FORWARD-LOOKING AND INVOLVES RISKS AND UNCERTAINTIES. FOR INFORMATION REGARDING RISK FACTORS THAT COULD HAVE A MATERIAL ADVERSE EFFECT ON OUR BUSINESS, REFER TO THE DISCUSSION OF RISK FACTORS IN THE “DESCRIPTION OF BUSINESS” SECTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2020, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Forward-Looking Statements

Certain statements made in this discussion are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These statements may materially differ from actual results.

Forward-looking statements can be identified by terminology such as “may”, “should”, “expects”, “intends”, “anticipates”, “believes”, “estimates”, “predicts”, or “continue” or the negative of these terms or other comparable terminology and include, without limitation, statements regarding:

●

The going concern qualification in our consolidated financial statements;

●

our liquidity and our ability to raise capital to finance our overall exploration and development activities within our license area;

●

our ability to continue meeting the requisite continued listing requirements by OTCQX;

●

the outcome of the current SEC investigation against us;

●

Business interruptions from COVID-19 pandemic;

●

our ability to obtain new license areas to continue our petroleum exploration program;

●

interruptions, increased consolidated financial costs and other adverse impacts of the coronavirus pandemic on the drilling and testing of our MJ#2 well and our capital raising efforts;

●

our ability to explore for and develop natural gas and oil resources successfully and economically within our license area;

●

our ability to maintain the exploration license rights to continue our petroleum exploration program;

●

the availability of equipment, such as seismic equipment, drilling rigs, and production equipment as well as access to qualified personnel;

●

the impact of governmental regulations, permitting and other legal requirements in Israel relating to onshore exploratory drilling;

●

our estimates of the time frame within which future exploratory activities will be undertaken;

●

changes in our exploration plans and related budgets;

●

the quality of existing and future license areas with regard to, among other things, the existence of reserves in economic quantities;

●

anticipated trends in our business;

●

our future results of operations;

●

our capital expenditure program;

●

future market conditions in the oil and gas industry

●

the demand for oil and natural gas, both locally in Israel and globally; and

●

The impact of fluctuating oil and gas prices on our exploration efforts

Overview

Zion Oil and Gas, Inc., a Delaware corporation, is an oil and gas exploration company with a history of 21 years of oil and gas exploration in Israel. We were incorporated in Florida on April 6, 2000 and reincorporated in Delaware on July 9, 2003. We completed our initial public offering in January 2007. Our common stock, par value $0.01 per share (the “Common Stock”) currently trades on the OTCQX Market under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW.”

The Company currently holds one active petroleum exploration license onshore Israel, the New Megiddo License 428 (“NML 428”), which was granted on December 3, 2020 and overlaps the previous Megiddo-Jezreel License 401 (“MJL 401”), comprising approximately 99,000 acres. The terms of the new license are effective through June 2, 2021 and is extendable for a six-month period.

The Megiddo Jezreel #1 (“MJ #1”) site was completed in early March 2017, after which the drilling rig and associated equipment were mobilized to the site. Performance and endurance tests were completed, and the MJ #1 exploratory well was spud on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company obtained three open-hole wireline log suites (including a formation image log), and the well was successfully cased and cemented. The Ministry of Energy approved the well testing protocol on April 29, 2018.

While the well was not commercially viable, Zion learned a great deal from the drilling and testing of this well. We believe that the drilling and testing of this well carried out the testing objectives which would support further evaluation and potential further exploration efforts within our License area. Zion believed it was prudent and consistent with good industry practice to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion completed all of the acquisition, processing and interpretation of the 3-D data and incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well.

On March 12, 2020, Zion entered into a Purchase and Sale Agreement with Central European Drilling kft, a Hungarian corporation, to purchase an onshore oil and gas drill 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. 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.

As of the date of this report, our drilling of the MJ-02 well is continuing as planned.

At present, we have no revenues or operating income. Our ability to generate future revenues and operating cash flow will depend on the successful exploration and exploitation of our current and any future petroleum rights or the acquisition of oil and/or gas producing properties, and the volume and timing of such production. In addition, even if we are successful in producing oil and gas in commercial quantities, our results will depend upon commodity prices for oil and gas, as well as operating expenses including taxes and royalties.

Our executive offices are located at 12655 North Central Expressway, Suite 1000, Dallas, Texas 75243, and our telephone number is (214) 221-4610. Our branch office’s address in Israel is 9 Halamish Street, North Industrial Park, Caesarea 3088900, and the telephone number is +972-4-623-8500. Our website address is: www.zionoil.com.

Current Exploration and Operation Efforts

Megiddo-Jezreel Petroleum License

The Company currently holds one active petroleum exploration license onshore Israel, the NML 428, comprising approximately 99,000 acres. The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension.

The NML 428 lies onshore, south and west of the Sea of Galilee and we continue our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential.

The previous Megiddo Jezreel #1 (“MJ #1”) exploratory well was spudded on June 5, 2017 and drilled to a total depth (“TD”) of 5,060 meters (approximately 16,600 feet). Thereafter, the Company successfully cased and cemented the well while awaiting the approval of the testing protocol. The Ministry of Energy approved the well testing protocol on April 29, 2018.

While not meant to be an exhaustive list, a summary of what Zion believes to be key information learned in the MJ#1 well is as follows:

	1.	The MJ#1 encountered much higher subsurface temperatures at a depth shallower than expected before drilling the well. In our opinion, this is significant because reaching a minimum temperature threshold is necessary for the generation of hydrocarbons from an organic-rich source rock.

	2.	The known organic rich (potentially hydrocarbon bearing) Senonian age source rocks that are typically present in this part of Israel were not encountered as expected. Zion expected these source rocks to be encountered at approximately 1,000 meters in the MJ#1 well.

	3.	MJ#1 had natural fractures, permeability (the ability of fluid to move through the rock) and porosity (pore space in rock) that allowed the sustained flow of formation fluid in the shallower Jurassic and lower Cretaceous age formations between approximately 1,200 and 1,800 meters. While no hydrocarbons were encountered, Zion believes this fact is nonetheless significant because it provides important information about possible reservoir pressures and the ability of fluids to move within the formation and to the surface.

	4.	MJ#1 encountered oil in the Triassic Mohilla formation which Zion believes suggests an active deep petroleum system is in Zion’s license area. There was no natural permeability or porosity in the Triassic Mohilla formation to allow formation fluid to reach the surface naturally during testing, and thus the MJ#1 was not producible or commercial.

	5.	The depths and thickness of the formations we encountered varied greatly from pre-drill estimates. This required the MJ#1 to be drilled to a much greater depth than previously expected. Zion has tied these revised formation depths to seismic data which will allow for more accurate interpretation and mapping in the future.

A summary of what Zion believes to be some key questions left to be answered are:

As a consequence of seismic remapping, where does the MJ#1 well lie relative to the potential traps at the Jurassic and Triassic levels, and was the well location too low on the structures and deeper than the potential hydrocarbons within those traps?

As a result of these unanswered questions and with the information gained drilling the MJ#1 well, Zion believed it was prudent and consistent with good industry practice to try and answer some of these questions with a focused 3-D seismic imaging shoot of approximately 72 square kilometers surrounding the MJ#1 well. Zion has completed all of the acquisition, processing and interpretation of the 3-D data and incorporated its expanded knowledge base into the drilling of our current MJ-02 exploratory well (see further details below).

The Geology team is continuing on a larger interpretation of 3D areas, along with potential exploration locations located in the western portion of the NML 428 area.

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.

I-35 Drilling Rig & Associated Equipment

	Three-month period ended March 31, 2021
	I-35 Drilling Rig			Rig Spare Parts			Other Drilling Assets		Total
	US$ thousands			US$ thousands			US$ thousands		US$ thousands
December 31, 2020		6,494			698			376		7,568

Asset Additions		-			50			26		76

Asset Depreciation		(169	)		-			-		(169	)

Asset Disposals for Self-Consumption		-			(58	)		-		(58	)

March 31, 2021		6,325			690			402		7,417

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.

As mentioned previously, the MJ-02 drilling plan was approved by the Ministry of Energy on July 29, 2020. The NML 428 was awarded on December 3, 2020 for a six-month term with the possibility of an additional six-month extension. The NML 428 area is the same area as the MJL 401 area and lies onshore, south and west of the Sea of Galilee, and we continue our exploration focus here as it appears to possess the key geologic ingredients of an active petroleum system with significant exploration potential.

On January 6, 2021, Zion officially spudded its MJ-02 exploratory well. Zion plans to reach a total depth of approximately 5,800 meters (~19,024 feet) and the drilling is expected to take approximately 150 days. As of the date of this report, our drilling of the MJ-02 well is continuing as planned.

Zion’s ability to fully undertake all of these aforementioned activities is subject to its raising the needed capital from its continuing offerings, of which no assurance can be provided.

Map 1. Zion’s New Megiddo License 428 as of March 31, 2021.

Zion’s Former Joseph License

Zion has plugged all of its exploratory wells on its former Joseph License area, and the reserve pits have been evacuated, but acknowledges its obligation to complete the abandonment of these well sites in accordance with guidance from the Energy Ministry, Environmental Ministry and local officials

Onshore Licensing, Oil and Gas Exploration and Environmental Guidelines

The Company is engaged in oil and gas exploration and production and may become subject to certain liabilities as they relate to environmental cleanup of well sites or other environmental restoration procedures and other obligations as they relate to the drilling of oil and gas wells or the operation thereof. Various guidelines have been published in Israel by the State of Israel’s Petroleum Commissioner, the Energy Ministry, and the Environmental Ministry in recent years as it pertains to oil and gas activities. Mention of these guidelines was included in previous Zion Oil & Gas filings.

We acknowledge that these new regulations are likely to increase the expenditures associated with obtaining new exploration rights and drilling new wells. The Company expects that additional financial burdens could occur as a result of the Ministry requiring cash reserves that could otherwise be used for operational purposes.

Capital Resources Highlights

We need to raise significant funds to finance the continued exploration efforts and maintain orderly operations. To date, we have funded our operations through the issuance of our securities and convertible debt. We will need to continue to raise funds through the issuance of equity and/or debt securities (or securities convertible into or exchangeable for equity securities). No assurance can be provided that we will be successful in raising the needed capital on terms favorable to us (or at all).

The Dividend Reinvestment and Stock Purchase Plan

Please see Footnote 3E (“Dividend Reinvestment and Stock Purchase Plan (“DSPP”)), which is a part of this Form 10-Q filing, for details about specific unit programs, dates, and filings during the years 2016 through 2021.

For the three months ended March 31, 2021, and 2020, approximately $2,849,000, and $9,109,000 were raised under the DSPP program, respectively.

The warrants balances at December 31, 2020 and transactions since January 1, 2021 are shown in the table below:

Warrants	Exercise Price		Warrant Termination Date	Outstanding Balance, 12/31/2020		Warrants Issued		Warrants Exercised			Warrants Expired		Outstanding Balance, 03/31/2021
ZNWAA	$	2.00	01/31/2023		1,498,804		-		-			-		1,498,804
ZNWAD	$	1.00	05/02/2023		243,853		-		-			-		243,853
ZNWAE	$	1.00	05/02/2023		2,144,099		-		-			-		2,144,099
ZNWAF	$	1.00	08/14/2023		359,435		-		-			-		359,435
ZNWAG	$	1.00	01/08/2023		240,068		-		-			-		240,068
ZNWAH	$	5.00	04/19/2023		372,400		-		-			-		372,400
ZNWAI	$	3.00	06/29/2023		640,730		-		(20	)		-		640,610
ZNWAJ	$	1.00	10/29/2023		545,900		-		-			-		546,000
ZNWAK	$	0.01	02/25/2023		437,875		-		(3,920	)		-		433,955
ZNWAL	$	2.00	08/26/2023		517,875		-		-			-		517,875
ZNWAM	$	1.00	07/15/2022		-		4,376,000					-		4,376,000
Outstanding warrants					7,001,039		4,376,000		(3,940	)		-		11,373,099

According to the warrant table, the Company could potentially raise up to approximately $15,731,000 if all outstanding warrants were exercised by its holders.

10% Senior Convertible Notes due May 2, 2021 and paid on May 3, 2021

Please see Footnote 5 (“Senior Convertible Bonds”), which is a part of this Form 10-Q filing, for a description and details about the Bonds.

2018 Subscription Rights Offering

Please see Footnote 3F (“Subscription Rights Offering”), which is a part of this Form 10-Q filing, for a description of and details about the Subscription Rights Offering.

Principal Components of our Cost Structure

Our operating and other expenses primarily consist of the following:

●

Impairment of Unproved Oil and Gas Properties: Impairment expense is recognized if a determination is made that a well will not be commercially productive. The amounts include amounts paid in respect of the drilling operations as well as geological and geophysical costs and various amounts that were paid to Israeli regulatory authorities.

	●	General and Administrative Expenses: Overhead, including payroll and benefits for our corporate staff, costs of managing our exploratory operations, audit and other professional fees, and legal compliance is included in general and administrative expenses. General and administrative expenses also include non-cash stock-based compensation expense, investor relations related expenses, lease and insurance and related expenses.

	●	Depreciation, Depletion, Amortization and Accretion: The systematic expensing of the capital costs incurred to explore for natural gas and oil represents a principal component of our cost structure. As a full cost company, we capitalize all costs associated with our exploration, and apportion these costs to each unit of production, if any, through depreciation, depletion and amortization expense. As we have yet to have production, the costs of abandoned wells are written off immediately versus being included in this amortization pool.

Going Concern Basis

Since we have limited capital resources, no revenue to date and a loss from operations, our 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. The appropriateness of using the going concern basis is dependent upon our ability to obtain additional financing or equity capital and, ultimately, to achieve profitable operations. Therefore, there is substantial doubt about our ability to continue as a going concern. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

The Impact of COVID-19

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expense during the reporting period.

We have identified the accounting principles which we believe are most critical to the reported financial status by considering accounting policies that involve the most complex of subjective decisions or assessment.

Impairment of Oil and Gas Properties

We follow 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 income from continuing operations before income taxes, and the adjusted carrying amount of the unproved properties is amortized on the unit-of-production method.

Our oil and gas properties represent 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. A further impairment requiring a charge to expense may be indicated through evaluation of drilling results, relinquishing drilling rights or other information.

Abandonment of properties is accounted for as adjustments to capitalized costs. The net capitalized costs are subject to a “ceiling test” which limits such costs to the aggregate of the estimated present value of future net revenues from proved reserves discounted at ten percent based on current economic and operating conditions, plus the lower of cost or fair market value of unproved properties. The recoverability of amounts capitalized for oil and gas properties is dependent upon the identification of economically recoverable reserves, together with obtaining the necessary financing to exploit such reserves and the achievement of profitable operations.

During the fourth quarter of 2018, the Company testing protocol was concluded at the MJ #1 well. The test results confirmed that the MJ #1 well did not contain hydrocarbons in commercial quantities in the zones tested. As a result, in the year ended December 31, 2019, the Company recorded a non-cash impairment charge to its unproved oil and gas properties of $30,906,000. During the three months ended March 31, 2021, and 2020, respectively, the Company did not record any post-impairment charges.

Following the impairment charge noted above, the total net book value of our unproved oil and gas properties under the full cost method is $23,702,000 at March 31, 2021.

Asset Retirement Obligation

We record a liability for asset retirement obligation at fair value in the period in which it is incurred and a corresponding increase in the carrying amount of the related long-lived assets.

Fair Value Considerations

We follow 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 from the sale of 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.

There are three levels of inputs to fair value measurements - Level 1, meaning the use of quoted prices for identical instruments in active markets; Level 2, meaning the use of quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active or are directly or indirectly observable; and Level 3, meaning the use of unobservable inputs. We use Level 1 inputs for fair value measurements whenever there is an active market, with actual quotes, market prices, and observable inputs on the measurement date. We use Level 2 inputs for fair value measurements whenever there are quoted prices for similar securities in an active market or quoted prices for identical securities in an inactive market. We use observable market data whenever available. We use Level 3 inputs in the Binomial Model used for the valuation of the derivative liability.

Derivative Liabilities

In accordance with ASC 815-40-25 and ASC 815-10-15 Derivatives and Hedging and ASC 480-10-25 Liabilities-Distinguishing Liabilities from Equity, the embedded derivatives associated with the Convertible Bonds are accounted for as liabilities during the term of the related Convertible Bonds.

RESULTS OF OPERATIONS

	For the three months ended March 31,
	2021			2020
	(US $ in thousands)

Operating costs and expenses:
General and administrative expenses		1,971			975
Other		792			468
Subtotal Operating costs and expenses		2,763			1,443

Gain on derivative liability		(426	)		(16	)

Other expense, net		223			181

Net loss		2,560			1,608

Revenue. We currently have no revenue generating operations.

Operating costs and expenses. Operating costs and expenses for the three months ended March 31, 2021 were $2,763,000 compared to $1,443,000 for the three months ended March 31, 2020. The increase in operating costs and expenses during the three months ended March 31, 2021 compared to the corresponding period in 2020 is primarily attributable to an increase in general and administrative expenses driven by the non-cash expenses associated with stock option grants, and to an increase in other expenses during the three months ended March 31, 2021 compared to the corresponding period in 2020.

General and administrative expenses. General and administrative expenses for the three months ended March 31, 2021 were $1,971,000, compared to $975,000 for the three months ended March 31, 2020. The increase in General and administrative expenses during the three months ended March 31, 2021 is primarily attributable to higher non-cash expenses recorded in connection with stock option grants during 2021 and to higher salary expenses compared to the corresponding period in 2020.

Other expense. Other expense during the three months ended March 31, 2021 was $792,000 compared to $468,000 for the three months ended March 31, 2020. Other general and administrative expenses are comprised of non-compensation and non-professional expenses incurred. The increase in other expenses during the three months ended March 31, 2021 compared to the corresponding period in 2020 is primarily attributable to depreciation expenses related the company’s drilling equipment and to increased marketing expenses associated with investor relations activities.

(Gain) on derivative liability. (Gain) on derivative liability during the three months ended March 31, 2021 was ($426,000), compared to a gain of ($16,000) for the three months ended March 31, 2020. An embedded derivative is contained within the valuation of Zion’s $100 convertible bond offering which closed in March 2016. The gain on derivative liability during the three months ended March 31, 2021 compared to the gain on derivative liability during the three months ended March 31, 2020 is primarily due to that the Company’s $100 Convertible bonds that matured on May 2, 2021 and paid in common stock on May 3, 2021.

Other expense, net. Other expense, net for the three months ended March 31, 2021 was $223,000, compared to $181,000 for the three months ended March 31, 2020. The increase in other expense, net during the three months ended March 31, 2021 compared to the corresponding period in 2020 is primarily attributable to exchange rate differences associated with the fluctuating exchange rates of the New Israeli Shekels (“NIS”) with the U.S. Dollar (“USD”) and to financial expenses related to the Company’s convertible bonds.

Net Loss. Net loss for the three months ended March 31, 2021 was $2,560,000 compared to $1,608,000 for the three months ended March 31, 2020.

Liquidity and Capital Resources

Liquidity is a measure of a company’s ability to meet potential cash requirements. As discussed above, we have historically met our capital requirements through the issuance of common stock as well as proceeds from the exercise of warrants and options to purchase common shares.

Our ability to continue as a going concern is dependent upon obtaining the necessary financing to complete further exploration and development activities and generate profitable operations from our oil and natural gas interests in the future. Our current operations are dependent upon the adequacy of our current assets to meet our current expenditure requirements and the accuracy of management’s estimates of those requirements. Should those estimates be materially incorrect, our ability to continue as a going concern will be impaired. Our financial statements for the three months ended March 31, 2021 have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. We have incurred a history of operating losses and negative cash flows from operations. Therefore, there is substantial doubt about our ability to continue as a going concern.

At March 31, 2021, we had approximately $6,293,000 in cash and cash equivalents compared to $11,708,000 at December 31, 2020, which does not include any restricted funds. Our working capital (current assets minus current liabilities) was $4,854,000 at March 31, 2021 and $11,812,000 at December 31, 2020.

As of March 31, 2021, we provided bank guarantees to various governmental bodies (approximately $1,843,000) and others (approximately $85,000) in respect of our drilling operation in the aggregate amount of approximately $1,928,000. The (cash) funds backing these guarantees are held in restricted interest-bearing accounts and are reported on the Company’s balance sheets as fixed short-term bank deposits restricted.

During the three months ended March 31, 2021, cash used in operating activities totaled $2,141,000. Cash provided by financing activities during the three months ended March 31, 2021 was $2,850,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan (the “DSPP” or “Plan”). Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $7,124,000 for the three months ended March 31, 2021.

Accounting standards require management to evaluate our ability to continue as a going concern for a period of one year subsequent to the date of the filing of this Form 10-Q. We expect to incur additional significant expenditures to further our exploration and development programs. While we raised approximately $1,180,000 during the period April 1, 2021 through May 13, 2021, we will need to raise additional funds in order to continue our exploration and development activities in our license area. Additionally, we estimate that, when we are not actively drilling a well, our expenditures are approximately $600,000 per month excluding exploratory operational activities. However, when we are actively drilling a well, we estimate an additional minimum expenditure of approximately $2,500,000 per month. The above estimates are subject to change. Subject to the qualifications specified below, management believes that our existing cash balance, coupled with anticipated proceeds under the DSPP, will be sufficient to finance our plan of operations through June 2021.

The recent outbreak of the coronavirus has to date significantly disrupted business operations and resulted in significantly increased unemployment in the general economy. The extent to which the coronavirus impacts our operations, specifically our capital raising efforts, as well as our ability to continue our exploratory efforts, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the outbreak, new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

No assurance can be provided that we will be able to raise the needed operating capital.

Even if we raise the needed funds, there are factors that can nevertheless adversely impact our ability to fund our operating needs, including (without limitation), unexpected or unforeseen cost overruns in planned non-drilling exploratory work in existing license areas, the costs associated with extended delays in undertaking the required exploratory work, and plugging and abandonment activities which is typical of what we have experienced in the past.

The financial information contained in these consolidated financial statements has been prepared on a basis that assumes that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities and commitments in the normal course of business. This financial information and these consolidated financial statements do not include any adjustments that may result from the outcome of this uncertainty.

Off-Balance Sheet Arrangements

We do not currently use any off-balance sheet arrangements to enhance our liquidity or capital resource position, or for any other purpose.

Recently Issued Accounting Pronouncements

The Company does not believe that the adoption of any recently issued accounting pronouncements in 2021 had a significant impact on our financial position, results of operations, or cash flow.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk. Our exposure to market risk relates to our cash and investments. We maintain an investment portfolio of short-term bank deposits and money market funds. The securities in our investment portfolio are not leveraged, and are, due to their very short-term nature, subject to minimal interest rate risk. We currently do not hedge interest rate exposure. Because of the short-term maturities of our investments, we do not believe that a change in market interest rates would have a significant negative impact on the value of our investment portfolio except for reduced income in a low interest rate environment. At March 31, 2021 we had cash, cash equivalents and short-term and long-term bank deposits of approximately $8,247,000. The weighted average annual interest rate related to our cash and cash equivalents for the three months ended March 31, 2021, exclusive of funds at US banks that earn no interest, was approximately.13%.

ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms. As of March 31, 2021, our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of our disclosure controls and procedures. Based on this evaluation, our chief executive officer and our chief financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2021.

Changes in Internal Control over Financial Reporting

There were no changes in internal controls over financial reporting that occurred during the quarter ended March 31, 2021 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Securities and Exchange Commission (“SEC”) Investigation

Litigation

ITEM 1A. RISK FACTORS

During the quarter ended March 31, 2021, there were no material changes to the risk factors previously reported in our Annual Report on Form 10-K for the year ended December 31, 2020.

ITEM 2. UNREGISTERED SALES OF SECURITIES AND USE OF PROCEEDS

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

None.

ITEM 5. OTHER INFORMATION:

None.

ITEM 6. EXHIBITS

Exhibit Index:

10.1		Executive Employment and Retention Agreements (Management Agreements)

		(i) Employment Agreement dated January 1, 2021 and made effective January 1, 2021 between Zion Oil & Gas, Inc. and Martin van Brauman

31.1		Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 under the Exchange Act

31.2		Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 under the Exchange Act

32.1		Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only)

32.2		Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (furnished only)

101.INS		XBRL Instance Document

101.SCH		XBRL Taxonomy Extension Schema

101.CAL		XBRL Taxonomy Extension Calculation Linkbase

101.DEF		XBRL Taxonomy Extension Definition Linkbase

101.LAB		XBRL Taxonomy Extension Label Linkbase

101.PRE		XBRL Taxonomy Extension Presentation Linkbase

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

ZION OIL & GAS, INC.
(Registrant)

By:	/s/ Robert W.A. Dunn	By:	/s/ Michael B. Croswell Jr.
	Robert W. A. Dunn		Michael B. Croswell Jr.
	Chief Executive Officer		Chief Financial Officer
	(Principal Executive Officer)		(Principal Financial and Accounting Officer)

Date:	May 13, 2021	Date:	May 13, 2021

For the three months ended March 31,

US$ thousands

US$ thousands