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 September 30, 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 incorporation or organization)		(I.R.S. Employer Identification No.)

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

(214) 221-4610

(Registrant’s telephone number, including area code)

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 ☒

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

As of November 8, 2021, Zion Oil & Gas, Inc. had outstanding 340,521,048 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 – September 30, 2021 and December 31, 2020		1

Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2021 and 2020		2

Consolidated Condensed Statement of Changes in Stockholders’ Equity for the three and nine months ended September 30, 2021 and 2020		3

Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2021 and 2020		5

Notes to Consolidated Condensed Financial Statements		7

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations		36

Item 3 – Quantitative and Qualitative Disclosures About Market Risk		48

Item 4 – Controls and Procedures		49

PART II — OTHER INFORMATION

Item 1 – Legal Proceedings		50

Item 1A – Risk Factors		50

Item 2 – Unregistered Sales of Equity Securities and Use of Proceeds		50

Item 3 – Defaults upon Senior Securities		50

Item 4 – Mine Safety Disclosures		50

Item 5 – Other Information		50

Item 6 – Exhibits		51

Exhibit Index		51

SIGNATURES		52

Zion Oil & Gas, Inc.

Consolidated Condensed Balance Sheets as of

	September 30, 2021			December 31, 2020
	US$ thousands			US$ thousands
	(Unaudited)
Current assets
Cash and cash equivalents		4,564			11,708
Fixed short term bank and escrow deposits – restricted		1,269			2,954
Prepaid expenses and other		473			1,900
Other deposits		595			597
Governmental receivables		1,770			2,040
Other receivables		379			195
Total current assets		9,050			19,394

Unproved oil and gas properties, full cost method (see Note 4)		39,439			15,526

Property and equipment at cost
Drilling rig and related equipment, net of accumulated depreciation of $525 and nil (see note 2J)		6,948			7,568
Property and equipment, net of accumulated depreciation of $595 and $564		146			131
		7,094			7,699

Right of Use Lease Assets (see Note 7)		390			438

Other assets
Assets held for severance benefits		503			446
Total other assets		503			446

Total assets		56,476			43,503

Liabilities and Stockholders’ Equity

Current liabilities
Accounts payable		2,212			1,369
Lease obligation – current (see Note 7)		228			191
Asset retirement obligation		571			571
Derivative liability (see Note 6)		-			431
10% Senior convertible bonds, net of unamortized deferred financing cost of nil and $9 and unamortized debt discount of nil and $205 at September 30, 2021 and December 31, 2020, respectively (see Note 5)		-			3,033
Accrued liabilities		1,638			1,987
Total current liabilities		4,649			7,582

Long-term liabilities
Lease obligation – non-current (see Note 7)		200			307
Provision for severance pay		517			505
Total long-term liabilities		717			812

Total liabilities		5,366			8,394

Commitments and contingencies (see Note 8)

Stockholders’ equity
Common stock, par value $.01; Authorized: 800,000,000 shares at September 30, 2021: Issued and outstanding: 304,260,077 and 237,381,555 shares at September 30, 2021 and December 31, 2020, respectively		3,043			2,374
Additional paid-in capital		269,790			245,539
Accumulated deficit		(221,723	)		(212,804	)
Total stockholders’ equity		51,110			35,109

Total liabilities and stockholders’ equity		56,476			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						For the nine months ended
	September 30,						September 30,
	2021			2020			2021			2020
	US$ thousands			US$ thousands			US$ thousands			US$ thousands
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
General and administrative		1,601			1,139			6,524			3,227
Other		697			563			2,553			1,608
Loss from operations		(2,298	)		(1,702	)		(9,077	)		(4,835	)

Other income (expense), net
Gain (loss) on derivative liability		-			49			431			(2	)
Foreign exchange gain (loss)		7			(4	)		(43	)		(7	)
Financial expenses, net		(12	)		(139	)		(230	)		(484	)

Loss, before income taxes		(2,303	)		(1,796	)		(8,919	)		(5,328	)
Income taxes		-			-			-			-

Net loss		(2,303	)		(1,796	)		(8,919	)		(5,328	)

Net (loss), gain per share of common stock
Basic and diluted (in US$)		(0.01	)		(0.01	)		(0.03	)		(0.03	)

Weighted-average shares outstanding
Basic and diluted (in thousands)		286,390			202,877			258,442			171,296

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 and nine months ended September 30, 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 and exercise of warrants		60,665		607		17,550			—			18,157
Costs associated with the issuance of shares		—		—		(115	)		—			(115	)
Value of bonds converted to shares		15		*		9			—			9
Bond interest paid in shares		530		5		316			—			321
Bond principal paid in shares		5,296		53		3,161			—			3,214
Funds received from option exercises		372		4		11			—			15
Value of options granted to employees, directors and others as non-cash compensation		—		—		3,319			—			3,319
Net loss		—		—		—			(8,919	)		(8,919	)
Balances as of September 30, 2021		304,260		3,043		269,790			(221,723	)		51,110

	Common Stock				Additional paid-in		Accumulated
	Shares		Amounts		Capital		deficit			Total
	thousands		US$ thousands		US$ thousands		US$ thousands			US$ thousands
Balances as of June 30, 2021		283,273		2,833		264,887		(219,420	)		48,300
Funds received from sale of DSPP units and shares and exercise of warrants		20,732		207		4,162		—			4,369
Funds received from option exercises		255		3		11		—			14
Value of options granted to employees, directors and others as non-cash compensation		—		—		730		—			730
Net loss		—		—		—		(2,303	)		(2,303	)
Balances as of September 30, 2021		304,260		3,043		269,790		(221,723	)		51,110

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 and nine months ended September 30, 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 and exercise of warrants		105,354		1,053		24,464		—			25,517
Value of bonds converted to shares		1		*		—		—			—
Bond interest paid in shares		1,782		18		307		—			325
Funds received from option exercises		653		7		—		—			7
Value of options granted to employees, directors and others as non-cash compensation		—		—		59		—			59
Net loss		—		—		—		(5,328	)		(5,328	)
Balances as of September 30, 2020		231,763		2,318		242,722		(211,136	)		33,904

	Common Stock				Additional paid-in		Accumulated
	Shares		Amounts		Capital		deficit			Total
	thousands		US$ thousands		US$ thousands		US$ thousands			US$ thousands
Balances as of June 30, 2020		179,909		1,799		230,220		(209,340	)		22,679
Funds received from sale of DSPP units and shares and exercise of warrants		51,589		516		12,499		—			13,015
Funds received from option exercises		265		3		—		—			3
Value of options granted to employees, directors and others as non-cash compensation		—		—		3		—			3
Net loss		—		—		—		(1,796	)		(1,796	)
Balances as of September 30, 2020		231,763		2,318		242,722		(211,136	)		33,904

*	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 nine months ended September 30,
	2021			2020
	US$ thousands			US$ thousands
Cash flows from operating activities
Net loss		(8,919	)		(5,328	)
Adjustments required to reconcile net loss to net cash used in operating activities:
Depreciation		556			36
Cost of options issued to employees, directors and others as non-cash compensation		3,319			59
Amortization of debt discount related to convertible bonds		190			332
Non-cash interest expense		-			101
Change in derivative liability		(431	)		2

Change in assets and liabilities, net:
Other deposits		2			(361	)
Prepaid expenses and other		1,427			(106	)
Governmental receivables		270			25
Lease obligation – current		(91	)		(32	)
Lease obligation – noncurrent		(107	)		(143	)
Right of use lease assets		176			158
Other receivables		(184	)		191
Severance payable, net		(45	)		28
Accounts payable		(291	)		31
Asset retirement obligation		-			(14	)
Accrued liabilities		(760	)		(125	)
Net cash used in operating activities		(4,888	)		(5,146	)

Cash flows from investing activities
Acquisition of property and equipment		(46	)		(9	)
Acquisition of drilling rig and related equipment		(115	)		(4,636	)
Investment in unproved oil and gas properties		(21,837	)		(880	)
Net cash used in investing activities		(21,998	)		(5,525	)

Cash flows from financing activities
Payments related to capital lease		-			(9	)
Costs paid related to the issuance of new shares		(115	)		-
Proceeds from exercise of stock options		15			7
Proceeds from issuance of stock and exercise of warrants		18,157			25,517
Net cash provided by financing activities		18,057			25,515

Net increase in cash, cash equivalents and restricted cash		(8,829	)		14,844
Cash, cash equivalents and restricted cash – beginning of period		14,662			5,935
Cash, cash equivalents and restricted cash – end of period		5,833			20,779

Supplemental schedule of cash flow information
Cash paid for interest		-			2

Non-cash investing and financing activities:
Convertible Bond interest paid in shares		321			325
Convertible Bond principal paid in shares		3,214			-
Unpaid investments in oil & gas properties		3,114			183
10% Senior Convertible Bonds converted to shares		9			*
Capitalized convertible bond interest attributed to oil and gas properties		104			110
New lease accounted for as a right of use lease asset		128			-

*	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:

	September 30, 2021		December 31, 2020		September 30, 2020		December 31, 2019
	US$ thousands		US$ thousands		US$ thousands		US$ thousands
Cash and cash equivalents		4,564		11,708		18,621		4,845
Restricted cash included in fixed short-term bank deposits		1,269		2,954		2,158		1,090
		5,833		14,662		20,779		5,935

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 September 30, 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 in the future, 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. On April 29, 2021, Zion submitted a request to the Ministry of Energy for a six-month extension to December 2, 2021. On May 30, 2021, the Ministry of Energy approved our request for extension to December 2, 2021. The ML 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 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 nine months ended September 30, 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.

Zion Oil & Gas, Inc.

Consolidated Condensed Notes to Financial Statements (Unaudited)

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

SEC Form 10-Q filed by Zion Oil