Senior Convertible Bonds

12 Months Ended

Dec. 31, 2018

Note 7 - Senior Convertible Bonds

Rights Offering -10% Senior Convertible Notes due May 2, 2021

See Note 6, Paragraph J for a description of the rights offering.

The Notes contain a convertible option that gives rise to a derivative liability, which is accounted for separately from the Notes (see below and Note 8). 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 years ended December 31, 2018, 2017, and 2016, the Company recorded approximately $27,000, $28,000 and $18,000 respectively, in amortization expense related to the deferred financing costs, and approximately $274,000, 246,000, and $113,000, respectively in debt discount amortization, net. The Notes are governed by the terms of the Indenture. The Notes are senior unsecured obligations of the Company and bear interest at a rate of 10% per year, payable annually in arrears on May 2 of each year, commencing May 2, 2017. The Notes will mature on May 2, 2021, unless earlier redeemed by the Company or converted by the holder.

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 will not be issued and the final number of shares will be rounded up to the next whole share.

On May 2, 2018, the Company paid its annual 10% interest to its bondholders of record on April 18, 2018. The interest was paid-in-kind (“PIK”) in the form of Common Stock. An average of the Company stock price of $4.68 was determined based on the 30 trading days prior to the record date of April 18, 2018. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued 70,780 shares to the accounts of its bondholders.

On May 2, 2017, the Company paid its annual 10% interest to its bondholders of record on April 18, 2017. The interest was paid-in-kind (“PIK”) in the form of Common Stock. An average Zion stock price of $1.196 was determined based on the 30 trading days prior to the record date of April 18, 2017. This figure was used to divide into 10% of the par value of the bonds held by the holders. The Company issued 289,213 shares to the accounts of its bondholders.

At any time prior to the close of business on the business day immediately preceding April 2, 2021, holders may convert their notes into Common Stock at the conversion rate of 44 shares per $100 bond (which is equivalent to a conversion rate of approximately $2.27 per share). The conversion rate is subject to adjustment from time to time upon the occurrence of certain events, including, but not limited to, the issuance of stock dividends and payment of cash dividends.

Beginning May 3, 2018, the Company was entitled to redeem for cash the outstanding Notes at an amount equal to the principal and accrued and unpaid interest, plus a 10% premium. No “sinking fund” is provided for the Notes due May 2021, which means that the Company is not required to periodically redeem or retire the Notes due May 2021.

Through the years ended December 31, 2018, 2017, and 2016, approximately 922, 982 and 129 convertible bonds of $100 each, respectively, have been converted at a conversion rate of approximately $2.27 per share. As a result, the Company issued approximately 41,000, 43,000 and 5,700 shares of its Common Stock during the same period, respectively, and recorded approximately $84,000, $52,000 and ($5,000) in financial expenses (income) during the same period.

	December 31, 2018			December 31, 2017			December 31, 2016
	US$ thousands			US$ thousands			US$ thousands

10% Senior Convertible Bonds	$	3,470		$	3,470		$	3,470
Debt discount amortization, net	$	(993	)	$	(1,267	)	$	(1,513	)
Bonds converted to shares	$	(203	)	$	(111	)	$	(13	)
Offering cost, net	$	(63	)	$	(90	)	$	(118	)
10% senior Convertible bonds – Long Term Liability	$	2,211		$	2,002		$	1,826

The Company recognized $331,000, $346,000 and $0 in capitalized interest for the years ended December 31, 2018, 2017 and 2016, respectively. The Company recognized $0 and $0 and $231,000 as interest expense for the year ended December 31, 2018, 2017 and 2016, respectively.