NOTE 6 - LOANS

2012 Convertible Loan

On April 5, 2012, the Company issued senior secured convertible debentures (the "2012 Convertible Debentures") due April 5, 2014 in the original aggregate principal amount of $11,702,128 and five-year warrants (the "2012 Warrants") to purchase an aggregate of 835,866 shares of its common stock at an exercise price of $7.20 per share in a private placement transaction in exchange for aggregate gross proceeds of approximately $11 million. The 2012 Convertible Debentures beared interest at an annual rate of 8% (payable quarterly beginning on July 1, 2012) and were convertible at any time into shares of common stock at an initial conversion price of $7.00 per share.

The relevant features of the 2012 Convertible Debentures and 2012 Warrants at the time of issuance are summarized below:

2012 Convertible Debentures

Conversion and contingent conversion

The 2012 Convertible Debentures, including accrued interest on such 2012 Convertible Debentures, were convertible at any time, in whole or part, at the option of the holders into shares of common stock at an initial conversion price of $7.00 per share, subject to adjustment for stock splits, fundamental transactions or similar events and an additional conversion adjustment described below.

The number of conversion shares issuable upon a conversion was determined by the quotient obtained by dividing (x) the sum of (a) the outstanding principal amount to be converted, (b) at the option of the holder, a portion or all of any accrued and unpaid interest to be converted and (c) the conversion adjustment amount by (y) the conversion price.

The "conversion adjustment amount" was calculated by multiplying the principal amount being converted by a fraction, the numerator of which is (a) the number of days elapsed from the original issue date multiplied by (b) .021917808; and the denominator of which is 100. The maximum number of days elapsed to be used in calculating the conversion adjustment amount was not permitted to be greater than 548 days regardless of the actual number of days elapsed from the original issue date.

The Company had the right to force conversion of the 2012 Convertible Debentures if the closing bid price of the Company's common stock equaled or exceeded 165% of the conversion price for twenty consecutive trading days, the minimum daily trading volume for such period was $1,100,000, all of the shares of the common stock underlying the 2012 Convertible Debentures during such period were either registered for resale with the Securities and Exchange Commission or eligible for resale pursuant to Rule 144 and there was no event of default or existing event which, with the passage of time or the giving of notice, would have constituted an event of default existed during such period.

The 2012 Convertible Debentures contained certain limitations on conversion. No conversion by a holder was permitted if, after giving effect to the conversion, such holder would have beneficially owned in excess of 4.99% of the Company's outstanding shares of common stock. This percentage could have been increased to a percentage not to exceed 9.99%, at the option of such holder, except any increase would not have been effective until 61 days' following notice to the Company.

The 2012 Convertible Debentures impose penalties on the Company for any failure to timely deliver any shares of its common stock issuable upon conversion.

Events of default and holder's contingent redemption option

If there was an event of default as stipulated in the agreement, then by election of the holders holding at least 60% of the 2012 Convertible Debentures, the Company was required to redeem all of the 2012 Convertible Debentures in cash for 112% of the outstanding principal, together with all unpaid and accrued interest, all interest that would have been payable through the maturity date and any other amounts due under the 2012 Convertible Debentures (such amount, the "Mandatory Default Amount"). The Mandatory Default Amount was to accrue interest at a rate of 24% per annum commencing on the fifth calendar date following the relevant event of default.

Holder's noncontingent redemption option

Commencing 18 months following the original issuance date of the 2012 Convertible Debentures, the holders had the right to require the Company to redeem all or a portion of the 2012 Convertible Debentures, for a price equal to 112% of the amount of principal to be redeemed plus all accrued but unpaid interest and other amounts due under the 2012 Convertible Debentures.

Company's noncontingent redemption option

Commencing 6 months following the original issuance date of the 2012 Convertible Debentures, the Company had the right to redeem all or a portion of the 2012 Convertible Debentures for a price equal to 112% of the amount of principal to be redeemed plus all accrued but unpaid interest and other amounts due under the 2012 Convertible Debentures.

Covenants

The 2012 Convertible Debentures contained certain covenants which prohibited or limited the Company's and its subsidiaries ability to, among other things:

pay cash dividends to its stockholders;

redeem, repurchase or otherwise acquire more than a de minimis number of shares of its common stock or common stock equivalents;

incur additional indebtedness;

permit liens on assets or conduct sales of assets;

effectuate stock splits until April 5, 2013, except in connection with an initial listing on a national securities exchange or to meet the continued listing requirements of such exchange;

cease making public filings under the Securities Exchange Act of 1934, as amended;

engage in transactions with affiliates; and

amend its charter documents in a way that would materially and adversely affect any holder of the 2012 Convertible Debentures.

Pro rata distributions

If the Company, at any time while the 2012 Convertible Debentures were outstanding, distributed to all holders of common stock evidences of its indebtedness or assets (including cash and cash dividends) or rights or warrants to subscribe for or purchase any security other than the common stock, then, upon any conversion of the 2012 Convertible Debentures, the holder would have been entitled to receive such distribution to the same extent that the holder would have if the holder had held the number of conversion shares issued upon such conversion of the 2012 Convertible Debentures immediately before the date on which a record was taken for such distribution, or, if no such record was taken, the date as of which the record holders of shares of common stock were determined for the participation in such distribution.

2012 Warrants

Exercisability

The 2012 Warrants, upon issuance were immediately exercisable and, in the aggregate, entitle the holders to purchase up to 835,866 shares of common stock. The 2012 Warrants had an initial exercise price of $7.20 per share payable in cash. The 2012 Warrants would have expired on April 5, 2017.

Similar to the 2012 Convertible Debentures, the 2012 Warrants also contained limitations on exercise that would cause the holder to beneficially own in excess of 4.99% or 9.99% of the Company's outstanding common stock.

Anti-dilution protection

The exercise price of the 2012 Warrants and the number of shares issuable upon exercise of the 2012 Warrants were subject to adjustments for stock splits, combinations or similar events.

"Most favored nation"

The 2012 Warrants were also subject to an adjustment pursuant to which, in the event that the Company issues or was deemed to have issued certain securities with terms that are superior to those of the 2012 Warrants, except with respect to exercise price and warrant coverage, the superior terms would have automatically been incorporated into the 2012 Warrants (a "Most Favored Nation Adjustment").

Contingent holder redemption option

Upon the occurrence of a transaction involving a change of control that was (i) an all cash transaction, (ii) a "Rule 13e-3 transaction" as defined in Rule 13e-3 under the Securities Exchange Act of 1934, as amended, or (iii) involving a person or entity not traded on a national securities exchange, the holders of the 2012 Warrants had the right, among others, to have the 2012 Warrants repurchased for a purchase price in cash equal to the Black-Scholes value of the then unexercised portion of the 2012 Warrants.

Pro rata distributions

Similar to the 2012 Convertible Debentures, the 2012 Warrants allowed exercising holders to participate in pro rata distributions.

Public information failure

If the Company failed for any reason to satisfy the current public information requirement under Rule 144(c) then, in addition to any other remedies available to the holders, the Company was required to pay to the holders, in cash, partial liquidated damages as set forth in the agreement.

Transaction costs

In connection with the Transaction, the Company paid issuance costs, including placement agent and legal fees, of approximately $1,200,000, and issued five-year warrants ("2012 Placement Agents Warrants") to purchase 78,078 shares of the Company's common stock at an exercise price of $7.20 per share to the placement agent.

Accounting treatment

2012 Warrants

The Company determined, based on the provisions of ASC 480-10-25-8, that equity classification of the 2012 Warrants was precluded because of the redeemable option of the holders in the event of a change in control (in certain conditions), which is an event that is not within the Company's control. Accordingly, the 2012 Warrants were classified as a liability in the consolidated balance sheets at June 30, 2012 and measured at fair value at each reporting period. The fair value of the 2012 Warrants as estimated using the Black-Scholes valuation model. See Note 2t.

In calculating the fair value of the 2012 Warrants (including the 2012 Placement Agents Warrants) on the transaction date and at June 30, 2012, the Company used the following assumptions: expected term of 5 and 4.76 years, respectively; expected volatility of 66.1% and 69.6%, respectively; risk-free interest rate of 1.01% and 0.72%, respectively; and dividend yield of 0%.

As of the closing day of the Exchange Agreement (see also Note 6) the Company recalculated the fair value of the 2012 Warrants by using the following assumptions: expected term of 3.79-4 years, expected volatility of 63.5%-64.7%, risk-free interest rate of 0.52%-0.78% and dividend yield of 0%.

2012 Convertible Debentures

In accordance with ASC 470-20, "Debt with Conversion and Other Options," the Company determined that a BCF existed at the issuance date of the 2012 Convertible Debentures. The BCF amounting to approximately $3,790,000 was recorded in equity.

In addition, the Company analyzed the holders' contingent redemption option based on the guidance stipulated in Topic 815, and concluded that the holders' contingent redemption option is not clearly and closely related to the debt host contract. Thus, the Company bifurcated and accounted for it separately as an embedded derivative and classified it, together with the 2012 Convertible Debentures, in its statement of financial position. This embedded derivative was measured at fair value at each reporting period. The fair value of the embedded derivative is estimated using the binominal valuation model.

In addition, the Company analyzed the holders' noncontingent redemption option and determined that the prepayment options were clearly and closely related to the debt host contract and should not have been bifurcated from the 2012 Convertible Debentures.

The gross proceeds amounting to approximately $11,000,000 from the 2012 Convertible Debentures transaction were allocated as follows:

2012 Warrants at fair value - approximately $2,807,000 based on their fair value;

embedded derivative - approximately $8,000 based on its fair value; and

2012 Convertible Debentures - approximately $8,185,000 based on the residual amount after the allocation of other components as described above.

In addition, an amount of approximately $3,790,000 was recognized as a BCF against the 2012 Convertible Debentures.

The 2012 Convertible Debentures were subsequently measured at amortized cost on the basis of the effective interest method over the loan period until the maturity date.

Transaction costs

Direct transaction costs of approximately $1,394,000, which included the placement agents fees and the 2012 Placement Agents Warrants valued at approximately $262,000 as of the transaction date, as well as other issuance costs, were allocated to the various instruments associated with the 2012 Convertible Debentures pro-rata to the amount such instruments were recorded as of the transaction date. The amounts that were allocated to the 2012 Warrants at fair value and embedded derivative were recorded in "Financial expenses" and the remainder amounting to approximately $1,037,000 was recorded as "Deferred debt issuance costs" in the consolidated balance sheets and amortized over the loan period using the effective interest method until the maturity date.

Exchange and amendment agreement

On April 9, 2013, the Company, entered into an exchange and amendment agreement with the holders of the Company's 2012 Convertible Debentures due April 5, 2014 and as subsequently amended on April 15, 2013 (the "Exchange Agreement"). Simultaneously with the closing of the Offering (as defined in Note 9a), the Company consummated the transactions under the Exchange Agreement on April 16, 2013 (the "Closing Day"). Pursuant the Exchange Agreement and in full satisfaction of the Company's obligations under the 2012 Convertible Debentures, the Company:

repaid $8,787,234 in cash;

issued 2,159,574 shares of common stock to the holders of the 2012 Convertible Debentures, reflecting a conversion price of $2.00 per share for the remaining unpaid portion of the 2012 Convertible Debentures;

issued five year warrants to the holders of the 2012 Convertible Debentures to purchase an aggregate of 659,091 shares of common stock for $3.00 per share ("$3.00 Warrants");

In accordance with the provisions of ASC 470-20, the terms of the Exchange Agreement were considered to be an induced conversion and the retirement of the 2012 Convertible Debentures was accounted for as if the 2012 Convertible Debentures had been converted according to their original conversion price of $7 valued at $3,538,723. This value was compared to the fair value of the consideration paid to the holders of the 2012 Convertible Debentures, including the 2,159,574 shares issued (which reflected a conversion price of $2.00 per share) that were valued at $4,081,595, the $8,787,234 of cash paid to the holders of the 2012 Convertible Debentures and the $3.00 Warrants valued at $568,098. As a result, the Company incurred approximately $9.9 million of expenses in connection with the Exchange Agreement which were recorded in "Financial expenses (income), net" within the consolidated statements of operations.

In calculating the fair value of the $3.00 Warrants, the Company used the following assumptions: dividend yield of 0% and expected term of 5 years; expected volatility of 68%; and risk-free interest rate of 0.71%.

In connection with the Exchange Agreement the Company amortized the deferred debt issuance costs. The expenses amounting to approximately $641,000 were recorded in "Financial expenses (income), net" within the consolidated statements of operations.

In addition, pursuant to the Exchange Agreement, the Company:

amended the securities purchase agreement pursuant to which the 2012 Convertible Debentures were originally issued to prohibit the Company from issuing securities containing anti-dilution protective provisions; and

amended the 2012 Warrants to (i) eliminate the Most Favored Nation Adjustment and (ii) provide that upon a fundamental transaction, the holders of such warrants will now have the right to cause the Company to repurchase the unexercised portion of such warrants at their Black-Scholes value on the date of such fundamental transaction, payable in shares of common stock, rather than in cash as was previously provided.

The Company determined, based on the provisions of ASC 480-10-25-8, that following the amendment to the 2012 Warrants described above, equity classification is no longer precluded and accordingly, the 2012 Warrants valued at approximately $314,000 as of the Closing Day of the Exchange Agreement were classified from a liability to equity in the consolidated balance sheets.

II.

2013 Security and Loan Agreement

Loan and Security Agreement

On October 23, 2013, the Company and InspireMD Ltd. entered into a Loan and Security Agreement (the "Loan and Security Agreement"), pursuant to which a lender made a term loan to the Company and InspireMD Ltd. in the aggregate amount of $10 million (the "Loan"). The annual interest rate on the Loan is prime plus 4%, but shall not be reduced below 10.5%. Payments under the Loan and Security Agreement are for the interest portion only for 9 months, followed by 30 monthly payments of principal and interest through the scheduled maturity date on February 1, 2017. The Company and InspireMD Ltd.'s obligations under the Loan and Security Agreement are secured by a grant of a security interest in all of the Company's and InspireMD Ltd.'s assets (other than their intellectual property).

The Company is permitted to prepay all or a portion of the Loan. However, any prepayments of the Loan will be subject to a penalty of (i) 2%, if the prepayment occurs within 12 months of the Loan being requested by the Company and InspireMD Ltd. (the "Advance Date"), (ii) 1%, if the prepayment occurs between 12 and 24 months after the Advance Date, and (iii) 0.5%, if the prepayment occurs more than 24 months after the Advance Date. The Company and InspireMD Ltd. will also pay the lender an aggregate end of term charge (the "End of Term Charge") of $500,000 when the Loan is paid in full or matures. In addition, upon the occurrence of a change in control, the Company shall prepay the outstanding amount of all principal and accrued interest through the prepayment date and all unpaid lender's fees and expenses accrued to the date of the repayment (including the End of Term Charge) together with the penalties stated above.

Warrant Agreement

On October 23, 2013, in connection with the Loan and Security Agreement, the Company issued the lender a warrant to purchase 168,351 shares of common stock at a per share exercise price of $2.97 (the " 2013 Warrant"). The Warrant is immediately exercisable and has a five year term. The 2013 Warrant may also be exercised on a cashless basis. The exercise price of the 2013 Warrant and the number of shares issuable upon exercise of the Warrant are subject to adjustments for stock splits, combinations or similar events.

Upon the occurrence of a transaction involving a change of control of the Company in which the consideration is either all cash or securities that are either registered for sale on an exchange or quotation system or otherwise unrestricted, the Warrant, to the extent not previously exercised, may be exchanged, at the holder's request, for the consideration, to be paid by the acquirer, that the holder would have received, less the exercise price, had the holder exercised the Warrant immediately prior to the change of control. For all other changes of control of the Company, the 2013 Warrant will be assumed by the successor or surviving entity with similar rights to the 2013 Warrant as if it had been exercised immediately prior to the change of control.

Security Documents

On October 23, 2013, InspireMD Ltd. issued the lender a Fixed Charge Debenture and a Floating Charge Debenture (collectively, the "Israeli Security Agreements") in order to create a security interest in all the assets and property of InspireMD Ltd., securing the Company's and InspireMD Ltd.'s obligations under the Loan and Security Agreement. In addition, on October 23, 2013 and November 8, 2013, the Company entered into Deposit Account Control Agreements with the lender and two banking institutions in the US (the "Deposit Account Control Agreements") in order to perfect the lender's security interest in the Company's bank account. Pursuant to the Loan and Security Agreement, the Israeli Security Agreements and the Deposit Account Control Agreement, the Company's obligations to the lender are secured by a first priority perfected security interest in all of the assets and properties of the Company and InspireMD Ltd., other than the intellectual property of the Company and InspireMD Ltd.

The Company is required under the Loan and Security Agreement to maintain at all times in the bank accounts under the Deposit Account Control Agreements, cash and cash equivalents, in each case unrestricted and unencumbered, in an aggregate amount of at least the lesser of (a) an amount equal to one hundred percent (100.0%) of the then outstanding principal amount of the Loan and (b) an amount equal to seventy-five percent (75.0%) of the aggregate amount of all of the Company's worldwide cash and cash equivalents

Accounting treatment

The Company evaluated whether the 2013 Warrants can be classified as equity and determined that equity classification is appropriate. Accordingly, proceeds from the Loan and 2013 Warrant were allocated to the two elements based on the relative fair value. The portion of the proceeds so allocated to the 2013 Warrant, of approximately $280,000 was recorded in additional paid-in capital. The portion of the proceeds so allocated to the Loan, of approximately $9.7 million (before deduction of approximately $237,000 of issuance costs) was recorded in long term liabilities.

The Loan was subsequently measured at amortized cost on the basis of the effective interest method over the loan period until the maturity date.

Direct transactions costs of approximately $237,000, were allocated to the Loan and the Warrants pro-rata to the amount such instruments were recorded as of the transaction date. The amounts that were allocated to the Warrants were deducted from the Warrants and the amount related to the Loan was recorded as "Deferred issuance costs" in the consolidated balance sheets and is amortized over the loan period using the effective interest method until the maturity date.

The Company has evaluated and concluded that the Prepayment options and the prepayment under an event of Change in control are clearly and closely related to the debt host contract and thus should not be bifurcated from the debt host.

In addition the Company evaluated whether the default interest mechanism, as defined in the Loan and Security Agreement, results in an interest rate derivative that should be bifurcated and determined that based on the provisions of ASC 815-15-25-1, an interest rate derivative should not be bifurcated.

As of December 31, 2013, the future principal payments obligation for the Loan were as follows:

	($ in thousands)
Year Ended December 31:
2014	$	1,181
2015		3,809
2016		4,234
2017		776
	$	10,000