NOTE 6 – FINANCING TRANSACTIONS

2012 convertible loan and warrants

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 bore 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, subject to a conversion adjustment mechanism based on a formula stipulated in the agreement.

The terms of the 2012 Convertible Debentures contained, certain conversion and contingent conversion features, as well as a contingent redemption option (by the holder) and a non-contingent redemption option (by the holder and by the Company). For accounting purposes, A BCF charge to equity was recorded at the date of issuance in the amount of $3,790,000, and an embedded derivative related to the holder's contingent redemption option was bifurcated from the debt host and marked to market against the income statement until the date of the April 2013 transaction discussed below.

The terms of the 2012 Warrants contained, a contingent redemption option by the holder upon certain change in control events, as defined in the agreement, for a cash consideration based on the Black-Scholes value of the redeemed warrants. For accounting purposes, the 2012 Warrants were treated as a liability in light of the cash redemption option upon an event deemed outside the Company's control, and were marked to market against the income statement until the date of their amendment, as discussed below.

On April 16, 2013 (“the Closing Day”), simultaneously with the closing of the 2013 Offering (as defined in Note 9a), the Company entered into an exchange and amendment agreement with the holders of the Company's 2012 Convertible Debentures due April 5, 2014 (the “Exchange Agreement”). In accordance with the Exchange Agreement , the Company:

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repaid $8,787,234 in cash;

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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; and

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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 and valued at $3,538,723.

As a result of the Exchange Agreement the Company amortized the deferred debt issuance costs in the amount of $641,000 and incurred approximately $9.9 million of expenses which were recorded in "Financial expenses, 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%. The fair value of the Warrants, using the Black-Scholes option-pricing model was approximately $568,000.

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

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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

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amended the 2012 Warrants to (i) eliminate the Most Favored Nation Adjustment clause which stated that in the event that the Company issued or was deemed to have issued certain securities with terms that were 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 and (ii) provide that upon a fundamental transaction as defined in the agreement, 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 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 instituions 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 which may include cash collected from Accounts Receivable by Inspire M.D Ltd. and InspireM.D GmbH within the previous 7 days, and cash transferred to Inspire M.D Ltd. for the settlement of Permitted Indebtedness within the following 7 days, in each unrestricted and unencumbered, in an aggregate amount of at least the lesser of (a) an amount equal to one hundred percent of the then outstanding principal amount of the Term Loan Advance and (b) an amount equal to seventy-five percent of the aggregate amount of all of Borrower'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 transaction 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 until the maturity date.

The Company has evaulted 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, 2014, the future principal payments obligation for the Loan were as follows:

	($ in thousands)
Year Ended December 31:
2015		3,809
2016		4,234
2017		776
	$	8,819