ZION OIL & GAS INC

Previous wording

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM CONDENSED CONSOLIDATED 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, 2025, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Current wording

THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH OUR UNAUDITED INTERIM CONDENSED CONSOLIDATED 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 “RISK FACTORS” SECTION OF OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED December 31, 2025, FILED WITH THE SECURITIES AND EXCHANGE COMMISSION.

Previous wording

Zion Oil and Gas, Inc., a Texas corporation, is an oil and gas exploration company with a history of 25 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. The shareholders of Zion Oil & Gas, Inc. approved the re-domestication of its incorporation to Texas on June 4, 2025. 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 marketplace of OTC Markets, Inc. under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW”. On January 24, 2020, Zion incorporated a wholly owned subsidiary, Zion Drilling, Inc., as 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. On May 14, 2025, Zion Drilling, Inc. and Zion Drilling Services, Inc. were re-domesticated and converted from Delaware corporations to Texas corporations pursuant to plans of conversion approved unanimously by the directors and shareholders of each corporation. On October 19, 2022, Zion incorporated a wholly owned subsidiary in Israel, Zion Drilling Israel Ltd, for the purpose of owning a drilling rig and related equipment and spare parts. On this date, the entity was created as a placeholder only. A bank account was created in November 2024 and a tax file was created in January 2025. Zion Drilling Israel Ltd did not have any activities during the three months ended March 31, 2026.

Current wording

Zion Oil and Gas, Inc., a Texas corporation, is an oil and gas exploration company with a history of 25 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. The shareholders of Zion Oil & Gas, Inc. approved the re-domestication of its incorporation to Texas on June 4, 2025. 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 marketplace of OTC Markets, Inc. under the symbol “ZNOG” and our Common Stock warrant under the symbol “ZNOGW”. On January 24, 2020, Zion incorporated a wholly owned subsidiary, Zion Drilling, Inc., as 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. On May 14, 2025, Zion Drilling, Inc. and Zion Drilling Services, Inc. were re-domesticated and converted from Delaware corporations to Texas corporations pursuant to plans of conversion approved unanimously by the directors and shareholders of each corporation. On October 19, 2022, Zion incorporated a wholly owned subsidiary in Israel, Zion Drilling Israel Ltd, for the purpose of owning a drilling rig and related equipment and spare parts. On this date, the entity was created as a placeholder only. A bank account was created in November 2024 and a tax file was created in January 2025. Zion Drilling Israel Ltd did not have any activities during the six months ended June 30, 2026.

Previous wording

On September 14, 2023, the Israel Ministry of Energy approved a new Megiddo Valleys License 434 (“NMVL 434”or “Exploration License 434”), allowing for oil and gas exploration on approximately 75,000 acres or 302 square kilometers. This Exploration License 434 is valid for three years until September 13, 2026 with four potential 1-year extensions for a total of seven years until September 13, 2030. This NMVL 434 effectively supersedes our previous NML 428.

Current wording

On September 14, 2023, the Israel Ministry of Energy approved a new Megiddo Valleys License 434 (“NMVL 434” or “Exploration License 434”), allowing for oil and gas exploration on approximately 75,000 acres or 302 square kilometers. This Exploration License 434 is valid for three years until September 13, 2026 with four potential 1-year extensions for a total of seven years until September 13, 2030. This NMVL 434 effectively supersedes our previous NML 428. On May, 18, 2026, the Israel Ministry of Energy extended NMVL 434 until September 13, 2027.

Previous wording

I-35 Drilling Rig & Associated Equipment

Current wording

JB-1 Drilling Rig & Associated Equipment

Previous wording

Zion purchased an onshore oil and gas drilling rig, drilling pipe, related equipment and spare parts for a purchase price of $5.6 million in cash, inclusive of approximately $540,000 allocated to spare parts and $48,000 allocated to 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. Zion determined that the life of the I-35 drilling rig (the rig Zion purchased), is 10 years. Zion is depreciating the rig on a straight-line basis.

Current wording

Zion purchased an onshore oil and gas drilling rig, drilling pipe, related equipment and spare parts in March 2020 for a purchase price of $5.6 million in cash, inclusive of approximately $540,000 allocated to spare parts and $48,000 allocated to 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. Zion determined that the life of the JB-1 drilling rig (the rig Zion purchased), is 10 years. Zion is depreciating the rig on a straight-line basis.

Previous wording

During the three months ended March 31, 2026, Zion added approximately $294,000 in costs associated with its drilling rig, approximately $307,000 in rig spare parts and approximately $485,000 in other drilling assets, for total combined additions of $1,086,000. We also recorded approximately $150,000 in self-consumption of rig spare parts.

Current wording

During the six months ended June 30, 2026, Zion added approximately $1,302,000 in costs associated with its drilling rig, approximately $372,000 in rig spare parts and approximately $556,000 in other drilling assets, for total combined additions of $2,230,000. We also recorded approximately $240,000 in self-consumption of rig spare parts.

Previous wording

Map 1. Zion’s New Megiddo License 434 as ofMarch 31, 2026**.**

Current wording

Map 1. Zion’s New Megiddo License 434 as of June 30, 2026

Previous wording

For the three months ended March 31, 2026 and 2025, approximately $30,000 and $212,000, respectively, were recorded under the Company’s Statement of Changes in Stockholders’ Equity as Subscriptions Receivables. In both cases above, the subscription receivables were received in the following month.

Current wording

For the six months ended June 30, 2026, approximately $208,000 were recorded under the Company’s Statement of Changes in Stockholders’ Equity as Subscriptions Receivables. These funds were later received in July 2026

Previous wording

For the three months ended March 31, 2026 and 2025, approximately $8,009,000 and $6,040,000, respectively, were raised under the DSPP program.

Current wording

For the three and six months ended June 30, 2026, approximately $3,385,000 and $11,394,000, respectively, were raised under the DSPP program.

Previous wording

The warrants balances at December 31, 2025 and transactions since January 1, 2026are shown in the table below:

Current wording

The warrants balances at December 31, 2025 and transactions since January 1, 2026 are shown in the table below:

Previous wording

On February 28, 2026, Israel and the United States jointly attacked Iran. The attacks took the form of missile strikes throughout Iran targeting regime leadership, nuclear sites, ballistic missile sites and other military infrastructure. Iran’s former supreme leader, Ali Khomenei, was killed on this day. There have been daily attacks during March 2026 and into April 2026. While there has been a temporary ceasefire recently, tensions remain high between the US, Israel and Iran.

Current wording

On February 28, 2026, Israel and the United States jointly attacked Iran. The attacks took the form of missile strikes throughout Iran targeting regime leadership, nuclear sites, ballistic missile sites and other military infrastructure. Iran’s former supreme leader, Ali Khomenei, was killed on this day. There have been daily attacks during March 2026 and into April 2026. Hostilities escalated significantly during the Passover holiday period in early April 2026, when Iran launched a massive retaliatory wave of hundreds of ballistic missiles and drone salvos targeting cities and infrastructure throughout Israel. Following these intensive exchanges, a temporary ceasefire was implemented on April 8, 2026. While direct kinetic engagements subsequently subsided into a tense naval standoff through May, a formal bilateral 60-day stabilization framework was initiated on June 17, 2026, to manage regional security boundaries and lift maritime blockades. Tensions still remain high between the US, Israel, and Iran

Previous wording

In early March 2026, Hezbollah joined the war against Israel by launching daily attacks, primarily missiles, into northern Israel. Israel responded by launching its own missiles into Beirut and southern Lebanon and moving ground forces into southern Lebanon.

Current wording

In early March 2026, Hezbollah joined the war against Israel by launching daily attacks, primarily missiles, into northern Israel. Israel responded by launching its own missiles into Beirut and southern Lebanon and moving ground forces into southern Lebanon. These active border hostilities peaked in intensity in late March and early April 2026, resulting in significant defensive maneuvers to establish a security buffer zone in southern Lebanon. A 10-day cessation of hostilities was instituted on April 16, 2026, which underwent consecutive diplomatic extensions through May. Sporadic field skirmishes persisted and a regional truce framework was negotiated on June 19, 2026. Israel stated that they will abide by the truce on a strict "quiet for quiet" basis.

Previous wording

There is uncertainty as to the degree of stability that will be seen in the Middle East, and Israel in particular, due to these present hostilities. While we acknowledge that uncertainty, the Company is moving forward with its MJ-01 re-entry project.

Current wording

There is uncertainty as to the degree of stability that will be seen in the Middle East, and Israel in particular, due to these present hostilities. While we acknowledge that uncertainty, the Company is moving forward with its MJ-02 re-entry project.

Previous wording

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.

Current wording

We have identified the accounting estimates 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.

Previous wording

The total net book value of our unproved oil and gas properties under the full cost method is $30,964,000 and $27,673,000 at March 31, 2026 and at December 31, 2025, respectively.

Current wording

The total net book value of our unproved oil and gas properties under the full cost method is $33,199,000 and $27,673,000 at June 30, 2026 and at December 31, 2025, respectively.

Previous wording

*Operating costs and expenses.*Operating costs and expenses for the three months ended March 31, 2026 were $2,122,000 compared to $1,700,000 for the three months ended March 31, 2025. Operating costs and expenses for the three months ended March 31, 2026 were $422,000 (25%) higher compared to the three months ended March 31, 2025. The primary driver of the increase was legal fees incurred for a proactive cyber security assessment.

Current wording

*Operating costs and expenses.*Operating costs and expenses for the three and six months ended June 30, 2026 were $2,060,000 and $4,182,000, respectively, compared to $1,996,000 and $3,696,000, respectively, for the three and six months ended June 30, 2025. Operating costs and expenses for the three months ended June 30, 2026 were $64,000 (3%) higher compared to the three months ended June 30, 2025. Operating costs and expenses for the six months ended June 30, 2026 were $486,000 (13%) higher compared to the six months ended June 30, 2025. The primary driver of the increase was legal fees incurred for a proactive cyber security assessment.

Previous wording

*General and administrative expenses.*General and administrative expenses (“G&A expenses”) for the three months ended March 31, 2026 were $1,461,000 compared to $1,101,000 for the three months ended March 31, 2025. This expense grouping includes salaries, benefits, stock option expenses and professional fees. G&A expenses were higher by $360,000 (33%) during the most recent quarter versus the prior year quarter primarily due legal fees incurred for a proactive cyber security assessment.

Current wording

*General and administrative expenses.*General and administrative expenses (“G&A expenses”) for the three and six months ended June 30, 2026 were $1,120,000 and $2,581,000, respectively, compared to $1,101,000 and $2,202,000, respectively, for the three and six months ended June 30, 2025. This expense grouping includes salaries, benefits, stock option expenses and professional fees. G&A expenses were higher by $19,000 (2%) during the most recent quarter versus the prior year quarter. G&A expenses increased $379,000, (17%) during the first six months of 2026 as compared to the six months of 2025, primarily due to higher legal fees incurred for a proactive cyber security assessment.

Previous wording

*Other expense.*Other expenses during the three months ended March 31, 2026 were $661,000 compared to $599,000 for the three months ended March 31, 2025. Other general and administrative expenses are comprised of non-cash compensation and non-professional expenses incurred. Other expenses increased by $62,000 (10%) for the three months ended March 31, 2026. Zion incurred higher rig depreciation expense in 2026 due to rig additions.

Current wording

*Other expense.*Other expenses during the three and six months ended June 30, 2026 were $940,000 and $1,601,000, respectively, compared to $895,000 and $1,494,000, respectively, for the three and six months ended June 30, 2025. Other general and administrative expenses are comprised of non-cash compensation and non-professional expenses incurred. Other expenses increased by $45,000, (5%) and by $107,000, or about 7% for the three and six months ended June 30, 2026 respectively. Zion incurred higher rig depreciation expense in 2026 due to rig additions.

Previous wording

Other (income), net. Other (income) during the three months ended March 31, 2026 were ($39,000) compared to ($25,000) for the three months ended March 31, 2025. The income in this category is comprised of foreign currency exchange costs, primarily the New Israeli Shekel (NIS) to the US dollar, and the financial expenses/income. Zion earned higher interest income during the three and nine months ended March 31, 2026, due to higher average cash balances.

Current wording

Other expenses (income), net. Other expenses (income) during the three and six months ended June 30, 2026 were ($10,000) and ($49,000), respectively, compared to ($85,000) and ($110,000), respectively, for the three and six months ended June 30, 2025. The income in this category is comprised of foreign currency exchange costs, primarily the New Israeli Shekel (NIS) to the US dollar, and the financial expenses/income. Zion earned higher interest income during the three and six months ended June 30, 2026, due to higher average cash balances.

Previous wording

Net Loss. Net losses for the three months ended March 31, 2026 were $2,083,000 compared to $1,675,000 for the three months ended March 31, 2025.

Current wording

Net Loss. Net losses for the three and six months ended June 30, 2026 were $2,050,000 and $4,133,000, respectively, compared to $1,911,000 and $3,586,000, respectively, for the three and six months ended June 30, 2025.

Previous wording

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 in doubt. Our financial statements for the three months ended March 31, 2026 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.

Current wording

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 in doubt. Our financial statements for the six months ended June 30, 2026 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.

Previous wording

At March 31, 2026, we had approximately $10,700,000 in cash and cash equivalents compared to $8,313,000 at December 31, 2025, which does not include any restricted funds. Our working capital (current assets minus current liabilities) was $11,317,000 at March 31, 2026 and $9,271,000 at December 31, 2025.

Current wording

At June 30, 2026, we had approximately $9,608,000 in cash and cash equivalents compared to $8,313,000 at December 31, 2025, which does not include any restricted funds. Our working capital (current assets minus current liabilities) was $9,729,000 at June 30, 2026 and $9,271,000 at December 31, 2025.

Previous wording

As of March 31, 2026, and December 31, 2025, the Company provided Israeli-required bank guarantees to various governmental bodies (approximately $1,429,000 and $1,424,000, respectively) and others (approximately $109,000 and $109,000, respectively) with respect to its drilling operation in an aggregate amount of approximately $1,538,000 and $1,533,000, respectively. The (cash) funds backing these guarantees are held in restricted interest-bearing accounts in Israel and are reported on the Company’s balance sheets as cash and cash equivalents – restricted.

Current wording

As of June 30, 2026, and December 31, 2025, the Company provided Israeli-required bank guarantees to various governmental bodies (approximately $1,461,000 and $1,424,000, respectively) and others (approximately $118,000 and $109,000, respectively) with respect to its drilling operation in an aggregate amount of approximately $1,579,000 and $1,533,000, respectively. The (cash) funds backing these guarantees are held in restricted interest-bearing accounts in Israel and are reported on the Company’s balance sheets as cash and cash equivalents – restricted.

Previous wording

During the three months ended March 31, 2026, cash used in operating activities totaled $1,478,000. Cash provided by financing activities during the three months ended March 31, 2026 was $8,045,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $4,179,000 for the three months ended March 31, 2026.

Current wording

During the six months ended June 30, 2026, cash used in operating activities totaled $3,673,000. Cash provided by financing activities during the six months ended June 30, 2026 was $11,463,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $6,440,000 for the six months ended June 30, 2026.

Previous wording

During the three months ended March 31, 2025, cash used in operating activities totaled $2,457,000. Cash provided by financing activities during the three months ended March 31, 2025 was $6,041,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $798,000 for the three months ended March 31, 2025.

Current wording

During the six months ended June 30, 2025, cash used in operating activities totaled $3,141,000. Cash provided by financing activities during the six months ended June 30, 2025 was $13,467,000 and is primarily attributable to proceeds received from the Dividend Reinvestment and Stock Purchase Plan. Net cash used in investing activities such as unproved oil and gas properties, equipment and spare parts was $3,977,000 for the six months ended June 30, 2025.

Previous wording

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 $974,000 during the period April 1, 2026 through May 5, 2026, which includes collection of the $30,000 stock subscription receivable at March 31, 2026, 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 2027.

Current wording

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 $1,115,000 during the period July 1, 2026 through August 6, 2026, which includes collection of the $237,000 stock subscription receivable at June 30, 2026, 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 December 2026.